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Posts Tagged ‘Bloomberg’

After we discussed some of the questions surrounding Mitt Romney’s mid-week proposal to achieve the necessary base broadening necessary to pay for his proposed 20% across-the-board tax rate cuts by implementing a $17,000 cap on a taxpayer’s deductions, Bloomberg reached out to me to crunch some numbers in order to determine the impact such a cap would have on a hypothetical family of four.

The Bloomberg article is here, but the full computations are below:

Assumptions:

  • Family income is all ordinary income from wages: $150,000
  • Family has an outstanding 30 year mortgage at 5 percent with a beginning balance in 2012 of $300,000. This gives rise to deductible mortgage interest for 2012 of $13,666.
  • Family lives in Ohio, where it pays real estate taxes on its home of $5,000 annually.
  • Family contributes $4,000 to charity.
  • Family withholds $6,000 in deductible Ohio state tax from wages
  • Family’s taxable income would fall in what is currently the 25% bracket, but would be the 20% bracket under Romney’s proposed 20% across-the-board reductions. The rates would be 8% on the first $17,400 of income, 12% on the next $53,300 of income, and 20% after that.
  • Under proposed Obama rates, (Scenario 2), the rates would be 10%/15%/25%.

Analysis:

Scenario 1: Using Romney’s Projected 2012 Tax Rates; No Cap on Deductions

AGI: $150,000

Itemized deductions: $28,666

Taxable Income: $106,535

Exemptions:   $15,200

Taxable Income: $106,134

Federal Income Tax: $14,874

Scenario 2: Using  Obama’s Projected 2012 Tax Rates; No Cap on Deductions

AGI: $150,000

Itemized deductions: $28,666

Taxable Income: $106,535

Exemptions:   $15,200

Taxable Income: $106,134

Federal Income Tax: $18,783

Scenario 3: Using Romney’s Projected 2012 Tax Rates; $17,000 Cap on Itemized Deductions Only; Personal Exemptions Allowed in Full.

AGI: $150,000

Itemized deductions: $17,000

Taxable Income: $133,000

Exemptions:   $15,200

Taxable Income: $117,800

Federal Income Tax: $17,208

Scenario 4: Using Romney’s Projected 2012 Tax Rates; $17,000 Cap Applies to BOTH Itemized deductions AND Personal Exemptions

AGI: $150,000

Itemized deductions: $17,000

Taxable Income: $133,000

Exemptions:   $0

Taxable Income: $133,000

Federal Income Tax: $20,248

 Summary

As you will see, because of the effect of Romney’s reduction in the tax rates by 20%, even when he caps a taxpayer’s itemized deductions — but only his itemized deductions  — (Scenario 3: Federal Tax of $17,208), our hypothetical family of 4 will stay pay-less under Romney’s plan than it would under that of Obama (Scenario 2: Federal Tax of $18,783).

When comparing Romney’s plan without a cap (which would be nearly impossible if he plans to keep the rate cuts revenue neutral) to that of his plan with a $17,000 cap on itemized deductions, our family of four saw their federal tax increase by $2,333.

Now, if we assume Romney will cap the benefit of BOTH itemized deductions and personal exemptions at $17,000, as his campaign seems to have indicated this week — our family of four would pay more (Scenario 4: Federal Tax of $20,248) than it would under the Obama plan (Scenario 2: Federal Tax of $18,783).   This would also increase our family of four’s taxes by $5,374 when compared to a Romney baseline with no cap, and $1,465 when compared to a Romney baseline where the cap applies only to itemized deductions.

The devil, of course, is in the details, and at this point, they are sorely lacking. On Wednesday night, Romney again referenced the possibility of using a cap to pay for his tax cuts, but this time quoted “$25,000 or $50,000” as a potential solution, which would obviously change the results dramatically.

Lastly, and perhaps most importantly, the Romney campaign clarified this week that it would not seek to change the current tax-free nature of employer paid health insurance coverage, a change that would have greatly increased the tax burden of the middle class.

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One hundred thousand views in a little over a year. That’s not too shabby. Though a closer inspection of this site’s hits reveals that many of our guests have stopped by unintentionally, and by the looks of it, left considerably disappointed. Below is a list of the Top 6 search terms that have led internet users to Double Taxation since its inception:

Canyonero: 886 (The fact that nearly 1,000 people came here because they were searching for the fictional SUV endorsed by The Simpsons’ Krusty the Clown warms my heart and renews my faith in humanity.)

Power Rangers Porn: 620 (For obvious reasons, this instantly renews my disgust for humanity)

Double Taxation: 606 (Picking a good blog title is key. Search engine optimization!)

Power Ranger Porn: 391 (You should all be ashamed of yourselves. Perverts.)

Tax Law Changes for 2013: 270 (I’m not sure what it says about the content of this site that it took until our fifth search term to yield a result that I actually wrote about.)

