Despite Charlie Rangel's Tax Problems, He Might Help Republicans Keep Bush's Tax Cuts

From US News.com:

It's looking like House Ways and Means Chairman Charles Rangel is going to face an ethics committee investigation for, among other things, failing to report income on rental properties and supporting a tax law change favoring a big donor to an institute named after Rangel. I'm sorry to see this. I like Charlie Rangel, I think he's a decent person and a charming pol, and I'm inclined to cut him some slack because he served in the Korean War and survived some of the most horrific fighting that American men in arms have ever faced. I think it would be sad to see him lose the chairmanship of Ways and Means for sins which are more venial than mortal, just as I thought it was sad that his predecessor as chairman, Dan Rostenkowski, lost not only his chairmanship but also his seat in Congress and, for a while, his freedom for some small bits of chicanery that were dwarfed by his public policy achievements, notably in the enactment of the tax reform bill of 1986.

The more so, because I think that the tax bill Rangel brought forward in the outgoing Congress showed he was open to major changes in tax law along the lines of the 1986 bill—a lowering of rates combined with a reduction in tax preferences that have accumulated, like barnacles on the ship of state, over the intervening two decades. Rangel's bill would have cut the corporate tax rate, which is far higher than in almost any other advanced country, at least a little bit, and was intended to get rid of the Alternative Minimum Tax which, because it's not indexed to inflation, threatens to cover hugely larger percentages of taxpayers every year. Taxpayers, as I have noted several times, who are concentrated in high-nominal-income, high-state-and-local-tax, heavily Democratic states like Massachusetts, Connecticut, New York, New Jersey, Maryland, and California.

The obvious deal goes something like this. Democrats get repeal of the AMT and perhaps some increase in refundable tax credits (the latter being part of Barack Obama's tax platform). Republicans get a retention of the Bush tax cut rates on higher earners and lower corporate rates. All this is "paid for" by eliminating tax preferences. It is something that is feasible only if done on a bipartisan basis, which is possible here because Democrats do not look likely to have the 60 votes to cut off a filibuster on a major tax bill in the Senate and because there is an ongoing practice of bipartisan deals between Senate Finance Chairman Max Baucus and ranking minority member Charles Grassley. Rangel's bill is an indication that he is interested in acting on a bipartisan basis in the House and would not (as his predecessor Bill Thomas did on the 2003 Medicare prescription drug bill) exclude the minority party (in that case Charlie Rangel himself) from participation in drawing up the legislation.

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.

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.”

Should the Bush Tax Cuts be Extended?

Last week one of the blogs on my blogroll, A Taxing Matter, posted an entry analyzing whether the Bush tax cuts should be extended or not. Below are some of the author’s findings.

“The federal government has borrowed $1.6 trillion from 2001-2008 to pay for the tax cuts.

Consequence: all Americans will have to pay for this tax-cut-related debt, reducing their after-tax income.

One third of the benefits of the cuts go to the top 1 percent of households; one fifth of the benefits of the revenue reductions went to the top 0.3% of households that earn more than $1 million per year. Consequence: inequality in America is increasing, with the top 1% grabbing more of the anemic growth AND the benefits of the Bush revenue reductions; meanwhile, the bottom is stagnating

Investment and economic growth have not equaled other growth periods. Consequence: with anemic growth and other policies that favor the wealthy, the vast majority have been hurt, not helped, by the tax cuts

Making the cuts permanent would cost $3.4 trillion just over the next decade, including borrowing costs – three times what is needed to close the Social Security funding gap!”

Senate Approved Foreclosure Relief Bill

er the weekend the U.S. Senate approved a new foreclosure relief bill in an overwhelming 72 to 13 vote. The huge margin goes to show that Congress is very well aware that the nation needs some type of foreclosure relief to help the economy. Earlier in the week the House of Representatives approved the bill in a 272 to 152 vote, and the President is expected to sign it into law in the next few weeks.

