The Homa Files

A week or two ago, the NY Time’s dropped a bombshell of a story.

The headline,  “GE’s Strategies Let It Avoid Taxes Altogether”:

The reported “facts”: GE reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

Hmmm.

According to Reuters, it turns out that GE hasn’t actually filed its tax return for 2010 yet, and when it does it will pay some unknown amount in US income taxes.

The ultimate conclusion is likely to be the same, but it looks like the Times got some of facts wrong.

Oh my.

If you want to know how your county stacks up against others in the US, here’s a very cool interactive tool from the Tax Foundation … reports data for every county in the US

http://interactive.taxfoundation.org/propertytax/

Remember when Charlie Gibson stunned Candidate Obama by pointing out that when capital gains tax rates go up,capital gains tax receipts go down? It was obviously new news to Obama who countered: “But, it should be done for fairness”.

Continues to amaze me that our crack legislators confuse “tax rates” with “tax revenue” … and refuse to accept the repeated empirical evidence that they are inversely related.

Excerpted from WSJ, Ducking Higher Taxes, Dec 21, 2010…

Oregon raised its income tax on the richest 2% of its residents last year to fix its budget hole, but now the state treasury admits it collected nearly one-third less revenue than the bean counters projected.

Oregon’s liberal voters ratified a tax increase on individuals making more than $250,000 and another on businesses … no doubt feeling good about their “shared sacrifice.”

Congratulations. After the tax was raised “income tax and other revenue collections began plunging steeply.  Instead of $180 million collected last year from the new tax, the state received $130 million.

One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did. Funny how that always happens.

All of this is an instant replay of what happened in Maryland in 2008 when the legislature in Annapolis instituted a millionaire tax. There roughly one-third of the state’s millionaire households vanished from the tax rolls after rates went up.

http://online.wsj.com/article/SB10001424052748704034804576026233823935442.html?mod=WSJ_Opinion_AboveLEFTTop

As Yogi would say, “It’s not over until it’s over”.

Why do I think that the proposed tax scheme (oops, I meant “compromise”) may offer a Christmas surprise.

OK, the Senate passed a bill with all of the compromise provisions included.

What if the lame duck, Dem-controlled House passes a variant that, say for the sake of illustration, resets the death tax to 55% with a relatively low exclusion (say, $1 million)?

Won’t happen, right?

The modified law will get blocked in the Senate, right?

Not so fast.

Remember the devious reconciliation play that was used to ram ObamaCare through? Allowed a modified bill to be passed by a simple majority of Senators (all Dems).

What if the House passes a slightly modified tax bill, and the Dem majority in the Senate decides that a simple majority reconciliation process is appropriate?

Bingo.  The GOP “wins” vanish from the bill.

Check ! and Mate !

Remember, it happened on ObamaCare … one of the biggest pieces if legislation in the country’s history …. which was opposed – then and now – by a majority of voters.

The difference this time? A bunch of lame-duckers will be punching in their votes.

Don’t put it past them.

OK, here’s the list:

Sales Tax
School Tax
Liquor Tax
Luxury Tax
Excise Taxes
Property Tax
Cigarette Tax
Medicare Tax
Inventory Tax
Real Estate Tax
Well Permit Tax
Fuel Permit Tax
Inheritance Tax
Road Usage Tax
CDL license Tax
Dog License Tax
State Income Tax
Food License Tax
Vehicle Sales Tax
Gross Receipts Tax
Social Security Tax
Service Charge Tax
Fishing License Tax
Federal Income Tax
Building Permit Tax
IRS Interest Charges
Hunting License Tax
Marriage License Tax
Corporate Income Tax
Personal Property Tax
Accounts Receivable Tax
Recreational Vehicle Tax
Workers Compensation Tax
Watercraft Registration Tax
Telephone Usage Charge Tax
Telephone Federal Excise Tax
Telephone State and Local Tax
IRS Penalties (tax on top of tax)
State Unemployment Tax (SUTA)
Federal Unemployment Tax (FUTA)
Telephone Minimum Usage Surcharge Tax
Telephone Federal Universal Service Fee Tax
Gasoline Tax (currently 44.75 cents per gallon)
Utility Taxes Vehicle License Registration Tax
Telephone Federal, State and Local Surcharge Taxes
Telephone Recurring and Nonrecurring Charges Tax

Answer: Not one of these taxes existed 100 years ago.

At the time, our nation was the most prosperous in the world, we had no national debt, and we had the largest middle class in the
world.

Hmmmm

I find that the rhetoric about extension of the Bush tax cuts demonstrates the economic ignorance of most of our elected officials..

Sen. Chuck Schumer and Sen. Barbara “Don’t call me M’am” Boxer are running around screaming that how extending the high bracket tax breaks is “simply giving undeserved tax breaks to millionaires and billionaires”.

Yes indeed, the high bracket includes some millionaires and billionaires.

