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AMT: Is it Necessary?

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:
  1. Treating state and local taxes as a preference
  2. Treating miscellaneous deductions as a preference
  3. Not modifying the rate to correspond to changes in the regular income tax rates.
  4. 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.

  1. 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.
  2. 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.
  3. 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%.
  4. 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.

TEA or OWS?

by | ARTICLES, ECONOMY, TAXES

Tom Palmer, a senior fellow at the Cato Institute, penned the following piece over at Policymic.  Tom rightly gets to the heart of the matter in his summation at the end of the essay.

“Government debts and printing-press money will harm future generations. It’s unfair. It’s immoral. And it’s going to be solved not by occupying Phoenix, or Wall Street, or Atlanta, but by demanding that spendthrift politicians stop the bailouts and the cronyism, put the brakes on spending, and pay attention to a truly radical concept: arithmetic. Those are sound Tea Party values.”

Should Americans Support the Tea Party or Occupy Wall Street?

 

 

Fact Check: Obama, taxes, and legislation

by | ARTICLES, ECONOMY, GOVERNMENT, HYPOCRISY, TAXES


I’ve seen very few fact checks pertaining to Obama’s record and/or speeches. USA Today did a nice little round-up of some recent claims by Obama regarding the jobs bill, taxes, etc. I’ve reproduced it below in it’s entirety because it was simple and straightforward.

AP fact check: Obama claims miss some evidence

By Jim Kuhnhenn, The Associated Press

WASHINGTON – In challenging Republicans to get behind his jobs bill Thursday, President Obama argued Republicans have supported his proposals before, demanded that they explain themselves if they oppose him, and challenged others to come up with a plan of their own. The rhetoric in the president’s quick-moving press conference dodged some facts and left some evidence in the dust.

Obama: “If it turns out that there are Republicans who are opposed to this bill, they need to explain to me, but more importantly to their constituencies and the American people, why they’re opposed, and what would they do.”

The facts: While Republicans might not be campaigning on their opposition to Obama’s plan, they’ve hardly kept their objections a secret.

In a memorandum to House Republicans Sept. 16, House Speaker John Boehner and members of the GOPleadership said they could find common ground with Obama on the extension of certain business tax breaks, waiving a payment withholding provision for federal contractors, incentives for hiring veterans, and job training measures in connection with unemployment insurance.

They objected to new spending on public works programs, suggesting instead that Congress and the president work out those priorities in a highway spending bill. And they raised concerns about Obama’s payroll tax cuts for workers and small businesses, arguing that the benefits of a one-year tax cut would be short-lived. The memo also pointed out that reducing payroll taxes, which pay for Social Security, temporarily forces Social Security to tap the government’s general fund. And it opposed additional spending to prevent layoffs of teachers, police officers and other public workers.

Obama: “Every idea that we’ve put forward are ones that traditionally have been supported by Democrats and Republicans alike.”

The facts: Obama proposes to pay for his jobs bill by raising taxes, something traditionally opposed by Republicans and, in the form Obama proposed it, even some Democrats. Senate Democrats were so allergic to Obama’s approach, which relied largely on limiting deductions that can be taken by individuals making over $200,000 a year and couples making more than $250,000, that they’re eliminating it and replacing it with a new tax on millionaires.

In claiming bipartisan support for the components of his proposal, the president appears to be referring just to what the plan would do, not how it’s paid for, but that’s a crucial distinction he doesn’t make.

Some of tax-cutting proposals offered by Obama have received significant Republican support in the past. But some of the new spending he proposes has received only nominal Republican backing. Evidence of bipartisanship provided by the White Houseincludes legislation last year that provided $10 billion to prevent teacher layoffs. It won the support of only two Republican senators —Olympia Snowe and Susan Collins, both of Maine and among the most moderate Republicans in Congress. Another example cited by the White House was proposal last year to offer tax breaks to businesses that hire new workers — it passed the House 217-201 with six Republican votes.

Obama: “The answer we’re getting right now is: Well, we’re going to roll back all these Obama regulations. … Does anybody really think that that is going to create jobs right now and meet the challenges of a global economy?”

The facts: Well, yes, some think it will. The U.S. Chamber of Commerce last month submitted a jobs proposal to Obama that included a call to ease regulations on businesses. It specifically called for streamlining environmental reviews on major construction projects and to delay the issuance of some potentially burdensome regulations until the economy and employment have improved. In the letter, Chamber President Thomas Donohue also called on Congress to pass legislation that would require congressional approval of major regulations. The chamber did not indicate how many jobs such regulatory changes could create, but it said: “Immediate regulatory relief is required in order to begin moving $1 trillion-$2 trillion in accumulated private capital off of the sidelines and into business expansion.”

Obama: “We can either keep taxes exactly as they are for millionaires and billionaires, with loopholes that lead them to have lower tax rates, in some cases, than plumbers and teachers, or we can put teachers and construction workers and veterans back on the job.”

The facts: True, “in some cases” wealthy people can exploit loopholes to make their tax rate lower than for people of middle or low income. In recent rhetoric, Obama had suggested it was commonplace for rich people to pay lower rates than others, a claim not supported by IRS statistics. But on Thursday, Obama accurately stated that it only happens sometimes.

In 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax, according to the IRS. Yet that was less than 1 percent of returns with incomes above $1 million. On average, taxpayers who made $1 million or more paid 24.4 percent of their income in federal income taxes; those making $100,000 to $125,000 paid 9.9 percent; those making $50,000 to $60,000 paid 6.3 percent. The White House argues that when payroll taxes — paid only on the first $106,800 of wages — are factored in, more middle class workers wind up with a higher tax rate than millionaires.

Investing in the Future

by | ECONOMY


It seems like the administration and media these days are spending a lot of their energy complaining about the growing disparity between the haves- and have-nots. Many explanations are bandied about in an attempt to show that “devious policies” are causing the wide gulf between higher and lower income earners. These devious policies include special benefits for the wealthy, corporate welfare, and a tax system that favors those with higher incomes. But there are no special benefits for the wealthy;  corporate welfare, though it exists only affects those few crony capitalist type industries and companies; and the tax system clearly favors those with lower incomes, not higher. Then why this imbalance?

The simple reason is that unlike people in the fastest growing countries, and unlike our own citizens in prior generations, the current middle and lower income lower classes have lost their inclination to invest in the future. I would argue that this is because the growing government welfare system is stripping individuals of their need to prepare and plan ahead. For the most part it is the upper middle and higher income individuals — those who are not the beneficiaries of government welfare and those with more entrepreneurial orientation — that are forcing themselves to save and put this money at risk into investments for their future.

China’s current economic success can be directly attributed to the financial attitude of their citizens with regard to investing. Almost all earners, even the middle and lower income ones, keep a certain amount of income each month and invest it in both entrepreneurial endeavors and the existing equity markets. It is common for even the minimum wage earners to save 25% – 50% of their income! Large or small sum, they regard investment as a priority and a path to prosperity.

Contrast this to the present state of affairs in our country. We have not been saving– we have been borrowing. Citizens have mortgaged their future by consuming continuously, while investing nothing.  We are turning into a country where people will begin to wonder why they should invest, if it’s just going to be taken away from them in the long run by those who do not.

In order to get the middle class back on track, we must focus our efforts and rhetoric on reminding ourselves that this country was built upon those who were willing to invest their time and money to become great.  It is the true source of upward mobility – and those that do not do their fair share will be left behind by those who do. Investment is what made our country thrive and it is the only thing that will properly sustain our country’s financial future.

Classifying Millionaires and Billionaires

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?

 

 


Taxes and the Wealthy

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.