So, in the cloak of night, while the rest of the nation celebrates the start of a new year, the Senate voted 89 to 9 in favor of the “American Taxpayer Relief Act” crafted by Biden and McConnell. The funny thing is, there is no “taxpayer relief” in the act.
The Congressional Budget Office has calculated that the bill includes $620 billion in revenue increases via tax hikes. Additionally, because the bill “kicks the can” on a myriad of spending programs, the actual spending cuts total a mere $15 billion. That’s 41 times more taxes than spending reduction — and it’s spending which is the root of the problem!
It is incomprehensible that McConnell was actually proud of this bill. He pointed out that now that the tax (revenue side) is settled, “now it’s time to get serious about reducing Washington’s out-of-control spending. That’s a debate the American people want. It’s the debate we’ll have next. And it’s a debate Republicans are ready for.”
Gimme a break. They’ve had plenty of time since Simpson-Bowles failed and the Super Committee failed to “get serious about reducing Washington’s out-of-control spending”.
The tax hikes include:
— An increase from 35% to 39.6% for individuals above $400K and couples above $450K. Way to punish families!
— Itemized deductions and personal exemptions and will be limited once individuals meet the $200K threshold and couples meet the $250K threshold.
— The Estate Tax (Death Tax) increases from 35% to 40% on all individual estates above $5 million and family estates above $10 million.
— Dividends and Capital Gains rates increased from 15% to 20%.
— There will be a permanent AMT “patch” as well, finally indexing it to inflation.
What about the spending cuts side? Here’s what they did:
— A $30B one-year extension of 73 week unemployment insurance, — which effects about 2 million people.
— A $30B one-year extension of the Medicare “doc fix”
— A 5 Year Extension of 2009 Stimulus tax credits aimed at college students and low-income workers.
— An extension on the Wind Production Tax Credit (the 2.2 cent per kilowatt/hour credit) that gives a refund to a wind company if it doesn’t turn a profit.
Additionally, Sequestration was delayed for two months –right about the time that the debt ceiling will reach its limit.
So many questions swirling around at this point. Do the Republicans actually think this is a good thing? That there won’t be factions at negotiation time in a couple months (defense/fiscal, etc). Why are we supposed to consider accepting more taxes now with the “promise” of spending cuts later? How is this better than Simpson-Bowles? (or even “Plan B” for that matter?) This is supposed to be an example of a “balanced approach”?
The two things to come out of this “package” are that 1) Obama was able to shape the narrative and make this about taxes, not spending; and 2) Obama was able to make Republicans break their pledge about not voting for new taxes. The damage has been done. The effects of these negotiations will be very long-term.
Let’s hope the House Republicans have the courage to do what it right. Chime in with your thoughts.
For those of you who have asked, I have produced an outline of my recent talk on the Fiscal Cliff: How We Got Here & Where Do We Go? This is a handy cheat sheet that outlines the problems that contributed to our current situation and what we can do to make long-lasting, systemic changes.
A. How Did We Get Here?
1. Spending
a) Spending up estimated 27% since 2008 (cite: Forbes)
b) Trillion dollar deficits each year since 2009 (cite: OMB)
c) Debt-GDP ratio up from just over half of GDP in 2009 to nearly three-fourths in 2012. (cite: Heritage)
2. Taxes
a) Bush “tax cuts”
b) Uncertainty with tax rates
c) New taxes slated for 2013
3. Entitlements
a) Social Security
b) Medicare/Medicaid
c) Food Stamps
d) Disability
4. Healthcare
a) Cost of Obamacare – $1.93 Trillion in first decade (cite: Weekly Standard)
b) Taxes associated with Obamacare
1. Health Insurers Tax
2. Surtax on Investment Income: (3.8%)
3. Health care deduction AGI haircut (from 7.5% – to 10%)
4. Hike in Medicare Payroll Tax: (.9%)
5. Medical Excise Tax
5. Regulations
a) Code of Federal Regulations has increased by 11,327 pages — a 7.4% increase since 2009
b) Examples
1. EPA
2. FDA
3. NRLB
4. IRS
B. Where Do We Go?
1. Cut Spending
a) First, go back to FY2008 spending levels
b) Cut Federal Workforce by at least 10%, which should be commensurate with spending cuts
c) Enact Spending Caps to 19%-20%
2. Tax Reform
a) Make “Bush Tax Cuts” Permanent
b) Lower corporate rate and all tax margins
c) Simplify the tax code
d) Eliminate AMT
3. Entitlement Reform
a) Social Security
1) Raise the retirement age
2) Privatization options
3) Change from current to straight inflation increase
b) Food Stamps/Disability Overhaul
1) Fraud and abuse
2) Stricter guidelines
4. Healthcare Reform
a) Repeal Obamacare
b) Tort Reform
c) Create system more like HSA
5. Regulation Reform
a) Repeal strangling regulations – is this possible?