Here’s the rub: it includes way more people who aren’t millionaires or billionaires.

The high end brackets start at $250,000.

In 2008, according to the IRS, about 138 million people filed tax returns.

Of the 138 million, approximately 2.8 million (2% of total returns) reported AGI greater than $250,000.

354,093 tax payers  — 12.8% of the 2.8 million high bracketers – reported AGI greater than $1 million.

In other words, almost 9 out of 10 tax payers in the vilified high brackets earn less than $1 million.

Hmmm.

Now, anybody who has taken a business or economics course knows that there is a difference between wealth and earnings.  (Note – this group doesn’t include many Congressmen, Senators, or members of the Administration).

Earnings are a “flow” and wealth is a “stock”.

Think water flowing into a pool. The accumulated water in the pool is liquid wealth.

Now, some people who earn more than $1 million spend it all  They accumulate no meaningful wealth. They’re not really millionaires.  They’re wasteful  idiots.

And, some people who earn less than $1 million annually, practice thrift and savings … and accumulate more than $1 million.

Obviously, these people are evil millionaires and should be penalized for not spending like a drunken Congressman.  They should be taxed high every year and then have their wealth confiscated when they die.

Huh?

My take: Schumer and Boxer wouldn’t know a millionaire if they saw one – unless they were just looking around the Senate. Then, the odds would be in their favor.

IRS Data:
http://www.irs.gov/pub/irs-soi/06in23ar.xls

Since the Bush tax cuts are in the news again, I’m taking the opportunity to reprise one of my favorite posts from the archives.  The original was posted on Sept. 11, 2008 …

The punch line: “wealthy” starts at a number higher than $250,000 and higher marginal tax rates for the real high earners might be a good idea.

* *  * * *

Maybe, just maybe, the answer is $5 million

Background: At the Obama-McCain Saddleback debate, the candidates were asked: “What’s rich?” Both gave glib answers.  Obama got a pass, McCain didn’t.  Thinking about it, McCain may have been right.

* * * * *

After Saddleback, Senator McCain was repeatedly hammered for his $5 million dollar answer to Rick Warren’s “what’s rich?” question.

Interestingly, but not surprisingly, Senator Obama got a free pass for his parallel laugh line — even though the annual royalties on 25 million books probably exceed $5 million.  Perhaps. the conversion from books to dollars is sufficiently nuanced that folks didn’t notice.

Even liberal columnist Paul Krugman, acknowledges that McCain was just joking when he flipped the $5 million dollar figure at Pastor Rick.

In a recent  New York Times op-ed titled “Now, that’s rich”,  Krugman concedes the point and puts it into context.  Specifically, he references the book Richistan by Robert Frank of The Wall Street Journal. According to Krugman, Frank “declares … that country is divided into levels, and only the inhabitants of upper Richistan live like aristocrats; the inhabitants of middle Richistan lead ample but not gilded lives; and lower Richistanis live in McMansions, drive around in S.U.V.’s, and are likely to think of themselves as “affluent” rather than rich.”

Perhaps, the stage-pensive Obama should take pause and reflect on Prof. Krugman’s observations.  Senator McCain gave Senator Obama a huge gift.  No, not the new applause line that Obama keeps repeating in his stump speech. It’s bigger than that.  It’s a clue to attracting — or, at least, to avoid alienating — about 5 million voters who, in a close election, may be what the pollsters call “statistically significant”.

* * * * *

Let me explain.

Boiled down to its essence, Senator Obama’s complicated tax plan reduces to taking an average of about $20,000 in additional annual income taxes from about 5 million people, and redistributing the loot to 200 million others — $500 (or more) per person in annual tax credits.

Some of the 5 million targeted “givers” earn as low as $200,000; some are in  Warren Buffett’s category, earning $40 million or $50 million or more.  Obama’s plan doesn’t differentiate among them. The freshly minted MBA working 80 high stress hours in a high cost, high tax locale (think, New York or San Francisco) – paying off a hundred grand or more in student loans — just gets lumped in with Bill Gates.

Now, what if Senator Obama were to adopt Senator McCain’s perspective and define “rich” as starting at $5 million ?  What would it take to raise a redistributable $100 billion from them ?

Well, according to recently released IRS data, there were about 41,000 tax returns filed in 2006 with adjustable gross income greater than $5 million.  Those returns averaged over $15 million in AGI and $13.5 million in taxable income.  As a group, the over $5 million crowd accounted for almost $600 billion in annual taxable income.

So, if he wanted to, Obama could leave the folks earning $200,000 to $5 million alone, and raise the $100 billion by introducing an uber-high income tax bracket for everybody reporting more than $5 million — upping their effective tax rates to about to about 37% (from their current 20% effective income tax rate).  To get there would require a 50% top bracket marginal income tax rate (up from 35%).  And, since about 75% of the uber-high-earners income comes from capital gains and dividends, which are insulated from the Alternative Minimum Tax calculations  — the capital gains and dividends rate would have to upped to about 30%, and rolled into the AMT.

