Ryan Ellis

Crisis of Faith:<br> Obama "Agnostic" About <$250k Tax Hikes


Posted by Ryan Ellis on Thursday, February 11th, 2010, 3:18 PM PERMALINK


You might have seen today that President Obama is now officially "agnostic" about whether a bi-partisan tax increase/deficit commission should raise taxes on families making less than $250,000 per year.  A few things here:

  1. This would directly contravene his campaign promise (repeated again and again throughout the campaign and during his first year in office) to not raise "any form" of taxes on these families, "not one dime."  ATR has maintained a full database of this tax promise
     
  2. As Jim Pethokoukis of Reuters has pointed out, this could be a subtle signal that Obama is paving the way for a value-added tax (VAT).  ATR maintains an Anti-VAT Congressional Caucus
     
  3. An agnostic is someone who lacks the conviction of either an atheist, or a believer.  It seems pretty clear that President Obama is actually rather zealous in his faith that higher taxes across the board (including for non-affluent households) is the correct public policy goal.

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The Hidden Tax Hikes in the Obama Budget


Posted by Ryan Ellis on Friday, February 5th, 2010, 11:21 AM PERMALINK


Over the past week, ATR has been breaking open the Obama budget to examine all the new tax hikes (on international income, small business, and more to come).  Today, we wanted to take a quick look at the "tax gap" and "tax compliance" tax hikes in the budget.

People often make the mistake of skimming over tax compliance measures, but that would be a big mistake.  Over the 10-year budget window, the Obama budget projects that these compliance "reforms" will raise $13.8 billion to close the so-called "tax gap," $7.4 billion to "improve compliance by businesses," $4.4 billion to "strengthen tax administration," $36 million in increased penalties, and $23.7 billion in backdoor death tax hikes.  You can view the scores here (Table S-8).  Add these together, and you get a $49.4 billion total tax hike.  That's more than double the amount raised by taxing carried interest as ordinary income, so this is a lot of money.

There are a couple of dozen individual proposals, so we'll focus on just the most damaging ones for small business owners and those who work for small businesses:

  • Corporate Information Reporting ($9.2 billion).  Under current law, small business owners and others need to issue "1099-MISC" statements to individuals and partnerships to whom they pay at least $600 for goods and services.  This expands that to also include corporations.  This could dramatically-increase the number of these forms that are issued, which will increase headaches for small business owners every January.
  • Landlord Information Reporting ($3.1 billion).  This further expands the above reporting requirement to owners of rental properties.  Those to whom rent is paid would need to receive a 1099-MISC.
  • Independent Contractor Discrimination ($7.3 billion).  This would permit the IRS to more easily re-classify independent contractors (who only need to receive a 1099-MISC in January) as employees (which requires hiring a payroll company, quarterly filing and tax payments, and a W-2 in January).  The real reason behind this is to make it easier to unionize people who are currently not employees.
  • Economic Substance Doctrine ($4.2 billion).  This would give the IRS the power to determine that a transaction used to lower a tax bill "lacks economic substance."  This is an arbitrary standard, and would subject every small business decision to the whims of an IRS auditor

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The Obama Budget and Small Business


Posted by Ryan Ellis on Tuesday, February 2nd, 2010, 4:32 PM PERMALINK


President Obama today is touting all the advantages his budget has for small businesses.  In particular, he's talking about using TARP funding (supposedly temporary, to be paid back to taxpayers) for small business lending.

Even if you limit yourself to the tax side of things, though, there are some pro-small business crumbs in the Obama budget: small business expensing is extended, a new jobs credit is created, and small business stock is exempted from capital gains.  Good things, all, to one degree or another.

But there is one bad--very bad--tax increase on the small business sector in the Obama budget.  Under his plan, the top two income tax rates increase from 33 and 35 percent to 36 and 39.6 percent.  We've documented before that two-thirds of small business profits pay taxes in these bracket levels.  Small businesses pass their profits through to their owners, who pay income tax on them.  To raise taxes on "the rich" is a laser-beam tax hike aimed at small employers.

Small business owners also have to pay the Medicare portion of the self-employment tax at the high margin.  Furthermore, they will face a phaseout of their itemized deductions (Pease) and personal exemptions (PEP) under the Obama budget, unlike 2010 law.

What does that mean for the marginal tax rate on small business activity?  Assuming a 5 percent state income tax rate, the calculation is the following for a sole proprietor or general partner (S-corporation owners don't have to pay Medicare tax, so it will be slightly smaller for them):

Tax Rate
Federal Income 39.6%
State Income 5.0%
Self Employment 2.9%
SE Deduction (0.65%)
PEP and Pease 2.34%
Total 49.19%

So, the top marginal tax rate on small business income will rise to 49.19 percent by my reckoning, up from about 41 percent today.  This is a huge increase in the tax rate on most small business profits.  I wonder if President Obama will be sharing this with entrepreneurs today?

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Initial Thoughts on the New Obama Budget


Posted by Ryan Ellis on Monday, February 1st, 2010, 1:16 PM PERMALINK


A few early thoughts on the  FY 2011 Obama budget:

  • It's important to keep the 30,000 feet view in mind. The top-line estimate for taxes, spending, and debt over the next decade can be found in Table S-1:

    Taxes are scheduled to rise from 14.8 percent of GDP in 2009 to 19.6 percent by 2020 (the historical average is 18 percent). 

