Taxes to Watch Out for in 2010

During 2009, the country’s economy has gotten worse, unemployment rates increased, and the Senate recently increased the Federal government’s debt ceiling. With two ongoing wars and a new health care reform plan, combined with record low tax revenues, Congress is going to need to find ways to increase Federal revenue. Senators and House of Representative members are on a Winter break for now, but when they return on January 20, 2010 they will decide the fate of a slew of tax law changes. To help my readers stay ahead of the game, I have put together this article on taxes to watch out for in the New Year.

Value Added Taxes

I have warned about the possibility of a value added tax (VAT) in several blog entries throughout the year, and every day it becomes a more likely possibility. The benefit to the government is that a VAT could generate billions of dollars in revenue. It is meant to add taxes to manufacturers but consumers always end up paying higher prices as a result. Proponents claim that increased tax credits for low-income families would help with the added VAT burden, but in today’s economy consumers are not spending like they used to. If a VAT was implemented it would almost certainly reduce consumer spending.

Fair Tax

You may remember hearing the phrase “fair tax” during the recent presidential election. Republican candidate Mike Huckabee was a large supporter of this tax, which would pretty much eliminate the current tax system, and possibly even the IRS. It may sound nice, but to make up for the lost revenue the Federal government would need to impose a 23 to 30% tax on the purchase of all goods. Although supporters say that the price of products would decline without payroll or corporate taxes, there is no way to know what the “break even” point would be. This new type of tax is unlikely to come to fruition in 2010 as there are no bills currently being debated in Congress. However, it may gain traction as a campaign talking point during the run-up to Congressional elections in late 2010.

Estate Taxes

As I explained earlier last week, Congress failed to take any action on the estate tax. This means that in 2010 there will be no estate tax levied whatsoever, unless Congress passes a retroactive bill. However, beginning in 2011 the estate tax will return and target even more taxpayers. If current laws are not changed, in 2011 the estate tax will return to a historic rate of 55%, and it will get levied on all estates valued at $1 million, which would represent the highest estate tax since the early 1990’s. Unfortunately for anyone inheriting a sizeable estate in 2010, Democratic leaders in Congress have vowed to deal with the estate tax as soon as they return to session, which could result in a permanent 45% estate tax rate.

War Taxes

It is widely known that military spending, especially during a war, adds up quickly. Over the past eight years, the costs of the military efforts in Afghanistan and Iraq have cost an estimated $1 trillion. As such, David Obey, (D – WI) – chair of the House Appropriations Committee – has proposed a war surtax that would range from an additional 1 to 5% income tax on the highest-earning households. Not surprisingly, there is a lot of opposition to this tax, and many experts claim that unused TARP funds could be used to pay for the military costs. On the other hand, some insist that a war tax would create a nationwide sense of urgency to end the wars.

Taxes on Stocks

One of the more popular revenue-raising ideas on Capitol Hill is to tax the sale of financial instruments like stocks, options and derivatives. The main proponents of the bill are two Democratic House members – Ed Perlmutter and Peter DeFazio – who have titled their bill the “Let Wall Street Pay for the Restoration of Main Street Act of 2009.” It would be a 0.25% tax on purchases of securities, and could potentially raise $150 billion per year. Supporters claim that the bill would deter investors from making risky moves, while critics are concerned that such a tax could lead to a market crash and ruin the country’s economy.

IRA's in 2010

Unfortunately it looks like life is going to change drastically for anyone with an IRA in 2010. Starting in the New Year, income limitations will disappear for individuals hoping to convert to a traditional IRA or tax deferred retirement plan into a Roth IRA, which lets taxpayers take untaxed withdrawals. The previous limit had only allowed taxpayers making $100,000 or less to take advantage of a Roth IRA conversion.

Patient Protection and Affordable Care Act

Like my blog entry last week on the Senate’s health care bill explained, any type of health care reform is going to lead to increased taxes. In the current legislation there are taxes on tanning salons, “Cadillac” health care plans, fees on businesses that do not provide coverage and a Medicare tax increase for individuals making over $200,000. As the House and Senate work to come up with a bill that can pass through both houses, all taxpayers should pay close attention to the tax increases that will undoubtedly accompany the legislation.

Employee Health Benefits

Although the health care reform bills do not contain any taxes on employer-provided health care, the House’s legislation does include a section that would make employers show those health care benefits on employees W-2s forms. There has been a lot of discussion in Washington about taxing employer provided health benefits, and it is definitely an issue everyone should watch out for.

