The Four R’s – The Reasons We Pay Taxes

The concept of taxation dates back to ancient times and it had a large impact on the creation of the United States. I mean, who hasn’t heard the phrase “no taxation without representation,” at least a dozen times in grade school? But how often do we stop and think about the real reasons we pay taxes? In fact, there are four main ideological reasons we pay taxes, and in this entry I have examined each of those four reasons.

1. Revenue

The most important purpose, taxes raise revenue for the government to spend on education, transportation, jobs, local governments, military, and judicial systems. Without taxes finding funding to build schools and buy books for them would be incredible difficult. Our country, as well as many others, is literally funded by our own taxes. Individuals, companies, and small businesses all get taxed for certain endeavors and those funds then go back into our economy.

As long as a country is thriving, there should be revenue coming in through taxes. However, concerns have arose in the past few years as to whether or not the United States is meeting expected revenue. Experts claim the economy is protected enough to let the low revenue affect taxpayer’s day to day lives.

2. Redistribution

Many debate the purpose of using taxes for redistribution, but the main idea is to tax those who can afford it (i.e. the wealthy) and use the money to fund programs for lower income families. Debate rages on as to whether or not this tactic is fair or if our government is even properly redistributing in the first place. Current presidential candidates disagree on the President Bush tax cuts in particular, which democratic candidates Sen. Barack Obama and Sen. Joe Biden feel give tax cuts to the wealthiest Americans, completely defeating the purpose of redistribution in our tax system.

3. Re-pricing

The tax system is also used to discourage and encourage. Taxes on things such as cigarettes and liquor discourage the intake of substances. The idea of implementing a carbon tax encourages fuel efficiency, but again is much like a penalty. Re-pricing is another main purpose of the inner workings of our tax system, because it is a large and equal flat tax, given to any and everyone indulging in such taxable items. Re-pricing happens all over the market in multiple ways in order to keep a sort of balance and subtle control on spending.

4. Representation

American revolutionists often coined the phrase “no taxation without representation,” so taxpayers know the government may be able to tax them, but accountability is mandatory. It is important for United States citizens and the government to be on even terms with taxes, and that all reasons and uses for said collected taxes are available to the public in multiple forms. It’s hard to remember that taxes are there to help us, but representation will always keep the information available.

House Votes Down Bail-Out Package

The House voted down a $700 billion plan aimed at bailing out Wall Street.

The rescue plan, a result of tense talks between the government and lawmakers, was rejected by 228 “nea” to 205 “yea” votes. About two-thirds of Republican lawmakers refused to back the rescue package, as well as 95 Democrats.

Shares on Wall Street plunged within seconds of the announcement, after earlier falls on global markets.

President George W. Bush was "very disappointed" by the result. He would meet members of his team in the coming days to "determine next steps", spokesman Tony Fratto said.

The BBC's Adam Brookes, in Washington, said Democratic leaders in the House were likely to try and convince a number of their members who voted against the bill to change their minds in coming days.

Speaking after the vote, Republican leaders suggested the Democrats were to blame, accusing them of failing to mobilize their majority in the chamber.

Democratic presidential candidate Barack Obama spoke shortly after the vote, saying it was an outrage that ordinary people were being asked to clean up Wall Street's mess.

Property Taxes: High in Blue States, Low in Red States

The Tax Foundation has published a study reviewing new census data on property taxes on homeowners. As Tax Prof pointed out, it is interesting to “note that 26 of the 30 highest-tax states in the three categories are Blue States that voted for John Kerry in 2004, and that 24 of the 30 lowest-tax states in the three categories are Red States that voted for George Bush in 2004.” Below is an embedded image of the study’s findings.

McCain Questions Obama's Tax Votes

From CNN.com:

Sen. John McCain told voters Monday that Sen. Barack Obama isn't being honest about his tax votes and said the Democrat is "always cheering for higher taxes."

In response, the Obama campaign called McCain's remarks "false attacks" and an "angry diatribe."

The economy is the No. 1 issue on the minds of voters, polls show, and both candidates are trying to convince voters that they will do a better job of getting the financial crisis under control.

"Two times, on March 14, 2008, and June 4, 2008, in the Democratic budget resolution, he voted to raise taxes on people making just $42,000 per year. He even said at the time that this vote for higher taxes on the middle class was 'getting our nation's priorities back on track,' " McCain said at a rally in Columbus, Ohio.

"Then something amazing happened: On Friday night, he looked the American people in the eye and said it never happened. My friends, we need a president who will always tell the American people the truth," McCain said.

McCain said a vote for Obama would "guarantee higher taxes, fewer jobs and an even bigger federal government" and charged that "these policies will deepen our recession."

Shortly after McCain finished his speech, the Obama campaign accused the Arizona senator of lying.

"Sen. McCain's angry diatribe today won't make up for his erratic response to the greatest financial crisis of our time. John McCain knows that the budget he's talking about didn't end up raising taxes on a single American, and the lie he told the American people today is all the more outrageous a day after he admitted that his health care plan will increase taxes on some families," Obama campaign spokesman Tommy Vietor said.

In McCain's speech, the Republican presidential candidate was referring to votes on a resolution (Senate Concurrent Resolution 70) meant to outline the Senate's budget priorities through 2013, but the measure had no practical effect.

According to a CNN review of the resolution, it assumes that most of the 2001 and 2003 tax cuts pushed by President Bush will expire in that time, which McCain says amounts to a tax increase. Obama and his running mate, Sen. Joe Biden, voted "yes" on the resolution. McCain did not vote.

Tax Related Inaccuracies Of The First Debate

Last Friday was the first of the presidential debates. Although the topic was supposed to be foreign policy, the financial crisis became a large topic in the debate.

When watching the debates, it can often be difficult to separate fact from fiction. Fortunately The Tax Foundation took the liberty to review the debate’s transcripts and identified “gaffes” made by both Senators Obama and McCain. I have posted their findings below.

Obama's Gaffes

First, Obama says this comparing his own tax plan to Sen. McCain's:

“And in his (Sen. McCain's) tax plan, you would have CEOs of Fortune 500 companies getting an average of $700,000 in reduced taxes, while leaving 100 million Americans out. So my attitude is, we've got to grow the economy from the bottom up. What I've called for is a tax cut for 95 percent of working families, 95 percent.”

Sen. Obama is mixing baselines here and the three figures aren't really comparable. First, the $700,000 in reduced taxes for CEOs comes from McCain's extending of the lower tax rates that those CEOs benefit from that were in place under the Bush tax cuts. So when Obama says that number, he is citing it relative to a baseline that assumed the Bush tax cuts were repealed. But when he talks about the "leaving 100 million Americans out" figure for McCain's tax plan, he is assuming that the Bush tax cuts are left in place with an AMT patch too (and he ignores McCain's health care tax credit and corporate income tax cut). When it comes to the 95 percent will get a tax cut under his plan, Obama includes the tax cuts that many relatively high-income (100k-300k) families would receive from an AMT patch, something he doesn't give McCain credit for in the 100 million figure, which only assumes McCain would increase the personal exemption.

Now this may seem like a technical and geeky point, but it's really not. Obama is basically comparing apples and oranges, and thereby misleading the American people. It's kind of like Obama telling you that the Georgia Bulldogs are 4-0 and the St. Louis Rams are 0-3 without telling you the fact that the Georgia Bulldogs play college football and the St. Louis Rams play professional football. He is implying that the two figures are comparable regarding the quality of the tax plans (football teams), but in reality, it is like comparing apples and oranges.

Obama also said this:

“[H]ere's what I can tell the American people: 95 percent of you will get a tax cut. And if you make less than $250,000, less than a quarter-million dollars a year, then you will not see one dime's worth of tax increase.”

That's not entirely true. According to Tax Policy Center, only 81.3 percent of tax units would receive a tax cut under Pres. Obama. The 95 percent of working families figure mentioned earlier in the debate is fairly accurate, but it's not 95 percent of the entire population. As for those making less than $250,000 not seeing a "dime's worth of tax increase," technically some households or tax units that benefit little from Obama's individual tax cuts could pay more due to Obama's closing of what he calls corporate tax loopholes, under the assumption that owners of capital would bear such a tax increase. This is not that significant a tax hike for those making under $250,000, but there are still some tax units or households making under $250,000 that could pay more in taxes under Obama's tax plan. Also, if you counted Obama's windfall profits tax and assumed that was borne in the short-run by owners of oil company stock, then some tax units that own a disproportionate amount of oil company stock either directly through stock ownership or indirectly through a pension fund could pay more in taxes, possibly exceeding the benefit that tax unit would receive from the energy "rebate" that Obama proposes to use the windfall profits tax money to fund.

McCain's Gaffes

Now McCain was also giving misleading information on taxes in the debate Friday night. The first instance was when he talked about his health insurance tax credit yet didn't bother to tell people that employer-provided health insurance benefits would be taxed. Obama was sure to point that out, and to his credit, he didn't say it was a massive tax hike like running mate Joe Biden has done on the campaign stump.

McCain also made this claim about his tax plan:

“I want to double the dividend from $3,500 to $7,000 for every dependent child in America.”

When McCain uses the term "dividend," he is referring to the personal exemption. It's unclear where that word dividend came from, and it's funny because he has made this error on multiple occasions throughout this campaign when he talks about this proposal publicly. (At least he didn't say credit as he has done in the past.) But that's not the issue here. McCain's claim is misleading because he never really doubles the personal exemption.

The current personal exemption in 2008 for a dependent is $3,500. McCain's plan calls for making it $7,000 by 2016 (eight years down the road). But even if McCain left it alone, the personal exemption would likely be near $4,600 in 2016 because of the annual inflation adjustment that is done to most tax parameters (assuming average 3.5 percent inflation). Therefore, instead of increasing it by 100 percent (double), it is safer to say that he is increasing by around 50 percent. McCain is exaggerating it by almost a factor of two. So in summary, the personal exemption would not be doubled due to McCain's policy. And even if this is passed, a $2,400 exemption increase in 2016 per child for a traditional family of four in the 15 percent bracket (truly middle-income) would only save them $720 in 2016 (assuming two children), which is only about $547 in 2008 dollars (again assuming 3.5 percent inflation). Many Americans who don't understand the difference between an exemption and a credit may have thought they were going to save $3,500 more per child.

McCain also brought up his optional flat tax plan, which is something that nobody analyzing his tax plan has really taken seriously because it will costs a lot in revenue, and they don't want to have that counted against them when debating the fiscal impacts of tax cuts. (In other words, the campaign wants it both ways as Obama adviser Austan Goolsbee once said at an event comparing the two candidates' tax plans: McCain can say one thing on the stump, but tell organizations like the Tax Foundation and Tax Policy Center something else when we score the lost revenue effects of his policies.)

Finally, McCain accused Obama of voting for tax hikes on those making as little as $42,000. That was a non-binding Senate vote earlier this year, and it's different from what Obama is proposing as a candidate. Very few households making $42,000 per year would pay more in taxes under Obama's tax plan. You may say that Obama is voting one way and proposing something else on the campaign trail. If that's fair, then McCain's drastic change of heart on the Bush tax cuts is fair game as well. McCain voted against the 2001 and 2003 tax cuts, but now supports extending almost all of them with the exception of the full repeal of the estate tax.

Other Gaffes

Factcheck.org points out some other errors as they relate to fiscal policy:

McCain tripped up on one of his signature issues - special appropriation "earmarks." He said they had "tripled in the last five years," when in fact they have decreased sharply.

