WALGREENS EYES LOOPHOLE END RUN AROUND TAXES

Original Story:  USAToday.com

DIXON, Ill. — The Walgreens drugstore chain proudly touts itself as "the pharmacy America trusts."

But many here in this small river town where the founder of the company got his start complain that the drugstore chain is on the precipice of turning its back on the USA.

Walgreens, the USA's largest drugstore chain, with more than 8,500 stores, soon will decide whether to take advantage of a loophole in U.S. tax law that would allow it to save billions of dollars by moving its headquarters to Europe, where it is on the verge of acquiring controlling interest in Alliance Boots, a Swiss-based company that operates drugstores in Britain.  A Tulsa Business Tax Lawyer said that giant corporations often look to move overseas for the purpose of cutting there taxes.

From the shareholders' perspective, making the move is a no-brainer: It could save the company roughly $4 billion over the next five years.

But here in this town of 16,000 where just about everybody can tell you about company founder Charles Walgreen's impact on the community, such a move seems out of step with how the Walgreen family conducted business.

"I think he'd be rolling in his grave if he knew what was going on today," says Bill Jones, who runs the Northwest Territory Historic Center in Dixon and worked closely with the Walgreen family on building an exhibit at the museum honoring the founder.

The loophole is known as tax inversion, a controversial tactic that allows a company that does most of its business in the USA to cut its federal tax bill by merging or buying an overseas company in a lower-tax country and then nominally relocating its headquarters there.

Despite years of on-and-off efforts by lawmakers in Washington and the IRS to close the loophole, dozens of American companies have used it — several in recent months.

The first corporate inversion to capture attention occurred in 1982, when oil-and-gas company McDermott moved its headquarters to Panama. It wasn't until 1994, after cosmetics company Helen of Troy moved to Bermuda, that the IRS raised concerns that such restructurings were motivated by the desire to dodge taxes.

This year alone, eight major U.S. companies — including AbbVie, Medtronic and Mylan — have announced plans to shift their headquarters overseas in an effort to trim their corporate tax rate, which hovers around 35% in the U.S. and is among the highest in the world.

Earlier this week, President Obama called inversion an "unpatriotic tax loophole" and pressed Congress to pass legislation to stem the flow of corporations that are effectively renouncing their U.S. citizenship. Inversion could cost the Treasury nearly $19.5 billion over the next decade, according to Congress' Joint Committee on Taxation.

Analysts say perhaps no company with a Main Street profile that matches Walgreens' — the country's largest pharmaceutical chain, with $72 billion in annual sales — has used the loophole, and Walgreens' pending decision is bringing unprecedented attention to the issue.

"I don't know how this inversion doesn't happen," says Christopher Geier, of the Chicago-based investment banking firm Sikich. "They'll get some bad press, but I don't see a big enough reaction from consumers on this to change where this appears to be heading."

Here in Dixon, the talk of Walgreens moving to Switzerland resonates in a personal way.

Charles Walgreen moved to Dixon as a teenager and got his start in the business working at a pharmacy, a job he took after injuring himself working at a shoe factory in town. Residents here recall Walgreen taking Boy Scouts up on his Sikorsky S-38 amphibian aircraft, which he would fly back and forth from the Chicago area and land on the Rock River, near the family's estate here.

As a young man, he moved to Chicago to seek his fortunes and eventually started his drugstore chain. But he opened his second pharmacy here in his adopted hometown — where he became revered as the city's second-favorite son. (President Ronald Reagan, who grew up here and caddied for Walgreen at the Timber Creek Country Club, is Dixon's most celebrated hometown boy.)

Walgreen, who died in 1939, saved the Dixon National Bank from going out of business during the Great Depression. The family also led fundraising for a statute erected in 1930 along the Rock River depicting a young volunteer named Abraham Lincoln, who spent time here during the Black Hawk War.

