FedUpUSA

Archive for the ‘Tax Code’ Category

Here’s something the government could do right now, it would have little or no cost, and it would be a major contributor to capital formation among small businesses.

Permit all cash-accounting businesses — which are those that (1) elect it, and (2) meet IRS requirements (the most-important of which is the gross receipts test — under $5m in annual gross) to immediately expense all cash-funded capital goods purchases on a permanent basis.

There was an “immediate expense” provisions in the Obama “recovery” act, but temporary moves like this simply pull forward purchases from one time period to another.

As envisioned I would prevent the use of debt to finance these deductible expenses; a better change would be to prohibit the deductibility of interest entirely (thereby removing the preference for debt over equity) but in the short term that’s going to be much harder to get through Congress than the above would be.

Detractors of this change will claim that it will decrease tax revenue from small businesses.  They’re wrong. If I take the deduction against top-line in the year of acquisition I have no depreciation deduction to take in the following years and am thus exposed to taxation on the full value of everything made with that or as a consequence of the capital good in the future.  This change would also simplify tax accounting for small business.

In this world of technology there are many items that businesses acquire that have useful service lifetimes far shorter than the IRS mandates for depreciated property.  When I ran MCSNet we used to run into this all the time — modem banks, for example, or desktop computers on customer agent desks, had service lifetimes that were typically two years or so in actual use (due to obsolescence) and were worth effectively nothing after that two years but IRS depreciation schedules mandated much longer claimed “service lifetimes.”  This effectively caused us to pay taxes unjustly on forward use that never materialized, as we were unable to match the duration of the item’s useful lifetime to its expensing on the balance sheet.

This becomes less of a problem as a business moves to accrual accounting for a whole host of reasons, but for cash-accounting small businesses it is a major issue.  Since accrual accounting records income and expenses when they’re incurred (as opposed to when they’re received) this mismatch tends to have less of an impact on those firms.

This change would lead small businesses to use retained earnings for capital expenditures to grow the company.  It would likely expand government revenue since the capital purchase would be made for the purpose of growing the business and that higher income in future years would not have the deduction of depreciation available to offset it.  This would in turn tend to create a virtuous cycle where growth would again be reinvested into capital goods to further expand.

Restricting this change to cash-based businesses would fuel the engine of our economy — small business and entrepreneurship.  Being a permanent change it would be one that small businesspeople and those thinking of starting a small business could count on into the future and thus write their business plans around; stability is critical when it comes to tax policy and its impact on business in general.

Let’s make a change that will actually make a difference.  While I advocate for much more serious change to the tax system in America this is one that is modest, targeted at the engine of job growth and yet inflicts no direct reduction on Treasury revenue.

Let’s talk taxes.

Everyone says we need fundamental tax reform.

Ok.

I prefer The Fair Tax, but recognize that many others do not.

But what if we don’t want to do The Fair Tax?

Let’s look at a clean, progressive and simple tax instead.

We’ll use two basic metrics – the first is that the median household income is approximately $50,000.  The second is that the gross PCE (personal consumption expenditures) is, as of the present time, approximately $10,656 billion (that is, $10.7 trillion) and residential investment (that is, personal spend on residences) is approximately $330 billion, for a total of $11 trillion (out of our $15 trillion GDP.)

Therefore, let’s presume the following:

• Three tax brackets: 10%, 20% and 30%.
• NO deductions of any sort, and no “zero” bracket.  Everyone pays from dollar one.
• NO other federal income taxes.  That is, payroll taxes are subsumed in these rates.  We quit pretending that FICA and Medicare are some sort of “lockbox” when in fact we know damn well they’re not.  FUTA and other “parasitic” federal taxes on employers and persons are also eliminated.
• Long-term capital gains are only personal and at-risk investments held for three years, excluding carried interest or other “combined-risk management activities”.  These qualified capital gains are taxed at 50% of your marginal rate and accreates after ordinary income.  In other words, if your cash income puts you into the 30% bracket, all of your long-term capital gains are taxed at 15%.  All other income is taxed as ordinary income including carried interest.

Now let’s look at the BEA’s personal income tables.  They disclose that we have $8.23 trillion in employee salaries, $1.60 trillion in supplements (that is, the current payroll taxes), $1.11 trillion in proprietor’s income, $397 billion in rental income and $2.345 trillion in transfer receipts (payments from government social insuance payments – all of which are taxable since we exempt nothing.)

This totals $13.68 trillion in money and transfer receipts.  The remainder ($1.8 trillion) is receipts on assets – that is, capital gains.  I’ll presume that half of that would qualify for long-term treatment (which is probably way, way too high – today – but won’t be in the future with these changes.)

