“Conservative” Group Pushes for Sales Tax on Services

The Thomas Jefferson Institute for Public Policy, a supposedly center-right public policy foundation, is pushing for sales taxes to be collected on most services in Virginia.  The law would include services provided to the public but not business-to-business services.  This would include tax preparation, legal services, transportation, shipping services, insurance, private education, auto repair, hair services, dry cleaning, landscaping services, apartments, bowling, and the list goes on and on.  The new law would be “revenue-neutral” (what they always say) and would eliminate the Business and Professional Occupational Tax (Business License), Business Personal Property Tax and Business Inventory Tax.

Although I like the idea of getting rid of Business License fees and Property and Inventory Taxes, I don’t like the idea of charging sales taxes on services.  Charging a sales tax on services is the same as charging sales taxes on labor.  As we all well know, labor is already taxed extensively through the Federal Income Tax, State Income Tax, Social Security Tax, Medicare Tax, State Unemployment Tax and Federal Unemployment Tax.  Now, they want us to collect and remit sales tax to the state for services?

This also creates burdensome accounting.   For example, if you pay someone to mow your lawn as an independent contractor then under this new law they would also be required to collect sales tax from you and remit it to the State.  That seems to me like a paperwork nightmare, especially for small operators.  And, it increases the potential for fraud.  How much of this new tax will never get remitted to the State?

Although this tax is paid by the public, it will eat into the pockets of service providers.  There are certain price points that people will pay, tax included.  Thus, service providers will have to lower their prices to accommodate the new tax.  Also, it will give an unfair advantage to those small operators who skirt the law and don’t collect or report the tax at all.  I say, “Two Thumbs Down” on this idea!

Boehner Piles On FB Founder

There is so much inaccurate and misleading information floating around about Facebook Co-Founder Eduardo Saverin and his tax avoidance that it is time to point out a couple of things.

1. Renouncing U.S. Citizenship does not help you avoid taxes up to that point.  In other words, Mr. Saverin still had to pay capital gains on his FB shares based on the value on the date that he renounced his citizenship.  Which means that he owed (or already paid) hundreds of millions of dollars in capital gains taxes upon his exit.

2. He will have to pay the taxes that have accrued no matter where he lives.  In other words, he is paying his “fair share” on what he earned as a U.S. Citizen.  What he earns after that is between him and his new home country.  The fact that he owns U.S. assets (FB shares) would make it rather easy for the IRS to collect the taxes that he owes.  If he doesn’t pay, they can put a tax lien on his remaining FB ownership.

“There’s already a law on the books, George,” John Boehner said to George Stephanopoulos . “But this is outrageous. This is absolutely outrageous — that somebody would renounce their citizenship to avoid paying taxes. And yes, it’s already against the law.”

Senators Chuck Schumer and Bob Casey have been on the case for a while now.  “Mr. Saverin has decided to ‘defriend’ the United States of America just to avoid paying his taxes,” said Schumer. “We aren’t going to let him get away with it so easily.”

“This guy just thinks he can rip us off by engaging in this scheme,” Casey, D-Pa., said.

“Saverin has turned his back on the country that welcomed him and kept him safe, educated him and helped him become a billionaire,” Schumer, D-N.Y., said. “This is a great American success story gone horribly wrong.”

ABC New’s entitled their article, “Facebook’s Eduardo Saverin ‘Spits in the Eye of the American People.’

Well, I don’t feel like Mr. Saverin “spat in my eye.”  He earned money here and paid taxes on it (and will pay more if he hasn’t already).  If he wants to leave then I think it is his loss.  But, I think that if Mr. Saverin wanted to come back and start another Billion dollar company he should be welcomed back.  Senator Schumer says that this country educated him and helped him become a billionaire.  That is true.  But, without Mr. Saverin’s money, Facebook may never have gotten started.  It was his family money that financed Facebook from the beginning.  Now, look how many Americans have become billionaires because of Mr. Saverin.

Let’s be clear.  I do think that everyone should pay their fair share of taxes.  But, there are two issues here worth mentioning:

1. We live in a Global Economy.  Thus, we have to compete globally.  The U.S. is the only country in the world that taxes it’s citizens on worldwide income no matter where you live.  If someone leaves because U.S. taxes are too high that should tell us something.  Also, the reporting requirements for U.S. Citizens living abroad are cumbersome.  Just to have a foreign bank account means that you have to report the information to the IRS every year on Form TD F 90-22.1.  Not reporting it results in a fine of $10,000 per occurrence.  Just that requirement alone would make someone consider renouncing their U.S. Citizenship.  Think about it.  If you live overseas and you have two checking accounts, a savings account and business account and you forget to report those accounts to the IRS for two years, you could owe $80,000 in penalties, just for not letting them know that “hey, I have some foreign bank accounts.”   And, of course, living overseas means that you have to pay taxes in the country where you live and to the U.S.  Sure, you can exempt about $100,000 or so, but for the high income earners that doesn’t help much.  Singapore doesn’t have a capital gains tax which could be the reason that Saverin chose that country.  But, Singapore will benefit from him living there in other ways because of the money he will spend and invest in their country.  Thus, Singapore is competing in the Global Economy by offering incentives, whereas Schumer is competing by trying to force people to stay.