Things get slightly more comforting when we look at the most-read posts in our 16-month history:

Tax Planning for the 2013 Law Changes 3,038
IRS Clarifies Interplay Between Luxury Auto Depreciation   Limits and 100% Bonus Depreciation, Long National Nightmare Finally Over   2,403
IRS Issues Luxury Audit Limits, Fails To Acknowledge   Potential Problem 1,873
Power Ranger Porn, Google Rip-Offs, and Homicidal   Accountants: Just Another Day in the Tax Court 1,591
Presidental Candidate Tax Comparison: Update 1,345

Two things can be gleaned from this data:

1. People really seem to care about luxury audit for some reason, and

2. If you want to get page hits, here’s a simple yet full-proof business plan for any blog:

Phase 1: Put “porn” in title

Phase 2: ?????

Phase 3: PROFIT!

On the tax front, in advance of tonight’s presidential debate, Mitt Romney has finally started to cave to continuing pressure to share some details regarding his tax proposals; particularly, how he plans to keep his 20% acr0ss-the-board rate cuts revenue-neutral while not shifting the tax burden away from the rich and towards the middle class. In a speech given this week, Romney indicated that he might cap deductible itemized deductions at $17,000 per individual.

There are still a number of details missing — particularly whether the $17,000 would be doubled for MFJ and how the cap would handle credits — but according to Bloomberg, this cap is just the first in a three-part plan to achieve Romney’s tax goal of a cutting tax rates by 20% while remaining revenue neutral and progressive. From Bloomberg:

A second cap would apply to personal exemptions and a third cap would apply to the health care exclusion. The amount and details of the caps could be changed to meet Romney’s targets for revenue and distribution of the tax burden. The aide emphasized that the three-cap idea is only one option being considered.

While devoid of the details necessary to formulate any meaningful conclusion, it’s hard to see how this is a step in the right direction in achieving progressive, revenue-neutrual tax reform while also cutting rates. A study conducted by the Tax Policy Center earlier this year concluded that Romney would have to eliminate all deductions for those taxpayers earning in excess of $200,000 before limiting those deductions to a lesser extent to those earning below the threshold in order to pay for his tax cuts in a progressive manner. Clearly this proposal does not accomplish those goals, as it allows those earning over $200,000 to retain some of their deductions, while providing the same limitation to those earning below the threshold.

The key, in my mind, is how the third cap would treat excludable health care benefits, as this preference largely benefits the middle class. Do away with the Section 105 exclusion, and you will likely be right back to shifting the burden of tax increases to those taxpayers earning less than $200,000.

What I do like about Romney’s proposal, however, is that he could avoid the morass of trying to eliminate deductions and preferences from the Code, as any attempt to do so would leave special interest groups fighting to the death for their particular provision. By instituting a cap,  you leave the mortgage interest deduction untouched, leave the state and local tax deduction, and leave the charitable contribution deduction in the Code, but cap their benefit. While this doesn’t neceessarily achieve the simplicity one seeks when base broadening, as it leaves those provisions in the Code, as we’ve discussed here before, sweeping Code reform isn’t particularly likely anyway.

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I pulled into the driveway Saturday night to find a bear munching on crab apples in my front yard. I believe this clip from The Simpsons accuratley reflects my cool, composed reaction:

The bears have been everywhere this fall, having been forced by a dry spring and summer to leave the highcountry and venture into human populations in search of the berries necessary to fatten them up for a winter’s rest. This, naturally, has led to numerous bear-human interactions, some of which have ended badly. A few of us concerned citizens implored City Hall to do something about the situation, but our catchy slogans were to no avail:

On to the tax stuff:

An interesting read on the tax obligation of those Facebook  employees who received restricted stock units pursuant to the recent IPO.

The WSJ has the first of what is likely to be many discussions on this topic: what should investors do with stock holdings given the uncertainty surrounding 2013 capital gains tax rates?

Also from the WSJ: Here’s more information that you’d ever care to know about the evolution of the personal income tax rates from 1945 to today. Most interesting tidbit: the average tax rate for the top 0.1% of taxpayers has plummeted from 55% in 1945 to approximately 26% today.

Albert Hunt at Bloomberg questions the political feasibility of Mitt Romney’s proposed base broadening.

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A few things you may have missed this weekend while asking the perfectly reasonable question: There’s a such thing as men’s field hockey?

In his Bloomberg opinion piece, the author hits the nail on the head: Neither President Obama’s nor Mitt Romney’s tax plans, as currently constructed, are what this country needs right now to reduce the deficit.

Speaking of the Romney plan, more on this later today, but the Tax Policy Center has crunched the numbers again, and it ain’t pretty. If his plan were to be enacted in the revenue neutral model that’s been promised, taxpayers earning over $1,000,000 will see their after-tax income increase by 8.3%, while those earning less than $200,000 will actually walk away with 1.2% LESS cash every year after paying their taxes.

A quick primer on the increasingly-necessary exclusions from cancellation of indebtedness (COD) income.

The war of words regarding Mitt Romney’s refusal to release more than his 2010 and 2011 tax returns has escalated, with Democrats citing an “anonymous source” and claiming that Romney paid no federal income tax for a 10-year period.