Unfortunately Census and the BEA only has quintiles through 2009.  It is what it is, but we’ll use what we can get.

We count 121 million approximate household units according to Census.  Unfortunately Census only accounts for money income – they claim (as of 2009) $7.596 trillion in total!  That’s crap, so let’s fix it – we’ll bump all categories by 64% (to account for the difference as of 2009 BEA GDP tables), since we’re taxing all income with no deductions of any sort (including Social Security and similar transfer payments.)

We will break the tax percentages as follows:

• First and second quintile (through $35,598) are taxed at the first rate (10%)
• Third and fourth quintile (through $93,784) are taxed at the second rate (20%)
• The top quintile pays 30%.

All are marginal rates and quintile breakpoints will be adjusted annually.

Note that since all other federal payroll and similar taxes are eliminated those in the first two quintiles pay less than what they pay today in payroll taxes alone, but there are no refundable credits.  That is, everyone pays something, most-specifically for those social programs everyone thinks they’re “entitled” to.  In addition, the progressive nature of the tax code is retained and for most people through the bottom three quintiles they will pay less.  The exception is those who are getting a “free ride” from refundable credits – they will pay something, but only to the extent that their “free ride” ends, and in fact their burden will not exceed that which would be paid only in payroll taxes alone.

So the first bracket earns $238 billion and the second $657 billion, for a combined $895 billion (adjusted $1,467 billion).  They will pay $147 billion in income tax.

The second bracket earns $2,887 billion (adjusted $4,735 billion).  There are 48,376 such households; on the first $1.722 trillion they will pay $172 billion in income tax, and on the remainder ($3,013 billion) they will pay $603 billion, for a total of $775 billion.

The third bracket makes a lot of money.  There are 24,196 such households.  They earn on average $157,631, for a total $3,808 billion (adjusted $6,244 billion).  On the first $861 billion they will pay $86 billion in tax, on the next $58,186 in income (or $1.41 trillion) they will pay $282 billion in tax and on the remainder ($3,973 trillion) they will pay $1,192 billion in tax, for a total of $1,560 billion.  That’s a shitload of tax; on a per-household basis they pay four times the “middle income” people’s burden and ten times the bottom two quintile’s burden.  If this isn’t progressive enough for you then you need to replace your brain with one that actually works.

Oh yeah, this totals $2,482 billion in taxes on incomes.

If we assume that most of the $1.8 trillion in returns on assets goes to the top marginal rate, and half is accountable as long-term capital gain, then we have ($900 billion * 15%) + ($900 billion * 30%) = $135 + $300 billion, or another $435 billion.

We thus have $2.917 trillion in tax revenue.

Oh, this understates the revenue, since according to BEA the numbers are somewhat better than this today, but we’re using 2009 figures.  If you want to be entirely accurate you can add about 10-15% to those numbers, but I like being conservative and recognize that we have an economic adjustment to take – so I won’t.

There are no taxes on corporations under this flat tax and no deductions of any sort.  Your tax return fits on one sheet of paper, except for stock trades and such where you must show basis and acquisition date.  The Internal Revenue Code fits within a dozen pages of legislative-laid-out text.

The Federal budget, as of 2005, was supportable in full at this level of revenue complete with our current interest payment requirements and a a hundred billion or so of actual debt retirement.  Since the goal is to actually retire debt we will drop spending to 2003 federal spending levels, which totaled $2.160 trillion, effective this September.

As the debt is retired (it will take 20 years) we can advance spending by the amount of the interest on the retired debt.  You now fix Health Care using the formula I’ve previously put forward, and index Social Security over five years to the actuarial improvement in life from the inception date of Social Security to today.

Problem solved.

You want a monster economic recovery?

ENACT THIS WASHINGTON OR SHUT THE FUCK UP AS FAILURE TO BOTH FIX REVENUE AND SPENDING ON THIS MODEL MAKES CLEAR YOU HAVE NO INTENTION OF ACTUALLY FIXING ANYTHING.

Stealth IRS Changes Mean Millions of New Tax Forms

By Neil deMause

NEW YORK (CNNMoney.com) — The massive expansion of requirements for businesses to file 1099 tax forms that was hidden in the 2,409-page health reform bill took many by surprise when it came to light last month. But it’s just one piece of a years-long legislative stealth campaign to create ways for the federal government to track down unreported income.

The result: A blizzard of new tax forms that the Internal Revenue Service will begin rolling out next year.

