The Homa Files

Appropriately, much attention is starting to get focused on the likely TRIPLING of the marginal tax rate on dividends (see the WSJ article below). 

Right now, the top rate on ordinary dividends is 15%.  The current Senate budget resolution calls for the rate to jump on January 1 to the pre-Bush ordinary income tax rate of 39.6%.  In 2013 — when the ObamaCare tax collection mechanism gets revved up — you can add another 3.8%, pushing the high marginal rate up to a whopping 43.4%

That’s for rich folks.  But what about the widows, orphans, and retirees?

Many folks don’t realize that the current 15% dividend tax rate only applies to folks in the upper tax brackets — starting, for married folks, at $67,800.  Married folks below that threshold are in the zero, 10% or 15% marginal tax brackets — their current tax rate on ordinary dividends is ZERO !  That’s right, ZERO.

So, if their dividend tax rate for low-earners also gets upped to their ordinary income tax rates, most of them will be paying 15%.  Statistically speaking, that’s significantly different from zero.

Going after the dividend receiving fixed income retirees … hmmm… I think they call that an unintended conseuence.

* * * * *

Excerpted from WSJ: The Dividend Tax Bill Arrives, April 29, 2010

As the big tax increase day of January 1, 2011 approaches, the Democrats running Congress are beginning to lay out their priorities. Get ready for bigger rate increases than previously advertised.

Last week the Senate Budget Committee passed a fiscal 2011 budget resolution that includes an increase in the top tax rate on dividends to 39.6% from the current 15% — a 164% increase. This blows past the 20% rate that President Obama proposed in his 2011 budget and which his economic advisers promised on these pages in 2008.

(See “The Obama Tax Plan,” August 14, 2008, by Jason Furman and Austan Goolsbee: “The tax rate on dividends would also be 20% for families making more than $250,000, rather than returning to the ordinary income rate.”)

And that’s only for starters. The recent health-care bill includes a 3.8% surcharge on all investment income, including dividends, beginning in 2013. This would nearly triple the top dividend rate to 43.4% in Mr. Obama’s four years as President. We suppose the White House would call this another great victory for income equality.

* * * * *

Dividends which are payouts from business earnings are already taxed once at the corporate rate of 35%. The individual dividend tax is a second levy on that same income, and at a rate of 43.4% would take the total tax on each dollar paid in dividends to something like 60 cents.

You can expect fewer businesses either to offer or increase dividend payouts, which means less dividend revenue for the government.

The punitive tax rate on dividends combined with the deductibility of interest on borrowing also increases the tax code’s bias toward debt over equity. But aren’t we supposed to be living in a new era of healthy deleveraging?

* * * * *
Full article:
http://online.wsj.com/article/SB10001424052748703709804575202481173165478.html?mod=djemEditorialPage_h

Too bad they’re a diminishing breed …

* * * * *

Excerpted from IBD: New Tax Math: Single Moms + Big Brother, 04/23/2010

The news that the U.S. has become a two-class society — i.e., half of Americans pay federal income taxes and half don’t — has been bouncing around the media and shocked some Americans who had no knowledge of this appalling economic fact.

Married taxpayers pay 75% of all federal income taxes, whereas two-thirds of single parents who file as head of household pay no income tax at all.

In 2008, 40.6% of children born in the U.S. were born outside of marriage; that’s 1,720,000 children …  7% of those babies were born to girls under age 18 … over three-fourths were born to women over 20.

LBJ’s Great Society set up a  system whereby millions of people were taught they had an “entitlement” to pick the pockets of law-abiding, taxpaying families if they met two conditions: They didn’t work, and they were not married to someone who did work.

Now, about 40% of Americans receive federal government handouts of cash and valuable benefits …  20% of Americans get 75% of their income from the federal government and another 20% get 45% of their income from the government.

Obama’s stimulus law will add nearly $800 billion in welfare spending over the next decade.

That means $22,500 for every poor person in the U.S., which will cost over $10,000 for each family that pays federal income taxes.

Full articler:
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=531278

Obama mocked Tea Partiers, saying that they should be thanking him. 

President Barack Obama struck a hyperpartisan note Thursday, telling Democrats that he was “amused” by the Tax Day Tea Party rallies. 

Obama, addressing a Democratic National Committee (DNC) fundraiser in Miami, did little to endear himself to the Tea Party groups protesting around the country, saying:

 “”I’ve been a little amused over the past couple of days where people have been having these rallies about taxes …they should be saying thank you”  because of the tax cuts he has signed into law. 

‘You Would Think They’d Be Saying Thank You’, April 16, 2010
http://thehill.com/homenews/administration/92625-obama-amused-by-tea-party-rallies 

click for video:
http://tinyurl.com/y3a88zf 

Oh really ?  

His rationale: he cut taxes for 95% of Americans. 

Give me a break, please. 

First, the tax break he was selectively talking about was a whopping dollar-a-day refundable tax credit that was part of the Stimulus package. 

Second, most of it went to the people who don’t pay income taxes anyway.  Those folks are already saying thank you … when they’re not saying “gimme, gimme, gimme” 

Third, the dollar-a-day program is more than offset by $670 Billion in enacted tax increases, about 1/2 of which hits folks reporting less than $200,000 in income … that works out to about $2,100 per citizen, and $4,200 per taxpayer collected by 16,000 additional IRS agents. 

According to a Ways and Means Committee staff analysis:

“The list of $670 billion in tax increases includes at least 14 violations of the President’s pledge not to raise taxes on Americans earning less than $200,000 for singles and $250,000 for married couples.”

This specific group of tax hikes totals $316 billion over 10 years.

http://www.house.gov/budget_republicans/press/2007/pr20100415whereisbudget.pdf

As RealClearPolitics opined:

President Obama just can’t help himself from playing the Comic-in-Chief and ridiculing his opponents.

It’s good for a laugh from the partisan crowd, sure, but it often comes across to average folks (and, of course, to the opposition) as petty and/or unpresidential.

That’s not … what the public might expect from a President who promised to rise above petty partisan politics.

http://realclearpolitics.blogs.time.com/2010/04/16/obama-may-not-be-so-amused-in-november/

“Paying taxes is strictly voluntary” … so says Harry Reid

Don’t you feel silly for sending in a check yesterday ?

It makes me shiver to think that this guy is the second most powerful person in the country (after Nancy Pelosi)

This is worth watching …

http://www.youtube.com/watch?v=R7mRSI8yWwg

“Paying taxes is strictly voluntary” … so says Harry Reid

Don’t you feel silly for sending in a check yesterday ?

