Nutter's Washington

Is Support for Newt Gingrich for Real?

I am perplexed and vexed about the Republican Presidential primary. It seems everyone has been a front runner or had momentum at one point of the other. Now, it is Newt Gingrich. I see a myriad of polls showing him leading in this state or that state.

It is kind of unbelievable. I mean the former Speaker has more baggage than an Amtrack freight car. Multiple marriages, ethics questions, Washington insider, prickly personality would be just a few of them according to detractors. He is now portrayed as the Anti-Romney. No doubt, Mr Gingrich is energetic, full of ideas (and himself) and not bashful. I just find it hard to believe that he is the choice for the nomination and that he could ever be elected as President. He is just not warm, fuzzy and personable enough and oh, that baggage. 

I am not dissing Gingrich. He has some obvious fine qualities, tons of experience in government and is pragmatic rather than an ideologue. This all leads me to wonder-- What is wrong with Mitt Romney? What is it about him there is this movement of anyone but Mitt. Would Republicans rather have President Obama for 4 more years? Does Romney not pass the conservative test? Do people not trust him somehow? Is it the Mormon affiliation?  Has he been unfairly branded as a flip flopper? Or is he, but it does  matter as long as he has sound judgement when it really counts.

It is all very interesting and certain to change. It is a long political season. Maybe the answer is that Gingrich is the best candidate. Maybe I am reading too much into all of this. Maybe there is more to it than I can decipher. Maybe Mitt Romney peaked long ago or this up and down is just part of the process. Maybe someone else will surge? How about Huntsman? It is surprising though that Gingrich, who was the butt of national jokes when his campaign more or less imploded last summer, is seen by some as leading the pack now. 

Congressional End of Year Ahead: Taxman at the Door

The tax man’s taken all my dough,

And left me in my stately home,

Lazing on a sunny afternoon.

And I can’t sail my yacht,

He’s taken everything I’ve got,

All I’ve got’s this sunny afternoon

 

                            Sunny Afternoon by the Kinks

Tomorrow is December 1 and all is not well, or, at least, not finished on Capitol Hill. Congress in the mess left after the failure of the supercommitee to make even a cent of deficit recommendation has a considerable amount of unfinished business before the end of the year.

It is not worth the effort to list of the pending items such as continuing to fund the government due to the failures to pass appropriations bills. It is never pretty to witness these mad dashes to the legislative finish and the laws passed in the waning days of a session are usually what you would expect—rushed, ill-conceived, secret and ugly.

This Congress is all about politics, visual, nasty politics. All year the two political parties have bumped heads, bickered and muddled through. The results show, particulary in the disfunctional Senate. Of course, this process is not new and not always unwelcome. However, it is getting tedious, counter productive, and tiresome. The fact the elected head of the country has given up and only thinks and acts with his re-election in mind is not, as I like to say, helpful.

Grading the SuperCommittee: Dismal and Disappointing

This story also was carried by Marketwatch.com http://www.marketwatch.com/story/grading-the-supercommittee-2011-11-21?link=MW_home_latest_news

Even before the Joint Select Congressional Committee on Deficit Reduction is scheduled to issue its report, it has folded its tent. This group of 12 seasoned lawmakers charged to come up with a plan to reduce future government deficits by $1.2 trillion over the next ten years could not reach agreement on anything. Not one cent of spending reduction or revenue enhancements will be forthcoming from this group. Nothing, zip, zilch, nada, zero.

Before the grading the results and the effort, let’s put it in perspective.

The $1.2 trillion was agreed upon last summer as part of the debt limit extension. In a Byzantine fashion, the so-named supercommittee composed equally of 3 Democrats and 3 Republicans from each Chamber would have 3 months to come up with a plan that had to be voted on without delay and without amendment.

Economic Plan and Salvation: Have Christmas Every Month

 I have a plan to solve the American economic doldrums. I will pass it along to the White House, as they seem to want to try anything rooted in desperation.