The bill know as, the American Housing Rescue and Foreclosure Prevention Act, contains a number of provision to improve the housing crisis including a guarantee of up to $300 billion in lower-cost mortgages.

"Today, Congress did more than send a bill to the president -- we sent a message to American families that help is on the way," claimed Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.).

"In addition to providing urgently needed relief to homeowners on the brink of losing their homes, this legislation will address our broader economic problems by helping to reform our housing sector and provide reassurances to our financial markets," Dodd continued.

Bush plans to sign the legislation despite reservations about "some provisions, including nearly $4 billion to help lenders, not the homeowners this legislation is intended to serve," noted Tony Fratto, deputy press secretary.

"It's been nearly six years since we called for a strong, independent regulator for Fannie Mae and Freddie Mac and nearly a year since the president called on Congress to quickly pass legislation to modernize the Federal Housing Administration to keep more deserving Americans in their homes, especially low-income Americans," Fratto said.

For more information on the bill check out this page on LA Times.com.

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8 Signs the U.S. Economy is NOT Headed Towards a Recession

As I discussed in a blog entry last week, 8 Signs the U.S. Economy is Headed Towards a Recession, dozens of leading economists adamantly claim that we are either headed towards a full fledged recession, or that we are already into the first few months of a recession. Although we can all admit to feeling the pains of a poor economy, saying that we are definitely headed for a recession may be a bit drastic.

As with most economic and financial issues, there is always room for debate. A looming recession is no exception. Dozens of highly educated, well respected, economists still proclaim that we are not headed towards a recession. The majority of their argument is that “yes” the economy is worse than it was a few years ago, but we are still a long way away from a recession.

"My view is that taking all the new data into account, that there is really no material change in our expectations for the U.S. economy since I last reported to Congress a couple weeks ago," claims Federal Reserve Chairman, Ben Bernanke. "If the housing sector begins to stabilize and if some of the inventory corrections that are still going on in manufacturing begin to be completed, there's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year."

So are we headed towards a recession or not? The truth is that no one can give a 100% sure answer. The economy can be sporadic. Moreover, just because we seeing some signs of a looming recession does not mean that the economy will not bounce back in the next few months. The only way to really know for sure, is just to wait and see. In the mean time, enjoy the following list of 8 signs that the U.S. economy is not headed towards a recession.

1. Overall Economic Growth

Although it is more of a technicality, the economy must exhibit negative growth 2 quarters in a row to validate a full-fledged recession. Yet, between January and March of 2008 the economy actually grew at a rate of 0.9%, and the overall growth was at 1.9% for 2007. As such, the economy is not in an actual recession. In addition, no one can claim that we are until there is data to back up the statement.

2. Consumers are Still Spending

Although the numbers have dropped, there are still plenty of people spending their hard earned cash on things they don’t necessarily need. Just look at the millions of people who lined up to buy the new iPhone. Box office sales are also doing well, with major summer hits drawing in crowds, such as “Dark Knight,” the new Batman movie, which is already performing above expectations. Are people just forgetting to be frugal, or do we have a better grip on our cash than we thought?

3. Election Year

The looming election may seem far off, but a change in the White House may make all the difference. Backed by his former competitor Sen. Hillary Clinton, Sen. Barack Obama plans on changing tax codes to better benefit the US economy. Obama has publicly blamed President Bush and contender Sen. John McCain for misleading the public on a looming recession. He argues that he is "the only candidate in this race to propose a genuine middle-class tax cut," and claims the nation needs as president a leader who "doesn't defend lobbyists as part of the system, but sees them as part of the problem."

4. Media Awareness

Possibly due to the popular election coverage this year, more Americans seem to be keeping up with the news. Practically every major news station has covered the possibility of a recession, and viewers have taken notice. An aware public makes a drastic difference in economic affairs, and many will be watching to see what they can do to prevent our economy from failing.