It makes me shiver to think that this guy is the second most powerful person in the country (after Nancy Pelosi)

This is worth watching …

http://www.youtube.com/watch?v=R7mRSI8yWwg

Last week, there was a flurry of news activity over a report that nearly half of all U.S. households will pay no federal income taxes for 2009.

It was treated as new news.  Geez.

Homa Files were all over this as far back as July 31, 2008. 

For all the wonky facts & a complete analysis see:
Under Obama, Tax Payers Will be a Minority !
https://kenhoma.wordpress.com/2008/10/28/under-obama-tax-payers-will-be-a-minority/

Note: This is the Homa Files post with all-time record for most hits.

 I hate to be an “I told you so” (yeah, right) … but hears the AP report … almost 2 years later.

As President Obama likesto say “Elections have consequences”.

* * * * *

Excerpted from AP: Nearly half of US households escape fed income tax, April 9, 2010

The federal income tax is the government’s largest source of revenue, raising more than $900 billion — or a little less than half of all government receipts .

So, Tax Day is a dreaded deadline for millions, but for nearly half of U.S. households it’s simply somebody else’s problem.

About 47 percent will pay no federal income taxes at all for 2009 … up from 38% in 2007.

Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability.

In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax.

Tax cuts enacted in the past decade have been generous to wealthy taxpayers making them a target for President Barack Obama and Democrats in Congress.

Less noticed were tax cuts for low- and middle-income families, which were expanded when Obama signed the massive economic recovery package last year.

The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners paid about 73 percent of the income taxes collected by the federal government.

The bottom 40 percent, on average, make a profit from the federal income tax … the government sends them a payment. Not just a refund of of excess withholding — so-called “refundable credits”.

“We have almost 50 percent of families who are getting something for nothing.”

Some of the blame goes to former President George Bush.  In 2008, he signed a law providing most families with rebate checks of $300 to $1,200.

Last year, Obama signed the economic recovery law that expanded some tax credits and created others.

Obama’s Making Work Pay credit provides as much as $800 to couples and $400 to individuals. The expanded child tax credit provides $1,000 for each child under 17. The Earned Income Tax Credit provides up to $5,657 to low-income families with at least three children.

There are also tax credits for college expenses, buying a new home and upgrading an existing home with energy-efficient doors, windows, furnaces and other appliances.

Many of the credits are refundable, meaning if the credits exceed the amount of income taxes owed, the taxpayer gets a payment from the government for the difference.

Obama has pushed tax cuts for low- and middle-income families and tax increases for the wealthy, arguing that wealthier taxpayers fared well in the past decade, so it’s time to pay up. The nation’s wealthiest taxpayers did get big tax breaks under Bush, with the top marginal tax rate reduced from 39.6 percent to 35 percent, and the second-highest rate reduced from 36 percent to 33 percent.

But income tax rates were lowered at every income level. The changes made it relatively easy for families of four making $50,000 to eliminate their income tax liability.

Here’s how they do it, according to Deloitte Tax:

The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.

With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.

The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

Full article:
http://finance.yahoo.com/news/Nearly-half-of-US-households-apf-1105567323.html?x=0&.v=1

* * * * *

Why it matters 

The Tax Foundation — a nonpartisan tax research group – has repeatedly warned that 

“While some may applaud the fact that millions of low- and middle-income families pay no income taxes, there is a threat to the fabric of our democracy when so many Americans are not only disconnected from the costs of government but are net consumers of government benefits.

The conditions are ripe for social conflict if these voters begin to demand more government benefits because they know others will bear the costs.” 

 http://www.taxfoundation.org/research/show/1111.html

Here’s probably the quirkiest part of the selective expiration of the Bush tax cuts that Obama has baked into his budget …

Obama repeatedly promised that individuals earning less than $200,000 — and families earning less than $250,000 wouldn’t see their taxes go up by as much as a dime.

Think about that for a second …

Let’s pretend there’s an unmarried couple (boyfriend and girlfriend, or any other combination) with each individual earning $200,000.

As individuals, if Obama keeps his pledge,  they incur no additional income taxes in 2011 when parts of the Bush tax cuts are allowed to expire, and no additional “payroll taxes” in 2013 when the ObamaCare surcharge goes into effect.

But, if the couple is married and files jointly, they’d have $400,000 of family income and officially be reclassified as “rich people” … uh-oh !

By my count, their marriage penalty would be over $23,000.

Their “base” income taxes would go from $102,285 to $118,340 —  an increase in their effective tax rate from just over 25% to 30%.

Plus, they’d be slapped with the 3.8% payroll tax on all income over $200,000.  That tacks on another $7.600.

That makes their total income tax bill $125,940 — 23% higher than if they were unmarried and filing as individuals.

Now, that’s a marriage penalty !

In a prior post, we walked through the impact if Obama selectively lets the parts of the Bush tax cuts expire in 2011 — those parts that effect individuals earning more than $200,000 and couples earning more than $250,000.

In a nutshell, here’s what we concluded …

• The tax rate on capital gains will go up 5% … and the tax rate on dividends will go up at least 5% (to the capital gains tax rate) and maybe all the way up to ordinary income tax rates.
• For ordinary income, the effective (not marginal) tax rate increase on ordinary income will be about 1/2% for each $100,000 of taxable income (i.e. ordinary income plus dividends and capital gains) over $200,000.

For example, assume a couple has $200,000 in taxable ordinary income and $100,000 in dividends and capital gains, giving them total taxable income of $300,000.   Their tax hit will be about $6,000 — $5,000 from the increase in dividend and capital gains tax rates (5% X $100,000) and $1,000 from the increase in the effective rate on ordinary income ($300,000 minus $200,000 = $100,000 => 1/2% rate increase times $200,000 = $1,000).  In rough numbers, their income taxes would go from $67,000 to $73,000 — an increase of almost 9% — and their effective tax rate would go from 21% to over 24%.

But, that’s only part of the story.

Remember that the original Senate bill funded roughly 1/2 of ObamaCare from MediCare cuts and roughly 1/2 from an excise tax on employer provided Cadillac health insurance plans — a plan originally teed up by Obama.  When the unions marched on the White House and reminded the President who got him elected, Obama recalibrated upward the threshold defining a Cadillac plan, delayed the implementation of that tax until 2018, and replaced the lost tax revenue with a supplemental 3.8% payroll tax on AGI (Adjusted Gross Income — which includes ordinary income plus dividends and capital gains) over $200,000 — starting in 2013

Technical note:  The base Medicare tax rate is currently applied as a payroll tax on so-called earned income.  Employees pay 1.45% and employers are required to match the 1.45% — for a total of 2.9%.  Under ObamaCare, for “unearned income” — mostly dividends and capital gains — there is no employer per se, so the taxpayer is charged the full 2.9% base … plus, a supplemental .9% was added on for good measure — raising the total to 3.8%

So, comparing 2013 to the current tax rates

• The tax rate on capital gains will go up 5% … and the tax rate on dividends will go up at least 5% (to the capital gains tax rate) and maybe all the way up to ordinary income tax rates.
• For ordinary income, the effective (not marginal) tax rate increase on ordinary income will be about 1/2% for each $100,000 of taxable income (i.e. ordinary income plus dividends and capital gains) over $200,000.
• There is a 3.8% “payroll tax” on all AGI over $200,000 — that includes ordinary income plus dividends and capital gains.

