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Tuesday, May 12, 2009

The audacity of tax: As bad as you thought they would be 


Via Glenn Reynolds, TaxProf rounds up the reaction in the popular press to the newly-releasted details of the Obama administrations hideous new tax proposals. See, e.g., the Wall Street Journal's short summary.

For those of you who know a little about federal personal income or corporate tax, or who just want to get a sense for the scope of the tax increase, I commend to you the more extensive write-up produced by Deloitte Tax. I've clipped some inflammatory excerpts for your morning indigestion, but it is worth scrolling through to get a sense for the breadth and nature of the proposal. The short version is that President Obama is pushing absolutely staggering increases through the corporate and business tax systems. Direct taxes on business are, in general, inefficient and economically disruptive, but they are also peerless in their complexity, which means that few voters and essentially no reporters will make the effort to understand what is being done to them.

Trust me on this: something awful is being done to you.

Anyway, here are the most irritating (though not necessarily the most consequential) bits from the Deloitte Tax write-up, with my occasional commentary:


Introduction

More than two months after releasing its FY 2010 budget blueprint and a week after unveiling a set of provisions to reform the international tax rules, the Obama administration on May 11 provided a comprehensive description of its tax proposals for the coming fiscal year. This latest budget document describes more than 40 new provisions ranging from additional penalties or information reporting to dramatic new tax increases on businesses and estate tax reforms....

The detailed budget package also proposes to make a down payment on health care reform – one of President Obama’s top legislative priorities for this year – through a nearly $326 billion “health reform reserve fund” of corporate and individual revenue raisers. The centerpiece of this reserve fund is the provision included in the February budget outline that would limit the rate at which itemized deductions reduce tax liability to 28 percent for single taxpayers earning over $200,000 a year and joint filers earning over $250,000.

Information reporting

Starting small, one of the persistent themes is to massively increase the government's surveillance of small or even trivial transactions with the hope of improving tax collection in the little corners of the economy. The problem, of course, is that the new reporting requirements on businesses and individuals are "free" to the government, but not free to the economy. See, e.g.:
Information reporting on payments to corporations – The proposal would modify existing rules regarding reporting of payments made to corporations. It would require a business to file a Form 1099 to report payments made to a corporation totaling $600 or more in a calendar year. Notably, this provision was included in the Bush administration’s FY 2008 and FY 2009 budgets, but was not enacted. The provision would be effective for payments made after December 31, 2009, and would raise an estimated $9.15 billion over 10 years.

Information reporting and withholding for contractors – The provision would require a contractor receiving $600 or more from a business to provide a Form W-9 with the contractor’s TIN. The business would be responsible for verifying the TIN information with the Internal Revenue Service, which would validate the TIN. Should the contractor fail to provide the appropriate information, the business would be directed to withhold a percentage of gross payments. The flat-rate withholding could be at a rate of 15, 20, 30, or 35 percent, to be selected by the contractor. The proposal would raise $704 million over 10 years, effective for payments to contractors after December 31, 2009....

Are you a landlord? Do you maybe own an investment property, or a summer place that you rent to others, or perhaps you could not sell your last house so you are renting it instead? Well, you're really going to hate this one:
Recipients of real estate rental income that make payments of $600 or more to a service provider (such as a plumber or accountant) in the course of earning rental income would be required to send an information return (generally, Form 1099-MISC) to the IRS and to the service provider. Exceptions would be made for particularly burdensome situations, such as for taxpayers (including members of the military) who rent their principal residence on a temporary basis, or for those who receive only small amounts of rental income. The proposal would be effective for tax years beginning after December 31, 2009, and would raise about $3 billion through 2019.

Of course, not only will this create bureaucratic hassles for small landlords, but it will significantly raise the costs of hiring local tradesmen, who will suddenly learn that they no longer work in a "cash business." That may be fair -- electricians, plumbers and carpenters should not cheat on their taxes -- but this seems like the wrong time to be imposing big new costs and other disincentives on landlords.