* * * * *

Before dismissing the notion out-of-hand, consider that a $5 million top bracket fits in a historical context, and has some well-aged precedents. 

Since 1913, the top bracket income threshold has averaged about $650,000 (unadjusted for inflation), ranging from $29,750 in 1988 (Reagan’s last year)  to, yes,  $5 million (from 1932 to 1941).  In order to fund WWII, the top bracket income threshold was cut in 1941 to $200,000 — which, coincidentally, inflates to about $5 million in 2008 dollars.

Besides generating a $100 billion redistribution pool, a top bracket with a high rate and high income threshold addresses a few of Senator Obama’s other oft-repeated concerns.  On the campaign trail, Obama often showcases Warren Buffett’s lament that his secretary’s 30% tax rate is higher than his 18%.  That gap only narrows a bit under Senator Obama’s current plan (her’s drops to 29%; his goes to 22%).

Under an uber-income rate bracket structure, the Buffett injustice would remedied, and along with it, private equity and hedge fund loopholes would be closed, and the fattest cats would start paying their fair share despite the holes in the AMT.  Sure, these uber-earners will be tempted to search harder for tax shelters — in the U.S. and offshore — but that’s a risk that Obama says he’s willing to take.

* * * * *

If Senator Obama wanted to moderate the risk somewhat, he could scheme between the extremes by creating multiple new brackets.  Maybe a bracket starting at $500,000 with a 40% marginal rate, a 42.5% bracket starting at $1 million, a 45% bracket starting at $2.5 million, a 47.5% bracket starting at $5 million, and a 50% bracket starting at $10 million.  By my math, this multiple bracket structure would give Senator Obama his $100 billion, too. The point: there are many ways to skin the (fat) cats.

Comedians say that, at their core, many jokes have a ring of truth.  Senator McCain’s $5 million jest may have provided Senator Obama with an out-of-the box idea for rebalancing incomes: deep-drilling the super-rich. The introduction of an uber-income bracket would make Obama’s tax plan more palatable to about 3% of the voting population. And, Mr. Buffett would get his wish come true. In military parlance, I think that’s called friendly-fire. 

* * * * *

An interesting factoid from the Tax Foundation …

The scorned “wealthy” taxpayers — those earning more than $200 – $250k — work an average of 48.1 hours per week … those earning less than that amount dodge Obama’s tax arrow — they work an average of 38.8 hours per week.

In other words, on average, the wealthy tax targets work about 20% more hours than the Obama-classified non-wealthy.

Makes sense to punish them for working harder, right ?

* * * * *

Tax Foundation Fiscal Fact, No. 247,  September 22, 2010
http://www.taxfoundation.org/files/ff247.pdf

Here’s a chart of total US employment from 2000 to today.

A couple of observations;

• Employment was flat from 2000 to 2003 … remember the bursting of the dot com bubble and the 9-11 terrorist attacks ?
• There was strong employment growth between 2003 and 2007 …  remember the Bush tax cuts of 2001 and 2003? … hmmm
• The financial collapse in 2008 reversed practically all of the prior 5 year gains … resulting in a net ‘no gain’ during the Bush years

So, when the Dems talk about the failed policies of the prior 10 years, exactly what are they talking about?

Hard to make a case that the Bush tax cuts creamed the economy.  To the contrary, looks like they created strong job growth.

Obviously, the culprit is the financial crisis – a mix of the disastrous housing policy (think Fannie & Freddie) …  and loose regulation of mortgage backed securities and derivatives.

Bush shares blame for the Fannie and Freddie fiasco … but blame for that is easily spread across the Clinton a administration and the Congress (i.e. Barney Frank, Chris Dodd).

OK, you can taint Bush with loose financial regulation and enforcement.

But, fin-reg does little to address the egregious security & derivative transgressions … and nothing has been done with Fannie & Freddie.

The main “Bush policy” being targeted by Dems are the tax cuts – of which less than 20% were “for the wealthy” – doesn’t look to me like they’re job killers.  Go figure.

According to the WSJ …

The issue: 2011 tax-withholding tables.

Treasury officials must release the tables, which determine the take-home pay of millions of wage-earners, by mid-November because it takes payroll processors weeks to adjust their systems before Jan. 1.

But congressional leaders recently postponed voting on taxes until after the election and lawmakers don’t reconvene until Nov. 15.

The Senate is scheduled to take up several nontax issues when it returns and is expected to leave for Thanksgiving soon after, possibly pushing a vote on taxes into December.

Treasury officials’ most obvious option is the least attractive. If they publish tables based on expiration of the Bush tax cuts, which occurs Jan. 1, millions of low- and middle-income taxpayers who have paid little or no income taxes for a decade would likely see increases in January.

