Facebook Tax Propaganda

A friend of mine sent me the following from a Facebook post and asked me if it was true:

It is utterly and completely false.  So much so I don't know where to begin.

Let's start with the easiest.

First, there is no "real estate transaction tax" under federal tax law.  None.

Second, about the claim that "the top income payroll tax went from 37.4% to 52.2%," I have no idea what the writer of this is referring to.  There is no such thing as an "income payroll tax."  Now, there is an income tax and there is a payroll tax, but they are separate taxes.  And even if you add up the top rates of both, they don't come anywhere near 52.2%.  So I have no idea what this person is talking about.

The other items I think I know what the writer is talking about.  But before I get into the details, let me just emphasize the following:

"These taxes were all passed solely with Democratic votes.  Not a single Republican voted for these new taxes." - utterly and absolutely wrong.

These taxes were all passed in the Affordable Care Act, aka Obamacare."  Utterly and totally wrong.

So let's take the remaining points in order:

1.  Medicare tax went from 1.45% to 2.35%.  This is partially true. Effective January 1, 2013 (not January 1, 2015), the medicare tax was increased by 0.9 percentage points for people making more than $200,000 ($250,000 for married couples).  The tax increase was passed as an amendment to the Affordable Care Act in 2010 as part of the budget reconciliation process that year.  The final bill (which was very large mostly had nothing to do with the ACA) was passed on a party-line vote.

Note that the vast majority of Americans are not subject to this tax increase: it affected 2.1% of tax returns filed in 2013 (the last year for which statistics are available).

2.  Top income tax bracket went from 35% to 39.6%.  This is correct, but

• it had nothing to do with the ACA, and
• It happened automatically - nobody voted for it.

Let me explain.  The Bush tax cuts in 2001 lowered the maximum rate from 39.6% to 35%.  However, they were scheduled to expire in 2011, at which time the rate schedules would revert back to those that existed prior to 2001.  Now this was an accounting gimmick.  The Republicans didn't want to say that they increased budget deficits until the end of time, so they put an expiration date on the tax cuts.

In 2010, a bill was passed extending the income tax rate cuts for two more years.  They were allowed to expire at the end of 2012.  Then, on January 3, 2013, Congress passed a bill that reinstated the Bush tax rates for everybody other than those whose incomes are greater than $400,000 ($450,000 for married couples).  That bill passed with bipartisan majorities in both houses.

Note that the vast majority of Americans are paying taxes at the same rates as under the Bush tax cuts.  Only 0.6% of returns filed in 2013 (the last year for which statistics are available) show tax imposed at the highest rate of 39.6%.

The funny thing about this was the whole process.  The Republicans refused to consider the tax bill until after the Bush tax cuts had expired.  That way, they could claim they gave everybody a tax cut.  If they had passed the bill during 2012 rather than waited until January 2013, they were vulnerable to people saying they had passed a tax increase.  Instead, they waited until January and called it a tax cut.

3.  Capital Gains went from 15% to 28%.  This is not correct:

• Capital gains went from 15% to 20%.
• it had nothing to do with the ACA
• it happened automatically - nobody voted for it.

The reduction of the capital gains rate from 20% to 15% was part of the Bush tax cuts as well.  Like those cuts, this rate reduction was scheduled to expire at the end of 2010.  This cut was also extended for two more years during 2010, but unlike the cuts on ordinary income rates (discussed in 2), this cut was allowed to expire at the end of 2012.

About that 28% rate, there is a category of capital gains that are taxed at a higher 28% rate (mainly art and other collectibles).  This was established in 1997, when under President Clinton the capital gains rate on items other than collectibles was reduced from 28% to 20%.  The special rate on collectibles was not affected by the Bush tax cuts - it never declined, and was never increased.  But there is no 28% rate on everything.  The tax rate on capital gains is 20%.

4.  Dividend tax went from 15% to 39.6%.  This is not correct:

• The tax on dividends went from 15% to 20%
• it had nothing to do with the ACA
• it happened automatically - nobody voted for it.

This story is essentially the same as for capital gains.  One of the Bush innovations was treat dividends on corporate stock the same way you treat capital gains. This resulted in a cut in the rate of tax on dividends from 39.6% to 15%.  But when the 15% tax rate on capital gains expired and went back up to 20%, the rate on dividends went to 20% as well.  It did not increase to 39.6%.

5.  Estate tax went from zero percent to 55%.  This is not only incorrect, it is crazy.

• The estate tax rate was 45% when Obama took office - it is now 40%.
• It had nothing to do with the ACA, 
• But for the actions taken by Obama (with, by the way, bipartisan support in Congress), the rate would have increased to 55%.

The estate tax story is effectively the same as the story for the income tax and capital gains tax.  In 2001, as part of the Bush tax cuts, the cuts were made to the estate tax as well.  The 2001 act reduced the top estate tax rate to 50%, and greatly increased the brackets and exemption amounts.  The top rate was scheduled to be reduced to 45% by 2009, then to zero in 2010.  But, like all of the Bush tax cuts, the estate tax cuts were scheduled to expire in 2011, so that the top rate would go back to 55%.

In 2010, Congress passed a bill that, among other things, provided a reinstated estate tax with a maximum rate of 35%.  That rate was made retroactively effective to the beginning of 2010.  This is the same bill that extended the Bush tax cuts on income, capital gains and dividends for two more years.  It was passed with bipartisan majorities in both houses of Congress (in fact, Republicans supported it more strongly than Democrats).

