Ryan Ellis

State of the Union Myth/Fact:<br> Obama's New Taxes on Your 401(k)


Posted by Ryan Ellis on Thursday, January 28th, 2010, 11:40 AM PERMALINK


MYTH:    “To recover the rest [of TARP], I have proposed a fee on the biggest banks. I know Wall Street isn't keen on this idea, but if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.”

FACT:    The President himself pointed out that most of the money from the bailout has been recovered from the banks.  This new “bank tax” has nothing to do with TARP—it is being assessed on banks which never accepted TARP funds (or have since paid them back with interest), and is not being assessed on TARP recipients who still owe the taxpayers money (like Government Motors).  It’s a money grab.

In fact, this new “bank tax” will be passed along by the banks to ordinary Americans.  It will be paid in the form of higher 401(k) fees, higher bank fees, higher mortgage and credit card interest rates, and lower interest rates on savings.

MYTH:    “We cut taxes for 95 percent of working families…we haven’t raised income taxes by a single dime on a single person.  Not a single dime.”

FACT:  
  It’s mathematically impossible to cut taxes for 95 percent of working families.  According to the IRS, fully one-third of all tax returns owed no income tax last year.  Nearly 20 percent of returns had neither an income nor a payroll tax liability.  These people cannot see their taxes cut any further.  Anything given to them is pure spending.

Obama, Pelosi, and Reid may not have raised income taxes last year, but they surely tried to.  Last year’s administration budget submission had dozens of tax hikes.  The health care legislation they are still pushing has 18 separate tax hikes.  All told, ATR has calculated that President Obama proposed or supported $2.1 trillion in tax hikes in 2009.  And let’s not forget that he signed into law a $65 billion tax hike on cigarette smokers 16 days into his administration.  The median income of a smoker is $36,000.

MYTH:    “To encourage these and other businesses to stay within our borders, it's time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America.”

FACT:    Obama is no doubt referring to his tax hikes from last year’s budget.  ATR has compiled a series of one-pagers detailing his $210 billion in proposed tax hikes on American companies who have overseas income.  How raising taxes on American companies will incent them to remain in the United States is a mystery.  The reason these tax breaks are in place is to avoid double taxation of international corporate income.  To take away these tax breaks is to tell an American company that they will potentially have to pay taxes twice on the same income.  The best solution is to transition the U.S. tax code toward a territorial system (which most of the developed world has done), but getting rid of these tax breaks without doing that reform is foolish.  There’s no reason that an American company with an Irish subsidiary cannot become an Irish company with an American subsidiary.  America has a 39 percent “all-in” corporate rate.  Ireland’s is 12.5 percent.

MYTH:    “[We’re] making it easier to save for retirement by giving every worker access to a retirement account and expanding the tax credit for those who start a nest egg.”

FACT:    Candidate Obama campaigned on a “forced IRA” plan for small businesses, and President Obama continues to support it.  It would force every small business in America which doesn’t have a qualified retirement plan like a 401(k) or a SIMPLE IRA to open a salary-deferral IRA for their employees.  Some versions of this plan would also require the employer to start making salary deferrals into this IRA unless the employee opts out.  But suppose neither the business owner nor the employee wants to save in the IRA?  It would still have to be set up, at the business’ expense.  Retirement savings is a good thing, but not at the barrel of a gun.  The best solution here is personal Social Security savings accounts for younger workers, who often don’t have the after-tax income to save adequately.

MYTH:    “To help working families, we will extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, investment fund managers, and those making over $250,000 a year. We just can't afford it.”

FACT:    Let’s lay out exactly what tax increases he is proposing here (leaving aside the fact that “we” are the ones who can’t afford his taxes, not the other way around):

The top two tax rates (which two-thirds of small business profits face) would rise from 33 and 35 percent today to 36 and 39.6 percent in 2010.  The return of the itemized deduction and personal exemption phase-outs would take the mathematical effective top marginal tax rate to 41.6 percent.

