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Taxes as Behavior Modification

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(This entry originally posted May 25, 2005 at unrepentantindividual.com. The argument is more for tax simplification and the immorality of taxing to encourage/discourage certain behaviors than the FairTax, but I thought it might be good to post anyway. It can equally be used against exempting certain items from the FairTax, in favor of using the prebate instead.)

Much was made when Bush was reelected of his desire to simplify the tax code. I’m not sure where that went, but maybe sometime by 2008 he might give another speech supporting it. And one of the most common rationales for simplifying the tax code is that it is such a maze of unintelligible, frequently contradictory, and counter-productive cut-outs to satisfy one special interest or another. Simplification reduces compliance costs that burden our economy, and reduces economic distortion caused by unproductive uses of money designed to reduce tax burden rather than improve the economy. But that’s only half of it.

It popped to mind with this:

Bar Tabs Going Up As States Tax Alcohol

More and more states are considering higher alcohol taxes after years of raising cigarette rates.

This year, Kentucky and Washington state hiked their liquor tariffs. Montana, Indiana and North Dakota rejected higher beer taxes.

Texas is still considering an increase, which would go to help pay for public schools. And Ohio lawmakers must decide what they’re going to do before the new fiscal year starts July 1.

Yep. The demonization of smokers has been so successful that fewer and fewer people smoke. You’d think that was a good thing, but now fewer and fewer people are paying cigarette taxes, leading to less revenue in government coffers. Likewise, those nasty buyers of hybrid vehicles, with their care for the environment and desire for high fuel efficiency, are forcing lawmakers to consider taxing by the mile to offset the reduction in gasoline taxes. Faced with the success of their policies, now they want to go after alcohol, or I should say, further after alcohol, because it is typically already given its own excise and “sin” taxes.

But is this the right thing to do? Is it legitimate, in the spirit of America’s founding, for the majority to decide that certain activities are “bad” or “good”, and thus should be taxed at higher or different rates than others? Is it legitimate, in a country where we supposedly have “equal protection under the law”, that some people and activities are just more “equal” than others?

I think we can look at some things, and most people will agree that some of these cutouts are a good idea. Like, for example, the mortgage interest deduction. Unless you’re a renter, of course, which probably means you can’t itemize and you get slammed. Or that mileage and car leases are deductible if you’re in sales as a business expense. Unless, of course you live in LA, an hour away from your work, but can’t deduct a dime because getting to an office is not actually a business expense, and you get slammed. Even the well-meaning exemptions and deductions are unfair to those who can’t claim them. But the little exemptions for special interest groups, that may impact 1% or less of the population, are unconscionable windfalls to them, paid for by the rest of us.

Taxes are one of those things in life that nobody likes. But it’s absolutely wrong that your tax burden should be based upon your ability to get elected officials to write special exemptions into the law for you. And it’s absolutely wrong that your tax burden should be based on whether you’re engaging in perfectly legal activities that are a “sin”, like smoking, or a “luxury”, like buying a Lexus. The tax burden should be equally painful to all.


Protecting the Poor from Paying Taxes

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Many people view sales taxes as a “regressive” form of taxation and have conerns about its impact on the poor and middle class. Fortunately, these issues have been thought through very carefully by the creators of the FairTax plan.

Still, it’s often useful to read an independent analysis of the same issues, to see what other researchers have come up with.

In that vein, I found the following information very useful. It is an excerpt from the Cato Institute’s policy analysis titled “Emancipating America from the Income Tax: How a National Sales Tax Would Work.”

A common assumption about the NST is that it is naturally regressive, since lower income individuals spend a greater percentage of their income in any given year on consumption of necessities. Because a sales tax is an altogether different paradigm of taxation, any judgment on the equity of the tax must be accompanied by a different analysis of regressivity.

To examine how a national sales tax could address such concerns, a number of issues should be broached. First and foremost, taxing income at a graduated rate is not the only means of making a tax system progressive. Moreover, a tax on income, no matter how steeply graduated, does not necessarily make an income tax progressive. Even if progressivity is measured by the common standard of “ability to pay,” the income tax is imposed only on productive labor and the return to capital and not on wealth. An income tax does not tax consumption of older accumulated capital, whereas a sales tax does.

