What Are We Missing in Georgia?

What Are We Missing in Georgia?

According to the Atlanta Journal-Constitution:

Rep. Chuck Martin (R-Alpharetta) is pushing legislation co-sponsored by leaders of both parties to make sure Georgians don't have to pay state income taxes on the stimulus checks they might be receiving from the federal government.

The final stimulus plan hasn't been approved by Congress, but President Bush and congressional leaders have supported putting $150 billion into the package. Under the plan, most individuals would get up to $600, couples would get $1,200 and each dependent child would bring families an extra $300.[...]

Without his bill, Martin said recipients would have to pay the 6 percent state income tax on those stimulus checks.

We're not so sure about that. Some states allow residents to deduct federal taxes from their state taxes, so reducing federal taxes would increase state taxes. That's why Missouri enacted a bill similar to Georgia's back in 2001. But Georgia does not allow federal deductibility like Missouri does, so that's not the reason.

We've read the text of the bill (which just adds a one-year income exclusion, without changing any other laws) and the relevant statute, and we can't figure this out. When filing taxes, Georgia instructs filers to start with federal adjusted gross income and then subtract state deductions. The stimulus rebate check, as an advance on the 2008 tax refund, would not increase or decrease federal adjusted gross income, so why would it affect state taxes?

It may well be that Georgia legislators want to give taxpayers a one-year cut in their income tax. But if they're doing that, they might want to get rid of the bottom five income tax rates which apply to income earned under $7,000.

State of the Union Address Mostly on Target, but Misses One Important Point

In tonight's State of the Union Address, President Bush proposed the right prescription of short-term stimulus to calm American's economic jitters in the near term and long-term confidence-building by challenging Congress to make his signature tax cuts permanent.

But the President missed a golden opportunity to use his bully pulpit to jump-start the debate over the nation's lagging business tax competitiveness in the global economy. With the second highest corporate tax rate among developed counties, the U.S. business tax system continues to fall behind as Washington stands still, thus threatening American jobs and undermining the attractiveness of the U.S. as a place to invest.

Click here for more on corporate taxes.

The 1870s Called: It Wants Overreaching Virginia Legislature Back

In a rush to relieve Virginia motorists of steep "abusive driver fees," state legislators have run head-on into a 130-year-old Virginia State Supreme Court case that is thwarting their attempts. The controversial law passed last year requires drivers charged with abusive driving to pay heightened charges (taxes) to the state. They are currently charged in three installments over the space of three years and range from $750 to $3,050.

The repeal of the highly unpopular law appears to be a virtual certainty but the Washington Post reports that refunding money paid by those already assessed is being held up by Ratcliffe v. Anderson (Va. 1878), which states that the legislature "oversteps its authority when it passes legislation to invalidate or otherwise reopen a court judgment or decrees." The court's decision effectively prevents any retroactive action by the legislature in stopping the collection of the tax already owed.

One possibility being discussed is to grant refunds of the tax paid only after complete payment. This would require taxpayers to pay the repealed tax, and then receive it as a refund. That is at least in harmony with the Court's decisions. But a refund troubles some lawmakers who oppose writing checks to drunk drivers convicted of killing someone during the last year.

Although the long-standing case throws a wrench into the well-designed plans of the lawmakers, it appears that an all-out effort will be employed to side-step the case law and repeal last year's bad legislation that became worse law:

The House also wrestled Monday over what to do about those who are already paying the fees. House Democrats pushed for an amendment that would allow them not to pay. But the Republican majority, citing many of the same concerns that came up in the Senate, rejected the idea.

Our recent wrap-up of their likely repeal is here.

Florida Voters Vote to Further Limit Property Taxes

The anti-property tax fervor that has swept the nation over the past couple of years has registered another victory. This time it was in the State of Florida. On Tuesday night, the voters approved Amendment 1, a measure that would scale back property taxes in the Sunshine State, mostly on primary homes. This was in addition to the property tax cut that the state legislator and Gov. Crist put into law in 2007. For more on the vote, here is an Orlando Sentinel article discussing the vote, as well as providing a good brief overview of the issue in Florida.

An interesting question for local political pundits to answer is what was the role of the importance of the Republican Primary compared to the Democratic Primary in driving turnout and thereby influencing the vote on this measure, given that the former would be more likely to vote in favor of Amendment 1 to cut taxes. To what extent would the final result have been different, and would it have even made a difference?

Go to the original author's site::

According to the Atlanta Journal-Constitution:

Rep. Chuck Martin (R-Alpharetta) is pushing legislation co-sponsored by leaders of both parties to make sure Georgians don't have to pay state income taxes on the stimulus checks they might be receiving from the federal government.

The final stimulus plan hasn't been approved by Congress, but President Bush and congressional leaders have supported putting $150 billion into the package. Under the plan, most individuals would get up to $600, couples would get $1,200 and each dependent child would bring families an extra $300.[...]

Without his bill, Martin said recipients would have to pay the 6 percent state income tax on those stimulus checks.

We're not so sure about that. Some states allow residents to deduct federal taxes from their state taxes, so reducing federal taxes would increase state taxes. That's why Missouri enacted a bill similar to Georgia's back in 2001. But Georgia does not allow federal deductibility like Missouri does, so that's not the reason.

We've read the text of the bill (which just adds a one-year income exclusion, without changing any other laws) and the relevant statute, and we can't figure this out. When filing taxes, Georgia instructs filers to start with federal adjusted gross income and then subtract state deductions. The stimulus rebate check, as an advance on the 2008 tax refund, would not increase or decrease federal adjusted gross income, so why would it affect state taxes?

It may well be that Georgia legislators want to give taxpayers a one-year cut in their income tax. But if they're doing that, they might want to get rid of the bottom five income tax rates which apply to income earned under $7,000.

Go to the original author's site::

The Senate will likely cave to the demands of AARP and others to expand the stimulus to include rebates to elderly Americans who pay little or no taxes (and the rebates dropping from $600 to $500 to keep the cost the same). As we noted:

When dealing with a policy that is designed primarily to stimulate the economy, any arbitrary policy can almost be justified to some degree. But what this shows is that there is a problem in trying to use the tax code as the main vehicle for fiscal stimulus and/or social policy. Everyone is always going to complain that they are being shortchanged, despite the fact that getting money to everyone is difficult.

On second thought... maybe we should just send helicopters over every major city in the country and drop out $20 bills. And we can even make AARP happy by putting double the money in the helicopters that fly over golf courses in Florida and Arizona.

Because the stimulus bill enjoys such broad congressional support, it's a magnet for all sorts of silliness to be attached to it (the term is a "Christmas tree" bill). The Senate may seek to add additional unemployment benefits. A provision has been added to prevent a Child Death Tax. Some are now insisting on an amendment to prevent illegal immigrants from getting rebate checks. Mike Huckabee and Rep. Brian Baird (D-WA) think we should spend the money on infrastructure. The REALTORS® are happy with the stimulus bill, though. Contrast that with the Coalition [of Economists] Against Fiscal Stimulus, and those normally anti-tax congressmen who voted against it in the House.

AARP's success at amending the bill makes this Canadian cartoon from 1985 seem apt:

Go to the original author's site::

In tonight's State of the Union Address, President Bush proposed the right prescription of short-term stimulus to calm American's economic jitters in the near term and long-term confidence-building by challenging Congress to make his signature tax cuts permanent.

