For example, in order to lower our dependence on foreign energy, the stimulus bill included breaks for energy conservation and alternative-energy sources. In Pennsylvania, the shale industry went untaxed to encourage exploration. And the City of Philadelphia has used a property-tax abatement to foster housing construction.
If tax breaks are given to those activities that are deemed to have special value, what does it say about those activities that are taxed at higher rates? Policymakers are indicating they consider the competing activities to be of lower value. That is precisely the issue with how we treat income.
The tax code says people should earn their income from almost any means other than labor. Wages and salaries are taxed at just about the highest rate of any income source. There are special low rates for dividends, capital gains, and interest income - especially from state and local debt - but if all you do is make your money from wages and salaries, you pay a higher tax rate.
Consider the tax-free treatment of interest on state and local government securities. Most state and local governments issue bonds for schools, roads, and other infrastructure projects, and imposing no federal income tax means interest on the securities can be reduced. That increases construction by making the projects more affordable.
Of all the deductions woven into the sprawling U.S. tax code, few have been more fiercely guarded than the enormous tax break that lets homeowners deduct the interest they pay on their mortgages.
But as Congress and the White House negotiate the first major rewrite of tax laws in decades, changing the generations-old mortgage-interest deduction — which costs the government roughly $100 billion a year — has gone from far-off possibility to part of the conversation.
The outcome of that debate could have profound long-term effects on homeowners across the country — and particularly those in the Washington area, who tend to benefit from the tax break more than many other Americans due to the region’s hefty home prices and high incomes.
As the Obama administration and lawmakers on Capitol Hill scramble to defuse automatic spending cuts and tax increases set to take effect Jan. 1, a herd of sacred cows — from Social Security and Medicare to deductions for charitable giving and mortgage interest — are in danger of losing their untouchable status.
If Congress drives the country off the fiscal cliff, Americans will face an unprecedented tax increase in 2013. It totals $500 billion and includes the majority of tax breaks enacted since 2001, as well as some of the most popular in the tax code. A middle-income family would see a tax increase of about $2,000, according to report from the Tax Policy Center.
Among the taxes in play:
The child tax credit: Under President George W. Bush’s Tax Relief Reconciliation Act, the maximum value of the credit was doubled to $1,000 per child, said attorney Adi Rappoport of the Gunster firm in West Palm Beach. Two years ago, Congress extended the credit until the end of 2012 and allowed families whose income tax is lower than the credit’s value to receive more of the credit in a cash refund.
The alternative minimum tax: This tax seeks to ensure that people who have access to certain deductions and credits — usually the wealthy — pay at least a minimum amount of tax. Congress has repeatedly patched this tax, which does not take inflation into account, to ensure that it does not apply increasingly to middle-class families. If Congress does not address this tax, 26 million households will face an average tax increase of $3,700, according to the Chicago Sun-Times.
Estate taxes: In 2012, a couple can give a gift or the estate of a couple can bequeath up $10 million tax free. If the estate tax break expires, that limit will drop to $2 million and 10 times as many estates would be hit by the estate tax.
Bush tax cuts: They benefited virtually anyone who filed a tax return but were most generous dollar-for-dollar to higher-income earners. The top income tax rate was reduced to 35 percent from 39.6 and the bottom rate to 10 percent from 15.
Payroll tax cuts: About 120 million households would be subject to a 2 percentage point increase in the payroll tax .
In answering the tax question, Romney also noted, “The top 5 percent of taxpayers will continue to pay 60 percent of the income tax the nation collects. So that’ll stay the same.”
But by referring to the “top 5 percent,” Romney may have changed his definition of the middle class. If he now means that his relief for taxpayers in the middle ends at the top 5 percent, that means in effect that the middle class ends somewhere below $200,000 in adjusted gross income.
In September, by contrast, Romney said, “Middle income is $200,000 to $250,000 and less.”
Roughly the top 3 percent of US households have incomes of $200,000 and higher. Romney’s other 2 percent would come from the top end of the next group tracked by the Internal Revenue Service, the roughly 10 percent of tax filers with adjusted gross incomes of between $100,000 and $200,000.