Charles Walgreen Jr., the founder's son, won the bid during World War II to open a store at the newly built Pentagon by giving all store profits to the Pentagon Post Restaurant Council, which supervised food service in the complex.

"Walgreens' attitude was so patriotically generous that no competitor could possibly better it," declared a weekly publication from the War Department.

Myrtle Walgreen, the wife of the company's founder, also was a good friend of the people of Dixon. James Burke, Dixon's mayor, says legend has it that at one of the regular coffee klatches at Dixon's Walgreens, she offered an extraordinary stock tip to some of the city's most prominent citizens.

"She told them we are getting ready to introduce a new line of product that you might consider investing in," says Burke, who has called on Walgreens to ditch the tax inversion plan. "That product was the tampon."

TRADING WALGREENS FOR CVS?

Larry Dunphy, who owns an independent bookstore in Dixon, says he takes pride in buying stocks in Illinois companies such as McDonald's, John Deere and Walgreens. But he says he's told his financial adviser to dump his stock in Walgreens and buy CVS if the company goes through with the inversion.

In the end, Dunphy says the public outcry may not have an impact on Walgreens' decision, but it could have a long-term effect on how companies approach inversion in the future and spur Congress to change laws to give companies an incentive to stay put.

"Will there be enough people who go to CVS or the local pharmacy that will offset the $4 billion that Walgreens will make by moving?" Dunphy says. "Maybe not. But I hope the damage this is doing to Walgreens' image is something that companies in the future will consider before moving to cut their share of taxes."

Walgreens CEO Gregory Wasson, who, along with his board, has come under intense pressure from shareholders to move the headquarters to Switzerland, says the company will decide soon whether to move its headquarters.

Early in 2014, Wasson said publicly that an inversion wasn't under consideration. The Deerfield, Ill., company bought 45% of Switzerland-based Alliance Boots in 2012 and has an option to buy the rest of the company next year, which would create the opportunity to make the move.

But after a private meeting in France with a shareholder group — including Goldman Sachs Investment Partners and hedge funds Jana Partners, Corvex and Och-Ziff — Wasson began to change his tune.

He made clear in a call with Wall Street analysts last month that an inversion was very much a possibility as Walgreens restructures the company ahead of completing the Alliance Boots deal.

Michael Polzin, a company spokesman, says Walgreens will do "what is in the best long-term interests of our customers, employees and shareholders."

Polzin won't comment about the impact a tax inversion would have on the company's image. The company also declined to make Kevin Walgreen, the great-grandson of the company's founder and the only member Walgreen family currently involved in day-to-day operations, available for an interview.

"Whether we do an inversion or not, we're still going to pay over $2 billion a year in federal, state, employer and property taxes," Polzin says. "We will still be one of the top job providers in America, with roughly 250,000 employees. We're going to continue to make capital investments in the U.S. and expand our business here for decades to come."

That argument hasn't assuaged some Illinois lawmakers.  A Tax Lawyer Tulsa representative is actively watching the case unfold.

In a letter to Walgreens' board of directors this week, Rep. Jan Schakowsky, D-Ill., warned that the company was in danger of sullying its reputation as a community-minded corporation. She also sought to remind the Walgreens board that roughly a quarter of its $2.5 billion in profits last year were directly connected to federal programs — such as Medicare, Medicaid and the Affordable Care Act.

"Everywhere you look, the success of Walgreens is tied to the opportunities it has been afforded by this country," she wrote. "To benefit from those resources and then to refuse to pay your fair share of taxes needed to fund them is inexcusable."

In a separate letter, Sen. Dick Durbin, D-Ill., took a shot at Walgreens' folksy motto. "Is 'the corner of happy and healthy' somewhere in the Swiss Alps?" Durbin wrote. He added, "I believe you will find that your customers are deeply patriotic and will not support Walgreens' decision to turn its back on the United States."

Burke, the Dixon mayor, says he hopes Walgreens will stay put. But if it pushes ahead with the inversion, Burke notes there are three other drugstores in his town.