But the President missed a golden opportunity to use his bully pulpit to jump-start the debate over the nation's lagging business tax competitiveness in the global economy. With the second highest corporate tax rate among developed counties, the U.S. business tax system continues to fall behind as Washington stands still, thus threatening American jobs and undermining the attractiveness of the U.S. as a place to invest.

Click here for more on corporate taxes.

Go to the original author's site::

Child Tax Credit #3

Child Tax Credit #3

Regardless of whether one supports a stimulus package, the agreed-upon package by the House leadership and the White House could almost rival AMT in terms of the amount of complexity it adds to the 2008 tax system. Not only do we have the government sending out checks to those who have no income tax liability (thereby requiring some method to reduce their tax liability), the proposal calls for yet another child tax credit. Yes. Make it three child tax credits.

We have the regular child tax credit, which gives everyone $1,000 per child with a floor at zero income tax liability (which is phased-out at $110,000). Then we have the additional child tax credit for those who are hit by that floor, thereby making the child tax credit refundable. But now we have a new child tax credit for $300 per child available to all, which is subject to different phase-out ranges than the current child tax credit. Furthermore, this is in addition to the personal exemption that a tax return gets for each child (which for someone in the 15 percent bracket is worth $525 for 2008) and other credits that are linked to children such as education credits, the credit for child and dependent care expenses, and the Earned Income Tax Credit.

And if last night's Republican debate is any guide to the future of child tax credit policy, it may someday be the case that if you have a child, you just won't have to file a tax return at all. In all seriousness, though, what is the difference between these child tax credits and the government establishing a program called "Paying You to Have Kids" whereby HHS would write out checks to every family, paying each one $2,000 per child? Conservatives would tend to hate that as it would be big government, but they will defend to the death every child tax credit because they can call it a "tax cut." In reality, there is no difference. Whether you do it through the tax code or through a spending program, it must be offset by one of the following: a tax hike on others today, a tax hike on others tomorrow, a cut in spending today, or a cut in spending tomorrow.

Finally, it's worth noting that because of the complexity surrounding this rebate, this tax year (2008) may be the year in which the number of lines on the standard 1040 actually hits 80. The number was 77 in tax year 2007 (for which we are currently filing taxes).

AARP Complains Not Enough of Stimulus Goes to Seniors

You knew it was coming. It was only a matter of time before one of the biggest interest groups in the country weighed in on the fiscal stimulus agreement reached between the White House and the House leadership. The AARP is pressuring senators to expand the fiscal stimulus so that more money can go to senior citizens who don't pay income taxes. The stimulus already includes money for those who work yet pay no income taxes. Now we are being told that it needs to be expanded to those who don't work and pay no income taxes yet earn some sort of retirement income.

Should these seniors be included? Who knows? Maybe. When dealing with a policy that is designed primarily to stimulate the economy, any arbitrary policy can almost be justified to some degree. But what this shows is that there is a problem in trying to use the tax code as the main vehicle for fiscal stimulus and/or social policy. Everyone is always going to complain that they are being shortchanged, despite the fact that getting money to everyone is difficult.

On second thought...maybe we should just send helicopters over every major city in the country and drop out $20 bills. And we can even make AARP happy by putting double the money in the helicopters that fly over golf courses in Florida and Arizona.

Tax Humor

"Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?"
            —Peg Bracken

"The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."
           — Jean Baptiste Colbert, Minister of Finance under King Louis XIV of France

"A fine is a tax for doing something wrong. A tax is a fine for doing something right."
            —Author unknown 

"Nuclear physics is much easier than tax law. It's rational and always works the same way."
            —Jerold Rochwald 

"Contrary to what some people claim, the tax laws have a lot of respect for logic. They use it so sparingly."
             —Jeffrey L. Yablon 

Child Tax Credit #3

Regardless of whether one supports a stimulus package, the agreed-upon package by the House leadership and the White House could almost rival AMT in terms of the amount of complexity it adds to the 2008 tax system. Not only do we have the government sending out checks to those who have no income tax liability (thereby requiring some method to reduce their tax liability), the proposal calls for yet another child tax credit. Yes. Make it three child tax credits.

We have the regular child tax credit, which gives everyone $1,000 per child with a floor at zero income tax liability (which is phased-out at $110,000). Then we have the additional child tax credit for those who are hit by that floor, thereby making the child tax credit refundable. But now we have a new child tax credit for $300 per child available to all, which is subject to different phase-out ranges than the current child tax credit. Furthermore, this is in addition to the personal exemption that a tax return gets for each child (which for someone in the 15 percent bracket is worth $525 for 2008) and other credits that are linked to children such as education credits, the credit for child and dependent care expenses, and the Earned Income Tax Credit.

And if last night's Republican debate is any guide to the future of child tax credit policy, it may someday be the case that if you have a child, you just won't have to file a tax return at all. In all seriousness, though, what is the difference between these child tax credits and the government establishing a program called "Paying You to Have Kids" whereby HHS would write out checks to every family, paying each one $2,000 per child? Conservatives would tend to hate that as it would be big government, but they will defend to the death every child tax credit because they can call it a "tax cut." In reality, there is no difference. Whether you do it through the tax code or through a spending program, it must be offset by one of the following: a tax hike on others today, a tax hike on others tomorrow, a cut in spending today, or a cut in spending tomorrow.

Finally, it's worth noting that because of the complexity surrounding this rebate, this tax year (2008) may be the year in which the number of lines on the standard 1040 actually hits 80. The number was 77 in tax year 2007 (for which we are currently filing taxes).

Go to the original author's site:

You knew it was coming. It was only a matter of time before one of the biggest interest groups in the country weighed in on the fiscal stimulus agreement reached between the White House and the House leadership. The AARP is pressuring senators to expand the fiscal stimulus so that more money can go to senior citizens who don't pay income taxes. The stimulus already includes money for those who work yet pay no income taxes. Now we are being told that it needs to be expanded to those who don't work and pay no income taxes yet earn some sort of retirement income.

Should these seniors be included? Who knows? Maybe. When dealing with a policy that is designed primarily to stimulate the economy, any arbitrary policy can almost be justified to some degree. But what this shows is that there is a problem in trying to use the tax code as the main vehicle for fiscal stimulus and/or social policy. Everyone is always going to complain that they are being shortchanged, despite the fact that getting money to everyone is difficult.

On second thought...maybe we should just send helicopters over every major city in the country and drop out $20 bills. And we can even make AARP happy by putting double the money in the helicopters that fly over golf courses in Florida and Arizona.

Go to the original author's site:

AARP Complains Not Enough of Stimulus Goes to Seniors

You knew it was coming. It was only a matter of time before one of the biggest interest groups in the country weighed in on the fiscal stimulus agreement reached between the White House and the House leadership. The AARP is pressuring senators to expand the fiscal stimulus so that more money can go to senior citizens who don't pay income taxes. The stimulus already includes money for those who work yet pay no income taxes. Now we are being told that it needs to be expanded to those who don't work and pay no income taxes yet earn some sort of retirement income.

Should these seniors be included? Who knows? Maybe. When dealing with a policy that is designed primarily to stimulate the economy, any arbitrary policy can almost be justified to some degree. But what this shows is that there is a problem in trying to use the tax code as the main vehicle for fiscal stimulus and/or social policy. Everyone is always going to complain that they are being shortchanged, despite the fact that getting money to everyone is difficult.

