© Copyright 1999-2003 All Rights Reserved.
|
January 27, 2003 The Rich and Everyone Else It’s true that Bush’s proposed tax package heavily favors the wealthy. But it’s also true that ‘soaking the rich’ poses dangers By Robert J. Samuelson Newsweek Jan. 27 issue — The debate over whether the rich are being plundered or pampered is a necessary one — even if it’s hard to resolve. IT’S TRUE that the wealthy would receive a huge part of President George W. Bush’s proposed tax cut. The top 1 percent would get more than a quarter of the cuts. But it’s also true that overtaxing the rich poses dangers. It encourages self-serving and cynical politics. Government is tempted to tax the few and distribute to the many without considering the long-term consequences. Here are the facts of today’s system:
Conventional wisdom holds that the wealthy rule politics through hefty campaign contributions. Not so. If the rich are so powerful, why are they taxed so heavily? Even after Bush’s tax cuts, they would still pay most of the taxes. In our democracy, votes count for more—much more— than dollars. Rightly so. This raises another question: if the rich are so outnumbered, why aren’t they taxed even more? The common answer is that Americans don’t loathe the rich. People want to become wealthy. They don’t want success punished. Wealth is—if legally and ethically earned—seen as a reward for hard work, talent or risk-taking. True. But again, votes count. These values resonate politically because the rich and near-rich vote more than everyone else. In 2000, half of those with incomes under $35,000 voted compared with three quarters of those with incomes exceeding $75,000. The electorate has an upper-middle-class bias. There is now a consensus that the rich should pay more than the poor and middle class—but not a consensus on how much more. In 1906, Teddy Roosevelt said: “The man of great wealth owes a peculiar obligation to the State, because he derives special advantage from the mere existence of government.” This is the classic case for the progressive income tax—higher rates on higher incomes. Government promotes social stability and protects property; it enables the rich to get rich. Why should the rich get tax relief, ask Bush’s critics, when their higher taxes mainly reflect higher incomes? Government should narrow the gap between rich and poor. (There’s also an issue of timing. In the boom, some of the rich profited unethically.) Here are competing ideals of tax justice. One says that taxes shouldn’t penalize success; the other says people should pay their “fair” share. The argument is endless, because there is no obvious dividing line between a legitimate levy and confiscation. If redistribution is the government’s main purpose, then none of this is a problem. The rich should pay more; the poor should receive more; tax breaks—if affordable—should go to the middle of the middle class. But there is a problem if (as this writer worries) too much redistribution becomes politically corrupting and economically destructive. Under the guise of “meeting national needs,” politics becomes an exercise in buying votes because burdens (mainly taxes) fall narrowly and benefits are spread widely. The economic danger is suffocation under an excess of taxes, government subsidies and welfare programs. It’s insidious because it creeps up slowly over time. Think Europe. The case for spreading the tax burden more evenly is not to reward or punish. It is to restore political discipline. Politicians and citizens ought to weigh the promised gains of government against the costs. They won’t if the direct costs are borne only by a tiny minority. No one then needs to make hard choices. It becomes easy to forget that taxes are the price of government. If people want more (less) of one, they ought to want more (less) of the other. This is an exacting standard that politicians of both parties would gladly evade. © 2003 Newsweek, Inc. [beginning of article]
January 30, 2003 SAN FRANCISCO (CBS.MW) -- Not many of us consider ourselves bullfighters, but quite a few of us wave red at the IRS without realizing it. That's why it makes sense to be aware of some potential audit triggers on your tax return. Knowing what trips the audit wire doesn't mean you should forego legitimate deductions, such as those for large medical expenses. But it does mean you should keep diligent records to back up your numbers in case the IRS targets you. The IRS uses what's called a Discriminant Function System (DIF) that assigns a numeric score to each return to kick out those that are questionable, according to IRS Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund. "If your tax return is selected from DIF, it has received a high score. This means that there is a high potential for an examination of your return to result in change to your income tax liability," the IRS says. If the computer tags you, it may be because your return contained an item that's often claimed erroneously or misreported, or your numbers deviate substantially from the norm. Uncle Sam has three years from the due date of your return or the day you file it to audit you -- unless you've omitted more than 25 percent of the reportable income on your return, in which case he can take up to six years, said Martin Nissenbaum, national director of personal income tax planning at Ernst & Young. But if you've committed fraud, the sky's the limit. The IRS can take a lifetime to hunt you down. 15 ways to trouble That said, we've asked tax professionals around the country what items make the IRS perk up. Keep in mind, though, that this list is by no means exhaustive.
Granted, there are worse things than an IRS inquiry. But it could turn out to be a paperwork headache. So do yourself a favor and get it right the first time. Be scrupulous and attentive to the details and hopefully you'll never have to hear from Uncle Sam. © 1997-2003 MarketWatch.com, Inc. All rights reserved. [beginning of article]
February 1, 2003 The White House's proposal to simplify and expand tax-preferred savings accounts has just one problem: it may not increase saving. Instead, economists say, its main impact may be to tilt the tax system away from its current bias in favor of immediate consumption. At the same time, if it becomes law, it is expected to shift some tax revenue from the distant future to the present. Since Congress approved the first I.R.A.'s in 1974, economists have tried to measure whether people use such programs to save more or just transfer money from existing saving accounts that lack a tax advantage. The evidence has been mixed. Yet skepticism over the administration's latest proposal was widespread, even uniting academics who have long disagreed about the effects of tax-preferred plans on household saving. "When one thinks, 'Are we going to get a lot more saving out of this?' I just don't know," said David A. Wise, a professor at Harvard whose research indicates that I.R.A.'s and 401(k)s promote extra saving. His sometime rival, John Karl Scholz, a professor of economics at the University of Wisconsin at Madison, was even more dismissive. "My best guess is that this would reduce private saving in aggregate," Professor Scholz said, "rather than increase private saving." Despite their differences, both economists agree that few people are constrained by current limits on contributions to I.R.A.'s and 401(k) plans. So the higher limits in the administration's proposal might not have much effect on saving. The new program would allow individuals to put away up to $15,000 of their after-tax income each year into two separate accounts, with no taxes on any earnings from their saving. Each year, the maximum contribution would rise with inflation. All the money in the new accounts, known as Lifetime Savings Accounts, could be taken out at any time tax free, while the money set aside in the expanded Retirement Savings Accounts would remain saved until age 58, except in cases of death or disability. "That's going to take care of almost everybody's saving," said Gary V. Engelhardt, an associate professor of economics at Syracuse University. Except for the wealthiest families, the $30,000 that a married couple could put aside every year would be more than enough to cover what they can afford to save. "Effectively all your saving is going to be sheltered," Professor Engelhardt said. Even with higher limits on tax-preferred saving, the government might have a hard time encouraging more people to begin putting money aside. "You're not going to get the participation rates you do in employer- based plans," said William G. Gale, a senior fellow at the Brookings Institution, a liberal policy group. Professor Wise agreed. For most people, he said, "this is small potatoes relative to 401(k) plans." Replacing saving plans aimed at medical care and higher education with one lifetime account, Mr. Engelhardt warned, could also curb savers' enthusiasm. Nevertheless, Mr. Gale noted, economists have little data to use in forecasting the behavior of high-income people, who are currently barred from