"I think Walgreens will see that a lot of Americans will take their business elsewhere," Burke says. "At some point, how much profit is enough?"

US tax code longer than Bible and without good news

originally appeared in The Associated Press:


Too intimidated to fill out your tax return without help? Join the club.

At nearly 4 million words, the U.S. tax law is so thick and complicated that businesses and individuals spend more than 6 billion hours a year complying with filing requirements, according to a report Wednesday by an independent government watchdog.

That's the equivalent of 3 million people working full-time, year-round.

If tax compliance were an industry, it would be one of the largest in the United States, according to a report by the National Taxpayer Advocate.

The days of most taxpayers sitting down with a pencil and a calculator to figure out their taxes are long gone, she said. Since 2001, Congress has made almost 5,000 changes to U.S. tax law. That's an average of more than one a day.

As a result, almost 60 percent of filers will pay someone to prepare their tax returns this spring. An additional 30 percent will use commercial software. Without the help, she says, most taxpayers would be lost.

On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments, she said. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.

The tax advocate ranks complexity as the most serious tax problem facing taxpayers and the Internal Revenue Service in her annual report to Congress. She urges lawmakers to overhaul the nation's tax laws, making them simpler, clearer and easier to comply with.

Momentum is building in Congress to overhaul the tax code for the first time since 1986. But Washington's divided government has yet to show it can successfully tackle such a task.

President Barack Obama and Republican leaders in Congress say they are onboard, though they have rarely seen eye to eye on tax policy. They struggled mightily just to avoid the year-end fiscal cliff, passing a bill that makes relatively small changes in the nation's tax laws.

Undaunted, the top tax writer in the House says he is determined to pass reform legislation this year.

This report confirms that the code is 10 times the size of the Bible with none of the good news, according to Rep. Dave Camp, chairman of the House and Ways and Means Committee. Our broken tax code has become a nightmare of loopholes and special interest provisions that create added complexities and costs for hardworking taxpayers and small businesses.

Comprehensive tax reform will make sure everyone is playing by the same rules and help businesses create more jobs and invest in their workers, Camp said.

The general formula for tax reform is widely embraced on Capitol Hill: Eliminate or reduce some tax credits, exemptions and deductions and use the additional revenue to pay for lower income tax rates for everyone. There is, however, no consensus on which tax breaks to scale back.

That's because Americans like their credits, deductions and exemptions - the provisions that make the tax law so complicated in the first place. Would workers want to pay taxes on employer-provided health benefits or on contributions to their retirement plans? How would homeowners feel about losing the mortgage interest deduction?

Those are the three biggest tax breaks in the tax code, according to congressional estimates. Together, they are projected to save taxpayers nearly $450 billion this year.

In all, taxpayers will save about $1.1 trillion this year by taking advantage of tax breaks, according to the Joint Committee on Taxation, the official scorekeeper for Congress. That's almost as much as individuals will pay in income taxes.

To avoid angering millions of constituents who rely on popular tax breaks, politicians prefer to endorse tax reform without getting into specifics. Instead, they say they want to reform the tax code by eliminating special interest "loopholes" that help only small but well-connected groups of taxpayers.

Obama has repeatedly said he wants to eliminate tax breaks for hedge fund managers and companies that buy corporate jets. Throughout the recent fiscal cliff debate, House Speaker John Boehner said he favored raising additional tax revenue by reducing unspecified tax loopholes rather than raising income tax rates.

The tax advocate defines "loopholes" as tax breaks that benefit someone else. She warns that targeting only narrow provisions won't raise enough revenue to significantly lower rates or make the law much simpler.

That's what we've been trying to say to taxpayers, that the special interests are us. It's not just oil and gas or whatever you want to point your finger at, she said. That's not where the money is.