The top capital gains rate would rise from 15 to 20 percent.  The top dividends rate would skyrocket from 15 to 39.6 percent.  This would be a body blow to everyone’s IRA and 401(k) as the stock market priced in this new tax wedge.

Obama-Pelosi-Reid wants to raise the capital gains tax rate for managers of investment partnerships from 15 percent to 39.6 percent.  This will leave universities, charities, and pension plans holding the bag as partnership managers understandably demand a greater profit share to make them whole after-tax.

Finally, Obama is referring to repealing the “Section 199” domestic production activities deduction—but only for energy companies.  This is a targeted tax hike on one industry.  It will result in higher energy costs for all of us (companies don’t pay higher taxes—they pass them along to us as higher prices).  It’s shortsighted and counter-productive.

PDF Version

Top Comments


Updated: How Much Does It Cost To Hire a New Federal Employee?


Posted by Ryan Ellis on Wednesday, January 27th, 2010, 3:48 PM PERMALINK


When politicians claim that they will save money by “in-sourcing” federal functions from contractors, or will respond to some new need by expanding the federal workforce, that has a cost to taxpayers.  How much is that cost?

In order to determine the cost of hiring a new federal bureaucrat, ATR has calculated the “all-in” cost of hiring a new employee.  We include salary as well as benefits, pension contributions, and payroll taxes.  We assume a 40-year federal career.  The numbers presented are both nominal and inflation-adjusted.  A COLA is assumed which is equal to the average level in the Washington, DC area for the past five years.

Here are the results for a low-cost, medium-cost, and high-cost employee:  

  Low Cost (GS-7) Intermediate Cost (GS-11) High Cost (GS-15)
Nominal $4.73 million $7 million $13.86 million

Inflation-Adjusted

$2.73 million $4.04 million $8 million
  • The federal general pay schedule for the Washington, DC area is used
     
  • There are separate estimates for low-cost (GS-7), intermediate-cost (GS-11) and high-cost (GS-15) employees.  This was recommended as appropriate levels by former administration officials to give a sense of scope
     
  • The employee is assigned a “Step 5” in the GS table for a 40-year career.  As employees move up the GS-scale, their steps bounce up and down.
     
  • The five-year moving average for this locality’s COLA is 3.55%, so that is assumed to be the COLA rate going forward
     
  • In order to account for benefits, pension contributions, and payroll taxes, the GS dollar levels are increased by 33 percent, which was standard budgeting practice in the Department of Labor in the Bush Administration
     
  • The dollar value is expressed in nominal terms and after-inflation (2.5%)


PDF Version

More from Americans for Tax Reform

Top Comments


Mr. Freeze? Hardly.<br> The Fake Spending "Restraint" of Obama


Posted by Ryan Ellis on Tuesday, January 26th, 2010, 2:40 PM PERMALINK


The political media is awash in news that President Obama will propose a freeze in non-defense, non-security discretionary spending over the next three years.  This will reduce the spending baseline by $250 billion over the next decade. 

A few thoughts:

  1. Welcome to the fiscal responsibility party, Mr. President.  After a year of trillion-dollar bailouts, trillion-dollar stimulus bills, and trillion-dollar healthcare plans, it's nice to see at least a rhetorical nod toward sanity coming out of the White House.
     
  2. One little problem: CBO was actually projecting a decline in non-defense discretionary spending over the next few years (from $682 billion in FY 2010 gradually down to $640 billion in 2014).  It's right there in Table 3-1 of the CBO report.  The reason is all the "temporary" spending programs that were enacted the first year of the Obama Administration.  This is like the weatherman taking credit for a sunny day--it was happening anyway.  In fact, freezing this spending is actually a hike in projected spending over the next several years.
     
