Tax Reform Law Induces Sticker Shock For Millions Of Taxpayers

Tax season is upon us and many taxpayers are discovering the changes to the tax code that were generated by the tax reform bill passed in December 2017. While most taxpayers will find at least modest savings from the new tax law, a growing number of filers are learning that they will pay more this year and they aren’t happy.

The tax reform law contains several features that lowered taxes for many Americans. The law kept the seven tax brackets that existed previously but lowered the tax rates. The new law also almost doubled the standard deduction and increased the child tax credit. The problem for many taxpayers, especially in blue states, is that the lower rates and higher standard deduction are not enough to offset the caps that were placed on the deductions for state and local taxes (SALT) and mortgage interest.

Under the old law, state and local property, income, and sales taxes were generally fully deductible. Tax reform capped the deductible portion of those taxes at $10,000. The new law also lowered the amount of mortgage interest that can be deducted from a principal amount of $1 million to $750,000. The new limits to these deductions are hitting middle and upper-class taxpayers in blue states hard.

Many of the irate taxpayers are blue collar workers who claim to have voted Republican. For example, Nycgirl tweeted to the White House:

https://twitter.com/nlnp99/status/1092606993792225281

Dennis Jordan, a veteran and Catholic, tweeted angrily to the GOP:

https://twitter.com/DennisMJordan/status/1092784259864109057

These tweets and others like them are easy to find as people get their W-2s and start to work on their 2018 tax returns. Especially for taxpayers in states with high property taxes and home values, many are finding that, with no other changes, tax reform has eliminated their tax refunds and left them with tax bills due. For many taxpayers, the list of deductions lost is greater than the increase in the standard deduction.

For example, in California, the median house value is now more than $600,000 which means that almost half of California homeowners cannot deduct all of their mortgage interest. If a home buyer takes out a mortgage for $1 million at five percent interest, the interest payments for the first year would total just under $50,000. Under the new tax law, more than $10,000 of that interest would no longer be deductible.

The problem is compounded by state and local property taxes. California doesn’t have the highest property tax rates (the state is actually 35^th), but due to the high price of housing there, the average property tax is $4,783 per USA Today. Northeast and Rust Belt states have even higher property tax rates. New Jersey has both the highest rates and the highest average tax at 2.31 percent and $8,477 respectively. New Jersey’s property tax alone almost reaches the cap for state and local tax deductions.

But wait, as they say, there’s more. Only a handful of states don’t have their own income taxes. In many cases, the states that have high property taxes also have high income tax rates. In addition, there are taxes on other personal property, such as cars, as well as income taxes levied by cities and counties. There is a long list of cities, many in red states, that take their own share of income from workers.

When all these taxes are added up, the tally is more than $10,000 for many Americans. These taxpayers have just lost thousands of dollars in deductions and that drives up the federal income tax that they owe. Last September, the General Accounting Office warned that as many as 4.5 million taxpayers could end up having to write checks to the IRS unless they increased the amount of the tax withheld from their paychecks.

There is a tendency for conservatives to dismiss concerns about the loss of these deductions because they primarily affect blue states, but that is not necessarily a safe assumption. The Tax Foundation published an interactive map that shows which areas benefit most from state and local tax deductions. As it turns out, even swing and red states have pockets of high tax areas.

While California was a large beneficiary of the deductions, Fulton County, Georgia had a higher average SALT deduction claimed ($5,814) than Los Angeles County ($5,405). Delaware County, the home of Columbus, in the must-win swing state of Ohio had an average SALT deduction of ($7,674). Other counties in Rust Belt states carried narrowly by Donald Trump in 2016 are also heavily impacted by the loss of the deduction. These include the Philadelphia suburbs of Montgomery and Bucks Counties, the Milwaukee suburbs of Waukesha and Dane Counties, and the Detroit suburb of Oakland and Washtenaw Counties.

