HERMAN CAIN'S 9-9-9 PLAN

Have you heard about the tax plan proposed by Republican Presidential candidate Herman Cain (aka “The Black Walnut”)?  He calls it the “9-9-9 Plan”.

According to Cain his 9-9-9 system would raise as much revenue as the existing federal income, corporate, and payroll taxes and could bring in additional revenue by boosting economic growth.

Here, from Cain’s campaign website, are the basics of the plan -

• Business Flat Tax – 9%

1. Gross income less all investments, all purchases from other businesses and all dividends paid to shareholders.

2. Empowerment Zones will offer additional deductions for payroll employed in the zone.

·         Individual Flat Tax – 9%.

1. Gross income less charitable deductions.

2. Empowerment Zones will offer additional deductions for those living and/or working in the zone.

• National Sales Tax – 9%.

Under 9-9-9The “Fair Tax” would ultimately replace the 9% individual and corporate income taxes.  I assume he means the FairTax proposal for a national sales tax that has been around for a while.  According to its website -   

“The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.”

Cain summarizes the results of his plan -

• It ends the Payroll Tax completely – a permanent holiday!
• Zero capital gains tax
• Ends the Death Tax.
• Eliminates double taxation of dividends
• Ends nearly all deductions and special interest favors

Let me begin by stating that I would not vote for Herman Cain for President.  I will never vote for anyone who openly supports the “Tea Party” movement.

While the 9-9-9 Plan is obviously a gimmick, it does deserve careful consideration.

I doubt the flat 9% tax rates for federal income, corporate, and sales tax would actually work, especially if it must also replace the current Social Security and Medicare payroll taxes, although I, as Cain is fond of saying, “don’t have facts to back this up”.  But “The 9-9-9 Plan” sounds better than “The 10-15-6 Plan”.  At least he didn’t call it “The 6-6-6 Plan”.

I do like the “flat tax” aspect of the plan.  And I like the fact that he does away with all loopholes and “tax expenditures”.  However, he does not mention whether some of these expenditures currently affecting the 1040, such as the tax benefits for college, the energy credits, and perhaps even a form of the Earned Income Credit, would continue as direct grant programs.

 

On the corporate level I also support a “dividends paid deduction”.  However I would apply any flat corporate tax to net book income (without a deduction for depreciation of real property).  I do not support a “gross income” tax for corporations.  Currently a NJ corporation, with high gross income but no actual taxable income, can pay as much as $2,000 in state corporate tax (again on actual income of “0”) – and this is not fair. 

I do not know what he means by “gross proceeds less all investment”.  Does he mean investment in equipment, such as a 100% Section 179 deduction?  I am not sure if I support this aspect.

On the individual level, if you do away with all tax expenditures why keep the deduction for charity?  The charitable deduction is most effective at higher levels of tax.  I do not think that taking away the deduction for charitable giving under a low flat rate would substantially reduce contributions.

It is assumed from the plan outline that there would be a “0” tax rate on capital gains (I assume long term).  While I do favor a lower tax on capital gains (or “more better”, in my opinion, a return to the capital gains deduction, at one time 50%) I do not support a “0” tax on capital gains.  Warren Buffet would pay practically no federal income tax!

I would want to consider keeping the deduction for contributions to retirement plans, or some kind of “universal savings plan” that would cover medical costs, education, and retirement, but would be willing to do away with all other deductions under a 10% or similarly low flat tax.  And I would do away with the deduction for depreciation of real property on Schedules C, E, and F.    

I especially like the fact that under a flat tax we would no longer have a situation where nearly 50% of Americans pay absolutely no federal income tax.

A national sales tax, as long as it is low enough, is not a bad thing.  One of its major benefits is that it would collect tax from the current “underground economy”.  A drug dealer who does not pay income tax on his earnings, or a self-employed businessperson who under reports his income, would still be required to pay sales tax when he buys an expensive car.  And, as most states already collect state sales tax, it would be easy to administer.  A side benefit of a national sales tax could be standardized national rules for what is subject to state, and federal, sales tax.