  3. The spending "restraint" is a drop in the bucket.  Let's take the White House claim on its face--that this measure will reduce total spending over the next decade by $250 billion.  CBO says that under current services, the federal government will be spending $42.9 trillion.  So even if this "freeze" is followed through on by the Congressional appropriators, the Obama-Pelosi-Reid regime will still be spending 99.42% as much as they were planning to, anyway.  Big deal.  It's like if you were planning on spending $100 on groceries this week, and instead spent only $99.42.
     
  4. It's awfully heroic to say that you're not going to increase spending after it just went up by 17.4 percent.  That's right: non-defense discretionary spending grew by 17.4 percent in Obama's first year.  Even if it stays at that level for the next three years, that would still be an average annual increase of 5.5 percent.  That's faster than the economy is expected to grow, and faster than wages are expected to grow.

So what's a better idea?

The freeze is not a bad concept: it just comes a year too late.  It's as if someone stumbled out of an all-you-can-eat buffet in a food coma and vowed to eat no more than that every day for the next three years.

What we need to do is back out that huge spending of 2009.  Going into 2009, non-defense discretionary spending was $581 billion.  The 2010 level (approved last year) of $681 billion should be pared back to this still-massive 2009 level.  That would require finding $101 billion in cuts in FY 2010 spending bills (something Dr. Coburn should be able to do easily), and then keeping domestic spending at $581 billion.  Oh, and it should be that way for the entire budget window.

By having a "real freeze" of $581 billion, federal spending will be almost $1 trillion less than CBO projects, which is still 97.7 percent of the spending which was going to happen anyway.  Nonetheless, this would be a real step toward progress.

More from Americans for Tax Reform

Top Comments


Who's Going to Pay the Bank Tax?<br> You Are.


Posted by Ryan Ellis on Monday, January 25th, 2010, 2:20 PM PERMALINK


I've written before about the new "bank tax" President Obama is so fond of these days (and even did a bit on Fox News Channel to discuss more).

One natural question is, "who will pay the bank tax?"  It's true that it's assessed on the 50 biggest banks, but surely that will be passed along to all of us.  The "bank tax" is actually one of the most regressive taxes likely to be proposed by the Obama regime.

How will we pay the bank tax?

  • Imagine opening up your bank statement every month and seeing a $1 "bank tax" surcharge in there.  Assuming about 100 million active bank accounts in America and $12 in annual fees, that alone would be enough to pay about 10 percent of the tax every year
  • Another mechanism might be to increase fees to manage 401(k) and IRA accounts.  This could take the form of fees assessed to your employer (which you never see), or 12b-1 fees on your mutual funds (which you didn't even know existed before I typed that)
  • Befuddled by all the fees and costs on your house's HUD-1 closing form?  Here's another one that might be in there.  Check for it just above "county recorder fee" and just below "water reclamation fee"

The list could go on, but I take it you see my point.  You can't force the banks to reduce their profits in order to pay this new tax.  Ultimately, the only way any business has to pay any tax is by increasing prices for what they sell.  That's exactly what's going to happen here.  It's not the banks' fault--it's the Obama Administration's fault for hiking taxes on a crippled industry in the middle of a deep recession.

Don't believe me?  Maybe you'll believe Suze Orman.

More from Americans for Tax Reform

Top Comments


Broken Promises: Obama's First-Year Tax Hikes On Families Making Less Than $250,000


Posted by Ryan Ellis on Wednesday, January 20th, 2010, 8:00 AM PERMALINK


Sept. 12, 2008: Candidate Obama said the following:
 
“I can make a firm pledge.  Under my plan, no family making less than $250,000 a year will see any form of tax increase.  Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.” (Dover, NH) [Transcript] [Video clip]
 
Feb. 4, 2009:  Speaking before a joint session of Congress, Obama said:
 
“If your family earns less than $250,000 a year, you will not see your taxes increased a single dime.  I repeat: not one single dime.” [Transcript]
 
April 15, 2009: When asked if Obama’s tax pledge applies “to the health care bill”, White House spokesman Robert Gibbs replied:
 
“The statement didn’t come with caveats.”  (White House Briefing) [Transcript]
 
August 3, 2009: Gibbs reiterates Obama’s tax pledge:
 
“I am reiterating the President's clear commitment in the clearest terms possible, that he's not raising taxes on those who make less than $250,000 a year.”[ Transcript]
 
This promise has been broken again and again. 
 