The rate was increased to 40% in the 2013.  That increase (which was in the same bill that limited the increase in the federal income tax to incomes over $400,000, as described in 2 above) was passed with bipartisan majorities as well.
  

Links: The Slow Death of the IRS

Two things I saw today:

An Emotional Audit: IRS Workers Are Miserable and Overwhelmed

The GOP's Campaign to Make You Hate the IRS is Kind of Genius

Look, the bottom line is, we are always going to have to pay taxes.  This has been going on since biblical times, and we have yet to come up with a society that doesn't have taxes associated with it. As a result, there will always be tax collectors.  The idea of abolishing the IRS is ludicrous.  We're just going to have to replace it with something else.  And that will be the case no matter what kind of tax system we have (income tax, sales tax, property tax, whatever).

And people have always had a love/hate - mostly hate - relationship with the tax collector.  This, too, has been going on since biblical times.  Funny how Jesus' attitude towards tax collectors was a lot different than Ted Cruz's.

Besides, the people who collect the taxes are not the ones we should be criticizing.  I am quite sure that our tax collectors are doing what Jesus said they should do:

12 Even tax collectors came to be baptized. “Teacher,” they asked, “what should we do?” 13 “Don’t collect any more than you are required to,” he told them.

Luke 3:12-13.

Your real beef is with those who give the orders.  That would be Congress.

And your, by the way, your state legislatures as well.  At least here in NY, I am sure mine are going to hell for laws like this one.

501(c)(6): This Should Prove Interesting....

Most people are familiar with Section 501(c) of the tax law, which lists a number of kinds of organizations that are exempt from income tax.  Most recognized charities are exempt under Section 501(c)(3), and of course social welfare organizations - the subject of the IRS "scandal" involving conservative political groups - are exempt under Section 501(c)(4).  Less well known is the exemption under Section 501(c)(6), which covers:

(6) Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

This is the provision which results in the National Football League being exempt from federal income tax.  However, it's reach is far beyond the NFL.

Yesterday, Jason Chaffetz and Elijah Cummings, the chairman and ranking member of the House Oversight Committee, sent out letters to a number of sports organizations regarding their 501(c)(6) exemptions, including the National Football League, the National Hockey Leagem the US Tennis Association, the Women Tennis Association (WTA) Tour, the Association of Tennis Professionals (ATP) Tour, the National Lacrosse League, the PGA, the PGA Tour, the LPGA and the Professional Rodeo Cowboy's Association.  They specifically asked for "an analysis of what your organization's 2014 tax liability would be, if your organization were not exempt under 501(c)(6)."

I can't wait to see their answers.

A link to the letter to the NFL is here.

BTW, the NBA, Major League Baseball and Major League Soccer are not tax exempt organizations.

For more on the 501(c)(6) exemption, see this.

Sounds Like Retailers Have Taken Some Creative Tax Positions

The IRS came out with a directive last week on the Section 199 deduction.  Here's a link.  Section 199 provides a special deduction for ""Qualified Domestic Production Activities" equal to 9% of "Qualified Production Activities Income."  If your business is the "manufacture, production, growth or extraction" of tangible personal property (which includes computer software and sound recordings), you are eligible for this deduction.  Income from producing films, electricity, natural gas or potable water and from construction activities also qualifies for the deduction.

The purpose of the deduction is quite simple: to provide a lower effective tax rate on income from producing goods as distinct from income from services.  I won't go into a explication of the sordid history of this provision, except to say that its rationale was to reverse the migration of manufacturing activities from the United States to foreign countries.

Interestingly, architects and engineers who provide services with respect to the construction of property also get the deduction.  I guess the lawyers who draw up the construction contracts didn't have the heft to get the same benefit.  Of course, workers don't get the benefit, even though they are actually the ones doing the "producing."

Anyway, the IRS apparently saw a need to issue a notice to its auditors regarding what constitutes "production" for purposes of this rule.  The notice is a list of activities that are not production.  Apparently, some people were being quite creative:

(1) cutting blank keys to a customer’s specification;

(2) mixing base paint and a paint coloring agent;

(3) applying garnishments to cake that is not baked where sold;

(4) applying gas to agricultural products to slow or expedite fruit ripening;

(5) storing agricultural products in a controlled environment to extend shelf life; and

(6) maintaining plants and seedlings. 

Yes, some hardware store (can you guess which?) was taking the position that duplicating a key and adding color to a base paint was "production."  Little did I know that Congress wanted to encourage these kinds of activities by giving them a reduced tax rate!

Sometimes I hate the fact that I'm a tax lawyer, because so many of us are coming up with this sort of shit.

Tax Reform?

You know I'm starting to think this might happen.  The following update from Bloomberg BNA just crossed my desk:

"Members of the Senate Finance Committee's working group on overhauling international taxes say they are “making good progress,” though tax experts at a March 17 committee hearing on the issue said that much work still needs to be done.

Speaking at the hearing, Sens. Charles E. Schumer(D-N.Y.) and Rob Portman (R-Ohio), who co-chair the international-issues working group, sounded positive notes on their efforts to reach a bipartisan agreement.“We’ve reached a good deal of consensus here,” Portman said.

Witnesses ran down a litany of possible changes to international taxes meant to curb base erosion and profit shifting. Pamela Olson, U.S. deputy tax leader and Washington National Tax Services practice leader at PricewaterhouseCoopers LLP, said that the best way to stop BEPS is a lower corporate rate, though tax law should still contain anti-base erosion features."

I love this last quote by the PWC person.  Hey, if we cut the corporate tax rate to zero, there won't be any need for tax avoidance!

I guess I'm gonna have to start posting on this stuff again.