Don't Make Section 501(c)(4) The Patsy of the IRS Scandal

The Visalia Times-Delta recently published an editorial of mine defending section 501(c)(4) organizations that have been vilified as of late as a reactionary response to the IRS tea party scandal.  I defend both their tax-exempt status and the fact that donors' names are kept confidential. 

Pres. Obama Lectured on the 10% Biblical Tithe and the U.S. Tax System

On Thursday's National Prayer Breakfast, renowned neurosurgeon Dr. Benjamin Carson gave a 25 minute address that lambasted political correctness, proposed changes to Obamacare and urged tax reform.

One of his more interesting discussions delved into "fairness" and the U.S. tax system.

He argued:

"What about our taxation system? So complex there is no one who can possibly comply with every jot and tittle of our tax system. If I wanted to get you, I could get you on a tax issue. That doesn't make any sense. What we need to do is come up with something that is simple.
When I pick up my Bible, you know what I see? I see the fairest individual in the Universe, God, and he's given us a system. It's called tithe. Now we don't necessarily have to do it 10% but it's principle. He didn't say, if your crops fail, don't give me any tithes. He didn't say, if you have a bumper crop, give me triple tithes. So there must be something inherently fair about proportionality. You make $10 Billion dollars you put in a Billion. You make $10 you put in $1 - of course, you gotta get rid of the loopholes, but now now some people say, that's not fair because it doesn't hurt the guy who made $10 Billion dollars as much as the guy who made $10. Where does it say you have to hurt the guy. He's just put in a billion in the pot. We don't need to hurt him.
It's that kind of thinking - it's that kind of thinking that has resulted in 602 banks in the Cayman Islands."

What We Can Learn From the 100th Anniversary of the Federal Income Tax

Just a few days ago marked the 100th anniversary of the ratification of the 16th Amendment, which enabled the establishment of the U.S. federal income tax.

The 16th Amendment has a fascinating political history and the fact that there was popular support for the self-imposition of additional taxes was somewhat unique.  However, the 16th Amendment was never intentioned to be the federal government's main source of revenues.  Indeed, when it was being promoted, it was marketed as "just 1% on the top 1%"--meaning that only the top 1% of earners would be subject to the tax, which rates began at just 1%.  After all, who could be against such a tax? As the House of Representatives Committee Report indicated "all good citizens, it is therefore believed, will willingly and cheerfully support and sustain this, the fairest and cheapest of all taxes".

Over the years, the rates went up and up and the percentage of those actually subject to the income tax increased as well.  What was envisioned as a "soak the rich" tax, ultimately "soaked" the middle class as well. 

California Out of Funds to Disarm 19,700 Felons and Mentally Ill People

I was surprised to find out that California already has laws in place that enable it to confiscate weapons from the mentally ill in addition to convicted felons.  Unfortunately, the State does not apparently have the funds to actually go out and seize the weapons.

From the LA Times:

SACRAMENTO — California authorities are empowered to seize weapons owned by convicted felons and people with mental illness, but staff shortages and funding cuts have left a backlog of more than 19,700 people to disarm, a law enforcement official said Tuesday.

Those gun owners have roughly 39,000 firearms, said Stephen Lindley, chief of the Bureau of Firearms for the state Department of Justice, testifying at a joint legislative hearing. His office lacks enough staff to confiscate all the weapons, which are recorded in the state's Armed Prohibited Persons database, he said.

The gun owners typically acquired the firearms legally, before being convicted of a felony or diagnosed with mental illness. Each year, the state investigates and seizes the guns of about 2,000 people on the Armed Prohibited Persons list, Lindley said, but each year about 3,000 names are added to the list.

"Despite our best efforts, the bureau does not have the funding or resources to keep up with this annual influx," he told the 15 assembled lawmakers.

2013 Tax Surprise--Everyone Pays More

While the media focused myopically on the impending changes in tax rates as part of the fiscal cliff negotiations, scant attention was given to the scheduled and automatic expiration of the payroll tax holiday--namely, an increase from 4.2% to 6.2%.

Because of this lack of coverage many low and middle-income Americans, contrary to what they had expected and understood, face a sober reality that their taxes will increase by a substantial degree.  It is estimated that this increase will result in an average of $2,000 in extra taxes for middle-income families during 2013.    