Is President Obama Really A Socialist? Let's Analyze Obamanomics

originally appeared in Forbes:


President Obama says that income taxes must be raised on the rich because they don’t pay their fair share.  The indisputable facts from official government sources say otherwise.

The CBO reports based on official IRS data that in 2009 the top 1% of income earners paid 39% of all federal income taxes, three times their share of income at 13%.  Yet, the middle 20% of income earners, the true middle class, paid just 2.7% of total federal income taxes on net that year, while earning 15% of income.  That means the top 1% paid almost 15 times as much in federal income taxes as the entire middle 20%, even though the middle 20% earned more income.

Moreover, the official data, as reported by CBO and the IRS, show that the bottom 40% of income earners, instead of paying some income taxes to support the federal government, were paid cash by the IRS equal to 10% of federal income taxes as a group on net.

Any normal person would say that such an income tax system is more than fair, or maybe that “the rich” pay more than their fair share.  So why does President Obama keep saying that the rich do not pay their fair share?  Is he ignorant?  Wouldn’t somebody in his Administration whisper to him that he is peddling nonsense?

The answer is that to President Obama this is still not fair because he is a Marxist.  To a Marxist, the fact that the top 1% earn more income than the bottom 99% is not fair, no matter how they earn it, fairly or not.  So it is not fair unless more is taken from the top 1% until they are left only with what they “need,” as in any true communist system.  Paying anything less is not their “fair” share.  That is the only logical explanation of President Obama’s rhetoric, and it is 100% consistent with his own published background.

Notice that Obama keeps saying that “the rich,” a crass term implying low class social envy, don’t “need” the Bush tax cuts.  That is reminiscent of the fundamental Marxist principle, From each according to his ability, to each according to his need.

Good tax policy is not guided by “need.”  It is guided by what is needed to establish the incentives to maximize economic growth.  The middle class, working people and the poor are benefited far more by economic growth than by redistribution.  That is shown by the entire 20th century, where the standard of living of American workers increased by more than 7 times, through sustained, rapid economic growth.

But President Obama’s tax policy of increasing all tax rates on savings and investment will work exactly contrary to such economic growth.  It is savings and investment which creates jobs and increases productivity and wages.  Under capitalism, capital and labor are complementary, not adversarial, exactly contrary to the misunderstanding of Marxists. More capital investment increases the demand for labor, bidding up wages to the level of worker productivity, which is enhanced by the capital investment.

Increasing marginal tax rates on savings and investment, however, will mean less of it, not more.  That will mean fewer jobs, and lower wages, just as we have experienced so far under President Obama, with median household incomes (hello middle class) declining by 7.3% (a month’s worth of wages) during his first term, even faster after the recession supposedly ended in 2009.  That will only get worse in Obama’s unearned second term, which can only be explained as “democracy failure” analogous to “market failure.”

If the tax increases are limited to those who earn $1 million or more, I don’t know if that alone will be enough to create a recession, as I am certain would be the result with Obama’s original policy of targeting couples making over $250,000 a year, and singles making over $200,000.

But there is so much in the Obama economic program that is contractionary.  His second term promises enormous new regulatory burdens and barriers.  The EPA is shutting down the coal industry, and Interior will join with it to sharply constrain oil production further, despite Obama’s duplicitous campaign rhetoric taking credit for the production produced by the policies and efforts of others.  I expect Obama’s EPA to burden natural gas fracking until it goes the way of the coal industry as well, stealing new found prosperity for many Americans.  All of this will sharply raise energy prices, which will be another effective tax on the economy.

Moreover, President Obama has said that a priority in his second term will be global warming, even though global temperatures have not been increasing for 16 years now, and the developing world led by Brazil, Russia, India and China (the BRIC countries), which are contributing to “greenhouse gases” at a much greater accelerating rate than the U.S., have rejected sacrificing any slice of their economies to that ideological phantom.  While even the Democrat Congress of Obama’s first term failed to adopt “cap and trade,” EPA is advancing with global warming regulations that will cost the economy trillions in still another effective tax.

