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Tax Policy

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Crafty_Dog:
WSJ

Mark it down as the first tax increase of the new Democratic era. The Journal reported yesterday that President-elect Obama and Congressional leaders intend to maintain the estate tax rather than let it expire on schedule in 2010.

They will do so even though their economic stimulus plan is supposed to be about creating millions of new jobs in a hurry. The death tax strikes most heavily at small- and medium-sized family-owned businesses that generate the majority of new American jobs. So hitting these family businesses with a multimillion dollar tax bill when the owner dies won't help job creation.

Republicans are partly to blame here for making this easy for Democrats, thanks to their mistakes in the 2001 tax bill. Rather than repeal the tax immediately, Republicans got bamboozled into agreeing to a 10-year phase-out that eliminates the tax only for a single year. Then the rate goes all the way back in 2011 to the confiscatory 55% rate of the Clinton era, with a mere $1 million exclusion. Republicans never did fix the tax revenue estimating process on Capitol Hill, and this is one price for that failure.

Mr. Obama wants to make the current death tax rate of 45% permanent, along with an exclusion of $3.5 million ($7 million for couples). One issue to watch is whether this exclusion is indexed for inflation, or else over time it will hit more and more average earners who build up a small nest egg over a lifetime. Think Alternative Minimum Tax.

The death tax is supposed to be an easy way to extract revenue from the likes of Warren Buffett and Bill Gates, who support the tax. It won't. The super wealthy have foundations and other tax dodges to shield themselves from much of the tax. A 2006 Joint Economic Committee (JEC) study found that death tax "liabilities depend on the skill of the estate planner, rather than on capacity to pay." So much for tax fairness.

By contrast, "family-run firms and farms particularly feel the pinch of the estate tax, because they are less likely to have the liquid resources needed to meet their estate tax liabilities." The latest JEC estimate is that the death tax has reduced the stock of capital in the economy by about $847 billion. So let's get this straight: We are said to need an economic stimulus plan that will borrow and spend roughly the same amount of money to replace the capital stock that the estate tax has wiped out. Go figure.

This lost capital reinvestment translates into fewer workers on business payrolls. Douglas Holtz-Eakin, the former Congressional Budget Office director, estimates in a new study that the economy would create roughly 1.3 million more small business jobs with no death tax rather than with a 45% rate. Foreign governments understand this relationship, which is why they have been slashing their estate taxes in recent years. According to the American Council for Capital Formation, the U.S. has the third highest estate tax in the developed world -- 49% if you add the federal rate and average state rate, just below 50% in Japan and South Korea.

Republicans alone won't have much chance to stop this Obama estate-tax plan, so its fate will hang on Senate Democrats. For years many of those Democrats -- especially in swing states like Arkansas and Montana -- campaigned on the promise to lower or eliminate the estate tax. We'll now find out if they meant it.

 

Crafty_Dog:
One question we wish someone had asked President Obama at last night's press conference is this: Why doesn't his economic stimulus bill include his own campaign proposal to eliminate the capital-gains tax for small businesses? The House bill omits it entirely, and the Senate version offers a rate reduction to 7% from the current 14%, but only on investments made in the next two years. That lower rate would apply to less than 2% of all capital gains.

Mr. Obama's original promise to cancel the capital gains tax for small enterprises was highlighted on his campaign Web site under "Small Business Emergency Rescue Plan." A few weeks before the election, advisers Austan Goolsbee and Jason Furman touted their boss's pro-growth credentials by noting in this newspaper that "he is proposing additional tax cuts" that included "the elimination of capital gains taxes for small businesses and start-ups."

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The revenue loss would be minimal, especially as compared to the rest of the $800 billion spend-a-thon, because any untaxed gains would only be realized well into the future. We'd prefer an across-the-board capital gains cut rather than a targeted reduction. But the proposal would at least signal some Democratic interest in encouraging businesses to take risks again -- the only way the economy is going to recover.