Obama mischaracterized an aspect of McCain's health care plan, saying "employers" would be taxed on the value of health benefits provided to workers. Employers wouldn't, but the workers would. McCain also would grant workers up to a $5,000 tax credit per family to cover health insurance.

McCain misrepresented Obama's plan by claiming he'd be "handing the health care system over to the federal government." Obama would expand some government programs but would allow people to keep their current plans or chose from private ones, as well.

The Latest from the Candidates on 10 Important Economic Issues

Election day is only a few weeks away, and although I’ve blogged recently on the Vice Presidential candidate’s tax views, it has been a while since I have spent much time researching the latest on Sen. McCain and Sen. Obama’s views on economic issues. In my efforts to decide which candidate to cast my vote for I gathered the following list of the candidate’s views on 10 important economic issues, and I hope the information will help all of you make an informed decision this November as well!

1. Small Business

McCain:

By helping small business owners afford new equipment and technology, McCain hopes to promote growth in new and small businesses. He has also proposed a small business health care plan that would take the form of a tax credit that would be purchased personally and could be transferred to a different job if the employee where to leave their current position.

Obama:

Obama has long been a supporter of raising minimum wage to keep up with the cost of living. To help those struggling with the uneven difference between the cost of living and wages Obama plans hopes to continually index the minimum wage with the cost of living. His small business health plan also includes a refundable credit of 50% for employers that pay their employee’s health insurance premiums.

2. Personal Taxes:

McCain:

Extending the Bush tax cuts that were put into place in 2001 and 2003 is something McCain has been clear on from the beginning. He’s also dedicated to eliminating the Alternative Minimum Tax, as he feels it is unnecessary and completely replaceable. In its place, McCain hopes to put into place a two-rate income tax code that would greatly simplify our tax system.

Obama:

Although at first he supported repealing the Bush tax cuts, Obama now claims that he would not fully repeal the cuts but adjust them. However, he does not support extending the cuts past their expiration date. Obama also once claimed that he wanted to double the capital gains rate, but has since lowered his stance leaving many to wonder if he actually intends to target capital gains taxes or not. Obama is a strong supporter of tax cuts for low wage and middle class families, and has proposed numerous tax cuts aimed at helping American families.

3. Energy Security

McCain:

McCain is well known for his adamant support of nuclear energy has strong views about energy and the conservation of it. While he recognizes the threat of global warming, he still feels that nuclear energy is a safe and efficient way to go. McCain also supports offshore drilling as relief for high prices at the gas pump, and feels exploring other expensive energy options is simply not smart or affordable for our economy at this time.

Obama:

Taking pains to look into any and all alternative energy sources, Obama is not the biggest fan of nuclear energy as a main source. He is honest about gas prices, and has admitted that he understands the strain Americans are under. However, he does not support offshore drilling as a solution. However, in an attempt to push through some of his own policies on energy independence, he voted for limited offshore drilling in addition, as a compromise.

4. Real Estate & Foreclosures

McCain:

Though both candidates agree the real estate market is in trouble, they have slightly different takes on how the governments should intervene. McCain wants to offer limited financial aid and advice to borrowers, but with strict rules, restrictions, and guidelines. He also feels home rescue efforts are dealt with best within local communities and would provide additional funding to make that possible.

Obama:

Taking a strong defense against predatory loans, if elected Obama would work to create a $10 billion fund to help victims of such loans. He is appalled by the government’s willingness to bail out large investment banks in trouble, but reluctance to help individual citizens. In order to counteract this, Obama would create a 10% tax credit, awarded to any homeowner who does not itemize their taxes, and allow subprime borrowers to fight abusive lending practices. He would also set aside an additional $10 billion to maintain local government structures and authorize bankruptcy judges to reduce mortgage principal.

5. Health Care

McCain:

His voting record is limited on healthcare, but McCain still seems to have pretty strong views on the subject in this election season. His plans for overall healthcare seem to pertain especially to children without insurance as well as senior citizens. He has claimed that he would like to get health insurance to the 11 million children in this country without it, and also hopes to match funds for senior citizen’s prescription drugs. He did however vote against including prescription drugs under Medicare, a decision that has upset a lot of voters hoping to see large change in the healthcare system.

Obama:

Obama feels so strongly that healthcare should be available to every American, that he would like it to be a universal right, like our neighbors in Canada. Obama hopes to use money from ending the Iraqi war to make healthcare more affordable for every American. He also feels strongly about obesity, stating that by reducing the obesity rate we can save billions in wasted health care. Obama knows taking on insurance companies is a messy but necessary job in making healthcare as well as prescriptions reasonable. He also feels the terminally ill should never have to worry about money, and the right to live should be clearly theirs regardless of their financial status.

6. Mortgage Giant Rescue

McCain:

Although he missed the senate vote to give aid to Fannie and Freddie through temporary authority from the Treasury, McCain still supports the decision. He would like to replace the agencies management as well as end their lobbying and stop company dividends. Like so many others, McCain feels it is necessary to make sure companies like this do not collapse.

Obama:

Although he also supports providing aid to Fannie and Freddie, Obama does not support protecting the investors or CEOs involved with them. In addition to missing the vote for the federal bailout, Obama also missed voting for the housing bill president Bush signed into law in July.

7. Balanced Budget

McCain:

Well known for his strong dislike of earmarks, McCain vows he is very dedicated to cutting wasteful spending and balancing the budget. He was one of two republicans who voted in 1995 and 1997 to take social security off budget, and supports the balanced budget amendment, which would require an annual balanced budget. With the money he plans on gaining from cutting taxes, McCain plans on putting the money into Medicare, social security, debt reduction, and tax cuts. However, he also wants to enforce existing spending caps later on.

Obama:

By ending the war on Iraq, and taking away tax cuts for the wealthiest Americans, Obama plans to save billions of dollars and use the funds towards debt and budget crisis within our own country. Although Obama voted against a bill to reduce overall federal spending by $40 billion he claims he did not support the bill because it reduced funding for Medicaid, conservation, Medicare, agriculture, employee pensions, and student loans.

8. Free Trade

McCain:

John McCain feels globalization is an opportunity, and in 1999, he stated “we are in a global marketplace, and that is exceptionally good news for American families. Withdrawing from it is not just inadvisable, it is impossible. Free trade is indispensable to our prosperity. In other words, the less America trades the poorer America will be.” McCain thinks we need to reduce, not restrain, barriers to trade with other countries so we can profit from such goods. He supports NAFTA, GATT, and WTO. However, some critics feel McCain’s feelings towards free trade are too open, and that he is not fully taking safety measures and foreign policy issues into account.

Obama:

Obama feels free trade is a great opportunity, but one that needs to be fairly regulated. He has said he feels it is important to keep safety, strong labor, and environmental standards in mind. In February of 2008 he explained, “it is absolutely critical that we engaged in trade, but it has to be viewed not just through the lens of Wall Street, but also Main Street, which means we've got strong labor standards and strong environmental standards and safety standards, so we don't have toys being shipped in the US with lead paint on them.” Obama also feels NAFTA needs to be amended, and is a strong fighter for not just free trade, but fair trade.

9. The War in Iraq

McCain:

Due to it’s high costs the war has become a top economic issue in this election season. It is also an issue the candidates strongly disagree on. McCain is a strong supporter of the war, still calling it a “war on terror.” He even went as far to say Obama would “rather lose a war in order to win a political campaign." Not as concerned about what the war is costing the country, McCain feels it is well worth it for the safety if our citizens.

Obama:

Strongly opposing the war, Obama feels it is not only disrespectful and embarrassing occupying Iraq, but a complete waste of money. At a primary debate Obama claimed, “we have spent billions of dollars, lost thousands of lives. Thousands more have been maimed and injured as a consequence and are going to have difficulty putting their lives back together again. This has undermined our security. In the meantime, Afghanistan has slid into more chaos than existed before we went into Iraq.”

10. Recession

McCain:

Up until very recently McCain was against the term “recession”, stating earlier that “part of the problem in any recession is psychological. I'm still optimistic that nothing is inevitable.” He felt by doing things like eliminating the AMT and permeating tax cuts we could prevent a recession. However, just this past week both candidates claimed within 24 hours of each other that the term “recession” is exactly the term you could use to describe our economies status at this point.

Obama:

Taking a strong opinion on the economy, Obama feels it’s very weak and a recession is a reality we all need to face. “The news with Freddie Mac and Fannie Mae, I think, along with the unemployment numbers, indicates that we’re fragile,” Obama stated earlier in the month. However, he arose both applause and criticism when he stated he still dislikes Bush’s tax cuts and feels his must take place regardless of recession “even if we’re still in a recession, I’m going to go through with my tax cuts,” Obama said. “That’s my priority.”

Obama to Drop Biden?

Over the past week there have been rumors circulating that Sen. Barack Obama might seek to drop Sen. Joe Biden as running mate and replace him with Sen. Hillary Clinton. Many agree that these are in fact just rumors, and there is little evidence to support that this is a move Obama is actually considering. However, there have been a few events in the past few weeks that have led people to question whether Biden even supports Obama’s agenda.

According to FOXnews.com, “Barack Obama and Joe Biden stepped out of sync again Tuesday, as the Democratic presidential nominee criticized his running mate for voicing opposition to the government bailout of American International Group early last week.

It was the third off-message moment for the Democratic team in two days. Biden had to ratchet back his own rhetoric Monday after an interview aired in which he called one of his own campaign ads “terrible” and said that he did not support clean coal technology – even though Obama is a big proponent.

The lack of harmony suggests the Obama team, for months a rancor-free institution, is running into the kind of message discipline problems that John McCain’s campaign faced before he started to cut back his interaction with reporters.”

Also adding fuel to the fire, Biden was as quoted as saying, "make no mistake about this, Hillary Clinton is as qualified or more qualified than I am to be vice president of the United States of America. Let's get that straight. She's a truly close personal friend, she is qualified to be president of the United States of America, she's easily qualified to be vice president of the United States of America and quite frankly it might have been a better pick than me. But she's first rate.”

However, when Bill Clinton appeared on “The View” he claimed that Hillary did not want to be Vice President. When NBC'S Today Show's Matt Lauer asked her about what Bill said, Hillary replied, “you know, Matt, there's no point in going back and, you know, talking about something that didn't happen. I want to keep focused on the future and to talk to those people who are worried about their jobs, their home, affording gas and groceries, you know, thinking that the government has just turned its back on them, making them feel almost invisible.”

So does Obama feel his choice was a mistake? And more importantly, will Joe Biden drop out of the race? With the election only six weeks away it does seem rather unlikely, but only time will tell.

Policymakers: Congress Must Move Quickly to Avert Damage

From WashintonPost.com:

Consensus is building in Congress that a version of the bailout will be passed, and quickly, but that it will involve considerably more oversight and other provisions than were in the Bush administration's original plans.

In their most vigorous public defenses of the planned bailout to date, Paulson and Bernanke almost seemed to echo the outrage from their questioners. But they argued that the plan is necessary to protect ordinary Americans from the economic fallout of clogged markets for credit.

"I'm not only concerned, I'm angry about the things that got us here," said Paulson. "It makes me angry, and it makes you angry. You talk about taxpayers being on the hook? Guess what? They're already on the hook. If the system isn't stabilized, they're going to bear the cost."

He said later in response to a question, "I share the outrage that people have. It's embarrassing for the United States of America."

Both Paulson and Bernanke stressed that they are still working through details of how the government would price the troubled mortgage assets it buys under the $700 billion plan. But they asked that Congress leave them maximum flexibility to design those auctions or other procedures as they and their expert advisers see fit.

