by | ARTICLES, BLOG, ECONOMY, FREEDOM, LAW, POLITICS, TAXES
Capital gains are unusual in that the taxpayer has the ultimate decision as to whether and when to sell his asset (stock, his business, a work of art, etc.) The higher the tax rate, the less likely he is to sell, seeing as he will only be able to enjoy or reinvest what is left of the proceeds after tax. History has borne this out – capital gains tax collections go down in the periods after increases, and go up in the years after decreases.
The actual impact of raising the capital gains rate by the Obama administration was devastating to the economy. By discouraging the sale of assets, there was reduced capital available for new projects and opportunities, reducing job creation and wages, and resulting in lower revenue collection.
Furthermore, with higher capital gain rates, the expected after tax rate of return on new projects went down, assuring that fewer of them went forward.
Additionally, there were a number of localities, like the state of California and New York City, which have tax rates of 12% or more and also a large concentration of wealthy people and high performing businesses. The Obama federal capital gains increase brought total capital gains rates of more than 37%. A capital gains rate this high virtually brought elective capital to a standstill. This amounted to a rate of almost 60% higher than the rate during the Bush Administration (15%) – when growth and the economy were very strong.
The higher capital gains rate put a stranglehold on risk taking and available capital. Why sell an asset to fund further investment and opportunity when the government takes a large share of the gain with the loss remaining all yours? It makes virtually no economic sense to do so, and the result meant an already anemic economy continued to struggle. Lowering the capital gains rate as part of the Trump Tax Reform package is a positive game-changer for the economy.
by | BLOG, ECONOMY, FREEDOM, POLITICS, TAXES
The concept of an American President (Obama) going after people making a lot of money and paying a relatively low tax rate on it was particularly naïve; it displayed 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 having a high capital gains tax only served to drive a deeper wedge between the have- and have-nots in an attempt to level the economic playing field. Trump would do well to lower the capital gains rate and and restore a sense of trust with those who work hard, contribute to the economy, and attain the American Dream.
by | ARTICLES, BLOG, ELECTIONS, FREEDOM, GOVERNMENT, LAW, POLITICS, TAXES
Taxpayers have been long bamboozled into making generous commitments to the retirement systems of public service workers. All over the country, in all levels of federal and state governments, these defined benefit plan pension plans have proven to be vastly untenable. To sustain the plans in their current arrangements and cover the obligations that have already been promised, the rest of society will be compelled to contribute to the retirement of those public service workers via higher taxes. This is turn makes the rest of the populace poorer — because their hard-earned money is being levied to the promised public pensioner, and not available to be saved for themselves.
The grand scheme is becoming unhinged. One must realize that the more people continue to buy into the idea that they are supposed to “retire at 65”, the more they are suckered into continuing to make their retirement years poorer and subsequently make the retirement years of public service employees richer. People see a public service worker being able to retire at that age and they think, “I should be able to also do so”. This idea needs to change.
There are two reasons why most people think that such pension programs are still sustainable and normal: 1) the exorbitant pension costs are buried in the category of “education costs” which allow advocates to falsely argue that higher education costs mean better education, and 2)the costs are largely buried in the larger budget process of federal/state/local governments (and how many people pay attention?).
In the private sector, costs are held in check by the fact that out-of-control costs make the overall cost of the product too high in the marketplace, and will bring the company down. The employees negotiate with company officials who are responsible to a board of directors and shareholders who need to provide a competitive product. But in the public sector, with no competition, costs become whatever the public sector unions can squeeze out of the elected officials who they have helped elect, and who are more accountable to them than to the taxpayers who pay the bill.
The costs to keep public employee pension plans afloat are borne by all the rest of society — the taxpayers. This arrangement enables a small group of people to be paid a sizeable and continuous pension until death. It is not out of the ordinary anymore for a person to receive $65K- $100K for the rest of his or her life. But the actuarial cost to provide that promised benefit is astronomical, and unfair to hard-working private sector employees.
by | BLOG, FREEDOM, RETIREMENT, SOCIAL SECURITY, TAXES
Everyone thinks he can retire at age 65. It’s an American ideal born in the last century with the rise of unions, the defined benefit plan, and generous pension systems. In reality — especially due to advances in health, medicine, and nutrition — many people have great capability to continue to work and contribute to society and themselves until 70-80. And they should, because they need to.
There is a crisis of affordability looming. Besides the enormously wealthy, for the most part no average person can afford to retire at 65. It is simply not possible, living a normal lifestyle, for anyone to put enough toward retirement by age 65 that will enable him to be supported for another 20-30 years. A life span of 85-95 is swiftly becoming the new norm. The only workers today who are the exception to this reality, and have any hope of a lengthy retirement with comfort, are public service employees. (That point is addressed in a subsequent piece entitled, “Abuse to the Taxpayer by Public Service Employees.”)
With the lifespan of Americans growing longer, retiring at 65 is no longer viable; the systems are badly strained. And it is certainly not rational for the longevity of Social Security and Medicare either. Yet the steadfast refusal of most of government to overhaul retirement systems or make age and formula adjustments to entitlement programs — in order to maintain this retirement facade — only compounds the problem.
Another one of the biggest detriments of being able to retire at 65 is investment return. Interest rates have been historically low for the last six years and there is a strong likelihood of them staying low for some time. As a result, people’s retirement portfolios have lagged in their anticipated growth and goals. The low rates mean less money overall for retirement time, a problem which can be offset by continuing to work and contribute to a retirement fund past the basic age.