Then there are the onrushing regulatory burdens of Obamacare, including the employer mandate, which will require all businesses with 50 employees or more to buy the most expensive health insurance available.  That will be an effective tax on employment.  As Obamacare forces up the cost of health insurance, that will be still another effective tax increase on all employers already providing health coverage.  Hundreds of regulations still in the pipeline under the “Dodd-Frank” legislation are already forcing the financial sector to contract, and threaten the business and consumer credit essential to full recovery.

In addition, few are adequately considering the longer term contractionary effects of the Fed’s current policy mischief.  For years now, businesses and investments have been launched all over the country based on the near zero interest rates, and even below zero real rates, that Fed policies have perpetuated, along with the easy free money .  When those rates inevitably rise back to normal, most likely after these Fed policies have resparked inflation, the basis for those businesses and investments will be gone, and many if not most will go into liquidation, which will be highly contractionary as well.

However, I am certain in any event that the Obama tax increases will result in less revenue rather than more.  Obama has been proposing to increase the capital gains tax rate by 58% on the nation’s job creators, investors and successful small businesses, counting his Obamacare tax increases that take effect on January 1 as well the expiration of the Bush tax cuts.  While his misleading talking points say there will be no tax increases for 97% of small businesses, that counts every Schedule C filed for every part time or hobby sole proprietorship, however marginal the earnings.  The small businesses that would bear President Obama’s originally proposed tax increases earn 91% of all small business income, and employ 54% of the total private sector U.S. work force, as reported in Investors Business Daily on November 9.

Over the last 45 years, every time capital gains tax rates have been raised, revenues have fallen, and every time they have been cut, revenues have increased.  The capital gains rate was raised 4 times from 1968 to 1975, climbing from 25% to 35%.  The 25% rate produced real capital gains revenues in 1968 of $40.6 billion in 2000 dollars.  By 1975, at the higher rate, capital gains revenues had plummeted to $19.6 billion in constant 2000 dollars, less than half as much.

After the capital gains rate was cut from 35% to 20% from 1978 to 1981, capital gains revenues had tripled by 1986 compared to 1978.  Then the capital gains rate was raised by 40% in 1987 to 28%.  By 1991, capital gains revenues had collapsed to $34.4 billion, down from $92.9 billion in 1986, in constant 2000 dollars adjusted for inflation.

Obama’s capital gains tax increase next year will reduce capital gains revenues again as well.

Tax Legislation Expires

Story first appeared in The Wall Street Journal.
Nine years ago this month Congress passed Bush's Jobs and Growth Tax Relief Reconciliation Act. That bill's lower rates on capital, as well as the continuity in tax policy it established, have helped make our economy far more resilient.

The legislation's centerpiece was a reduction in the taxation of dividends and capital gains to 15%. Unfortunately, the 2003 tax rates, including those on capital income, are due to expire at the end of the year.

Capital warrants special tax treatment because of the central role it plays in generating economic growth and jobs. Capital is the very lifeblood of the market economy, the mainstay of innovation, and the foundation for future prosperity. As more of it is put to work today, labor output and wages will rise tomorrow. An appreciation of that critical relationship should guide how the tax system treats earnings from capital.

The double taxation of dividends—with corporate earnings first taxed 35% at the corporate level and then, when paid out to shareholders, taxed again—has been a long-standing and well-recognized distortion in the tax code. It favors debt financing over equity capital formation, because interest is deducted as a cost of doing business and lowers taxable income, while dividends are taxed twice.

The preference for debt financing and leverage shortchanges shareholders and is not healthy for corporate decision-making. Double taxation penalizes dividend payments and discourages managements from making them, according to Washington DC Corporate Lawyers.