Equally important, using taxable income as the basis to determine progressivity is necessarily based on a year-to-year analysis where the ability to pay is measured as a function of income per unit of time. Consumption over the life of a taxpayer is in many respects a better measurement of the ability to pay taxes. Because people’s incomes fluctuate throughout their lives, the lifetime application of a sales tax is much less regressive than it would appear to be when examining a cross-section of taxpayers in any given year. [40] Since all income is earned for the purpose of eventual consumption, under a national sales tax, the taxpayer can defer taxation by saving his income. But he cannot forever avoid the tax.

In any case, an NST plan can be made progressive through a rebate mechanism that would shelter low-income people from paying the tax. One manner in which the NST could be made less regressive would be to exempt certain necessities–such as food and clothing–from the tax. That approach would exempt, however, the most expensive food (lobster and caviar) and the most expensive clothing ($1,000 designer suits). It is a very inefficient means of providing tax relief to lower and middle income Americans and would necessitate a much higher overall rate. [41] A more neutral and less distortive approach is to simply provide each family a level of consumption free of tax by providing a rebate of the tax on expenditures up to the poverty level. That is the device we recommend and the approach chosen by Representatives Schaefer and Tauzin in H.R. 3039. [42]

The rebate could work as follows: A family consumption refund would be established for each household at an amount equal to the sales tax rate times the poverty level. The poverty level is defined by the Department of Health and Human Services guidelines and should be raised by the sales tax rate. [43] For a family of four, the HHS poverty level for 1996 is $15,800, so the sales tax poverty level would be $18,588. The annualized rebate, which would be refundable for households with earnings below the poverty level, would therefore be $2,788. Assuming the head of household was paid 26 times per year, the rebate amount included in each paycheck would be $107.23. Earnings would be reported to the Social Security Administration. Employers would pay less payroll tax, and the Treasury would reimburse the SSA for the rebate amounts provided to families in order to ensure that the balance in the trust funds was unchanged. [44] Only the source of the payments to the trust funds would change. [45]

Families with no annual wages and salaries would apply directly to the Social Security Administration for a rebate check. Table 4 indicates the applicable poverty thresholds and maximum rebates for 1996 assuming a 15 percent national sales tax rate. [46]

All workers would receive a rebate up to the maximum rebate amount shown in the table. Thus, the average tax rate for a family of four earning and spending $37,176 would be 7.5 percent. The average tax rate for a family of four earning and spending $74,352 would be 11.25 percent. Figure 1 illustrates how the average tax rate increases with spending. This assumes that the sales tax falls on the consumer. The view that it falls on the factors of production is commonly, though by no means universally, held by economists.

The family consumption allowance approach has several effects. First, it makes the sales tax applicable only to consumption beyond the necessities of life. Second, it makes the tax in effect progressive, not only because it is based on consumption, a better index of true ability to pay, but because–if one wants to continue to view progressivity through an income tax lens–it entirely exempts lower income workers. Third, unlike most state taxes, it does not undertake the complex and politicized task of determining what to tax and what to exempt, thereby minimizing administrative and compliance questions and economic distortions.

See their full analysis for much more information about how Cato’s version of a national retail sales tax would work.

Bear in mind that there are some differences between this version and the FairTax plan (for example, Cato’s sales tax does not remove or replace payroll or Social Security taxes). Still, the approaches have much in common, and reading Cato’s analysis is very educational.

The K-Street Lobbyists are Stirring

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I was out of town when it was originally posted, and just now caught this gem from Neal’s Nuze on September 28th:

Last night as I pulled into a parking lot outside of Turner Field (the home of the Division Champion Atlanta Braves!) the parking lot attendant told me “It looks like Katrina and Rita knocked the FairTax right out of the news!”

Well, he’s partially right. The initial four-week book tour ended with Belinda, Royal, Net Dog and I escaping New Orleans just 18 hours before Katrina rolled in. At that time The FairTax Book was No. 1 on the New York Times Bestseller’s list. We’re still up there, but with the minds of the people justifiably on the damage done by these two hurricanes, we’ve slipped out of the top spot.