contributing to Roth I.R.A.'s, which work in the same way as the new accounts. Contributions to traditional I.R.A.'s, which offer an upfront tax deduction in exchange for being taxed at ordinary income rates when money is withdrawn, would stop under the White House's plan. Their replacement could even lead to lower saving rates, Professor Wise said. "The upfront deduction is the thing that gets people's attention," he argued. "I would question whether you might not have a decline in contributions." He predicted that some middle-income people who contribute to traditional I.R.A.'s would not switch to the new accounts, because they would no longer receive the immediate tax break. "It's clear that it is going to be skewed toward upper-income individuals," Mr. Engelhardt said. Indeed, that is almost unavoidable. Most proposals to increase saving inherently favor the well-to-do because they are the only ones who can afford to set aside income beyond their immediate needs. "They do proportionally more saving than lower-income individuals," Mr. Engelhardt said. Moreover, the wealthy have a greater incentive to avoid taxation. "They face higher marginal tax rates," he said, "and have bigger tax benefits from these types of vehicles." Combined with President Bush's plan to protect dividend income from personal taxes, this latest proposal also moves toward a goal long favored by a number of economists, including R. Glenn Hubbard, the chairman of the president's Council of Economic Advisers: the transformation of the income tax into a tax on consumption. With a pure consumption tax, there is no disadvantage to spending money in the future instead of the present; the tax -- effectively paid at the time of a purchase -- is always the same. In a sense, eliminating taxes on saving achieves the same goal, even with an income tax in place. That transformation would be on the horizon if the new saving rules became law. "I can't imagine that there's ever going to be a taxable dividend or capital gain or anything else if we do this and the president's other proposal," Mr. Gale said. Aside from its effects on the character of the tax system and income inequality, making the entire savings of almost all Americans eligible for a tax shelter could also put a dent in the government's annual revenue. "Clearly the government's going to forgo a lot of tax revenue," Professor Scholz said. "Households with two incomes -- like me and my lawyer wife -- we'll be real capable of taking full advantage of these things." After 20 years, an individual who saved at the program's maximum levels could have $300,000 in principal yielding tax-free income. But while the government would be giving up a big revenue stream in the future, the new accounts are likely to generate extra taxes in the near term to the extent people with traditional I.R.A.'s take up the Treasury's offer to convert them. "If they get people to convert existing funds, and pay a tax on the conversion, they'll show a big gain in revenue in the short term, and a big loss in the long term," Mr. Gale said. "It's a gimmick, in that it's shifting revenue from the future to now." [beginning of article]
February 4, 2003 Do you think top corporate executives are massively overpaid and unaccountable to shareholders? Are you worried that companies such as Microsoft Corp. are too big and just keep getting bigger? Have you become convinced there are too many mindless mergers and acquisitions? Do you think even after the Enron scandal that there are companies out there manipulating earnings for a higher share price? Such concerns are voiced by those on both sides of the political spectrum. But, say conservative economists, there is something the federal government could do to mitigate these problems: Repeal the double tax on corporate earnings and dividends, just as President George W. Bush has proposed to do in his growth package. Experts with whom Insight has spoken about the Bush proposal say that in addition to a likely short-term boost for the economy by inducing people to buy more stock, the big dividend from Bush's plans would be an almost certain change in corporate behavior to make public companies more accountable to shareholders. As Vice President Dick Cheney told the U.S. Chamber of Commerce on Jan. 10, repealing the double tax would "transform corporate behavior and encourage responsible practices." The problem with the current tax code on corporate earnings is this, say tax specialists: Shareholders are the owners of a publicly traded corporation, and when their business pays the corporate income tax it is really a tax on them, the owners. Yet when a corporation pays them dividends from earnings, that money is taxed again, resulting in total marginal tax rates on dividends of up to 60 percent. So corporations have been given a government incentive to retain earnings and leave shareholders to reap any gains when they sell the stock. This produces all kinds of economic distortions. For one thing, the tax on dividends encourages companies to go into debt because interest payments are tax deductible, while dividend payouts are not. Bruce Bartlett, a senior fellow at the free-market National Center for Policy Analysis, who was a deputy assistant treasury secretary in the George H.W. Bush administration, tells Insight, "It encourages debt, and companies become overleveraged. This hurts them when there is an economic downturn and sometimes causes them to go bankrupt." If dividends were not taxed, Bartlett and others say, companies could raise money by issuing more shares rather than borrowing. Another big effect of the double tax is that it "distorts the incentives of corporate management," Bartlett says. "It encourages them, when they have profits, to use that money for things that are not necessarily in the shareholders' interests. For example, buying other companies, rather than giving that money back to the shareholders." The full repeal of the tax on dividends unveiled in Bush's economic package came as a surprise to many. But getting rid of the double tax on corporate earnings long has been a staple of tax-reform proposals, including both the flat tax and the consumption tax, but was considered one of the hardest points to sell. Critics long argued that the flat tax was unfair because workers would pay taxes on wages, but wealthy investors would not pay taxes on dividends. Never mind that this criticism ignored the fact that as owners of the corporation the investors would still, in effect, be paying the corporate tax, monies which otherwise would be paid in dividends. Some say Bush was encouraged to abolish the tax on dividends last fall at his economic summit in Texas by discount broker Charles Schwab, but Schwab now says he suggested it almost as an afterthought. Bush and his advisers could well have read the Aug. 12 cover story in Insight [see "Tax-Code Trauma"] that indicted the corporate tax code, including the double tax on dividends, for the role it played in the corporate scandals by encouraging executives to engage in complicated transactions opaque to shareholders. A big push for the idea came from R. Glenn Hubbard, the Columbia University economist who is chairman of Bush's Council of Economic Advisers. As a deputy assistant secretary along with Bartlett in the administration of George H.W. Bush, Hubbard authored a paper in 1992 titled Integration of the Individual and Corporate Tax Systems: Taxing Business Income Once. He wrote that the double tax on dividends "distorts corporate financial decisions ... encouraging debt and discouraging new equity." Hubbard concluded that "the potential economic gains from reform are substantial." Hubbard continued his research during his academic career at Columbia and now says that if Bush's plan goes into effect it should result in a 10 percent boost in stock prices and long-term growth from a positive change in incentives. Meanwhile, Democrats are pouncing on the fact that only half of Americans own stock and, even among those who do, much of it is in pension funds. They declaim that it will benefit only "the rich." Never mind that the investor class is growing rapidly, with more and more Americans owning individual stocks. Jim Cramer, the liberal cohost of CNBC's Kudlow & Cramer, says he is getting tons of e-mail in support of Bush's plan from investors with average family incomes who bought stock in the last few years and are anxious to see a sustained market rally. But the best strategy for ending the double tax, say proponents, could be bringing up the corporate issues liberals complain about, such as economic concentration, and telling them to put their money where their mouths are if they want to change corporate behavior. The National Meat Association, a trade group of meat packers, points out in its newsletter that "double taxation of dividends has been one of the driving forces of corporate concentration in both agriculture and other industries ... yet some of the same legislators who want to impose regulatory controls on corporate mergers are now speaking out against dividend tax