Congress did not eliminate the double taxation of dividends in 2003, but it substantially ameliorated the distortion. Dividends are now taxed at 15%, rather than the typically higher income-tax rates paid by shareholders. Importantly, the 15% tax rate was applied to capital gains as well. Capital gains previously had been taxed at 20% with special rates for assets held five years or longer. This symmetry between dividends and capital gains harmonized and simplified the regime for the taxation of capital and still stands today as a key achievement in modern tax policy.

Corporations responded to the lower rates on dividends by paying out more of their profits, which raises the returns to those holding stock and thus increases equity prices. Both trends strengthen Americans' retirement savings. As recent actions by Google, Apple and scores of other companies attest, corporations today find it more difficult to sit on cash instead of rewarding shareholders with dividend payouts.

Indianapolis Corporate Lawyers feel that with the expiration of the 2003 tax law at the end of this year, taxes—not only on capital earnings but also on ordinary incomes—will return to the much higher levels that previously existed.

This would be devastating to the fragile economic recovery, and to every American still looking for work. Combined with the expiration of temporary payroll tax relief, the United States faces what has now been labeled "taxmageddon"—a fiscal headwind so strong that it threatens a swift return to recession.

What seems to be lacking is a clear path to the future. Here are some suggestions for policy makers.

First, remember the principle that you always get less of anything you tax. For this reason, society discourages undesirable activities by imposing so-called "sin" taxes. By the same token, high marginal tax rates discourage work, risk-taking and capital formation.

Second, tax rates should be held as low as possible, consistent with maintaining fiscal balance. Low tax rates are not in conflict with fiscal sanity if the rate of government spending as a fraction of gross domestic product is reduced, or if the tax base is broadened with more fundamental tax reforms. It is encouraging to see so much interest gathering in support of changes to the tax code that would scrap many special tax breaks in favor of deeply lower marginal tax rates.

Third, St. Louis Corporate Lawyers state that marginal tax rates should be as neutral as possible across different types of economic activities. Otherwise the tax code distorts behavior in ways that sap economic strength, as market participants rely less on market price signals and more on government commands to decide how economic resources are used. Social engineering through the tax code comes at a very high cost.

Finally, policy makers should remember to "do no harm." A reversion to the kind of drastically higher marginal tax rates that existed in the past would be bad enough. It would only add insult to injury to use the economic crisis as an excuse to raise the tax burden on capital formation and thus reduce the lifeblood of America's job creators.

Unfortunately, we face that real prospect, as prominent proposals by the administration would triple the top dividend tax rate to nearly 45%, while doubling the top rate on capital gains to 30%. If one intended to cripple job creation, depress stock prices, and lower the value of retirement savings for working Americans, these proposals would be just what we should choose.

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Apple Gains Tax Incentives in Texas

Story first appeared on themacobserver.com.

Apple’s major expansion in Austin, Texas, is a step closer to reality now that Travis Country has approved an incentive package that will help the iPhone and Mac maker bring 3,600 new jobs to the city. The approval came Tuesday night with only one of the five Commissioners voting against the deal.

The dissenting vote came from the Commissioner who said she had hoped Apple would’ve been required to promise more in exchange for the incentives, according to the Austin Business Journal.

Apple now stands to get between US$5.4 million and $6.4 million in tax rebates from the county, for a combined $35 million in incentives over ten years from city, county and state. In exchange, Apple will double its workforce in Austin and invest $282.5 million locally in the process.

The county’s approval comes as good news for the Austin job market, especially since the county was the only holdout on approving the incentives package. Had the Commissioners voted against the deal, the state and city would’t be able to follow through on their offers and Apple would’ve likely taken its new jobs elsewhere.

With Travis County’s approval in place, however, Apple can now move forward to the next phase in its expansion plans.


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Unpaid Taxes Eating Into Your Tax Refund

Story first appeared in the Detroit Free Press.

The joy of going out and spending a tax refund on that new living room furniture set you've had your eye on, could be short-lived if you owe past taxes.