I say the parking lot attendant was partially right because the FairTax is still very much on the minds of people in Washington. Specifically, it’s on the mind of the lobbyists on K Street. As we told you in The FairTax Book, these K Street lobbyists make their livings by manipulating the federal tax code for the benefit of their clients. And a handsome living it is. These lobbyists make in the hundreds of thousands of dollars — sometimes over a million dollars — a year! Make no mistake, the FairTax is a threat to them and their high paid livelihood!

These are people who’s very lifestyle and business success depends on their ability to keep their fingers on the pulse of the Congress, and when congressmen and senators start getting calls, letters, faxes and emails from thousands of constituents, the lobbyists know it, and it’s not something they’re going to ignore.

Trust us on this … these lobbyists are not on your side in the cause of tax reform. They’re on their side … and their side only. Their jobs and their incomes must be protected, and if it means that you must continue to live under an oppressive tax system that stifles innovation, hard work and economic growth, so be it.

Yesterday we received an email from a listener with close connections to a congressional sponsor of the FairTax. According to our listener this congressman is relating stories about K Street denizens getting the word to various congressional and senatorial offices that if they dare support the FairTax bill they can kiss some big campaign contributions goodbye. So … it would seem that the pressure is on.

Those of you who have read The FairTax Book and have come to support this incredible idea for tax reform have sworn enemies in the law offices along K Street in Washington. The lobbyists are fighting for their very lifestyles, and they won’t go away. So, if you go away, if you stop spreading the word about the FairTax, if you stop contacting your elected representatives and holding their feet to the fire … the K Streeters will have won.

Last night my co-author, Congressman John Linder and I, discussed the growing unrest on K Street. We realize that one of the best ways to keep this FairTax idea in front of the media and in front of elected officials is to keep the book alive and as high up the bestseller’s lists as possible. That’s why both Congressman Linder and myself are hitting the book-signing highway again. In coming weeks we’ll be in places like Denver, Grand Junction, Indianapolis, Lexington, Knoxville, Orlando, Atlanta, Oklahoma City and more.

In addition to getting out there and pushing the book, Congressman Linder has agreed to another idea. Congressman Linder and I are going to take every penny we make in royalties from the sale of the book over the next two weeks and dedicate those royalties to hurricane relief. Every cent. We’re doing this because we want to start The FairTax Book moving up in the charts again … and we want to be able to do that without making it sound self-serving.

Neither one of us wrote this book to make money. The royalties I receive are all — 100% — going to charity. We wrote the book because we believe that the FairTax would be nothing less than a second American revolution; the largest transfer of power from government to the people since the Revolutionary War.

If you’re behind this idea, go buy another copy of the book. If you like you can make it easy on yourself and order it from Amazon.com. On Monday we were No. 113 on Amazon.com. Yesterday we were No. 115. We would like to see how far we can move this book up today … with all of the royalties going to Katrina and Rita relief. You can also go to FairTax.org and become a FairTax volunteer.

This idea is too good to be blown away by a hurricane. Do what you can.

Gingrich: Government Fakes Anti-Reform Numbers

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Below is an incisive article by Newt Gingrich and Peter Ferrara that appeared a couple weeks ago in the Wall Street Journal. The article provides plenty of empirical evidence for the following take-home-message:

The methodologies used by analysts across the federal government to score the impact of legislation still do not take into account the dynamic, pro-growth effects of policy changes. They continue to use mostly static methodologies that assume no significant changes in behavior in response to changes in incentives. The result of these antiquated scoring practices is that Congress is forced to discount any policy change that would increase economic growth or enhance efficiency in federal programs. Instead, Congress is constrained to consider legislation designed to meet a politically acceptable score from the CBO, even though experience demonstrates that the scoring will surely be erroneous — indeed, is effectively designed to be so.

The full article:

Doesn’t Anyone Know the Score?
Monday, September 26, 2005
by By Newt Gingrich and Peter Ferrara

While Katrina relief has now jumbled the numbers, the rapidly declining federal deficit projections this past summer revealed a critical challenge for national economic policy making. Once again, they showed that the scoring of the effects of major policy changes performed by the Office of Management and Budget and the Congressional Budget Office were highly erroneous.

