A few days ago the Senate failed to pass Senate bill S. 2343, the “Stop the Student Loan Interest Rate Hike Act of 2012 which would have limited the ability of S corporation shareholders to classify payments made to them by their corporations as distributions thereby avoiding self employment tax.
Tony Nitti has the story:
The bill would have paid for the lost revenue caused by keeping the interest rate on subsidized Stafford loans steady at 3.4% for another year by closing a long-standing S corporation “loophole” (their words, not mine).
The loophole in reference is the ability of S corporation shareholder/employees under current law to forego compensation in favor of distributions to reduce their payroll tax obligation. The Senate bill would have taken a hybrid approach to closing the loophole by subjecting the income allocated to shareholders of “professional service” S corporations — law, lobbying, accounting etc… — to self-employment tax only if:
1. the shareholder provides substantial services to the S corporation;
2. 75% or more of the gross income of the business is attributable to 3 or fewer shareholders; and
3. the shareholder has AGI > $250,000 if MFJ and $200,000 if single.
With the Senate bill dead — and with no other bill currently in the pipeline to close the loophole — S corporation shareholder-employees can continue to play the compensation/distribution game, but be warned…the IRS is watching.
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Tags: Legislative Watch · S Corporations · Tax Policy
Tony Nitti of Double Taxation has an interesting story about the tax evasion of a woman who sold suicide kits:
[W]hile a 92-year old retired school teacher would never be confused with a legendary criminal of Capone’s ilk, Sharlotte Hydorn shared one thing with Big Al: it again took the IRS to put an end to Hydorn’s immoral — if not illegal — activities.
Several years ago, Hydorn attracted the attention of federal investigators by selling suicide kits out of her home. Hardened by watching her husband die of colon cancer, Hydorn longed to give “the terminally ill the option to decide how to die.”
Law enforcement was posed with a bit of a conundrum; technically, there is no federal law prohibiting assisted suicide. It’s obviously a bit of a public risk to have a non-medical professional playing the role of a capitalist Grim Reaper, however, so investigators were eager to find a way to put a stop to Hydorn’s activities.
Their answer — as it often is — was found in Hydorn’s tax returns. Apparently, assisted suicide is big business, because although Hydorn admitted to selling over 1,300 kits nationwide — earning over $150,000 in the process — she failed to pay taxes on any of the income.
As a result, the IRS convicted Hydorn of tax evasion charges, and she was sentenced to five years supervised probation. As part of her plea deal, Hydorn will not be charged in state court for any of the assisted suicide kit sales.
Although I have no sympathy for Ms. Hydorn, I think it sets a bad precedent for the federal government to use its investigatory powers to shut down legitimate businesses.
What do you think?
Tags: Tax Crimes
Bruce Bartlett writing for the New York Times in Will Rich People Desert the U.S. if Their Taxes Are Raised? says:
In recent years, the number of Americans renouncing their citizenship has increased. According to the international tax lawyer, Andrew Mitchel, the number of Americans renouncing their citizenship rose to 1,781 in 2011 from 231 in 2008.
The mobility of individuals with a large net worth – who generally have no difficulty finding a nation to welcome them and their capital – has unquestionably increased in the last several years, especially within the European Union, where barriers against the movement of people have fallen sharply. This has reduced the ability of all governments everywhere from engaging in soak-the-rich policies.
As I noted in a recent post, Britain recently reduced its top income tax rate in part because of a belief that it would reduce the number of Britons living abroad. And the victory of the Socialist François Hollande in France’s presidential election on Sunday, on a platform of raising the top tax rate to 75 percent, may lead to some relocation from there, according to an article in The Financial Times.
It is probably true that the the number of rich people who flee a country solely because of high taxes is low. It’s a big deal to renounce your citizenship and move to another country. The bigger problem in the U.S. is state taxation. Although Bartlett says that high tax states like California and New York are “magnets for the rich” because of their culture and cuisine, the truth is that rich people and their businesses often relocate to low tax states.
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Tags: News · Politics of Taxes · State Taxes · The Economy
Economist Robert Frank writing for the Wall Street Journal Wealth Report asks Do the Wealthy Work Harder Than the Rest?:
One of the most controversial issues surrounding inequality is work effort. Some on the right argue that top earners are successful in part because they work harder than others. Many on the left argue that the middle class and poor work just as hard – maybe even harder, with multiple jobs — but that the economic deck is stacked against them.
A new study [below] offers evidence that higher-educated (and therefore higher-earning) Americans do indeed spend more time working and less time on leisure than poorer income groups. In fact, while income inequality may be growing, “leisure inequality” – time spent on enjoyment – is growing as a mirror image, with the low earners gaining leisure and the high earners losing.