So after Tuesday night, where are we in the debate over Romney’s tax plan?
Here are some important parts of the answer:
Skeptics of Romney’s tax math still abound. Among them is Mr. Obama. Here’s an excerpt of what the president said Tuesday night:
“Look, the cost of lowering rates for everybody across the board, 20 percent, along with what he also wants to do in terms of eliminating the estate tax, along with what he wants to do in terms of corporates, changes in the tax code, it costs about $5 trillion.”
Wonkbook’s Number of the Day: 6.2%, or $3,446. According to the Tax Policy Center, that’s the blow to after-tax income is 3.7 percent, or $412, most of which comes from the expiration of the stimulus tax breaks. Families right in the middle lose 4.4 percent of their after-tax income, or about $1,984, mostly from the expiration of the stimulus tax breaks and the payroll tax cut. And for families in the top one percent, going over the fiscal cliff will mean losing 10.5 percent of their after-tax income, or $120,537, mostly due to the expiration of the Bush tax cuts. So everyone takes a hit, but the rich get hit the hardest.
Step back for a moment to consider what this means: After a decade in which median household income fell by more than $10,000 — making it perhaps the worst decade for the middle class in modern American history — Congress, by virtue of being unable to come to a deal, might actually cut the money middle-income Americans have to spend after taxes by another $1,984.
They are, to their credit, trying to come up with a way to keep that from happening. We’ve got much more on those negotiations, and on the fiscal cliff in general, in today’s top story, so keep reading!
Congress is planning a post-election dodge of the fiscal cliff. “Senate leaders are closing in on a path for dealing with the ‘fiscal cliff’ facing the country in January, opting to try to use a postelection session of Congress to reach agreement on a comprehensive deficit reduction deal rather than a short-term solution. Senate Democrats and Republicans remain far apart on the details, and House Republicans continue to resist any discussion of tax increases. But lawmakers and aides say that a bipartisan group of senators is coalescing around an ambitious three-step process to avert a series of automatic tax increases and deep spending cuts…[S]enators would come to an agreement on a deficit reduction target — likely to be around $4 trillion over 10 years — to be reached through revenue raised by an overhaul of the tax code, savings from changes to social programs like Medicare and Social Security, and cuts to federal programs. Once the framework is approved, lawmakers would vote on expedited instructions to relevant Congressional committees to draft the details over six months to a year.” Jonathan Weisman in The New York Times.
Senate tax writers approved a $205 billion package of tax breaks in a rare show of bipartisan unity on Thursday, but across Capitol Hill in the House of Representatives, sniping over taxes between Democrats and Republicans was in full force.
Hours before leaving for a five-week break, the Senate Finance Committee passed legislation including a $15 billion business research tax break. It also contained a $132 billion provision to prevent the alternative minimum tax, targeted primarily at the rich, from hitting the middle class.
“This is a strong sign that we mean business,” said Republican Senator Pat Roberts who voted for the legislation, that passed 19-5 in a committee hearing filled with mutual praise.
The bill would need to be substantially changed, however, to stand a chance of winning approval in the more partisan House of Representatives, where Republicans hold a big majority.
There, while senators praised one another, the usual bickering was in high-gear during the debate over a Republican effort to “fast track” tax reform with a bill that would slash the top income tax rate to 25 percent from 35 percent and impose other changes that are anathemas to Democrats.
Democratic Representative Barney Frank said the bill would give too much power to Republican Ways and Means Committee Chairman David Camp, and criticized its specificity on tax cuts and vagueness on paying for them without bloating the deficit.
Camp will “single-handedly put on his cape and fly down here with this bill that will help the rich and do some unmentioned things regarding popular tax breaks that they don’t want to mention,” Frank said in his typically blunt style.
The House bill would set up procedures to let lawmakers move quickly to revamp the tax code in 2013. It was seen as likely to pass the House along largely party lines later on Thursday.
The Internal Revenue Service may be weighing changes to how it polices tax-exempt political groups amid charges the tax agency has been lax on enforcement for a new breed of campaign funding organizations with vast resources.