60 Minutes Gives Biased Coverage

According to MediaMatters.org, and many other political news sites, ABC’s news program 60 Minutes was biased of the candidate’s tax proposals during their interviews with Barack Obama and John McCain. In the broadcast the correspondents praised Obama’s plan, while intentionally saying nothing good about McCain’s. Bellow is the summary of Media Matter’s findings, but you can read their full report by clicking here.

During interviews with Sens. John McCain and Barack Obama, CBS 60 Minutes correspondent Steve Kroft characterized Obama's economic agenda as "ambitious and expensive," citing the costs of Obama's infrastructure, alternative energy, and health care plans, but there was no similar characterization of McCain's tax agenda by correspondent Scott Pelley, who interviewed McCain, even though, according to the Tax Policy Center, McCain's tax plan would likely add $1.5 trillion more to the federal deficit over 10 years than Obama's tax plan.

CA Legislature Approves New Compromise Budget

From the Associated Press:

Bringing an end to the state's longest-ever budget fight, California lawmakers approved changes to their $143 billion spending plan and gave in to Gov. Arnold Schwarzenegger's demands for a more robust rainy day fund.

Still, the governor said elected officials failed to fix California's ongoing fiscal imbalance that allows the state to spend more money than it takes in.

"There's nothing to really celebrate," Schwarzenegger said at the Capitol Friday. "As I said, great things were accomplished, but there are certain things that were not accomplished."

Democrats, who hold a majority in the Legislature and had proposed tax increases to help fill the state's $15.2 billion shortfall, countered that it was the governor who lacked leadership.

California is one of three states that require a two-thirds vote to pass a budget. Democrats needed a handful of Republican votes in both houses to accomplish the task.

"The real question was, could we have done any better without a tax? The answer was no," said Senate President Pro Tem Don Perata. "The governor couldn't get anybody to support his tax in his party. Republicans had the final say. They said no."

Schwarzenegger said he will sign the compromise plan next week, allowing California to resume payments to schools, medical clinics and state vendors that haven't been paid since the July 1 start of the fiscal year.

The governor said he was pleased legislative leaders agreed to stronger controls on the state's rainy day fund and gave him the authority to make spending cuts during the year.

The impasse dragged on because Republicans opposed any tax increase, while Democrats sought to combine budget cuts with higher taxes on corporations and the wealthiest Californians. Schwarzenegger proposed a temporary 1-cent increase in the state sales tax that would drop after three years.

U.S. Insurers Urge Swift Adoption of Legislation to Reduce Unfair Tax Advantages

From Market Watch:

The Coalition For A Domestic Insurance Industry, a group of 14 major U.S.-based insurance groups, applauds the introduction of a bill by Rep. Richard Neal (D – Mass.) to level the playing field and close the current loophole that provides foreign-based insurers a competitive advantage over domestic insurers in underwriting U.S. risks. This unfair tax advantage arises because foreign insurance groups operating in the U.S. are presently allowed to strip the bulk of their profits out of the U.S. merely by reinsuring risks to affiliates located in tax havens, and thus avoid paying billions of dollars in U.S. taxes. The tax treatment of these transactions undermines the ability of domestic companies to compete and ultimately threatens the future of our domestic insurance industry.

"The tax advantage, which originated in practice around 20 years ago, has already caused significant migration of insurance capital abroad," explained William R. Berkley, chairman and chief executive officer of W. R. Berkley Corporation and spokesman for the Coalition For A Domestic Insurance Industry.

Growth in related-party reinsurance written to foreign affiliates has been dramatic. In 2007, $58.4 billion of U.S. premiums went to foreign insurance companies, with nearly 60 percent ($33.8 billion) of those premiums going to related foreign reinsurance companies. Since 1996, U.S. premiums going to affiliated foreign reinsurers have increased at a compound annual growth rate of 21.4 percent.

"With the stroke of a pen, foreign-based groups can shift their profits overseas to affiliates in tax-advantaged locations. The principal incentive for this increased related-party reinsurance activity has been the avoidance of U.S. income tax," Mr. Berkley concluded.

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Biden Links Tax on Wealthy to Patriotism

From Boston.com:

Democratic vice presidential candidate Sen. Joe Biden acknowledged yesterday the wealthy would pay more taxes if he and Sen. Barack Obama are in the White House, but he put an interesting spin on it.

"It's time to be patriotic… time to jump in, time to be part of the deal, time to help get America out of the rut," Biden said on ABC's "Good Morning America."

Republican Sen. John McCain pounced on the remark. "Raising taxes in a tough economy isn't patriotic," he said in Cedar Rapids, Iowa. "It's not a badge of honor. It's just dumb policy."

Trying to find the right tone on the Wall Street crisis, McCain also went for the tried and true in a new TV ad yesterday: Warn voters that his Democratic opponent is a tax-and-spend liberal. The ad warns of huge spending increases, pork-barrel projects, and "painful taxes." "Can your family afford that?" the announcer concludes.

Obama's proposals, however, would lower the tax bill for the vast majority of taxpayers, and by letting President Bush's tax cuts lapse would raise income taxes on those earning $250,000 or more a year.

Another Misleading McCain Ad

Republican Presidential Nominee Sen. John McCain has put out yet another misleading ad about Sen. Barack Obama, according to the non-partisan site FactCheck.org. Embedded below is a video of the commercial, via McCain’s YouTube channel, and FactCheck’s summary of the distortions.

The McCain-Palin campaign has released a new ad that once again distorts Obama's tax plans.

• The ad claims Obama will raise taxes on electricity. He hasn't proposed any such tax. Obama does support a cap-and-trade policy that would raise the costs of electricity, but so does McCain.

• It falsely claims he would tax home heating oil. Actually, Obama proposed a rebate of up to $1,000 per family to defray increased heating oil costs, funded by what he calls a windfall profits tax on oil companies.

• The ad claims that Obama will tax "life savings." In fact, he would increase capital gains and dividends taxes only for couples earning more than $250,000 per year, or singles making $200,000. For the rest, taxes on investments would remain unchanged.

The McCain campaign argues in its documentation for this ad that, whatever Obama says he would do, he will eventually be forced to break his promise and raise taxes more broadly to pay for his promised spending programs. That's an opinion they are certainly entitled to express, and to argue for. But their ad doesn't do that. Instead, it simply presents the McCain camp's opinion as a fact, and it fails to alert viewers that its claims are based on what the campaign thinks might happen in the future.

CA Budget Deal Secured, Say Legislators

From: SignonSanDiego.com:

Legislative leaders said yesterday that they have an agreement with Gov. Arnold Schwarzenegger that will end a record 81-day budget deadlock, allowing payment of billions of dollars owed schools, health care providers and others.

Schwarzenegger threatened to veto a compromise budget sent to him Tuesday because it increased paycheck tax withholding for individuals and did not include a strong reserve fund to help close future budget gaps.

Republican and Democratic leaders, after meetings with the governor yesterday, said the Legislature will send him legislation today that they believe meet his demands.

“There appears to be an agreement,” said Aaron McLear, the governor's press secretary. “We will be able to confirm that once the governor meets with the legislative leaders tomorrow.”

The Democratic-led Legislature and the Republican governor had wanted to raise taxes to help close the $15.2 billion deficit. But they could not get the required handful of votes from Republicans who said a tax hike would harm the economy and cost jobs.

Tax Credit to Aid First-Time Homebuyers

Earlier in the week, the Internal Revenue Service (IRS) issued a new press release regarding a new tax credit for first-time homebuyers. Below is a snippet form the release, but you can check out the full text including questions and answers by clicking here.

First-time homebuyers should begin planning now to take advantage of a new tax credit included in the recently enacted Housing and Economic Recovery Act of 2008.

Available for a limited time only, the credit:

• Applies to home purchases after April 8, 2008, and before July 1, 2009.
• Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.

However, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return.

Biden and Palin – Comparing and Contrasting their Tax Views

Over the past week there has been a lot of media attention on the United States economy. With huge government buyouts, and record-breaking drops in the stock market, Americans are looking to the Presidential candidates for more information on their tax and economic plans.

In the past week weeks I have given an in depth look at both Vice Presidential candidate’s (see the entries on Sen. Joe Biden and Gov. Sarah Palin), and with the recent developments in our economy I thought it prudent to also compare the differences in their respective tax views on a few key issues.

Balanced Budget:

Joe Biden:

Senator Biden feels strongly that a balanced budget should be high up on the next president’s priority list. On top of consistently voting for what he believes were fair and balanced budget amendments since 1997, Biden has also voted against bills he felt would lead to an unbalanced budget. In 1990, Biden voted against George H. W. Bush’s budget bill, which aimed to raise taxes drastically over a five-year period. In 2000, Biden also voted against making tax cuts a priority over national debt reduction.

Biden’s own budget plan for the next few years includes cutting funding for the war (by which he hopes to generate over $100 billion in federal revenue), and eliminating tax cuts for the wealthiest Americans. He also plans on eliminating tax cuts for investment on dividends – which he claims could generate $195 billion in revenue over time.

Sarah Palin:

From the moment Palin took office as the Governor of Alaska, she began looking for ways to cut spending in all areas of the government. By cutting local project programs, selling a corporate jet, firing unnecessary government staff, and directing state agencies to reduce excess spending, she was able to reduce the states spending by $124 million. However, a $7 billion education and savings plan, new ice rink, and other local investments eventually led her state into debt. While the governor made many positive changes to Alaska and provided youth and cultural opportunity, debate rages at to whether her cuts were effective or not.

The difference:

Both candidates obviously agree that balancing the budget is an important task, though possibly on different levels. While Biden has experience working as a Senator to fix the national budget, Palin’s experience is limited to the state level. Without further statements from Palin herself, it’s hard to tell exactly what her plans for the budget are on the national level.

Gasoline Prices, Taxes, and Solutions:

Biden:

Knowing our dependence on oil and need for change, Biden has outlined multiple ways to help fix our countries current energy crisis. While other candidates have supported a gas tax holiday, Biden opposes the concept claiming that is merely a temporary solution. By pushing to reduce our dependence on oil entirely, Biden hopes to ease the demand for fossil fuels and also fight global warming. In 2005 he voted yes to bills that aim to significantly reduce oil by 2025, and for tax incentives to encourage energy production and conservation. He also voted against multiple bills promoting oil leasing programs in Alaska’s ANWR.

Palin:

A strong supporter of a gas tax holiday, Palin feels there is plenty of oil available for drilling in this country. Alaska has some of the highest gas prices in the country, and to help out citizens of her state Palin signed a gas tax holiday into law, and also pushed to get one time energy rebates sent out to Alaska taxpayers. Another one of Palin’s energy programs was known as Alaska’s “energy efficient month,” where the government provided incentives for reduced energy consumption. Although Palin has achieved some success in helping Alaska’s energy problems many wonder whether or not she will be able to do the same on the national level as the programs were made possible by windfall taxes from oil companies drilling in Alaska.

The Difference:

The only real similarity between the candidates is the fact that they both realize we are in an energy crisis. While Biden plans to make our nation less dependent on petroleum, Palin is very vocal about her support for increased offshore drilling. Palin does claim she supports green energy projects, but views them of secondary importance.

Earmarks:

Biden:

It is no secret that senator Biden has quite an earmark record. His FY09 requests total about $330 million, and it has caused a lot of bad publicity for Biden. Although it is not uncommon for members of Congress to take advantage of earmark spending, it is not helpful for a campaign running on the idea of change in a time of economic uncertainty.