Thanksgiving, the best holiday in America, is next week. It is a day Americans gather, have their family traditions without all the pressure of gift giving. The smell of favorite foods fill the air, people lounge to watch the tube, take walks to work off the feast.  However, that is the problem.

Fifteen Trillion (15,000,000,000,000) and Counting: Another Milestone Reached

Yesterday was another milestone in the annals of the Federal Government and the fiscal woes of the country. Yesterday, the National Debt went over the $15 trillion dollar mark. I did not notice any fanfare, bravado announcements or celebration. It was just another day, like every day in which the Federal Deficit increases at a rate of about $4 billion each and every day. Incredible.

In the interim, the Congressional Super Committee continues its bickering and negotiations, whatever that means. I watched a member of the Committee on the news this morning in a pathetic performance of double talk and almost a complete disconnect from the reality of the situation facing the country. It is confounding the leaders of the country are so narrow-minded and completely convinced that only their way, is the right way. It would be amusing if it were not so important.

Congressional Super Committee: What is the problem?

The Congressional “Super Committee” continues its deliberations with less than 8 days before they are due to report their findings. There have been closed meetings, partisan bickering, perhaps some good faith negotiations, finger pointing and intractable positions. Let’s add hand wring and whining to the description also. Nothing is settled yet.

The purpose of the Committee is to try to agree on an allocation of $1.2 trillion in budget savings over the next ten years. Repeat that, please. Ten years. There is a good chance there will be no agreement at all which will lead to prearranged automatic cuts of the same amount starting in 2013.

Cap and Trade Lives Down Under: A Harbinger for Things to Come?

The Commonwealth of Australia imposed through a new law enacted last week a quasi-cap and trade scheme on carbon emissions. It is a significant development in the inexorable march to impose restrictions on the use of carbon-based fuels using climate change as an impetus. 

Prime Minister Julia Gillard’s Clean Energy Futures plan will become law on July 2012, setting a cost of A$23 ($23.80) on each metric ton of greenhouse-gas emissions.(GHG) The carbon levy is fixed until 2015 and then a more or less cap and trade system will be installed.

Australia burns coal to produce about 80 percent of its electricity. The new law is intended to cut GHG emissions by 5 percent by 2020.

The 5-15-25 Plan-Tax Reform Part III

The fundamental question to ask when discussing tax reform is what is the purpose of imposing taxes in the first place.

 Is it to solely raise revenue to fund essential and necessary functions of the government? Is it to redistribute wealth from the have-enoughs to the have-not-enoughs? Is it to encourage or punish specific conduct? What about fostering economic growth and incentives.

 The previous suggestions for reform so far have been to vastly broaden the tax base, get rid of complexity and reduce the distortions on investment and consumption decisions.

Income exclusions have been eliminated, as have the silly above-the-line deductions. Tax credits have been junked. The AMT is history and the retirement system has been revamped among other things.  The final piece is the rate structure.

 Most taxpayers use the standard deduction. We will keep the concept and set it at $10,000 per return. However, a taxpayer under current law may elect to itemize deductions.

The deductions that may be itemized include state and local income taxes, real property and personal property taxes, home mortgage interest, charitable contributions, certain investment interest, limited medical expenses, casualty and theft losses and other miscellaneous expenses in excess of two percent of AGI. Only three of them will be kept — the home mortgage deduction, the charitable deduction and real property taxes. The housing market does not need another blow, and it should be government policy to marginally subsidize giving to legitimate and independent charitable organizations.  

 In addition, business expenses would be deductible and as would alimony and probably other adjustments I have not thought about yet.

 Finally, all income would be treated the same. It does not matter if it is capital gain--long or short--interest income, dividends, net gain from a sale, pass-through income, wages, a gift, or game show winnings, The rates are low enough to make all this palatable.   

 Tax brackets and rates are next.

 Everyone should pay some tax. Everyone needs to have a monetary stake in the country. Therefore-and with the elimination of the Social Security tax as noted below- tax rates would start at five percent from $10,000 up to $50,000; the next $450,000 would be taxed at a marginal rate of fifteen percent. Everything over half a million dollars is taxed at a rate of twenty five percent. Call it the 5-15-25 plan.