Tobacco Tax Hike (Signed into law by President Obama on Feb. 4, 2009)
  • Small cigar tax hike ($0.65 billion)
  • Large cigar tax hike ($4 billion)
  • Cigarette tax hike ($57.3 billion)
  • Other tobacco products ($2.7 billion)
TOTAL <$250,000 TOBACCO TAXES: $64.7 billion/10 years   

Obama Budget Submission (Feb. 26, 2009)
  • Tax “carried interest” capital gains at ordinary income tax rates ($23.5 billion)
  • Codify “economic substance doctrine” ($4.7 billion)
  • Repeal LIFO accounting for inventories ($61.1 billion)
  • Eliminate advanced EITC (Only outlay effects)
  • “Cap and trade” energy tax ($624 billion)
TOTAL <$250,000 TAX HIKES IN OBAMA BUDGET:    $713.3 billion/10 years

Senate Healthcare Bill (Supported by President Obama)
  • Individual mandate tax ($15 billion)
  • Employer mandate tax ($28 billion)
  • Medicine cabinet tax ($5 billion)
  • HSA early withdrawal tax hike ($1.3 billion)
  • Special needs kids tax ($13.3 billion)
  • Raise “haircut” for medical itemized deduction to 10% AGI ($15.2 billion)
  • STRICKEN Botax--REPLACED Tanning salon tax ($2.7 billion)
TOTAL <$250,000 TAX HIKES IN HEALTH BILL:        $80.5 billion/10 years

TOTAL <$250,000 TAX HIKES IN OBAMA’S FIRST YEAR        $858.5 billion/10 years

PDF Version

More from Americans for Tax Reform

Top Comments


Obama's First Year:<br> $2 Trillion in New, Proposed Taxes


Posted by Ryan Ellis on Tuesday, January 19th, 2010, 11:51 AM PERMALINK


We often get the question at ATR, "how much has Obama supported in new taxes?"  This new study seeks to answer that question.

For the first time ever, the tax increases signed into law, as well as proposals for tax hikes made by or supported by President Obama have been pieced together.  It combines three elements:

  • The tobacco tax hike he signed into law in February 2009
  • His budget proposal, also from February of 2009, and
  • The latest version of healthcare reform, which he has endorsed

The results are shocking.  All told, these tax hikes total $2 trillion over the next decade.  This does not even count his 2010 trial balloons, such as a value-added tax (VAT) or a new bank tax.

This is more in taxes than was ever supported by any past President since World War II, even after indexing for inflation. 

Click here to read the full report.

More from Americans for Tax Reform

Top Comments


"Bank Tax": Another Bad Idea<br> From Administration of Bad Ideas


Posted by Ryan Ellis on Thursday, January 14th, 2010, 4:43 PM PERMALINK


By now, you've probably heard that one of the trial balloons being floated by the Obama Administration in anticipation of the State of the Union speech is a new "bank tax."

Details are still coming in, but it would apparently apply to the top 50 banks in America, and would raise $117 billion over a decade.  It would be a tax of $1.5 million for every $1 billion in certain bank reserves.

Supposedly, this is to recoup TARP funds.  Except, of course, that the tax applies to banks that never accepted TARP.  Also, the tax does not apply to some firms that received TARP (like Government Motors, AIG, etc.)  So the TARP connection is flimsy.

In addition, firms have begun paying back TARP in droves (in most cases, with healthy interest).  The Administration has at times told firms not to pay yet, which also calls into question the credibility of this being a measure to get TARP payments back.