Palin:

Although she’s taken stride to criticize both Obama and Biden on their earmark spending, Palin does have a record of wasteful spending. The infamous “bridge to nowhere” project, which she first embraced and then, later, dropped, was estimated at about $398 million. Obama criticized Palin for the first time ever on September 6^th, and on her earmark policies in particular:

"I know the governor of Alaska has been saying she's change, and that's great," Obama said. "She's a skillful politician. But, you know, when you've been taking all these earmarks when it's convenient, and then suddenly you're the champion anti-earmark person, that's not change. Come on! I mean, words mean something, you can't just make stuff up."

The Difference:

While no one tries to say straight out they “favor” earmarks, Biden is, if at all, more open and honest about it. It was a considered risky move on Palin’s part to be so critical on earmarks when she had does have some history of them herself.

Stocks Sink After Government Bailout of AIG

From the Associated Press:

Wall Street stumbled again Wednesday, with anxieties about the financial system still running high even after the government bailed out the insurer American International Group Inc. The Dow Jones industrial average dropped about 300 points.

The Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the insurer, after it lost billions in the risky business of insuring against bond defaults. Wall Street had feared that the conglomerate, which has its tentacles in various financial services industries around the world, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.

"People are scared to death," said Bill Stone, chief investment strategist for PNC Wealth Management. "Who would have imagined that AIG would have gotten into this position?"

He said the fear gripping the market reflects investors' concerns that AIG wasn't able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter.

The two independent Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny, as does Washington Mutual Inc., the country's largest thrift bank. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit. It insisted that it is surviving the credit crisis that has ravaged many of its peers.

Lehman filed for bankruptcy protection on Monday, and by late Tuesday had sold its North American investment banking and trading operations to Barclays, Britain's third-largest bank, for the bargain price of $250 million. Over the weekend, Merrill Lynch, the world's largest brokerage, sold itself in a last-ditch effort to avoid failure to Bank of America Corp.

The troubles in the financial sector could exacerbate the problems facing the weak U.S. economy, given that individuals and businesses rely on the nation's money centers.

Details on Biden’s Tax Returns

Although his Republican counterpart Gov. Sarah Palin has yet to release her tax returns, Democratic Vice Presidential Nominee Sen. Joe Biden has published his returns dating back ten years. You can download the PDF version of his returns at Obama’s campaign website.

The returns appear to be pretty straightforward, the Bidens had an annual income of around $200,000 - $300,000, which is about average for a member of the Senate. However, the percent of their income that was deducted for charitable contributions was very low considering the Biden’s income level.

“I wonder, though, if the move might backfire because the returns show that the Bidens have been amazingly tight-fisted when it comes to their charitable giving,” claims Paul L. Caron of the Tax Prof blog. “Despite income ranging from $210,432 - $321,379 over the ten-year period, the Bidens have given only $120 - $995 per year to charity, which amounts to 0.06% - 0.31% of their income.”

“It is jarring that a couple earning over $200,000 per year would give as little as $2 per week to charity. This giving compares very unfavorably to John McCain, whose tax returns show that he gave 27.3% - 28.6% of his income to charity in 2006-2007. During the same period, the Obamas' tax returns show that they gave 5.8% - 6.1% of their income to charity.”

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McCain Embraces Regulation After Many Years of Opposition

From Washington Post.com:

A decade ago, Sen. John McCain embraced legislation to broadly deregulate the banking and insurance industries, helping to sweep aside a thicket of rules established over decades in favor of a less restricted financial marketplace that proponents said would result in greater economic growth.

Now, as the Bush administration scrambles to prevent the collapse of the American International Group (AIG), the nation's largest insurance company, and stabilize a tumultuous Wall Street, the Republican presidential nominee is scrambling to recast himself as a champion of regulation to end "reckless conduct, corruption and unbridled greed" on Wall Street.

"Government has a clear responsibility to act in defense of the public interest, and that's exactly what I intend to do," a fiery McCain said at a rally in Tampa yesterday. "In my administration, we're going to hold people on Wall Street responsible. And we're going to enact and enforce reforms to make sure that these outrages never happen in the first place."

McCain hopes to tap into anger among voters who are looking for someone to blame for the economic meltdown that threatens their home values, bank accounts and 401(k) plans. But his past support of congressional deregulation efforts and his arguments against "government interference" in the free market by federal, state and local officials have given Sen. Barack Obama an opening to press the advantage Democrats traditionally have in times of economic trouble.

Bush Acknowledges Financial Pain

President Bush spoke at the White House Rose Garden this morning acknowledging that the country is facing financial pain. However, he was reluctant to mention Dow’s massive plunge, and did not provide many details on the administration’s plan to ease the countries pain.

"I know Americans are concerned about the adjustments that are taking place in our financial markets," noted President Bush. "We are working to reduce disruptions and minimize the impact on the [broader economy]. In the short run, adjustments in the financial markets can be painful, for people worried about their investments, and for employees of the firms."

Below is a list of recent economic developments from CNN.com.

Lehman: Lehman Brothers (LEH, Fortune 500) filed for the biggest bankruptcy in history after it failed to find a buyer, triggering a 95% stock plunge to 19 cents a share.

Merrill: Bank of America (BAC, Fortune 500) said it would buy Merrill Lynch (MER, Fortune 500) for $50 billion in stock, or $29. Merrill's stock surged 24% on the news to $21.20 a share, while Bank of America plunged 15% to $28.59 a share.

AIG: The stock plunged 44% to $6.89 a share for AIG (AIG, Fortune 500), after the insurance giant said it was getting ready to announce a restructuring.

Art Hogan, chief market strategist at Jefferies & Co., described this as the biggest economic crisis since the Great Depression of the 1930s and the railroad bankruptcies of the 1800s.

"We've never witnessed this before," said Hogan earlier in the morning, before Bush's speech. "There's no road map for this.”

Details of Lehman Brothers's Employees Political Donations

With the announcement that Lehman Brothers would file for the biggest bankruptcy in history they have been all over the new headlines. One of the more interesting stories that I came across takes a look at the political support, and donations, of the company’s employees. Below is a snippet of the article, but you can read the full text at Brothers Grim: Is Lehman Next?

Since 1989, Lehman Brothers's employees and political action committee have given $9.2 million to federal candidates, parties and political action committees, with 54 percent of that going to Democrats. In the current Congress, 271 lawmakers have collected nearly $3 million since 1989, with 72 percent going to Democrats. Democratic presidential candidates and senators Hillary Clinton and Barack Obama top the list of all-time recipients for the company, collecting $410,000 and $395,600 respectively. Sen. Charles Schumer, D-N.Y., a member of both the Senate Banking, Housing and Urban Affairs Committee and the Senate Finance Committee, hauled in $181,450, while Sen. Chris Dodd, chair of the Senate banking committee, has collected $165,800. The top recipient of PAC money from Lehman Brothers has been Rep. Mike Castle (R-Del.), a member of the House Financial Services Committee, which has jurisdiction over banking and the securities industry. Castle has collected $38,500 from Lehman's PAC since 1993.

This election cycle, Lehman employees have given about $1.3 million to presidential candidates. Only fellow financial giants Goldman Sachs, Citigroup and Morgan Stanley have given more to the presidential hopefuls this election cycle. Lehman employees have made their firm one of the top contributors to both Obama ($370,500) and John McCain ($117,500) this election cycle. The company is also on track to spend more than $800,000 on federal lobbying this year.

Greenspan: No McCain tax cuts without reduction

From the Associated Press:

Alan Greenspan says the country cannot afford tax cuts of the magnitude proposed by Republican presidential contender John McCain — at least not without a corresponding reduction in government spending.

"Unless we cut spending, no," the former Federal Reserve chairman said Friday when asked about McCain's proposed tax cuts, pegged in some estimates at $3.3 trillion.

"I'm not in favor of financing tax cuts with borrowed money," Greenspan said during an interview with Bloomberg Television. "I always have tied tax cuts to spending."

McCain has said that he would offset his proposed cuts — including reducing the corporate tax rate and eliminating the Alternative Minimum Tax that has plagued middle-class families — by ending congressional pork-barrel spending, unnecessary government programs and overhauling entitlement programs such as Medicare and Social Security.

Democrats pounced on Greenspan's comments, in part because McCain professed last year that he was weaker on economics than foreign affairs and was reading Greenspan's memoir, "The Age of Turbulence," to educate himself.

"Obviously he needs to go back to that book and study it some more," Sen. Claire McCaskill, D-Mo., said during a conference call arranged by the campaign of Democratic nominee Barack Obama.

McCaskill said eliminating congressional earmark spending — estimated at $17 billion annually — cannot offset McCain's proposed tax cuts.

An Updated Analysis of the 2008 Presidential Candidates' Tax Plans

The Tax Policy Center has updated their analysis of the Presidential candidate’s tax plans. Below is the abstract from their analysis, but you can read the full text, or download the study as a PDF, by visiting their website.

Tax and fiscal policy will loom large in the next president's domestic policy agenda. Nearly all of the tax cuts enacted since 2001 expire at the end of 2010 and the individual alternative minimum tax (AMT) threatens to ensnare tens of millions of Americans. While a permanent fix palatable to both political parties has proven elusive, both candidates have proposed major tax changes. This report describes how we performed our modeling and analysis, outlines the major tax proposals, and discusses the implications of their policies for the revenue raised, taxpayer economic activity, and the distribution of the tax burden.

How to Avoid Common Errors that Delay Stimulus Payments

In their newest press release, the IRS has identified a list of common mistakes that may have caused an delay in your receipt of an economic stimulus check. If you are expecting a check, but have still not received it, then be sure to carefully read the following list and check out the IRS’ “Where’s My Economic Stimulus Payment?” Web tool.

File only one tax return — People should file only one 2007 tax return. It takes the IRS up to 12 weeks to process paper returns and issue the stimulus payments. However, some people are filing more than one tax return in an effort to receive a stimulus payment, which could further delay their stimulus payment. The IRS is concerned there will be more multiple filings as the Oct. 15 deadline approaches for filing a return in 2008.

List qualifying income — Some people are listing their monthly income instead of annual income. People must list their annual amount of qualifying income to be eligible for the minimum payment of $300 ($600 married filing jointly). The qualifying income required by law is at least $3,000 in benefits from Social Security, Veterans Affairs and Railroad Retirement, earned income and/or combat pay.

Review your tax liability — Some people who have either small amounts of tax liability or no tax liability are getting smaller stimulus payments than they expected or none at all. Generally, the law provided for a maximum stimulus payment of $600 ($1,200 for married couples) or an amount equal to a taxpayer’s tax liability, whichever was less. Tax liability is the net amount of federal income taxes paid after deductions and credits. If people had no tax liability but had at least $3,000 of “qualifying income” from specific sources, they would be eligible for $300 ($600 for married couples). There also is a $300 payment for each qualifying child.

Amended return — Generally, people cannot file an amended return solely to get an economic stimulus payment unless they are a retiree, veteran or have other “qualifying income.” While amended returns will be processed to correct the income, deductions and income tax as appropriate, the economic stimulus payment amount will not be adjusted based on an amended return. If people do not receive a payment this year, they can claim it when they file their tax return in 2009.

Use most current address — People must use their most current address in order to receive a timely payment. People who change addresses after filing should complete Form 8822 and a change of address card with the U.S. Postal Service. If the postal service is unable to deliver the payment, it is returned to the IRS.

