Posts tagged ‘IRS’

Plucking the Feathers of Taxpaying Geese

“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.” ~Jean Baptist Colbert

With exploding deficits, multiple wars, healthcare reform, and a sluggish economy, there are two logical immediate choices on how to improve our current financial situation:

1)      Cut spending. This is not a desirable option for politicians since benefit cuts to voters are not appreciated come re-election period.

2)      Raise Taxes. Not desirable from a voter standpoint either, but the Obama administration has chosen to target the rich – the smaller voting population. This can of course backfire, when many of these wealthy individuals are campaign contributors or have ties to lobbyists who are backing the President’s agendas.

The tax-paying geese are getting fatter, but before the goose can be put in the oven, the feathers need plucking with the goal of minimizing hissing. Sure, I am an advocate for tax cuts like most taxpayers. I’m even a larger proponent, if Congress had the political gumption to cut spending to fund the tax drops. Unfortunately, politicians view expense reduction as suicide because cutting programs or benefits will only lead to fewer reelection votes. Congressmen are perfectly fine letting taxpayers live high on the hog for now, and just saddle future generations with our mounting debt problems.

What’s Fair?

The current strategy is based on taxing the wealthy to fund deficits, healthcare, wars, debt, etc. Since the rich represent a smaller proportion of voters, from the egotistical politician standpoint (reelection is paramount), this wealth distribution strategy appears more palatable to incumbent legislators. Democrats would rather focus on squeezing a narrower demographic footprint of voters versus an across the board tax increase, which would impact all taxpayers. Merely taxing the rich can certainly backfire however, especially if the wealthy demographic getting taxed is the exact population paying for the politicians’ reelection and lobbying agendas.

Source: Alan’s Money Blog (U.S. has high corporate tax rate)

But at what point is taxing the rich unfair and counterproductive?  Currently the top 10% of the nation that earns more than $92,400 a year, pay about 72% of the country’s income taxes. Ari Fleischer, former G.W. Bush Press Secretary compares the current tax policy to an “inverted pyramid scheme” in a Wall street Journal Op-Ed earlier this year. Like an upside spinning top, the whirling pyramid is supported by a narrow, pointy pinnacle.

Fleischer goes onto add:

“According to the CBO, those who made less than $44,300 in 2001 — 60% of the country — paid a paltry 3.3% of all income taxes. By 2005, almost all of them were excused from paying any income tax. They paid less than 1% of the income tax burden. Their share shrank even when taking into account the payroll tax. In 2001, the bottom 60% paid 16.3% of all taxes; by 2005 their share was down to 14.3%. All the while, this large group of voters made 25.8% of the nation’s income. When you make almost 26% of the income and you pay only 0.6% of the income tax, that’s a good deal, courtesy of those who do pay income taxes.”

 

Cheaters Should Not Be Exempt (See Celebrity Tax Evader Article)

Certainly loopholes and undeserving credits for multinationals and the wealthy should be removed as well. The House of Representatives recently approved a $387 million boost for the IRS to fund a high-wealth unit focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals (read Reuters article). The IRS is also opening new criminal offices in Beijing, Panama City and Sydney to focus on international enforcement of tax cheaters. At the center of the IRS’ offshore effort is the legal cases against Swiss banking giant UBS (stands for Union Bank of Switzerland), which resulted in UBS agreeing to turn over almost 5,000 client names and pay $780 million to settle tax evasion charges.

Taxes in 2010 and Beyond

When it comes to future taxes, a lot of details remain up in the air. What we do know is that the 2001 Bush tax cuts are set to expire in 2010 and the Obama administration has indicated they want to raise taxes on the rich (those earning more than $250,000) and keep the cuts static for those in the lower paying tax brackets.

  • Healthcare: If healthcare reform will indeed pass, those benefits won’t be free. The Obama administration is backing a House bill that creates a 5.4% surtax on income over $500,000 for single filers or $1 million for couples.
  • Income Taxes: On the income tax front, Obama and some Democrats are pushing to have the two highest tax brackets revert back to the pre-2001 levels of 36% and 39.6%.
  • Capital Gains: If the Obama administration gets its way, capital-gains tax rates would go back to 20% for wealthier individuals and qualified dividends would be taxed as ordinary income up to the top rate of 39.6%.
  • Estate Taxes: The House passed a bill earlier this month that makes the 2009 estate tax provisions permanent (i.e., a  45% top marginal rate on estates larger than $3.5 million or $7 million for married couples). If the Senate were not to pass the bill, current law has the estate tax rate reverting to a 55% rate on estates worth more than $1 million after next year.