Let’s rework our example …

Again, assume a couple has $200,000 in taxable ordinary income and $100,000 in dividends and capital gains, giving them total taxable income of $300,000.

Their tax hit (versus 2009) will be about $9,800 …

• $5,000 from the increase in dividend and capital gains tax rates (5% X $100,000)
• $1,000 from the increase in the effective rate on ordinary income ($300,000 minus $200,000 = $100,000 => 1/2% rate increase times $200,000 = $1,000).
• $3,800 in additional “payroll taxes” ($300,000 minus $200,000 = $100,000 times 3.8% = $3,800

In rough numbers, their income taxes would go from $67,000 to $76,800 — an increase of almost 15% — and their effective tax rate would go from 21% to over 25.5%.

Keep in mind, that this is just Federal income taxes.  Add on another 5% to 10% for state and local income taxes … then draw your own conclusions re: fairness and effect on the economy. …

* * * * *

Here’s a handy tool for estimating effective tax rates now, and prospectively in 2013.

* * * * *

Next up: The triumphant return of the marriage penalty

>> Current Posts

OK, what’s the effect if Obama lets the Bush tax cuts expire? Big hurt or little hurt ?

Here’s a first cut …

* * * * *

Base Case

Assume a married couple earning a combined $250,000 in taxable income.  Their tax liability based the 2009 tax rate schedule would be $60,320 — an effective tax rate of 24%. 

Literally reverting back to the pre-Bush 2000 tax rate schedule, they’d owe $73,048 — a 29% effective tax rate — and a 21% increase over the current tax rates.

That’s a big hurt … and probably an unlikely worst case scenario.

* * * * *

Likely Obama Plan

Remember that Obama has often said “not a dime more in taxes for families making less than $250,000″ … and sometimes said the same for individuals making less than $200,000.

In fact, according to the Tax Foundation, the plan outlined in the Obama administration’s budget is to allow:

• The top tax rate to revert from 35% to 39.6%. 
• The 33% tax rate to revert to 2001 law (rate of 36%) but the income threshold where that bracket starts will shift up to $250,000 in taxable income (couples) and $200,000 for singles
• The rate on long-term capital gains to revert to 2001 law (rate of 20%) but only for couples with over $250,000 in AGI the year the gain is realized ($200K threshold for singles)
• The rate on dividends to be hiked to long-term capital gains rates, i.e. up to 20%, but below ordinary income tax rates.

  Excerpted from Tax Foundation: Fate of Bush Tax Cuts Uncertain As Expiration Approaches, March 25, 2010   http://www.taxfoundation.org/research/show/26062.html

* * * * *

If the Tax Foundation is right, here’s what the brackets would look like for married couples per the Obama budget:

If Obama keeps his word on this one, our illustrative couple earning $250,000 won’t pay higher income taxes.

What about their friends who earn more and have more wealth to spread around ?

Well, a couple earning $500,000 would have their tax liability go from $137,500 (an effective tax rate of about 27.5%) —  to $150,000 (an effective tax rate of about 30%) — roughly a 9% increase in their taxes paid.

Draw your own conclusion whether that’s a lot or a little …

Note: This is only the increase due to the tax brackets shift if the Bush tax cuts are allowed to expire … it does not consider:

• The impact of the likely increase increase in the capital gains tax rate (from 15% to 20%), or the increase in the dividends tax rate (from 15% to either 20% or the ordinary income tax rate)
•  … or the triumphant return of the marriage penalty (on steroids this time)
•  … or the 3.8% payroll tax surcharge on AGI over $200,000 (including dividends and capital gains)  to be added in 2013 to pay for ObamaCare. 

I’ll cover capital gains and dividends below … and  the marriage penalty and ObamaCare payroll tax surcharge in subsequent posts.

* * * * *

Estimating your tax hit

Here are some back-of-the-envelope ways to ballpark how much more you’ll be paying in income taxes in 2011 …

If your taxable income (AGI minus deductions) is less than $200,000 (individuals) or $250,000 (couples) — and if Obama keeps his campaign pledge — then your income taxes won’t go up.

If taxable income is over the thresholds …

The tax rate on capital gains will go up 5% … and the tax rate on dividends will go up at least 5% (to the capital gains tax rate) and maybe all the way up to ordinary income tax rates.

For ordinary income, the effective (not marginal) tax rate increase on ordinary income will be about 1/2% for each $100,000 of taxable income (i.e. ordinary income plus dividends and capital gains) over $200,000.

For example, assume a couple has $200,000 in taxable ordinary income and $100,000 in dividends and capital gains, giving them total taxable income of $300,000.   Their tax hit will be about $6,000 — $5,000 from the increase in dividend and capital gains tax rates (5% X $100,000) and $1,000 from the increase in the effective rate on ordinary income ($300,000 minus $200,000 = $100,000 => 1/2% rate increase times $200,000 = $1,000).  In rough numbers, their income taxes would go from $67,000 to $73,000 — an increase of almost 9% — and their effective tax rate would go from 21% to over 24%.

* * * * *

Here’s a handy chart for eyeballing 2011 effective ordinary income tax rates at a range of taxable income levels. 

Technical note: Remember to separate out capital gains and dividends from taxable ordinary income — since they get a 5% hit. But, use total taxable income (ordinary income plues dividends and capital gains ) to estimate the increase in the ordinarary income effective tax rate.

In a subsequent post, I’ll incorporate the ObamaCare 3.8% payroll tax on AGI over $200,000 to be added in 2013 and look at the return of the uber-marriage penalty.

* * * * *

Next up: The payroll tax surcharge …  add 3.8% for all income over $200,000

OK, what’s the effect if Obama lets the Bush tax cuts expire? Big hurt or little hurt ?

Here’s a first cut …

* * * * *

Base Case

Assume a married couple earning a combined $250,000 in taxable income.  Their tax liability based the 2009 tax rate schedule would be $60,320 — an effective tax rate of 24%. 