“It was actually something that we were following back under the Bush administration under the 2008 budget — we started to see these kinds of rumblings about the ‘tax gap’ and whether or not businesses were paying their fair share,” says Tom Henschke, president of the Pennsylvania-based SMC Business Councils, which was one of the first organizations to call attention to the health care amendment when it was introduced last fall. “So two administrations can claim credit for this.”

The first tax-reporting expansion was buried in a different bill, the Housing Assistance Tax Act introduced by House Speaker Nancy Pelosi and signed into law by President George W. Bush in July 2008. Best known for its first-time homebuyers’ credit, the bill also created a new addition to the family of 1099 tax forms: the 1099-K.

The 1099 is a catch-all series of IRS documents used to report non-wage income from a variety of sources like contract work, dividends, earned interest and pension distributions. The new 1099-K aims to shine a light on a currently hard-to-track payment stream: credit cards. Starting in 2011, financial firms that process credit or debit card payments will be required to send their clients, and the IRS, an annual form documenting the year’s transactions.

The rule comes with a floor to weed out the most casual retailers: The 1099-K is only required when a merchant has at least 200 payment transactions a year totaling more than $20,000. But it applies to all payment processors, including Paypal, Amazon.com, and others that service very small businesses.

The goal of the new regulations is to catch income that is going unreported to the IRS. The federal government loses an estimated $300 billion each year from the “tax gap” between what individuals and businesses owe and what they actually pay.

“Better information reporting helps the tax system work better by ensuring that everyone pays what they owe,” IRS Commissioner Doug Shulman explained last year as his agency unveiled the 1099-K. “The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses.”

For companies that currently report all their credit card and Paypal sales to the IRS, the 1099-K requirement will have little impact. All the paperwork will be done by the bank or payment processing service, and business owners will simply receive a form at the end of the year listing their total receipts.

The 1099 changes attached to the health care reform bill are another kettle of fish. These massively expand the requirements for filing the “1099-Misc” form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods.

Starting in 2012, that changes. All business payments or purchases that exceed $600 in a calendar year will need to be accompanied by a 1099 filing. That means obtaining the taxpayer ID number of the individual or corporation you’re making the payment to — even if it’s a giant retailer like Staples or Best Buy — at the time of the transaction, or else facing IRS penalties.

In essence, the 1099-Misc is having its role changed from a form for tracking off-payroll employment to one that must accompany virtually any sizeable business transaction.

“Just with business travel it would include hotels, rental cars,” Henschke says. “Phone service: 1099. Computer service: 1099. Whoever does your postage meter: 1099. You do a little advertising, Yellow Pages: 1099. Your landlord: 1099. You might as well just keep them in your pocket and hand them out as you go around every day.”

How did this sweeping provision end up hidden in the health reform bill? No one is willing to take credit for introducing the new legislation, which appeared in the Senate Finance Committee’s version of the health bill last fall. Committee chairs Don Baucus, D-Mont., and Chuck Grassley, R-Iowa, both referred calls to committee staffers, who wouldn’t comment on the record.

But the provision appears to be a long-in-the-works change that was just waiting for the right moment to be attached to legislation.

Back in 2007, the Senate Finance Committee asked the government’s General Accountability Office to conduct a tax-gap study. The resulting report estimated that establishing additional 1099 paper trails for income could provide up to $345 billion annually in new federal tax revenues.

Enter the health reform bill. Last fall, as the debate raged over its projected cost, Congressional supporters of the bill began a desperate search for “revenue enhancers” to bring the net cost down — and eliminating the 1099 exceptions for corporations and goods was seen as an easy way to bring in more cash without raising tax rates.

House and Senate staffers “essentially have a cupboard full of convenient revenue raisers that they can put into bills when they need it,” notes Chris Edwards, director of tax policy studies for the libertarian Cato Institute. In the case of the 1099 changes, he says, “this was sitting around, the IRS wanted it and had testified in favor of it, and they needed a revenue raiser. This was just a convenient thing.”

Still, the form the new law took was surprising — especially the requirement that businesses file 1099s when they purchase goods, which hardly anyone saw coming.

Henschke’s group had previously surveyed its members and learned that they average 10 filings a year of 1099 forms, each of which takes about half an hour to prepare. That’s in line with the GAO report, which found that a typical small business spent between three and five hours per year filing 1099s.

But SMC’s survey found that extending 1099s just to services purchased from corporations would push that number to at least 200 filings per year for a typical small business — adding an estimated $6,000 to the cost of preparing the average tax return. And that’s without even accounting for the requirement that 1099s be filed for purchases of goods, a provision that Henschke’s group didn’t see coming when it conducted its survey last year.