Some Facts on McCain's Health Care Tax Credit

From the Tax Foundation:

The Obama campaign and many in the leftist blogosphere are in the process of pulling a John McCain on tax policy: don't tell the whole truth about your opponent's tax plan.

Today in a speech in Kansas City, Joe Biden said, "They want to tax your health-care benefits; I am not making this up."

While it's true that McCain's plan would tax the value of employer-provided health insurance (as it should be under a true income tax), Biden ignores the fact that McCain's plan also provides a refundable tax credit that for most would exceed the tax increase induced by the taxation of employer-provided health insurance (over time, this value of this credit could erode, see below). In summary, for most, it's a tax cut. It is true that for some (mostly very large families and high-income families), taxes could go up. But for the vast majority of tax returns, tax liabilities would actually decrease over the next five-to-ten years.

A common misinterpretation among voters who Biden misleads will likely come from a misunderstanding of the difference between a credit and exclusion. The value of an exclusion equals the amount excluded multiplied by your marginal tax rate, which is why exclusions and deductions tend to disproportionately benefit higher income taxpayers who are in higher tax brackets. A refundable credit's value to the taxpayer is exactly the value of that credit. So a tax return in the 25 percent bracket would have to receive an exorbitant amount ($20,001) in health insurance income to actually have its tax bill go up in 2009.

Even a family earning $50,000 who had an expensive $15,000 health care plan would actually pay less tax under McCain's health tax credit plan. Their income tax before credits would rise by $2,250. But they would get a $5,000 credit that would more than offset that higher tax before credits.

A family earning $100,000 who has a huge $20,000 health care plan (which is much more than the national average) would actually break even. If that family had a more reasonable $10,000 health care plan, it would receive a tax cut.

A family earning $200,000 who had a $15,000 health care plan (28% bracket) would even get a tax cut. If that family had the expensive $20,000 health care plan, it would face a tax hike of around only $600.

Palin Billed Taxpayers for Nights Spent at Home

From Washington Post.com:

Alaska Gov. Sarah Palin has billed taxpayers for 312 nights spent in her own home during her first 19 months in office, charging a "per diem" allowance intended to cover meals and incidental expenses while traveling on state business.

The governor also has charged the state for travel expenses to take her children on official out-of-town missions. And her husband, Todd, has billed the state for expenses and a daily allowance for trips he makes on official business for his wife.

Palin, who earns $125,000 a year, claimed and received $16,951 as her allowance, which officials say was permitted because her official "duty station" is Juneau, according to an analysis of her travel documents by The Washington Post.

The governor's daughters and husband charged the state $43,490 to travel, and many of the trips were between their house in Wasilla and Juneau, the capital city 600 miles away, the documents show.

Dividend Tax Abuse: How Offshore Entities Dodge Taxes on U.S. Stock Dividends

Earlier in the day, the Senate Permanent Subcommittee on Investigations issued a new report titled, “Dividend Tax Abuse: How Offshore Entities Dodge Taxes on U.S. Stock Dividends.” Below is the introduction, but you can download a PDF of the 77-page study by clicking here.

Each year, the United States loses an estimated $100 billion in tax revenues due to offshore tax abuses. The U.S. Senate Permanent Subcommittee on Investigations has examined various aspects of this problem, including how U.S. taxpayers have used offshore tax havens to escape payment of U.S. taxes. This Report focuses on a different subset of abusive practices that benefit only non-U.S. persons, have been developed and facilitated by leading U.S. financial institutions, and have been utilized by offshore hedge funds and others to dodge payment of billions of dollars in U.S. taxes owed on U.S. stock dividends.

Using phrases like “dividend enhancement,” “yield enhancement,” and “dividend uplift” to describe their products, U.S. financial institutions have developed, marketed, and profited from an array of transactions involving multi-million-dollar equity swaps and stock loans whose major purpose is to enable non-U.S. persons to dodge payment of U.S. taxes on U.S. stock dividends. In addition, many of the offshore hedge funds that have benefited from these abusive transactions appear to function as shell operations controlled by U.S. professionals who are helping them dodge U.S. dividend taxes. Six case histories illustrate the scope and nature of the offshore dividend tax abuse problem.

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Tax Court Refuses to Follow 9th Circuit

From Tax Prof:

The Tax Court yesterday refused to follow the Ninth Circuit's decision in Boise Cascade Corp. v. United States, 329 F.3d 751 (9th Cir. 2003), holding that § 162(k) precludes a deduction for Ralston Purina Co.'s payment to its ESOP in redemption of its preferred stock, where the proceeds were distributed to employees terminating their participation in the plan. Ralston Purina Co. v. Commissioner, 131 T.C. No. 4 (Sept. 10, 2008). Two district courts have followed the Ninth Circuit's opinion in Boise Cascade (Conopco, Inc. v. United States, No. 2:2004cv06025 (D.C. N.J. Dec. 8, 2004); General Mills, Inc. v. United States, No. 06-3547 (D. Minn. Jan. 14, 2008)), and those cases are on appeal in the Third and Eighth Circuits, respectively.

Money for Breakfast

I was yet again invited to be a special guest on FOX Business Channel’s Money for Breakfast. In the first video, which aired yesterday, I discussed the Vice Presidential candidate’s finances and how their own finances have impacted their views on the economy with host Alexis Glick.

In the second video, which aired earlier today, I again spoke with Alexis Click. This time we discussed the tax-impact of the Government’s bailout of Freddie Mac and Fannie May.

Palin Makes Her First Gaffe

From Huffington Post:

Gov. Sarah Palin made her first potentially major gaffe during her time on the national scene while discussing the developments of the perilous housing market this past weekend.

Speaking before voters in Colorado Springs, the Republican vice presidential nominee claimed that lending giants Fannie Mae and Freddie Mac had "gotten too big and too expensive to the taxpayers." The companies, as McClatchy reported, "aren't taxpayer funded but operate as private companies. The takeover may result in a taxpayer bailout during reorganization."

Economists and analysts pounced on the misstatement, which came before the government had spent funds bailing the two entities out, saying it demonstrated a lack of understanding about one of the key economic issues likely to face the next administration.

"You would like to think that someone who is going to be vice president and conceivable president would know what Fannie and Freddie do," said Dean Baker, co-director of the Center for Economic and Policy Research. "These are huge institutions and they are absolutely central to our country's mortgage debt. To not have a clue what they do doesn't speak well for her, I'd say."

Added Andrew Jakabovics, an economic analyst for the progressive think tank, Center for American Progress: "It is somewhat nonsensical because up until yesterday there was sort of no public funding there. Even today they haven't drawn down any of the credit line they have given to Treasury. 'Gotten too big and too expensive' are two separate things. The too big has been a conservative mantra for a while and there is something to be said of that in that they hold about half of the mortgage guarantees that are out there. And in the last year they have been responsible for roughly 80 percent out there. The 'too expensive to tax payers,' I don't know where that comes from."

Even conservative analysts acknowledged that the statement simply did not hold true.

"Heretofore, if the treasury had a balance sheet there would have been a liability but there was never a taxpayer payment before [the bailout]," said Gerald P. O'Driscoll, an economist with the Cato Institute. "[Fannie and Freddie] were not taxpayer funded. They had taxpayer guarantee, which is worth something, especially in the stock market..."

The Palin misstatement comes as Fannie and Freddie are set to be placed under control of the Federal Housing Finance Agency, created by President Bush in late July to help regulate the two housing giants. Both presidential candidates have been critical of Fannie and Freddie but neither is opposed to the government's plans for the companies. The treasury is hoping that the government's role will help stabilize credit markets and incentive more mortgage lending.

"With the takeover they will be taxpayer funded," said O'Driscoll. "As I understand it they get to withdraw funds with permission going forward."

How politically significant a "gaffe" it is remains to be seen. The major concern about Palin's position on the ticket is that she lacks the economic and foreign policy wherewithal to serve as vice president. This certainly doesn't help on that front. At the same time, the remark went almost entirely unnoticed over the weekend and discussions on the developments of the housing market can be difficult to process for even the most attuned voter.

There are varying explanations that could be offered for Palin's defense. As O'Driscoll noted, both Fannie and Freddie "were hybrid institutions because they had private ownership but... an implicit government guarantee which people thought at the end of the day was explicit." Meanwhile, as Baker noted, as of July the two lenders were being offered low market interest rates by the fed again, theoretically, at the taxpayer's expense. But, he added, "I kind of doubt she had any sense of that."

Obama Admits Tax Hikes Could Harm Economic Growth

As many of you may have already heard, earlier in the week Obama was interviewed by George Stephanopoulos and acknowledged that tax hikes hurt the economy.

"I think we've got to take a look and see where the economy is. I mean, the economy is weak right now. The news with Freddie Mac and Fannie Mae I think, along with the unemployment numbers, indicates that we're fragile."

Separating Palin Fact from Palin Fiction

It seems like every other day there is a new rumor about Vice Presidential Nominee Sarah Palin. Yesterday I posted an entry taking a deeper look at the truth about her tax views, but there are dozens of other non-tax related stories floating the Internet about Palin. Below are some of those rumors – either true or debunked – from a list compiled by Charlie Martin of Pajamas Media, who took the time to separate the fact from fiction in recent rumors about the Governor.

• No, Willow and Piper are not named for witches on TV. Among other things, Willow was born before Buffy came on TV, and Piper was born before Charmed.
• Yes, it appears that she has a Big Dipper tattooed on her ankle. She lost a bet.
• No she was not a member of the (wild-eyed libertarian) Alaska Independence Party, although her husband once was.
• No, she was never a Pat Buchanan supporter – even when Buchanan claims she was, she was on the board of Steve Forbes’ campaign in Alaska.
• No, Buchanan does not support her now – in fact, he is supporting Obama. Buchanan did think her speech was amazing, but then so do 80 percent of the people who saw it.
• Yes, she was apparently pregnant when she got married
• Yes, barring Immaculate Conception virgin birth, Bristol appears to have had sex with her fiancee. No, Bristol didn’t receive only “abstinence-only” sex ed.
• No, it wasn’t/won’t be [bad tense, has not happened yet] a shotgun wedding; Bristol and Levi been engaged for a good while according to Levi’s mother. It was either an accident or just an unconventional order.
• Yes, she did try, clearly unsuccessfully, to get Bristol married off to her fiancée before the story came out.
• Yes, she did fire the public safety guy — but he said in the Anchorage paper that, for the record, she never, and no one else in her administration ever, tried to make him fire her ex-brother-in-law.
• And yes, the state trooper (her sister’s ex-husband) she was worried about did: tase her 10 year old nephew; drive his state patrol car while drinking or drunk; did threaten to “bring her down”; and did threaten to murder her father and sister if they dared to get an attorney to help with the divorce.
• Yes, the state trooper was suspended when he was put under a court protective order.
• No, the trooper wasn’t fired.
• Yes, she did try to cut her own salary as mayor by $4000 a year; yes, she had voted against the $4,000 a year raise while on the city council.
• No, she didn’t cut funding for unwed mothers; yes, she did increase it by “only” 354 percent instead of 454 percent, as part of a multi-year capital expenditures program. No, the Washington Post doesn’t appear to have corrected their story. Even after this was pointed out in the comments on the story.
• No, she didn’t cut special needs student funding; yes, she did raise it by “only” 175 percent.
• Yes, she did ask the librarian if some books could be withdrawn because of being offensive; no, they couldn’t; yes, it was “rhetorical, at least as was reported contemporaneously in 1996
• No, the list of books she wanted to ban that’s being passed around is not real; among other things, it includes a number of books published after her time in office there.
• Yes, she apparently believes in some variant of intelligent design.
• No, she didn’t try to force the schools to teach it; she said if someone brought it up, it was an appropriate subject for debate.
• No, she doesn’t believe in “abstinence only” education. Yes, she thinks abstinence is an effective way of preventing pregnancy. Duh. Yes, she believes kids should learn about condom use in schools.
• Yes, she did smoke marijuana, when it was legal in Alaska. Yes, she apparently did inhale.
• Yes, she kills animals and eats them, and wears their skins.
• Yes, she was a beauty contest contestant.
• Yes, she was once a sportscaster.
• Yes, she has a college degree in journalism, but I won’t hold that against her, as she seems to have found honest work as well.
• Yes, she was vetted extensively, not just in three days — I’ve got links to press reports about people coming to Wasilla on May 29, and we had her on our Veepstakes at PJM from the first day we ran it.
• Yes, Sarah Palin’s acceptance speech was written by a speechwriter. Duh. No, none of Obama’s, McCain’s, nor Biden’s speeches were impromptu off the cuff things either.
• Yes, she did put the governor’s plane on eBay. No, that’s not how it was finally sold. Yes, McCain did say it wrong. Bad McCain.