Notably, the tax burden will rise more for someone making $30,000 a year (1.7%) than it does for someone earning $500,000 a year (1.3%) 

Is the New $450,000 Threshold of "Increased" Taxes Political Fiction?

From the Wall Street Journal, The Stealth Tax Hike:

Anyone still need a reason to abandon "grand bargains" and deals negotiated between this President and GOP Congressional leaders? Here it is: The revival of two dormant provisions of the tax code means the much ballyhooed $450,000 income threshold for the highest tax rate is largely fake.

The two provisions are the infamous PEP and Pease, which aficionados of stealth tax increases will recognize immediately as relics of the 1990 tax increase. Those measures, which limit deductions and exemptions for higher-income taxpayers, expired in 2010. The Obama tax bill revived them this week. It isn't going to be pretty.

Under the new law, some of the steepest tax increases may fall on upper-middle class earners with incomes just above $250,000.

...

A store manager married to a dentist with a combined income of, say, $350,000 may pay a higher tax rate under the new law than if the tax code had simply reverted back to the Clinton-era rates that Mr. Obama championed. Those earning more than $450,000 would see their de facto tax rate rise to about 41% under the new law, not 39.6%. Add in the new ObamaCare investment taxes and the tax rate on interest income is close to 45%.

...

Democrats are advertising the higher $400,000-$450,000 threshold as a victory for affluent taxpayers in blue states. But with PEP and Pease these Democrats are hammering their own constituents via the backdoor.

If your wondering just how much your taxes will be affected in 2013 compared to 2012, the nonpartisan Tax Policy Center in Washington has updated an easy-to-use calculator that will help you estimate your 2013 tax bill. It offers results for typical taxpayers from the lowest to the highest incomes, and also has a feature allowing users to create their own example.  It’s available here.

Income Tax Rates Rise...Revenues Fall: The UK's Vanishing Millionaires

From the WSJ editorial page, Britain's Missing Millionaires: Income tax Rates Rise but Revenues Fall:

A funny thing often happens on the way to soaking the rich: They don't stick around for the bath. Take Britain, where Her Majesty's Revenue and Customs service reports that the number of taxpayers declaring £1 million a year in income fell by more than 60% in fiscal 2010-2011 from the year before.

That was the year that millionaires became liable for the 50% income-tax rate that Gordon Brown's government introduced in its final days in 2010, up from the previous 40% rate. Lo, the total number of millionaire tax filers plunged to 6,000 in 2010-2011, from 16,000 in 2009-2010.

The new tax was meant to raise about £2.5 billion more revenue. So much for that. In 2009-2010 British millionaires contributed about £13.4 billion to the public coffers, or just under 9% of the total tax liability of all taxpayers that year. At the 50% rate, the shrunken pool yielded £6.5 billion, or about 4.4%....

Politicians would love to lay the whole burden of their policies on a tiny minority of the rich, but you can't finance the welfare state on the shoulders of the 1%. That's something for the U.S. to remember as President Obama pretends he can fill a $1 trillion budget hole with tax hikes on "millionaires and billionaires."

(Hat Tip: Tax Prof Blog)

To Avoid 21% Sales Tax Theater Sells $16 Carrots--Gives Away Tickets

In what can be considered the most original method of avoiding (or evading) a draconian 21% sales tax, a Spanish theater has actually resorted to "selling" carrots for $16 a piece, and then giving away a theater ticket for free.

When the Spanish government hiked sales tax on theater tickets this past summer, Quim Marcé thought his theater was doomed. With one in four local residents unemployed, Marcé knew that even a modest hike in ticket prices might leave the 300-seat Bescanó municipal theater empty.
"We said, 'This is the end of our theater, and many others.' But then the next morning, I thought, we've got to do something, so that we don't pay this 21 percent, and we pay something more fair," says Marcé in Spanish.
He looked out his window at farmland that surrounds this village, two hours north of Barcelona, and suddenly had an idea: Instead of selling tickets to his shows, he'd sell carrots.
"We sell one carrot, which costs 13 euros [$16] -– very expensive for a carrot. But then we give away admission to our shows for free," he explains in Spanish. "So we end up paying 4 percent tax on the carrot, rather than 21 percent, which is the government's new tax rate for theater tickets."
Classified as a staple, carrots are taxed at a much lower rate and were spared new tax hikes that went into effect here on September 1.