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Now that we’re more than halfway through 2012, Congress has decided it’s an appropriate time to make some serious inroads towards extending the 55 tax provisions that expired as of December 31, 2011.  From Bloomberg:

The U.S. Senate Finance Committee has reached a bipartisan agreement to revive lapsed tax breaks, including the credit for corporate research. The committee will vote on the proposal in Washington tomorrow, according to a statement by Chairman Max Baucus, a Montana Democrat, and by Orrin Hatch of Utah, the top Republican on the panel. [Ed note: No work on whether the committee took Donald Marron’s sage advice, discussed here.]

Chief among the expired provisions are the R&D credit, the optional deduction for state sales taxes, accelerated depreciation for certain restaurants and the ability for financial-services companies to defer U.S. taxation on overseas income. (for a complete list, see here) Details of the bill — including the list of provisions being extended and the length of the extensions — have not been released, but Bloomberg is reporting that 25% of the “extenders package” will not be given new life.

Importantly, the bill is also expected to include an AMT patch that would increase the exemption for 2012, sparing millions of Americans from being forced to pay an additional minimum tax on their 2012 tax returns.

Exhausted from a summer of mud-slinging, bickering, and running in place, Congress is slated to take a well-deserved recess for the next month,  so no further action will take place on the bill until September at the earliest, though in all likelihood, no new legislation of any kind will be passed until after the November election.

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In an article published today, Bloomberg echoes a concern we previously voiced here, questioning where Mitt Romney intends to conjure enough offsets to the $5 trillion in lost revenue resulting from his proposed tax rate cuts to keep the proposal revenue neutral. Publicly, Romney has been adamant that his rate cuts would not increase the deficit, and thus there must be $5 trillion in additional tax revenue to be had in cutting certain tax breaks.

The problem, as it has been pointed out time and time again, is that there simply isn’t $5 trillion in tax revenue to be had in broadening the tax base. At least not without both:

1) eliminating the rather popular tax-exempt health care, charitable contributions, state and local taxes and mortgage interest, and

2) increasing the tax liability of the middle and lower class, which Romney has stated he would like to avoid.

We’ve always found this to be the biggest shortcoming in Romney’s proposal. While a 28% maximum rate sounds appetizing — as do 0% capital gains, dividends, and interest rates for those earning less than $200,000 — with a steadily mounting deficit, how can Romney propose to both cut tax rates and decrease the deficit if there isn’t enough base broadening to be done?

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They say a good negotiation is one that leaves both sides unhappy, so maybe we should take the news that two high-profile political figures are willing to step outside party lines as a good sign that we’re on our way towards bipartisan agreement regarding the soon-to-expire Bush tax cuts.

First, former President Bill Clinton — long portrayed as the embodiment of the “tax and spend” Democrat —  recently urged President Obama to extend the Bush tax cuts for all taxpayers, not just those earning less than $250,000 as has been proposed by the President.  In Clinton’s view, this would buy Congress time to focus their efforts on deficit reduction rather than haggling over tax issues.

From Bloomberg:

Clinton “does not believe the tax cuts for the wealthiest Americans should be extended again,” [Clinton’s spokesman Matt] McKenna said yesterday. The former president “simply said that he doubted that a long-term agreement on spending cuts and revenues would be reached until after the election.”

Clinton, who appeared with Obama at fundraising events in New York June 4, said in an interview broadcast yesterday on CNBC that Congress “will probably have to put everything off until early next year” because of Republican demands that the tax cuts for the wealthy be made permanent. Doing so would be “an error,” he said.

“What I think we need to do is to find some way to avoid the fiscal cliff, to avoid doing anything that would contract the economy now and then deal with what’s necessary in the long- term debt reduction plan as soon as they can, which presumably will be after the election,” Clinton said.

Much has been made recently of this so-called “fiscal cliff,” and while details regarding the cliff are spotty at best, I was able to locate the following artist’s rendition of the future of America should the expected combination of tax increases and spending cuts be permitted to occur at year-end: 

In similarly disillusioning fashion, former Florida Governor and member of the “first family of Republicans” Jeb Bush said he would back tax increases if it meant cutting the deficit, an admission that ruffled feathers within the Republican party and likely left Rush Limbaugh reaching for the percosets.

Also from Bloomberg:

The brother of former President George W. Bush told a congressional panel in Washington today that he could back a theoretical deficit-reduction package that would include $1 in tax increases for every $10 in spending cuts.

 “If you could bring to me a majority of people to say that we’re going to have $10 in spending cuts for $1 of revenue enhancement — put me in, coach,” Bush told the House Budget Committee. “This will prove I’m not running for anything,” he said, prompting laughter from lawmakers and the audience.
 
All joking aside, it’s refreshing to see two political figures widely viewed as strict adherents to their respective  party policies recognize that compromise is going to be necessary if we intend to avoid becoming the largest province in the Chinese empire. Whether the President and Congress are taking notes remains to be seen.

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