If there was something similar to the 9-9-9 plan in place I definitely would not eventually replace it with the Fair Tax as currently proposed.

So – what do you think?

TTFN

MORE ON THE EARNED INCOME CREDIT

The IRS notice I referenced in my recent post “The Earned Income Credit and Tax Fraud” included the following statement (highlight is mine) -

“We estimate 24 to 29 percent of all EITC claims have some type of mistake which costs the government $13 billion to $16 billion each year. Some errors are caused by misinterpreting the law; some are because the preparer accepted client-provided information at face value and others are out and out fraud.”

Trish McIntire in her post “Stoning Glass Houses” at OUR TAXING TIMES correctly tells us that we should not blame the 47% of Americans who pay absolutely no federal income tax by claiming a combination of the Earned Income Credit, the Child Tax Credit, the Making Work Pay Credit, and other benefits in the Tax Code. 

For the most part these 47% “tax non-payers” did nothing wrong (obviously there are varying levels of tax cheats in the 47%, just as there are in the 53% who paid taxes).  They merely took full advantage of the many completely legal tax loopholes available to them.

While I do not believe the Earned Income Credit, and many other “tax expenditures”, should be in the Tax Code, I have no problem with claiming them on my clients’ returns if the client legitimately qualifies.

Let us remember the famous quote from Judge Learned Hand -

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

Don’t blame the player, blame the game.  Or rather, in this case, those who write the rules for the game.

If there is anyone to blame it is the idiots in Congress.  Running social programs through the Tax Code is cheap (although not so cheap when you consider the resulting excessive tax fraud) and easy.  And we all know that the idiots in Congress will always react by choosing the quickest and easiest way rather than respond by resorting to actual serious thought.

I expect the only way to get true tax reform is to replace the current idiots in Congress with individuals who have intelligence, integrity, and backbone.

TTFN     

AN EVENING WITH LUCILLE BALL

Just wanted to tell you about a great show I saw last Tuesday at the Surflight Theatre in Beach Haven on Long Beach Island.

Actually I saw two great shows at Surflight.   On Sunday afternoon I saw the last performance of ALL HANDS ON DECK, a review of WW2-era music patterned after a USO radio broadcast, and on Tuesday afternoon I saw the first performance of AN EVENING WITH LUCILLE BALL: “THANK YOU VERY MUCH”, a one-woman show about, well, Lucille Ball, presented as one of the Q+A evenings that Ms Ball did in the mid-70s.

The LUCY show starred Suzanne LaRusch and was written by Ms LaRusch and Lucie Arnaz and directed by Lucie Arnaz.  It also featured the recorded voices of various related parties as the question-askers. 

We were fortunate that Lucie Arnaz (whom I had seen twice on Broadway with Robert Klein in THEY’RE PLAYING OUR SONG) was in the area for a concert and was at the performance.  After the show she and Suzanne did their own Q+A with the audience.

I had also seen Lucille Ball on Broadway in WILDCAT as a child.

The show was great – you actually thought you were watching Lucy on stage.  She talked about her life as a model in NYC, told some “behind the scenes” tales about I LOVE LUCY, and admitted that Desi Arnaz was the love of her life.

AN EVENING WITH LUCILLE BALL will be at Surflight through October 16 – so there is still time to get tickets.

TTFN   

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENIN’

+ It’s here!  Check out the October 2011 issue of LOIS.

+ And check out “The Main Street Guide to College and Taxes”

by yours truly.

+ Nick Kasprack takes a stab at “Fact-Checking Warren Buffett”

at the TAX POLICY BLOG of the Tax Foundation.

Here is what Nick has to say (the highlight is mine)–

“The effective rates he claims for other workers in his office are extraordinary. To me, they seem too high to be realistic, and I can't figure out how he calculated them, even if you include all payroll (employee and employer side) taxes.  Even if you assume the scenario that leads to the highest possible tax burden (single filer, no deductions), a taxpayer would have to make at least $285,388 (in 2010) before his or her effective rate reaches 33 percent.”