Punitive damages
The administration believes the deductibility of punitive damages undermines their role in discouraging and penalizing undesirable actions, and this proposal would disallow all deductions for punitive damages paid or incurred by a taxpayer on judgment or by settlement of a claim. The proposal would also extend to punitive damages covered by insurance. The damages paid or incurred by the insurer would be included in the insured’s gross income, and the insurer would be required to report the payment to the insured and the IRS. The proposal would apply to punitive damages paid or incurred after December 31, 2010.

There is a certain logic to this, if you believe that punitive damages assessed by juries amount to the fair dispensation of justice. It is also a load off for the Democrats, because they no longer have to worry that their friends in the trial bar will reduce the revenue available to them to spend.

Foreign taxes

There are a whole slew of complex foreign tax proposals that, in the aggregate, will make U.S. companies even less competitive in foreign markets and discourage foreign companies from doing business here.
The administration has proposed substantial changes to the U.S. international tax regime that, if enacted as proposed, would expand the reach of the federal tax code and raise the cost of doing business in the United States. These proposals generally would become effective in 2011 and would raise some $210 billion over 10 years, according to Treasury Department estimates.

Raise money for Congress to spend and throw a sop to the protectionists at the same time, all in a manner so complex that the press could not call you out even if it were so inclined. Can it get any more audacious than that?

Energy

If you are an energy producer, the hits just keep coming.
The budget proposal contains revenue-raising measures that will have a substantial impact on the oil and gas industry. Together, they generate more than $31 billion in revenue over 10 years. In addition to imposing new taxes, the administration is also seeking to repeal tax preferences that promote oil and gas production, arguing that: (1) they distort markets by encouraging more investment in the oil and gas industry than would otherwise occur; (2) to the extent that they result in the overproduction of oil and gas, preferences are detrimental to long-term energy security; (3) preferences are inconsistent with the administration’s policy of reducing carbon emissions and encouraging the use of renewable energy sources; and (4) because they ultimately are financed with taxes, preferences result in underinvestment in areas of the economy that potentially are more productive.

Well, you (not really meaning you per se) voted against "drill here, drill now," so now we have "don't drill, or only at a much higher cost." Then there is the "reinstatement" of the old Superfund tax:
The administration proposes to raise $17 billion over 10 years by reinstating taxes that were originally enacted in 1980 to finance the cost of cleaning up toxic waste sites and allowed to expire. The superfund taxes included: (1) an excise tax of 9.7 cents per barrel on crude oil received at a U.S. refinery and on each barrel of imported petroleum products; (2) an excise tax of varying amounts on certain hazardous chemicals sold in the U.S. or used in substances imported into the U.S.; and (3) an environmental tax of 0.12 percent on the amount by which the modified alternative minimum taxable income of a corporation exceeded $2 million. These taxes would be reinstated for tax years beginning in 2011.

Taxing the "rich"

Apart from the indirect impact of all these new corporate taxes and bureaucratic burdens (most of which I have not included in this post), the Obama administration proposes raising marginal tax rates for single people who earn more than $190,000 and married couples making more than $231,000 (down, I note, from the $250,000 promised during the campaign). The top federal income tax rate, all in, goes to 40.79%. Of course, if that is wage income add more than 1% for Medicare tax and your state tax rate (adjusted for the associated federal deduction). I am fortunate to report that my marginal rate from only those three taxes will reach approximately 46%. Of course, President Obama's nattering about health care has massively reduced both my income and my net worth, so I'm not sure he is going to break even in the deal, but that's his doing, not mine.

Conclusion
As expanded by this latest release, the Obama administration’s tax program has taken on an everything-but-the-kitchen-sink quality. One lesson here is never to underestimate the energy and persistence of this administration. But even though some new details on previous proposals were contained in this release, particularly on the international tax provisions, this document seems to raise as many questions as it answers.

Additionally, many of the groups that the administration has criticized in the press in recent months – financial institutions, insurance companies, oil and gas companies, private equity and hedge funds, and high income/high net worth taxpayers –
will find that this budget only further underscores those sentiments.