Likewise, inflation is not the issue that everyone thinks it is. The true problem is the cost of living — but really, it’s the cost of modern living, the “keeping up with the Jones’s”. The cost of aspirin, color TV’s, computers, and long distance calls are NOT going up. But people now can have Celebrex instead of aspirin, surround-sound with flat screens instead of color TV, and smart phones instead of computers and standard phones. Newer models of everything due to technology is constantly changing — upgrading quality of life, but at an increased cost.
In sum, with living longer, low rates of return, and the “cost of Jones’s increase”, people must begin to realize that the time span between 65 – 75 can be, and should be, a healthy and productive time of life. Working, staying active, and continuing to save will be beneficial in the long run. The mindset of older citizens needs to change and they need to understand that they can should aim to be productive until they are 75. At 65 they can certainly slow down, but the concept of retiring and not working anymore at that age is unrealistic and unaffordable.
by | ARTICLES, BLOG, FREEDOM, GOVERNMENT, IRS, LAW, TAXES
We need to eliminate the AMT from the tax code entirely. Here’s why:
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
- 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 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.
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 the AMT needs to be eliminated completely.
by | ARTICLES, BLOG, GOVERNMENT, IRS, LAW, POLITICS, TAXES
The Democrats have continuously claimed that they are looking out for America’s middle class by keeping the tax rates the same for them while seeking to raise rates on the wealthiest Americans who need to “pay their fair share”. This assertions serves to deflect attention away from the one policy that is already the mechanism for ensuring that the wealthiest pay more. What is it? The AMT.
The Alternative Minimum Tax (AMT) currently serves virtually no useful purpose, other than the raising of an ever-increasing amount of tax revenue. 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”. Yet 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 developed to identify “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 is used to calculate and compare the differences between income and deductions in order to determine who falls under the guidelines. Interestingly, a very substantial majority of all current AMT paid by taxpayers results from the following factors: 1) treating state and local taxes as a preference; 2) treating miscellaneous deductions as a preference; 3) allowing lower exemptions than the regular tax.
These factors have flaws. For instance, state and local taxes are hardly a loophole because taxes exacted by state and local governments are hardly “voluntarily” paid by taxpayers in an attempt to avoid paying federal taxes. Likewise, “Miscellaneous Deductions” is the category of deductions that consists primarily of expenses incurred to earn income. It often includes unreimbursed employee expenses, investment expenses, etc. This is the most basic and important deduction necessary to have a truly fair income tax system and should not be considered a loophole. Furthermore, the exemption available under the AMT is a fixed dollar amount which, unlike exemptions and standard deductions under the regular tax system, is not indexed for inflation; it is also phased out entirely over certain income levels.
During AMT discussions over the years, Congress used to posture and point to the AMT 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”. Once the “patch” became permanent and the higher exemption level kept many taxpayers from being hit with the AMT, Congress stopped talking about the AMT altogether. But the fact still remains that there is a parallel tax system already that goes after the highest income-earners; they already pay “their fair share” — and then some
by | ARTICLES, BLOG, ECONOMY, FREEDOM, LAW, RETIREMENT, SOCIAL SECURITY
Entitlement reform is necessary for the fiscal health of this country, but it is something that no one wants to talk about, much less tackle. How can we begin? How can we open up the conversation and the possibility to reform and improve our social security system?
One step in the right direction would be to treat Social Security as a true retirement plan, and not as a wealth transfer system that it currently is. This could begin with reclassifying the payroll tax. The majority (6.2% out of 7.65%) of the payroll tax covers Social Security retirement benefits. If we actually used it (or at least most of it) for that individual’s social security retirement, everyone’s perception would change. Instead of being viewed as a hated tax (just ask any young person who has received their first paycheck), it would be viewed as a desirable saving for their future!
Let’s make another incremental change. The employer and employee contribute equally to the Social Security Tax. If the individual’s part went towards his personal retirement, the other part could go towards defraying the past obligations that are coming due. If we had done such a thing 20 years ago, the entire system would have been fixed. Unfortunately, the present situation would probably require some portion of the individual’s portion to also go towards paying the ever growing obligation for past unfunded promises. It’s that dire! And every year that we do not fix it, it gets worse.
We must stop treating Social Security like welfare or wealth transfers and start treating it like a retirement system. It’s our money anyway, even though the government wants to act like it is being generous when it gives us back our money. This would lessen the loose-and-fast accounting gimmicks that contribute to the fiscal mismanagement of Social Security anyway — and may move it away from its impending insolvency.
by | ARTICLES, BLOG, FREEDOM, IRS, LAW, RETIREMENT, SOCIAL SECURITY, TAXES
Whenever tax reform, tax packages, or tax changes get discussed and debated, the focus is always on “the middle class.” While this sounds noble, the reality is that the middle class already pays very little in taxes. The majority of the middle class “tax bill” is actually Social Security — which is not truly a tax.
For example, my son made about $35,000 last year. He paid $1,500 in income tax and $4,500 in Social Security. But contributions to the Social Security system should not be viewed as a tax — it is effectively a forced retirement payment. Pundits and lawmakers need to stop calling Social Security payments a tax, and need to stop including Social Security payments in their tax equations because it does not operate as a tax.
I strongly believe that with some tweaks to the Social Security system that make the benefits more tied to contributions and allow for some ownership of the underlying assets, we can get people to view those payments in a positive light – investing for their future. When you remove the Social Security line item from the amount of tax liability, you see that the lower and middle classes have a very low income tax liability.
