internal revenue service

Economix Blog: The Rich Can Afford to Pay More Taxes

August 23, 2011 by NewsMaker Leave a Comment

Bruce Bartlett held senior policy roles in the administrations of Ronald Reagan and George H.W. Bush and served on the staffs of Representatives Jack Kemp and Ron Paul.

Warren Buffett’s commentary in The New York Times on Aug. 15 has opened a new front in the continuing debate on whether taxes should be raised to reduce projected budget deficits.

Today’s Economist

Perspectives from expert contributors.

Mr. Buffett asserted that the well-to-do could easily shoulder a higher burden. Specifically, he proposed an increase in the current 35 percent top rate for those making more than $1 million and a further increase on those making more than $10 million. He also proposed taxing dividends and capital gains as ordinary income (currently, they are taxed at a maximum rate of 15 percent).

Conservative groups such as the Tax Foundation pooh-pooh the idea of raising tax rates on the rich, asserting that there isn’t enough money available to bother with.

On Friday, however, the respected Tax Policy Center published estimates showing that the potential revenue would have a significant impact on projected deficits. It looked at several options, including a 50 percent top rate on incomes over $1 million and changes to the taxation of dividends and capital gains.

Tax Policy Center, Aug. 19, 2011

As one can see, the revenue potential depends critically on what baseline is assumed. That is because the top tax rate is already scheduled to rise to 39.6 percent on incomes over $380,000 in 2013. Moreover, dividends on corporate stock would go back to being taxed as ordinary income. And capital gains would go back to being taxed at a maximum rate of 20 percent.

The larger question is how much the well-to-do should pay. According to the Internal Revenue Service, in 2008, those in the top 1 percent of the income distribution, with incomes over $380,000, had an effective tax rate of 23.3 percent. In 1986, a year when the real gross domestic product grew a healthy 3.5 percent, their effective tax rate was 33.1 percent. It has been much lower every year since.

If this group were still paying 33.1 percent, federal revenue would have been more than $166 billion higher in 2008 alone. That would be enough to reduce the budget deficit by about 10 percent this year. If the top 1 percent of taxpayers had continued to pay the same effective tax rate they paid in 1986 every year from 1987 to 2008, the federal debt today would be $1.7 trillion lower.

Internal Revenue Service

Of course, these are not hard numbers. If the effective tax rate had stayed at 33.1 percent on the top 1 percent of taxpayers all these years, their behavior would undoubtedly have changed.

And it probably would have been impractical to maintain a higher rate on just the top 1 percent of taxpayers without having had higher rates on many of those below that percentile. But it does show the order of magnitude of how much revenue has been sacrificed from tax cuts on those with very high incomes.

Some will argue that those tax cuts bought higher economic growth, but that is very doubtful. Growth was stronger in the 1990s when the relative revenue loss was small and was dismal during the George W. Bush administration, when two-thirds of the aggregate revenue loss occurred.

It is not class warfare to suggest that the richest 1 percent of people in society pay one-third of their income to the federal government, as they did under Ronald Reagan. Keep in mind that dividends were taxable as ordinary income every year of his administration, and in the Tax Reform Act of 1986 he supported taxing capital gains as ordinary income as well.

Higher effective tax rates on the rich could even be achieved without raising the top tax rate bracket to 50 percent, as it was under President Reagan. There are many tax preferences that largely benefit the well-to-do that could be scaled back to avoid raising marginal rates.

The important thing is for people to accept that we can no longer afford such low effective tax rates on those with the greatest capacity to pay at a time when total revenue as a percentage of G.D.P. are at their lowest level in 60 years and we are facing a debt crisis. The issue is not whether the rich should pay more, but how best to accomplish it.

Article source: http://feeds.nytimes.com/click.phdo?i=7165ea1d9d780ee19cb45202424e83c8

Filed Under: Business News Tagged With: internal revenue service, jack kemp, tax foundation

Bucks: Delta Says It Will Refund Airfare Tax

August 1, 2011 by NewsMaker Leave a Comment

Delta Air Lines offered a bit of good news on Monday for passengers who bought airline tickets before July 23 for travel taking place after that date. The carrier announced it would refund passengers directly. Just don’t hold your breath.