The errors were not random. They were strongly and consistently biased against pro-market, pro-growth reforms, and they are the long-recognized results of outdated methodologies employed by federal scoring agencies. The end result is that such errors greatly hamper or prevent Congress from adopting policies that would maximize economic growth and personal prosperity.

In February, for example, OMB projected a federal budget deficit of $427 billion for the current 2005 fiscal year (ending in October). A few months later, in July, OMB projected the deficit at $333 billion. The February projection was off by almost $100 billion, or 28%. This episode is not unique. In February 2004, OMB’s projected deficit (for fiscal year 2004) was off by $109 billion.

CBO is no different. In March, CBO projected a deficit of $394 billion for the current fiscal year. Last month, its projected deficit was $331 billion. CBO’s numbers changed by $63 billion in five months. The changes in these federal deficit projections resulted because OMB and CBO had projected massive losses from the 2003 Bush tax cuts. Those losses never happened. Thus, in February 2003, OMB projected federal revenues of $2.135 trillion for fiscal year 2005. That was before the Bush tax cuts. Now OMB projects that, with the tax cuts, federal revenues for 2005 will be $2.140 trillion — slightly more than the revenues it projected before the tax cut.

OMB and CBO are not the only players in the scoring game. The Congressional Joint Committee on Taxation (JCT) and the Treasury Department also estimate the revenue impacts of tax policy changes. Their projections have similar problems. Consider the 1997 tax changes, which primarily involved a cut of 28.6% in the capital gains tax rate. According to a recent report from the American Shareholders Association by Dan Clifton, JCT estimated that revenues would increase $7.8 billion from 1997 to 1999, but decline $28.8 billion over the next seven years. Instead, the actual increase in federal revenues from capital gains taxes from 1997 to 1999 was more than 10 times higher — $84 billion. What about the projected losses later on? Capital gains revenues have now grown to double their levels of 1996, just before the tax cut.

For estate taxes, JCT estimates that total repeal would cost the federal government $70 billion a year, even though the death tax now raises only $20 billion per year. Academic analyses, on the other hand, estimate either no revenue loss or even a net gain.

The methodologies used by analysts across the federal government to score the impact of legislation still do not take into account the dynamic, pro-growth effects of policy changes. They continue to use mostly static methodologies that assume no significant changes in behavior in response to changes in incentives. The result of these antiquated scoring practices is that Congress is forced to discount any policy change that would increase economic growth or enhance efficiency in federal programs. Instead, Congress is constrained to consider legislation designed to meet a politically acceptable score from the CBO, even though experience demonstrates that the scoring will surely be erroneous — indeed, is effectively designed to be so.

Take Social Security. The CBO fails to recognize the growth impact of personal accounts for Social Security, which Harvard’s Martin Feldstein has estimated to be in excess of $10 trillion in present discounted value terms. CBO scores assume that stocks earn no more than bonds in the market, a historically false assumption which would render all stock investments irrational. Similar scoring failures prevent tax reform to make the tax code flatter, fairer, and simpler.

On health care, the adoption of modernizing technologies to enable doctors to prescribe drugs over the Internet and maintain medical records on the Web would save the Feds billions, and save lives as well. Federal scorers, however, count only the costs of acquiring the new technologies and not the resulting savings. So nothing has happened.

Federal scoring methodologies must be revamped to achieve the most accurate results possible. President Bush should start reform by ordering the OMB and Treasury to utilize whatever dynamic scoring methods are available to maximize accuracy. Congressional leadership should do the same with the CBO and JCT. Without such reform, Washington will be hopelessly blocked from adopting the pro-growth solutions necessary for the 21st century.

President's Tax "Reform" Panel Ducking True Reform

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Today brings disappointing news from the President’s so-called Tax Reform Panel. Here’s the scoop, via today’s Nuze:

The president’s so-called tax reform commission telegraphed its intentions several months ago when members stated that they were not going to recommend a full reform of our federal tax system, rather they were going to recommend some incremental reforms. The The FairTax Book hit the book stores and debuted at No. 1 on the New York Times Bestseller’s list. Politicians and other Beltway denizens told co-author Congressman John Linder that the success of The FairTax Book was a certain indication that the people of this country were in the mood for wholesale reform. Who knew?