2. If he owes taxes, he should have to pay them.  I haven’t heard anyone report that Mr. Saverin said he isn’t going to pay the taxes that are actually due.  But, to try to pass a new tax law just because of him?  Come on.  That is a little ridiculous.

In a time where we should be encouraging overseas investment into our economy, new laws like the one Senator Schumer is espousing would only discourage people from doing business here.

As far as Speaker Boehner is concerned, he would be much better served focusing on cutting the Federal Deficit by cutting spending instead of attacking Mr. Saverin.  Perhaps if our Congress would focus more time and energy on finding ways to cut spending and finding ways to bring ex-patrioted dollars back into the U.S. instead of trying to squeeze every last dollar of possible taxes out of people on the other side of the world we wouldn’t be in the financial position we are in.

Business License Fees Punish Success

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Like most other responsible business owners in Chesapeake, VA I renewed my business license before March 1st of this year.  One of the things that has always seemed odd to me is how the license fee is calculated.  If you make less than $100,000, your business license is $50.  But, if you make $100,000 or more, you pay a percentage of gross revenue.  For accountants it is 58 cents per $100, or 0.58%.  In other words, if you have $99,999.99 in revenue your business license is $50, but if your revenue is $100,000.00 your business license is $580.

Of course, a third grader could see why this isn’t fair.  That one extra penny costs you $530 in extra license fees.

Whoever set this up was either too incompetent to implement a gradual system or simply didn’t care.

From a political standpoint, I can see why this would be hard to change.  It would be practically impossible to keep business license fees revenue neutral without raising taxes on someone.  For example, if you lowered the $50 cutoff to $75,000 and then said that business license fees are $50 for the first $75,000 and a percentage of revenue for everything above that then you would be raising fees on businesses that bring in between $75,000 – $100,000 but lowering fees on those that bring in above $100,000.  On the flip side if you had a partially graduated scale where the first $99,999.99 was still $50 but $100,000 – $125,000 was $50 plus a percentage of the amount over $100,000 and then increased taxes on the amounts above $125,000 to make up for the loss of license fees on the amounts lower than $100,000 then you would be increasing fees on those businesses with more than $125,000 in revenue.  Business license fees are already high enough and shouldn’t be raised on anyone.

The only fair solution is to charge $50 for the first $100,000 and then a percentage on everything above that.  Of course, doing this will lower tax revenue to the city (which is not necessarily a bad thing).  And, “fair” is a relative term.  It would be “fair” to make everyone pay a percentage of sales, regardless of how much those sales are.  If you bring in

$90,000, for example, instead of $50, you would pay a percentage.  But, of course, making it “fair” would cause an increase in license fees for those businesses with revenues of less than $100,000, and I would never be for increasing taxes or fees on small businesses.

Another solution is to implement a graduated scale from $100,000 – $125,000 (for example) and not raise rates on those above $125,000.  This would fix the “one penny costing $530 problem”.  This would also cause a loss of revenue to the city.

Thus, the only way to fix this improper business license calculation without raising taxes on anyone is for the city to take a cut in tax revenue.  But, worse things have happened.  If doing the right thing means less revenue to the city then so be it.

Romney Releases 2010 Tax Return

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Mitt Romney released his massive 203 page 2010 tax return yesterday.  The big story is the 14% tax rate that he pays.  But, to me, as a tax professional, my eyes went to Schedule A, Line 22, Tax Preparation Fees.  I’m always curious what high profile individuals pay for tax preparation services.  And, guess what?  The line is blank.  Is this a mistake?  Did Pricewaterhousecoopers LLP do it for free?  He was way over the 2% threshold so the tax preparation fees would have been a dollar for dollar deduction.  Oh, well,  I guess I’ll focus on the 14% issue.

Here are the facts:

1) His income was about $21.6 million

2) The majority of his income was from Capital Gains ($12.5 million)

3) The next largest portion was from Dividends ($4.9 million)

4) The third largest portion was from Interest ($3.3 million)

Capital gains are taxed at 15%.  There is a reason for that.  It encourages investment.  Raise the capital gain rates and you discourage investment.

Dividends are also taxed at 15%.  The reason for this is because they have already been taxed at the Corporate Income Tax rate of 35%.  Corporations don’t get a deduction for dividends.

Interest is taxed as ordinary income which means Mitt Romney paid 35% on his Interest Income.  This is because Corporations DO get a deduction for interest payments and therefore don’t have to pay taxes on it.

5) He gave $3 million to charity.  This helped reduce his taxable income and, of course, his overall tax rate.