Tax-exempt groups are raising and spending record amounts of money in attempting to sway the November 6 elections, bolstered by the Supreme Court’s landmark “Citizens United” ruling in 2010, which lifted some political contribution limits in federal elections.
Consumer groups have been pushing the IRS to clarify the standards for these so-called “social welfare organizations,” as Section 501(c)(4) of the U.S. tax code calls them, to ensure that they are not abusing their tax-exempt status.
Here’s a question for Mat Staver, head of Liberty Counsel - what do you and your organization have to hide?
Liberty Counsel is a Religious Right legal group operating from Jerry Falwell Jr.’s Liberty University. It does things like argue that the Ten Commandments should be displayed in public buildings, that all abortions should be illegal and that marriage equality should be denied to gay couples.
The rhetoric is often shrill, partisan and breathtakingly wrong-headed. Staver once said Americans United is “out to literally destroy America; they’re out to erase our religious heritage and religious symbols from every area of life.” In a recent fund-raising pitch, he said the Obama administration’s inclusion of birth control as part of health care reform is “one of the most disrespectful, ‘in your face’ dictates ever inflicted upon the American people.”
But one of Staver’s most dubious claims is that Liberty Counsel is a “church auxiliary.” That means the organization is tax-exempt under Section 501(c)(3) of the tax code and doesn’t have to file a Form 990 that gives information on its activities. As a result, the public doesn’t know how much money Liberty Counsel takes in or how that money is spent.
To even the most casual observer, Liberty Counsel isn’t a church or a church auxiliary. In its own words on its website, Liberty Counsel “is an international nonprofit litigation, education, and policy organization dedicated to advancing religious freedom, the sanctity of life, and the family since 1989, by providing pro bono assistance and representation on these and related topics.”
That doesn’t sound like any church organization I know. If you cut through the rhetorical fog, it means Liberty Counsel is just another garden-variety Religious Right legal organization doing its best to undermine church-state separation.
Staver, who serves as dean of the Liberty University Law School, told The Roanoke Times that his group’s tax status is no different from the Salvation Army, but that’s baloney. The Salvation Army is actually a Christian denomination.
A recent profile of Staver in the Times noted that his organization has about 35 employees and offices in Lynchburg, Va., Orlando, Fla., and Washington, D.C. The organization also claims hundreds of volunteers who provide legal and other services. Again, this doesn’t sound much like a church.
No deduction for you missee! The bible tells me so!
The House passed a wide-ranging anti-abortion bill Monday, along with another bill meant to keep Kansas courts from making rulings based on foreign laws — which some supporters have said is necessary to protect the state from Muslims who would impose their legal code, also known as sharia.
The abortion bill, which supporters dubbed “The No Taxpayer Funding for Abortion Act,” passed 88-31. It seeks to revamp the state’s tax code to remove all subsidies — direct and indirect — for medical costs related to the elective termination of pregnancy.
“We’re talking about not being able to deduct the cost of any health insurance that pays for coverage of abortions,” said Rep. John Rubin, R-Shawnee, one of the bill’s champions.
Rubin said the bill also prohibits including donations to institutions that provide abortions in a taxpayer’s charitable deductions.
Opponents of the bill expressed concerns about how it would be enforced, saying that tax auditors combing through a woman’s medical records to find evidence of an abortion within her deductions could run up against privacy laws established by the federal Health Insurance Portability and Accountability Act, or HIPAA.
Rep. Sean Gatewood, D-Topeka, is on the Federal and State Committee that heard the bill and said he had received no enforcement information.
“We never heard a word from the Department of Revenue,” Gatewood said. “Nothing.”
Rubin said the department already audits medical deductions routinely and there may be a provision in HIPAA that allows access to medical records for law enforcement purposes.
“As with all changes to the tax code, our tax staff and auditors will study it after the session is over,” department spokeswoman Jeannine Koranda said of the bill.