 We can sort out single or married filing later, but we have already eliminated the concept of personal exemptions and the old standard deduction, now replaced with the new $10,000- filing threshold.

 In order to bring some balance, payroll taxes that finance Social Security benefits should be repealed. The Federal Insurance Contributions Act (“FICA”) imposes a tax on employers and employees and the self- employed. For the past year, employees have received a two percent reduction in their rate. The President has proposed increasing that by fifty percent. Get rid of it now.

 Payroll taxes are magically deposited in a “trust fund” which is composed of government debt. After supplying excess taxes to the government for years and years, the trust fund is now redeeming its debt held (its assets so to speak) to pay out current benefits. Social Security is the giant elephant in the room; in fact it is bigger than the room.

There is no real reason it has a separate tax system. Repeal the Social Security tax on employees, keep the program as it is, make adjustments to it as deemed fit. But it is not necessary to fund it separately, as it all comes from the same pocket. Even the President has recognized the illusion of the system.

Heresy, I know, the third political rail. This is about taxes though, not some notion of social safety net. Repeal would make a bigger hole in the deficit but the new income tax provisions should fill it. Medicare tax probably should be gone also.

Two other major revenue sources for the government, the corporate income tax and the estate and gift tax are beyond the scope here. Suffice it to say, there is little doubt the corporate tax needs major revisions. In addition, while I have suggested that gifts and inheritance be subjected to income taxes, I still support and gift and estate tax with generous exemptions, but high rates at the upper level to avoid tax games.

There is a plan. It is imperfect to say the least. I can see the holes and through them too.  It is not possible for me to estimate other than on the back of a cocktail napkin its ultimate revenue generation capacity. The tax base has been expanded, and the tax influences have been minimized. It is a simpler system, provides tax relief to the lower and middle-income taxpayers and allows plenty of incentive to work hard and invest wisely.

Implementation of this type of system would require a combination of grandfather clauses and phase-in periods: It is not a flat tax but a streamlined way to raise revenue- no loopholes, no fuss, but some muss.  It would also be possible to develop transition rules that allow for certain assets and investments to be grandfathered and others subject to phased-in tax laws.

The process to find a more efficient, simpler system-no matter what it is- will have to run the gauntlet of Congress, the public and the special interests from the left, from the right, from business groups, and unions, from everyone imaginable. I do not think for a moment that Congress or the public want to repeal the Social Security taxes, eliminate exclusions from income or can agree to major structural revamping.

Even if the prospect is lower rates, the ruckus of taking on this or that provision dear to the hearts of someone out there will be Herculean Don’t look for anything to happen soon and certainly nothing this radical. No one is going to pass the scepter of tax czar to me. However, it was fun imaging it.

 Jack. O. Nutter is a partner in the Washington DC firm of Nutter & Harris. Mr. Nutter is former tax counsel to the U.S. Senate Finance Committee. His further comments on tax, economic and political issues can be found at jacknutter.com and can also be reached at jack.o.nutter@gmail.com.

 

 

Tax Reform Part II: Bring on the Axe

Funneling revenue to the government to support its various functions is a necessary bane to our form of society. There are legitimate political questions on how large or small, intrusive or essential the government has become, a discussion for another day.  The issue here is what kind of changes can be made to the tax system to make it better?

Generally, taxes alter decisions about how to use resources, creating economic inefficiencies. By changing the relative attractiveness of highly taxed and lightly taxed activities, taxes impact decisions such as what to consume, how much to work, and how to invest. In some cases this is the intention of Congress and in others, it is the unintended results of their action.

The current Federal tax system has four main elements:  (1) income tax on individuals and corporations (which consist of both a “regular” income tax and an alternative minimum tax); (2) payroll taxes on wages and self-employment income; (3) taxes on estates and gifts, and (4) excise taxes on certain goods and activities.