It's also been speculated that this would be paired with a one or two-year extension of the "Bush tax cuts."  So, we're supposed to agree to new savings-killing tax hikes just to keep the current tax rules we have in place? 

All in all, it looks like another desperation power grab by an administration which has been characterized by desperation power grabs.  At some point, they're either going to have to rein in the socialist agenda, or they will find themselves in quagmires like healthcare for the next 3 to 7 years.

More from Americans for Tax Reform

Top Comments


Why Does Coakley Want to Raise Taxes<br> On Families with Special-Needs Kids?


Posted by Ryan Ellis on Thursday, January 14th, 2010, 1:58 PM PERMALINK


Americans for Tax Reform today challenged Massachusetts Senate candidate Martha Coakley to defend her support for a tax increase on families with special-needs children.  Coakley has endorsed the Senate healthcare bill, which contains a new cap on flexible spending accounts (FSAs)--disproportionately raising taxes on these families.

Under current law, there is no legal cap on FSA contributions.  Most people defer $10 or $20 per paycheck to pay for eyeglasses, co-payments, and non-prescription medication.  Many families, however, defer thousands of dollars per year into FSAs to pay for special needs education on a pre-tax basis.  The Senate healthcare bill’s $2500 FSA cap won’t affect typical families, but it will especially impact families with special-needs children.

“Martha Coakley supports this tax increase on special-needs kids because she only cares about, in her words, ‘getting taxes up,’ said ATR President Grover Norquist.  “Maybe she should put her loyalty to Washington bureaucrats aside for the moment and stop to consider the pain she is causing for families with special-needs children.”

If a median-income family in Massachusetts has a special needs child whose tuition is $10,000 per year, the tax benefit from deferring this money with an FSA is $3560.  Under the Coakley FSA cap, this tax benefit would decline to $890—a tax increase of thousands of dollars on a working family with high medical bills.

“In what universe does Martha Coakley live where she thinks that raising taxes on these families is a good idea?”
continued Norquist.  “Only someone who is completely detached from the everyday lives of average Bay Staters could possibly support this boneheaded tax hike.”

The provision can be found on page 1999, section 9005 of the bill.

PDF Version

More from Americans for Tax Reform

Top Comments


Coakley Support for Senate Health Bill<br> Risks 22,000 High-Paying Mass. Jobs


Posted by Ryan Ellis on Tuesday, January 12th, 2010, 4:33 PM PERMALINK


Americans for Tax Reform today released an analysis showing the impact on Massachusetts of Martha Coakley’s support for the Senate healthcare bill.  Coakley is on record supporting the Senate government healthcare bill, which contains eighteen separate tax increases.  One of these is a new $2 billion per year (rising to $3 billion in 2017) tax on medical device manufacturers. 

Massachusetts can expect their share of this tax to be $760 million annually (rising to $1.14 billion in 2017).

According to a 2007 study by Advamed, a medical device manufacturing trade association, Massachusetts counts on medical device manufacturers for nearly 22,000 jobs.  This ranks the Bay State as second in the country behind California, or fourth in the country as a percent of all state jobs.  One in every 150 Massachusetts workers is employed in the medical device manufacturing industry.  The average medical manufacturing employee earns about $51,000 annually (higher than the Massachusetts average of about $42,000).  The state medical device manufacturing industry generated $8.2 billion in sales and paid $1.47 billion in wages

Each medical manufacturing job generates an additional 3.83 jobs in Massachusetts.  Each $1.00 earned by employees of a medical device manufacturer generates $2.48 of wages elsewhere in Massachusetts.  Each $1.00 of sales in medical device technology generates $2.06 in additional sales in Massachusetts.

A few examples of communities that will be affected by this new tax supported by Coakley are in the PDF.

“Martha Coakley has already been quoted as saying that taxes need to go up,”
said ATR President Grover Norquist.  “Raising taxes is not free—it will cost jobs.  People need to ask Martha Coakley why she wants to be the deciding vote on a government healthcare and taxes bill which will endanger 22,000 high-paying jobs in Massachusetts.”