So what happened? We're told the obstacle is House Democrats, who oppose any cut in capital gains tax rates. The objection seems to be wholly ideological, a concern that such a cut -- even for start-ups, rather than for current capital holdings -- would validate Republican tax-cutters. The White House decided not to fight Democrats to add the President's own pro-growth idea to a bill whose supposed purpose is to promote growth. This looks like an early example of Mr. Obama repeating a mistake that President Bush made too often -- refusing to challenge a Congress run by his own party.

Crafty_Dog:
"If lawmakers really want to trigger a recovery, they'll shelve their massive 'stimulus' bill -- a trillion-dollar debt plan that would actually weaken the economy. They'd do much better to take a simple but powerful step: reduce the corporate income tax rate to zero. Our nation's convoluted tax code (so confusing that even a high percentage of President Barack Obama's nominees apparently can't understand it) keeps a small army of accountants and tax lawyers employed. A simplified code might put them out of work. But that would be a small price to pay for a fairer system, one that helps create many more jobs for ordinary Americans. And creating jobs is what a federal stimulus is supposed to be all about. Lawmakers should think carefully before they borrow hundreds of billions of dollars, digging a deeper debt hole and expanding the size and scope of government. Far better to eliminate corporate taxes -- and unleash the job-creation power of our nation's entrepreneurs." --Heritage Foundation President Edwin Feulner, free enterprise economist

ccp:
This is part of the reason we have will have autos required to have the means to track our miles.  so we can be taxed. Folks this is the most outrageous crap I have heard so far. 

By JOAN LOWY

Associated Press Writer

12:54 PM EST, February 20, 2009

WASHINGTON (AP) — Transportation Secretary Ray LaHood says he wants to consider taxing motorists based on how many miles they drive rather than how much gasoline they burn — an idea that has angered drivers in some states where it has been proposed.

Gasoline taxes that for nearly half a century have paid for the federal share of highway and bridge construction can no longer be counted on to raise enough money to keep the nation's transportation system moving, LaHood said in an interview with The Associated Press.

"We should look at the vehicular miles program where people are actually clocked on the number of miles that they traveled," the former Illinois Republican lawmaker said.

Most transportation experts see a vehicle miles traveled tax as a long-term solution, but Congress is being urged to move in that direction now by funding pilot projects.

The idea also is gaining ground in several states. Governors in Idaho and Rhode Island are talking about such programs, and a North Carolina panel suggested in December the state start charging motorists a quarter-cent for every mile as a substitute for the gas tax.

A tentative plan in Massachusetts to use GPS chips in vehicles to charge motorists by the mile has drawn complaints from drivers who say it's an Orwellian intrusion by government into the lives of citizens. Other motorists say it eliminates an incentive to drive more fuel-efficient cars since gas guzzlers will be taxed at the same rate as fuel sippers.

Besides a VMT tax, more tolls for highways and bridges and more government partnerships with business to finance transportation projects are other funding options, LaHood, one of two Republicans in President Barack Obama's Cabinet, said in the interview Thursday.

"What I see this administration doing is this — thinking outside the box on how we fund our infrastructure in America," he said.

LaHood said he firmly opposes raising the federal gasoline tax in the current recession.

The program that funds the federal share of highway projects is part of a surface transportation law that expires Sept. 30. Last fall, Congress made an emergency infusion of $8 billion to make up for a shortfall between gas tax revenues and the amount of money promised to states for their projects. The gap between money raised by the gas tax and the cost of maintaining the nation's highway system and expanding it to accommodate population growth is forecast to continue to widen.

Among the reasons for the gap is a switch to more fuel-efficient cars and a decrease in driving that many transportation experts believe is related to the economic downturn. Electric cars and alternative-fuel vehicles that don't use gasoline are expected to start penetrating the market in greater numbers.

"One of the things I think everyone agrees with around reauthorization of the highway bill is that the highway trust fund is an antiquated system for funding our highways," LaHood said. "It did work to build the interstate system and it was very effective, there's no question about that. But the big question now is, We're into the 21st century and how are we going to take care of our infrastructure needs ... with a highway trust fund that had to be plussed up by $8 billion by Congress last year?"

A blue-ribbon national transportation commission is expected to release a report next week recommending a VMT.

The system would require all cars and trucks be equipped with global satellite positioning technology, a transponder, a clock and other equipment to record how many miles a vehicle was driven, whether it was driven on highways or secondary roads, and even whether it was driven during peak traffic periods or off-peak hours.