Because Congress could not agree on legislation to extend the authority of the Federal Aviation Administration, the agency lost the ability to levy taxes on airfares. Since then, there has been some wrangling over whether the airlines or the Internal Revenue Service would be responsible for providing refunds.

Last week, the I.R.S. said that customers should be able to get their refunds directly through the airlines and that it would develop a claims procedure for passengers who were unable to do so.

Now, Delta said, “The airline will process refunds directly for customers.” But the airline also said it was awaiting instructions from the I.R.S. on how to process those refunds.

If you paid taxes on such a flight and are pursuing a refund, let us know how it’s going in the comments.

Article source: http://feeds.nytimes.com/click.phdo?i=62665d174a48c297c4fbb14af6b318f8

Filed Under: Your Money Tagged With: airfare, delta air lines, internal revenue service

Week in Review: Rich and Sort of Rich

May 15, 2011 by NewsMaker Leave a Comment

In the debate over how to close the budget deficit, President Obama talks often about raising taxes on “millionaires and billionaires,” but his policy prescription is a bit different. He says that federal income taxes should be increased on families making more than $250,000. That seems to be the threshold. Under $250,000, you’re middle class; over it and you’re wealthy.

Where did this number come from? Is it based on a statistical metric of wealth in America — a true dividing line?

Empirically, these households are surely not middle income. Only 2 percent of households in the nation make more than $250,000, according to the Internal Revenue Service. But some economists and tax reform advocates are questioning whether those households are rich enough to be worthy of the same tax bracket as millionaires.

“The very round nature of it suggests that it’s arbitrary,” said Roberton Williams, a senior fellow at the Tax Policy Center and the deputy assistant director for tax analysis at the Congressional Budget Office from 1998 to 2006. “There’s nothing magical about $250,000 per year. It has no economic basis.”

It does have a political basis.

The dividing line appears to have its genesis in 1993, when President Bill Clinton created a new tax bracket at $250,000 and raised the rate to 39.6 percent. Prior to Mr. Clinton’s new bracket, the highest earners were those defined by making more than $86,500; they paid 31 percent under the first President George Bush.

Mr. Obama started using the $250,000 household income level to define wealthy Americans during his campaign in 2008. Under his budget proposal, a target of the Republicans in recent weeks as part of a fierce battle over raising the debt ceiling, the tax cuts enacted by his predecessor, President George W. Bush, would be reversed for those households. Mr. Obama’s proposed top household income tax bracket — starting at $250,000 — would pay 39.6 percent on federal income. (Single filers making $200,00 or more would also be in the highest bracket.) Currently, the highest tax bracket starts at $379,150, and they pay 35 percent.

Aides that worked with Mr. Obama during his campaign said he latched onto $250,000 because it helped invoke President Clinton’s era of economic prosperity in the 1990s — a demonstration, the argument goes, that higher taxes did not hinder growth.

He was also following an analysis by Thomas Piketty, a widely followed economist at the Paris School of Economics, and Emmanuel Saez at the University of California, Berkeley. Their study on economic equality showed that the rich have gotten richer — income for the top 1 percent rose by $261,930, or 30 percent, from 2002 to 2008 — while the bottom 90 percent saw their incomes drop by $1,170, or 4 percent, on an inflation adjusted basis.

The economists concluded: “We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional reforms should be developed to counter it.”

Whatever the policy debates, households at President Obama’s dividing line might be wealthy, but that doesn’t mean they feel wealthy.

On a Yahoo message board, a poster named Mason, who lives in Manhattan with two young children, said his household income was $262,000. “I understand the need to raise taxes,” he wrote, “but I don’t understand why people like us are lumped in with millionaires and billionaires.”

On one level, Mason is feeling the effects of inflation; $250,000 isn’t what it used to be. If Mr. Obama were really trying to return to Mr. Clinton’s 1993 levels, he would have to adjust the bracket for inflation, moving it up to about $386,075. In fact, in Mr. Clinton’s last year in office, the top bracket had risen to $288,350 from $250,000.