Now we’re starting to get an indication of what the tax reform commission is going to recommend. It’s very simple. Tax increases, not tax reform.

First: The commission is going to recommend that the cap on the home mortgage interest deduction be reduced. Currently you can deduct interest on home loans up to one million dollars. The new limit is likely to be $350,000. This means that all interest on home loans about $350,000 will not be deductible. The result? A tax increase for people who [owe] more than $350,000 on their homes. Now this won’t bother most Americans because they believe that anyone who owns a home valuable enough to stand as security for a loan in excess of $350,000 is rich, and as we all know there really should be no limit to the taxes that evil rich people pay. Political survival rule No. 1: You can never go wrong raising taxes on the rich.

Second: Another tax increase. Right now your employer can deduct the cost of any health insurance it pays for on your behalf. The tax reform commission wants to limit that deduction. Does this amount to a tax increase on businesses? In a sense, yes. But, as you know, business don’t pay taxes, they pass the taxes and the tax increases down the line of commerce until they end up embedded in the final retail price of goods and services. So this is a tax increase, but it’s an increase on all of us.

The panel calls these ideas “tough choices” that must be made to allow for the elimination of the hated Alternative Minimum Tax. The truth is that they’re not tough choices at all. They’re the easy choices … the easy political choices. First, as for the mortgage deduction choice, it will affect only the hated rich, so no political danger there. As for the taxing of health care benefits, most Americans — and were talking a huge percentage here — don’t understand the concept of embedded taxes in the retail price of goods and services, so this is another politically safe choice. People will actually believe that this only raises taxes on businesses, so no harm no foul.

As for the FairTax — a national sales tax? Well, Vice-Chairman John Breaux, a Democrat, says that the panel has decided not to endorse the idea. K-Street influence, perhaps?

It seems that the president’s tax reform panel is paying attention to the political equation here, not to the interests of the American people. These so-called tax reform ideas do nothing but protect politicians and lobbyists. There is nothing here for the people. Sure, the panel members will say that they are going to recommend getting rid of the Alternative Minimum Tax. Big Deal. With passage of the FairTax not only do they get rid of the AMT, but the income tax, death tax, Social Security tax and Medicare tax as well.

These “reforms” do nothing to reduce the hideous tax compliance costs in this country. In fact, we’ll probably see tax compliance costs go up. Wealthy homeowners will have to look for ways to overcome the loss of their mortgage interest deduction, and businesses will spend money trying to find a way to overcome the increased taxes from the loss of deductibility on health care.

These “reforms” do nothing to bring American businesses back home. When Chrysler and Daimler Benz merged they headquartered in Germany because the tax burden would be at least 20% higher if they were headquartered in the United States. So, the merger became Daimler-Chrysler. There is nothing in these reform proposals that would cause any discussion on becoming Chrysler-Daimler. The FairTax would make America the world’s largest tax haven. The panel’s “reforms” only increase the burden on American businesses.

These “reforms” do nothing to bring the $10 trillion-plus U.S. dollars that are invested overseas back home to work in our own country. These dollars will continue to work overseas where American taxes won’t drag them down. Those dollars will stay overseas. Nothing here calls them home.

These “reforms” will not allow you to invest with no tax consequences. These “reforms” will not allow you to save money or to pay to educate your children (or yourself) with no tax consequences.

These “reforms” are totalmente mierda del toro. (OK .. You get the idea) I want you to consider a thought that my friend Bugsy (the world’s best talk-radio consultant, Greg Moceri) put in my ear this morning. Is this a preemptive strike by the tax reform panel? They know of the success of the FairTax idea, they know that the book is staying at the top of the bestseller’s lists …. are they sending a message? “No way, people. No way we are going to lose that much power to the American people. We’ve worked for too many years to subject the American people to our money-hungry government behemoth, and we’re not going to let that slide away just because some businessmen spent over $20 million developing a tax scheme that empowers the people.”