The big question is whether the Republican tax increase on blue state voters would be enough to affect the outcome of an election. The answer is that it may already have. The Republican rout in the suburbs last year may have been at least partly due to those voters who were aware that their deductions for taxes and mortgage interest would be curtailed this year. Among the Republican losses in 2018 were six seats in the Los Angeles suburb of Orange County where the average SALT deduction was $6,569, among the highest in the nation. A Republican stronghold just a few years ago, Orange County is now completely dominated by Democrats. Many other suburban districts, often characterized by high property values and high-income voters, flipped from Republican to Democrat as well.

The tax reform bill was well-intended and provided a boost to the economy, but an unintended consequence was raising taxes on millions of voters in swing states and districts. That policy error may have combined with other factors to make 2018’s blue wave a reality even before most voters knew that they were paying more in taxes. If the error isn’t corrected, things could get worse in 2020 with millions more who saw their tax refunds turn into tax bills. Even though the assumption is that the 2020 election will be a referendum on Donald Trump, many swing voters may turn out to vote their pocketbooks against the party that increased their taxes.

Originally published on The Resurgent

Beware of tax protest conspiracies

As we approach April 15, the deadline for filing federal income tax returns for most individual taxpayers, many people question whether Americans are really required to pay an income tax. Scores of Youtube videos featuring people such as former IRS agent Joseph Bannister claim that the federal income tax is illegal and that Americans cannot be forced to pay taxes to the IRS. In celebration of the Ides of April, let us once again don our tin foil hats and delve into the world of income tax protesters.

One claim made by tax protesters is that there is no law on the books that permits a federal income tax. It is true that the original income tax signed into law by Abraham Lincoln in 1861 was found unconstitutional by the Supreme Court in 1895. This problem was fixed with the ratification of the 16th Amendment in 1913. Some tax protesters argue that the 16th Amendment was never properly ratified. Professor Jonathan Siegel of the George Washington University Law School explains that the 16^th Amendment had the same ratification process as other amendments and really is part of the Constitution.

Another claim is that even though the Constitution permits an income tax, no federal law ever enacted one. Some tax protesters claim that even after years of searching that they have found no law establishing an income tax. In truth, they need look no further than Title 26 of the U.S. Code, commonly known as the Internal Revenue Code. Subtitle A, chapter one, subchapter A, part one legally establishes an income tax on individuals. This part also defines that wages are included in taxable income, debunking another claim by some tax protesters.

The “861 argument” against paying income tax is based on a section of chapter one of the tax code. Section 861 relates to resident and nonresident aliens working in the United States as well as foreign corporations. Section 861 does not apply to U.S. citizens unless they have income that has already been taxed according to Professor Siegel. If a U.S. citizen has paid taxes to a foreign government, the federal tax code allows them to use these payments as a credit on their federal income tax. Otherwise Section 861 does not apply to U.S. citizens.

Tax protesters also cite the names of many people who have allegedly “beat the IRS” in court. What they don’t say is that while these people may sometimes avoid jail time, they are not so fortunate when it comes to avoiding civil penalties and being forced to pay back taxes and penalties. Often tax protesters are sent to jail as well.

Vernice Kuglin, a former FedEx pilot who appears in some online videos as someone who beat the IRS in court, actually was acquitted in 2003 of falsifying W-4 forms and failing to pay taxes. Although she did not go to jail, she agreed to pay more than half a million dollars in back taxes and penalties and had her wages garnished by the IRS according to court documents cited on Tax Protester Dossiers. The Memphis Daily News reported in 2007 that the IRS had filed an additional tax lien against her house for $188,025.

Joseph Banister, the IRS agent who was mentioned in the first paragraph, also escaped jail although he was indicted for conspiracy to avoid taxes. According to Tax Protester Dossiers, Banister was acquitted of the criminal charge, but was disbarred from IRS practice. The California Board of Accountancy revoked his CPA license in 2007. The CBA website cites the cause for discipline as “providing erroneous advice to taxpayers” and “improperly advising them that tax returns were not required….”

Banister’s client in the case that led to his disbarment was Walter “Al” Thompson. Thompson refused to withhold taxes from their wages and file tax documents as required by law. According to etax.com, Thompson was convicted, fined $7,500, and sentenced to 72 months in prison on a variety of charges including filing a false return and failing to pay income and Social Security taxes for his employees.