reform, which would remove a major incentive for these mergers." Without the double taxation, for instance, Microsoft would have less incentive to sit on $20 billion in cash from earnings, as it currently is doing, Bartlett says. "Microsoft would get smaller because it would have to pay out that cash to the shareholders," he explains. And the president's proposal should reduce unwise acquisitions by big companies because chief executive officers (CEOs) will have to justify to shareholders why purchasing a particular company is better for their long-term interest than paying the cash as dividends. "There would be less favoritism in favor of retained earnings," says Stephen J. Entin, president of the Institute for Research on the Economics of Taxation and who was a deputy assistant treasury secretary in the Reagan administration. "The Cisco [Systems] shareholders who voted not to have a dividend last year might change their mind." This in turn would mean that more of investors' money would flow toward small, entrepreneurial, public companies whose innovations would benefit the economy, Entin and others say. "Right now if you have a lot of money locked up in, let's say, Cisco, and you want to get it in some firm that is perhaps yielding a higher return but don't want to take it out as a dividend you'd have to pay tax on, Cisco would have to buy that other company," Entin says. "[If the dividend tax were repealed,] you would have less pressure for corporate mergers and more growth of independent companies. There will be more competition for money and it will flow more readily to the highest returns." Concentration of industry is a big issue on Capitol Hill. Last year, the Democrat-controlled Senate, with many votes from Republicans, passed an amendment to the farm bill to ban meat packers from raising their own livestock. The amendment, opposed by Bush, was dropped from the final bill in conference. National Meat Association attorney Phil Olsson says lawmakers such as Sen. Charles Grassley (R-Iowa), who supported the amendment and support dividend-tax repeal, could say to their Democratic colleagues: "This would stop concentration. Which side are you on?" Another way that ending the double tax could change the behavior of corporate chieftains for the better is by making it less likely that they would manipulate earnings. Enron, which did not pay any dividends, hid debt and reported bogus profits. But with no tax bias against dividends, shareholders likely would demand that more CEOs show them the money. "Dividends are hard cash, and you shouldn't be able to manipulate them," Chris Edwards, Cato Institute's director of fiscal- policy studies, argues to Insight. "If you're getting 'x' dollars a month from your ownership, there's no way that the company can manipulate that. They've got to give you the cash, and if they cut the dividend payout, you know that something fishy is going on here." Bartlett adds, "If we'd had this legislation five years ago, we would have saved ourselves an awful lot of trouble" from some of the corporate scandals. Liberal groups such as the Center on Budget and Policy Priorities say, among other things, that the Bush plan doesn't do enough to crack down on tax avoidance. "The administration is talking about this issue of double taxation of dividends, but it's ignoring what we're calling the zero taxation of profits at the corporate level because of the aggressive use by corporations of tax shelters and other tax-avoidance techniques that have been reducing the overall amount of taxes that corporations have been paying," says Joel Friedman, a senior fellow at the center. But the Bush plan has strict recordkeeping requirements that any dividends paid must come out of a company's earnings that have been taxed. As prescribed in Hubbard's 1992 paper, the plan requires companies to pay dividends only out of what are called excludable distribution accounts of taxable earnings. Some big technology companies already have announced they will pay dividends if the proposal becomes law. Dividends help establish trust between shareholders -- something that's vital for the capital markets to work and something that's been missing since the corporate scandals. That's why the plan is likely to boost the market and the economy even before it goes into effect, supporters say. And Cato's Edwards offers another reason for ending the double taxation: international competitiveness. In a survey he conducted among the 30 developed countries in the Organization for Economic Cooperation and Development (OECD), the United States was one of only three that did not have some form of relief from dividend double taxation. And the other two that don't provide relief, Switzerland and Ireland, have lower corporate tax rates. The U.S. corporate tax rate of 36 percent itself is now higher than the 31 percent average for European Union countries, and is the fourth-highest among OECD countries. "Multinationals now span borders and send money back and forth and decide where they're going to set up their plants and the like," Edwards says. "It's extremely competitive, and getting more so all the time in the international climate, and the main imprimatur is on what are called capital income taxes: dividends, interest, corporate profits." Bush Puts Supply-Siders in the Treasury In the mid-1990s when Bill Clinton was president and "Rubinomics," the economic theories of Treasury secretary Robert Rubin, resisted federal tax cuts despite record surpluses, the Joint Economic Committee (JEC) of the Republican-led Congress kept alive the flame of tax cuts and tax reform. Economists on that committee wrote papers on cutting the capital-gains tax, providing relief from the double tax on dividends and simplifying the tax code. They held on to their strong supply-side commitment. Now, two of those economists from the JEC are at the Bush Treasury Department, where they can put their research into action. James Carter became deputy assistant secretary for policy coordination on Nov. 4. Bob Stein just started as special assistant to Assistant Secretary for Economic Policy Richard Clarida. Some of their former JEC colleagues say their appointments show the Bush administration is serious about enacting a Reaganesque fiscal policy. This is, of course, despite conservative concern about the recent appointments of John Snow as Treasury secretary and Stephen Friedman as chairman of the National Economic Council. Snow had been associated with the Committee for a Responsible Federal Budget and Friedman with the Concord Coalition, fiscal groups that oppose most tax cuts. Carter had been a tax and budget adviser to then-senator John Ashcroft (R-Mo.) and to Republican National Committee chairman Haley Barbour. He made the case for tax cuts and limits on federal spending in journals including the Washington Times, Investor's Business Daily, National Review and the Weekly Standard. He traveled to Russia in 2000 as part of an economic team to advise President Vladimir Putin on free-market reforms. He started in the Bush administration as associate director of the National Economic Council under then-chairman Lawrence Lindsey, a conservative favorite. Before he came to the JEC, Stein was a Washington correspondent for Investor's Business Daily at a time when the paper distinguished itself for original reporting on the effects of America's tax and regulatory burden that other media ignored. After he served at the JEC, Stein became a senior economist on the Senate Banking Committee and then chief economist at the Senate Budget Committee. Brian Wesbury, chief economist at the Chicago brokerage firm of Griffin, Kubik, Stephens & Thompson, served with Carter and Stein in the mid-1990s when he was chief economist at the JEC. "I think it's a great team," Wesbury tells Insight. "They're not only great Americans who want to do the best for this country, but they're intelligent and they're willing to step out of their comfort zones to find things that will help the country." Copyright © 2002 News World Communications, Inc. [beginning of article]