I’ll have plenty more to say about this capitulation to K-Street on today’s show … and when I get off the road you’ll see much more here in Nealz Nuze. These absurd ideas from the tax “reform” panel have reinvigorated me. They are totally and completely ignoring the groundswell of public opinion in favor of wholesale tax reform. I can’t wait to get to Lexington, Kentucky tonight for my next book signing. Here are a few pictures from Indianapolis.

Mises Institute Slams FairTax Book

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Writing for the free-market Ludwig von Mises Institute, Laurence Vance can’t find enough bad things to say about the FairTax Book.

As far as I can tell, his basic gripe is that the FairTax won’t roll us back to the size of federal government that existed before the industrial revolution took place.

The antidote to the fraud of the FairTax is a good dose of the wisdom of Murray Rothbard: “There can be no such thing as ‘fairness in taxation.’ Taxation is nothing but organized theft, and the concept of a ‘fair tax’ is therefore every bit as absurd as that of ‘fair theft.’”

Gotta love that Rothbardian outlook. “Why accomplish some good today when you can piss and moan about the need for perfection tomorrow, instead.”

The BOINC Challenge

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Let’s have some fun and play with science. The FairTaxScorecard issues a challenge to all online Fair Tax Supporters to unite and show our strength while supporting scientific research with distributed computing resources.

The term Distributed Computing can be applied to many applications, including server farms and the world wide web. Distributed computing is any program or system that utilizes resources from multiple computer systems. Berkeley University developed the Berkeley Open Infrastructure for Network Computing (BOINC) system to perform scientific calculations previously reserved for supercomputers. The millions and millions of calculations needed for research are broken down and distributed to hundreds of thousands of volunteer’s computers. A program called BOINC automatically retrieves work, performs calculations while the computer is idle and then sends in the results back to the researchers.

Individuals donate their computer’s idle time to perform the scientific calculations. Berkeley’s BOINC will track every individual’s contribution and display the results on the project’s website. BOINC provides an opportunity for Fair Tax Supporters to compete against teams as diverse as the U.S. Air Force, AMD Users, Fraternities, and any number of other special interest groups such as Mensa.

The benefit to the scientific projects from a large group of Fair Taxers’ computer time is obvious. But, how will this help Fair Tax?

  1. Exposure
  2. Competition
  3. Activity
  4. Community
  5. Contribution

Remember, eighty-five percent of people who learn about the Fair Tax become supporters. Assisting with distributed computing efforts and competing against other groups provides another exposure opportunity for Fair Tax. Thousands of current BOINC participants could become Fair Tax supporters. This is a win-win proposition. Research is accomplished and the Fair Tax reform movement grows.

These teams support one or more scientific projects that utilize the BOINC’s Distributed Computing technology. The primary projects are:

Project Objective Largest Team
Rosetta@home Determine the 3-dimensional shapes of proteins to find cures for human diseases. 334
Predictor@home Prediction of protein structures critical to biomedical questions of protein-related diseases 736
Climate Prediction Experiment to try and produce a forecast of the climate in the 21st century. 1,333
Einstein@home Search for spinning neutron stars 1,069
SETI@home Search for Extraterrestrial Intelligence 14,324

To achieve the desired exposure, we need to compete and become a high ranking team in the existing projects. The large number of Fair Tax supporters can result in an impressive team. The current 471,477 BOINC users worldwide compete as individuals or teams ranging from 1 to over 14,000 users. A small Fair Tax team of a few hundred users can make an impressive showing in the smaller Rosetta@home project in a relatively short time. As the team grows, we can expand and achieve top ranking in all projects.

The ongoing nature of BOINC provides an opportunity for Fair Tax supporters to remain active with relatively little effort. The progress and accomplishment of the distributing computing effort will demonstrate continued success of the Fair Tax community, albeit for a non-Fair Tax issue. The activity, however, will build additional bonds among the Fair Tax/BOINC participants, resulting in a stronger community ready to take decisive action when it is needed.

Meanwhile, the Fair Tax/BOINC participants will make significant contributions to science. Remember, what goes around, comes around. Our contribution will not go unnoticed.

Visit http://FairTaxScorecard.com/boinc.phtml and find out how to sign up.

Who Benefits Most From AMT Reform?