“These folks are doing their paperwork in the evenings and on the weekends already,” he says. “This certainly adds to the burden substantially.”

The IRS has a draft version of the 1099-K form available now for public feedback, and will begin requiring the form’s use next year. The additional 1099 requirements take effect in 2012. The agency is in the process of drafting its guidance on them. 

 Congress Tinkers WIth Witholding Tax Tables for 2010 (Surprise You Have A Tax Increase)

Recently, retired military have received e-mail messages notifying them of a withholding tax increase. The email states:

NO ANNUAL COST OF LIVING ADJUSTMENT (COLA) WILL BE ADDED TO MILITARY RETIRED PAY IN 2010.

DUE TO RECENT LEGISLATION YOUR FEDERAL WITHHOLDING TAX HAS CHANGED.

After much investigating and several discussions with the IRS, it appears the Democrats have played a “cash-flow trick” on working Americans and are taking more out of American’s paychecks across the board–all the while touting the Making Work Pay tax credit.

The trick, when looking at the new withholding tax tables for 2010 as compared to post-stimulus 2009, buries an increase in federal withholding taxes–for all income categories–basically giving the government an interest-free loan until current year taxes are filed next year. Some would blame the increase in withholding on the Making Work Pay tax credit being spread out over 12 months as compared to 2009, which was only over 9 months, but this would be impossible as some middle class wage categories carry an increase in the withholding tax of over $200 per pay period.

Unlike the middle class wage earners, who are going to see huge amounts taken out of their paychecks, unless they increase their exemptions on their W4 form, it’s an increase that most wouldn’t even notice–$10 or $20 in some cases. Here are some of the “highlights” of the new 2010 withholding tables:

1.) Congress has lowered the threshold to capture more wages that qualify to owe taxes–across the board. For example, in 2009 the withholding tax threshold began at weekly single wage levels of $138. In 2010, that same wage is lowered to $116. In short, instead of the taxable wage starting at $138, it is now down to $116–which changes the income threshold and taxes even poorer Americans.

For married couples, the change in the weekly base taxable wage changes from $303 in 2009 down to $264 in 2010. These lower wage thresholds can be seen throughout the new withholding charts for weekly, biweekly, semi-monthly, monthly, quarterly, semiannual, and annual, as well as daily and miscellaneous pay periods.

This across-the-board reduction in the initial wage threshold increases the number of wage earners who would have to pay taxes.

2.) Instead of seven (7) wage categories, there are now nine (9) wage categories. The new structure allows for direct taxation on the middle class with these wages broken out into smaller categories. The direct hit on the middle class withholding taxes can be seen on all of the new tables. Additionally, the IRS could not explain these changes.

Let’s look at the actual numbers for one category and compare them from 2009 to 2010:
2009 Biweekly, Single, Payroll Period, after subtracting withholding allowances

Not over $276: $0 in taxes
Over $276 – $400: 10% payroll tax
Over $400 – $1,392: $12.40 plus 15% of excess over $400
Over $1,392 – $2,559: $161.20 plus 25% of excess over $1,392
Over $2,559 – $6,677: $452.95 plus 28% of excess over $2,559 (Notice the large salary range)
Over $6,677 – $14,423: $1,605.99 plus 33% of excess over $6,677
$14,423: pays $4,162.17 plus 35% of excess over $14,423

Let’s look at the new numbers for 2010 Biweekly, Single, Payroll Period, after subtracting withholding allowances

Not over $233: $0 in taxes
Over $233 – $401: 10% payroll tax
Over $401 – $1,387: $16.80 plus 15% of excess over $401
Over $1,387 – $2,604: $164.70 plus 25% of excess over $1,387
Over $2,604 – $3,248: $468.95 plus 27% of excess over $2,604 (Notice the large salary range is gone)
Over $3,248 – $3,373: $642.83 plus 30% of excess over $3,248 (Notice the substantial increase and 30% tax rate on these wages)
Over $3,373 – $6,688: $680.33 plus 28% of excess over $3,373
$14,450: pays $4,169.99 plus 35% of excess over $14,450

These patterns of additional withholding can be seen throughout the new charts for the 2010 tax year for single and married persons. It appears that everyone earning a paycheck is affected, not just retired military; social security payments will remain the same.

Why would the Democrats tinker with the withholding taxes and, ultimately, cause more stress on Americans and businesses? Why would the Democrats create more wage categories and deliberately target the middle class with a huge withholding increase and 30% tax rate? Are the Democrats trying to backfill the deficits they created in 2009? Because taxpayers will have overpaid the federal government payroll taxes, will they be eligible to get back this additional withholding money in a tax refund when filing in 2011? Do taxpayers in the hardest-hit wage categories even realize that their paychecks are going to be significantly lower, unless they make the necessary changes?