It’s estimated that higher withholding could take up to $10 billion a month out workers’ pockets due to higher tax rates alone.

Excerpted from WSJ: Delays to Tax Tables May Dent Paychecks, Oct. 7, 2010
http://online.wsj.com/article/SB10001424052748704689804575535861229293800.html?mod=WSJ_hps_LEFTWhatsNews

I think this is the fatal flaw in Obama’s class-warfare tax plan.

Initially, high earners will push their tax deductions to the absolute limit (no, I don’t think they’re doing that now).

…  then they’ll just re-create tax shelter devices reminiscent of the pre-Reagan days (e.g. rental properties; gas, oil, timber partnerships)

…  and finally, they’ll take their bank accounts to safe havens.

A couple of vignettes bring the dynamics to life.

* * * * *

According to FBN’s John Stossel …

New York billionaire Tom Golisano isn’t stupid.

With $3,000 and one employee, he started a business that processes paychecks for companies. He created 13,000 jobs.

Then New York state hiked the income tax on millionaires.

“It was the straw that broke the camel’s back,” he says.

“Not that I like to throw the number around, but my personal income tax last year would’ve been $13,800 a day. Would you like to write a check for $13,800 a day to a state government, as opposed to moving to another state where there’s no state income tax or very low state income tax?

He established residence in Florida, which has no personal income tax.

* * * * *

Maryland created a special tax on rich people that was supposed to bring in $106 million. Instead, the state lost $257 million.

Former Gov. Robert Ehrlich, who is running again for his old job, says: “It reminds me of Charlie Brown. Charlie Brown was always surprised when Lucy pulled the football away. And they’re always surprised in Washington and state capitals when the dollars never come in.”

Some of Maryland’s rich left the state.

“They’re out of here. These people aren’t stupid,” Ehrlich says.

* * * * *

Donald Trump, who knows something about making money, says of course the rich will leave when hit with higher taxes.

“I know these people,” he told me.

“They’re international people. Whether they live here or live in a place like Switzerland doesn’t really matter to them.”

You haven’t left, I told him.

“I haven’t left yet. … Look, the rich people are going to leave. And other people are going to leave. You’re going to end up with lots of people that don’t produce. And then that’s the spiral. That’s the end.”

* * * * *

Excerted from John Stossel, Taxing the Rich, September 29, 2010
http://www.realclearpolitics.com/articles/2010/09/29/taxing_the_rich_107350.html

I’ve often expressed my chagrin over Warren Buffet’s pontificating that his taxes are too low and so all high earners should pay more taxes.

Now Bill Gates’s father has jumped on the bandwagon and is helping fund support for a new millionaire’s tax in Washington state.

He riles me more than Buffet.  At least Buffet created his pile of gold.  This guy’s major claim to fame is providing young Bill with some DNA.  Now, he lives a lavish life as part of young Bill’s live-in posse. 

Give me a break …

And, oh yeah, before you tell me how philanthropic Buffet and Gates are, remember (1) most of their gifts are forthcoming when they die — allowing to retain the the power of their wealth until they’re long gone, and (2) all of their giving is specifically directed to causes they care about, and managed by members of their posse. 

Why don’t they just turn over their accumulated wealth to the the government right now?

Answer: they’d lose their power as super-rich guys … and even they know that most of the money would be wasted on wacky, ineffective programs.

* * * * *

According to Art Laffer in the WSJ …

It’s one thing to believe in bad policy. It’s quite another to push it on others.

But Mr. Gates Sr.— a retired lawyer— is now trying to have his way with the people of the state of Washington.

Mr. Gates Sr. has personally contributed $500,000 to promote a statewide proposition on Washington’s November ballot that would impose a brand new 5% tax on individuals earning over $200,000 per year and couples earning over $400,000 per year. An additional 4% surcharge would be levied on individuals and couples earning more than $500,000 and $1 million, respectively.

If Mr. Gates Sr. and his son feel so strongly about taxing the rich, they should simply give the state a chunk of their own money and be done with it. Leave the rest of Washington’s taxpayers alone.

The 11 states where income taxes were adopted over the past 50 years are: Connecticut (1991), New Jersey (1976), Ohio (1971), Rhode Island (1971), Pennsylvania (1971), Maine (1969), Illinois (1969), Nebraska (1967), Michigan (1967), Indiana (1963) and West Virginia (1961).

Each and every state that introduced an income tax saw its share of total U.S. output decline. Some of the states, like Michigan, Pennsylvania and Ohio, have become fiscal basket cases. As the nearby chart shows, even West Virginia, which was poor to begin with, got relatively poorer after adopting a state income tax.

WSJ, The Bill Gates Income Tax,  OCTOBER 5, 2010
http://online.wsj.com/article/SB10001424052748703882404575520241519315372.html?mod=WSJ_Opinion_LEADTop

 According to Bloomberg …

High-income residents of New York City and President Barack Obama’s home state of Hawaii would have the highest marginal tax rates in the U.S. if Congress adopts the president’s proposal to increase taxes for top earners, a study found.