6) He earned $593K from speaking fees, director fees, etc.  He reported this on Schedule C and paid the FULL Medicare Tax on it.  He could have run it through an S-Corporation, paid himself a reasonable salary, and then taken the rest of it as a distribution, like Newt Gingrich did, but he didn’t .   Not that there is anything wrong with the way Newt did it.  I’m just pointing out the facts.  Romney should at least get some points for that.

There is a lot to this tax return and I’m not going to spend the time going through all the forms.  I’ll just stick with the basics.  But, I don’t see anything big here.  The only ammunition will be for those who want to play class warfare.

Soda tax could prevent 26,000 premature deaths, study finds

The LA Times reports that the Health Affairs Journal has determined that “a penny-per-ounce tax would reduce soda consumption by 15%” which would result in “95,000 fewer instances of coronary heart disease, 8,000 fewer strokes, 26,000 fewer premature deaths, and more than $17 billion in savings from medical expenditures averted across the U.S. population,”.

No, this is not a joke.  They really did study this.  It amazes me that there are people in the world that spend time and money on a study like this.

I have a better headline, “History Has Determined That Free Market Capitalism Causes Millions and Millions Fewer Premature Deaths”.

Or, “The North Korean Department Of Health Has Determined That Big Government Intrusion On the Free Market Causes Millions and Millions of Premature Deaths.”

Why Do We Demand To See Presidential Candidates Tax Returns?

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As you know, it has become commonplace for presidential candidates to release their tax returns to the public.  Of course, they are under no obligation to do so.  But, if they don’t, they are accused of hiding something.

The real question for me is, why do we feel like we have a right to see their private information?  Let’s think about the possible reasons for this.

1. We want to make sure they know how to prepare taxes.  Ummm, no.  They don’t prepare their own taxes.

2. We want to make sure they give money to charity.   This seems silly to me because any politician who is planning on running is going to make sure that they give to charity in advance, right?  Unless you’re John Kerry, Al Gore or Joe Biden.  John Kerry hardly ever gave anything to charity until 2003, the year before he ran for president and then he suddenly gave over $40,000.  Al Gore gave $353 to charity in 1997, while he was VP.  I guess things were just that tight for him.  And, of course, Joe Biden gave less than $1,000 per year to charity the ten years leading up to 2008 when he ran for president.  He didn’t bother bumping it up in 2007.

3.  We want to see how much their medical expenses are so we can make sure they are healthy.  This information is probably whited out and most people don’t go over the 7.5% threshold anyway, but even if they did and it wasn’t whited out you wouldn’t be able to tell for sure if the medical expenses were their’s, their spouse’s or their dependent’s.

4. We want to make sure they aren’t cheating on their taxes.  This also doesn’t make sense because how would you know?  You can’t tell by looking at someone’s tax return whether or not they cheated.  You would have to audit them and ask for backup documents.  Also, anyone who is planning on running for Governor, Senate, etc. is most likely not going to cheat on their taxes.  And, when they decide to run for President they certainly aren’t.  Most of these candidates have been in the public eye for years and years and know better than to try and cheat.  And, of course, they don’t do their own taxes anyway so in order to cheat they would have to lie to the tax preparer.

5.  We just want to know how much money they make.  Aha!  That’s it.  We want to know how much money they make compared to the percentage of tax that they pay so we can play class warfare.  But, does a presidential candidates income have anything to do with their potential ability to be president?  If success in your career is determined by the size of your income, wouldn’t we want a president to be extremely successful and have a very high income?  If that is the case, then why is it viewed as such a negative thing by the left that Mitt Romney has a high income?

I don’t really care how much money Mitt Romney makes, what percentage of it he paid to the U.S. Treasury, how much he gave to qualified 501(c)(3) charitable organizations, how much he spent on medical expenses or anything else that is suppose to be private.  I do care about what positions he takes on issues.

How To Really Stimulate the Economy

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What motivates people?  Well, money, for one thing.  If you’re familiar with the book “Carrots and Sticks”, or the web-site StickK.com, you’ve probably noticed that money motivates people to do something more than just about anything else.  So, how do you stimulate the $14 Trillion mammoth economy of the United States?

Tax Reform, Much Ado About Nothing

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Tax Reform has now become the major topic of debate for this election cycle.  Of course, this happens every few years.  They will probably make a few small changes that are suppose to make the tax code simpler but it always has the opposite effect.

I’m not exactly sure why Republicans are pounding this drum so loudly.  Especially when focusing on government spending worked so well in 2010.  I thought the problem was spending?

9-9-9 Would Probably Double Your Taxes

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Herman Cain’s 9-9-9 is certainly attracting a lot of attention and has given him a huge boost in popularity and poll numbers.  Proponents of the plan claim it’s simplicity will end the need for complicated tax returns, stimulate the economy and still raise the revenue necessary for the fed.  Opponents of the plan claim it will put a much larger tax burden on the poor and middle class while at the same time giving the government yet another way to tax us via a national sales tax (who says it will remain at 9%).

Since I prepare tax returns for a living, I have a lot of raw data to test this scenario out myself.  Here is what I did: