by | HYPOCRISY, TAXES
The concept of an American President going after people making a lot of money and paying a relatively low tax rate on it is particularly naïve; it displays an absolute lack of familiarity with how people get wealthy. As a CPA, I can attest to the fact that the most common way people accumulate massive wealth is either by a huge amount of hard work (creating a successful business) or selling an asset (an invention, real estate, etc).
Many people who file tax returns with large amounts of income, such as selling a business for $10 million, will have a multi-million capital gains amount. It’s not that the higher income earners have some sort of capital gains loophole, but it’s really that the wealthy have done something well to attain the American Dream. And when they do strike it rich through their effort, part of their wealth is treated as a capital gain and it gives those earners a chance to keep a part of it. Knowing that there is a low capital gains rate is an extra incentive to work hard and be successful.
Many of my clients are wealthy, and I have experienced time and again that they will come to me and ask the question: if they are successful, can they keep the majority of their money?”. This is because they know that government wants to take more from the highest income earners who have proven their success, while at the same time, the government is quite happy to let them lose on their own on their particular endeavor.
Most in the top echelon get there from a one-time income-producing significant event. To punish such success by raising the capital gains tax only serves to drive a deeper wedge between the have- and have-nots in an attempt to level the economic playing field.
by | ECONOMY, POLITICS, TAXES
The Alternative Minimum Tax (“AMT”) presents hardships to the practitioner as well as the taxpayer who prepares his own return by, as its name implies, imposing a second tax calculation mechanism on taxpayers. It serves virtually no useful purpose, other than the raising of an ever-increasing amount of tax revenue. But it has become very clear in recent years that this AMT tax revenue is not coming from just the taxpayers who were the intended targets of this tax.
The AMT was instituted in its present form when the prior “add on” Minimum Tax was transformed into the AMT in the early 1980’s. Its stated purpose was to require that all taxpayers paid at least a fair share of tax. It was to do this by identifying “loophole” type deductions, also known as “preferences”. There would then be an alternative calculation using lower tax rates applied against this taxable income as increased by the preferences. Whichever of the taxes is higher is the one the taxpayer must pay.
However the AMT was seriously flawed from the outset. Instead of focusing on these loophole type preferences (which would have limited the tax to a very small number of tax law “abusers”), the law that was passed included items that were not loopholes at all. A convoluted formula compares the differences between income and deductions to determine who falls under the guidelines.
A very substantial majority of all AMT paid by taxpayers results from the following four factors:
- Treating state and local taxes as a preference
- Treating miscellaneous deductions as a preference
- Not modifying the rate to correspond to changes in the regular income tax rates.
- Allowing lower exemptions than the regular tax.
Each of these, however, can be quickly shown as inappropriate factors with which to base a tax system intended to just make sure everyone pays a “fair share” of tax.
- State and local taxes are hardly a loophole. The taxes exacted by state and local governments are hardly “voluntarily” paid by taxpayers in an attempt to avoid paying federal taxes.
- Miscellaneous deductions is the category of deductions that consists primarily of expenses incurred to earn income that is subject to tax. It includes unreimbursed employee expenses, investment expenses, etc. This is the most basic and important deduction needed to have a truly fair income tax system. For example, if an individual pays a lawyer a fee for collecting back wages, the legal fee is a miscellaneous deduction. If an individual pays the lawyer $300 for collecting $1000 of back pay, netting $700, the AMT would tax the individual on the full $1000.
- The AMT rate is generally 28%. This was its rate when regular tax rates were 39.6%. Regular tax rates have dropped to 35% currently, but the AMT rate remains at 28%.
- The exemption available under the AMT tax system is a fixed dollar amount which, unlike exemptions and standard deductions under the regular tax system, is not indexed for inflation. Furthermore, it is phased out entirely over certain income levels. And each year Congress has to approve an annual “patch”, which raises the threshold for inflation, in order to raise the exemption limits of the tax so that less wealthy taxpayers won’t be subject to the AMT.
It must be noted that the annual AMT patch is not a tax cut at all, but merely the avoidance of a massive tax increase on millions of middle-income taxpayers’ families. Congress likes to point to the patch as some major revenue loss, had the AMT been applied to those families, as an excuse to raise to raise taxes in order to offset this “potential missing tax revenue”.
The AMT in its present form has no place in tax law. The AMT does not serve the purpose for which it was intended and functions in a most inequitable manner while adding enormous compliance burdens. It should therefore be changed to eliminate the adjustments for state and local taxes and miscellaneous deductions, update its rates, and modify its exemption, or else be eliminated completely.
by | ECONOMY, GOVERNMENT, HYPOCRISY, TAXES
Class warfare has become a key component of Obama’s policies and re-election rhetoric. The components of such a tactic are easily recognized: 1) the political opponent will hurt those among us who are most vulnerable (elderly, poor, etc); 2) the political opponent does not care about the “middle class”; 3) the political opponent wants to benefit those most advantaged (the rich/elite). The third point of this strategy is the one that is most popular with Obama, as he continuously and intentionally rails against “millionaires and billionaires” in order to separate that particular population from mainstream America.
Besides the obvious baseness of such an argument coming from the President of the United States, it is critically important to note that he doesn’t actually ever define a millionaire or billionaire. The amount of true millionaires and billionaires are so few in number, that taxing them more – as Obama plans to do – will not help with any significant deficit reduction. His assertion is pure dishonest political speech because you cannot possibly create enough revenue from the millionaire/billionaire population even if you were to tax them at 100%. Our fiscal situation is so dire in this country that an increased tax on this group in any large or small amount solves nothing.
Unfortunately, none of this matters to Obama. He intentionally throws the labels around so that they conveniently fit whatever emotive language will coerce voters and supporters to rally behind his outrageous fiscal policies. It is classical class-warfare: antagonizing lower socio-economic groups against the “rich”.
Obama has stated his intent to raise the marginal rates on the top income earners, (aka the “rich”, “wealthy”, or “top 2%”). Yet according to the IRS, the threshold for this bracket is actually 200K for individual taxpayers or 250K for married couples. These incomes are certainly no where near millionaire or billionaire amounts.
Since there is a clear federal definition for a group of taxpayers whom Obama is targeting for tax increases, Obama really has no right to say millionaires and billionaires as a collective for the highest income earners. But he uses the generic terms anyway. By making it sound like one kind of people, it pits the average/middle-class against “the other guy”. And if he actually tried to define that other guy instead of resorting to generic terms, it would include a lot of people who would be upset to be included.
History shows us that higher tax rates results in less – not more – tax collections. Democrats like to wax poetic about the high rates of 70% and even 91%. What they fail to comprehend or deliberately don’t explain is that at those times, there were an enormous amount of tax shelters such as real estate, so that people could legally lower that taxable income and would not have to actually pay the outrageous tax rates.
With the IRC reforms of 1986, Reagan reduced the tax rates to 28% in exchange for getting rid of the tax shelters. As a result, the amount of federal income collected was more at 28% and a clean tax code than at 91% and tax shelters, because at 28%, it really wasn’t worth the time, cost, and effort to hide money. If the tax rates are going to rise again – in addition to state and local tax hikes – the tax burden in this country will be staggering. People will do one of two things: 1) start finding ways not to pay it like they did when the rates were outrageous or 2) stop working and investing so much because it’s just going to get taken away from them. When that happens, it’s not good for the economy.
Blindly going after “millionaires and billionaires” (who earn $200,000 or more) is simply a tactic Obama uses to pit classes against one another for political gain. Imposing higher taxes on that segment of the population most able to invest in and aid our recovery is true economic ignorance. Why take additional money from those taxpayers who have been able to create wealth and employment successfully and give it to the government and politicians who have proven their ability to mismanage and squander income?
by | ECONOMY
It didn’t take long for Obama to begin talk about eliminating tax cuts for the wealthy. In fact, this is shaping up to be a major theme of his reelection campaign. Thankfully for the Republicans, this position serves to highlight his continued economic incompetence.
As a practicing CPA for nearly forty years, the wealthy are my clients and they are assuredly the ones paying the most taxes. The people in the highest tax bracket fall into three categories 1) Small business owners (200-2000 employees); 2) Executives working for a company; and 3) Wealthy individuals by inheritance or investment. Allowing the tax rate to rise affects each of these groups differently, but all impact the economy and its recovery greatly.
With the first group, most small business owners are arranged as an Scorp or LLC, which means they pay tax rates at the individual level, not business. Raising the rate to 39.6% raises the rate on these businesses. Most of the money made by these owners is reinvested in their company. They basically take out enough income on which to live and anything more gets put back into their business. So, if you increase their taxes, there is less money to reinvest in their company and back into the economy. This is important point because spending money as a means of recovery is much less effective and stimulative than investment.
Regarding the second group, most executives working for a company enjoy a large salary; however, much of that salary is fueled by stock options which make their taxes larger. Quite typically, the proceeds of that income is returned the company via more stock, which funnels growth, or cash is reinvested as needed. An increase in taxes will decrease their ability to best allocate their business returns.
Although the third group of individuals often have a lifestyle that is inherited, more money that is taxed out of that lifestyle means there is less to invest in appropriate economic endeavors – i.e. hedge funds, equities, and high risk funds. Those very investments are responsible for much of the entrepreneurship in this country. Taking away available capital via tax increases reduces innovation in the economy.
In a time of a recession unprecedented since the Great Depression, economic improvement is crucial. Inflicting tax increases on the segment of the population most able to invest in our economy and businesses will only slow our sluggish recovery. Trying to punish the taxpayers for the sake of campaign sound bites and political gain is both reprehensible and repugnant.
by | ARTICLES, ECONOMY, POLITICS
This past week, the Washington Post provided a sliver of clarity when
Glen Kessler, “The Fact Checker” , exposed Obama’s dubious tax cut claims. While he should be commended for issuing four pinocchios for Obama’s untruths, he completely missed the biggest lie of them all. What Obama (and Mr. Kessler) call tax cuts are not. As a lifelong CPA, I can assure you that tax cuts are a specific term, meaning cuts to the marginal tax rate. The package that Obama passed after he took office contained virtually none of those.
When the government gives out money, it is spending. Tax credits are government expenditures run through the tax system; your income collected is then given back to people on their taxes who meet a criteria. Simply having the IRS write the check (instead of a department such as Health and Human Services), allows the government to classify it a cut instead of spending. The “Making Work Pay Credit” cited in Kessler’s piece is a perfect example of what is not a tax cut – this is a government handout. Others include Cash for Clunkers , Energy Credits, and First Time Home Buyer Credits. Instead of doing the honorable thing and using the Treasury to send the money to each eligible taxpayer, the administration instead ran the disbursements through the IRS so they could claim a “tax cut”. This same type of deceit put Enron executives behind bars. Clearly there was nothing resembling a marginal rate tax cut that would be valuable to the economy .
This new jobs bill (that we haven’t seen yet) contains more of the same
tax cuts deceptive language,
fuzzy math, and worthless programs. Mr. Kessler’s assessment of Obama’s nonsense was a welcome contribution to economic debate, but the confusing rhetoric weakened his argument. The biggest whopper — Obama’s claim of tax cuts that aren’t– deserved a fifth Pinocchio.