The lesson of that last paragraph is this: If Barack Obama is bashing somebody in his speeches, he is preparing the media battlespace for a substantive attack to come. It turns out that it matters very much what he says.

30 Comments:

By Anonymous Anonymous, at Tue May 12, 07:47:00 AM:

The top federal rate goes beyond 40.79% due to limitations on itemized deductions. Charitable contributions max out at a 28% benefit and Obama reimposes the exemption phase-out. One side benefit is you probably won't be subject to the head exploding AMT anymore.  

By Anonymous feeblemind, at Tue May 12, 09:12:00 AM:

Reuters is reporting that Obama also wants to double the money spent for 'tax enforcement'. The smoke screen is that it will be spent going after people/corporations that shelter money in foreign accounts, but you can fully expect the money will be used to audit the Little People. The politically unconnected. Those that can't push back.  

By Anonymous Anonymous, at Tue May 12, 09:19:00 AM:

In the modern era, globalization has ensured that capital and talent can move to lower-tax locations faster than ever.

So why, exactly, would capital and labor stay in America?

Did we ever think we would see the day where China has lower taxes than the US? Where China and VietNam are better practitioners of free-market capitalism than the US?  

By Anonymous Anonymous, at Tue May 12, 09:22:00 AM:

How long will the law-abiding obey the "laws" of a lawless, out of control government?  

By Anonymous Mark Buehner, at Tue May 12, 09:23:00 AM:

This is part 1. Part 2 is when, to the amazement of democrats, the taxes don't pull in the ridiculous receipts they are projecting and they must sadly raise taxes directly on the middle class to make up for it.  

By Anonymous Anonymous, at Tue May 12, 09:32:00 AM:

Regarding enforcement the previous comment is exactly correct. Every big corporation already has a resident IRS auditor so they are definitely aiming at the small guy. The incredible expansion of information reporting (1099M's) will create technical violators out of just about everyone. Failure to file these forms will result in significant penalties. It will be like handing out speeding tickets for the IRS.  

By Anonymous Anonymous, at Tue May 12, 09:56:00 AM:

"The top federal income tax rate, all in, goes to 40.79%. Of course, if that is wage income add more than 1% for Medicare tax..."

It's 1.45% for you and 1.45% for your employer, which means you, even if you are not self-employed.

If you are employed by someone else, they have already reduced your salary by this amount.

Wait until the amount of income subject to Social Security is raised to infinity. Add another 12.4%.

Then figure sales tax or property tax if you actually want to spend the pitiful remnant.

I am already at 70% or so. I refuse to work, and will live off savings for a while.

I am a slave.

Chester White  

By Blogger geoffrobinson, at Tue May 12, 09:58:00 AM:

Given the $200K for single and $250K for joint filers it looks like the marriage penalty tax is back.

My wife stays at home so it doesn't affect me, but that still stinks.  

By Anonymous Geoff, at Tue May 12, 10:02:00 AM:

Nanny-staters are universally bad at math and history. History records that stifling production lowers everyone's standard of living. Math shows that hiking marginal taxes above a certain (rather low) point reduces receipts. As long as nanny-staters can get whiners to vote for them in sufficient numbers, they will continue to push the country toward a European stagnation. Vote, vote, vote! (Only once each, though).  

By Blogger herb, at Tue May 12, 10:05:00 AM:

I had a conversation with an IRS help line a while back, trying to track down a piece of correspondence. He told me that they were 9-120 days behind in processing paper that is submitted to them. Its a well known fact that their computer systems are past their prime. All this paper will do is further bog them down.

The revolt will take the form of hyper-compliance, where everything comes in its own envelope on the last day due.  

By Anonymous Anonymous, at Tue May 12, 10:08:00 AM:

Hmmmm...No proposal to tax those who reap the benefits of tip income.

Here in the Chicago I know some waitstaff/hairdressers make $100K at the fancy places. (Maybe some limo drivers in there too).

They are only required to declare 10% of income for tips, when the average they receive is 15-18%. Grossly unfair that they get away with it.