5. Confusing Unemployment Figures

Unemployment rates are misleading. The percentage comes from individuals collecting unemployment from the government for the 2 months they’re allowed. These numbers are unreliable, because there is no real way to tell just how many people have or do not have jobs, and certain factors just are not being added in. Economists also argue that unemployment may be rising, but that more people are seeking out alternative forms of income, such as self-employment or independent contracting. In addition, any studies conducted at this point of the year have to be discounted to account for the influx of high school and collegiate aged individuals seeking work for the summer.

6. Decrease in Abroad Travel = Increase in U.S. Travel

Due to limited spending money, more people are spending their summers and vacations in the States. This is beneficial because the cash they would be spending in Europe is now being fed directly into our economy instead. As more and more families take road trips this summer, the money generated from tourism is likely to help the economy.

7. Isolated Housing Crash

The housing and mortgage crash of recent years is widely considered one of the leading causes of a poor performing U.S. economy. Home sales are continuing to drop, and more and more Americans are facing foreclosure. However, many economists claim that the housing crash is somewhat isolated. Moreover, other sectors of the economy are actually picking up extra slack. Additionally, experts also predict that the housing market will cool off in the next few months, and will help improve the economy overall.

8. Reasonable Inflation Rates

Although there are many signs that point towards a recession, the inflation rate of the U.S. dollar does not. When you look at our “core inflation” – which excludes food and energy prices – it is actually under 2%. Some economists argue that if we were headed to a recession, this number would be much, much higher.

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AARP Upset Over Stimulus Package

According to Yahoo News, the AARP is speaking out against Congress’ plans for an economic stimulus package. The plan could give individual taxpayers as much as $600 in rebates, and an additional $300 per qualifying child. The rebates would phase out gradually for individuals whose adjusted gross income exceeds $75,000 and for couples with incomes above $150,000.

However, the package would exclude any one who earns less than $3,000 from earned income. Therefore about 20 million senior citizens living off Social Security would not be eligible. "Less than half of all Americans 65 and older would get it," claims AARP spokesman Jim Dau.

President Bush would like to push the plan through ASAP. "I strongly believe it would be a mistake to delay or derail this bill," Bush said. "I understand the desire to add provisions from both the right and the left," he noted. President Bush added that doing so would be in error and would delay the purchasing power boost the stimulus package is designed to create to confront a feared impending recession.

Bush Says No to Children's Health Insurance

A few days ago President Bush vetoed a bill that would have expanded a children’s heath insurance program by over $35 million over the next five years. Speaking in Pennsylvania, Bush claimed he vetoed the bill because he felt it was a step towards federalizing medicine and inappropriately expanding the program to help more children. Senate and House Democrats alike were quick to condemn the veto, which had received bipartisan support. House Majority Leader Nanci Pelosi has already announced plans to gain enough votes to overturn the veto. For more coverage on this issue, check out CNN.com.

Bush Opposes Raising Gas Tax for Bridge Repairs

A week after the deadly bridge collapse in Minneapolis, President Bush dismissed the idea of raising the federal gasoline tax to repair the structurally deficient bridges across the nation. According to the American Society of Civil Engineers more than 70,000 of the nation's bridges are rated structurally deficient, including the bridge that collapsed over the Mississippi River last week. The group claims that repairing all the bridges would cost at least $9.4 billion a year for 20 years. The Democratic chairman of the House Transportation Committee proposed a 5-cent increase in the federal gasoline tax to establish a new trust fund for repairing or replacing structurally deficient highway bridges. However, President Bush has sworn to veto any tax increases. To read more check out this article in the New York Times.

New Tax Law Changes

On May 25th 2007, President Bush signed into law H.R. 2206 – the "U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007." The bill included a $120 billion emergency war supplemental funding bill for the current wars in Iraq and Afghanistan as well as numerous tax related law changes. Among the numerous provisions contained in H.R. 2206 are the "Fair Minimum Wage Act of 2007," and the "Small Business and Work Opportunity Tax Act of 2007" – a $4.84 billion small business tax relief package. Below are brief summaries of the important tax law changes.