Other tax protesters were also not as lucky as Banister and Kuglin. Sherry Peel Jackson, a Stone Mountain, Ga. resident and former IRS agent, was found guilty on four counts of failing to file tax returns. Jackson appears in some of the internet films espousing tax protest theories. She was sentenced to four years in prison. She surrendered her CPA license to Georgia authorities after her conviction.

Many other tax protesters have gone to jail when they followed their beliefs and failed to file tax returns. Other prominent tax resisters who have gone to jail include Peter Hendrickson, author of “Cracking the Code,” a book of tips on how to avoid paying taxes, who received a 33 month jail term and a $25,000 fine. Larken Rose, a proponent of the 861 argument, received a 15 month prison sentence and $10,000 fine. Irwin Schiff has gone to jail three times for criminal violations of tax laws. He is currently serving a 13 year sentence on tax charges and criminal contempt.

The lesson taxpayers should learn is that if there were an easy way out of paying taxes, nobody would pay them, taxes would not be a major political issue and the Republicans would not put such emphasis on tax cuts. Most obviously, if paying income taxes was not mandatory, people who do not pay taxes would not go to jail. It is not illegal to question the legality of the income tax. It is illegal to refuse to pay taxes or file a return.

Many conspiracy theories are ultimately harmless. Staying inside because of a fear of chemtrails may hamper one’s life, but it won’t ruin it. Believing that that JFK was the victim of a vast conspiracy, that secret forces were behind the September 11 attacks, or that Obamacare requires Americans to receive implants or establishes a secret police force probably won’t cause one to lose their job or family. While it is not against the law to espouse conspiracy theories about the income tax, acting on those theories can cost conspiracy believers years in jails and thousands of dollars in fines and penalties.

Originally published on Examiner.com:

 

http://www.examiner.com/article/tax-protester-conspiracy-theories-can-lead-to-jail-fines

Fair Tax flaws

Recently an Alert Reader commented on the article “Fair Tax basics” on this site.  The reader noted in part that the “Fairtax sounds great but check out the fine print http://fairtaxfineprint.blogspot.com/.”  The link is to a blog critical of the notion that the Fair Tax will also tax governments.

The text of the Fair Tax bill does confirm that the definition of the word “person” does include governments, which means that local, state, and even the federal government will be taxed if the Fair Tax becomes law.  This is counter-intuitive.  It seems nonsensical that the government will be forced to pay a consumption tax to itself. 

Only people pay taxes.  Corporations and governments have no money that they don’t get from people, so when a corporation or government is taxed, the money it uses to pay that tax comes from real people.  In the case of the government, it comes from taxpayers.  Therefore, it seems that the Fair Tax would merely shift the tax burden to local and state governments as they increased taxes to pay the Fair Tax.

To get an answer to this question, the Atlanta Conservative Examiner called the expert.  Neal Boortz is the coauthor of two Fair Tax books and host of the Neal Boortz Show, a syndicated radio talk show based on Atlanta’s WSB AM-750 on Tuesday, April 12.  Boortz pointed out that the problem with the Fine Print blog’s argument is that the government already pays taxes.  Governments directly pay sales taxes on goods and services that they buy as well as Social Security and Medicare taxes on payroll.  There are also indirectly pay embedded taxes on the goods and services that governments buy.  These include payroll taxes of the workers that make the product being purchased. 

The Fair Tax would eliminate many of these taxes that governments already pay indirectly (although not the sales taxes levied by local and state governments).  By specifically and directly taxing governments, the Fair Tax simply takes the money that governments have paid indirectly in the past and makes it a direct payment.  Theoretically at least, the change is a wash.  Because prices of goods and services would fall without embedded taxes, the total paid out should remain approximately the same with the Fair Tax making up the difference.  Additionally, Boortz stated that he was working on a position paper to answer the charges from the Fine Print blog.

More than a new sales tax

A second objection to the Fair Tax it is simply a sales tax that would cause prices to rise by 23%.  This does not consider the fact that the Fair Tax replaces other federal taxes.  As those embedded taxes are removed, the price of goods and services should fall to an equilibrium point.  The Fair Tax would be added to the lower price so that the actual final price paid on new items would be approximately the same as it is today.  Used items would not be taxed and would therefore be cheaper than they are today.