Democrats and Republicans agree that the federal income tax must be reformed. They even agree on some common goals. President Obama’s budget proposal calls for “fundamental reform” that would “simplify the tax code and lower tax rates” while eliminating “inefficient and unfair tax breaks.” House budget committee chairman Paul Ryan’s budget proposal, which the House passed in March, collapses the existing six tax brackets into two, both of them (10 and 25 percent) much lower than the current top rate (35 percent), and similarly pledges to eliminate “special-interest loopholes.” The Obama budget and the Ryan budget, a Bloomberg View editorial notes with approval, “aren’t as far apart as you might think.”
Granted, there’s virtually no chance the two sides will agree to comprehensive tax reform before the November election. But afterward, it seems quite possible that both parties will set aside their differences and reach a compromise. So why do I hope they don’t?
The beau ideal both sides have in mind is the 1986 tax reform bill crafted by Democratic Representative Dan Rostenkowski and Republican Senator Bob Packwood, which was signed into law by Ronald Reagan. Neither Rosty nor Packwood had a reputation as a reformer—TNR mocked Packwood as “Senator Hackwood”—and both legislators would eventually leave Congress tainted by scandal. Reagan, reportedly, had only the shakiest understanding of what the bill would do. Yet these three flawed politicians managed to shepherd a good-government bill through a maze of lobbyists and ideologues, achieving, briefly, a rare state of wonky grace.
The essence of the 1986 tax law was to combine conservatives’ desire for lower marginal tax rates and fewer tax brackets with liberals’ goal of reducing pro-business tax loopholes. The result was a tax code that was simpler and, on balance, fairer. But 2012 isn’t 1986 in a few underappreciated and, to my mind, crucial ways. Let’s review them:
Tax rates. If you want to swap lower tax rates for fewer tax loopholes, you should come to the table with high tax rates. In 1986, the top marginal rate was 50 percent. That wasn’t high by historic standards: For a decade and a half prior to Reagan’s 1980 victory, the top marginal rate never fell below 70 percent, and, during the 1950s and early ’60s, the top marginal rate exceeded 90 percent. By current standards, though, a top marginal rate of 50 percent is pretty high. The 1986 tax reform dropped it to 28 percent, and, since then, it has bounced between 30 and 40 percent. The current top marginal rate of 35 percent will, if no legislative action is taken, rise next year to 39.6 percent when George W. Bush’s tax cuts expire. To anyone who favors progressive taxation, bargaining down from 50 percent is much easier to stomach than bargaining down from 39.6 percent.
And that’s assuming the Republicans will consent to 39.6 percent as their starting point. They’ll push hard to bargain down from the current level of 35 percent. Baseline wars over whether to negotiate from 39.6 or 35 percent helped scuttle the supercommittee negotiations in November. In 1986, the starting point of 50 percent was never up for debate.
Tax complexity. Reducing the number of tax brackets follows a logic similar to that of lowering tax rates: It helps if you start out with a lot. In 1986, there were 15 different tax brackets for families and 16 for single people. Again, this was not high by historic standards: For most of the 1970s, the number of brackets never fell below 25. The 1986 tax reform swapped 15 or 16 tax brackets for two. Since then, that number has increased—but only to six.
Six brackets isn’t an ideal number, but not because it’s too many. It’s too few. Right now the top bracket (35 percent) kicks in for families at about $388,000. Obama wants to lower that threshold to $250,000. Everyone making this much money resides in the upper ranks of the top 5 percent. If your income exceeds a quarter of a million dollars, you are, by any sensible reckoning, rich, and you ought to pay more in taxes.
But there’s rich and then there’s rich. The higher you go up the income scale, the economists Emmanuel Saez and Thomas Piketty have found, the faster you’ll find rich people’s share of the nation’s income growing. The top 1 percent (everyone today making more than about $352,000) have doubled their income share since 1979; the top 0.1 percent (everyone today making more than about $1.5 million) have tripled their share; and the top 0.01 percent (everyone today making more than about $7.9 million) have more than tripled their share. Clearly these latter two groups merit brackets of their own. As James Surowiecki put it in a 2010 New Yorker column, the current system taxes LeBron James, who is super-rich, at the same rate as his dentist, who is merely rich.