So Did The Wall Street CEOs Actually Call For Tax Hikes to Fix the Deficit?

On Thursday, the Wall Street Journal published a letter from over 100 major CEOs apparently calling for tax hikes in an effort to reduce the deficit.

Almost immediately, the letter was cited as proof that any position which did not accept the idea of tax increases as a prime vehicle to decrease the debt was indefensible. 

The Wall Street Journal editorial board, has taken a different interpretation in its editorial:  CEOs to the Tax Rescue? Liberals Confuse a Pro-Growth Plea With a Tax-Rate Hike:

Two words: game, change. On Thursday a 100-strong group of major business leaders did a Warren Buffett and endorsed a big tax hike, even if it means they'll have to pay more themselves. The support of this CEO lobby could break the Republican dead-enders who oppose all taxes and finally clear the way for a glorious bargain of tax increases and spending cuts to reduce the deficit. 

If you've seen this news story, don't worry. It's all a fantasy, albeit one that appeals to certain political types, who are reading their own priorities into the latest CEO petition on debt and taxes. The reality is that the chief executives who this week signed on to a "core set of principles" on budget reform are more than anything else scorching President Obama's lack of leadership. ...

The CEOs favor a framework that would "stabilize the debt as a share of the economy, and put it on a downward path." ... The CEOs also want to "reform Medicare and Medicaid" and do more to control national health spending. ... Only then—as a condition of structural entitlement reform, including Social Security—do the CEOs back "comprehensive and pro-growth tax reform, which broadens the base, lowers the rates, raises revenues and reduces the deficit." Note that reference to tax reform and lower rates, not the standard Beltway trade of certain tax increases for the promise of spending cuts that never happen.

The folks who are treating this as an extraordinary political breakthrough have apparently come down with a case of Romnesia, to borrow the President's coinage: Mitt Romney has been running on exactly such a tax reform for nearly a year, using exactly those principles....

What the CEOs we know really want is faster economic growth, the policies to promote it, and a Washington political class that can pass those policies. The politicos claiming that this rather anodyne CEO debt proclamation will make it easier for Mr. Obama to "raise taxes" are the same ones who merely want him to raise taxes.

 Hat Tip (Tax Prof.)

Brown's Plan to Stem CA Public Pension Costs Not Sufficient

From the LA Times regarding Gov. Jerry Brown's newly released plan to reduce public sector pension costs:

Even by the most ambitious forecasts, the plan Gov. Jerry Brown and fellow Democrats are championing to contain government worker pensions in California could leave state taxpayers awash in debt to public employees.
The governor's plan, announced Tuesday, is unlikely to save cities on the brink of bankruptcy. The relief his proposal would provide to the strained state budget is modest.
Analysts who study the issue say far more aggressive action — including reduction of benefits for hundreds of thousands of current employees left untouched by Brown's proposal — will be needed to get runaway retirement costs under control.
Taxpayers still face the prospect of major bailouts to cover retirement promises made to public employees whether lawmakers pass the plan as expected Friday or not.
...[E]very California household may be on the hook for roughly $23,000 for public retirements over the coming decades. Brown's plan might whittle that tab to $18,000.
"It doesn't solve the problem," said Joe Nation, a former Democratic assemblyman and professor of the practice of public policy at Stanford University. "We still have many, many miles to go."
Brown's negotiations with lawmakers resulted in a more modest plan focused on raising the public retirement age, limiting the annual sums collected by retirees whose jobs paid them six-figure salaries and tinkering with the formulas on which pensions are based.
The leaders' decision not to take any benefits away from workers already on the payroll, however, limited their ability to confront the soaring debt.
"You can't address these problems unless you address the existing liability," said David Crane, who advised former Gov. Arnold Schwarzenegger on pension issues.
"The only way to do that is to go after benefits for existing employees."
An exhaustive study last year by the Little Hoover Commission, an independent oversight agency that reports to the Legislature, warned that pension debt will continue to overwhelm government budgets if benefits for existing workers are not scaled back.
Making changes that affect only new employees, the commission's report said, "will not deliver savings for a generation, while pension costs are swelling now as baby boomers retire.... The promised benefits are unaffordable and leave taxpayers facing all the risk as the bill becomes due."