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In the news recently, and in Congress, discussion has focused upon how the AMT’s net is widening, and the looming “crisis” when it spreads. There’s expected to be an enormous (4x or more) increase in the numbers of taxpayers subject to the AMT in the next year, and the ramifications of this will be brutal if nothing is done. How brutal? Instead of the current 3-4% of households subject to the AMT, we’ll be looking at about 15%:

This parallel tax system was created two generations ago to take away tax breaks from about 150 wealthy taxpayers who had piled up write-offs to erase their tax bills. Chances are, it seems irrelevant if you aren’t among the 4 million taxpayers who owe it for 2005.

But give it time – a year, to be exact. These days you don’t have to be rich for the AMT to wipe out your write-offs.

Though most of them are unaware of it, 21 million Americans are on the hook to pay the AMT next tax season barring intervention from Congress. Some experts predict lawmakers will restore an expired tax provision that had slowed the AMT’s spread through 2005. If they don’t, however, it will unleash a fivefold increase in the number of taxpayers who will owe what one prominent U.S. senator calls the “Darth Vader of the tax code.”

The AMT will strike 35 percent of all taxpayers with $50,000 to $100,000 of adjusted gross income in 2006 – up from 1 percent in 2005, according to the CBO. Two out of three will owe it in 2010.

The AMT will hit 81 percent of taxpayers with $100,000 to $200,000 of adjusted income in 2006, nearly five times the 17 percent share in 2005. It will net more than 95 percent in 2010.

To understand the problem, a little bit of history is in order. The AMT was started in 1969 after it was found that a few very wealthy Americans managed to completely evade paying income taxes. The idea behind the AMT is a brute-force solution to a complex tax code, telling individuals that despite the fact that lawmakers have written thousands of deductions, exemptions, and special rules into the tax code, there is a certain minimum that must be paid. Rather than fix the root problem, which is the carving out of deductions and rules to please special interests, they said that all those rules apply, but only to a certain point.

All the AMT was designed to do is to reduce the impact of all the loopholes and deductions in the tax code, and ensure that those with the means to direct their assets to reduce their taxable income still pay “their fair share”. I personally believe that if we want to look at the problems correctly, we should solve the source (special interest loopholes and deductions), but I’m also an engineer. I know as well as anyone that at times, solving the root problem is simply too difficult. I’ve worked with customers who are running into a technical problem, and it is simply more effective, less costly, and quicker to brute-force a solution than to go fix to the root cause. Given that fixing Congress is probably not going to happen any time soon, the AMT is good legislation– in theory.

In theory, Congress is trying to blunt the tax implications of a few very rich people who are able to shuffle assets and income to reduce tax liability. It is designed for those people who have much more economic freedom than the “average” taxpayer. But therein lies the problem. Congress didn’t design this legislation well, and it’s increasingly affecting the “average” taxpayer (quotes added as it is still restricted to the upper-income taxpayers, but increasingly affecting people who do not employ the sort of advanced tax strategies this legislation was targeting).

It’s somewhat likely that I will be feeling the effect of the AMT next spring, and I can tell you I’m not happy about that. I, like many other people, have to plan my finances based upon certain information. One aspect of that information is the level of mortgage interest I pay, which is deductable. Given that I’ve only owned this home for a year, I’m still at a point where the bulk of my monthly payments are interest, and thus get a fairly substantial deduction. I don’t yet have kids, so perhaps I may be spared. I know lots of young professionals with kids, though, living in places like California or the Northeast, who will run into the AMT next year because their deductions are just “too large”. Especially with the larger mortgages they carry, the interest deduction and exemptions for kids will quickly put them in the AMT’s clutches. For people like me, who base certain financial decisions on what we know of the tax code, getting snared in the AMT net could be tremendously painful.

Congress have their backs against a wall. Budget and revenue projections depend upon the income of the AMT to continue as if there is no reform. Our legislators are expecting to spend the money raised by ensnaring millions of people in this net. When the President’s tax panel gave their recommendations, the reason they had to cut so many personal deductions was to offset the cost of fixing the AMT. They know that to fix the AMT will be incredibly painful, because they either have to reduce their spending plans (not likely!) or find revenue elsewhere– raising other taxes or eliminating deductions.

