Taxable Talk

Late today the Senate passed a one-year Alternative Minimum Tax (AMT) patch that did not have any corresponding tax increases. The measure will now go to the House where it faces an uncertain future.

The House had passed a two-year patch that contained corresponding tax increases. As I mentioned previously, there’s no chance that an AMT patch which contains tax increases can pass the Senate nor would it be signed by President Bush. However, that doesn’t mean that House Democrats have figured that out.

Other tax measures which are scheduled to expire were removed from the AMT legislation. A separate bill on those “extenders” will soon be introduced. However, because it will contain corresponding tax increases it, too, faces an uncertain future.

Meanwhile, tax forms (which will almost certainly be wrong) are being printed at the Government Printing Office, and I and other tax professionals will have to explain to clients why the forms are wrong. As I said before, I expect that by April 15, 2008 all of my hair will be gray.

I’ve been asked if I am a supporter of the “Fair Tax.” The Fair Tax is an idea of scrapping the current U.S. Tax Code and replacing it with a national sales tax. You can go to the Fair Tax website and get detailed information on the program. The site gives fundamentals behind the program here.

I hadn’t seen an unbiased review of the Fair Tax program until this weekend. Hank Adler, a professor of business at Chapman University, has published a lengthy critique of the Fair Tax. You can read it here (it is best read using Internet Explorer rather than Firefox). Professor Adler comes to the conclusion that while our current Tax Code may need to be replaced, the Fair Tax isn’t the way to go.

I agree that our current Tax Code is not a very good system. I’m still digesting material on the Fair Tax, and haven’t reached Professor Adler’s full conclusion, but I do have many reservations about the Fair Tax.

Pork has gotten ridiculous in Congress. My Congressman, John Campbell, is one of the few who has said he will not ask for any earmarks for his district. Meanwhile, David Obey (D-WI), the Chairman of the House Appropriations Committee, said it will be a cold day in Hades before there’s real earmark reform. At least he’s honest.

But there is something we can do. When individuals complain to Congress, results occur. You’ll see below a form that you can fill out to complain about earmarks (aka pork). The elimination of pork and a streamlined tax system go hand and hand. Join me and sign the petition—it’s free and easy.

November 10th is Saturday. That’s normally the day the IRS sends all of the forms and schedules to the printer. There’s a problem, though: Will Congress enact an AMT patch for 2007?

The House is scheduled to vote on a patch tomorrow. The Senate will likely take up the bill next week. However, President Bush is threatening to veto the legislation. Besides the AMT relief the measure extends 38 expiring tax provisions.

There are reasons why the President is threatening a veto. First, the bill has revenue offsets that the President doesn’t like. The measure would increase taxes on carried interest paid to financial managers and deferred compensation paid to some foreign hedge fund managers. Second, the bill would repeal the private debt collection efforts used by the IRS. President Bush is also upset that Congress has waited to the last minute to address AMT and other issues.

Remember how this year some deductions weren’t noted on the tax forms (e.g. the sales tax deduction), and that the IRS sent out a supplemental mailing? This also delayed refunds to those impacted by these tax breaks because the IRS had to reprogram their computers. Expect a similar situation this year.

I expect that eventually we’ll see an AMT patch that both Congress and the President can live with. The AMT impacts individuals in “Blue” states more than “Red” states. However, I expect some of the 38 tax breaks that need to be extended won’t be and will expire. And I won’t be shocked if President Bush does veto the initial legislation, and that Congress will then pass something the President would (and will) sign.

Hat Tip: TaxProf Blog

Suppose you’re an employee of a business in New York, and you reside in New York. You come to California on business for a convention and stay for ten days. Later, you visit relatives in California for a week. Did you realize that you owe California taxes?

Yes, that’s the law. If you’re not paying, you’re not alone. Most employers ignore out-of-state tax issues, and it’s very difficult for the Franchise Tax Board to go after employers in Nebraska (for example).

California’s rule is 14 days. Other states have different rules. There’s a bill in Congress to make the rule uniform throughout the United States and only allow states to tax out-of-state employees at 60 days. The AICPA has endorsed the bill; I like it, too. Unfortunately, the bill has only three co-sponsors and is unlikely to emerge from Congress quickly.

Hat tip: Tick Marks and Roth Tax Update

Back in March, I ran a post titled, “Be Afraid. Be Very Afraid.” I asked the question, “Did anyone really believe that with a Congress controlled by Democrats we would be looking at lowered spending and/or a decrease in taxes?”

The answer has been clear from day 1, and it came more into focus today. Representative Charlie Rangel (D-NY), chairman of the House Ways & Means Committee, proposed sweeping tax legislation today. The legislation, which has no chance of being enacted into law in its current form (see below), would:
– Lower the top corporate tax rate from 35.0% to 30.5%;
– Eliminate LIFO (last-in, first-out) accounting for inventory;
– Defer deductions of foreign subsidiaries of corporations until funds are repatriated into the U.S.;
– Eliminate the Alternative Minimum Tax (AMT) after 2007;
– Add a 4% surtax on incomes above $150,000 (single)/$200,000 married filing jointly (MFJ);
– Add an additional 0.6% surtax on incomes above $500,000;
– Increase the Earned Income Credit, and the Child Tax Credit; and
– Have a one-year patch for the AMT.

The devil is in the details, of course, and I haven’t seen them. And since except for the last part of the bill (the one-year patch), this bill will not be signed into law in this legislative term (the term ending in 2008), it just gives a flavor of what might be if we have a Democrat in the White House in 2009.

Why am I harping on this? Because of what’s not mentioned in this legislation. Many of the Bush tax cuts will expire (beginning in 2009). Ask your legislators whether they will vote to extend them. The legislation introduced today implies that they’re dead (at least in the view of Congressman Rangel). We’re looking at a $200 Billion stealth tax increase!

Much of this legislation seems good to me. For example, I’m all for simplifying the Tax Code. However, a major issue—one which Democrats seem to ignore—is that if you increase the tax rate, the tax collected tends to decrease (the Laffer curve). This is definitely the case when this occurs on the wealthy. Indeed, because of the prevalence of S-Corporations and LLCs, much of the income of the “wealthy” is actually business income. If taxes increase on business income, business owners have far less incentive to innovate and provide additional jobs.

One day the American people will realize that a simple flat tax system is the way to go. Until then, be afraid.

Link to New York Times article here