Literally reverting back to the pre-Bush 2000 tax rate schedule, they’d owe $73,048 — a 29% effective tax rate — and a 21% increase over the current tax rates.

That’s a big hurt … and probably an unlikely worst case scenario.

* * * * *

Likely Obama Plan

Remember that Obama has often said “not a dime more in taxes for families making less than $250,000″ … and sometimes said the same for individuals making less than $200,000.

In fact, according to the Tax Foundation, the plan outlined in the Obama administration’s budget is to allow:

• The top tax rate to revert from 35% to 39.6%. 
• The 33% tax rate to revert to 2001 law (rate of 36%) but the income threshold where that bracket starts will shift up to $250,000 in taxable income (couples) and $200,000 for singles
• The rate on long-term capital gains to revert to 2001 law (rate of 20%) but only for couples with over $250,000 in AGI the year the gain is realized ($200K threshold for singles)
• The rate on dividends to be hiked to long-term capital gains rates, i.e. up to 20%, but below ordinary income tax rates.

  Excerpted from Tax Foundation: Fate of Bush Tax Cuts Uncertain As Expiration Approaches, March 25, 2010   http://www.taxfoundation.org/research/show/26062.html

* * * * *

If the Tax Foundation is right, here’s what the brackets would look like for married couples per the Obama budget:

If Obama keeps his word on this one, our illustrative couple earning $250,000 won’t pay higher income taxes.

What about their friends who earn more and have more wealth to spread around ?

Well, a couple earning $500,000 would have their tax liability go from $137,500 (an effective tax rate of about 27.5%) —  to $150,000 (an effective tax rate of about 30%) — roughly a 9% increase in their taxes paid.

Draw your own conclusion whether that’s a lot or a little …

Note: This is only the increase due to the tax brackets shift if the Bush tax cuts are allowed to expire … it does not consider:

• The impact of the likely increase increase in the capital gains tax rate (from 15% to 20%), or the increase in the dividends tax rate (from 15% to either 20% or the ordinary income tax rate)
•  … or the triumphant return of the marriage penalty (on steroids this time)
•  … or the 3.8% payroll tax surcharge on AGI over $200,000 (including dividends and capital gains)  to be added in 2013 to pay for ObamaCare. 

I’ll cover capital gains and dividends below … and  the marriage penalty and ObamaCare payroll tax surcharge in subsequent posts.

* * * * *

Estimating your tax hit

Here are some back-of-the-envelope ways to ballpark how much more you’ll be paying in income taxes in 2011 …

If your taxable income (AGI minus deductions) is less than $200,000 (individuals) or $250,000 (couples) — and if Obama keeps his campaign pledge — then your income taxes won’t go up.

If taxable income is over the thresholds …

The tax rate on capital gains will go up 5% … and the tax rate on dividends will go up at least 5% (to the capital gains tax rate) and maybe all the way up to ordinary income tax rates.

For ordinary income, the effective (not marginal) tax rate increase on ordinary income will be about 1/2% for each $100,000 of taxable income (i.e. ordinary income plus dividends and capital gains) over $200,000.

For example, assume a couple has $200,000 in taxable ordinary income and $100,000 in dividends and capital gains, giving them total taxable income of $300,000.   Their tax hit will be about $6,000 — $5,000 from the increase in dividend and capital gains tax rates (5% X $100,000) and $1,000 from the increase in the effective rate on ordinary income ($300,000 minus $200,000 = $100,000 => 1/2% rate increase times $200,000 = $1,000).  In rough numbers, their income taxes would go from $67,000 to $73,000 — an increase of almost 9% — and their effective tax rate would go from 21% to over 24%.

* * * * *

Here’s a handy chart for eyeballing 2011 effective ordinary income tax rates at a range of taxable income levels. 

Technical note: Remember to separate out capital gains and dividends from taxable ordinary income — since they get a 5% hit. But, use total taxable income (ordinary income plues dividends and capital gains ) to estimate the increase in the ordinarary income effective tax rate.

In a subsequent post, I’ll incorporate the ObamaCare 3.8% payroll tax on AGI over $200,000 to be added in 2013 and look at the return of the uber-marriage penalty.

* * * * *

Next up: The payroll tax surcharge …  add 3.8% for all income over $200,000

This brief was originally posted July 23, 2008. 

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

In subsequent posts, I’ll deal with the likely implications of letting the cuts expire … 

* * * * *

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?

* * * * *

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”

* * * * *

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:

* * * * *

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.

* * * * *

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

* * * * *

Next up: What if Obama let’s the Bush tax cuts expire ?  You may be surprised …

The Bush tax cuts completely did away with the income tax marriage penalty, right ?

Au contraire, mon ami. 

That’s just an urban legend repeated so many times that many have been led to believe it. 

Me included.

* * * * *

Let’s go through the numbers with an example:

Assume a couple — boyfriend and girlfriend (or any other combination of two people) — each earn $100,000 in taxable income.

According to the 2009 schedule X tax table (individuals), they’d each pay $21,720 if they file separately. 
(The tax table is at the end of this post if you want to check my arithmetic)

So, the unmarried couple pays a total of $43,440 in income taxes (2 X $21,720) — that’s an effective tax rate of 21.7%.

* * * * *

What if they were married and filed a joint return?

Well, the good news is that the standard deduction ($11,400) is twice an individual’s standard deduction — it wasn’t until Bush fixed it.  And, their personal exemption amount ($7,300) is double an individual’s (because they’re below the phase out income level).

So, we can just pull their number from the $200,000 taxable income line of the 2009 schedule Y tax table (married filing jointly).

The answer: their tax liability is $44,277.50 — about 2% higher than if they were unmarried and filing individually.

Technical note: Married filing separately doesn’t make the problem go away.  You’re either married or your not.

If you think a 2% difference is just rounding error, let’s move up the tax schedule.

Assume that he & she (or whatever) each earn $200,000 taxable income.    Their combined income tax liability would be $102,285 if they were unmarried and filing individually, and $110,362 if they were married and filing jointly — a spread of almost 8%.

For sure, that’s some serious money …

Technical note: The penalty is relative small at incomes below $50,000 (per person) … and relatively small at very, very high incomes that are taxed mostly at the highest bracket rates.

Bottom line: The marriage penalty may have been reduced, but it’s still there … and in a later post, I show how it swells when Obama lets parts of the Bush tax cuts expire.

* * * * * * * * * * * * * * * * * * * * * * * * *

2009 Tax Rate Schedules

http://www.unclefed.com/IRS-Forms/taxtables/index.html

* * * * *

Next up: Those (expletive deleted) Bush tax cuts …

I figure that attentiveness to income tax issues is probably at a high point as we close in on April 15, so I have loaded several tax-relevant posts for the next several days. 