Marijuana Tax

Over the past year there has been more and more interest in taxing the sale of marijuana. Earlier in the year Oakland, California became the first U.S city to institute a tax on marijuana sales, with 80% of the voters approving. Professor Jeffrey A. Miron of Harvard University estimates that the legalization and taxation of marijuana in the U.S could easily raise $2.4 billion a year, taking a large chunk out of the deficit. However, many suggest that the additional costs associated with legalizing cannabis would outweigh the potential for revenue. For example, the U.S. collects nearly $8 billion per year in alcohol taxes, but the overall cost of alcohol-related problems to the government is over $70 billion. This new type of “sin tax,” is highly controversial, and also probably unlikely to be an issue Congress faces in 2010. However, it – like the Fair Tax – may come up during the run-up to Congressional elections in late 2010.

Taxes: Have You Paid Your Fair Share?

From CBS News.com:

I guess we've all paid - or avoided paying - our taxes by now and it feels good to have it over with. It didn't hurt much, did it? I made more money last year than I made the year before, but of course my taxes were higher too - the most I ever paid.

To tell you the truth, I have a feeling I paid more than my share of taxes. I guess everyone feels that way.

I have an idea how the IRS could get more money out of the tax cheaters and it wouldn't cost the government a nickel: they would make tax records open to all of us. The figures would be available to anyone who wanted to look them up. This would be a good way to get everyone to pay what they owe. I'd be willing to do it if everyone else did it.

Some people wouldn't dream of cheating anywhere else but they don't worry about cheating on their tax returns if they think they could get away with it.

I've always thought that Uncle Sam goes about trying to get us to pay our taxes the wrong way.

The IRS never appeals to us as patriotic Americans. I think what everyone pays should be public information. Americans would be happier to pay their income tax if they thought that everyone was paying what they were supposed to pay.

Maybe people would be proud of what they pay instead of hiding their income.

I don't know why our tax returns are secret, anyway. What we earn isn't usually much of a secret to anyone who knows us or to anyone who wants to find out what we make.

About 45 percent of what the federal government gets comes from individual income taxes.

Forbes magazine did a piece that said that rich people hide more of their income than poor people hide. Well, of course they have more to hide but generally speaking I think Americans are willing to pay their income taxes. They just want to be damn sure they paid their share - not their share and part of someone else's.

Progressive Income Taxation and Socialism

Professor James Edward of Mauled Again has posted his take on the “progressive tax” concept. Below is a quote from the entry, but you can read the full text by clicking here.

Perhaps we interpret Obama's statement differently. I did not read it as revoking the tax cut on the wealthy in order to give cash to the poor and middle class. I read it as revoking the tax cut on the wealthy so that the government did not need to rack up deficits to provide the health care, school lunches, head-start education programs, and other benefits that indeed give opportunity to people who otherwise would be stuck in poverty.

This nation has been doing that for decades. It's socialism, perhaps not as far along the spectrum as Sweden's version, but it's socialism. When the administration refused to raise taxes to finance the war, it ended up cutting benefits to those in need. Obama seeks to fix that problem. That problem is exacerbated by the impact of cutting taxes on the wealthy, who didn't trickle much down to the poor other than short-term smoke and mirrors and longer-term financial distress. The poor and lower middle class will suffer far more from the present and continuing recession (depression, perhaps) than will the wealthy.

What I think underlies these charges of socialism is fear. It's fear, not of millionaires paying another fifty or a hundred thousand dollars in taxes, not of government taking over ownership of all assets, but of change. For quite some time, the economic and tax arrangement have favored the wealthy. They created this arrangement by persuading the middle class and even the poor that life would be better if income taxes were cut, particularly income taxes on capital gains and dividends. Yet when all was said and done and the policies advanced by the tax cutters played out, the nation ended up in what may be the worst economic catastrophe it has faced. While wages barely kept pace with inflation, and in some instances fell, while jobs were outsourced, while the quality of products and services suffered, while health care became less affordable and less available, while resources allocated to education continued to be insufficient, the percentage of wealth owned by the wealthy increased. Because the sales pitch worked in the past, they expected it to work again, but to their surprise, the track record of the don't-tax-but-spend crowd has turned out to be no better than, and in most respects worse than, the track record of the tax-and-spend crowd. With that taking the wind out of their economic policy sails, they turned their focus on a broader question, using terminology designed to spread their fear throughout the electorate.

The answer to Joe the Plumber's question was honest. It might not be something with which people agree, but at least it's not the misleading promise that cutting taxes will make everyone economically secure. And underneath this trumpeting of the "socialism" warning cry is an unarticulated lack of faith in America, a notion that somehow citizens will sit back and do nothing if it attempts to fix the economic mess turn too sharply to what genuinely is socialism rather than returning the country to the path which uses economic policy to promote fairness, affordable health care, improvement in children's education, and the other characteristics of high quality of life that were promised but not delivered by the merchants of tax cuts for high income taxpayers. I don't see the appeal in continuing to do what has been done, when what has been done is what brought us to where we are.