State, local and federal levies would result in a top 50.8 percent rate on high-income New York City residents. Affluent Hawaiians would pay 49.7 percent. Residents of California, Vermont, Maryland and New York round out the five states with the heaviest burdens, with top federal- state rates of 49.4 percent, 48.8 percent, 48.6 percent and 48.4 percent, respectively.

States rounding out the top 10 are Maine, Minnesota, Idaho, North Carolina and Ohio.

* * * * * 

Separately, IRS data shows 80 percent of those facing higher taxes under Obama earn between $200,000 and $500,000. An analysis by the congressional Joint Committee on Taxation in August concluded their taxes would increase on average by $532 a year.

* * * * *

Source:
http://www.bloomberg.com/news/2010-09-22/new-york-hawaii-top-earners-face-highest-tax-under-obama-plan-study-says.html

According to the WSJ …

If he Bush Tax Cuts are allowed to expire at year-end per current law, after-tax income for every working American would be reduced.

According to the Tax Policy Center, the average reduction in after-tax income would be 3.3% .

Do the math:

94% of income goes to consumption, and consumption is 70% of gross domestic product.

All else being equal, if the Bush tax cuts don’t get extended, that’s a 2.3% hit to 2011 GDP.

In other words, a certain double dip.

The Trade and Tax Doomsday Clocks, Oct. 4, 2010 
http://online.wsj.com/article/SB10001424052748704116004575521822940983434.html?mod=djemEditorialPage_h

According to the WSJ …

Claiming to tax only the rich has always been more political strategy than fiscal realism.

IRS tax data show that you could have taken 100% of the taxable income of every American who earned more than $500,000 in the boom year of 2006 and still only have raised $1.3 trillion in revenue.

That amount would not have closed the budget deficit in either of the last two fiscal years.

Liberals know that the only way to pay for their spending plans is by soaking the middle class—because that’s where the real money is.

But, they pretend they can finance a European-style entitlement state by taxing only the rich because they know that soaking the middle class is unpopular.

* * * * *

WSJ, The Democratic Tax Retreat, Sept. 25, 2010
http://online.wsj.com/article/SB10001424052748704523604575511863393295260.html?mod=WSJ_Opinion_LEADTop

The President sound bites that extending the Bush Tax Cuts “to the wealth” will “cost” $700 billion.

Let’s take his number at face value, but put it in context …

The $700 billion — based on conventional, but odd gov’t accounting — is a 10 year projection. 

The annual impact is $70 billion … and that’s making the unlikely assumption that folks won’t employ strategies to mitigate the tax hit.

The $70 billion equates to about less than 1/2% of GNP … which is sluggishly running at about $14.5 trillion. 

Generally, economists expect that raising taxes on the rich will hurt the recovery since — according to the Tax Policy Center — about $400 billion of small business income in hit and since the rich account for almost a quarter of all consumer spending.

If GNP drops by 2.5%, the apparent tax revenue increase would disappear … tax revenues would be the same as prior to the tax increase.

So, the pivotal question is: will the decline in consumption by the rich (again, 1/4 of consumer spending) be substantial enough to drive a reduction  in GDP ? 

I’m betting “yes”.

Taking another perspective … what about the impact on unemployment ?

Mark Zandi — one of the Dems’ poster-child economists — says that raising taxes on the rich would cost 770,000 jobs. 

The current unemployment rate of 9.6% equates to about 15 million people unemployed.

In other words, bumping the tax rate on the rich is likely to increase the unemployment rate by about .5% — to over 10% if all other things are held constant.

Is $70 million of best case tax revenue worth bumping the unemployment rate by .5% ? 

Keep in mind that the $70 billion is against a national debt that’s running over $13 trillion …

So, the decision reduces to increasing the unemployment rate by .5% to over 10%  in order to (maybe) cut the national debt by about .5% per year .  The latter is a big ‘maybe’ since politicos would have to avoid the temptation to just spend the windfall on more goofy programs  …  and since ‘the rich’ would have to avoid the natural tendency to  change their behavior to duck taxes or to cut spending  — which would utltimately cut tax revenues.

Doesn’t sound like a good bet to me …

* * * * *

Sources:

Washington Post, The Problem With Sound-Bite Economics, September 20, 2010
http://www.realclearpolitics.com/articles/2010/09/20/the_economic_blame_game_107220.html

US Debt Clock
http://www.usdebtclock.org/

Whine, whine whine.

Warren Buffett says raise taxes on folks making more than $200,000 because he pays a lower tax rate than his secretary and he wants to pay more.

Music to Obama’s ears … and an anecdotal rationale for allowing all of Bush’s high-end tax cuts to expire.