February 4, 2003 With nearly all the tax forms, interest statements and income reports now delivered to tens of millions of American mailboxes, the annual dread of spending a lot of time and money compiling a tax return is back with a vengeance. It was not always so. Not so long ago, Washington managed to hack through much of the underbrush of the tax code in an overhaul that President Ronald Reagan signed into law in 1986. But in the years after, lawmakers started adding dozens of provisions to the individual and corporate income tax systems, contributing to their complexity and helping the tax preparation industry grow into an even larger business. It is no wonder that many Americans turn to professionals to prepare their returns. This year's instruction manual for the federal government's individual income tax adds up to 126 pages, a far cry from the 56 pages needed in 1987, after the revision took effect. In short, said Warren B. Rudman, who voted for the 1986 tax law as a Republican senator from New Hampshire, "you have a nice wool blanket looking like a patchwork quilt again." The system is complicated enough that trying to abolish a tax can add new headaches. President Bush's apparently simple plan to end individual taxes on dividends, for example, is in fact quite complicated, said Brenda K. Schafer, senior tax research coordinator at H&R Block. "When you look at it deeper," she said, "you find out that not all dividends are excludable." Seventeen years after the tax code was overhauled, why has this crippling complexity returned? The reasons are almost entirely political, said Joel B. Slemrod, director of the Office of Tax Policy Research at the University of Michigan. Raising taxes so that more money could be spent had become taboo in Washington, so politicians had to find another way to cater to their constituencies. Tax changes - in the form of credits, subsidies, deductions and refunds - were the answer. Others take the argument further. "The tax system," said C. Eugene Steuerle, who coordinated the Treasury Department's tax reform group from 1984 to 1986 and is now president of the National Tax Association, "has become the vehicle of choice for influencing economic policy, the distribution of the tax burden, the state of the economy, the social welfare of families, and almost anything else you want to mention." Democrats, Mr. Steuerle added, found that they could achieve social goals using the tax code. In doing so, they were taking a page from the playbook of Republicans, who had long used the tax system to encourage business investment. "What's different today," he asserted, "is that the tax breaks in the tax system are much more oriented toward social expenditures than they are toward business-type incentives." In the 1990's, after Republicans had led the charge to push down tax rates at the top, the Democrats ushered in larger credits and new subsidies to help working and middle-class families with the costs of child care and education. Other provisions were also added to the code. "Some of these were for such strange things as building school buildings, which are hardly things one thinks of as going to the tax system to do," Mr. Steuerle said. "But they did it anyway." Besides avoiding the political criticism associated with sharply increasing spending, using the tax system as a way of achieving policy goals had another advantage. Where the budgeted cost of spending programs made headlines every year, Professor Slemrod said, few people stopped to sum up the cost of tax credits and the like. "A lot of these things don't get the same kind of scrutiny they would get if they were stand-alone expenditure programs." Yet using the income tax system to promote social policy goals does not always work, especially when changes are aimed at low-income people, said Fred T. Goldberg Jr., a former I.R.S. commissioner who is now a partner of the law firm of Skadden, Arps, Slate, Meagher & Flom in Washington. "When you have a world where 30 to 40 percent of the people don't pay an income tax," Mr. Goldberg said, "it's not a tool that's very precisely targeted to the folks you might want to pay attention to." Fiddling with taxes on businesses can also have harmful consequences, Mr. Goldberg said. "It is a direct path from complexity to corporate tax shelters." And when it comes time to file a return, complexity hurts taxpayers, and the Internal Revenue Service, directly. "The system is just in some ways out of control," Mr. Steuerle maintained. "The resources aren't there for the I.R.S., and taxpayers can't deal with it." The cost to taxpayers, in time and frustration, may even outweigh the beneficial effects of some new rules, suggested Pamela F. Olson, the assistant secretary of the Treasury for tax policy. Overlapping or inconsistent provisions in the tax code have added to the complexity, she said, and made errors on returns more likely. Elements of the tax code can have unintended consequences that will punish future taxpayers, as well. As a result, some provisions of the tax system need revision, the experts said, either in the very near future or within a few years. The most obvious offender, Mr. Rudman said, is the alternative minimum tax. The rule voids most itemized deductions and credits for filers who might otherwise have paid less tax, instead imposing one of two flat rates on their incomes. It also takes on the form of double taxation because people required to compute their taxes that way cannot deduct state and local income taxes from their federal obligation. And it is growing fast. About 1.3 million people paid the alternative minimum tax in 2000. Unless the law is changed, Professor Slemrod estimates, about 35 million people could fall under its embrace within a decade. Mr. Steuerle called the tax a "monster" that is "about to envelop almost every middle-income family with children in the country." The applicability of the tax is growing so quickly, he said, "that if you look at the Bush tax cuts in 2001, they really did very little for people in the upper-middle-income ranges because so many of them get hit with the A.M.T." Fixing that problem would require hundreds of billions of dollars in additional revenue or borrowing in the next few years. And yet another expensive tax twist needs to be addressed soon: the strange plan for the estate tax. The estate tax rate is to fall to zero in 2010 from 45 percent in 2009, then return to 55 percent in 2011. The amount exempt will also drop, to $1 million in 2011 from $3.5 million in 2009. To the astute estate planner, dying in 2010 might seem like an excellent idea. "That is just way too morbid, to think about what the incentives would be," Professor Slemrod said. "A rational Congress would certainly deal with that well before 2009." Other provisions of the 10-year tax plan that became law in 2001 are also giving tax preparers headaches. "It's difficult to remember what's what - what takes effect in 2001 versus 2002," Ms. Schafer of H&R Block said. "Only to us, to tax professionals, is that something we're really concerned with." These problems, and many others, might be dealt with in a single stroke if the nation moved to a radically different tax system, like a flat tax that imposes a uniform rate on wage income above a certain threshold, or a national sales tax. The latter idea has been advocated by R. Glenn Hubbard, the chairman of President Bush's Council of Economic Advisers; the Treasury Department has been researching several similar options. Mr. Rudman said he would not necessarily support either proposal. Nonetheless, he acknowledged, "either a flat tax, which in my view has a lot of problems with it, or a value-added tax, which probably has a lot fewer problems, is the only way you're going to get rid of the complexities in this code." A national sales tax would be an especially hard sell, said Jack F. Kemp, the former lawmaker who helped lead the 1986 tax overhaul through the House as a Republicanfrom New York. He said that it would be hard to make the tax fair to low-income families, and that it would be too easy, once established, to raise the rate. "Realistically, they're never going to get rid of the income tax," he said. (Emphasis added by NRSTA editor.) The political obstacles to any all-encompassing change, even if the income tax remains at the system's core, could be insurmountable. Mr. Rudman said he doubted that popular tax breaks like the personal income tax deduction for mortgage interest (worth $300 billion to homeowners in 2000) and the corporate deduction for employees' health insurance (worth $99 billion) could be eliminated. In addition, Professor Slemrod said, a simpler system could be harder on low-income people. "There's a trade-off of progressivity and the cost the tax system imposes," he said. Though a flat tax might convey some economic gains, he said, the social value of a progressive tax system might also be substantial. So, true simplification may be a long way off, despite the proposals being floated in Washington. In pursuing their economic agenda, Mr. Steuerle said, Republicans have "actually proposed more complication in the midst of their proposals for simplification." Even a radical restructuring is unlikely to take the form of a "pure" income or sales tax. "Once you start cluttering up the system," Mr. Rudman said, "you're back to where you started." Even with a supposedly flat income tax, he added, "it's no longer flat, it's slightly hilly." Copyright 2002 The New York Times Company [beginning of article]