The device would tally how much tax motorists owed depending upon their road use. Motorists would pay the amount owed when it was downloaded, probably at gas stations at first, but an alternative eventually would be needed.

Rob Atkinson, chairman of the National Surface Transportation Infrastructure Financing Commission, the agency that is developing future transportation funding options, said moving to a national VMT would take about a decade.

Privacy concerns are based more on perception than any actual risk, Atkinson said. The satellite information would be beamed one way to the car and driving information would be contained within the device on the car, with the amount of the tax due the only information that's downloaded, he said.

The devices also could be programmed to charge higher rates to vehicles that are heavier, like trucks that put more stress on roadways, Atkinson

Crafty_Dog:
By JONATHAN CLEMENTS
Like Bernie Madoff, I've got the government coming after my money. Unlike Madoff, I didn't do anything wrong.

The House of Representatives, alas, thinks otherwise. Last Thursday, 328 members voted for a bill that would slap a 90% surtax on my bonus, with Ways and Means Committee Chairman Charles Rangel dismissing the payout I received in January as "repugnant to everything that decent people believe in." The Senate is considering a similar bill.

All of this might come as a surprise to those of you who recognize my byline. Until a year ago, I was The Wall Street Journal's personal-finance columnist -- and widely considered to be a friend of the ordinary investor.

But that was then. In April 2008, I left to join a new Citi venture. (What follows are my views -- not those of Citigroup Inc.) For the past year, I thought I was involved in building a wonderful, customer-friendly business that minimizes conflicts of interest, favors index funds, and helps everyday Americans with their entire financial lives.

It seems that I was sadly mistaken. If the rebuke from Washington is any guide, I have apparently played an integral part in the collapse of the global economy and the financial markets -- and I must be punished.

Should the House bill become law, my bonus will be taxed at up to 90% once my adjusted gross income hits $250,000. The tax will apply to employees of those companies, like Citi, that have received more than $5 billion from the government's financial rescue program. As you might imagine, this is a tad perplexing, given that I've never been involved in lending to subprime mortgage borrowers and, as far as I know, nor have any of the folks I now work with.

In fact, many of the Wall Street executives responsible for today's mess have long since moved on -- and, unless they receive a bonus in 2009, will escape the 90% surtax. Unfair? Indeed, it is. The House bill is akin to, say, penalizing the earnings of today's politicians because their predecessors failed to save us from the current economic debacle.

I realize readers won't be shedding tears -- $250,000 is a decent chunk of change (though, trust me, it doesn't buy that great a lifestyle in New York). Still, the bill could cause financial headaches. Some of my colleagues have already spent their bonus or put a big chunk into their 401(k) plan, so finding the money to pay the 90% tax will be a struggle. Some have total incomes that don't come close to $250,000 -- but they breach that level once their spouse's salary and their investment income are included. The bill could also hurt the economy, encouraging banks to cut back on lending, so they can return their bailout money and protect employees from the surtax.

Not buying the hardship angle? Not persuaded that this tax is unfair? Consider this truly searing indictment: A 90% tax is downright stupid, creating bizarre disincentives. Exhibit A? That would be me. Once my total income hits $250,000 for the current calendar year, I will have no incentive to work a single day more in 2009. After all, for every extra dollar of income I earn above $250,000, I will lose 90 cents of the bonus I received earlier this year.

Being somewhat knowledgeable about personal finance, I'm trying to figure out how to finagle this. By minimizing my investment income in 2009 and pushing other income into 2010, I reckon I can delay the day of tax reckoning. But even with that finagling, by mid-October, I will hit $250,000 in total income -- and have no incentive to earn any more income in 2009.

At that point, I plan to ask Citi for an unpaid sabbatical. Forget earning more income. There's no point. Instead, you will find me hunkered down at home, desperately trying not to spend money. This will make entire financial sense for the Clements household. What about the struggling economy? Not so much.

Mr. Clements is director of financial guidance for myFi, a unit of Citi, and the author of "The Little Book of Main Street Money," out in May by Wiley.

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