Problem: Even if the Bush tax cuts are allowed to expire, Warren will still be paying a lower rate than his secretary.

Consider the generic uber-wealthy case …

Obama’s proposal would allow the top marginal tax rates of 33 percent and 35 percent to revert to 36 percent and 39.6 percent next year. Phase-outs for deductions and exemptions would also be reinstated, pushing the rate higher.

Tax rates on dividends and capital gains would increase to 20 percent from 15 percent.

The top marginal rates also don’t reflect the overall tax the highest earners pay, especially when most of the income comes from capital gains or dividends.

The 400 highest-earning U.S. households reported an average of $345 million of income in 2007, while their average tax rate fell to 16.6 percent, the lowest in almost 20 years.

Almost three-quarters of the highest earners’ income was in capital gains and dividends taxed at a 15 percent rate.

Of the 400 earners, 289 paid a total effective federal tax rate of 20 percent or less in 2007.

http://www.bloomberg.com/news/2010-09-22/new-york-hawaii-top-earners-face-highest-tax-under-obama-plan-study-says.html

Buffett’s income is practically all capital gains.

So, Obama’s plan will nick him an additional 5% … but since his rate will be the 20% capital gains tax rate, it’ll still probably be below his secretary’s rate.

I propose a super-uber tax bracket: for folks with huge  portfolios —  say, in excess of $5 billion — every dollar of earnings over $250,000 — ordinary income, cap gains, and dividends — gets turned over to the government each year with no recourse.

Bingo.  Problem solved.

This week, a series of ‘angles’ on the debate to kill or keep the Bush Tax Cuts …

Again, I’m for extending all of the Bush Tax Cuts, and I don’t like helping the Dems with their messaging.  But …

The GOP’s constant sound bite is that that letting any of the Bush Tax Cuts expire would hurt investors and small businesses.

The Dems say that only 3% of all small businesses report Schedule C business income on their 1040s.

The GOP counters that the 3% accounts for 43% all small business income.

 The Tax Policy Center estimates that higher business taxes would affect 725,000 returns with about $400 billion of business income. Some of these are partnerships of doctors, lawyers and accountants. Others are contractors, restaurant owners, florists and plumbers.

http://www.realclearpolitics.com/articles/2010/09/20/the_economic_blame_game_107220.html

Score the point for the GOP.

So, why don’t the Obamatrons just cap Schedule C  income at, say, 25%.

That would take that issue off the table.

And, before you say ‘would be too complicated’ … remember that typical 1040s treat ordinary income, dividends, and capital gains at different rates already.

This week, a series of ‘angles’ on the debate to kill or keep the Bush Tax Cuts …

First, a couple of context points: I think all of the Bush Tax Cuts should be extended and, I’m not in the business of hepling the Dems with their messaging.  But …

According to the nonpartisan Tax Policy Center, the average taxpayer earning $200,000 to $500,000, will be socked an additional $988 if Obama jacks tax rates on “the wealthiest” Americans.

True, it’s more than pocket change, but it’s not going to threaten anybody’s lifestyle.

I wonder why Obamatrons aren’t highlighting the under $1,000 number to settle down the ‘almost rich’ who are collateral damage in his class attack?

* * * * *

Data source: L,A, Times, The tax cut debate, September 15, 2010
http://www.latimes.com/news/opinion/editorials/la-ed-taxes-20100915,0,6983741.story

This week, a series of ‘angles’ on the debate to kill or keep the Bush Tax Cuts …

The President’s constant sound bite the past week was that extending the Bush Tax Cuts to ‘the wealthiest Americans’ would be “giving $100,000 to each  millionaire”.

Not so fast.

According to the Tax Policy Center:

• Folks with precisely $1 million in taxable income would pay about $11,000 more under Obama’s scheme than they would if the Bush tax cuts were extended. 
• The top 0.1% — those with average incomes of $8.4 million — would pay $310,000 more under Obama’s proposal.

Bottom line: the average is obviously skewed by a relatively few uber-earners.

So, instead of going after garden variety fat cats, why not go after the obese cats ?

I say, add a few uber-high-end brackets … say,

• Over $500,000 gets nicked, 37.5%;
• Over $1,000,000 gets dinged 40%
• Over $5 million pays 45%, etc.
• Warren Buffett pays 99.6% and stops whining about how he’s undertaxed

Such a scheme would potentially get the dollars (empasis on ‘potentially’ — more on that in a later post) … while impacting the fewest taxpayers.

Seems like a democratic thing to do, doesn’t it ?

* * * * *

Data source:L,A, Times, The tax cut debate, September 15, 2010
http://www.latimes.com/news/opinion/editorials/la-ed-taxes-20100915,0,6983741.story

Obama econ advicer was asked by CNBC about the tax hike on the so-called wealthy taxpayers.

Keep in mind that Obama’s rap is that “we can’t afford to keep tax rates for the weathy where they are now” … implying that the money would go towards deficit reduction.