The critics who claim that the Fair Tax would raise current prices by 23% more accurately describe the Value Added Tax proposed by some Democrats.  A VAT is a European-style consumption tax in which a tax is added at each stage of production of a good.  Unlike the Fair Tax, a VAT would be in addition to current taxes.

Crunching Numbers

Rep. Rob Woodall

There is also some dispute over the actual Fair Tax rate.  The answer depends on how the rate is figured.  Depending on whether the rate is being quoted as tax-inclusive or tax exclusive, the rate can be as high as 30%.  The amount of the tax is the same regardless of the percentage of the rate. 

The Fair Tax website acknowledges that the rate charged at the point of sale would be 30%.  For example given on the site, if a person bought an item for $77, they would pay $23 of tax for a total of $100 ($77 x 1.3).  The tax-inclusive price is $100.10. 

When figured the other way, the rate is different.  If one begins at the total price of $100 and multiplies by 23 percent, the result is $23 of tax and $77 for the product.  The tax-exclusive price is $77.  This is akin to how income tax rates are quoted. 

Proponents of the Fair Tax say they use the tax-exclusive rate because the Fair Tax would replace the income tax.  Critics say that the lower rate is misleading.  In either example, the tax is virtually the same.

Who will pay more?

Factcheck.org reports that a Treasury Department comparison of the Fair Tax and income tax shows that the middle class would pay more.  Factcheck’s own analysis shows that those earning less than $24,156 per year would benefit when all taxes replaced by the Fair Tax are considered. Further, Factcheck says that David Burton of Americans for Fair Taxation acknowledges that high earners would probably pay a smaller share while “probably those earning between $40[thousand] and $100,000” would pay a larger share.

The important thing to remember here is that each American would control the amount of tax that they pay.  Since the Fair Tax is only levied on new goods and services, a taxpayer can reduce their tax bill by buying fewer new products.  If middle class consumption of new products decreases, that would make more money available for saving and investing as well.

An economic boon

Fairtax.org claims that the Fair Tax would entice expatriate companies to return to the US, flooding the country with capital.  The group claims that GDP would increase by more than 10 percent in the first year alone while the increasing money supply would keep interest rates low.  

Even the left-leaning Annenberg Factcheck.org’s analysis agrees that the size of the economy would grow by 5 to 7 percent, and possibly as much as 10 percent, over a period of time.  A growing economy would lead more profits, higher wages, a better standard of living, and, ultimately, higher tax revenues.

Could there be a Fair Tax and income tax?

A last major challenge to the Fair Tax is the charge that it will not be possible to pass.  To ensure that the country does not end up with a sales tax and income tax, the Fair Tax would be passed along with an amendment to the Constitution that repeals the 16^th amendment, which established the income tax.  Needless to say, it is much easier to pass a law than a constitutional amendment, which requires approval by three-fourths of the states. 

The authors of the Fair Tax have written the repeal of the income tax, the payroll tax, the gift tax, and the estate tax into the bill.  However, since the sixteenth amendment would have to be repealed separately, the possibility of having both an income tax and the Fair Tax remains a distinct possibility.  This is especially true if the Democrats took control of the government, or of a majority of the states, after the Fair Tax is enacted. 

Thus far it has been difficult for the Fair Tax to gain traction in mainstream circles.  With the current budgetary crisis, both parties can agree that major tax reform is needed.  Unfortunately, there is little agreement on what sort of reform that should be.  If it is difficult to enact the Fair Tax, it would likely be more so to repeal the constitutional income tax.

Most support for the Fair Tax seems to be among conservatives and libertarians.  Most independent voters are not aware of the Fair Tax.  Those who know about it probably do not completely understand it.  Even assuming the Republicans complete their takeover of Congress in 2012, it is unlikely that they will be able to muster the votes to pass the Fair Tax unless there is a major political realignment.  Given the dire financial state of the federal government, the current crisis may spur that realignment.