...I would support this tax...largely because the rich waitstaff/hairdressers I know voted for Obama.

Let them drink the Koolaid they mixed.  

By Blogger Georgfelis, at Tue May 12, 10:18:00 AM:

So what we have is the Obama Prescription (Rx by Tax):
Yesterday the Health Care industry proposed reducing health care Costs over the next ten years.
Today Obama proposed a massive sweeping tax regime that will eat up those potential health care savings, and then some. And then some more.

Just think of it as Dr. Obama doing surgery to reduce some of that nasty Wallet Fat that has accumulated in my pocket over the last couple decades. Left untreated, that wallet fat could lead to unhealthy levels of leisure, an RV, or even loss of children (as they go off to an Institute of Higher Brainwashing). Now I am certain to remain a healthy working member of society until I expire, and am placed in a government approved fully biodegradable carbon neutral resting place. Thank you Dr. Obama.
/sarc  

By Anonymous MainStreet, at Tue May 12, 10:33:00 AM:

Speaking for the retired among us who are living on fixed incomes, the increase in corporate taxes and energy is disastrous. But, who knows, the rationed health care proposal these taxes are supposed to pay for, will probably weed us older guys out pretty quickly.  

By Anonymous Anonymous, at Tue May 12, 10:33:00 AM:

Chester White's comments cover this nicely. If you are self-employed or a business owner your tax rate on income above the $200/$235k limit is 41%+3%+12.4%=56% plus your state tax rate. Self-employed business owners are going to find their top marginal tax rates between 60% and 70%, which is confiscatory by any reasonable standard.

I'm with Chester White. I'm a practicing attorney and I own some small businesses. In the recent past I've been busting my chops, have made a damn good living, and have paid over $200k annually in taxes. No more. I'm not going work myself to death to fund this socialist experiment. I've slowed down my law practice, laid off my help, and abandoned most of my office space. I'm targeting my income to $234k, and should pay about $100k in taxes.

In sum, just in my little world Obama's tax plan resulted in the loss of two part-time jobs (about $40k in comp each), the abandonment of 1600 square feet of office space in the middle of the worst commercial real estate market in modern history, and a REDUCTION in tax revenue of approximately $100k. Nice work, Obama.

I suspect there are several million other small business owners out there who are doing the same thing. This is where the Democrats learn that the Supply Siders were right: incentives matter.  

By Blogger Mister Snitch!, at Tue May 12, 10:34:00 AM:

"this seems like the wrong time to be imposing big new costs and other disincentives"

Nah. It's NEVER a bad time for a juiicy new tax!!  

By Blogger Mrs. Davis, at Tue May 12, 11:07:00 AM:

Every 75 years or so, 1787, 1865, 1933, we go through a major revolution that radically changes the nation. So we're about due for one. The question in my mind was whether Obama would be the Hoover to the New Deal era or the Roosevelt to the new one. This makes me confident he's the Hoover. If only I could figure out who will be the Roosevelt.  

By Blogger William Woody, at Tue May 12, 11:32:00 AM:

The increased requirement for 1099-MISC reporting by entities such as landlords hiring electricians and plumbers somehow raising $3 billion strikes me as odd: it seems to assume that those not receiving 1099-MISC reports don't report that income.

First, I can tell you I've failed to receive 1099-MISC reports in the past--including for amounts where I should have received a 1099-MISC. Yet I paid taxes on all of my income. I suspect the percentage of unreported income that this proposal will catch is far smaller than the Obama Administration is assuming here.

Second, I suspect that quite a few landlords will simply forget to file a 1099-MISC report, assuming the electrician or plumber they hired out of the yellow pages are exempt from 1099-MISC reporting for whatever reason. (I wouldn't think to give a 1099-MISC report to the contractor I hired through Sears who installed the tile floor in my kitchen.)

Third, for those who realize they need to file a 1099-MISC, I suspect to avoid the paperwork they'll simply pay cash.

So I can't see how this will raise additional revenue. Instead I suspect it will simply push more payers into non-compliance.  