On second thought...maybe we should just send helicopters over every major city in the country and drop out $20 bills. And we can even make AARP happy by putting double the money in the helicopters that fly over golf courses in Florida and Arizona.

Go to the original author's site::

Regardless of whether one supports a stimulus package, the agreed-upon package by the House leadership and the White House could almost rival AMT in terms of the amount of complexity it adds to the 2008 tax system. Not only do we have the government sending out checks to those who have no income tax liability (thereby requiring some method to reduce their tax liability), the proposal calls for yet another child tax credit. Yes. Make it three child tax credits.

We have the regular child tax credit, which gives everyone $1,000 per child with a floor at zero income tax liability (which is phased-out at $110,000). Then we have the additional child tax credit for those who are hit by that floor, thereby making the child tax credit refundable. But now we have a new child tax credit for $300 per child available to all, which is subject to different phase-out ranges than the current child tax credit. Furthermore, this is in addition to the personal exemption that a tax return gets for each child (which for someone in the 15 percent bracket is worth $525 for 2008) and other credits that are linked to children such as education credits, the credit for child and dependent care expenses, and the Earned Income Tax Credit.

And if last night's Republican debate is any guide to the future of child tax credit policy, it may someday be the case that if you have a child, you just won't have to file a tax return at all. In all seriousness, though, what is the difference between these child tax credits and the government establishing a program called "Paying You to Have Kids" whereby HHS would write out checks to every family, paying each one $2,000 per child? Conservatives would tend to hate that as it would be big government, but they will defend to the death every child tax credit because they can call it a "tax cut." In reality, there is no difference. Whether you do it through the tax code or through a spending program, it must be offset by one of the following: a tax hike on others today, a tax hike on others tomorrow, a cut in spending today, or a cut in spending tomorrow.

Finally, it's worth noting that because of the complexity surrounding this rebate, this tax year (2008) may be the year in which the number of lines on the standard 1040 actually hits 80. The number was 77 in tax year 2007 (for which we are currently filing taxes).

Go to the original author's site::

Based on the reported agreement between House Speaker Pelosi and House Minority Leader Boehner, it is apparent that fiscal stimulus may not be provided as the much touted tax rebates, but instead as simple cash payments to most working Americans. The cash payments would be set at $600 for individuals, $1200 for married couples who pay income taxes. Workers with at least $3,000 in earnings, but who pay no income taxes, would receive $300. There would be an additional payment of $300 per child added to the base. Estimates suggest the cash payments would total $100 billion.

Tax Foundation Vice President for Economic Policy Robert Carroll responded:

"While direct cash payments may help boost consumer spending and shore up the economy in the near term, this relief would do virtually nothing to improve the prospects of working Americans or the economy as a whole over the long haul. Short-term fixes only serve as short-term solutions. In addition to addressing the current economic weakness, the Congress also needs to take notice of how far the U.S. business tax system has fallen behind in today's global economy. The U.S. now has the second highest corporate tax rate among major economies. Taking action on this pressing issue would improve America's competitiveness, strengthen our economy, and protect American jobs facing pressure from foreign competition."

Go to the original author's site::

"Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?"
            —Peg Bracken

"The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."
           — Jean Baptiste Colbert, Minister of Finance under King Louis XIV of France

"A fine is a tax for doing something wrong. A tax is a fine for doing something right."
            —Author unknown 

"Nuclear physics is much easier than tax law. It's rational and always works the same way."
            —Jerold Rochwald 

"Contrary to what some people claim, the tax laws have a lot of respect for logic. They use it so sparingly."
             —Jeffrey L. Yablon 

Go to the original author's site::

AARP Complains Not Enough of Stimulus Goes to Seniors

AARP Complains Not Enough of Stimulus Goes to Seniors

You knew it was coming. It was only a matter of time before one of the biggest interest groups in the country weighed in on the fiscal stimulus agreement reached between the White House and the House leadership. The AARP is pressuring senators to expand the fiscal stimulus so that more money can go to senior citizens who don't pay income taxes. The stimulus already includes money for those who work yet pay no income taxes. Now we are being told that it needs to be expanded to those who don't work and pay no income taxes yet earn some sort of retirement income.

Should these seniors be included? Who knows? Maybe. When dealing with a policy that is designed primarily to stimulate the economy, any arbitrary policy can almost be justified to some degree. But what this shows is that there is a problem in trying to use the tax code as the main vehicle for fiscal stimulus and/or social policy. Everyone is always going to complain that they are being shortchanged, despite the fact that getting money to everyone is difficult.

On second thought...maybe we should just send helicopters over every major city in the country and drop out $20 bills. And we can even make AARP happy by putting double the money in the helicopters that fly over golf courses in Florida and Arizona.

Child Tax Credit #3

Regardless of whether one supports a stimulus package, the agreed-upon package by the House leadership and the White House could almost rival AMT in terms of the amount of complexity it adds to the 2008 tax system. Not only do we have the government sending out checks to those who have no income tax liability (thereby requiring some method to reduce their tax liability), the proposal calls for yet another child tax credit. Yes. Make it three child tax credits.

We have the regular child tax credit, which gives everyone $1,000 per child with a floor at zero income tax liability (which is phased-out at $110,000). Then we have the additional child tax credit for those who are hit by that floor, thereby making the child tax credit refundable. But now we have a new child tax credit for $300 per child available to all, which is subject to different phase-out ranges than the current child tax credit. Furthermore, this is in addition to the personal exemption that a tax return gets for each child (which for someone in the 15 percent bracket is worth $525 for 2008) and other credits that are linked to children such as education credits, the credit for child and dependent care expenses, and the Earned Income Tax Credit.

And if last night's Republican debate is any guide to the future of child tax credit policy, it may someday be the case that if you have a child, you just won't have to file a tax return at all. In all seriousness, though, what is the difference between these child tax credits and the government establishing a program called "Paying You to Have Kids" whereby HHS would write out checks to every family, paying each one $2,000 per child? Conservatives would tend to hate that as it would be big government, but they will defend to the death every child tax credit because they can call it a "tax cut." In reality, there is no difference. Whether you do it through the tax code or through a spending program, it must be offset by one of the following: a tax hike on others today, a tax hike on others tomorrow, a cut in spending today, or a cut in spending tomorrow.

Finally, it's worth noting that because of the complexity surrounding this rebate, this tax year (2008) may be the year in which the number of lines on the standard 1040 actually hits 80. The number was 77 in tax year 2007 (for which we are currently filing taxes).

Tax Humor

"Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?"
            —Peg Bracken

"The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."
           — Jean Baptiste Colbert, Minister of Finance under King Louis XIV of France

"A fine is a tax for doing something wrong. A tax is a fine for doing something right."
            —Author unknown 

"Nuclear physics is much easier than tax law. It's rational and always works the same way."
            —Jerold Rochwald 

"Contrary to what some people claim, the tax laws have a lot of respect for logic. They use it so sparingly."
             —Jeffrey L. Yablon 

Tax Foundation Comments on Proposed Stimulus Deal

Based on the reported agreement between House Speaker Pelosi and House Minority Leader Boehner, it is apparent that fiscal stimulus may not be provided as the much touted tax rebates, but instead as simple cash payments to most working Americans. The cash payments would be set at $600 for individuals, $1200 for married couples who pay income taxes. Workers with at least $3,000 in earnings, but who pay no income taxes, would receive $300. There would be an additional payment of $300 per child added to the base. Estimates suggest the cash payments would total $100 billion.