Maybe there is a good explanation for the increase in the withholding taxes from 2009 through 2010, but I remain skeptical, because inherently, Democrats do not have the capacity to reduce taxes and typically make up the revenue somehow.

Get your calculators out and you do the math. Go here for 2009; start on page 4. Go here for 2010; start on page 39.

And you should remember this and the fact that House and Senate Republicans united against the stimulus bill, which may have been the trigger to all of this. And Obama and Congress should remember this from December 21, 2009:

After years of irresponsibility, we are once again taking responsibility for every dollar we spend the same way families do. It’s true that what I’ve described today will not be enough to get us out of our fiscal mess by itself. We face a deficit that will take some tough decisions in the next year’s budget and in years to come to get under control. But these changes will save the American people billions of dollars. And they’ll help to put in place a government that’s more efficient and effective, that wastes less money on no-bid contracts, that’s cutting bureaucracy and harnessing technology, that’s more fiscally responsible and that better serve the American taxpayer.” ~President Obama

Responsibility. Really?

I spoke with some friends who are Greek and also in the shipping
business. They hate the problems that Greece is facing. The 12.7%
budget deficit is the highest in the EU and is not sustainable. Efforts
to cut government expenses have caused a political backlash against PM
Papandreou. The only available solution is to raise taxes and crack
down on tax evaders.

The Shippers are largely untaxed on their global operations. Their
status is ‘protected’ under the constitution. Taxing the shippers would
go a long way toward closing the budget gap. The changes in tax laws
will not come easy. There is no certainty of the outcome. The sense
that I got from these discussions was that there is a short window open
for Greece to come up with a plan to cut its deficit to approximately
9%. I asked for both a ”good” and a “bad” news scenario. Although the
responses to the question I asked are speculation, they have
interesting implications.

“If Greece is able to restructure its tax code and install a
plan to reduce its deficits to 8% of GDP, then China will invest Euro
25 billion in Greek bonds.”

The issue of the Chinese investing in Greece was first raised on November 29 by the WSJ.
I think it was one of those well placed rumors. If this were to happen,
it would be of significance. It would establish that China is assuming
a role as some form of ‘lender of last resort’. The bilateral trade
conditions that would be attached to a deal of this magnitude would
re-raise the issue of China’s trade hegemony and economic muscle. For
me, the most significant aspect of this is that it would represent yet
another significant diversion of China’s investable funds away from the
US.

If this were to happen, the $40 billion under discussion would not
impact the supply demand equation for US debt. But the direction of
this would be significant. The US desperately needs China to
significantly increase their holdings of US IOU’s in the coming years.
They are under no obligation to do so. What if they were to take a
stance with the US similar to Greece? We would get a headline that
looked like:

Of course we are not going to see a headline like that anytime soon,
but the developments in Greece are a possible first step in that
direction. If China bails out Greece in 2010 it is a game changer from
a number of perspectives.

“If Greece is unable to address its budget deficit the Chinese
will not invest and financial conditions for the country will
deteriorate quickly. One consequence would be that Greece would be
forced to separate from the Euro.”

This is not a high probability outcome. However, talk of  it would have
a very significant impact on the FX markets. The people who I spoke
with made an interesting observation, “Switzerland
is very much integrated with the EU and the Euro, but they have
maintained their own currency. If Greece had its own currency it could
adjust it to achieve a trade advantage that would address the
fundamental imbalances.” (Same argument as “the weak dollar is good
for the USA”). These same people point to the fact that the Swiss
National Bank has been intervening in the currency market to weaken the
Swiss Franc in order to achieve a trade advantage. The thinking is, “If it works for the Swiss, then Greece should do it too!”

Consider where this could go. If there is talk of this happening, it
would raise the same issue for Spain and Italy who are suffering from
their association with they Euro. This could lead in the direction of a
two-tiered Euro. One would be strong. The other weak. The implications
for the dollar would be significant in both the short and long term. It
could be the source of instability as the process unfolds.

The Greece story has already gotten the money moving. It is a story
that could take us in some surprising directions. I got the sense that
there was a short fuse on this. The next three months may put some
powerful forces into play.

Is there anything behind the Chinese/Greece connection? I think so. I
always assume there is something to it when you get statements like the
following. Asked whether Greece is negotiating with China to sell
bonds, a government spokesman said:

“It may be true, and if it is true, we do not want to comment. But even if it isn’t true we wouldn’t want to comment.”