Well, Summers blew it.

His answer: “There are better uses for the money”

He clarified: maybe more targeted tax breaks or stimulative spending.

Deficit reduction didn’t make his list.

Oops …

The CNBC shills didn’t follow-up on the obvious slip.

Answer: Based on history, aggregate tax revenues go down.

If you run into President Obama, whisper in his ear, please.

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Remember this exchange, from a 2008 primary debate, between Obama and ABC News’s Charlie Gibson:

Gibson: You have . . . said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, “I certainly would not go above what existed under Bill Clinton,” which was 28%. It’s now 15%. That’s almost a doubling, if you went to 28%. But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20%.

Obama: Right.

Gibson: And George Bush has taken it down to 15%.

Obama: Right.

Gibson: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28%, the revenues went down.

So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?

Obama: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.

WSJ : Best of the Web,  ‘The Bush Tax Increase’ , August 31,2010
http://online.wsj.com/article/SB10001424052748703467004575463772860827634.html?mod=WSJ_Opinion_MIDDLETopOpinion

This Homa FIles brief was originally posted July 23, 2008. It’s long, … loaded with with pivotal facts.

Since expiration of the Bush tax cuts is looming soon, I thought they’re worth another look — just as background 

On the campaign trail, candidate Obama broad-brushed all of the Bush tax cuts as “for the wealthy”.

Now, OMB estimates that extending the Bush tax cuts in their entirety would cost $3.7 trillion over 10 years … of that amount over 80% goes to folks making less than $200,000 – $250,000 annually.

In other words, over 80% of the Bush tax cuts for the wealthy went to Obama-defined “non-wealthy” folks — some of whom pay income taxes, and some of whom don’t. 

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Summary: We’ve all heard the  rants about the cuts in the top bracket rate, capital gains rate, dividend taxes, and estate taxes.

But, when was the last time that your heard a candidate (on either side) or a pundit (O’Reilly included) mention the new 10% bracket, larger and refundable child and earned income credits, negative income taxes, elimination of the marriage tax penalty, or expanded college benefits?

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The income tax cuts of 2001 and 2003 are shorthanded by the press and political candidates as “Bush’s tax breaks for the wealthy — who didn’t even want them”, and are blamed for an accelerating polarization of wealth distribution (i.e. rich get richer, poor stay poor).

Warren Buffet says his secretary pays more taxes than he does (really?). McCain says he’ll stay the course. Obama says that he’ll roll back the tax cuts if he’s elected and redistribute them to the “folks who need them the most”.

All of the rhetoric got me thinking.  Somewhat embarrassed, I realized that I didn’t know exactly what was in the Bush tax plan.  (Quick Test: take out a sheet of paper and jot down the tax breaks enacted as part of the Bush plan)

Prompted by curiosity (and a modicum of selfish interest) I did some digging.  Here’s what I found, along with my “take”:

The top marginal income tax rate  was cut from 39.5% to 35% (applied to Taxable Income >$350,000)
– the 36% marginal rate was cut to 33%  (TI > $161,000)
– the 31% marginal rate was cut to 28%  (TI> $77,000)
– the 28% marginal rate was cut to 25%  (TI > $32,000)
…  a clear benefit to the top half of income earners; with the biggest benefit to the highest earners

Capital gains and dividend tax rates were reduced to 15% for high-earners, zero for low earners … more of a benefit to high-earners, but 1/3 of households own stock and more than 1/4 of returns (including many retirees) report dividend income … turned out to be a windfall for hedge funds and private equity via the “carried interest” loophole (more on that in a subsequent post)

A low-income 10% tax rate bracket was introduced … benefit to many low-earners previously in the 15% bracket

Child Care Credit and Earned Income Tax Credit were increased and made refundable … resulting in zero or negative tax due balances for millions of people (note: “refundable” means that any negative tax due is paid to the citizen — a very important policy shift)

Income limits were eliminated on personal exemptions and itemized deductions … the former helps low earners most — since it’s a higher proportion of income; the latter benefits higher earners most — since they are the ones who itemize deductions. (Note: roughly 2/3′s of tax filers take the standard deduction)

Marriage penalty was neutralized … benefits middle-earning couples most

College education benefits were liberalized, e.g. 529 plans, student loan interest deduction, tax-free employer paid tuition … benefits mid- and high-earners most (since their family members disproportionately attend college)

Estate taxes were reduced and to be phased out… only impacts wealthy folks with estates that are big enough to be subject to “death taxes”

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Details re: “Bush Tax Plan” – 2001 and 2003

Officially, the first round of Bush tax cuts were codified in the “Economic Growth and Tax Relief Reconciliation Act of 2001″ which was approved by the Congressional conference committee on May 25, 2001; signed into law shortly thereafter; but phased in over a several year period.  The key provisions of the law (as reported in the conference committee’s report):
Introduce a 10-percent rate bracket… reducing the rate from 15% to 10% for the first $6,000 of taxable income for single individuals ($7,000 for 2008 and thereafter), $10,000 of taxable income for heads of households, and $12,000 for married couples filing joint returns ($14,000 for 2008 and thereafter).