Given the exploding deficits and weary economy, which is recovering from a severe economic crisis, getting our tax policy situation back in order is critical. Having politicians make tough tax policy decisions runs contrary to their partisan reelection agendas, however our country needs to pluck more feathers from our taxpaying geese to face these monumental economic challenges…even if it requires listening to irritating hissing from our citizens.

Ari Fleischer WSJ Op-Ed From Earlier This Year

Article on Tax Policy Issues for 2010 and Beyond

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in an security referenced, including UBS. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

December 21, 2009 at 1:45 am 4 comments

Celebrity Tax Evaders Run But Can’t Hide

Hide and Seek

As Mark Twain said, “The only certainties in life are death and taxes.” That is, of course, unless you decide to not pay your taxes. Some well known celebrities fall into this camp.

The financial crisis has hit the economy hard and the impact has been felt directly by our nation’s cash register (i.e., the Internal Revenue Service – IRS). Based on 2006 IRS data, the U.S. had about an 84% Voluntary Compliance Rate (VCR) by tax payers in 2001; a goal of 85% VCR in 2009; and Senate Finance Committee Chairman Max Baucus has thrown out a 90% voluntary compliance goal by 2017. Those collection goals may be a little ambitious given the recession and the escalating unemployment trends over 2008 – 2009.

So who makes up the deadbeats who have deliberately or unintentionally not paid their taxes? Obviously 10-15% of the non-paying tax-payer base is a large number, but the real fun comes by tracking the smaller celebrity component of the tax evaders. Let’s take a look at some of the more prominent dodgers (data provided by The Daily Beast):

  • O.J. Simpson:  In 2007 the state of California placed listed Mr. Simpson as one of their worst tax offenders, owing close to $1.5 million. Currently he is serving a 33-year sentence in a Nevada prison for an armed robbery and kidnapping conviction.
  • Willie Nelson: The long-haired hippy and king of country music, Willie Nelson, was hunted down by the IRS for $16.7 million in 1990. Fortunately for him, his star-power allowed him to record albums and pay back his debt by 1993.
  • Wesley Snipes:  The Blade movie star claimed the reason he owed more than $17 million in taxes, penalties, and interest is because he was a “non-resident alien.” The judge didn’t buy the explanation, and now he is appealing a three-year prison sentence.
  • Pete Rose: “Charlie Hustle,” the all-star baseball player of the Cincinnati Reds served five months in prison for not paying taxes on his autograph, memorabilia, and horse-racing income. Mr. Rose cleared the slate by performing 1,000 hours of community service and paying off $366,000 in debt.
  • Nicolas Cage: Not sure if he is shooting a movie in New Orleans, but Mr. Cage is attempting to iron out a $6.2 million tax liability through a Louisiana court for his failure to keep up with 2007 taxes.
  • Judy Garland: Men are not the only non-compliers, even if they account for the majority. Judy Garland, from Wizard of Oz fame, had her own tax problems. Besides tax evasion charges in the early 1950s, she accumulated about $4 million in IRS debt after her 1964 variety show (The Judy Garland Show) was cancelled.
  • Al Capone: One of most well known cases in tax evasion history is tied to famous mobster Al Capone. After a long, controversial trial, Mr. Capone was convicted and handed an 11-year sentence, predominantly at Alcatraz. He got out early on parole in 1939 and kept a relatively low profile.

There are countless others that have gotten into tax problems with the IRS. Many of them make plenty of money to pay their taxes, however spending habits, laziness, or aggressive tax accountants may explain the reasons behind the tax evasion problems.

See a more complete media gallery of tax evaders here, provided by The Daily Beast.

Regardless of the celebrities’ tax-paying compliance rates, the IRS will have its collection hands full, given the sad state of the current economic environment and the crafty tax-dodging techniques pursued by some citizens. Unlike others, I’ll make sure to write myself a note, reminding me to write a check to my friends at the IRS on April 15th – especially if it involves millions.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

October 1, 2009 at 2:00 am 1 comment


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