Gov. Sarah Palin: a Deeper Look at her Tax Views

Both presidential candidates have chosen their Vice Presidential picks and Election Day is a mere two months away. On August 29, 2008, Sen. John McCain announced his choice to have the Governor of Alaska, Sarah Palin, serve as his running mate. Within minutes, controversy began, and Palin’s personal life was thrown into the limelight – as well as the rest of her family. However, with so much media attention on Palin’s personal life, it is hard to get a clear view of her position on more important issues, like taxes. To help the readers of my blog make an educated decision come this election I have put together the following outline of Palin’s tax views.

Energy Tax Rebates

In her own state of Alaska, Palin proposed a monthly $100 rebate for all Alaskans to help deal with energy and fuel prices. She soon dumped the monthly idea and decided to make it a flat rebate of $1,200 instead. However, criticism rose almost immediately because the flat rate did not suit every Alaskan’s needs, as fuel prices and demand are different in every region.

Balanced Budget and Tax Relief

As soon as Palin was elected as Governor she carried out a campaign promise and sold a corporate jet purchased by her predecessor for $2.1 million on eBay. Determined to reduce State Budget, she then signed the largest operating budget in Alaska history, $6.6 billion. She also slashed hundreds of construction projects in Alaska, cutting $237 million from the construction budget. The closure of some projects was applauded, while others were criticized, but the state needed the funds regardless of popularity.

In 2007 Palin took on the biggest construction project, the infamous, “Bridge to Nowhere”, which she had originally wanted to rebuild but then later opposed. “She made the final decision to kill a very bad project, so she deserves credit for that. But she didn’t do it as an ideological opponent of earmarks. She did it as someone who had to balance the books,” Keith Ashdown, a tax investigator told the Washington post.

Oil Taxes

Alaska’s economy and way of life has come to depend strongly on oil wealth. Palin proposed a $750 million oil tax increase, which eventually came to $1.5 billion. As soon as the bill was approved in the state’s legislature, Palin signed it into law.

However, she has also fought hard to try to open the Arctic National Wildlife Refuge for drilling, which many environmentalists and citizens across the country strongly opposed. The people of Alaska however, who’s economy depends on oil, agree with the drilling.

Finally, Palin has also been a strong supporter of a gas tax holiday, which received national attention when it was supported by McCain and Sen. Hilary Clinton.

Dairy Farm Closure

One of Palin’s more controversial finance choices was her choice to keep a state-owned dairy farm open. The Alaska creamery board recommended that the Matanuska Maid Dairy be closed, but Palin decided to keep it against their advice. Controversy arose when Palin replaced the entire membership of the Board of Agriculture and conservatism (the only people who could fire or hire members of the Alaska creamery board). In 2007, it became clear that the business was unprofitable and not worth keeping. At that time, Palin decided to just sell the farm.

Sales Tax Increase

As mayor of Wasilla, Palin followed through promises to reduce property taxes as well as her own salary. However, she did have to raise the sales taxes by almost half a percent to pay for an indoor ice rink and sports facility though. The project would cost over $15 million to build, but could greatly stimulate small town’s economy. The tax increase was necessary to pay for the ice rink, as the state had already spent their budget on road and sewer projects. Palin pushed to have the sports facility built quickly, before the city had a clear title, and got a bad reputation as the property was in litigation for 7 years.

U.S. Workers are Worse Off

According to a new study from Rutgers University, American workers are worse off than they have been in years. The study finds that more than 10% of the country is currently unemployed, or underemployed. This number represents a huge increase from last year, and is a bad indicator for our economy.

The study also had a few more interesting statistics about the economy which are outlined below.

• About 530,000 were subject to mass layoffs in the last year, growth of nearly 5 percent but a lower rate than five and 10 years ago.
• The median weekly earnings for American workers have not grown in real terms over the past eight years.
• At $6.55, the federal minimum wage is worth 40 cents less per hour, in inflation-adjusted dollars, than it was a decade ago.
• Although employer-assisted child care and employee wellness programs have grown quickly over the past decade, they still cover less than one quarter of American workers.
• Roughly 4 percent of the work force wants to work full-time but is working part time because they can't find full-time work.

On Dividend Taxes, It’s a Post-Partisan Race

From NYTimes.com:

Barack Obama is often described as a post-partisan politician who transcends traditional ideological divides. Is it true? At least when it comes to one small but important aspect of tax policy — the treatment of corporate dividends — the answer appears to be yes. Without much fanfare or public notice, Senator Obama has embraced a central element of the Republican agenda.

Let’s start with some history. Before 2003, when a person received dividends from his stock holdings, this income was taxed at ordinary income tax rates. That is, a dollar of dividends generated the same individual income tax liability as did a dollar of wages.

But many economists have long argued against taxing dividends this way. Dividends are a stockholder’s payment from corporate profits, and these profits have already been subject to the corporate income tax. Any tax on dividends represents a second tax on essentially the same income.

One can question whether this double taxation of income from corporate capital is fair. But fairness aside, there is also the problem of incentives. Taxing dividends twice substantially raises the overall tax burden on this form of income and distorts various decisions. Whenever taxes, rather than true costs and benefits, drive the allocation of resources, the economy shrinks below its potential.

Here are five ways a heavy tax on dividends messes things up:

CONSUMPTION VS. SAVING

When the tax system depresses the return on a major asset class like corporate equities, households have less incentive to save for the future. Reduced saving means less funds for capital accumulation, which in turn impedes economic growth.

HOUSING VS. BUSINESS CAPITAL

Wealth invested in your own home has several tax advantages. These include the mortgage interest deduction and the absence of any tax on imputed rent (the value that homeowners earn implicitly by getting a place to live). By taxing business capital highly, the tax laws induce people to invest too much in housing and too little in businesses.

NONCORPORATE VS. CORPORATE

Because non-corporate businesses like partnerships are taxed only once, they have an advantage over twice-taxed corporations. Consequently, too much of the economy’s capital stock ends up in the non-corporate, business sector.

DEBT VS. EQUITY FINANCE

Because interest payments on corporate debt are deductible for corporate income tax calculations, this capital income is taxed only once. This asymmetric treatment of debt and equity finance induces companies to issue more debt than they otherwise would, increasing leverage and the economy’s financial fragility.

RETAINED EARNINGS VS. DIVIDENDS

Companies can avoid the dividend tax by retaining earnings rather than paying dividends. Excessive retained earnings, however, impede the movement of capital from older cash-generating companies to newer ones with better prospects.

Tax Topics in McCain’s Speech

At the end of last week, Sen. John McCain officially accepted the Republican nomination for president, and spoke to the crowd at the Republican National Convention. Embedded below is a video of McCain’s speech, and I have also included bullets of the tax issues mentioned in his speech, thanks to TaxProf.

• We believe in low taxes, spending discipline, and open markets. We believe in rewarding hard work and risk takers and letting people keep the fruits of their labor.
• I will keep taxes low and cut them where I can. My opponent will raise them. I will open new markets to our goods and services. My opponent will close them. I will cut government spending. He will increase it.
• My tax cuts will create jobs. His tax increases will eliminate them.
• Keeping taxes low helps small businesses grow and create new jobs. Cutting the second highest business tax rate in the world will help American companies compete and keep jobs from moving overseas. Doubling the child tax exemption from $3500 to $7000 will improve the lives of millions of American families.

Hurricane Gustav Victims Qualify for IRS Disaster Relief

According to the newest press release form the IRS, they have setup a program to provide relief for victims of Hurricane Gustav. Below is a snippet from the release, but click here to read the full text, and to learn how to qualify for disaster relief.

“The IRS is postponing until Jan. 5, 2009 deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and other time-sensitive acts otherwise due between Sept. 1, 2008 and Jan. 5, 2009. This includes:

Individual estimated tax payments due Sept. 15, 2008.

Corporate extended 1120 tax returns due Sept. 15, 2008.

Individual extended 1040 tax returns due Oct. 15, 2008.

‘As residents of Louisiana return to their homes following Hurricane Gustav, taxes are one thing they won’t need to worry about,’ IRS Commissioner Doug Shulman said. ‘This relief gives them extra time to get their lives in order before having to deal with their tax matters.’

In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after Sept. 1, 2008 and on or before Sept. 16, 2008 as long as the deposits are made by Sept. 16, 2008.

Taxpayers who reside in or have a business located in the following parishes qualify for the relief announced today:

Acadia, Allen, Ascension, Assumption, Avoyelles, Beauregard, Cameron, East Baton Rouge, East Feliciana, Evangeline, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Plaquemines, Pointe Coupee, Rapides, Sabine, St. Bernard, St. Charles, St. James, St. John the Baptist, St. Landry, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Vernon, West Baton Rouge and West Feliciana.

IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. Affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request tax relief.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing or payment due date between Sept. 1, 2008 and Jan. 5, 2009.”

2008 Republican Tax Platform

The Republicans recently released their 2008 Republican Party Platform, which outlines the party’s views on major issues in the next election. You can download a 67 page PDF of their full platform by clicking here. Below are the tax related items of the platform courtesy of Tax Prof.

“Republican Tax Policy: Protecting Hardworking Americans:

The most important distinction between Republicans and the leadership of today’s Democratic Party concerning taxes is not just that we believe you should keep more of what you earn. That’s true, but there is a more fundamental distinction. It concerns the purpose of taxation. We believe government should tax only to raise money for its essential functions.

Today’s Democratic Party views the tax code as a tool for social engineering. They use it to control our behavior, steer our choices, and change the way we live our lives. The Republican Party will put a stop to both social engineering and corporate handouts by simplifying tax policy, eliminating special deals, and putting those saved dollars back into the taxpayers’ pockets.

The Republican Agenda: Using Tax Relief to Grow the Economy

Sound tax policy alone may not ensure economic success, but terrible tax policy does guarantee economic failure. Along with making the 2001 and 2003 tax cuts permanent so American families will not face a large tax hike, Republicans will advance tax policies to support American families, promote savings and innovation, and put us on a path to fundamental tax reform.