Tax Foundation Vice President for Economic Policy Robert Carroll responded:

"While direct cash payments may help boost consumer spending and shore up the economy in the near term, this relief would do virtually nothing to improve the prospects of working Americans or the economy as a whole over the long haul. Short-term fixes only serve as short-term solutions. In addition to addressing the current economic weakness, the Congress also needs to take notice of how far the U.S. business tax system has fallen behind in today's global economy. The U.S. now has the second highest corporate tax rate among major economies. Taking action on this pressing issue would improve America's competitiveness, strengthen our economy, and protect American jobs facing pressure from foreign competition."

Tax Humor

"Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?"
            —Peg Bracken

"The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."
           — Jean Baptiste Colbert, Minister of Finance under King Louis XIV of France

"A fine is a tax for doing something wrong. A tax is a fine for doing something right."
            —Author unknown 

"Nuclear physics is much easier than tax law. It's rational and always works the same way."
            —Jerold Rochwald 

"Contrary to what some people claim, the tax laws have a lot of respect for logic. They use it so sparingly."
             —Jeffrey L. Yablon 

Go to the original author's site::

Following the president's news conference outlining his thoughts on fiscal stimulus, Senator Hillary Clinton released a statement saying, among other things:

"For the White House to propose spending over $100 billion to jumpstart the economy, while shortchanging assistance to the 50 million families who are struggling the most and are most likely to inject those funds into the economy makes no sense... it would disproportionately leave out African American and Hispanic families who have, on average, lower incomes than white families."

These talking points have been echoed or "confirmed" by many, including Bob Greenstein of the Center on Budget and Policy Priorities, who said:

"First, the reported Administration plan would provide either no tax rebate or only a partial one to 49 million working households - some 30 million of which would receive no rebate at all. Millions of additional households without earnings, such as low-income seniors on fixed incomes who do not file tax returns, also would receive no rebate, bring the total number of households who would not benefit or receive only a partial rebate to 77 million."

Why is this the case? Who are these 50-77 million Americans who would not receive an income tax rebate?

People who don't pay anything in income tax.

As the federal income tax has become more progressive, more and more Americans have been completely knocked off the tax rolls. In 2005, we estimated the total number of filers with no tax liability to be over 43.8 million. Add in typical growth over time, and people who don't file because they have little-to-no income at all, and we arrive at the 50-77 million figures cited by both Senator Clinton and Mr. Greenstein.

Just to be clear, that means half of the households in America have no income tax liability - a number that's grown 50% since Bill Clinton left office and the Bush tax cuts were enacted.

So do the working poor get nothing from the federal government? No - and in fact, quite to the contrary. The working poor are the biggest beneficiaries on the other side of the federal fiscal coin: spending.

In early 2007, the Tax Foundation released a ground-breaking study comparing the amount of taxes paid by individuals versus the dollar values of government spending received.

The results show that the bottom 20% of households receives $14.76 in federal spending for every dollar paid in federal taxes. On the other end of the spectrum, the top 20% of households receive 32 cents in federal spending for every dollar paid in federal taxes.

In fact, as the chart below shows, the bottom 20% receive $23,176 more per year in federal spending than the pay in federal taxes. The top 20% pay $38,939 more in federal taxes than they receive in spending. This is in no small part due to the fact that so many low-income families have no income tax burden after applying their credits and deductions.

As Investor's Business Daily points out today, "No honest person could look at the data and say that the system favors the rich over the poor."

 

Go to the original author's site::

An editorial in yesterday's Investor's Business Daily argues that the income tax code has become more progressive in recent years, not less, citing Tax Foundation research that a growing number of Americans pay no income taxes at all:

Republicans say the rebates should go to taxpayers only—which makes sense, since they are "tax" rebates. Democrats reject this.[...]

More telling, though, is the [CBPP's] contention that the 58 million U.S. households—out of roughly 115 million total—that have no tax liabilities or simply don't have to file would get nothing.

Seems to us that if Washington is having a hard time finding taxpayers who are eligible for tax rebates, then a lot of Americans must have been wiped off the tax rolls.[...]

No honest person could look at the data and say that the system favors the rich over the poor.[...]

The editorial includes this chart using data from the National Center for Policy Analysis:

More on the revenue and distributional effects of the stimulus plans here.

Go to the original author's site::

Will Baltimore Bet on Gambling to Solve Property Tax Problems?

Baltimore might be the next jurisdiction to fall prey to the idea of state-run gambling as a budget panacea. A mayoral task force has reported that slot machines, if voters approve them in November, and full-fledged casinos may be a good way to reduce property taxes in the city.  From the Baltimore Sun:

Relying on gambling revenue to reduce property taxes underscores how difficult a task the city might have as it attempts to cut a stubborn property tax rate that officials believe has stifled growth by sending residents and businesses to the suburbs.

For the short term, the panel presented nine recommendations—including raising the income tax, lifting a cap on assessments and collecting more revenue through better commercial assessments—to lower the rate by about 11 percent. For the long run, it proposed a local sales tax.

Baltimore 's tax rate is $2.268 per $100 of assessed value.

Applying a model used in Detroit, which has casinos, the committee estimated Baltimore could reap $45.9 million through casino gambling. With only slots, the report estimates the city could collect $32.8 million a year.

. . .

Sen. George W. Della Jr., a Baltimore Democrat whose district would include the proposed slots parlor, tried to amend the legislation to guarantee that gambling revenue would be used for property tax reduction, but his proposal was defeated. Della said the Dixon administration said that would "tie their hands."

Sen. Lisa A. Gladden, a Democrat whose district includes Pimlico, said it would be "practical" for the city to use slots revenue to reduce the property tax. Gladden, a longtime slots proponent, said that other cities have expanded gambling in order to help balance municipal budgets and that it's time Baltimore wised up.

"The reality is you want to attract homeowners to a community like Baltimore City, and you can't when the property taxes are so high, [public] services are moderate and crime is high," Gladden said. "You need a crazy infusion of cash, and you get that by putting a slots venue on the I-95 corridor."

Maryland's lottery already brought half a billion dollars into state coffers in FY2006, but apparently that's not enough gambling revenue for some policymakers. 

Those promoting casinos (as well as slots and lottery supporters) might want to stop and think about where the new gambling revenue will come from. The idea is to lower property taxes, but surely many lottery players and potential casino patrons own property? So they will lose their money in one of Maryland's gambling enterprises and eventually they will, in theory at least, recoup some of it (after lottery or casino employees and bureaucrats take their cut) in the form of lower property taxes. Wouldn't it make more sense for them to keep their money in their wallets in the first place? 

Of course, not all lottery and casino customers own property.  So what this would amount to is a transfer of money from gamblers to property owners. Some people may think property owners are, in general, more deserving than gamblers, but should the tax code really be used to make these sorts of moral judgments? It's bad enough that the tax code already considers smokers as a group less deserving than otter taxpayers. 

If Baltimore's property taxes are exorbitant, that needs to be dealt with, but casinos are not the answer, especially if they are run by the government. Profits from government-run casinos would be nothing more than implicit tax revenue, although policymakers would certainly refuse to label them as tax revenue, just as they do with lotteries. Allowing privately run casinos and subjecting them to sales taxes would be better tax policy than having the city run them, but either way, it's not going to solve the city's property tax problem.

Click here for more on lottery and gambling taxes.