Then there is the problem of keeping up with the Joneses. In 1993, earning $250,000 was a more exclusive club, making it easier to feel like one of the wealthy. Back then, households making more than $200,000 represented about .08 percent of the country.

And today, $250,000 households tend to be clustered on the coasts, where there are often better-paying jobs.

The Fiscal Times, a publication financed by Peter G. Peterson, the very public deficit hawk and former commerce secretary under President Richard Nixon, commissioned BDO, an accounting firm, to look at how households that make $250,000 fared in different parts of the country, mostly in middle- to upper-class neighborhoods.

The takeaway, according to the study: “It’s not exactly Easy Street for our $250,000-a-year family, especially when they live in high-tax areas on either coast.”

Even when including in its estimates an additional $3,000 from investment income, the report said, families “end up in the red — after taxes, saving for retirement and their children’s education, and a middle-of-the-road cost of living — in seven out of the eight communities in the analysis.”

There is also an issue of fairness, say some economists and advocates of tax reform. The truly rich — the “millionaires and billionaires” — often pay much less in taxes. The wealthiest 400 Americans in the country paid, on average, a rate of only 16.6 percent, according to the latest report from the I.R.S. that examined returns from 2007. That is because much of the income of the country’s wealthiest people comes from investments, which is taxed at the long-term capital gains rate of just 15 percent.

So far, neither Democrats nor Republicans dare talk about raising the long-term capital gains tax out of fear that it would reduce crucial investments that could produce jobs.

Tax brackets could be added for the wealthiest — for instance, a millionaire’s tax. In 2009, the House of Representatives included 5.4 percent surtax on millionaires as part its health bill, but the tax later morphed into the Medicare payroll tax on households making more than $250,000.

Peter R. Orszag, the former director of the Office of Management and Budget under President Obama, said a millionaire’s tax “is an idea that has been discussed in Democratic policy circles,” but that ultimately it was outweighed by “economic concerns that marginal tax rates could creep over the 60 percent range” in certain cities in the country, when factoring in state and local taxes.

There is also a question about whether enough money could be collected from those “millionaires and billionaires” to make up for lost revenue from households making mid-six figures.

“The problem is that there’s not really enough income even at the top,” Mr. Williams, of the Tax Policy Center, said. “To close the deficit to 3 percent of G.D.P., we’d have to raise the top rate to 77 percent, which would change behavior, so you might have to raise the income tax even higher, perhaps to 90 percent.”

Right after World War II, the highest rate was roughly that. Indeed, for most of the 1950s, ’60s and ’70s the highest rate was about 70 percent. Even under President Ronald Reagan in 1986, the highest rate was 50 percent.

Of course, the Reagan revolution was about those high tax rates. And we are unlikely to see those rates anytime soon.

Article source: http://feeds.nytimes.com/click.phdo?i=c95d90a2a5f69cc84d3f093027c1696f

Filed Under: Economy News Tagged With: economic basis, internal revenue service, wealthy americans

UBS Settles Fraud Cases Over Munis

May 5, 2011 by NewsMaker Leave a Comment

The Justice Department, the Securities and Exchange Commission, the Internal Revenue Service and 25 state attorneys general entered into the agreement with UBS, which admitted that, from 2001 through 2006, several of its former employees repeatedly manipulated the bidding process when local governmental entities or nonprofit organizations sought to invest the proceeds of municipal bond offerings.

The conduct of UBS and its employees “corrupted the competitive process and harmed municipalities, and ultimately taxpayers, nationwide,” said Assistant Attorney General Christine A. Varney, who oversees the federal antitrust division. “Today’s agreements with UBS ensure that restitution is paid to the victims of the anticompetitive conduct, that UBS pays penalties and disgorges its ill-gotten gains.”

UBS said in a statement that it was pleased to have resolved the matter. “The underlying transactions were entered into in a business that no longer exists at UBS, and involved employees who are not longer with the firm,” the statement said. The company also said that it had made provisions for the settlement in prior quarters and it therefore “will have no effect on the firm’s future financial results or on any current business of UBS.”