Lower Taxes on Families and Individuals

• American families with children are the hardest hit during any economic downturn. Republicans will lower their tax burden by doubling the exemption for dependents.
• New technology should not occasion more taxation. We will permanently ban Internet access taxes and stop all new cell phone taxes.
• For the sake of family farms and small businesses, we will continue our fight against the federal death tax.
• The Alternative Minimum Tax, a stealth levy on the middle-class that unduly targets large families, must be repealed.
• Republicans support tax credits for health care and medical expenses.

Keeping Good Jobs in America

America’s producers can compete successfully in the international arena — as long as they have a level playing field. Today’s tax code is tilted against them, with one of the highest corporate tax rates of all developed countries. That not only hurts American investors, managers, and the U.S. balance of trade; it also sends American jobs overseas. We support a major reduction in the corporate tax rate so that American companies stay competitive with their foreign counterparts and American jobs can remain in this country.

Promoting Savings through the Tax Code

We support a tax code that encourages personal savings. High tax rates discourage thrift by penalizing the return on savings and should be replaced with incentives to save. We support a plan to encourage employers to offer automatic enrollment in tax deferred savings programs. The current limits on tax-free savings accounts should be removed.

Fundamental Tax Reform

Over the long run, the mammoth IRS tax code must be replaced with a system that is simple, transparent, and fair while maximizing economic growth and job creation. As a transition, we support giving all taxpayers the option of filing under current rules or under a two-rate flat tax with generous deductions for families. This gradual approach is the taxpayers’ best hope of overcoming the lobbyist legions that have thwarted past simplification efforts.

As a matter of principle, we oppose retroactive taxation, and we condemn attempts by judges, at any level of government, to seize the power of the purse by ordering higher taxes.

Because of the vital role of religious organizations, charities and fraternal benevolent societies in fostering charity and patriotism, they should not be subject to taxation.

In any fundamental restructuring of federal taxation, to guard against the possibility of hypertaxation of the American people, any value added tax or national sales tax must be tied to simultaneous repeal of the Sixteenth Amendment, which established the federal income tax.

The Democrats Plan to Raise Your Taxes

The last thing Americans need right now is tax hikes. On the federal level, Republicans lowered taxes in 2001 and 2003 in order to encourage economic growth, put more money in the pockets of every taxpayer, and make the system fairer. It worked. If Congress had then controlled its spending, we could have done even more.

Ever since those tax cuts were enacted, the Democratic Party has been clear about its goals: It wants to raise taxes by eliminating those Republican tax reductions. The impact on American families would be disastrous:

• Marginal tax rates would rise. This is in addition to their proposal to target millions of taxpayers with even higher rates.
• The “marriage penalty” would return for two-earner couples.
• The child tax credit would fall to half its current value.
• Small businesses would lose their tax relief.
• The federal death tax would be enormously increased.
• Investment income — the seed money for new jobs — would be eaten away by higher rates for dividend and capital gain income.
  

All that and more would amount to an annual tax hike upwards of $250 billion — almost $700 per taxpayer every year, for a total of $1.1 trillion in additional taxes over the next decade. That is what today’s Democratic Party calls ‘tax fairness.’ We call it an unconscionable assault on the paychecks and pocketbooks of every hard-working American household. Their promises to aim their tax hikes at families with high incomes is a smokescreen; history shows that when Democrats want more money, they raise taxes on everyone.”

Palin’s Speech Filled With Inaccuracies

As many of you may know, Governor Sarah Palin spoke at the Republican National Convention a few days ago. To her credit, Palin delivered an excellent speech and got the whole crowd involved. However, as good as her speech may have been, it was unfortunately filled with inaccuracies. Embedded below is a video of Palin speaking, and below are some of the factual errors identified by the Associated Press.

PALIN:

"I have protected the taxpayers by vetoing wasteful spending ... and championed reform to end the abuses of earmark spending by Congress. I told the Congress 'thanks but no thanks' for that Bridge to Nowhere."

THE FACTS:

As mayor of Wasilla, Palin hired a lobbyist and traveled to Washington annually to support earmarks for the town totaling $27 million. In her two years as governor, Alaska has requested nearly $750 million in special federal spending, by far the largest per-capita request in the nation. While Palin notes she rejected plans to build a $398 million bridge from Ketchikan to an island with 50 residents and an airport, that opposition came only after the plan was ridiculed nationally as a "bridge to nowhere."

PALIN:

"There is much to like and admire about our opponent. But listening to him speak, it's easy to forget that this is a man who has authored two memoirs but not a single major law or reform — not even in the state senate."

THE FACTS:

Compared to McCain and his two decades in the Senate, Obama does have a more meager record. But he has worked with Republicans to pass legislation that expanded efforts to intercept illegal shipments of weapons of mass destruction and to help destroy conventional weapons stockpiles. The legislation became law last year. To demean that accomplishment would be to also demean the work of Republican Sen. Richard Lugar of Indiana, a respected foreign policy voice in the Senate. In Illinois, he was the leader on two big, contentious measures in Illinois: studying racial profiling by police and requiring recordings of interrogations in potential death penalty cases. He also successfully co-sponsored major ethics reform legislation.

PALIN:

"The Democratic nominee for president supports plans to raise income taxes, raise payroll taxes, raise investment income taxes, raise the death tax, raise business taxes, and increase the tax burden on the American people by hundreds of billions of dollars."

THE FACTS:

The Tax Policy Center, a think tank run jointly by the Brookings Institution and the Urban Institute, concluded that Obama's plan would increase after-tax income for middle-income taxpayers by about 5 percent by 2012, or nearly $2,200 annually. McCain's plan, which cuts taxes across all income levels, would raise after tax-income for middle-income taxpayers by 3 percent, the center concluded.

Obama would provide $80 billion in tax breaks, mainly for poor workers and the elderly, including tripling the Earned Income Tax Credit for minimum-wage workers and higher credits for larger families.

He also would raise income taxes, capital gains and dividend taxes on the wealthiest. He would raise payroll taxes on taxpayers with incomes above $250,000, and he would raise corporate taxes. Small businesses that make more than $250,000 a year would see taxes rise.

Taxing Civil Rights Gains

Anthony C. Infanti, from the University of Pittsburgh, recently published a very interesting, and well prepared, article on taxes and civil rights. Below is the abstract of the article, but I highly recommend you download and read the full paper by clicking here.

“In this article, I take a novel approach to the question of what constitutes a ‘tax.’ I argue that the unique burdens placed on same-sex couples by the federal and state ‘defense of marriage’ acts (the DOMAs) constitute a tax on gay and lesbian marriages.

Classifying the DOMAs as a ‘tax’ has important substantive and rhetorical consequences. As a tax, the DOMAs are subject to the same constitutional restrictions as other taxes. This opens them to challenge under the federal constitution's direct tax clauses and the uniformity clauses present in many constitutions. Where such constitutional challenges are unavailable or unavailing, classifying the DOMAs as a tax provides grounds for arguing that this tax on lesbian and gay families should be taken into account when assessing the justness of the distribution of the overall tax burden. On a rhetorical level, labeling the DOMAs a tax on lesbian and gay families effectively counters the notion - implicit in their current moniker - that the DOMAs are a necessary ‘defense’ of marriage against an assault by same-sex couples. Instead, calling the DOMAs a tax may prove to be an effective means for shifting the rhetorical debate over same-sex marriage by making it clear that the DOMAs do nothing more than punish lesbian and gay families because they are different.”

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State Budget in California Sets Record for Tardiness

The legislature in my home state of California still has not reached an agreement on the state’s budget. As of yesterday the budget was 64 days late, which breaks the record for the longest our state has gone without a budget. Below is a snippet from an article on NYTimes.com about the ongoing budget problems, you can read the full text by clicking here.

“As lawmakers and Gov. Arnold Schwarzenegger continue to haggle over how to plug a $15 billion gap in the budget, health care clinics have reduced their staffs, community college students are being denied tuition grants, and art classes at one high school have moved to the lawn because the school district cannot afford new portable classrooms.

‘This is not a good time,’ David A. Sanchez, president of the California Teachers Association, said of the public school system, which has been denied $600 million during the stalemate.

The budget morass is a result in part of factors that have also hurt other states: high foreclosure rates, revenues that have trickled in below expectations and enormous fuel costs. Additional factors are particular to the way California does business, including voter initiatives that tie up various cash streams and the requirement that a tax increase be approved by two-thirds majorities in both legislative houses.”

John McCain Has a Tax Plan To Create Jobs

From the Wall Street Journal:

Sen. John McCain's tax policies are designed to create jobs, increase wages and allow all Americans -- especially those in the hard-pressed middle class -- to keep more of what they earn. His plan achieves these goals in three important ways.

First, he proposes a package of tax incentives that will create jobs and raise earnings by inducing firms to invest more in the U.S. Second, he is strongly committed to blocking any increase in tax rates while doubling the personal exemptions for families with children, which will reduce the tax burden on working Americans. Third, he proposes a new, refundable tax credit that will increase health-care coverage, reduce the cost of health care, and provide more funds for families and individuals to purchase health care.

Here's how the three components of McCain's tax plan will work in practice.

To create jobs, Mr. McCain will reduce the corporate tax rate -- now at 35% the second highest among all industrial countries -- to one that doesn't penalize firms for doing business here. To encourage small businesses to expand, he will fight against higher tax rates on their income.

To increase wages, Mr. McCain will provide incentives to raise productivity, which leads to higher wages. To increase productivity, he will provide incentives for developing and applying new technologies by expanding the tax credit for research and development, and by making that credit permanent.

More savings and investment in businesses also raise productivity. Mr. McCain will stimulate saving by keeping tax rates low on the returns to saving in the form of dividends and capital gains. He will also allow faster depreciation of assets, which encourages investment. And he will strengthen the incentive to save by reducing the maximum estate tax rate, with a substantial, untaxed exemption.

In stark contrast to Sen. Barack Obama, Mr. McCain believes that tax policy should be used to foster the creation of jobs and higher wages through economic growth, rather than to redistribute incomes. The economy is not a zero-sum game in which some people can enjoy higher incomes only if others are made worse off.

Mr. McCain's plan will significantly ease the tax burden on American families with children by doubling the personal exemption to $7,000 from $3,500. This means a larger percentage tax reduction for families with smaller taxable incomes, and specifically helps families in the middle income levels. And a President McCain will enable people to keep more of their earnings by preventing Congress from raising tax rates.

Mr. McCain's overall tax policy will also expand health-insurance coverage, and make health care more efficient. Most taxpayers will also pay less in tax. Here's how it will work. His plan includes a refundable tax credit of $2,500 for single individuals and $5,000 for couples, if they receive a qualifying health-care policy from an employer (one that includes adequate coverage against large medical bills), or buy a qualifying policy on their own. The credit will replace the current tax rule, which excludes employer payments for health insurance from employees' taxable incomes.

Is History Siding With Obama’s Economic Plan?

From NYTimes.com:

“Clearly, there are major differences between the economic policies of Senators Barack Obama and John McCain. Mr. McCain wants more tax cuts for the rich; Mr. Obama wants tax cuts for the poor and middle class. The two men also disagree on health care, energy and many other topics.

Such differences are hardly surprising. Democrats and Republicans have followed different approaches to the economy for as long as there have been Democrats and Republicans. Longer, actually. Remember Hamilton versus Jefferson?

Many Americans know that there are characteristic policy differences between the two parties. But few are aware of two important facts about the post-World War II era, both of which are brilliantly delineated in a new book, “Unequal Democracy,” by Larry M. Bartels, a professor of political science at Princeton. Understanding them might help voters see what could be at stake, economically speaking, in November.

I call the first fact the Great Partisan Growth Divide. Simply put, the United States economy has grown faster, on average, under Democratic presidents than under Republicans.