Reduce individual income tax rates  … from 28 percent, 31percent, 36 percent, and 39.6 percent are phased-down over six years to 25 percent, 28 percent, 33 percent, and 35 percent, effective after June 30, 2001.

click table to make it bigger

Phase-out of Itemized Deductions and Restrictions on Personal Exemptions … by eliminating all limitation on itemized deductions and any restrictions on personal exemptions for all taxpayers by one-third in taxable years beginning in 2006 and 2007, and by two-thirds in taxable years beginning in 2008 and 2009, and by 100% for taxable years beginning after December 31, 2009.

Increase and Expand the Child Tax Credit… Increasing the child tax credit to $1,000, phased-in over ten years. and by making the child credit — subject to certain income limitations — non-taxable and refundable (i.e. payable to the person if the net tax liability is zero),

Provide relief from the “marriage penalty” … by increasing the basic standard deduction for a married couple filing a joint return; by increasing the size of the 15-percent regular income tax rate bracket for a married couple filing a joint return to twice the size of the corresponding rate bracket for an unmarried individual filing a single return.; and by increasing limits on the Earned Income Tax Credit.

Provide Education Benefits… by increasing the annual limit on contributions to education IRAs to $2,000; by expanding the reach of 529 tuition programs; by extending the non-taxibility of employer paid tuition; and by raising income phase out levels for deductability of student loan interest.

Phase-out and Repeal of Estate and Generation-Skipping Transfer Taxes:

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In 2003, a second round of tax changes was enacted in the “JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF 2003” which:

Accelerated the phase in of the 10% bracket, the reduction in other bracket rates, the child care tax credit, and marriage penalty relief.

Provide reductions in taxes on capital gains and dividends … reducing the 10- and 20-percent rates on capital gains on assets held more than one year to five ( zero, in 2008 ) and 15 percent, respectively. and providing that dividends received by an individual shareholder from domestic and qualified foreign corporations generally are taxed at the same rates that apply to capital gains.

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Source Reports
http://www.jct.gov/x-50-01.pdf
http://www.house.gov/jct//x-54-03.pdf

Punch line: Obama’s plan to raise top marginal rates is holding back the very people who should be leading the economic recovery.

Ken’s Q: Why doesn’t Obama just declare that a separate rate will apply to business income reported on 1040s?  That would neutralize this issue.

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According to the WSJ …

The President has called for the permanent extension of the Bush tax cuts for singles with incomes below $200,000 and married couples with incomes below $250,000, but has proposed that most of the tax cuts for households with higher incomes be allowed to expire.

To buttress this position, the president and his supporters have repeatedly asserted that the expiration of these cuts will have little impact, because they affect only about 3% of the wealthiest Americans, people who “can afford it.”

House Speaker Nancy Pelosi repeatedly flips the number around and says that the planned tax increases would exempt “98% of American families and about 97% of small businesses.”

The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. 

But, according to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007.

That’s the number to look at, not the 3%.

And, the evidence is clear that lifting the top rates will hamper the business investment upon which our nation’s prosperity depends.

Research studies have consistently found that increasing progressivity of the tax code discourages entrepreneurs from starting new businesses.

Excerpted from WSJ: The Small Business The 97% Fallacy, Sept. 3, 2010
http://online.wsj.com/article/SB10001424052748703959704575454061524326290.html?mod=WSJ_Opinion_LEADTop

According to IBD /TIPP …

• 51% percent of Americans favor making the Bush cuts permanent vs. 28% who didn’t.
• Republicans were more than 4 to 1 and Independents more than 2 to 1 in favor.
• Only Democrats were opposed, but only by 40% to 38%.

The cuts also proved popular among all income groups — despite the Democrats’ oft-heard assertion that Bush merely provided “tax breaks for the wealthy.”

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As of midnight Dec. 31 , if the Bush tax cuts aren’t extended …

• The death tax returns — at a rate of 55% on estates of $1 million or more.
• The lowest bracket for the personal income tax moves up 50% — to 15% from 10%.
• The next lowest bracket — 25% — will rise to 28%, and the old 28% bracket will be 31%.
• At the higher end, the 33% bracket is pushed to 36% and the 35% bracket becomes 39.6%.
• The marriage penalty makes a comeback … e.g. the standard deduction for couples is fixed at the same level as it is for single filers.
• The capital gains tax will jump 33% — to 20% from 15%.
• The tax on dividends will go all the way from 15% to 39.6% — a 164% increase.
• Other tax hikes include: halving the child tax credit to $500 from $1,000

Source IBD: The Tax Tsunami On The Horizon, 07/21/2010
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=541131