UBS is the second big banking institution to settle accusations of bid-rigging in the municipal bond derivatives market. In December, Bank of America agreed to pay $137 million in restitution after voluntarily disclosing its anticompetitive conduct and agreeing to cooperate with authorities in further investigations.

As part of the broader investigation of bid-rigging in the municipal securities market, the Justice Department has brought criminal charges against 18 former executives of various financial services companies. Nine of the 18 have pleaded guilty, including one former UBS employee. Three other UBS employees also have been charged with criminal activities related to the municipal market.

Most of the $160 million to be paid by UBS will go to municipalities that were affected by the conduct, officials said, which involved more than 100 transactions. According to an outline of the charges by the S.E.C., the company played various roles in the illegal bidding scheme, sometimes obtaining advance information about competing bids for financial products, and in other cases facilitating illegal activity by submitting sham bids for services.

“Our complaint against UBS reads like a ‘how to’ primer for bid-rigging and securities fraud,” Elaine C. Greenberg, chief of the S.E.C.’s municipal securities and public pensions unit, said at a press conference announcing the settlement.

UBS, which acquired the American investment bank
PaineWebber in 2000, was at the time of its conduct one of the largest underwriters of municipal securities in the nation. UBS closed its municipal reinvestment and derivatives desk in 2008.

State and local governments often sell bonds to raise money to pay for projects like roads, schools and hospitals. Until they are ready to spend the money, the entities invest the proceeds in contracts that are often tailored to meet specific needs in terms of the timing of spending and required collateral to insure their debts.

Investment firms offer to sell those contracts at given prices, and bidding for the right to provide the service is supposed to be conducted at arm’s length. But UBS often conspired with the party overseeing the bidding to guarantee that it bid just enough to win the contract, thereby maximizing its own profit.

Of the $160 million to be paid by UBS, $91 million will be routed through the Justice Department and the states to the municipalities and other customers affected. UBS will also pay $47 million through the S.E.C. to the customers affected, and $22 million through the I.R.S.

Under I.R.S. regulations, the proceeds of tax-exempt municipal securities offerings must be invested at fair market value. Because of the fraudulent conduct by UBS, the tax-exempt status of billions of dollars of securities was jeopardized, officials said. That status was reaffirmed by the I.R.S. as part of its settlement with the company.

Article source: http://www.nytimes.com/2011/05/05/business/05muni.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: fraud cases, internal revenue service, state attorneys general

Bucks: Married Gay Couples ‘Refuse to Lie’ on Tax Forms

April 5, 2011 by NewsMaker Leave a Comment

Courtesy of Equality Florida The “Refuse to Lie” campaign was created gay activists who believe that the federal government should acknowledge same-sex marriage.

Some same-sex married couples are refusing to file their federal tax returns separately this tax season, as part of a movement demonstrating that they’re no longer content to quietly comply with the federal law that does not recognize same-sex marriage. And in some cases, these taxpayers will pay Uncle Sam more when they do so.

Same-sex couples who have married, or who have a legal status equivalent to marriage in certain states, must still file separate federal returns because the government — and therefore the Internal Revenue Service — defines marriage as a legal union between a man and a woman.

Using that definition, federal tax returns ask taxpayers to check one of five options under their filing status: single, married filing jointly, married filing separately, head of household or qualifying widow(er) with dependent child. Married same-sex partners typically file their own federal returns either as single or, if they qualify, as head of household, which has more favorable rates than the single filing status.

But many same-sex couples contend that filing as single amounts to lying about their marriage status, and that’s the message behind the “Refuse to Lie” campaign created by gay activists, which is timed to coincide with tax season.

“More people are refusing to lie on those forms, even though the government is telling them to,” said Nadine Smith, executive director of the gay, lesbian, bisexual and transgender advocacy group Equality Florida, who plans on filing a joint return with her wife, Andrea. “It would be both dishonest and deeply humiliating to now disavow each other or our marriage and declare ourselves single on our tax form.”

Nina E. Olson, the national taxpayer advocate who acts as an ombudsman for the I.R.S., acknowledged the uncertainty surrounding federal taxation of same-gender spouses in an annual report to Congress. In the report, she said that taxpayers may take a filing position without penalty if there is “substantial authority” to do so, such as a court case that hasn’t been overruled by the United States Court of Appeals. And there happen to be two such cases, which are currently on appeal.

In July 2010, the Federal District Court in Massachusetts declared the Defense of Marriage Act — the federal law known as DOMA that defines marriage as between a man and a woman — as unconstitutional in two cases. They are now being appealed in the First Circuit. “Thus, there may be substantial authority for same-gender spouses to take certain tax positions as married as long as the Massachusetts district court’s opinions stands,” Ms. Olson said in the report.

The “Refuse to Lie” Web site warns same-sex couples of the risks of filing jointly, and explains different options to both adhere to the law while expressing that they disagree with it. One way to do that would be to put an asterisk by the “single” box, and then indicate at the bottom of the tax form that you are “only single under DOMA.” Another option, the site says, is to attach a note with a similar message.

The campaign also explains on its Web site how to file a joint return while avoiding penalties. In the first method, each partner would file their own single return and include an attachment stating that they’re married, and then file an amended return jointly. “Once the I.R.S. rejects the amended return, or if six months passes and they do nothing, the taxpayers who file an amended return have the right to file suit in Federal District Court claiming the refund,” the activists’ site said, adding that this option would avoid penalties because your original return would be filed according to the law.

Another method suggests filing two returns: one filed jointly (and showing the tax due on the joint return) and one filed as a single taxpayer (showing the tax due on that return). Pay whatever is due on the single return — which means you will not have underpaid — and then ask the I.R.S. which return to accept. But if the I.R.S. accepts the joint return and issues you a refund, “there is no way to know what will happen if you are later audited,” the site said.

“People who follow this example need to do so with a clear head about the decision they are making and that what could happen is unclear,” Ms. Smith, of Equality Florida, said. “It’s not without risk.”

But there’s another way to preserve your right to collect any refunds due to you if the law is eventually struck down. Patricia Cain, a professor at Santa Clara Law and an expert on sexuality and federal tax law, said that couples who would benefit from a joint filing — that is, couples who would pay less in taxes or receive refunds — can file a protective claim using I.R.S. Form 843. (File separate returns in accordance with the law, then attach the form to an amended joint return).

“If you state on Form 843 that your claim is based on the unconstitutionality of DOMA, which is an issue pending in current litigation, it is more likely that the I.R.S. will do nothing until the issue is finally determined,” she added. “And if DOMA is struck down as unconstitutional, you should be entitled to the refund on the amended return.”

Although she generally recommends that same-sex married couples file their own returns in accordance with the law, she said that couples living in Massachusetts might be able to better justify filing their returns jointly because of the two court cases there.

“The question is whether that is sufficient as substantial authority to avoid being assessed penalties if you were audited by the I.R.S. and found to have filed incorrectly,” Professor Cain said.

She also said that she knew some same-sex couples in several different states who had filed joint returns and received refunds. “It’s because the returns are handled by machines,” she said, adding that the 1040 forms don’t have any gender markers on them. “That doesn’t mean they won’t be audited sometime. But honestly, I think the I.R.S. has bigger fish to fry than figuring out where same-sex couples filed jointly.”

Taxpayers who don’t pay the proper amount of tax will be levied a 20 percent penalty on top of the amount of tax owed. An I.R.S. spokeswoman said the agency followed the federal Marriage Act and declined further comment.

But for Kate Kendell it’s about more than the money. Ms. Kendell, executive director of the National Center for Lesbian Rights, said she and her wife, Sandy, who have been together for 18 years and have two children, are going to file as married this year (they married in California during the brief window in 2008 when same-sex marriage was permitted there).

“As a lawyer and a legal advocate for the L.G.B.T. community, I am often in a position to advise people to exercise great caution and to comply in most cases with the letter of the law, even when that means denying who we are,” she said. “This is my small way of saying, where we can, we are not going to play the game anymore.”

In their case, the move is going to cost the couple more than $5,000.

If you’re part of a same-sex couple and would like to file jointly, how far would you go to show that you disagree with the current law? And what does everyone else think about this effort?

Article source: http://feeds.nytimes.com/click.phdo?i=c9e8552f674bb1277242a3a8695383bc

Filed Under: Your Money Tagged With: advocacy group, internal revenue service, sex partners

Bucks: Taxpayer Suggestions for Improving the I.R.S.

March 31, 2011 by NewsMaker Leave a Comment

Taxpayer Advocacy Panel Herb Bohrer.

This is the time of year when many Americans are dealing with the usual frustrations of filing their annual tax returns with the Internal Revenue Service. But there is a group whose job is to make the I.R.S. better: The Taxpayer Advocacy Panel.

The panel, made up of 110 volunteers from around the country, researches ways to make what is perhaps one of the most reviled federal agencies more user-friendly. An outgoing member, Herbert Bohrer, spoke with me recently by phone about his experience. Mr. Bohrer, 67, is a retired nuclear engineer turned farmer in tiny Springfield, Idaho. Here’s an edited and condensed version of our conversation.

Q. How did you come to serve on the panel?
A. I’m not a C.P.A. or anything like that. My son works in D.C., and he saw the notice and e-mailed it to me because he knows I enjoy volunteer work. I worked for the Department of Energy and it has an advisory organization, too, and it seemed like a good thing to do. The TAP staff does the screening, and after that the remaining candidates are interviewed and nominees are forwarded to the secretary of the Treasury. I started in December 2008. It takes about 300 to 500 hours a year.

Q. What did you learn serving on the panel?
A. The I.R.S is a huge organization, with around 80,000 employees. You don’t normally hear much positive about the I.R.S. The thing that impressed me was the attitude of the I.R.S employees — they do have a desire to help the taxpayer.

Q. Some people might be surprised to hear that.
A. It became apparent to me that the customer really is important to the I.R.S.

Q. What sort of issues did you work on?
A. I’m on the Taxpayer Assistance Center Committee. The I.R.S has 401 taxpayer assistance centers. It’s the only place the taxpayer ever talks to an I.R.S. employee in person, unless they have an audit. People go there to make payments or get help with their taxes. We were asked to look at a number of things, to recommend how to improve their processes.

Q. What changes did you suggest?
A. We were asked to look at how payments are made. Handling cash is a difficult thing for these centers, especially the smaller ones where there might be only one or two people. They can’t keep it overnight; it has to be sent to a processing center. But if somebody wants to pay in cash, they have to take it — or have a good reason not to. One group doing it is truck drivers. They pay a federal heavy highway vehicle use tax, and have to have proof to get their state license. We made a number of recommendations. (His committee’s recommendations included encouraging truck drivers to use commercial online payment services or shifting payments to banks; and providing drop boxes for noncash payments.)

Q. What other topics did you study?
A. Last year, we were assigned to look at how signs are used in these offices, to see if they were really communicating effectively. I visited one center in Utah, and three in Idaho. We found there are a lot of signs but nobody reads them. (The committee advised getting rid of certain signs to reduce visual clutter.)

Q. Why don’t people like the I.R.S.?
A. People think, “I’m paying these guys, and they ought to be meeting my needs.” If you call for assistance, if you’re working on a specific issue and you have to call back, you won’t talk to the same person. That frustrates people. The I.R.S won’t communicate with taxpayers by e-mail, due to security concerns. They’re working on it, but because of the potential for fraud and confidentiality of records, there are a lot of hoops to jump through.

Q. Any advice for callers?
A. They need to have as much information as possible before they call. Try to have your facts together, so you can deal with the issue to completion at that point, and not have to call back. And, I hate to say it, but be patient.

The panel is accepting new applicants in many states, for seats coming available at the end of this year.

What suggestions would you make to improve the I.R.S.? Have you found I.R.S. employees to be helpful when you called to ask questions?

Article source: http://feeds.nytimes.com/click.phdo?i=49781116582d1cd6330d4f632a5daa59

Filed Under: Your Money Tagged With: bohrer, internal revenue service, nuclear engineer