+ Speaking of WB’s statement, Kay Bell tells us that “Buffett Clarifies His 'Tax the Rich' Stance”

+ And while I was out Kay posted “Tax Carnival 91: Taxtoberfest”.

As usual, lots of good stuff, and some new (to me) blogs.  I guess I forgot to send Kay something for this installment due to my previous computer’s diarrhea.

+ And Kay finishes a trifecta with interesting methods some states have instituted to collect back taxes in "Owe California Taxes? Pay Up or Lose Your Driving Privileges".

"On Tuesday Gov. Jerry Brown signed into law a measure that authorizes revocation of the driver's licenses of the Golden State's 1000 most egregious tax debtors unless they set up tax repayment plans with the Franchise Tax Board or State Board of Equalization."

And –

“As a way to close Maryland's $1.3 billion budget gap, lawmakers there agreed to make driver's licenses and vehicle registrations contingent on motorists' tax compliance. The bill became law on June 1.”

+ Over at the NEW YORK TIMES site Ron Nixon and Eric Lichtblau make a great point in "In Debt Talks, Divide on What Tax Breaks Are Worth Keeping" (the highlight is mine) -

“Plenty of lawmakers are against tax breaks and so-called loopholes.  Unless, of course, they personally helped create them.”

And such is the reason why I will probably never see a truly simple Tax Code in my lifetime.

+ Joe Arsenault provides a good explanation of the “Charitable Gift Annuity” at CAFETAX.

As Joe points out –

“A charitable gift annuity (CGA) allows a charitable donor to enjoy a charitable income tax deduction upon making a gift, while still guaranteeing a stream of future income payments.”

+ The JOURNAL OF ACCOUNTANCY tells us that the Tax Court has confirmed that “Medical Deduction Allowed for In-Home Personal Care”.

“The Tax Court held that payments made to an elderly woman’s providers of personal care that she required due to her diminished capacity qualified as long-term-care services and were therefore deductible under IRC § 213(d)(1)(C).”

TTFN

THE EARNED INCOME CREDIT AND TAX FRAUD

I received a notice from the IRS yesterday as part of my subscription service that reported the following -

“The Internal Revenue Service announced today that it is issuing proposed regulations that would require paid tax return preparers, beginning in 2012, to file a due diligence checklist, Form 8867, with any federal return claiming the Earned Income Tax Credit (EITC). It is the same form that is currently required to be completed and retained in a preparer’s records.

The due diligence requirement, enacted by Congress over a decade ago, was designed to reduce errors on returns claiming the EITC, most of which are prepared by tax professionals.

The IRS created Form 8867, Paid Preparer's Earned Income Credit Checklist, to help preparers meet the requirement by obtaining eligibility information from their clients. Preparers have been required to keep copies of the form, or comparable documentation, which is subject to review by the IRS. To help ensure compliance with the law and that eligible taxpayers receive the right credit amount, the proposed regulations would require preparers, effective Jan. 1, 2012, to file the Form 8867 with each return claiming the EITC.”

The Earned Income Credit is a federal welfare program.  As the notice explained -

 “Unlike most deductions and credits, the EITC is refundable –– taxpayers can get it even if they owe no tax. For 2011 tax returns, the maximum credit will be $5,751.”  

It is probably the most expensive federal welfare program.  The notice further pointed out that –

“For 2009, over 26 million people received nearly $59 billion through the EITC.”

Because it is refundable the Earned Income Credit is a magnet for tax fraud. 

Edwin Rubenstein, president of ESR Research issued a report in 2009 documenting abuse of the EITC.  Rubenstein's 55-page report, "The Earned Income Tax Credit and Illegal Immigration: A Study in Fraud, Abuse, and Liberal Activism", was published in "The Social Contract", a quarterly journal of public affairs.