The provision can be found on page 2020, section 9009 of the bill.

PDF Version

More from Americans for Tax Reform

Top Comments


Tax Return Preparer Regulation:<br> A Solution in Search of a Problem<br> In Search of Tax Revenue


Posted by Ryan Ellis on Wednesday, January 6th, 2010, 4:47 PM PERMALINK


Everybody knows by now that the IRS will be issuing regulations seeking to regulate unenrolled paid tax preparers.

Full disclosure: I am an Enrolled Agent, which makes me an IRS-regulated tax expert.  I have maintained my own tax preparation firm since 2004.  I was (briefly) an employee of H&R Block.

In fact, that's the first point to mention in all this: to read media accounts, one would think that preparer regulation doesn't exist now.  It does exist now, in spades, for a majority of tax returns.

Let's take a look at some numbers.  The IRS reported that in 2009, 132 million tax returns were filed.  Of these, 90 million were e-filed.  Almost by definition, the paper-filed returns were not done by preparers, who all use software.  Paper-filed returns are nearly-exclusively the domain of the computer-illiterate taxpayer at his kitchen table with a pencil and a desk calculator.

Of the 90 million electronic returns, 30 million were done using tax software at home.  These are dominated by a few big players, and work to make sure their software is strictly-compliant with current tax law.  So, no problems there.

That leaves 60 million returns done by a human being who prepares the return.  Most of these are done by paid preparers.  So the IRS is regulating the preparers of these 60 million returns, right?  Wrong.  Many--if not a majority--of these preparers are already regulated.  Some (like me) are Enrolled Agents, directly-regulated by the IRS.  Some are CPAs, who are regulated by the states.  Yet others are tax attorneys, who are regulated by state bar associations.

Furthermore, these 60 million returns were unchanged from 2008.  They've plateaued.  All of the growth in e-filing in 2009 was a result of increases in home tax preparation software.  As computer ownership and competency continues to deepen, and as these home tax software programs continue to improve, one can expect them to actually start eating into the human-to-human tax preparation business. 

What about poor neighborhoods that bad-actor preparers prey upon?  The IRS, faith-based, and community-activist groups have for years ramped up free returns in churches, schools, and community centers in these neighborhoods.  The IRS has a "Free File" program in partnership with home tax software preparers which can give a free or nearly-free return to tens of millions of Americans.

In short, IRS regulation of "unenrolled preparers" is a solution in search of a (probably declining and certainly over-blown) problem.  So what's going on here?

Money.  The long-term plan the IRS has is to insource all tax preparation to themselves.  In some countries, the tax office fills out your return for you, sends it to you, and makes you take them on if you disagree.  This is the opposite of how it works in this country, where the assertion of tax liability is made by the taxpayer, and the burden of proof is on the IRS if more is wanted.  If you don't believe that IRS preparation of tax returns will result in higher tax revenue, why does everyone who proposes it tout higher revenue collection as a benefit?  The fact is, people won't challenge the IRS over a spare $100 here or $300 there because they feel like they can't fight city hall.  Think about when you get your property tax assessment, and you get the idea.

Speaking as someone who gets the Enrolled Agent trade association publications, it's clear that the enrolled preparers view their relationship to the IRS in the same way a booster club might view their relationship to a college football team, or a third order might view their relationship to a religious community.  To them, the IRS is not the "benign adversary" they spar with in their client's corner.  Rather, they are the willing facilitator, always coming down on the IRS interpretation of tax law when encountering a gray area.  The IRS is licking their chops at getting all return preparers to think this way.  From there, it's a small step to insourcing preparation of the returns, either explicitly or in substance.  When that happens, taxpayers will find themselves without an advocate, forced to go it alone against an unrelenting bureaucracy with infinite resources to litigate.

More from Americans for Tax Reform

Top Comments


Pages

hidden
×