Huckabee’s Tax Plan: The Achilles Heel of his Campaign

On January 3, Iowa voters spoke out and voted for Mike Huckabee, the former Republican Governor from Arkansas. Over the past few week’s Huckabee has garnered a lot of media attention due to his far right religious views and his support for a national sales tax. These views appealed to the people in Iowa as 35% of Republican voters selected him to represent their party in the general elections. Although the Iowa voters supported Huckabee, his “fair tax” views are likely to become the Achilles heel of his campaign, and could cost him the election.

The fair tax policy is an idea that was actually thought-up in the mid-1990s by the Texas based Americans for Fair Taxation. The basic premise is simple. Instead of charging a federal income tax all of the federal revenue would be generated from a 23% flat tax on purchases. According to the plan, states would collect the funds and forward them to the federal government. Huckabee claims this system ensures a fair, progressive, sustainable tax system that encourages economic growth. He claims it allows working individuals to take home 100% of their paychecks and it would encourage saving and responsible spending.

This plan may look good at a glance, but upon further inspection it’s full of holes. Tax experts across the country, both Republican and Democratic, agree this plan will not work. Bruce Bartlett, a conservative economist and former official from the Department of Treasury even goes as far as saying, “anyone who supports it {the fair tax} should not be taken seriously.”

Supporters of the fair tax claim a 23% sales tax would need to be levied on all purchases Americans make. But how they came up with this number is a mystery. Independent research continues to show that the tax would need to be far higher to support the government at current levels. One bipartisan group, the Advisory Panel on Tax Reform, conducted a study that showed the tax rate would need to be at least 34%. Additional studies put the tax rate as high as 50%.

Huckabee’s plan also predicts that American spending habits will stay the same as they are now. However, with a massively higher sales tax many predict a strong black market would surge, thus providing a way for many to avoid the tax on larger purchases. Not paying the sales tax would be as easy as driving across the border to make a purchase in Canada or Mexico.

One major selling point of the fair tax is that people can keep 100% of their wages. People seem to respond well to this idea of not having to hand over a portion of their wages. This logic has problems. What about retirees who have paid an income tax their entire lives? Would they not be – in effect – taxed twice? So far, Huckabee’s plan fails to account for these individuals.

Huckabee also claim’s his fair tax is progressive. “All of us will get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line, so that we're not taxed on necessities,” Huckabee explains. “This means people below the poverty line will not be taxed at all. We will be taxed on what we decide to buy, not what we happen to earn.” However, these rebates would cost the federal government an estimated $600 billion per year.

Consider this: a 2006 Department of Labor study shows that households at every income level spend more than the poverty line. The average family making under $70,000 per year spends more then it earns. While the average family making more then $150,000 per year spends less then half of what it makes. Therefore middle-class families would get hit the hardest from a national sales tax. This plan is not progressive whatsoever it’s regressive.

Huckabee’s plan also calls for the abolishment of the Internal Revenue Services (IRS). This has many people wondering - if there is no IRS, then who will collect and monitor the new sales tax? Additionally, who is to monitor the distribution of the tax rebates? The government certainly cannot rely on the “honor system.” The American public disdains the IRS and any plan to get rid of it sounds good to most Americans. However, in order for the government to function and collect the sales tax a new institution with many of the same responsibilities as the IRS would need to be setup. It would just have a different name.

Granted, the fair tax plan is not completely bad. Economists do generally agree that a fair tax has the potential to cause economic growth. Without income taxes there will be no need for corporate tax shelters. With no corporate taxes, corporations would be more likely to do business in the country. However, it is unlikely these small benefits will outweigh all the other holes and discrepancies in the fair tax plan.

It is also interesting to note that Huckabee is the strongest supporter of the fair tax plan, when his history as Governor of Arkansas gives a drastically different impression of his tax views. While he was in office, he cut taxes 90 times but more than made up the difference with 21 tax increases. Between 1998 and 2006 Arkansas’s state budget increase by over $5.2 billion.

Huckabee may have won over Iowans with his empty promises of a fair tax, but he will have a much harder time as this election year continues. So much attention has been placed on his moral and religious beliefs that voters probably have not given any real though to his radical tax plans. If Huckabee wants to stand a chance in the general election, then he will slowly begin to distance himself from the fair tax plan. However, he may have dug himself into a hole as going back on his fair tax plays would get him labeled as a flip-flopper.