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Taxes and the fiscal cliff negotiation a suggestion.

November 27, 2012
Impact of permanent Bush tax cut extension inc...

Impact of permanent Bush tax cut extension including estate tax (Photo credit: Wikipedia)

“You are not a loan.”
Occupy Slogan

Exclusions from adjusted gross income are the largest drain on tax revenues at this time (even larger than the Bush Tax cut on the wealthy [only about $1-200 million yr.]). They are also one of the primary means by which the wealthy avoid paying the same rate of taxes as most of the rest of us (I can assure you, I took full advantage of them in the past). They probably are as much to blame for the increasing disparity of wealth in the nation as the Bush Tax cuts. For example, costs of carrying out a trade or business for non-employees could include things like yachts excluded from gross income by claims that they are used to conduct business meetings. Except perhaps for low-income self-employed individuals, it is difficult to conceive an individual (not a corporation) honestly requiring more than 15% of his and her income to carry out a trade or business.

Instead of searching for supposed specific tax “loopholes,” that could be closed, one approach has been to urge that Congress simply consider capping of these exclusions at say 15-20% of Gross Income? This would discourage the most outrageous tax avoidance by accounting scams in one fell swoop and reform the tax code as well. It should not affect most taxpayers since it would fall most heavily on those who can afford high-priced tax attorneys to argue that the above mentioned yacht is a business necessity.

Similarly, Itemized deductions and lower dividend and capital gains rates allow people like a recent candidate for President to pay taxes at a lower rate than a secretary or almost anyone who actually works for a living and earns a salary or wages. Why not, some urge, limit the itemized deductions, dividend and capital gains rates to 15-20% of taxable income for people earning over $150,000? This will have the unintended but probably positive consequence of encouraging those earning less that $150,000 to invest more. It would not have the negative impact on housing construction as those who oppose eliminating the deduction fear, but instead provide a premium for lower cost middle class affordable housing and discourage the unwary from spending more than they can afford on their homes.

English: Barack Obama signing the Patient Prot...

English: Barack Obama signing the Patient Protection and Affordable Care Act at the White House (Photo credit: Wikipedia)

Obamacare already addresses the above in part. In order to pay for the program, the legislation imposes a 3.8% surcharge on investment income (dividends etc.) for those earning over $200,000. Also, the program places a cap on flexible spending plans and a tax on “Cadillac” medical plans, two programs that discriminate among employees of corporations allowing the wealthier to reduce their tax burden in excess of and at the expense of those less so.

According to one analysis, unless Congress compromises, on January 1, dividend taxes for those in the top tax bracket will jump from the current 15% back to the Clinton-era 39.6%. Add to this then the new 3.8% surcharge to pay for Obamacare, the top bracket for federal dividend taxes will nearly triple on January 1, from 15% to 43.4%.

Caps or limits on deductions and other tax avoidance options could reduce Congressional disputes about the appropriate rate for taxing unearned income or whether the middle class should be entitled to a tax deduction on the mortgage interest they pay on their homes. This also avoids forcing Boehner to identify those so-called specific tax loopholes he would be willing to close.

Note: the refundable tax credit was a Republican (Reagan) tax program to discourage the working poor from choosing to go on to welfare when their wages on the private market dropped below what one could make on the dole. I would keep that program intact even though it is an indirect subsidy to business. At least everyone sort of benefits.

The administrations plan actually does a little of both; increase the tax rate for the most wealthy and close some of the loopholes like those described above.

According to Goldman Sachs they expect the following to happen:

The agreement that policymakers will (hopefully) reach before year-end seems likely to involve an increase in tax rates from current levels and it could also involve a limitation in tax preferences. Our fiscal assumptions for 2013 include a tax increase equivalent to allowing the upper income tax cuts to expire. This amount–$56bn in 2013 and a little more than $800bn over ten years–is halfway between the President’s proposals and what Republicans would prefer.

The White House seems likely to succeed in raising at least this much revenue, though it remains to be seen whether it will come in one agreement at year-end, or a two-stage process involving a debate on more comprehensive tax reform next year.Read more: http://www.businessinsider.com/goldman-sachs-on-obama-taxes-for-wealthy-2012-11#ixzz2Cq4yaLE2

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