The Internal Revenue Service is warning taxpayers that the U.S. Department of Treasury's Financial Management Service, which issues federal tax refunds, can use part or all of your federal tax refund to cover specific unpaid debts.

So before you dream about spending that refund, consider:

• Do you owe state or federal income taxes from the past? Your federal refund will be offset to pay those taxes.

• Do you have debt outstanding for child support or student loans? Again, the Treasury can use your refund to offset those debts.

The IRS notes that taxpayers would receive a notice if some debt is automatically paid off with refund money.

The notice would include the original refund amount, your offset amount, the agency receiving the payment and its contact information.

The publisher of Fastweb.com and FinAid.org, said what's known as a "Treasury Offset" occurs after someone defaults on a federal student loan -- both the federally guaranteed student loans and the direct loan programs. The offset typically happens about a year after the borrower defaults. And both federal and state income tax refunds can be intercepted.

In some cases, a spouse could mount an innocent spouse defense to protect his or her share of the refund from being offset.

There are options if you dispute the actual debt or the amount taken from the refund. But you'd need to contact the agency shown on the notice -- not the IRS.

Of course, sometimes there's the case where only one spouse is responsible for that debt. So, maybe the spouse can get that new dining room table they've been looking at.

If you filed a joint return and you're not responsible for the debt, but you're entitled to a portion of the refund, you can file IRS Form 8379, or Injured Spouse Allocation.

A certified public accountant and director of the tax-assistance program of the Accounting Aid Society of Detroit, said some taxpayers might be tempted to not file jointly, as one spouse owes debts that are subject to the tax refund offset.

However, he warned that if they file separately, certain credits and deductions are not available.

So in general, it is often best to file jointly to get the largest refund and file the Form 8379 to protect the part of the refund owed to the injured spouse. The Form 8379 can be filed with the tax return if a refund offset is anticipated.

The IRS notes that you'd want to follow instructions for Form 8379 carefully to avoid delays. If you don't receive a notice that spousal relief was granted or you don't receive a refund, it's possible to contact the Treasury's Offset Call Center at 800-304-3107 weekdays.

The Michigan Department of Treasury also offsets refunds for certain debts and then the state mails taxpayers a Form 743, Income Allocation for Non-obligated Spouse. That form must be completed and returned within 30 days. Only the Form 743 received from Michigan Treasury can be submitted.  The Form 743 is not otherwise available and is only issued after processing of the return.

It's important that taxpayers anticipating a Michigan state tax refund offset on a joint Michigan return watch for this Form 743 in the mail and submit it in a timely fashion.

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World Leaders Crack Down on Taxes

Story first appeared in The New York Times.

LONDON — The world’s tax havens are being forced to clean up their acts.

As regulators clamp down on money flows around the globe, governments, even those that prided themselves on the strength of their secrecy laws, like Switzerland, are facing pressure to share banking information and change their policies.

Now, private banks and wealth managers are scrambling to convert so-called black money — assets that have not been disclosed — into accounts that are above board.

The shift may provide opportunities for the industry. As more funds become legitimate, analysts say financial institutions will be able to sell extra wealth management products to affluent people and enter markets that had previously been off limits.

For decades, Western governments tolerated offshore tax havens, places where the wealthy could park millions away from the gaze of their domestic authorities. Switzerland, in particular, developed a reputation as a place where the wealthy could rely on secrecy laws.

But the tide began to turn in 2008, particularly after the financial crisis prompted many governments to act in concert.

The American authorities began pursuing UBS, the largest Swiss bank, saying it had helped thousands to hide money from the Internal Revenue Service. UBS later settled with the Justice Department, turning over details of 4,450 client accounts and paying a fine of $780 million in exchange for a deferred prosecution agreement. Other banks, including Credit Suisse and Julius Baer, have been ensnared by the broad investigation.