The Federal income tax, the most important revenue source, is based on an individual’s taxable income.  An individual computes taxable income by reducing gross income by deductions allowable in computing adjusted gross income (AGI), and then uses a standard deduction or itemized deductions, and the deduction for personal exemptions.

Graduated tax rates are applied to a taxpayer’s taxable income to determine the income tax liability. Lower rates apply to net capital gains and dividends.  A taxpayer may also be subject to an alternative minimum tax and may be able to reduce income tax liability by certain tax credits. Seems complicated?

It is no surprise the tax law takes a very expansive view on what is income. Gross income includes "all income from whatever source derived”. How is that for legislative drafting? There is quite a list of enumerated income items in the Tax Code as illustration, and courts have consistently given a very broad meaning to the definition of income, interpreting it to include all income unless a specific exclusion applies.

The starting point for a better system is to do away with all the items excluded from gross income.

The list of income exclusions is long and expensive to the Treasury, but I suggest no more excluding: gifts and inheritances, life insurance proceeds, sale of a residence, interest on state obligations, group-term life insurance, adoption expenses, compensation for injuries, health plans, meals and lodging, cafeteria plans, educational assistance plans, dependent care assistance programs, income earned abroad and my favorite-- the parsonage allowance.

Make it simple. If it looks like income, it is. I know, some of these exclusions are sacred, but they are all measures of income - a benefit to the person. The only exception to be made involves the receipt of retirement, annuity, and social security payments. Plus, there needs to be some more thought on the inheritance and gift exclusion or at least a special way to pay any tax to prevent forced asset liquidation.

With gross income in hand, the concept of adjusted gross income, a contrived notion, is the next to go. These are the so-called “above the line” deductions. Get rid of them all! No more IRA deductions, student loan interest, tuition and fees, educator expenses, expenses for performing artists, health savings accounts, moving expenses related to a new job and alimony. Gone into the dustbin.

 The new tax code is already now simpler, and we can make some adjustments later on to accommodate a few of these matters.

Before we get to the most important part, let’s dispose of a few more items in a kind of housecleaning.  

The Alternative Minimum Tax (AMT) requires taxpayers to compute their taxes twice and pay the higher of the two amounts. The AMT affects about 33 million taxpayers, but its impact is forgiven every year for the most part by a “patch” raising the threshold limit. Although the AMT was enacted to prevent high-income taxpayers from escaping tax liability through tax preferences, its applicability now is gone. Repeal it. Save the time, effort and complication and the budget hypocrisy.

 The Tax Code has multiple provisions regarding savings for retirement. There are different sets of rules governing eligibility, contribution limits, taxation of contributions and distributions, withdrawals, availability of loans, and portability. Simplify it; make it one-size-fits-all.

More than half of all individual income tax returns are affected by the phase-out of certain tax benefits as a taxpayer’s income increases. Phase-outs are simply back door tax increases and are burdensome as well as deceptive. Get rid of all of them. A relic of the past tax games played.

Finally, individuals may reduce their tax liability by certain tax credits. Tax credits are allowed for certain business expenditures, foreign income taxes, dependent children and child care expenditures. In addition, there is a refundable earned income tax credit, which is an income transfer program for lower income taxpayers akin to a quasi-welfare program. If government wants to provide for lower income assistance, do it outside the tax system.  Get rid of them all and while at it get rid of all personal exemptions, child exemptions, and additional exemptions based on age. The new system makes all of this unnecessary.

People hold different opinions as to whether the current rate structure is equitable. Some believe the rate structure should be more progressive, and effective tax rates should rise with income more rapidly than they do under the current system. The next installment, will discuss equity, fairness, distribution and characterization of different sources of income.  

 

Jack. O. Nutter is a partner in the Washington DC firm of Nutter & Harris. Mr. Nutter is former tax counsel to the U.S. Senate Finance Committee. His further comments on tax, economic and political issues can be found at jacknutter.com and can be reached by e-mail at jack.o.nutter@gmail.com

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