The stark contrast between the whiz-bang Clinton years and the dreary Bush years is familiar because it is so recent. But while it is extreme, it is not atypical. Data for the whole period from 1948 to 2007, during which Republicans occupied the White House for 34 years and Democrats for 26, show average annual growth of real gross national product of 1.64 percent per capita under Republican presidents versus 2.78 percent under Democrats.

That 1.14-point difference, if maintained for eight years, would yield 9.33 percent more income per person, which is a lot more than almost anyone can expect from a tax cut.

Such a large historical gap in economic performance between the two parties is rather surprising, because presidents have limited leverage over the nation’s economy. Most economists will tell you that Federal Reserve policy and oil prices, to name just two influences, are far more powerful than fiscal policy. Furthermore, as those mutual fund prospectuses constantly warn us, past results are no guarantee of future performance. But statistical regularities, like facts, are stubborn things. You bet against them at your peril.

The second big historical fact, which might be called the Great Partisan Inequality Divide, is the focus of Professor Bartels’s work.”

September Tax Talk Today Highlights EITC Due Diligence Rules

According to their newest press release, the IRS’ next Tax Talk Today Web cast will be next Tuesday (September 9, 2008) at 2 p.m. The topic of the next web case will be EITC Due Diligence - It’s Your Responsibility.

“Practitioners who prepare Earned Income Tax Credit (EITC) claims must meet four due diligence requirements. For example, they must ask the required questions on Form 8867, Paid Preparer's Earned Income Credit Checklist, and probe further when information seems incorrect, inconsistent or incomplete.

Failure to meet the due diligence requirements can result in a $100 penalty for each failure.

The broadcast will be a good opportunity for return preparers to review the requirements and get the latest information from the IRS executive and technical staff responsible for this $43 billion program.

Moderated by Les Witmer, panelists for the September program are: Debra S. Holland, EITC program director; Sue Gaston, director of industry operations, H&R Block; Sherrill L. Gregory, an Orange County, Calif., tax practitioner; and Bridget E. Tombul, IRS counsel.

Tax Talk Today is a Web cast aimed at educating tax and payroll professionals on the most current and complex tax issues. Tax professionals are encouraged to watch and submit questions.

To access the Web cast at no charge, viewers can register online. Tax professionals in need of continuing education credits are eligible to receive one CPE credit by viewing the September 9 Web cast.”

Sen. Joe Biden: a Deeper Look at his Tax Views

With Election Day only a few months away, both Sen. Barack Obama and Sen. John McCain have announced their running mates. Although everyone in the media is talking about Sen. Joe Biden and Gov. Sarah Palin, no one is really talking about their tax or economic views. With a looming recession, and gas prices expected to spike because of Hurricane Gustav, I decided to take a deeper look into Senator Joe Biden’s tax views.

Ending the War

One of Biden’s most progressive tax views is his adamancy about ending the war. Biden feels the sooner we end the war, the sooner we can start saving money again and reducing our national debt. Currently, the war on Iraq is costing around $100 billion a year, and Biden wants use that money to invest in our own country.

Bush Tax Cuts

The Bush tax cuts have been a large subject of debate this election season. Biden opposes the tax cuts and has voted against them recently and voted against similar tax cuts in the past when Bush Sr. was president. Although the argument has been made that the “trickle down” effect will make sure the tax cuts benefit us all, Biden claims that this tactic has not worked. “Imagine what we could do if we had a president who had the nerve and the wisdom to understand that rich folks are just as patriotic as poor folks--you just have to ask them,” claimed Biden. “I spoke to a group of millionaires about taking away their tax cut, and when I explained how I'd use it, they gave me a standing ovation.”

Health Care

Joe Biden is known for his fight for an ethical and easy health care system for America. Working closely with Social Security as well as Medicare, he has been a big part of numerous changes that have already been made to health care in this country. If elected as Vice President, Biden has claimed that he would like to work alongside Obama to strengthen prescription drug programs and make them affordable and available to everyone.

Biden recognizes that Medicare has many flaws and that it requires improvement. He would like to open programs to promote wellness and disease prevention, waive co-payments, and advance technology within the medical industry. He hopes to fund these new programs by repealing the Bush tax cuts for the top 1% and withdrawing troops from Iraq. However, there are noticeable flaws in Biden's health plans such as his neglect to recognize youth needs. Most of his plans emphasize senior health, which is important but should not be the only part of his plan.

Gas Prices

Taking on the OPEC monopoly is one of the riskier moves Biden wants to make. Some critics think this will not help but hurt the problem, as OPEC is not the only cause of high gas prices. Biden’s other energy plans are to invest in new alternative energies will be pricey at first, but have the potential to save billions in the long-run.

Education and Taxes

Biden has worked on numerous bills designer to make education more affordable, and introduced the college ACCESS legislation that provides a refundable tax credit for struggling students to help pay for tuition. The legislation also expanded grants for low-income families. To pay for the legislation Biden voted yes on shifting $11 billion from corporate tax loopholes to education.

Death Tax Exemption

While in the Senate Biden voted against raising the Death Tax Exemption from $1 million to $5 million. He felt the tax did not apply to most Americans, and only gave more money to wealthy heirs and heiresses such as the notorious Paris Hilton.

AMT Repeal

Senator Biden also voted against repealing the Alternative Minimum Tax (AMT). As we all know, the tax was originally meant to only target only the very wealthy, but is now being levied on thousands of middle class America due to inflation. However, Biden noticed that repealing it entirely would surely put us into deficit, decrease government revenue, and unbalance the budget even more. However, Biden has claimed that he would favor adjusting the ATM for inflation and the standard of living for 2008.

Balanced Budget

Sen. Biden is adamant about his fight for a balanced budget. He voted for the balanced budget amendment in 1997, and voted against making tax cuts a priority over national debt reduction in 2000. He also stated that interest rates should be lowered across the board, and that tax breaks on investment dividends should be repealed.

Hedge Funds

Biden has never been discrete about his dislike of hedge funds, and believes they are a main cause of the credit crunch in the United States. He also disliked equity funds and cites them as another cause of the country’s current financial crisis.

Foreign Aid

When the Georgia-Russia dispute first broke out, Biden immediately called for $1 billion in emergency aid. After meeting personally with Georgia’s president, he was adamant and convinced of his decision. In February of 2008, Biden also pushed for a massive increase of non-military financial aid to Pakistan.

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IRS to Suspend Collection of Options Tax

From BusinessWeek.com:

“The Internal Revenue Service has agreed to suspend collection of alternative minimum tax on incentive stock options, Sen. Chuck Grassley said Friday.

The suspension of collection efforts will give Congress time to ease the burden on affected taxpayers, according to Grassley, R-Iowa, ranking Republican on the Senate Finance Committee and former committee chairman.

Alternative minimum tax is an alternate tax calculation system targeting high-income Americans that ensnares more people each year because it is not indexed for inflation. Incentive stock options are a type of employee stock option with a tax benefit, when exercised, of not having to pay ordinary income tax. Instead, the options are taxed at a capital gains rate. However, they involve more risk for the option holders because they must keep the options longer in order to qualify for the lower capital gains rate.

The application of alternative minimum tax to income from incentive stock options is widely regarded as unfair because it left thousands of taxpayers with huge tax bills on income they never actually realized. Most of the taxpayers had stock options on shares of the technology companies at which they were employed. They exercised the options just before the technology bubble burst in 2001 and 2002, causing the price of tech shares to plummet. But the IRS calculates the income based on the value of the shares at the time they were exercised rather than at the time they were sold. That left many taxpayers with huge tax bills without stock profits they could use to pay the IRS.

Among the victims of the tax were many employees of telecommunications companies operating in Cedar Rapids, such as McLeodUSA, now part of PAETEC, and MCI, now Verizon Business.

Ron Speltz of Ely, a McLeodUSA executive who now works at PAETEC, and his wife, June, crusaded nationally to correct the tax code, working with the Coalition for Tax Fairness and other groups. Their efforts were rewarded by a legislative fix in the Tax Relief and Health Care Act of 2006 that provided gradual refunds of previous payments. But the legislative fix did not stop the IRS from trying to collect the original tax, penalties and interest.

"These families are facing the garnishments of wages, foreclosures of homes, seizures of retirement accounts, and all the other tools available to the IRS to settle uncollected tax debts," said a letter to IRS Commissioner Douglas Shulman cosigned by Grassley and 26 other members of Congress.

In the letter, Grassley wrote "there is now a very broad bipartisan consensus to abate all interest and penalties attributable to ISO AMT liabilities and permit taxpayers to apply the full amount of their future refundable credits toward the entirety of their ISO AMT liabilities." He wrote that there is strong commitment in both houses of Congress to enact legislation to accomplish those goals this year.”

10 Things to Know About Sarah Palin and Energy

As many of you have probably already heard, Presidential Candidate Sen. John McCain made headlines around the world when he announced that his Vice Presidential running mate would be Gov. Sarah Palin. Although there still has not been much written about her tax views, I found this interesting article on 10 Things to Know About Sarah Palin and Energy. Below are a few items that I found most interesting from the list, but you can read the whole article by clicking here.

Standing Up to Big Oil

Serving as the ethics commissioner of Alaska’s Oil & Gas Commission, Palin built her reputation on cracking down on big oil and her fellow Republicans for corruption. As governor, she also successfully led a bipartisan tax levy on big oil’s profits.

Creation of Alaska’s Climate Change Sub-Cabinet

Palin does recognize that her home state is thawing. Palin created the Climate Change Sub-Cabinet to consolidate the state’s knowledge on climate change and guide the state’s mitigation and adaptation policy. The Cabinet was also charged with exploring the state’s renewable energy potential, especially “geothermal, wind, hydroelectric, and tidal resources.”

Drill, Drill, Drill

As governor of an oil-rich state, it is no surprise Palin is in favor of domestic oil production. While McCain has reversed his position on drilling on the outer continental shelf (OCS), he has yet to call for drilling in the Arctic National Wildlife Refuge, which Palin refers to as “that little 2,000 acre plot.” But Palin thinks he’ll change his mind: “[McCain] came around on OCS…I anticipate the same with ANWR.”

Energy Rebate Check

Palin issued a press release praising Obama’s proposal for $1,000 energy rebate checks. She had proposed a $100-a-month energy debit card, but dropped that plan in favor of a $1,200 one-time special payment to eligible Alaskans, which she signed into law just this week.

Gas Tax Holiday

Alaska has some of the highest gasoline prices in the country and Palin signed into law a gas tax holiday, suspending the motor fuel tax on gasoline, marine fuel, and aviation fuel for one year. McCain and Clinton both were in favor of gas tax holiday while Obama claimed such a move was merely a “gimmick.”

How Much of a Tax Cut/Raise am I Getting?

As you may know, both Presidential candidates are proposing tax cuts that, in one way or another, result in cuts for most American families. Below, please find a chart that shows how much each average income bracket would be affected by both presidents tax proposals.

As you can see, for the approximately 147,000 families that make up the top 0.1 percent of the income scale, the difference between the two plans is stark. While McCain offers a $269,364 tax cut, Obama would raise their taxes, on average, by $701,885 – a difference of nearly $1 million.

Thanks, Washington Post.

Calculate Your “Obama Tax Cut”

Using a simple formula you can easily calculate what kind of tax cut, if any, you would get under Obama by going to ObamaTaxCut.com. You can learn details of how the site calculates your tax cut by clicking here, but it boils down to basic math.