CA School District Borrows $100M, Will Pay Back $1B.

In a transaction that makes a pay day loan look frugal, a California School district borrowed $105 million over 40 years by selling "a bond so unusual that the State of Michigan outlawed it years ago". Taxpayers in the Poway school district will be on the hook for $1 billion--10X the amount originally borrowed.

In the bond deal, taxpayers were told that there would be no tax increases for 40 years.  In fact, there is no interest or principal due for the first 20 years, which means that all the payments will be due on the back end.  On top of that. the bonds are not callable and cannot be paid off early or refinanced.

The "bond costs will go towards new classroom and library computers, state-of-the-art wireless data systems with increased bandwidth, new voice and video alarm systems, green 'recyclable building materials,' and landscaping" as well as "new storm water drainage systems to comply with the Federal Clean Water Act".

Poway has only 34,000 students in its district and school administrator and teacher compensation eats up 85% of its annual budget.

What's the FMV of artwork that cannot be sold? IRS says $65 million

From the NY Times:

The object under discussion is "Canyon," a masterwork of 20th-century art created by Robert Rauschenberg that Mrs. Sonnabend’s children inherited when she died in 2007.

Because the work, a sculptural combine, includes a stuffed bald eagle, a bird under federal protection, the heirs would be committing a felony if they ever tried to sell it. So their appraisers have valued the work at zero.  But the Internal Revenue Service takes a different view. It has appraised “Canyon” at $65 million and is demanding that the owners pay $29.2 million in taxes.

...

At the moment, tax experts note that the I.R.S.’s stance puts the heirs in a bind: If they don’t pay, they would be guilty of violating federal tax laws, but if they try to sell “Canyon” to zero-out their bill, they could go to jail for violating eagle protection laws.

Mr. Lerner said that since the children assert the Rauschenberg has no dollar value for estate purposes, they could not claim a charitable deduction by donating “Canyon” to a museum. If the I.R.S. were to prevail in its $65 million valuation, he said the heirs would still have to pay the $40.9 million in taxes and penalties regardless of a donation.

Then, given their income and the limits on deductions, he said, they would be able to deduct only a small part of the work’s value each year. Mr. Lerner estimated that it would take about 75 years for them to absorb the deduction.

“So my clients would have to live to 140 or so,” he said.

Mandate Constitutional--3.8% Investment Tax Now On Its Way

From the WSJ on the implications of the Supreme Court's health care decision:

It really is happening.
Until this week, investors were waiting to see what the Supreme Court would do about the 3.8 percentage-point surtax on investment income, part of President Obama's health-care overhaul. The IRS hasn't yet released guidance on the new tax.
So when the court affirmed the law on Thursday, investors—and tax advisers—started scrambling.
The new tax, which Congress passed in 2010, affects the net investment income of most joint filers with adjusted gross income of more than $250,000 ($200,000 for single filers). Starting on Jan. 1, 2013, the tax rates on long-term capital gains and dividends for these earners will jump from their current historic low of 15% to 18.8%, assuming Congress extends the current law.
If, on the other hand, Congress allows the tax rates set in 2001 and 2003 to expire on Dec. 31—an unlikely scenario, according to many experts—the top rate on capital gains will rise to 23.8% and the top rate on dividends will nearly triple, to 43.4%.
Whatever the fate of the 2001-03 tax rates, advisers are telling clients to start making moves to minimize the new levy. ...
Here are answers to some basic questions about the tax:

• How does the 3.8% tax on investment income work?

• How is "investment income" defined?

• What are some examples of when the tax would and wouldn't apply?

• How would the 3.8% tax apply to the sale of a principal residence?

• What happens if a taxpayer has adjusted gross income above the threshold that is then reduced by a large itemized deduction—such as for medical expenses or a charitable gift?