By Anonymous Anonymous, at Tue May 12, 11:43:00 AM:

The beatings will continue, until morale improves ...

Link, over  

By Blogger Donald Sensing, at Tue May 12, 11:47:00 AM:

If you start taxing punitive damages, then it will drive the amounts awarded higher. This will drive insurance premiums higher, too.  

By OpenID cubanbob, at Tue May 12, 12:47:00 PM:

When the correction comes, the question is will the correction merely undo all of the Obama democratic-communist actions or will it go back further? All the way back to LBJ or even further back to FDR? The 2010 election will be either a bust for fiscal conservatives in which its game over for the tax payers or the tide going out before the tsunami hits.  

By Anonymous John Stephens, at Tue May 12, 12:49:00 PM:

Say goodbye to the middle class, and hello to the new world of Lords and Peasants.

If you're not a Lord and don't want to be a Peasant, I have two suggestions for you: learn Spanish, and overcome any aversion you might have to the drug trade. If the only way to conduct small business is through the black market, then you're going to be rubbing elbows with characters fully as unsavory as Obama believes you to be.  

By Anonymous Anonymous, at Tue May 12, 01:11:00 PM:

OK, I just have to say Link has it nailed in his preceding comment.

Next, Jake Tapper and Hot Air are playing tennis today with the EPA memo describing the economic damage that the proposed carbon taxes will exert on the Depression era economy we live with.

A friend who years ago started his business and has nursed it to success and who voted for Obama told me today "I never thought he was serious about new taxes". Wrong.  

By Anonymous Anonymous, at Tue May 12, 03:34:00 PM:

The reporting of 1099s will create another problem for start-up and small corporations. Lets say a college professor is a corporation and consults in his specialty around the country. Every state in America will hassle the guy for state taxes that cost more to file than to pay. The guy could easily be trying to pay state taxes on a $1000.00 lecture in a state and be
hassled to file in 20 states instead of his home state.

There is a jocks and jokers law that outrageously penalizes start-ups in this way. Each state the guy lectures in will require he pay $250.00+ to file as a corporation in that state, be audited by that state, etc.

Basically, this will destroy the little guy in paperwork and collect no additional income!  

By Anonymous Anonymous, at Tue May 12, 04:50:00 PM:

Don't forget those additional 'millionaire's taxes' placed on people earning over $231K by various states as well. Seems we're very close to the 90 percent tax rates that sparked JFK's outrage. Gee, wasn't he a democrap?  

By Blogger randian, at Tue May 12, 05:10:00 PM:

Right now corporations don't receive 1099s. If every inter-corporate business deal has to generate a 1099, the mountain of paperwork will be enormous. I predict that the actual tax revenue generated, net of enforcement costs, will be near zero if not negative.  

By Anonymous Anonymous, at Tue May 12, 05:24:00 PM:

Which tax year does all this kick in 2009, 2010 or beyond ?  

By Blogger randian, at Tue May 12, 05:33:00 PM:

I just noticed another gem in the proposal: how carried interests are taxed. The change in capital gain treatment isn't the true horror, the change in SECA treatment is. Obama is proposing to charge self-employment tax on carried interests. That means that real estate rents and portfolio income, previously exempt from SECA, would become subject to it if received as part of a carried interest. That's a huge change to the historical treatment of such income. It will kill real estate and investment partnerships. This also portends the uncapping of self-employment tax. Since most holders of carried interests are going to be above the cap, this proposal won't raise much tax without eliminating the cap.  

By Blogger Purple Avenger, at Tue May 12, 06:40:00 PM:

I guess Obama failed to mention all those "saved or created" jobs would be accountants and tax attorneys.  

By Blogger Joemama, at Tue May 12, 10:23:00 PM:

Let this be your rallying cry: NO NEW TAXES! NO NEW TAXES! Kind of a flashback to the G.H.W Bush years.  

By Anonymous Lily, at Tue May 12, 10:42:00 PM:

Jomama:

Most true fiscal conservatives are not huge fans of GHW Bush (or his son for that matter)  

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