Rubinstein found that, "Year after year about one-third of all EITC returns are based on illegal multiple returns, phony Social Security numbers or claims of nonexistent children or spouses". 

The General Accounting Office has reported that the IRS estimates between 27 and 32 percent of EITC dollars are collected fraudulently.

The Rubinstein report also identified the massive size of the Earned Income Tax Credit –

"EITC spending dwarfs that of the traditional welfare program – Temporary Assistance for Needy Families (TANF) – and food stamps combined."  

Just about every tax preparer has had at least one EITC client who we learned after-the-fact, or strongly suspected, had sufficient unreported income to make them ineligible for the credit.  And I would expect each one of us, at one time or another, had as a client the single parent with apart-time W-2 that also had an unreported, and unknown to us, side-line cash business cleaning houses and apartments? Or the Schedule C client who reported just enough income to max-out their Earned Income Credit?

The Earned Income Credit does not provide the safeguards and checks and balances required in other federal and state welfare programs and necessary for responsible fiscal management.  Hence the IRS requirement for additional “due diligence” when claiming the credit for a client.  But simply asking questions of a client really is not sufficient.

And as tax professionals we have enough to worry about just getting all the necessary information from our clients without the added burden of having to determine if a person qualifies for federal welfare.

As I have been saying for years, the Earned Income Credit, and many other similar “tax expenditures”, does not belong in the Tax Code.  The reasoning behind the existence of the EITC and many of the other tax expenditures is not necessarily bad.  But they would be more appropriately and effectively distributed via direct “point of purchase” grants by the specific cabinet agency to which they apply, with all the accompanying checks and balances to verify the recipients’ qualification.  

The EITC is one of the main reasons that close to half of Americans pay absolutely no federal income tax.

As a preparer I have no problem with being required to attach the due diligence form to the client’s return.  Hey, it has to be completed anyway, so it is not additional work.  I do not have that many clients who claim the credit anymore – and since I do not accept new clients I do not expect to have many, if any, more – so it is not a major issue in my practice.  My problem is, as I said above, with the existence of the EITC in the Tax Code, and forcing tax preparers to take on the added burden of having to determine if a person qualifies for federal welfare.

TTFN     

THE NEW SCHEDULE D

Have you heard about the new Schedule D?  I first learned of the change from a table-mate at the recent NJ-NATP Annual Meeting.

For as long as I have been preparing 1040s (since February of 1972) individual capital transactions were reported on Schedule D.  Part I was for short-term gains and losses and Part II was for long-term activity.  A supplemental Schedule D-1 was later created if more room was needed to list transactions.

Individual transactions, short-term and long-term, will now be listed on a new Form 8949 – Sales and Other Dispositions of Capital Assets.  The new Schedule D will be a summary of the Form 8949 entries.  There is no more Schedule D-1. 

The change comes because, as per “The Emergency Economic Stabilization Act of 2008”, beginning with tax year 2011 brokers must report on Form 1099-B the cost basis of any common or preferred stock, exchange-traded funds (ETFs), American Depositary Receipts (ADRs) and Real Estate Investment Trusts (REITs) purchased on of after January 1, 2011.

For future reference, effective January 1, 2012, information about mutual funds and dividend reinvestment plans will also be recorded and reported, and effective January 1, 2013, options, fixed income, and any other security otherwise not included in the previous tax years must be recorded by the brokerage and reported to the IRS.

This is a great new requirement.  When fully phased in it will save tax preparers lots of time during the season.  I have always said that one of the biggest problems I face in preparing returns is determining a cost basis for investments sold by clueless clients.

It is also good for the IRS to have this information provided by the broker.  In my 40 tax seasons I have never seen the Service question the cost basis for a stock sale.

I hope that the regulations for satisfying this requirement, and the brokerage software programs, will make sure that 20 years from now, when a taxpayer sells a stock purchased in 2011, the cost basis reported on Form 1099-B will correctly reflect the effect of all subsequent mergers, spin-offs, etc. 