• Does the 3.8% tax apply to trusts and estates?

• Doesn't the health-care law also have an extra payroll tax for higher earners?

3 Tax Increase Measures Qualify For November Ballot

Come November, Californians will will have a chance to vote on three different tax proposals.

Governor Brown's proposal would raise state sales tax and raise income taxes for those making more than $250,000.  Funds raised would be used to backfill the state's general funds and to guaratnte funding for local governments and public safety.

A competing initiative, backed by L.A. attorney Molly Munger, would instead raise income taxes accross the board for nearly every California taxpayer as well as increase the Millionaires tax to the highest in the nation--13.3%. These funds are to be used to go directly to publich schools. 

The third proposal would change corporate tax calculations for multi-state corporations--basing the liability on their share of sales in California.

Will Smith Discovers France's Top Marginal Tax Rates--Shrieks

The video speaks for itself.

California Ranks at the Bottom of Tax Friendliness Survey

The Kauffman Foundation has released its United States Small Business Friendliness survey.  California gets an "F" in half the categories measured. Here is the Tax Friendliness map comparing all States:


The highest grades California received were two "C-", in Training Programs and Hiring Costs.  

(Hat Tip: Tax Prof)

$4 Billion in Annual Tax Fraud From Undocumented Workers

This local news report from Indiana is startling and uncovers a growing trend. 

Word has spread amongst the undocumented workers how they can easily claim (albeit improperly) child tax credits for numerous children and relatives in Mexico, with some claiming as many as 12 dependents. 

"One of the workers, who was interviewed at his home in southern Indiana, admitted his address was used this year to file tax returns by four other undocumented workers who don't even live there. Those four workers claimed 20 children live inside the one residence and, as a result, the IRS sent the illegal immigrants tax refunds totaling $29,608."

The U.S. Inspector General is well aware of the abuse and released a new report showing the problem now costs American tax payers more than $4.2 billion a year.

The Great California Exodus

Another great article in the weekend edition of the WSJ interviewing Joel Kotkin, who is an acclaimed demographer and self-professed "Truman Democrat".  Mr. Kotkin runs through a litany of California's ills that are driving away its middle class.

Here are just a few snippets:

[The] Golden State's fastest-growing entity is government and its biggest product is red tape. The first thing that comes to many American minds when you mention California isn't Hollywood or tanned girls on a beach, but Greece....

And things will only get worse in the coming years as Democratic Gov. Jerry Brown and his green cadre implement their "smart growth" plans to cram the proletariat into high-density housing. "What I find reprehensible beyond belief is that the people pushing [high-density housing] themselves live in single-family homes and often drive very fancy cars, but want everyone else to live like my grandmother did in Brownsville in Brooklyn in the 1920s," Mr. Kotkin declares....

Another is the cap-and-trade law AB32, which will raise the cost of energy and drive out manufacturing jobs without making even a dent in global carbon emissions. Then there are the renewable portfolio standards, which mandate that a third of the state's energy come from renewable sources like wind and the sun by 2020. California's electricity prices are already 50% higher than the national average.

Meanwhile, taxes are harming the private economy. According to the Tax Foundation, California has the 48th-worst business tax climate. Its income tax is steeply progressive. Millionaires pay a top rate of 10.3%, the third-highest in the country. But middle-class workers—those who earn more than $48,000—pay a top rate of 9.3%, which is higher than what millionaires pay in 47 states.

Interview with John Malos of MeTV Fresno: Tax Day

This morning I was a guest on the show "Connect With Me", which is a new show hosted by John Malos.  He invited me on on tax day, April 17th,  to discuss a whole host of tax related topics.  We even discussed Ron Paul's position to throw out the entire tax code!  John's a great host and is surrounded by a great crew.

How will the "Buffet rule" reduce the deficit?

The "Buffett rule" (a minimum 30% tax on people making over $1 million per year) has been suggested and raised these past few months as a possible cure to national deficits.

The projected revenue increases range from between $30 billion and $40 billion over 10 years.

Below is a chart (courtesy of political math) which demonstrates the impact the "Buffet rule" will have on government finances, in particular, the deficit. Make sure to scroll all the way down to the bottom of the chart to see the impact.