Go to the original author's site:

Following the president's news conference outlining his thoughts on fiscal stimulus, Senator Hillary Clinton released a statement saying, among other things:

"For the White House to propose spending over $100 billion to jumpstart the economy, while shortchanging assistance to the 50 million families who are struggling the most and are most likely to inject those funds into the economy makes no sense... it would disproportionately leave out African American and Hispanic families who have, on average, lower incomes than white families."

These talking points have been echoed or "confirmed" by many, including Bob Greenstein of the Center on Budget and Policy Priorities, who said:

"First, the reported Administration plan would provide either no tax rebate or only a partial one to 49 million working households - some 30 million of which would receive no rebate at all. Millions of additional households without earnings, such as low-income seniors on fixed incomes who do not file tax returns, also would receive no rebate, bring the total number of households who would not benefit or receive only a partial rebate to 77 million."

Why is this the case? Who are these 50-77 million Americans who would not receive an income tax rebate?

People who don't pay anything in income tax.

As the federal income tax has become more progressive, more and more Americans have been completely knocked off the tax rolls. In 2005, we estimated the total number of filers with no tax liability to be over 43.8 million. Add in typical growth over time, and people who don't file because they have little-to-no income at all, and we arrive at the 50-77 million figures cited by both Senator Clinton and Mr. Greenstein.

Just to be clear, that means half of the households in America have no income tax liability - a number that's grown 50% since Bill Clinton left office and the Bush tax cuts were enacted.

So do the working poor get nothing from the federal government? No - and in fact, quite to the contrary. The working poor are the biggest beneficiaries on the other side of the federal fiscal coin: spending.

In early 2007, the Tax Foundation released a ground-breaking study comparing the amount of taxes paid by individuals versus the dollar values of government spending received.

The results show that the bottom 20% of households receives $14.76 in federal spending for every dollar paid in federal taxes. On the other end of the spectrum, the top 20% of households receive 32 cents in federal spending for every dollar paid in federal taxes.

In fact, as the chart below shows, the bottom 20% receive $23,176 more per year in federal spending than the pay in federal taxes. The top 20% pay $38,939 more in federal taxes than they receive in spending. This is in no small part due to the fact that so many low-income families have no income tax burden after applying their credits and deductions.

As Investor's Business Daily points out today, "No honest person could look at the data and say that the system favors the rich over the poor."

 

Go to the original author's site:

IRS Addresses More Frivolous Tax Claims

Nearly a century after the passage of the 16th Amendment, a handful of Americans still believe that no one is legally required to pay income taxes. Others acknowledge that the Constitution does allow collection of income taxes, but still look for sneaky ways to beat the system. Some people even make big money selling books that claim to teach others how to "legally" avoid paying taxes.

These arguments frequently center on either the claim that the 16th amendment was never ratified or on an argument involving one of the other amendments to the Constitution. The arguments are so numerous that the IRS has created a special document to refute them.

Periodically, the IRS addresses new arguments for legal tax avoidance. Last week the agency issued the following notice:

WASHINGTON - The Internal Revenue Service today issued a notice that lists four additional erroneous legal positions that taxpayers should refrain from using as an excuse to avoid paying their taxes.

An individual or group may not avoid paying their fair share of taxes by making "frivolous" legal arguments such as those listed in this notice. The IRS publicizes these frivolous claims to help taxpayers understand the law and avoid penalties.

Notice 2008-14 lists positions identified as frivolous for purposes of the penalty under section 6702 of the federal tax code for filing a frivolous tax return or submitting to the IRS a frivolous request for a collection due process hearing or application for an installment agreement, offer-in-compromise, or Taxpayer Assistance Order.

Taxpayers who file a tax return or make a submission based on a position listed in this notice are subject to a $5,000 penalty. This notice adds to the positions listed in Notice 2007-30, 2007-14 I.R.B. 883. The positions that have been added are found in paragraphs 9(g), 11, 14, and 25.

The four new frivolous claims pertain to the following:

• Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
• Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
• A nonexistent "Mariner's Tax Deduction" (or the like) related to invalid deductions for meals.
• Certain instances of misuse or excessive use of the section 6421 fuels credit.

In 2006, Congress increased the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

It's certainly understandable that some people want to avoid paying taxes, but anyone who thinks he has a legitimate, legal refutation of any aspect of the U.S. tax system would be wise to consult a lawyer or other tax professional before deciding to consider April 15 just another day.

Go to the original author's site:

IRS Addresses More Frivolous Tax Claims

Nearly a century after the passage of the 16th Amendment, a handful of Americans still believe that no one is legally required to pay income taxes. Others acknowledge that the Constitution does allow collection of income taxes, but still look for sneaky ways to beat the system. Some people even make big money selling books that claim to teach others how to "legally" avoid paying taxes.

These arguments frequently center on either the claim that the 16th amendment was never ratified or on an argument involving one of the other amendments to the Constitution. The arguments are so numerous that the IRS has created a special document to refute them.

Periodically, the IRS addresses new arguments for legal tax avoidance. Last week the agency issued the following notice:

WASHINGTON - The Internal Revenue Service today issued a notice that lists four additional erroneous legal positions that taxpayers should refrain from using as an excuse to avoid paying their taxes.

An individual or group may not avoid paying their fair share of taxes by making "frivolous" legal arguments such as those listed in this notice. The IRS publicizes these frivolous claims to help taxpayers understand the law and avoid penalties.

Notice 2008-14 lists positions identified as frivolous for purposes of the penalty under section 6702 of the federal tax code for filing a frivolous tax return or submitting to the IRS a frivolous request for a collection due process hearing or application for an installment agreement, offer-in-compromise, or Taxpayer Assistance Order.

Taxpayers who file a tax return or make a submission based on a position listed in this notice are subject to a $5,000 penalty. This notice adds to the positions listed in Notice 2007-30, 2007-14 I.R.B. 883. The positions that have been added are found in paragraphs 9(g), 11, 14, and 25.

The four new frivolous claims pertain to the following:

• Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
• Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
• A nonexistent "Mariner's Tax Deduction" (or the like) related to invalid deductions for meals.
• Certain instances of misuse or excessive use of the section 6421 fuels credit.

In 2006, Congress increased the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

It's certainly understandable that some people want to avoid paying taxes, but anyone who thinks he has a legitimate, legal refutation of any aspect of the U.S. tax system would be wise to consult a lawyer or other tax professional before deciding to consider April 15 just another day.

Go to the original author's site::

"Stimulus" is the word of the day in Washington. And tax rebate checks have been the most frequently cited possibilities for financing such a stimulus. But in order for a supposed stimulus to "work," tax rebate checks must lead to short-term real increases in consumption. So will they?

We can let recent history be our guide. Below are links to some academic papers on the question of whether or not people spent their rebate checks they received in 2001.

"Did the 2001 Tax Rebate Stimulate Spending? Evidence from Taxpayer Surveys", by Matthew Shapiro and Joel Slemrod. The conclusion:

The tax rebates sent out in the summer and early autumn of 2001 were a small part of the 10-year tax cut bill that became law earlier that year. Although not originally part of the tax cut plan, as an economic slowdown became more apparent, one part of the tax cut for 2001 was converted into more visible checks sent out to taxpayer rather than reductions in withholding. One might speculate that incumbent politicians also guessed that household-voters would be more likely to recall their largesse if the tax cut took the form of a check as opposed to, for example, a reduction in tax withholding.