In addition to short and long term, capital transactions reported on Form 8949 will also be broken down into three categories –

(A)  gains and losses with the cost basis reported on Form 1099-B,

(B)  gains and losses with no cost basis reported on Form 1099-B, and

(C)  gains and losses for which no Form 1099-B was received.

A separate Form 8949 must be completed for each of the above categories.

While a draft of the forms are available, there are no draft of the instructions available yet – so I could not learn more about the Form 8949, such as what is the “Code” that goes in box (b).   

I have several clients whose capital transactions for the year take up as many as 50 pages of a supplemental Profit and Loss report included in the brokerage firm’s Consolidated Year-End package.  In such a case I create my own supplemental schedule, which I attach to the return, by “cutting and pasting” the P+L, with the totals carried forward to the Schedule D. 

I wonder how the new 2011 Consolidated Statement will deal with the changes.  Will Form 1099-B report the cost basis for all sales for which the broker has the information in their system, or just for investments purchased in 2011?  Will the Profit and Loss report identify and summarize transactions in the above three categories? 

I am worried that the new procedure may add hours to the prep time for clients with already time-consuming multi-page “cut and paste” Schedule D (and now Form 8949) schedules.   

TTFN

READ MY LIPS - NO NEW TAXES!

So here, as outlined by Kay Bell in “Obama Tax Bill – Winners, Losers” at BANKRATE.COM, are BO’s individual tax proposals -

·      Allow the Bush-era tax rate cuts for higher-income earners to expire, making the top individual income tax rate 36.9 percent.

·      Institute the "Buffett Rule" to add a new tax rate for households making more than $1 million a year.

·      Reduce the value of itemized deductions to 28 percent for high-income taxpayers.

·      Expand the current 2 percentage point employee payroll tax cut to a 3.1 percent rate -- half of the usual 6.2 percent rate -- for 2012.

·      Return the estate tax limits to 2009 tax year levels: a $3.5 million exclusion and a 45 percent rate on estates worth more than that.

Basically his answer is to raise taxes on the rich because they can afford it.  The typical Democratic answer for everything.

I support BO’s call for support of WPA-like public works projects, included in his Jobs Package.  And I like that he has also proposed eliminating oil and gas tax preferences and preferences for the coal industry, and taxing carried (profits) interests as ordinary income.  It is a good start at ridding the Tax Code of special interest loopholes – but much more needs to be done.

And I somewhat support his tax credits for hiring the chronic unemployed and returning vets (also in his Jobs Package).  But I do not think that such credits will actually create new jobs.  As an employer I will not create a new job just because of a tax credit – but I would, when faced with multiple equally-qualified applicants for an existing position, choose to hire the person that would generate a tax credit.  

As for the payroll tax holiday (the final evolution of the disastrous Bush tax rebate checks) – as I have said before, as an employer and an employee (I pay myself a salary) I personally welcome it from a strictly selfish point of view, but I doubt very much that they are effective.  It is certainly not going to make me run out and hire a new employee.

But I say a very strong “nay” to raising taxes on the “wealthy”.  We should not punish success, entrepreneurship, and just plain hard work – we should celebrate and encourage it!

It is argued that the rich should pay more because they ultimately get more benefit from the programs and protections of the government (although those who pay absolutely no income tax seem to me to be getting much more benefit from government). With a relatively flat tax system the rich would still pay more than the not so rich – 25% of $1 Million is a lot more than 25% of $50,000.

We shouldn’t raise taxes, we should cut spending.  And we don’t have to cut genuinely beneficial programs or compromise our security.

I have said it before and I will say it again – every budget of every department of every governmental entity - federal, state, and local - can be cut without sacrificing needed programs because every budget of every department of every governmental entity contains substantial waste and pork.

Let us look as a simple local example (from person knowledge) -

John Q Taxpayer is employed full-time as a civilian employee of the Police Department of the City of Metropolis.  His mother is also an employee of the City of Metropolis.  The City provides its employees with family health insurance coverage.  John Q, because of his age, is covered by the insurance provided to his mother.  So he does not require his own individual insurance coverage, and is not separately covered under the City’s plan.