February 4, 2003 SAN FRANCISCO (CBS.MW) -- The kindler, gentler IRS will be more aggressive in pursuing tax cheats and more efficient in collecting from deadbeats should President Bush's proposed budget win approval. The IRS plans to increase audits of wealthy taxpayers and businesses by 70 percent, reform the Earned Income Credit program to reduce fraud and hire private firms to collect unpaid taxes with the 5.25 percent budget increase that Bush requested for the agency. Specifically, the agency would focus auditing efforts on people who underreport their income, use tax-avoidance schemes and misuse trusts and offshore accounts, and on businesses that misuse corporate tax avoidance transactions and don't pay employment taxes, according to a Treasury Department statement released Monday. Revamping the EIC About 30 percent of federal earned-income credits -- totaling $8.5 billion to $9.9 billion -- were paid out in error in 1999. The program doesn't require eligibility verification before the credit - available to low-income taxpayers with children -- is paid. A pre-qualification requirement could reduce errors and fraud in a program that critics say requires complex income calculations and involves a separate worksheet to determine whether a child qualifies as a dependent. "The unique nature of this program almost cries out for a unique solution for determining eligibility," said Pete Sepp, spokesman at the National Taxpayers Union, a nonprofit advocacy group. "With, say, the mortgage interest deduction, the pre-qualifying process has been done," Sepp said. "If you get a loan and you live in a house and you're not misrepresenting that to the world, you probably do qualify for the mortgage interest deduction." Requiring pre-eligibility would ensure that when taxpayers claiming the credit file their return, the "check is sent immediately and we know that the check goes to the right person," Treasury spokeswoman Tara Bradshaw said. Private collection To recoup some $13 billion in uncollected taxes, the IRS will contract with private collection agencies to take over some of the more simple cases of overdue bills, the Treasury statement said. Unlike the planned focus on high- and low-income taxpayers, which only require budget approval, this proposal requires a change in tax law, the Treasury's Bradshaw said. If the law is changed, don't expect the IRS to suddenly collect all that's owed to it, Sepp said. "We shouldn't expect miracles out of a program like this because so much of the debts that the IRS carries on its books are either old or doubtful as to whether they're owed," Sepp said. "Many of these debts are not like mortgages or credit cards where you have an amount that a person owes and they just haven't paid it," he said. "There's an added dimension to tax debt ... there (could be) a serious doubt of liability." © 1997-2003 MarketWatch.com, Inc. All rights reserved. [beginning of article]
February 4, 2003 LOS ANGELES (CBS.MW) - President Bush's plan to eliminate taxes on the earnings in general savings accounts is a radical incentive to promote thrift, but for a nation of spenders, that might be a lofty goal, investing psychologists say. In a bid to get more Americans to save, the Bush administration has proposed overhauling tax-advantaged retirement accounts and also creating a new Lifetime Savings Account. See full story LSAs would offer individuals the chance to sock away up to $7,500 in after-tax dollars a year, with future earnings free from taxes. The money could be withdrawn at anytime, for any purpose without penalties, unlike Individual Retirement Accounts (IRAs). While enthused by the idea, financial experts say it may be an uphill battle getting individuals to take advantage of what seems an attractive plan at face value. "It will be incentive for those people who already save and also have the discipline to safe, but for those people who live beyond their means, paycheck to paycheck, this won't be a strong incentive," said Kathleen Gurney, chief executive of Financial Psychology Corp. The U.S. ranks low among industrialized nations when it comes to individuals' commitment to save money. The average American household only saves about $1,000, according to the Consumer Federation of America. "We have a society based on instant gratification," said Howard Dvorkin, president of Consolidated Credit Counseling Services. "If this became law would it automatically spur some kind of savings rate? No, people need incentives to save. 401(k) s have employer matches and even with that, participation levels stink," Dvorkin said. Dangle this plan before many people who could really use it, and they won't leap at it, Gurney said. "Those people usually need more drastic measures such as money taken out of a paycheck." Who'd have it Since there are no income limits on who could take advantage of the tax break, middle- to upper-income households would be most likely to take advantage of the plan, Dvorkin said. A person earning $45,000 a year and contributing 15 percent to a 401(k) is already saving $6,750 for retirement needs, leaving little more to put aside, he said. For families stretched as it is -- by unemployment, low-paying jobs or medical expenses -- the $7,500 maximum represents an impossible dream, Gurney said. "It's a tremendous amount of money for someone who doesn't save anything today. Potential is out there "What it comes down to is what people can afford. If they only have $3,000 to $4,000 they can invest, at least they're able to do it in a tax-advantaged manner," said John Mroz, manager of Retirements and College Planning Services at Strong Financial Corp. He said that if individuals, especially those on tight budgets, know that they can get to their money in an emergency without penalty, it might draw them into a plan. Said Mroz: "The fact that (money) can be taken out tax free will attract some people who sat on the sidelines before, maybe those who didn't understand a Roth or traditional IRA and what was deductible or not." © 1997-2003 MarketWatch.com, Inc. All rights reserved. [beginning of article]
February 4, 2003 Although I agree in principle with much of the President's stimulus package there is one fundamental flaw -- it exacerbates the complexity of the Internal Revenue Code. Since the Carter administration the tax code has doubled in size from approximately 23,000 pages to 46,000 pages. Slightly more than half of all income tax filers pay someone to prepare their tax returns. Complying with our overly complex tax code costs the American economy over $250 billion per year. On top of that, the tax burden on businesses is ultimately borne by consumers through higher prices and by workers through lower wages. These 'hidden taxes' affect everyone, especially the poor and the elderly. There is only one practical solution -- The FairTax -- a bipartisan bill (HR 25) introduced earlier this month by Rep. John Linder (R-GA) and Collin Peterson (D-MN). The FairTax eliminates all income and payroll taxes and replaces them with a simple 23% national retail sales tax and a monthly Family Consumption Allowance to insure that the poorest Americans pay no federal taxes whatsoever. Readers may visit these web sites for more information: www.fairtax.org (Americans For Fair Taxation) and www.scrapthecode.com (National Retail Sales Tax Alliance). [beginning of article]
February 5, 2003 Although I agree with much of President Bush's recent stimulus proposal [news stories, Jan. 12 and Jan. 22], it has one fundamental flaw: It would exacerbate the complexity of the Internal Revenue Code. Since the Carter administration, the tax code has doubled in size to approximately 46,000 pages. Slightly more than half of all income tax filers pay someone to prepare their tax returns. Complying with our complex tax code costs the economy more than $250 billion a year. On top of that, the tax burden on businesses ultimately is borne by consumers through higher prices and by workers through lower wages. A practical solution to this morass is the FairTax -- introduced as a House bill last month by Reps. John Linder (R-Ga.) and Collin C. Peterson (D-Minn.). This bill would eliminate income and payroll taxes and replace them with a 23 percent national retail sales tax and a monthly "family consumption allowance" to ensure that the poorest Americans paid no federal taxes. © 2003 The Washington Post Company [beginning of article]
February 5, 2003 Every few years, interest in fundamental tax reform rises. The leading proposal has long been a flat rate tax on a consumption base, such as the Hall-Rabushka plan. However, the interest always fades because the transition from our current system is too difficult, both politically and economically. Consequently, in recent years, flat-tax supporters have concentrated more on incremental tax changes that would gradually move us in the direction of a flat tax. If enough progress were made, then perhaps at some future date we would achieve something close to it. Tax reformer Ernest Christian has identified the key steps as the 5 easy pieces:
With last week's announcement that President Bush will propose expansion of deferred savings, we can see he has proposed all five pieces, with three already enacted into law. Like many conservatives, I was disappointed by the modesty of the tax- rate reductions proposed by President Bush during the 2000 campaign. I was much more excited by the flat tax proposed by Steve Forbes and, to a lesser extent, John McCain. However, I consoled myself that Mr. Bush would propose something bolder after the election. I was further disappointed when Mr. Bush sent Congress a plan identical to his campaign proposal in 2001. This was a lost opportunity, I thought. When it came time for compromise, Mr. Bush was bargaining from a weak position. The result was that a modest tax cut became even more modest by being phased in over many years. But again, I consoled myself that the party split in Congress probably made this the best deal that could be obtained under the circumstances. Finally, I was disappointed that Mr. Bush didn't use his post-September 11 popularity to push a meaningful stimulus plan through Congress. Instead, he settled for a temporary increase in depreciation allowances. I was heartened, however, when Mr. Bush decided to ask for full elimination of the double taxation of corporate profits, rather than the 50 percent exclusion that was widely rumored. He correctly reasoned he could not be attacked any more severely by Democrats for asking for 100 percent of what he wanted instead of only half. Mr. Bush also now understands — if he didn't before — that Congress is always going to demand its pound of flesh. Moreover, by asking for full elimination of double taxation, Mr. Bush strengthens his hand by being able to argue the point as a matter of principle. Had he only asked for 50 percent, his position would not be as strong. And if forced to compromise — a certainty — he would be doing so from a weaker position. With many Democrats, like Massachusetts Sen. John Kerry, favoring elimination of double taxation, they will have a harder time doing so as Mr. Bush has framed the issue. Now we see Mr. Bush asking for expansion of tax-deferred saving. On Jan. 31, the Treasury Department announced the president's budget would contain an initiative that will allow Americans to save more for their retirement. With this last proposal, we can now see Mr. Bush has had a strategy all along that conforms exactly to the five easy pieces. If he is successful in getting relief for double taxation and further elimination of saving from the tax base, he will have achieved meaningful legislative progress on every incremental change necessary to achieve fundamental tax reform. One secret to President Bush's success is that he has always been willing to settle for what he could get in terms of taxes, so long as the principle is not compromised and it is enacted into law. Thus, he will concede to long phase-ins, if necessary, and then ask for the tax cuts to be speeded up. He is satisfied with such compromises because they always move the law in his direction and that is what is important. By Mr. Bush's second term, it is possible we will have made enough incremental progress toward a flat-rate consumption tax that we may finally see fundamental tax reform fully enacted into law. If so, it will be testament to a very clever, yet bold strategy that was initially invisible even to people like me, who study such things for a living. I am impressed. Bruce Bartlett is a nationally syndicated columnist. Copyright © 2003 News World Communications, Inc. All rights reserved. [beginning of article]
February 6, 2003 WASHINGTON - Piece by piece, President Bush's new tax proposals would go a long way toward achieving a goal cherished by many of his top advisers: eliminating taxes on investment income. White House officials insist that their proposals are not part of a comprehensive plan to push through a fundamental overhaul of the tax system. The goal, they say, is simply to encourage savings and eliminate obstacles to investment. The intent of the proposed tax-free savings accounts, Pamela F. Olson, the assistant secretary of the Treasury in charge of tax policy, said when the plans were presented last week is to "make saving simple for everyone and for every purpose." But experts say the myriad changes would do much more by shielding the vast bulk of most individuals' investment income. "It's a comprehensive tax shelter," said Alan J. Auerbach, a tax expert at the University of California at Berkeley. "It's huge, but the costs don't show up in the budget as being huge." President Bush personally unveiled the White House proposal to eliminate taxes on most corporate dividends, a move that would cost the Treasury $300 billion over 10 years. That would be the first big step in making investment income tax-free. But more important, in the view of many experts, is Mr. Bush's even newer but much less trumpeted proposal to revamp and expand the nation's laws on tax-advantaged individual retirement accounts. Under that proposal, a married couple with two children would be able to put up to $45,000 a year into a class of individual retirement and savings accounts. They would still have to pay taxes when they earned the income, but they would never have to pay taxes on any of the money that accumulated in their accounts after that. The new retirement plans would shield much more than income from stock dividends. They would also shelter interest from bank certificates of deposit and corporate bonds, and they would eliminate taxes on profits from all kinds of investments held in the new accounts. "This proposal is simply a Trojan horse to get us to the point where we don't tax investment income," said Representative Earl Pomeroy, Democrat of North Dakota, who has studied retirement issues for years. At least as envisioned thus far, people would even be able to take home-equity loans on their houses, deduct their payments of mortgage interest and put the money in a "retirement savings account" or a "lifetime savings account," where it could earn tax-free profits indefinitely. The costs to the Treasury would be minimal for the next few years, but they could be huge over the long run as investment income built up and remained tax-free forever. Administration officials have not provided any long-term price tag for the new retirement proposals. Because people will be encouraged to move money from the current individual retirement accounts to the newer plans, the Bush administration estimates that the measure will actually generate an additional $15 billion in tax revenue over the next five years. But after 15 or 20 years, experts say, the new plans would reduce tax revenues by many times that much money every year. The political prospects for the administration's plans remain far from clear. Congressional Democrats are adamantly opposed to the dividend tax proposal, and many Republicans are uncomfortable with it as well. The retirement plan, announced late last week, is so new that Republicans are just beginning to digest the ideas. Representative Bill Thomas, Republican of California and chairman of the House Ways and Means Committee, said on Tuesday that he would take up the retirement proposals only after dealing with Mr. Bush's original economic package, which includes the dividend tax cut. The retirement plan has already received support from lobbyists for the securities industry, which sees rich new opportunities for marketing new individual retirement plans and selling the securities to go in them. But insurance companies are expected to fight the idea because the new plans would undermine the tax advantages that many life insurance policies offer in sheltering the investment income that builds up from premium payments. States and city governments may fight both the dividend and the retirement proposals because both measures would diminish the tax advantage that municipal bonds have long enjoyed over corporate bonds and stocks. On the other hand, the popular appeal of Mr. Bush's proposals could trump much of the resistance. Though only a tiny percentage of taxpayers receive more than a few hundred dollars a year in taxable stock dividends, millions of people could be attracted to the saving and retirement plans. Each individual would be allowed to contribute up to $7,500 a year from earnings, and each couple could contribute $15,000, into a retirement savings account. The "lifetime savings accounts" would be even more alluring. Each individual in a family could contribute up to $7,500 a year from any source. So a family of four could put aside $30,000, and the family would be free to withdraw money for any purpose at any time. The lifetime accounts could even be used as checking accounts, used to pay daily expenses but also accumulating tax-free interest. If approved by Congress, all of this would go a long way toward reaching a broad goal of senior White House advisers, which is to move from today's complex tax system to a much simpler system based on either a flat-rate income tax or a consumption tax, a form of sales tax. Investment income would inherently be excluded from taxation under a system dominated by a consumption tax. A flat-tax system would not necessarily exclude investment income from taxation, though most of the proposals offered in the past have proposed just that. In any event, a flat-tax system that eliminated most deductions would apply a much lower tax rate than the one imposed at present. The big difference between Mr. Bush's current proposals and most of the academic plans for a radical tax overhaul is that the bigger plans would eliminate tax breaks like the mortgage interest deduction. Mr. Bush's proposals end the taxation on much, if not most, investment income, but they do not offset that with any new tax on currently protected items like home borrowing, charitable contributions and state taxes. R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, is a fan of fundamental tax overhaul and has written extensively about how a consumption tax could work. But he said the new proposals were not yet part of a broader plan. "The president is a pretty straight shooter," Mr. Hubbard remarked last month. "If he wanted fundamental tax reform right now, he would have said so." Copyright 2002 The New York Times Company [beginning of article]
February 6, 2003 The chief executive of the Sprint Corporation, William T. Esrey, said last night that he could lose his entire fortune if the Internal Revenue Service decided that a tax shelter that he and the company's No. 2 executive bought from the company's auditors was improper. The shelter was sold to executives at hundreds of companies by Sprint's auditor, Ernst & Young, according to tax experts who have analyzed the transaction. Executives were told that the shelter would let them delay paying taxes on the exercising of options for 30 years, instead of having to pay them the year the options were exercised. Without the shelters, the two Sprint executives could face a combined tax bill of as much as $123 million. Such shelters not only save the executives large amounts. They are also lucrative for Ernst & Young, which can make millions in fees on each shelter sold, as well as for the law firms that bless them as being more likely than not to pass muster with the I.R.S. The shelter, called E.C.S., for Equity Compensation Strategy, was described last June in The New York Times. It was one of four Ernst & Young tax shelters that the firm told clients could result in little or no tax bill. After the article appeared in The Times, the I.R.S. announced that it would disallow tax savings sought under one of the four shelters. Mr. Esrey's disclosure is the first evidence that the I.R.S. is questioning the E.C.S. shelter. Mr. Esrey, who is leaving Sprint, sent an e-mail message to company employees last night saying that he was being audited and that the I.R.S. had not yet taken any action to disallow the tax shelter. However, he added, "In the event of an extreme adverse outcome, and in the event of low prices for Sprint stocks, future taxes could take up most, if not all, of my assets since I have nearly all my assets in Sprint stock." Rarely are such shelters disclosed. Indeed, in his note to employees, Mr. Esrey stated, "Ernst & Young required me to sign a nondisclosure agreement because of the unique and proprietary nature of their investment and tax strategy." But Mr. Esrey added that "I was assured by Ernst & Young that the investment and tax strategy was perfectly legal." He noted that he had a legal opinion from an outside law firm "that the I.R.S. should agree with the tax position taken." Sprint refused to comment on the deal last night. Documents filed with securities regulators indicate that Mr. Esrey and Ronald T. LeMay, Sprint's president, may have put into the shelter options that when exercised produced a $311 million profit. Without the shelter, the two executives would have owed more than $123.3 million in income taxes. Yesterday, the total holdings in Sprint shares of the two executives were worth less than $68 million, about $55 million short of the tax potentially due. Had the executives sold the stock immediately after exercising the options, they would have had more than enough cash to satisfy their potential tax obligations. Ernst & Young acknowledged that both executives were clients but declined to discuss the tax shelter. In its statement, Ernst & Young said that its "long-established policy is to provide tax planning for its clients that is appropriate and has the highest probability of being approved if reviewed by the I.R.S." "Because this policy was strictly adhered to in the case of the Sprint executives, we stand by the tax advice and counsel we provided," the statement said. "Ernst & Young will not comment further on this matter because of our policy not to publicly address client matters. Ernst & Young stands by the tax advice and counsel it provided." Federal law does not allow the I.R.S. to comment on the cases of individual taxpayers. The I.R.S. can impose penalties as high as 75 percent of taxes owed if it rules a tax shelter to be a fraud. If the I.R.S. decides the shelter was not legitimate, the consequences for Mr. Esrey and Mr. LeMay would be dire. In 1998, 1999 and 2000, Mr. Esrey exercised options that produced a profit of $159 million, on which he would have owed about $63 million in taxes if none of it went into the trust. Because the price of Sprint stock has plummeted, however, he owns shares worth only $39.4 million based on yesterday's closing price. That is $23.6 million less than he would have owed on the option exercises, excluding penalties and interest. Mr. LeMay's option profits were $152.2 million. The tax on that profit would be about $60.3 million. His Sprint shares were worth $28.5 million yesterday, or nearly $32 million less than the taxes. The E.C.S. tax shelter was sold as a way for executives to pass money to their family, usually children and grandchildren, while delaying for 30 years taxes on option profits of at least $5 million. Ernst & Young charged a fee of 3 percent of the profits on the stock options plus $50,000 that went to a law firm for a letter expressing the opinion that it was "more likely than not" that the shelter would survive an audit. While Ernst & Young would not describe the transaction, several lawyers and accountants said it and similar ones sold by some competitors worked this way: The executive sold options to a family trust in return for a note promising that the trust would pay him in 30 years, at which time the executive would owe tax. The price for the options was based on a computer model, known as the Black-Scholes technique, which many companies use with Securities and Exchange Commission approval. The crucial issue is whether the sale of the options was at the same price that the executive would make with anyone else, a standard known as an arm's-length transaction. The I.R.S. would question whether a bona fide sale had taken place, said Stuart J. Offer, a tax partner at Foerster & Morrison in San Francisco who has litigated tax cases involving compensation. I.R.S. auditors would ask "what is the game being played with the note," he said. Copyright 2002 The New York Times Company [beginning of article]
February 6, 2003 Sprint Case Highlights the Risks Of Basing Tax Moves on LettersThe blowup at Sprint Corp. over top executives' use of a controversial tax shelter raises a thorny question for many other taxpayers: Just how much protection do you get by having the official blessing of a high- powered accountant or lawyer? The issue moved into the spotlight when Sprint's two top executives, William Esrey and Ronald LeMay, were forced out as part of a boardroom dispute over their use of a questionable technique under scrutiny by the Internal Revenue Service. Other taxpayers are likely to confront similar issues as the IRS intensifies a recently announced crackdown on tax-motivated transactions by people with high incomes. Congress also is gearing up to combat tax shelters. Wednesday, the Senate Finance Committee approved legislation that would impose substantial penalties for failing to comply with Treasury regulations requiring disclosure by taxpayers of certain types of tax-motivated transactions. The Senate Finance bill is designed to "flush out tax shelters" and help the IRS "identify them and shut down illegal operations," says Sen. Chuck Grassley, the Iowa Republican who is chairman of the powerful Finance Committee. "Disclosure is the best disinfectant." Precisely defining a tax shelter is tricky. It's generally viewed as a vehicle designed to shield income or investment gains from taxes. Tax shelters for individuals flourished in the 1970s and early 1980s, much to the dismay of Congress and Treasury officials. The historic 1986 tax act made major changes to curb abuses. But in the 1990s, new types of complex shelters sprang up. Many people assume that if an accounting firm or lawyer concludes a tax shelter passes muster -- and puts that opinion in writing -- they're in the clear. But the blunt truth is that opinion letters never offered complete cover, and they're viewed with growing suspicion these days. "Many opinion letters about tax-motivated transactions are basically worthless," says David Hariton, a tax partner at law firm Sullivan & Cromwell in New York. "They hide the ball within a matrix of boiler- plate recitations of complex regulations, but when you cut through all of the cant, what they really say is, 'this will work, unless it doesn't.' " Clients often whip out opinion letters when the government challenges their tax maneuvers. If the letter proves to be wrong, you still have to pay the tax, plus interest. But the conventional wisdom is that the letter will protect you from penalties. That isn't always true. You may have to pay penalties unless you can prove you were relying on that opinion with reasonable cause and good faith. The Treasury has already said it will take steps to limit the ability of taxpayers to rely on opinion letters from lawyers and accountants to avoid penalties arising from shelters. "If it's too good to be true, it probably is," says Leslie B. Samuels, a lawyer at Cleary Gottlieb Steen & Hamilton and a former assistant Treasury secretary for tax policy. Mr. Samuel's advice: Those facing taxing situations should hire independent advisers, such as an attorney with a different firm that had no part in the design of the tax program. You'll have to pay extra for that advice, but it may save you far bigger dollars in the long run. Taxpayers shouldn't stop there. They should take time to understand any tax shelters they're considering. Then they should carefully read any opinions to make sure the facts are consistent with the details of the transaction they're about to embrace. "The Sprint story was quite frightening," says J.J. MacNab, a financial planner in Bethesda, Md. "A legal opinion is good -- maybe -- for avoiding some penalties. But it does not render the taxpayer safe from a lot of very negative consequences." Taxpayers also should make clear to their advisers what their risk tolerance is for aggressive tax maneuvers. Mr. MacNab says. "A lot of times, clients don't mention the fact that they're quite conservative, and an adviser has no way of knowing unless you tell them." TAX AGENDA: The Bush economic-stimulus package will get a speedy hearing in the House Ways and Means Committee. Rep. Bill Thomas, a California Republican and chairman of the tax- writing committee, says the panel will hold hearings on the president's proposals in the first two or three weeks of March. The committee is likely to mark up the bill later in March, he says, and action is expected by the full House prior to the beginning of April. The growth package includes accelerating income-tax rate cuts now scheduled to occur in 2004 and 2006. It also includes excluding dividends from individuals' taxable income, accelerating reduction of the marriage penalty and accelerating an increase in the child tax credit. But the big battle will come in the sharply divided Senate, where prospects remain cloudy, especially for the highly controversial dividend proposal. TEACHERS and many other educators would get an expanded tax benefit under Bush plan. The president wants to extend and increase a special $250 deduction scheduled to expire at the end of this year. Under current law, this deduction applies to teachers, instructors, counselors and certain other school personnel in public and private elementary and secondary schools who incur out-of-pocket expenses for such items as books, supplies, computer equipment and other items used in the classroom. To qualify, they must work at least 900 hours during a school year at a "school," as defined by state law. If eligible, they can claim this deduction even if they don't itemize. The president's plan would increase the deduction to $400. It would also make this provision permanent and expand the definition of eligible, unreimbursed expenses to include "teacher training expenses related to current teaching positions," says the Treasury's "Blue Book," a summary of the president's tax proposals. But travel and lodging expenses wouldn't be allowed. Neither would costs related to religious instruction or activities. For more details, see page 43 of the Treasury's Blue Book. NEW RULES on the home-office deduction are available on the IRS Web site. Many tax advisers have asked where they can get the text of recent Treasury regulations that changed a key rule involving the home-office deduction. As reported here Jan. 23, that change will reduce capital- gains taxes for many homeowners who deduct home-office expenses and later sell their home at a profit. For more details, visit the IRS Web site (www.irs.gov). Click on "The Newsroom," and scroll down the page until you get to a headline that says: "IRS Issues Home Sale Exclusion Rules." Click on that headline. At the end of the IRS message are links to the new regulations. They also were published in the Federal Register on Dec. 24, 2002, the IRS says. And they will also be published in the Internal Revenue Bulletin. BRIEFS: President Bush said he intends to nominate Robert A. Wherry Jr. of Colorado to be a judge of the U.S. Tax Court. Mr. Wherry, 58 years old, is a tax lawyer at the Denver firm of Lentz Evans & King PC ... Nancy J. Jardini takes over as deputy chief of criminal investigation at the IRS. She is the first woman to serve in that post. The criminal-investigation unit, the agency's law-enforcement arm, has about 4,500 employees, including more than 2,900 special agents. Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved [beginning of article]
February 7, 2003 WASHINGTON - The White House is jump-starting the debate over fundamental tax reform. In a report released Friday, the White House details the evils of the current income tax and discusses alternatives, such as a national consumption or sales tax. (Emphasis added by NRSTA editor.) It also examines a broadening of the current income tax to include a greater range of income. The "Economic Report of the President"
contains a 36-page discussion of ways to eliminate the current income tax
system. The current income tax "fosters economic inefficiency and its complexity
leads to staggering compliance costs," the report said. The report is noteworthy since many tax analysts argue President George W. Bush's latest tax cut proposals -eliminating double taxation on corporate dividends and creating large savings accounts that let investments grow tax-free are major steps towards a consumption tax system. The report observes that some argue the current tax system "needs to be 'ripped out by its roots' and completely replaced." (Emphasis added by NRSTA editor.) "Arguments for such wholesale reform certainly have merit," the report said. "This chapter, however, illustrates ways in which the current system could be modified to improve incentives and boost real incomes." The report doesn't explicitly state a preference for a consumption tax or an income tax based on a broader, more comprehensive definition of income. It does, however, examine the main argument against moving towards a consumption tax, the most popular form of which is the national sales tax. That argument is such a sales tax would be highly regressive to lower income taxpayers. "This claim depends critically on the time frame used to analyze the distributional effects of the two tax bases," the report said. "Consumption taxes are generally less regressive when viewed from a lifetime perspective than when viewed from an annual perspective." "It might be expected that, for many individuals, lifetime consumption should be roughly equal to lifetime income," the report said. "If this is the case, the lifetime incidence of a consumption tax and of an income tax should be close to proportional." The report says the major difference between the consumption and income models is that a consumption tax doesn't "distort the choice between current and future consumption (that is, saving)." With an income tax, "current consumption is tax- favored and saving disfavored, relative to future consumption." "Taxing consumption rather than income would eliminate this distortion," the report said. The report said because the tax base under a consumption tax would be smaller than under a comprehensive income tax model, "a higher tax rate would be required to raise a given amount of revenue." It added that eliminating the tax on income from saving "can have important salutary effects on economic growth and real incomes by encouraging saving." The report cited estimates that shifting to a consumption tax base "would generally increase the size of the capital stock in the long run, with some estimates suggesting an increase of as much as 20%." The report said that with a comprehensive income tax, individuals with the same purchasing power are treated equally, regardless if their income came from labor or investments or inherited wealth. A major problem with this option is determining the value of wealth derived outside the market, known as "imputed income," such as the value of services provided by a homemaker. "Clearly, taxing such imputed values raises enormous practical difficulties," the report said. Both alternatives are explored in- depth, with an extended discussion on tax reform's effect on housing, retirement savings, and investment. [beginning of article]
|
FAIR USE NOTICE:
This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of economic and tax reform issues. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.
|
|
|
National Retail Sales Tax AllianceTM © Copyright 1999-2003 All Rights Reserved. |