Did they work as a counter-recession policy? The answer to that question depends in part on households’ propensity to consume out of the increased disposable income due to the rebates. Our survey-based research suggests that the spending rate was quite low compared to what many economists had expected. This finding appears in a contemporaneous survey and a retrospective survey that addressed the actual rebate plan. It also appears in answers to what would be the response to a hypothetical survey conducted soon after September 11. An examination of the NIPA data is completely consistent with a small impact on consumption. Yet, because it is impossible to know what consumption would have been absent the rebates, aggregative analysis cannot be definitive. Nonetheless, that the counterfactual in aggregate data gives a similar result to the counterfactual that we pose to survey respondent is significant validation of the survey methodology.

Another paper on this issue by Shapiro and Slemrod appeared in AER. Here is the abstract:

Many households received income tax rebates in 2001 of $300 or $600. These rebates represented advance payments of the tax cut from the new 10 percent tax bracket. Based on a survey of a representative sample of households, this paper finds that only 22 percent of households receiving the rebate would spent it. Instead, they would either save it or use it to pay off debt. This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending. The low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand.

A study by Parker and Souleles suggests a larger response by American consumers to the rebate checks. Here is their abstract:

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, most U.S. taxpayers received a tax rebate between July and September, 2001. The week in which the rebate was mailed was based on the second-to-last digit of the taxpayer's Social Security number, a digit that is effectively randomly assigned. Using special questions about the rebates added to the Consumer Expenditure Survey, we exploit this historically unique experiment to measure the change in consumption expenditures caused by receipt of the rebate and to test the Permanent Income Hypothesis and related models. We find that households spent about 20-40 percent of their rebates on non-durable goods during the three-month period in which their rebates were received, and roughly another third of their rebates during the subsequent three-month period. The implied effects on aggregate consumption demand are significant. The estimated responses are largest for households with relatively low liquid wealth and low income, consistent with liquidity constraints.

For more on the economic research of consumption, check out a previous recent blog post on the issue.

Go to the original author's site::

Bowyer FairTax Critique Proves Too Much

Radio host Jerry Bowyer criticized the FairTax proposal in the Wall Street Journal last week, in part because it would exempt business-to-business transactions to prevent pyramiding (taxes on taxes):

In addition to the colossal job of selling America on a zero tax rate for business, a rigorous definition of the term "business transaction" would have to be provided. What is a business transaction, exactly? I write articles for publication. I consider it a hobby. Sometimes I get paid. Should I pay sales taxes on money I earn for writing this article?

What about the Internet connection I used to send it? Should readers pay taxes on the connection they use to read my article? What if a reader uses it for his job? If he is a financial adviser, then no, but otherwise it's yes? Will I pay taxes on gas I used to drive to the studio to talk about this article? What if I stop to buy my son Jack a birthday present on the way home?

I'm a recovering tax accountant (and not a good one at that) and I've got 50 ways to avoid this tax swimming around in my head. What about the really smart guys?

This criticism isn't persuasive; it could be used against our current tax system.

People pay taxes, not businesses, so taxing businesses is just a hidden way of taxing people. Thus many tax reform plans (including the FairTax) exempt business-to-business transactions from tax. The current income tax system also allows businesses to deduct business expenses. Bowyer seems not to know this, as he worries that businesses will be unable to distinguish between business and personal expenses. They have to now, when they figure out their income taxes.

Bowyer again:

Then there's the complexity argument. You don't think the lobbyists and lawyers will get involved in this, looking for exemptions on houses, medical services and education? You're going to put a 30% tax on my home purchase, and my doctor visits and my kids' tuition? Yeah, great idea.

The danger of lobbyists clamoring to exempt their industry from general taxation is a real one, but one that already exists at both the federal and state levels. Owner-occupied housing is so generously exempted from taxes that it is actually subsidized to the tune of negative 5 percent, for example. I'm not sure how opposing reform fixes a problem we have now.

Incidentally, the FairTax exempts tuition, so Bowyer is wrong there. But that exemption might open the door for all the other special interests claiming that their economic activity is so unique that it justifies exemption.

Finally, Bowyer argues that any discussion of tax reform is meaningless since it will never pass:

None of this matters anyway. We will never make this change.

The FairTax is just one idea and may have its problems, but the fact that it comes up so often shows that people want a national discussion about our uncompetitive, burdensome, and overly complex tax system.

Go to the original author's site:

Virginia Bicyclist Hit With “Abusive Driver Fee” Tax

We've been following Virginia's new tax on traffic offenses, which went into effect January 1.  They are another example of legislators targeting random activities for punitive taxation, solely to raise revenue.  Other recent examples include cigarettes, alcohol (to fund public transit), bottled water, and even video games (to fund juvenile detention facilities).

Because the purpose of the surcharges is to raise money, rather than deter behavior or recoup the cost of administration, they are rightly called taxes, not fees.  And they aren't small; a pregnant woman rushing to the hospital (57 mph in a 35 mph zone) was hit with a $1,050 abusive driver tax on top of the usual $100 traffic fine.

Now, a bicyclist has been ordered by the Newport News district court to cough up the $1,050 surcharge for going too fast on his 18-speed Huffy:

Bicyclist Kajuan Cornish, 19, has not accumulated a bad driving record because he does not own an automobile. That did not stop Newport News Police Officer George Evans for writing up Cornish as he pedaled down Warwick Boulevard near Denbigh Boulevard on December 27. Cornish was headed back to work after taking a lunch break.

WAVY-TV has more of the silliness:

Cornish says his reckless driving ticket might one day be funny, if it weren't so confusing.

"I get some people who laugh," he says, "and I get some people, like me, that are lost."

He reads his ticket out loud.

"Year?  None.  Make?  None.  Type?  Bike.  License?  None.  State?  None."

Cornish may be among the last who have to fight the surcharges.  They're in court on an Equal Protection Clause challenge, and the Governor recently conceded that it's time to repeal them.

More on Virginia tax issues here.

Go to the original author's site::

"Stimulus" is the word of the day in Washington. And tax rebate checks have been the most frequently cited possibilities for financing such a stimulus. But in order for a supposed stimulus to "work," tax rebate checks must lead to short-term real increases in consumption. So will they?

We can let recent history be our guide. Below are links to some academic papers on the question of whether or not people spent their rebate checks they received in 2001.

"Did the 2001 Tax Rebate Stimulate Spending? Evidence from Taxpayer Surveys", by Matthew Shapiro and Joel Slemrod. The conclusion:

The tax rebates sent out in the summer and early autumn of 2001 were a small part of the 10-year tax cut bill that became law earlier that year. Although not originally part of the tax cut plan, as an economic slowdown became more apparent, one part of the tax cut for 2001 was converted into more visible checks sent out to taxpayer rather than reductions in withholding. One might speculate that incumbent politicians also guessed that household-voters would be more likely to recall their largesse if the tax cut took the form of a check as opposed to, for example, a reduction in tax withholding.

Did they work as a counter-recession policy? The answer to that question depends in part on households’ propensity to consume out of the increased disposable income due to the rebates. Our survey-based research suggests that the spending rate was quite low compared to what many economists had expected. This finding appears in a contemporaneous survey and a retrospective survey that addressed the actual rebate plan. It also appears in answers to what would be the response to a hypothetical survey conducted soon after September 11. An examination of the NIPA data is completely consistent with a small impact on consumption. Yet, because it is impossible to know what consumption would have been absent the rebates, aggregative analysis cannot be definitive. Nonetheless, that the counterfactual in aggregate data gives a similar result to the counterfactual that we pose to survey respondent is significant validation of the survey methodology.