Because the City does not pay for separate insurance for John Q as an employee he receives additional cash in his pay in lieu of insurance coverage.

In this situation John Q does not pay for his own outside health insurance coverage and has opted out of City coverage.  The City of Metropolis is already paying for John Q’s health insurance coverage by paying for the family coverage of his mother, which includes John Q. 

There is no logical reason why the City should pay John Q additional money, above and beyond his normal pay.  This is waste.

On the federal level, didn’t we just recently hear that “the Pentagon spent more than $720 million since 2001 on fees for shipping containers it failed to return on time”?  This is just one of many, many examples of waste.

The appropriate solution for balancing the budget is a combination of doing away with business and individual special interest loopholes and “tax expenditures” and cutting waste and pork.

TTFN

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENIN’

+ Have you checked out the September issue of LOIS yet?

+ Trish McIntire has published a response to my "Enough Already" post at OUR TAXING TIMES.  Check out her "Response to Robert Flach".      

+ Kay Bell explains how “FSAs Can Help With Medical Costs” at DON’T MESS WITH TAXES.

And over at her BANKRATE.COM blog she reports that “Workers Ignore Tax Saving FSAs”.

“According to the organization's 2011 version of its annual ‘Getting Paid In America’, only 12 percent of employees contribute $2,500 or more to their company's FSA.”

An FSA is a great tax saving opportunity – you can use medical expenses, not otherwise deductible because of the 7½% of AGI exclusion, to reduce your AGI.  And readers of TWTP know that reducing AGI can increase a multitude of other tax deductions and credits. 

If your company offers an FSA to employers, and you anticipate out of pocket medical expenses, you should take advantage of it!

+ USA TODAY catches BO in a big fib in “Fact Check: Obama Wrong on Teacher’s Tax Rate” by Brooks Jackson of FactCheck.org.

Brooks correctly points out (the highlight is mine) -

“President Obama's claim that he pays a lower tax rate than a teacher making $50,000 a year isn't true. A single taxpayer with $50,000 of income would have paid 11.9% in federal income taxes for 2010, while the Obamas paid more than twice that rate — 25.3% (and higher rates than that in 2009 and 2008). And if the $50,000-a-year teacher were in Obama's tax situation — supporting a spouse and two children — he or she would have paid no federal income taxes at all.”

+ Tom Herman tells us that “A Tax Revolt Is Quietly Brewing In Some States” in the Wall Street Journal’s TAX REPORT.

Tom talks about various state and local tax issues under currently under consideration in Massachusetts, Oregon, Nevada, and other states.  For example,

“On Election Day, Massachusetts will vote on whether to eliminate its state income tax.”

+ And Tom provides an answer for Warren Buffett (of the “Buffett Rule”), who feels he is not paying enough federal income tax, in his earlier Wall Street Journal piece “A Tax Deductible Gift to the Government”.

+ Bruce McFarland, the MISSOURI TAX GUY, discusses “What to Do When You’re Struggling With Taxes”.

“Anyone who has gotten behind on their taxes knows how difficult it can be to get caught up. When you’re struggling with taxes, the IRS can forgive people who get behind. As long as you are willing to work hard to get caught up, they will be willing to work with you.”

+ Professor Annette Nellen makes some good points in her post “Buffett Rule - a New Tax Principle?” at 21^st CENTURY TAXATION.

+ John Steele Gordon gives us “A Short History of the Income Tax” over at the WALL STREET JOURNAL.

+ The IRS has published the annual fiscal year 2011-2012 per diem rates for business travel.  Click here to read IRS Notice 2011-81 

I will be away October 1 through 5, attending my 40^th High School Reunion and visiting Long Beach Island for two shows at SURFLIGHT.  There will be no BUZZ this coming Wednesday.

TTFN