Congress does not want to fix the AMT. In fact, given that Congress really doesn’t care very much about the “average” taxpayer– as evidenced by their spending habits rewarding people who contribute to campaigns and screwing the rest of us– I don’t think they even care about the financial implications of the AMT upon us. After all, what we earn is legitimately the government’s money, and we should all be grateful they let us keep so much of it. They do care, however, about the political implications. If the AMT ensnares 21 million people this year, the backlash will be enormous. While Congresspeople don’t regularly pay attention to the worries and concerns of us plebes, they saw after Kelo that we can be a sleeping giant. They know that 21 million people feeling the pinch of the AMT may result in them losing their seat of power, which is their greatest and only fear.

Congress is starting to realize that they must reform the AMT or they’ll be in serious political jeopardy. For those of us who pay taxes, however, we know they’re not going to cut spending, so they’ll find another place to squeeze money from us. They’ll distribute the pain the AMT would have caused, in small changes to deductions and exemptions that cause just as much pain for taxpayers, but are harder to spot. We’ll still be screwed, but they’ll be safe. And then they’ll trumpet how wonderful they are for saving 21 million Americans from the AMT, when all they’ve done is to hide that taxation elsewhere.

So who benefits the most from reforming the AMT? Congress. Not that anyone should be surprised by this, of course. The only reason Congress does most things is to increase their own power, and shore up their own safety in office, as we saw from the Bipartisan Incumbent Protection Act of 2002. Remember who’s running this shell game, and you’ll realize that despite how close you’re watching, the shell you pick will be empty.


Immigration and the FairTax

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From reader Earl Foreman:

I would like to see or hear some comment on the immigration issues that are currently in the news. It seems to me the issue of illegal immigration might be eased by FairTax. First off, I would like to say that it is not right people should live here illegally, but the fact of the matter is that we are hard put to keep them out and right or wrong the illegal immigrant is a factor in our economy. I do not think that making it a felony for being here is the right answer either. Most of the people that are trying to reach this land are looking for a better enviroment or circumstance for themselves and or thier families. They for the most part are doing what they can to provide for families. This is no different then our forefathers albeit the illegal immigrants are doing so by avoiding our immigration laws.

It seems to me the main concern that the American people object to is that illigal immigrants are using services that should be reserved for Americans. Using the Schools, Hospitals and welfare, ect without paying into the system. Perhaps the answer is Fairtax. I would rather have everyone pay a consumption tax. This in turn would help to pay for the extra school needs, hospitals and welfare.

Some would object by saying we preying on the illegal immigrant by making them pay a consumption tax. I would say that everyone would pay in equally. Uncle Sam would not need to know who was paying into the system preserving privacy both for us and the illegal immigrant. This would be a boon to the illegal immigrant.

If they choose to go out and return as a legal immigrant via the normal and preferred channels they should be allowed participate in the prebate. Otherwise, that is the penalty for trying to stay outside of the boundaries of the law.

Others would object because the illegal immigrant sends much of thier wages back to thier families that they left behind. Pulling money from our economy, but in truth, wouldn’t the service of sending money to another country be taxable by the consumption tax? And while living here, they will consume.

I wonder if other people think this would be fair? I still think we need to fix our borders and perhaps create a Guest Worker program and solution.

Mr. Foreman also sends us this link to a related article by Matt Towery at the Free Republic.

Global Taxation

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Let’s count the taxation ways – Sales taxes, School taxes, Property taxes, Village taxes, County taxes, State taxes, Federal taxes, fee taxes, etc. I think there is a song for this.

And now Global taxation: The U.N.’s World Health Organization is Eyeing Global Tax on Banking, Internet Activity, etc.

The World Health Organization (WHO) is considering a plan to ask governments to impose a global consumer tax on such things as Internet activity or everyday financial transactions like paying bills online.

Such a scheme could raise “tens of billions of dollars” on behalf of the United Nations’ public health arm from a broad base of consumers, which would then be used to transfer drug-making research, development and manufacturing capabilities, among other things, to the developing world.

Click here for the article found on Fox News titled “U.N.’s World Health Organization Eyeing Global Tax on Banking, Internet Activity”.

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