Another paper on this issue by Shapiro and Slemrod appeared in AER. Here is the abstract:

Many households received income tax rebates in 2001 of $300 or $600. These rebates represented advance payments of the tax cut from the new 10 percent tax bracket. Based on a survey of a representative sample of households, this paper finds that only 22 percent of households receiving the rebate would spent it. Instead, they would either save it or use it to pay off debt. This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending. The low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand.

A study by Parker and Souleles suggests a larger response by American consumers to the rebate checks. Here is their abstract:

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, most U.S. taxpayers received a tax rebate between July and September, 2001. The week in which the rebate was mailed was based on the second-to-last digit of the taxpayer's Social Security number, a digit that is effectively randomly assigned. Using special questions about the rebates added to the Consumer Expenditure Survey, we exploit this historically unique experiment to measure the change in consumption expenditures caused by receipt of the rebate and to test the Permanent Income Hypothesis and related models. We find that households spent about 20-40 percent of their rebates on non-durable goods during the three-month period in which their rebates were received, and roughly another third of their rebates during the subsequent three-month period. The implied effects on aggregate consumption demand are significant. The estimated responses are largest for households with relatively low liquid wealth and low income, consistent with liquidity constraints.

For more on the economic research of consumption, check out a previous recent blog post on the issue.

Go to the original author's site::

Radio host Jerry Bowyer criticized the FairTax proposal in the Wall Street Journal last week, in part because it would exempt business-to-business transactions to prevent pyramiding (taxes on taxes):

In addition to the colossal job of selling America on a zero tax rate for business, a rigorous definition of the term "business transaction" would have to be provided. What is a business transaction, exactly? I write articles for publication. I consider it a hobby. Sometimes I get paid. Should I pay sales taxes on money I earn for writing this article?

What about the Internet connection I used to send it? Should readers pay taxes on the connection they use to read my article? What if a reader uses it for his job? If he is a financial adviser, then no, but otherwise it's yes? Will I pay taxes on gas I used to drive to the studio to talk about this article? What if I stop to buy my son Jack a birthday present on the way home?

I'm a recovering tax accountant (and not a good one at that) and I've got 50 ways to avoid this tax swimming around in my head. What about the really smart guys?

This criticism isn't persuasive; it could be used against our current tax system.

People pay taxes, not businesses, so taxing businesses is just a hidden way of taxing people. Thus many tax reform plans (including the FairTax) exempt business-to-business transactions from tax. The current income tax system also allows businesses to deduct business expenses. Bowyer seems not to know this, as he worries that businesses will be unable to distinguish between business and personal expenses. They have to now, when they figure out their income taxes.

Bowyer again:

Then there's the complexity argument. You don't think the lobbyists and lawyers will get involved in this, looking for exemptions on houses, medical services and education? You're going to put a 30% tax on my home purchase, and my doctor visits and my kids' tuition? Yeah, great idea.

The danger of lobbyists clamoring to exempt their industry from general taxation is a real one, but one that already exists at both the federal and state levels. Owner-occupied housing is so generously exempted from taxes that it is actually subsidized to the tune of negative 5 percent, for example. I'm not sure how opposing reform fixes a problem we have now.

Incidentally, the FairTax exempts tuition, so Bowyer is wrong there. But that exemption might open the door for all the other special interests claiming that their economic activity is so unique that it justifies exemption.

Finally, Bowyer argues that any discussion of tax reform is meaningless since it will never pass:

None of this matters anyway. We will never make this change.

The FairTax is just one idea and may have its problems, but the fact that it comes up so often shows that people want a national discussion about our uncompetitive, burdensome, and overly complex tax system.

Go to the original author's site::

Remember: Tax Rebate Checks Are Coming Soon Anyway

With all the talk about passing legislation that will cause a stimulus for the economy and put a cash infusion into the economy, including possible tax rebate checks (which are actually more like prebates), there is one point that seems to have been overlooked: this spring, billions of dollars of tax rebate checks are already set to be sent out to people.

The president is quoted as wanting $100 billion of rebate checks to be sent out to taxpayers in order to provide a stimulus for the economy. But if one looks at IRS refund statistics from last year, one will see that over $140 billion in individual income tax refunds were sent out from January 2007 through March 2007. Plus, another $78 billion was sent out from April through June. Using 2005 statistics, one would estimate that the amount owed by taxpayers to the IRS in that time period last year was about 50 percent of this refund amount (typically around a 2 to 1 ratio), which would be about $109 billion. Therefore, from January through June last year, using this back-of-the-envelope calculation, one would estimate that on net $109 billion was sent from Treasury and put into the hands of taxpayers.

And for those who argue that putting money into the hands of low-income people is the best solution, be sure to look at this table from the IRS, which shows that taxpayers with incomes below $100,000 typically have the greatest refunds (on net) while those who are above $100,000 are much more likely to owe the IRS money come April 15th. These large refunds are mostly due to credits that are available only to those whose incomes are below $110,000 such as the Child Tax Credit and EITC.

Now it may be the case that those who are proposing a stimulus for this year have already taken the refunds that are set to be sent out this spring into account.

One final note on this issue, regarding demands on the resources of the IRS. While most people have little sympathy for the IRS, we must still recognize that there are constraints on its ability to administer various programs. If tax rebate checks were to be sent out this spring at the same time in which millions of other rebate checks are already being sent out, I would think that the administration and Congress should at least seek input from the Treasury regarding the feasibility of such timing.

Go to the original author's site:

Nearly a century after the passage of the 16th Amendment, a handful of Americans still believe that no one is legally required to pay income taxes. Others acknowledge that the Constitution does allow collection of income taxes, but still look for sneaky ways to beat the system. Some people even make big money selling books that claim to teach others how to "legally" avoid paying taxes.

These arguments frequently center on either the claim that the 16th amendment was never ratified or on an argument involving one of the other amendments to the Constitution. The arguments are so numerous that the IRS has created a special document to refute them.

Periodically, the IRS addresses new arguments for legal tax avoidance. Last week the agency issued the following notice:

WASHINGTON - The Internal Revenue Service today issued a notice that lists four additional erroneous legal positions that taxpayers should refrain from using as an excuse to avoid paying their taxes.

An individual or group may not avoid paying their fair share of taxes by making "frivolous" legal arguments such as those listed in this notice. The IRS publicizes these frivolous claims to help taxpayers understand the law and avoid penalties.

Notice 2008-14 lists positions identified as frivolous for purposes of the penalty under section 6702 of the federal tax code for filing a frivolous tax return or submitting to the IRS a frivolous request for a collection due process hearing or application for an installment agreement, offer-in-compromise, or Taxpayer Assistance Order.

Taxpayers who file a tax return or make a submission based on a position listed in this notice are subject to a $5,000 penalty. This notice adds to the positions listed in Notice 2007-30, 2007-14 I.R.B. 883. The positions that have been added are found in paragraphs 9(g), 11, 14, and 25.

The four new frivolous claims pertain to the following:

• Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
• Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
• A nonexistent "Mariner's Tax Deduction" (or the like) related to invalid deductions for meals.
• Certain instances of misuse or excessive use of the section 6421 fuels credit.