The more surprising discovery, however, is a corresponding leisure gap has opened up between the highly-educated and less-educated. Low-educated men saw their leisure hours grow to 39.1 hours in 2003-2007, from 36.6 hours in 1985. Highly-educated men saw their leisure hours shrink to 33.2 hours from 34.4 hours. … A similar pattern emerged for women. Low-educated women saw their leisure time grow to 35.2 hours a week from 35 hours. High-educated women saw their leisure time decrease to 30.3 hours from 32.2 hours. … (The study defines leisure as time spend watching TV, socializing, playing games, talking on the phone, reading personal email, enjoying entertainment and hobbies and other activities.) …
While the study doesn’t seek to prove that the high earners work harder “that story would be consistent with the data,” said Mr. Hurst.
These findings won’t come as a surprise to anyone with a fully intact frontal cortex, which means the radical class warrior left will be surprised by them.
Tags: The Economy
Kevin Duncan of The Tax Foundation writes in Americans Paying More in Taxes than for Food, Clothing, and Shelter:
In 2012, Americans will pay approximately $4.041 trillion in taxes, which is $152 billion, or 3.9%, more than they will spend on housing, food, and clothing. … Between 1929 and the early 1980s, aggregate tax collections were less than total expenditures on housing, food, and clothing. From 1929 to 1980, tax liabilities grew from $10 billion to $751 billion, while expenditures on housing, food, and clothing grew from $41.6 billion to $775.7 billion. In 1982, total tax collections exceeded expenditures on those items. The gap between tax collections and expenditures on essential goods reached a maximum in 2000, when Americans gave 19% more to the government than they spent on these items. The growth in tax collections has halted due to economic contractions, such as the collapse of the “dot-com bubble” in 2001 and the 2007-2009 financial crisis.
(Hat Tip: Paul Caron)
Tags: News · Tax Policy
Income equalitarians like President Obama really don’t want to hear that the incomes of the poor and middle class rise when those of the rich rise because it destroys their argument that the rich are benefiting at the expense of the lower classes. Cornell has conducted a study that says just that, once again giving the lie to the left’s claim that there is a finite amount of income and wealth in America and the rich are hoarding it all for themselves.
James Pethokoukis of the Enteprise Blog has the story:
[H]ere’s Obama this week: “What drags our entire economy down is when the benefits of economic growth and productivity go only to the few, which is what’s been happening for over a decade now, and gap between those at the very, very top and everybody else keeps growing wider and wider and wider and wider.”
Underlying Obama’s entire thesis is the work of two economists, Thomas Piketty and Emmanuel Saez. According to them, median American incomes rose just 3.2% from 1979 through 2007. (All figures are inflation adjusted.)
So what happened to the rest of the dough? The top 10%, 1% and 0.1% grabbed all the money. Or pretty much most of it. Time to crank up taxes on the rich and spend more on the middle class. It’s not overstating things to say that the findings of Piketty and Saez form the very heart of Obamanomics, giving a powerful economic rationale for Obama policies such as ending the upper-end Bush tax cuts to Obamacare to the Buffett Rule.
But it’s just not true, according to a new study in National Tax Journal from researchers at Cornell University. (Here’s an earlier, working-paper version.) The academics, led by economist Richard Burkhauser, don’t say the findings of Piketty and Saez are wrong — just incredibly, massively incomplete. According to the Cornell study, median household income – properly measured – rose 36.7%, not 3.2% like Piketty and Saez argue. That’s a big miss.
Pethokoukis is a kinder Greek than I am because, to me, “incredibly, massively incomplete” means incredibly, massively wrong.
Don’t expect Obama and his class warrior cohorts to stop using the Piketty/Saez study. As Saul Alinsky said, the question isn’t whether a particular tactic is true, but only “will it work.”
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Tags: Politics · Politics of Taxes
“A man is very apt to complain of the ingratitude of those who have risen far above him.”
- Samuel Johnson -
Holman Jenkins, Jr. of the Wall Street Journal in The Inequality Obsession echoes what I have been saying about the left’s obsession with income inequality:
If it were learned that the car driven by the average American is 10 times more likely to burst into flames than the car driven by the richest 1%, what should the policy response be? Should it be to mandate that cars driven by the rich burst into flames more often?
Everyone’s focus should be on raising the incomes of the poor and middle class not on equalizing everyone’s income, but that focus won’t motivate the electorate to vote against Republicans. The left needs the income inequality argument like Al Sharpton needs racism.
(Hat Tip: Paul Caron)
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Tags: Politics of Taxes