Among the topics:

• Did the marriage penalty really get eliminated?  Answer: no.
• Where the Bush tax cuts really just for the wealthy?  Answer: no.
• So what if Obama let’s the Bush tax cuts expire? Answer: uh-oh
• What about the 3.8% non-payroll payroll tax on dividends and capital gains? Answer: uh-oh (again)
• What about the marriage penalty? Answer: it gets a dose of steroids
• So, what’s like to happen … really? Answer: gonna get interesting

Stay tuned over the next week or so …

There were 3 related stories last week that have to make you scratch your head … or scream.

First, the monthly BLS jobs report indicated that 36,000 more jobs were lost (“good news” according to Harry Reid) … job losses in the private sector were offset by more jobs added in government. The federal government now spends about $125 billion annually on compensation for about 2 million civilian employees.
http://www.bls.gov/news.release/empsit.nr0.htm

Second, USA Today reported that Federal employees earn higher average salaries than private-sector workers in more than eight out of 10 occupations and that federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector. The average pay for the same mix of jobs in the private sector was $60,046 — a difference of almost 13%. That doesn’t include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker. So, the total of comp plus benefits is $108,476 for a Federal employee, $69,928 for a private sector grunt — a difference of over 55%.
http://www.usatoday.com/news/nation/2010-03-04-federal-pay_N.htm

Now, the coup de grace: According to Internal Revenue Service documents, 276,300 federal employees and retirees owe $3,042,200,000 in back taxes. Rep. Jason Chaffetz (UT) introduced a bill to collect “seriously delinquent” taxes from federal employees and congressional staffers. The amendment was voted down, ostensibly because it would “overburden the Office of Personnel Management, which would be responsible for administering the provision”. And, oh yeah, government employees’ unions lobbied against the changes.

Keep reading for details …

* * * * *

Provision to fire tax-delinquent federal employees pulled

A legislative compromise that would have allowed agencies to fire tax-delinquent federal employees fell apart on Thursday.

An amendment to the 2009 Contracting and Tax Accountability Act would have targeted “seriously delinquent” federal employees and congressional staffers.

Democrats raised concerns about whether the amendment would overburden the Office of Personnel Management, which would be responsible for administering the provision.

Govexec.com, March 4, 2010
http://www.govexec.com/dailyfed/0310/030410rb1.htm

* * * * *

Feds owe Uncle Sam $3B in unpaid taxes

At a time when the White House is projecting the largest deficit in the nation’s history, Uncle Sam is trying to recover billions of dollars in unpaid taxes from its own employees.

Federal workers owe more than $3 billion in income taxes they failed to pay in 2008. According to Internal Revenue Service documents, 276,300 federal employees and retirees owe $3,042,200,000.

The agency with the most tax scofflaws is the U.S. Postal Service, with 28,913 employees who owe $297,933,756.

“We urge our employees to comply with all tax laws and are encouraged that many who have been delinquent have agreed to payment plan with the IRS,” USPS spokesperson Mark Saunders said.

“We remind our employees of this responsibility as part of our mandatory annual ethics training.”

Notable agencies on the list:

Executive Office of the President (includes the White House): 50 employees owe $812,917;

U.S. Senate: 231 employees owe $2,469,026;

U.S. House of Representatives: 447 employees owe $5,809,631;

Wtop.com, December 14, 2009
http://www.wtop.com/?nid=428&sid=1838232

Here are my pets from the Team Obama budget and the yak that romanced its announcement …

1. I’m officially tired of hearing the President whine that Bush created the deficit with his “costly prescription drug plan”.  If Team O doesn’t like it, then show some cahones and cut it.  Otherwise stop strolling down memory lane.  (Note: they don’t have the fortitude to kill it — it’s just a talking point.)
2. Half of ObamaCare ($50 billion per year) was to be funded with MediCare waste and fraud.  Why don’t they get cracking on the waste and fraud this afternoon?  They said it’s low hanging fruit, so let’s pick it !
3. Limit the itemized tax deductions high earners can claim for charitable donations.  Let me make sure I understand this: The Feds borrow $100 million from the Chinese to give to the Haitians … and then turn around to starve the Red Cross, Doctors Without Borders and other charitable groups that actually do something.
4. Repeal a widely ignored law that taxes the personal use of company-issued cell phones like other fringe benefits.  Have you ever looked at your phone bills to see how much is already paid in taxes ?
5. The budget is silent on the tanning salons’ excise tax. Nuts. That’s at the top of my list.

Punch line: States with the highest taxes also rank as the unhappiest.

* * * * *

WSJ: Are Taxes the Root of Unhappiness?, Dec. 29, 2009

Does living in a blue state make people blue?

It seems so, according to a new study in Science magazine  … New Yorkers — with high taxes, traffic congestion, cold weather, and poor schools — are the unhappiest people in America and their neighbors in Connecticut come in a close second, followed by Michigan, Indiana, New Jersey, California, and Illinois.

And the happiest states? Drum roll, please…Louisiana, Hawaii, Florida, Tennessee, and Arizona.

Eight of the ten happiest states lean right while eight of the ten unhappiest tilt left.

The people who say they’re satisfied with their lives aren’t just delusional or overly optimistic, and people who say they’re unsatisfied aren’t just pessimists. People have legitimate reasons to be happy or unhappy.

And well, high taxes seem to be a big reason—ostensibly an even bigger reason than weather given that California is one of the unhappiest states and inclement Louisiana is the happiest.

According to the Tax Foundation 2008 analysis, three of the top five unhappiest states—New York, Connecticut and New Jersey — have the highest state-local tax burdens.

On the other hand, four of the top five happiest states—Louisiana, Florida, Tennessee and Arizona — are among the states with the lowest state-local tax burdens. True, correlation doesn’t prove causation, and high taxes alone don’t always make people miserable, but there’s something going on here.

In states with high property, income, and sales taxes like New York, people have less money to spend on other things that make them happy. They have less money to spend on vacations, hobbies, home improvements, eating out and child care. Another problem may be that people receive a low return on their tax dollars.

People are least happy in states that impose high taxes but don’t provide matching public benefits (e.g. good highways to relieve congestion and reduce commute times). It’s in states where taxes disproportionately subsidize public employee pensions and entitlement programs, but don’t much improve the general public’s quality of life, that people are most unhappy.

This intuitively makes sense. If you’re paying more than a third of your income in taxes, as many New Yorkers do, then you expect to realize the benefits from your hard-earned tax dollars. You expect quality schools, good roads, low crime rates, and quick commutes. You expect your local and state governments to be responsive to your needs, not to the cash flows of entrenched public employee unions and other special interests.

Many liberal state governments like those in Albany, Trenton and Sacramento are spending more and more on entitlement programs and public employee pensions, racking up more and more debt, and imposing more and more taxes to pay for it all –while ignoring their taxpayers’ needs.

Taxpayers, however, aren’t just getting unhappy. They’re getting out. United Van Lines’ 2009 annual study shows that New York, New Jersey, Michigan and Illinois are among the states with the highest outbound migration while Alabama and Tennessee are among the states with the highest inbound migration.

This doesn’t bode well for high-spending, high-tax states like New York where outbound migrants’ income is 13% greater than that of inbound migrants. In 2006, this differential meant a loss of $4.3 billion in taxpayer income for the state.

Taxes may not be the root of all unhappiness, but they do result in some very sad citizens.

Full article (with stats explanation)
http://online.wsj.com/article/SB10001424052748703278604574624743612652998.html?mod=djemEditorialPage

The punch lines: 

(1) “The House raises taxes on carried interest”

(2) Obama says “we’re proposing a complete elimination of capital gains taxes on small business investment” for one year.

* * * * *

Ken’s Take:

(1) Oh, those poor private equity guys.  The taxation of so-called carried interest is complicated, but reduces down to the fact that private equity firms have enjoyed a massive tax break for years.  Whether that tax break has fueled innovation and growth or simply lined the pockets of the equitists is subject to debate. My view: more the latter than the former.  So, I say: go get ’em.

(2) From a personal standpoint, I favor low or no capital gains taxation.  Why not?  I have some horses in that race.

But, for the life of me, I can’t figure out how a 1-year suspension of small business capital gains taxes helps small businesses and promotes hiring. 

What appreciated assets is a typical small business going to sell in the next 12 months that would qualify for a gain?  Except for small financial firms that hold and trade securities and family farms that are passing down generationally,  I can’t figure out how small businesses benefit from this move.

Does seem that — if we have any appreciated assets — we should all become small businesses and sell them in 2010.

If somebody can explain this to me, please hit the reply button … I must be missing something.

* * * * *

Excerpted from WSJ: Zero to 35 in 24 Hours, Dec.10, 2009 

On Tuesday, Mr. Obama announced that “we’re proposing a complete elimination of capital gains taxes on small business investment” for one year.

On Wednesday, the House voted to change the capital gains rate for venture capitalists, private equity fund managers and managers of real-estate and oil-and-gas partnerships. But rather than eliminating the tax, the House more than doubled it, moving the tax rate to 35% from 15% by reclassifying such gains as ordinary income.

The new 35% rate applies to what is known as “carried interest,” which is income that only materializes if fund managers wisely invest the fund’s capital and only after other investors in the fund have benefited. Venture and private equity fund managers already pay normal income taxes on their regular salary derived from management fees. The carried interest, no sure thing, represents a capital gain on a successful investment and has therefore been taxed that way.

Some argue that partnerships should be taxed just like other corporations before money is distributed to partners. We think that’s a reasonable argument in the context of lowering the 35% U.S. corporate tax rate to something remotely competitive in the world economy. By itself, this tax increase is simply a drag on investment and job growth.

Mr. Obama now has a chance to respond with similar speed and show his commitment to lower capital-gains taxes on start-up investments. A Statement of Administration Policy condemning the House bill would discourage the Senate from making a similar mistake.

Full article: 
http://online.wsj.com/article/SB10001424052748704240504574586274278223030.html?mod=djemEditorialPage

The punch lines: 

(1) “The House raises taxes on carried interest”

(2) Obama says “we’re proposing a complete elimination of capital gains taxes on small business investment” for one year.

* * * * *

Ken’s Take:

(1) Oh, those poor private equity guys.  The taxation of so-called carried interest is complicated, but reduces down to the fact that private equity firms have enjoyed a massive tax break for years.  Whether that tax break has fueled innovation and growth or simply lined the pockets of the equitists is subject to debate. My view: more the latter than the former.  So, I say: go get ’em.

(2) From a personal standpoint, I favor low or no capital gains taxation.  Why not?  I have some horses in that race.

But, for the life of me, I can’t figure out how a 1-year suspension of small business capital gains taxes helps small businesses and promotes hiring. 

What appreciated assets is a typical small business going to sell in the next 12 months that would qualify for a gain?  Except for small financial firms that hold and trade securities and family farms that are passing down generationally,  I can’t figure out how small businesses benefit from this move.

Does seem that — if we have any appreciated assets — we should all become small businesses and sell them in 2010.

If somebody can explain this to me, please hit the reply button … I must be missing something.

* * * * *

Excerpted from WSJ: Zero to 35 in 24 Hours, Dec.10, 2009 

On Tuesday, Mr. Obama announced that “we’re proposing a complete elimination of capital gains taxes on small business investment” for one year.

On Wednesday, the House voted to change the capital gains rate for venture capitalists, private equity fund managers and managers of real-estate and oil-and-gas partnerships. But rather than eliminating the tax, the House more than doubled it, moving the tax rate to 35% from 15% by reclassifying such gains as ordinary income.

The new 35% rate applies to what is known as “carried interest,” which is income that only materializes if fund managers wisely invest the fund’s capital and only after other investors in the fund have benefited. Venture and private equity fund managers already pay normal income taxes on their regular salary derived from management fees. The carried interest, no sure thing, represents a capital gain on a successful investment and has therefore been taxed that way.

Some argue that partnerships should be taxed just like other corporations before money is distributed to partners. We think that’s a reasonable argument in the context of lowering the 35% U.S. corporate tax rate to something remotely competitive in the world economy. By itself, this tax increase is simply a drag on investment and job growth.

Mr. Obama now has a chance to respond with similar speed and show his commitment to lower capital-gains taxes on start-up investments. A Statement of Administration Policy condemning the House bill would discourage the Senate from making a similar mistake.

Full article: 
http://online.wsj.com/article/SB10001424052748704240504574586274278223030.html?mod=djemEditorialPage

Note:  This is intended primarily for Homa Files more “mature” readers.  But, may be relevant for younger folks with rich relatives who are on their last legs …

* * * * *
Source: WSJ: State Death Taxes Are the Latest Worry, Oct 31, 2009
http://online.wsj.com/article/SB125694593227919879.html

With the federal estate tax disappearing for most people, state death taxes have emerged as a surprise new worry.

This year, the federal exemption rose to $3.5 million per individual, or as much as $7 million per married couple. At the current level, only 5,500 estates a year are federally taxable.

The problem is that most states with estate or inheritance taxes haven’t raised exemptions to match the federal limits. That means thousands of taxpayers who now escape the federal levy could still get hit with a state death tax.

As a result, tax advisers are tweaking bypass trusts that allow married couples to maximize exemptions from state taxes. They are advising taxpayers where to retire in order to pare or eliminate estate taxes.

“In the past, many people hardly gave state death taxes a thought … now they are shocked at how expensive mistakes can be.”

Adding insult to injury, Congress is talking about eliminating the federal deduction for state estate taxes. That would affect only wealthy taxpayers whose estates still exceed $3.5 million per individual.

“States are in such dire straits that most without these taxes would like to have one, and nobody who has one will let it go.”

Seventeen states and the District of Columbia currently impose estate taxes. Eight states have inheritance taxes, which are levied on heirs, not estates. Maryland and New Jersey have both.

Compared to the uniform federal tax, state taxes are a crazy quilt. In many states with inheritance taxes, rates are tied to how closely the heir is related to the late donor. Iowa and Kentucky exempt both spouses and children who inherit property, while Nebraska treats only transfers to spouses as tax-free.

Advisers say taxpayers are most likely to be tripped up by states that used to conform to the federal exemption but haven’t raised it at the same rate.

As a result, married couples in states with lower exemptions — such as New York, Oregon, Minnesota and Massachusetts (all $1 million) or Illinois ($2 million) — are setting up “bypass” trusts in wills even if they no longer need them for federal taxes.

Here’s how bypass trusts work: At the death of the first spouse, assets go into a trust that the survivor can draw on if necessary. When the second spouse dies, the remaining assets in the bypass trust pass tax-free to heirs, preserving the value of both individual exemptions.

Put another way, if a married couple lives in a state with a $1 million individual exemption, a bypass trust would let them to pass as much as $2 million tax-free to heirs.

“Without the proper trusts … a couple in New York with $2 million in assets might pay an unnecessary $100,000.”

* * * * *

The issue is figuring out the “domicile” of a taxpayer. Domicile is a much broader idea than the mere residency test that often determines where someone pays income tax.

Although one determinant of domicile is the amount of time spent in a state, it also may look at where a taxpayer votes, has church and club memberships, registers a car or even has a burial plot.

This means that a taxpayer could live in estate-tax-free Florida, California or Texas and even spend most of his time there. But if he keeps an apartment in New York or a summer home on Cape Cod and has other ties to the area, he might be considered to be domiciled there.

In the worst case, a taxpayer could be domiciled in more than one state and owe taxes to each.

TakeAway: A new study says high taxes are driving people away from NY … especially NYC.

* * * * *

Excerpted from WSJ: Escape from New York, Oct. 28, 2009

An old saying goes that the time to live in New York is when you’re young and poor, or old and rich—otherwise, you’re better off somewhere else. .

Between 2000 and 2008, the Empire State had a net domestic outflow of more than 1.5 million, the biggest exodus of any state, with most hailing from New York City.

The departures have perilous budget consequences, since they tend to include residents who are better off than those arriving. Statewide, departing families have income levels 13% higher than those moving in, while in New York County (home of Manhattan) the differential was 28% .

In 2006 alone, that swap meant the state lost $4.3 billion in taxpayer income. Add that up from 2001 through 2008, and it translates into annual net income losses somewhere near $30 billion.

According to the Tax Foundation, between 1977 and 2008, New York has ranked first or second in the country for its state-local tax burden compared to the U.S. average.

That pattern is consistent with the annual migration patterns, showing that highly taxed and economically lackluster states were most likely to end up in residents’ rear view mirrors. According to the annual study by United Van Lines, states like New York, New Jersey, Michigan and Illinois have been big losers in recent years.

Greener pastures that drew New Yorkers included states like Florida, North Carolina and Pennsylvania.

Liberals continue to insist that they can raise taxes ever higher without any effect on behavior, but the New York study is one more piece of evidence that this is a destructive illusion.

Full article:
http://online.wsj.com/article/SB10001424052748703574604574499772371161800.html?mod=djemEditorialPage

Ken’s Take: I say, only for pets who are in the country legally …

* * * * *

The Survey Says

According to Rasmussen …

25% of voters nationwide favor a proposal that would allow pet owners to deduct up to $3,500 for “qualified pet-care expenses” for household pets.

A proposal known as the HAPPY (Humanity and Pets Partnered Through the Years) Act was introduced in Congress earlier this year. (Details are below)

Women like the tax break more than men.

Most voters under 30 favor the approach, but their elders strongly disagree.

Democrats are more than twice as likely to favor the pet-care tax deduction than Republicans.

Full article:
http://www.rasmussenreports.com/public_content/politics/general_politics/october_2009/25_favor_tax_deduction_for_pet_expenses

* * * * *

The Details

Excerpted from NOLA.com: Capitol Hill considers tax breaks for pet owners, October 13, 2009

Legislators in Washington — with support from animal rights groups — are considering a bill that pairs tax cuts and pet ownership.

The Humanity and Pets Partnered Through the Years Act — called the HAPPY Act — aims at helping current pet owners in these tough economic times and also hopes to encourage pet adoption through attractive incentives.

With more attention being paid to the fate of pets whose owners lose their homes, interest is growing on Capitol Hill and beyond about how the government can respond.

“Taking care of pets does cost money, and during the dramatic decline of people’s income and the shaky economy, any possibility of assisting people in meeting those costs should be looked at.”

The bill includes tax breaks not only for cats and dogs, but also for legally owned exotic pets.

Considering the costs of keeping pets, which varies between about $650 a year on average for a cat and almost $900 a year on average for a dog, a tax break would be nice for many New Orleans pet owners. A cap of $3,500 would be put on the tax break per person.

* * * * *

According estimates from The Humane Society, 39 percent of American households own at least one dog, and 38 percent own at least one cat. As many as 62 percent U.S. households own a pet.

* * * * *
Excerpted from NOLA.com: Capitol Hill considers tax breaks for pet owners, October 13, 2009
http://www.nola.com/pets/index.ssf/2009/10/capitol_hill_considers_tax_bre.html

Summary: The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation’s plate and struggling to find money to pay the tab.  The deep recession is reducing incomes, wiping out corporate profits and straining government programs.

Ken’s Take: There will be no talk of slowing spending … marginal rates will go up (for more than the top 1%) … the economy will stall (again)

* * * * *

Excerpted from: AP ENTERPRISE, Biggest tax revenue drop since 1932, Aug. 3, 2009

Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

• Individual income tax receipts are down 22 percent from a year ago.
• Corporate income taxes are down 57 percent.
• Social Security tax receipts could drop for only the second time since 1940, and
• Medicare taxes are on pace to drop for only the third time ever.

The last time the government’s revenues were this bleak, the year was 1932 in the midst of the Depression.

* * * * *

While much of Washington is focused on how to pay for new programs such as overhauling health care — at a cost of $1 trillion over the next decade — existing programs are feeling the pinch, too.

• Social Security is in danger of running out of money earlier than the government projected just a few month ago.
• Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining for the 2nd straight year.
• The national debt already exceeds $11 trillion and
• Bills just completed by the House would boost domestic agencies’ spending by 11 percent in 2010 and military spending by 4 percent.

* * * * *

The future of current programs — not to mention the new ones Obama is proposing — will depend largely on how fast the economy recovers from the recession’.

Full article:
http://www.google.com/hostednews/ap/article/ALeqM5ibGXhJv-N7Qg6nh-nQpPOgJRTgugD99RMD200

* * * * *

Ken’s Take: Taxing every dollar earned by the evil top 1% doesn’t come close to funding the current government spending spree.  First, it’ll be tax gimmicks like this; then higher rates – much higher rates – for the 49% of workers who pay income taxes.  It’s going to get ugly.

* * * * *

From the WSJ, “The IRS Phones Home”, June 15, 2009

With federal spending in 2009 at 28% of the economy and deficits heading north, Democrats are eyeing tax increases on everything from soft drinks to electricity to health benefits to charitable contributions. The IRS is even contemplating a new tax on the use of business cellphones.

The IRS believes that some percentage of the costs incurred by employees using company-provided wireless devices should count as a “fringe benefit” and thus be subject to taxation. Since workers inevitably end up taking personal calls or emails, the thinking goes, it’s only fair that they pay for the privilege. The IRS suggests that businesses automatically assign 25% of annual phone expenses as a taxable liability.

What’s next? Maybe a per-cup tax on office coffee, or targeting furtive visits to ESPN or Hulu on the office PC? Or maybe taxing use of the company washroom.”

Full article:
http://online.wsj.com/article/SB124501952511913563.html

Ken’s Take: Soaking the rich to cover governmental deficits has become the cure of choice — both Federally and in in high deficit states.   And, budget projections assume that the rich folks will just bend over — stay where they are, report the same earnings and just suck it up.

The problem is “behavioral economics” — when the game changes, people adjust to rearrange the gameboard to their best advantage.  To adjust to higher marginal rates people of means often shift income to lower tax alternatives (low tax locales, tax-free investments).  So, the taxing body (states or Feds) don’t end up realizing much of the anticipated gains.

Below are highlights from an article that spells out the effect …

* * * * *
Excerpted from WSJ, “Soak the Rich, Lose the Rich”, May 18, 2009

Americans know how to use the moving van to escape high taxes.

Here’s the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.

Americans are more sensitive to high taxes than ever before. The tax differential between low-tax and high-tax states is widening, meaning that a relocation from high-tax California or Ohio, to no-income tax Texas or Tennessee, is all the more financially profitable both in terms of lower tax bills and more job opportunities.

From 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

There are three unintended consequences from states raising tax rates on the rich.

First, some rich residents sell their homes and leave the state;

Second, those who stay in the state report less taxable income on their tax returns; and

Third, some rich people choose not to locate in a high-tax state.

Since many rich people also tend to be successful business owners, jobs leave with them or they never arrive in the first place.

Full article:
http://online.wsj.com/article/SB124260067214828295.html

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… then sit down (absolutely necessary) and watch the attached 3-minute video clip which presents the John Murtha AIrport in Johnston, PA.

The highlights:

$150 million of government pork invested

Almost $1 million of stimulus funds

3 flights per day a.. to / from DC

20 passengers per day

These guys have absolutely no conscience …

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ABC TV video
http://cosmos.bcst.yahoo.com/up/player/popup/?cl=13140642

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52% of U.S. voters now believe they pay more than their fair share of taxes.  The split:  61% of Republicans, 48% of Democrats and 48% of independents.
http://www.rasmussenreports.com/public_content/business/taxes/most_voters_say_they_pay_more_than_their_share_of_taxes_political_class_disagrees

Ken’s Translation: The half of the population that actually pays income taxes thinks that it pays too much; the half that pays no income taxes thinks that it pays about the right amount.  Surprise, surprise, surprise.

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51% of Americans have a favorable view of the “tea parties” held nationwide last week; 33%  view the events unfavorably; 15% hadn’t even heard about the tea parties (since they get their news exclusively from the NY Times)..  

The tea parties were viewed favorably by 83% of Republicans, 49% of unaffiliated Americans, and 28% of Democrats.
http://www.rasmussenreports.com/public_content/politics/general_politics2/51_view_tea_parties_favorably_political_class_strongly_disagrees

Ken’s Take: So, when and where will the folks who favor high taxes and out-of-control spending hold their rallies ?

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Ken’s Take:

(1) Of course a simpler tax code makes sense, but it’ll never happen.  Why?  Because the complicated tax code is Congress’ source of power.  It allows them to pick winners & losers — among people, ideas and, oh yeah, contributors.

(2) I’d add a 7th principle: Everybody has to have some skin in the game.

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Excerpted from WSJ, “We Need a Simpler Tax Code”. April 10, 2009

As the national taxpayer advocate, I am required to report to Congress each year on the most serious problems facing U.S. taxpayers. With April 15 fast approaching, it will come as no surprise to many frustrated taxpayers that the complexity of the tax code tops my list.

The law should be plain enough that most people can compute their own liabilities on a single form.

In developing a comprehensive tax reform blueprint, I recommend that emphasis be given to six core principles.

First, the tax system should not be so complex as to create traps for the unwary.

Second, the tax laws should be simple enough so that most taxpayers can prepare their own returns and compute their tax liabilities on a single form, and simple enough so that IRS telephone assistors can accurately answer taxpayers’ questions.

Third, the tax laws should anticipate the largest areas of noncompliance and minimize the opportunities for such noncompliance.

Fourth, the tax laws should provide some choices, but not too many, since choices are confusing and can lead to taxpayer error.

Fifth, where the tax laws provide for refundable credits, they should be designed in a way that is minimally burdensome both for the taxpayers claiming the credits and for the IRS in administering them.

Sixth, the tax system should incorporate a periodic review of the tax code — a sanity check to guard against complexity creep.

Tax simplification would benefit all Americans, regardless of political party.

Full article:
http://online.wsj.com/article/SB123933106888707793.html

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