Recently I gave a talk on the Fiscal Cliff — how we got here and where we are going. Since several people have asked, I posted the videos from the talk. For whatever reason, the last 2 minutes ended up a second separate video, but you can view them one after the other. Enjoy!
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 top 2% who need to “pay their fair share”. The spotlight has been on this point of contention in the fiscal cliff negotiations, thereby serving to deflect attention away from the one policy that 1) is already the mechanism for ensuring that the wealthiest pay more and 2) will raise rates on the middle class for certain if the fiscal cliff has not been resolved. 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 – and 28 million additional taxpayers will now be impacted if the method by which it is calculated is not fixed by the end of the year.
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.
The indexing brings us back around to the problem at hand. 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. During AMT discussions, Congress likes to posture and 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”. It’s all song-and-dance really. Congress always approves the patch; the yearly patching process itself, however, is poor government. We are learning this lesson the hard way as a quiet showdown is unfolding during negotiations.
The AMT presents a dire situation with the fiscal cliff right now. If the patch isn’t approved by the end of December 31, the AMT will reset and taxes will go up for millions. If we go off the fiscal cliff, the Democrats will be directly complicit in a massive tax increase on millions of middle-income taxpayers’ families – the opposite of what they have been claiming in their bid to raise taxes on the most wealthy.
How could this occur – unless the Democrats really do prefer to let the patch lapse…and hope they can pin the discussion failures on the Republicans. After all, if more citizens pay the AMT, more revenue is raised for the rapacious government. Is it all part of a grander scheme, perhaps? What we do know for certain is this: the Democrats have shown that their narrative of protecting the middle class is a lie and empty rhetoric. They would risk sacrificing the tax rates of 28 million taxpayers for the sake of ideology and the job creators (the top 2%).
Time for another milestone. I noted it when it was 1,000 days past, but today we are now 1331 days without a budget. Nevermind all the doomsday talk for tomorrow — our fiscal situation is dire now.
April 29, 2009 is the last time Congress passed a budget. Obama’s two budgets proposals failed 0-97 in the Senate, and 0-414 in the House. No Democrats would vote for, or even sponsor, his proposals.
Right now we are about: $16,370,000,000,000 in debt. But that is not the whole picture. It doesn’t include entitlement debt, which makes the situation more egregious.
And what about the fiscal cliff? Harry Reid has decided to send Congress home for Christmas and reconvene on December 27th, and rules out a vote on Boehner’s “Plan B”. On the contrary, Eric Cantor has said the House has the votes for “Plan B”. “Plan B” raises taxes for taxpayers above $1 million, while the Senate version is a much lower, $250,000 threshold. More discussions, but no answers. We continue on in a state of uncertainty.
Yesterday, I wrote out a primer which showed all government debt, spending, and fiscal cliff solutions scaled down to manageable numbers. If you were to reduce equally everything by $10 million, you can understand the figures in amounts we are use to.
For instance:
Total Current Financial Picture for a Family of Three, on a $25,000 income
Annual Revenue: $25,000
Annual Spending: $38,000
Annual Expenses/Deficit per year: $13,000
Current Government “Shadow” Debt: $156,000 (ie. think – like your mortgage & credit cards)
Promised Future Entitlement Debt (SS and Medicare): $603,000
Total Family Debt on a $25,000 Income = $759,000 + $13,000 in annual added deficits
Debt “Fiscal Cliff” Solutions:
Obama’s Plan: cuts a mere $812 a year for 10 years and adds $1242 in revenue
Boehner’s Plan: cuts a mere $955 a year for 10 years and adds $955 in revenue.
With 11 days out before the fiscal cliff deadline and no solution in sight, you can be sure the “no-budget clock” will also continue ticking. 1331 days…and counting.
A gentleman, one of my clients, recently sold his entire business that he founded. Having worked at it and worked hard for it his entire life (he is in his late 70’s), the company sold for around $600 million dollars. This is a classic example of the American Dream.