In 2006, Congress increased the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

It's certainly understandable that some people want to avoid paying taxes, but anyone who thinks he has a legitimate, legal refutation of any aspect of the U.S. tax system would be wise to consult a lawyer or other tax professional before deciding to consider April 15 just another day.

Go to the original author's site:

We've been following Virginia's new tax on traffic offenses, which went into effect January 1.  They are another example of legislators targeting random activities for punitive taxation, solely to raise revenue.  Other recent examples include cigarettes, alcohol (to fund public transit), bottled water, and even video games (to fund juvenile detention facilities).

Because the purpose of the surcharges is to raise money, rather than deter behavior or recoup the cost of administration, they are rightly called taxes, not fees.  And they aren't small; a pregnant woman rushing to the hospital (57 mph in a 35 mph zone) was hit with a $1,050 abusive driver tax on top of the usual $100 traffic fine.

Now, a bicyclist has been ordered by the Newport News district court to cough up the $1,050 surcharge for going too fast on his 18-speed Huffy:

Bicyclist Kajuan Cornish, 19, has not accumulated a bad driving record because he does not own an automobile. That did not stop Newport News Police Officer George Evans for writing up Cornish as he pedaled down Warwick Boulevard near Denbigh Boulevard on December 27. Cornish was headed back to work after taking a lunch break.

WAVY-TV has more of the silliness:

Cornish says his reckless driving ticket might one day be funny, if it weren't so confusing.

"I get some people who laugh," he says, "and I get some people, like me, that are lost."

He reads his ticket out loud.

"Year?  None.  Make?  None.  Type?  Bike.  License?  None.  State?  None."

Cornish may be among the last who have to fight the surcharges.  They're in court on an Equal Protection Clause challenge, and the Governor recently conceded that it's time to repeal them.

More on Virginia tax issues here.

Go to the original author's site:

Radio host Jerry Bowyer criticized the FairTax proposal in the Wall Street Journal last week, in part because it would exempt business-to-business transactions to prevent pyramiding (taxes on taxes):

In addition to the colossal job of selling America on a zero tax rate for business, a rigorous definition of the term "business transaction" would have to be provided. What is a business transaction, exactly? I write articles for publication. I consider it a hobby. Sometimes I get paid. Should I pay sales taxes on money I earn for writing this article?

What about the Internet connection I used to send it? Should readers pay taxes on the connection they use to read my article? What if a reader uses it for his job? If he is a financial adviser, then no, but otherwise it's yes? Will I pay taxes on gas I used to drive to the studio to talk about this article? What if I stop to buy my son Jack a birthday present on the way home?

I'm a recovering tax accountant (and not a good one at that) and I've got 50 ways to avoid this tax swimming around in my head. What about the really smart guys?

This criticism isn't persuasive; it could be used against our current tax system.

People pay taxes, not businesses, so taxing businesses is just a hidden way of taxing people. Thus many tax reform plans (including the FairTax) exempt business-to-business transactions from tax. The current income tax system also allows businesses to deduct business expenses. Bowyer seems not to know this, as he worries that businesses will be unable to distinguish between business and personal expenses. They have to now, when they figure out their income taxes.

Bowyer again:

Then there's the complexity argument. You don't think the lobbyists and lawyers will get involved in this, looking for exemptions on houses, medical services and education? You're going to put a 30% tax on my home purchase, and my doctor visits and my kids' tuition? Yeah, great idea.

The danger of lobbyists clamoring to exempt their industry from general taxation is a real one, but one that already exists at both the federal and state levels. Owner-occupied housing is so generously exempted from taxes that it is actually subsidized to the tune of negative 5 percent, for example. I'm not sure how opposing reform fixes a problem we have now.

Incidentally, the FairTax exempts tuition, so Bowyer is wrong there. But that exemption might open the door for all the other special interests claiming that their economic activity is so unique that it justifies exemption.

Finally, Bowyer argues that any discussion of tax reform is meaningless since it will never pass:

None of this matters anyway. We will never make this change.

The FairTax is just one idea and may have its problems, but the fact that it comes up so often shows that people want a national discussion about our uncompetitive, burdensome, and overly complex tax system.

Go to the original author's site:

From Daily Tax Report's Kathy Lundy Springuel:

Maryland Comptroller Peter Franchot (D) weighed in Jan.1 8 against extension of the state's 6 percent sales tax to cover computer services, calling it an "attack on our knowledge-based economy" that will "damage our long-term economic success."

Franchot said he intended to "work with a broad grassroots coalition" to repeal the computer services sales tax during the 90-day General Assembly session that opened Jan. 9.[...]

"I spoke out in public opposition to this proposal when it was rammed through during the closing days of the special session, and I feel the same way today," the comptroller said, calling on the General Assembly and the governor to repeal it.[...]

A[ Governor] O'Malley spokeswoman declined to comment on the comptroller's remarks, noting that the governor will deliver his State of the State address Jan. 23 and "will have more to say then."[....]

We discussed the problematic tax here, and first noted efforts to repeal it here.

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New Podcast on the Incidence of Corporate Taxes

We have posted a new Tax Foundation Podcast interview with Dr. William Gentry. a professor of economics at Williams College in Massachusetts. Dr. Gentry recently wrote a paper for the Treasury Department titled A Review of the Evidence on the Incidence of the Corporate Income Tax.

In this podcast, Dr. Gentry and Tax Foundation Vice President for Economic Policy Robert Carroll discuss the incidence of corporate taxes—that is, who bears the burden of corporate taxation.. Dr. Gentry discusses the growing academic evidence that suggests the burden of the corporate tax is increasingly falling on labor and impacting workers directly.

The podcast is 14 minutes, 26 seconds.

Click here to listen.  Click here for more on corporate taxes.

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The Tax Foundation has estimated what the revenue impact of an income tax rebate of the 10% rate would be in 2008. Media reports suggest this may be one component of President Bush's plan to stimulate the economy. Taxpayers would receive a rebate check, likely based on their 2006 tax returns. The 10% rate would be set to zero when taxpayers file returns for tax year 2008. The summary of our results:

• Under a baseline assumption of no AMT patch (current law), reducing the 10% rate to zero would cost approximately $58 billion for calendar year 2008 (static score).
• Under a baseline assumption of an AMT patch, reducing the 10% rate to zero would cost approximately $96 billion for calendar year 2008.
• Reducing the 10% rate to zero would push about 11 million more returns into AMT for 2008 (under current law) and raises the price of an AMT patch for 2008 from $55 billion to $93 billion.
• Approximately 29.6% of tax returns (representing 41.2 million of the nation's projected 139 million tax returns in 2008) are scheduled to pay nothing in federal individual income taxes in 2008 and would therefore receive no savings by a mere reduction in the 10% rate.
• Currently, 41.2 million returns pay nothing in federal individual income taxes in 2008, and reducing the 10% rate to zero for 2008 would increase this number to 62.9 million.
• Due to the non-payers and because high-income individuals are more likely to be married, 21.2 percent of the tax savings from the reduction will go to those tax returns earning over $100,000, despite the fact that they make up only 13.8 percent of tax returns. (Assumes AMT patch baseline). However, ignoring the non-paying taxpayers, this reduction would make the tax code more progressive, because those making $60,000 receive greater savings as a percentage of their incomes as compared to those making $1 million.

Click here to read the full analysis. Click here for more Tax Foundation discussion of the stimulus proposals.

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