    Spending is scheduled to fall from 24.7 percent of GDP in 2009 to a still-high 23.7 percent of GDP in 2020 (considering the historical average is 21 percent, this is actually a very significant and permanent increase in the size of government).  When Bill Clinton left office, for instance, federal spending was 18.2 percent of GDP and falling.

    The national debt is scheduled to rise from 53 percent of GDP in 2009 to 77.2 percent of GDP in 2020.  As a percentage of the economy, the national debt hasn't been that high since 1950.
     
  • So, taxes are scheduled to be higher than their historical average.  Spending is scheduled to be higher than its historical average.  If you have a problem with the deficit, it's not because taxes are too low--it's because spending is too high.  The culprit is clearly spending, not taxes.  The deficit is signaling to policymakers that they are spending far more money than they should be.
     
  • In the terminations and reductions section (page 4), the budget includes some energy tax hikes along with actual spending cuts.  Tax increases ARE NOT spending cuts.
     
  • In the coming days, ATR will be breaking out different analyses of the budget, including the international tax hikes, the energy tax hikes, the small business tax hikes, the tax hikes disguised as "compliance," and the tax increases on families making less than $250,000.  We'll also be looking at the various spending questions via our Center for Fiscal Accountability.


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State of the Union Myth/Fact:<br> Government-Run Healthcare


Posted by Ryan Ellis on Thursday, January 28th, 2010, 3:42 PM PERMALINK


MYTH:      “[My health plan] would give small businesses and uninsured Americans a chance to choose an affordable health care plan in a competitive market.”

FACT:    The Obama-Reid-Pelosi plan would actually increase health premium costs for the uninsured.  The average individual health insurance premium today is $2985 for singles and $6328 for families.  According to the non-partisan Congressional Budget Office, the average premium will increase to $5800 for singles and $15,200 for families under the Obama plan by 2016.  This is 10 to 13 percent higher than they would be under current law.  Only those individuals earning less than about $40,000 and families earning less than about $85,000 would receive any tax or spending benefits to even partially-offset this increased cost.  Those earning more than this get no help whatsoever.

For small businesses (“small group plans”), today’s average premium is $4155 for singles and $10,956 for families.  Under the Obama-Reid-Pelosi plan, this increases to $7800 for singles and $19,200 for families by 2016, a 1-2 percent increase over current law.  Only about 12 percent of people receiving coverage from their small business employer would benefit from the small business health tax credit.

MYTH:    “[My plan] would require every insurance plan to cover preventive care.”   

FACT:    Under current law, someone can’t wait until they are sick and then sign up for health insurance.  That’s called “gaming the system.”  Insurance only works if healthy people are paying premiums each month, so that when you get sick or go to the doctor, money is there for you.  If healthy people can wait to buy coverage, the entire insurance model falls apart very quickly.  Put simply, “guaranteed issue” would be the death of insurance.

MYTH:    “Our approach would preserve the right of Americans who have insurance to keep their doctor and their plan.”

FACT:    The Obama-Reid-Pelosi plan taxes your current health insurance, if it’s deemed to be a “Cadillac plan.”  It also puts in place minimum coverage requirements in order to remain “qualifying,” which probably will alter your plan.  It probably will make it impossible to design health insurance plans which are HSA-compatible.  Clearly, you simply can’t keep your current plan under this bill.

MYTH:    “According to the Congressional Budget Office – the independent organization that both parties have cited as the official scorekeeper for Congress – our approach would bring down the deficit by as much as $1 trillion over the next two decades.”

FACT:    According to CBO, these cost estimates only pan out if Congress is willing to cut Medicare provider reimbursements, something everyone knows will never happen.  Budget savings based on phony, never-going-to-happen spending cuts are bogus.  This creates an unfunded liability in the program.

MYTH:    “I know that with all the lobbying and horse-trading, this process left most Americans wondering what's in it for them.”

FACT:    When the American people don’t want a massive plan of this size, margins can get a little tight on Capitol Hill.  That’s why Obama-Reid-Pelosi had to buy off members with the Louisiana Purchase, the Cornhusker Kickback, the Cadillac Compromise, and untold other backroom, closed-door deals.  Back in the campaign, candidate Obama said he would put negotiations on C-SPAN so this could not happen.

MYTH:    “There's a reason why many doctors, nurses, and health care experts who know our system best consider this approach a vast improvement over the status quo.”

FACT:    One word: money.  The American Medical Association, nursing groups, hospitals, and others are receiving billions in taxpayer subsidies under this bill.

MYTH:    “If anyone from either party has a better approach that will bring down premiums, bring down the deficit, cover the uninsured, strengthen Medicare for seniors, and stop insurance company abuses, let me know.”

FACT:    It’s worth pointing out that even President Obama’s own plan will increase premiums, increase the deficit (at least in the real world) even while raising taxes, cover only some of the uninsured (theoretically), cut Medicare, and drive insurance companies totally out of business.  So one might first turn the question back on him.

Can President Obama, Speaker Pelosi, and/or Leader Reid use the Internet?  Can their staffs?  It appears not, since this is a common refrain easily refuted.  The fact is, there are dozens of good ideas and several comprehensive plans which have been proposed.  The House Republicans have even aggregated all of them.  Their list doesn’t include the DeMint plan, nor does it include the comprehensive “American Roadmap” government reform plan (including healthcare) of Congressman Paul Ryan (R-Wisc.)

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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.

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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%)


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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.

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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.

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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

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