From the sale of the company, his cut was around $65 million (pre-taxes). The sale took place recently. I advised my client that he should arrange the close of his business before the end of 2012 because of the likelihood of the change of tax rates. If he was able to close by the end of December, his share of taxes was calculated to be around $18 million, or just under 28%. This would mean his net earnings were $47 million total.
But Obama is saying that amount is not enough, to a man whose company has created thousands of jobs for this country. Jobs for people who have paid income taxes to the government for all those years.
The gentleman found out that, due to the numerous amounts of paperwork and regulations regarding the sale of his company, he will not be able to close on his company until April 2013. And Obama’s tax proposals say that successful taxpayers have to pay more, which means that my client would now be expected to pay 36% in taxes. Therefore, out of the $65 million from the sale, the gentleman’s net is now $41 million, while the government will get $24 million. Why that extra $6 million to them? For what?
Some people will say that $41 million is enough. Is it? Who decides? Is it really fair that the government should have that 36% instead of 27.7% for someone else’s life work because of an arbitrary date? Regulations? Massive deficits? And is it “fair” to the gentleman that the government can’t control its spending, or that he can’t close in 2012?
Why does the government get to arbitrarily decide what is someone else’s “fair share” for work that they did? How do you quantify the fair share of something — in this case, a successful company — that someone nurtured for their own entire life? As I have argued before, those who are prosperous should be given the same liberty to manage their success as any other citizen, not additional tax penalties based on whimsy and “need”. How can we honestly and morally take extra money from those taxpayers who have been able to create wealth and employment successfully and give it to the government and politicians who manage to continuously and egregiously squander income?
There have been renewed talk about reviving the bipartisan Simpson-Bowles recommendations as a Republican bargaining strategy. Though the package isn’t perfect – Republicans cringe at the tax increases while Democrats despise the spending cuts – in many ways, it seems better and more reasonable than some of the other offers currently on the table.
Simpson-Bowles could work under two circumstances: 1) Congress must first repeal the $1 trillion/year spending binge we’ve seen during the first Obama administration and start at FY2008 budget levels; and 2) the deal must include the healthcare revisions that were contained (and subsequently removed by Obama before the final draft) in the original Simpson-Bowles negotiations.
The virtues of Simpson-Bowles right now are that it includes entitlement reform, reigns in spending better than other current proposals, simplifies the tax code, and most importantly, is a bipartisan commission that originated from President Obama. Simpson-Bowles isn’t perfect, but it could be doable. And because Simpson-Bowles originally had more Democrat support than Republican support, it would put the Democrats in a tough spot if they rejected it now during the fiscal cliff talks.
Coming off the fresh wounds of the staggering Romney loss, the Simpson-Bowles package may be just what the Republicans need as a rallying point in order to emerge as the winners of this current standoff crisis.
President Obama has all but admitted that raising the tax margin on the top 2%/”millionaires and billionaires”/the wealthy might, just might, affect the economy negatively. Anticipating increased economic decline when he pushes up the rate from 35% to 39.6%, Obama has proposed another successful round of stimulus.
What might this new stimulus look like?
Extending the 2 percentage point Social Security payroll tax cut, boosting a tax incentive to businesses, establishing a $50 billion bank for long-term infrastructure projects, and extending unemployment benefits.
And the cost to taxpayers?
An estimated $255 billion total — which the GOP would surely need to demand that it be matched dollar-for-dollar in extra spending cuts.
So, let’s recount the logic of the Left:
Raise taxes –> Economy falters due to less consumption spending —> Need to spend $255 billion in government money to prop up the economy.
How about some other logic?
Keep tax rates the same as they’ve been for 10 years —> Economy gets a chance to recover without government interference and economic uncertainty —> No need to spend another $255 billion of taxpayer money
Some have suggested these are merely bargaining chips for the budget discussions. However, if Obama was so sure about his economic policies, and if these policies were really so good, he wouldn’t need to “spend” more or bargain any.
The IRS is reminding taxpayers and Congress alike that if the annual “AMT patch” isn’t renewed before the end of the year, millions of taxpayers (28 million) would be on the hook for thousands more per person in tax payments.
But we need more than just a “patch”. We need to eliminate the AMT from the tax code. 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.
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 the AMT needs to be eliminated completely.