IRS Liability Notices
The new law increases the time from 18 to 36 months in which the IRS has to notify individuals about a tax liability before interest and penalties are enforced. Therefore the IRS must cease charging interest and filing related penalties on a taxpayer’s liability if the IRS fails to notify the taxpayer about a liability within 36 months after the taxpayer filed the return.

Tax Return Preparer Penalties
This provision broadens and toughens tax return preparer penalties for returns prepared next year. It expands the scope of the penalty to include all types of tax returns and increases the penalty for irresponsible tax return preparation to a $1,000.00 fine or 50% of the income derived by the tax preparer for preparing the claim.

Levies to Collect Federal Employment Tax
The act provides that the rules requiring notice and a hearing opportunity before the IRS can issue a levy do not apply to disqualified employment tax levies, which are any levies to collect employment taxes for any period if the taxpayer requested a hearing for unpaid employment taxes.

Erroneous Refund Claims
The new law adopts a new penalty for filling erroneous refund claims and applies to all claims filed for the 2007 tax year. The act establishes a punishment for taxpayers claiming a refund for an excessive amount, and establishes a penalty of 20% of the excessive amount.

Bad Checks and Money Orders
The provision changes the penalty for bad checks and money orders and goes into effect for all checks and money orders received after May 25, 2007. The new penalty for passing bad checks or money orders less then $1,250.00 is a $25.00 fee or the amount of the check or money order whichever is less.

"Kiddie Tax" Changes
The new law expands the impact of the "kiddie tax" by raising the age for which it applies from under 18 to under 24 if a student.

Spouse Partnership May Elect Out of Partnership
The new rule allows unincorporated businesses owned jointly by a married couple to file their tax returns individually and not be treated as a partnership for tax purposes. All items in the taxpayer’s returns are divided between the spouses according to their respective interests in the venture, and each spouse’s share of income or loss from the business is taken into account in determining the spouse’s net earnings.

FICA Tip Credit
The new law modified the FICA Tip Credit so that the credit is determined based on a minimum wages of $5.15 per hour, allowing employers to receive the full tip credit despite of the Federal minimum wage increase. The provision also states that as the minimum wage increases, the amount of the credit will not be reduced.

Corporate Estimated Tax
The act increases the corporate estimated tax payment due in July, August, and September 2012 from 106.25% to 114.25% of the payment otherwise due.

Work Opportunity Credit
The passage of the new bill extends the credit by forty-four months. Now the credit is valid through August 31, 2011 for most targeted groups.

Disabled Veterans
There is an enhancement in the Work Opportunity Credit for employing certain disabled veterans who begin working for an employer after the passage of the bill.

WOTC and Tip Credit Offset by AMT
This new provision allows for use of the Work Opportunity Credit and the FICA Tip Credit to offset the Alternative Minimum Tax.

Section 179 Expensing
In addition to extending it through 2010, the provision increases the minimum amount a taxpayer can deduct annually as a Section 179 expense from $100,000.00 to $125,000.00. It also increases the $400,000.00 phase-out level to $500,000.00.

For more information on the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007 you can read the Senate Finance Committee’s summary, the House of Representatives’ technical explanation, or the Senate’s legislative text.

IRS Looking To Collect Personal User Data From Internet Firms

The Internal Revenue Service (IRS) is backing the U.S. Treasury Department’s efforts to include a proposal in the 2008 budget requiring many Internet businesses to collect personal data from their users. The proposal is part of an effort to close the ever-present gap between what Americans should pay in income taxes and what they actually do. This amounts to an estimated $300 billion per year. However, collecting the targeted data is going to be a difficult task for the site-operators and small business owners. Furthermore, the process will create security issues for millions of users in a time when online identity theft is rampant.

In 2001, the "tax gap" – difference between what the IRS should collect in taxes and what it actually does collect – was over $345 billion. Underreporting on individual income tax returns accounted for $197 billion of the gap. Underreporting on business tax returns accounted for $88 billion. This left the IRS collecting only about 85% of owed taxes. Since taking over the White House, the Bush Administration has seen this gap as an opportunity to increase the federal government’s revenue without raising taxes.