Currently, Georgia is a center for Fair Tax activism.  The Fair Tax bill is sponsored in the House by Rep. Rob Woodall (GA-7).  He is joined by sixty cosponsors including Paul Broun (GA-10), Phil Gingrey (GA-11), Tom Graves (GA-9), Jack Kingston, (GA-1), Tom Price (GA-6), and Lynn Westmoreland (GA-3).  Notably absent is Rep. Paul Ryan (R-WI), author of the Path to Prosperity.  In the Senate, the bill is sponsored by Georgia’s Saxby Chambliss and has six cosponsors, including Georgia’s other senator, Johnny Isakson.

http://www.examiner.com/conservative-in-atlanta/fair-tax-flaws"> 

Obama's "soak the rich" plan misses mark

(Center for American Progress Action Fund)

When President Obama gave his long-awaited speech on deficit reduction today, it was predictable that his prescription for curing the government’s spending problem would be to raise taxes.  There are several problems with this strategy that the president does not address.

First and most important is that taxing the wealthy cannot solve our spending problem.  The Wall St. Journal has noted that even if the IRS confiscated 100 percent of the taxable income of all Americans who earn more than $500,000, it would only provide $1.3 trillion in new revenue.  They further noted that confiscating all taxable income over $75,000 would barely cover the $4 trillion that Obama and Congress spent in 2010.  Obviously, a 100 percent tax rate is not possible.  The US needs economic growth to boost tax revenues; raising taxes on “the wealthiest Americans” cannot and will not solve the problem.

The second problem with President Obama’s strategy is that very few rich people are stupid.  Most of the wealthy that are stupid employ financial advisors who are not.  When taxes go up on millionaires, it usually follows that there are fewer millionaires around to tax.

As an example, another Wall St. Journal article details how after Maryland enacted a millionaire tax in 2008, the state found that a third of its millionaires had flown the coop.  It is likely that many of them settled in states like Texas, Florida, or Tennessee where there is no state income tax.  If the federal government raises taxes on millionaires, there will be nothing to stop them from transferring their residences to tax havens in the Caribbean or elsewhere.  After a tax increase, Uncle Sam could easily end up collecting less money instead of more as Maryland’s state government did.

Many wealthy and politically savvy Americans already use the friendlier tax laws in other countries to shelter money and assets.  One prominent US tycoon who is rumored to be considering a presidential run is well known for flying around the country in a privately owned 727 with a Bermuda registry.

Finally, voters should ask themselves why President Obama is pushing for a tax increase on the wealthy given the fact that the wealthy typically support Democrats by large margins.  It is not logical that the president would bite the hand that feeds the Democratic Party with millions of dollars in campaign donations. 

The obvious answer is that the wealthy won’t really be paying the tax rates that President Obama proposes.  Any increase in tax rates is likely to be quietly accompanied by new tax shelters, write offs, and other assorted means of avoiding a bigger tax bill.  It is unreasonable to assume that rich, powerful, and influential people who helped put President Obama in the White House and most Democrats in the respective congressional seats will sit idly by and let the government take their money.

The biggest effect of a tax increase, even if it is solely aimed at the wealthy, would likely be to slow the recovery and possibly even plunge the economy back into recession.  If money is removed from the economy, whether by being sent to the government or fleeing to tax shelters, the economy shrinks.  Less capital is available to businesses to hire and expand.  The effect trickles throughout the economy as sales fall, followed by wages and employment rates.

Nevertheless, the siren song of increased revenues, often a code phrase for tax increases, can infect the right as well as the left.  Georgia’s own Senator Saxby Chambliss is rumored to be considering a compromise budget that might include tax increases as a member of the “Gang of Six.”  However, Chambliss says, “We’re not talking about raising taxes….  We’re talking about lowering tax rates.”

America’s problem is not that we are taxed too little.  The problem is the out-of-control spending of both parties.  The solution is not tax increases that are too little, too late and in any case would trigger more spending.  The only practical solution is to drastically cut spending.  The solution, however, is an anathema to the president who, in less than two years, added more to the national debt than the first forty US presidents combined. 

http://www.examiner.com/conservative-in-atlanta/obama-budget-speech-misses-mark">