At the behest of the Bush Administration, the IRS has implemented a variety of new enforcement and collections measures to reduce the gap over the last five years. The efforts have paid-off: the IRS increased its enforcement revenues by nearly 44 percent from $33.8 billion in 2001 to $43.1 billion in 2004 to $48.7 billion in 2006. "Clearly, more work needs to be done by the IRS to improve service and enforcement," states IRS Commissioner Mark W. Everson. "But we are clearly making progress, and these numbers underscore that point."

Now, more enforcement and collection measures are on the table. As part of its ongoing campaign to close the tax gap, the Bush administration has allocated over $400 million of next year’s budget for these new measures. A main goal of the proposed measures is to increase the taxes paid by many sole-proprietors and small businesses. Currently, sole proprietors and small businesses report most of their income to the IRS through an "honor" system. The IRS claims some of these small businesses report only half of their total income, leaving millions of dollars in unpaid taxes. One specific target of the proposal is to collect taxes from income generated through online auction sites such as eBay and Ubid.com. Recent studies show over 700,000 Americans making their sole income from auction sites like eBay, and without any formal method to monitor these sales the government is assuming most of this income is being underreported.

Specifically, the new proposal would force auction sites acting as online brokers to file income statements for all customers using their sites to conduct 100 or more transactions or generating more than $5,000.00 per year in income. In order to comply, the sites would need to collect personal data from their users including name, address, and taxpayer identification or social security numbers (SSNs). Essentially, the IRS is forcing the collection of the data under the threat of liability and further legal consequence.

Typically, people generating income form auction sites are small businesses and self-employed individuals who do not have taxpayer identification numbers. Therefore, they will have to provide the sites with their SSNs, which will be stored and maintained by the individual sites in massive data banks of personal information. Although the IRS claims the sites will only need to collect data from high volume users, it is very likely that the sites will have to collect data from all of their users.

Having the proposed amount of personal data exchanged over the Internet could prove to be very problematic. Illegal phishing scams already target sites collecting personal data. Phishing is already problematic for eBay, where scammers create fake re-direct sites that retrieve users' personal data.

With so many issues of identity theft online, many people are going to be reluctant to provide their SSNs to sites like eBay. According to the Center for Democracy and Technology, "forcing businesses to collect SSNs could have a chilling effect on legitimate e-commerce if consumers balk at providing their SSNs for simple transactions -- something most people are not accustomed to doing."

In addition, the government is putting the entire financial burden on the Internet businesses. Collecting and safely maintaining this confidential data could cost millions of dollars. These large costs might not be a problem for huge companies like eBay, but it might be too much to bear for small businesses. More than likely, they will have to take on an additional and sizeable expense to store and secure the data.

Scott Weber, owner of GunrunnerAuctions.com, a site that auctions about 400 guns per month, said the additional paperwork would be a huge burden and additional cost. "I'm pretty much a one-horse operation here," Weber said. "I do everything myself. I would have to hire a whole bunch of people. I would have to hire someone full-time to do this. You'd need to track people all over the country, and you'd have to get their SSNs."

Some sites are already beginning to make changes with anticipation of this new proposal. Just a few days after the IRS’s announcement, Yahoo! Auctions announced they would close their auction sites in the United States and Canada effective June 16, 2007. Though Yahoo! Auctions only account for under 1% of total online auctions and they recently established an alliance with eBay, many are still wondering if Yahoo’s decision had anything to do with the IRS’s recent announcement.

Currently no lawmaker has come out for or against the new proposal. However, it is likely to go unnoticed as part of the President’s 2008 budget plans. As part of a representative democracy, it is the job of the citizen to notify their member of Congress when they disagree with an important issue. If you want your voice heard, you can write your representative through House.gov.

For more information on this topic, please see the following suggested readings:

News.com -Selling stuff online? Here comes the IRS
Center for Democracy and Technology
Yahoo! US Auction Sites Are Retiring
Written Statement of Nina E. Olson