Global regulators followed with their own crackdown. For years, the Organization for Economic Cooperation and Development had tried to rein in offshore financial centers that did not meet certain requirements, like failing to share tax information with other countries, In 2009, the O.E.C.D. compiled a blacklist for the Group of 20, which comprises the world’s largest economies, exerting pressure on nations to be more forthcoming. To get off the list, several countries and regions, including Andorra, Costa Rica, the British Virgin Islands, Liechtenstein and Monaco, have since agreed to adopt international standards.

As Switzerland and other locales tightened their financial controls, many people initially flocked to other tax havens like Singapore and Hong Kong, which still offer some of the world’s most secret accounts. But these places, too, are facing new pressures.

Several European allies reached an agreement with the United States in February to help enforce the Foreign Account Tax Compliance Act, which requires that virtually every financial institution in the world report any accounts held by Americans. Many wealthy clients who previously had not worried about revealing all their international assets to home authorities are taking advantage of tax amnesty programs in countries like the United States and Britain.

The global push against tax havens has been a boon for government coffers.

Spanish authorities discovered a Swiss bank account opened in the 1930s by the father of a billionaire Spanish banker and chairman of Banco Santander. In 2010, the Spanish banker and other family members paid 200 million euros (about $267 million currently) in taxes to avoid tax evasion charges.

So far, countries have collected about $18.7 billion in additional taxes from more than 100,000 wealthy individuals, according to the O.E.C.D.

The situation has left private banks scrambling to bolster their risk management practices and educate wealthy clients on the new regulatory environment.

It’s a costly process. Banks must stay on top of fast-changing global regulations, ensure that clients are paying tax on all their investments and improve their compliance efforts, for example, by reporting potential tax evasion to authorities.

While larger firms, like UBS, can rely on their multibillion-dollar balance sheets to pay for upgrading their risk operations, smaller banks with a limited number of wealthy clients may feel the pinch. That could prompt firms to join forces as they try to meet the regulatory hurdles.

Still, the changing dynamic could create some opportunities. Analysts say a leaner, more consolidated private banking sector will have greater resources to attract an increasing number of wealthy people from emerging economies. Swiss banks, which have a history of attracting foreign clients, have already expanded into Latin America and Asia, while Austrian banks have focused on Eastern Europe and Russia.

Keeping these new clients will not be easy. In the wake of the financial crisis, the wealthy are demanding lower fees and transparency over where their money is invested. They also have shied away from complicated financial products, like asset-backed securities, in favor of investments that can be easily sold if the markets take a turn for the worse.

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Online Tax Rules

First appeared in USA Today

Attention, online shoppers. The days of tax-free online shopping may be coming to an end.

More than a dozen states have enacted legislation or rules to force online retailers to collect sales taxes on purchases, according to tax publisher CCH.

Similar legislation is pending in 10 states.

Reasons for the spread of online sales tax laws:

•   Budget shortfalls. The National Conference of State Legislatures estimates that uncollected state sales taxes will cost states $23 billion this year. Residents of sales-tax states are supposed to pay taxes on online purchases, but because retailers don't collect them, they rarely do.
•  Heavy lobbying from retailers. Retailers have long argued that exempting online purchases from sales taxes gives online retailers an unfair advantage over brick-and-mortar stores. The pressure escalated in December after online giant Amazon offered customers a one-day 5% discount if they used its Price Check app to make a purchase while in a physical store, says Jason Brewer of the Retail Industry Leaders Association, which supports taxing online purchases
• "A store manager has the power to say, 'I'll match that price,' but they don't have the power to say, 'I won't charge you a sales tax,' " he says. "They go to jail if they do that."
•  Gridlock. Legislation has been introduced in the House and Senate that would give states broad authority to require online retailers to collect state sales taxes, as long as they streamline the collection process.

Amazon supports the legislation, says spokesman Ty Rogers. Federal legislation to permit interstate collection of sales tax "is the only way to level the playing field for all sellers and provide states the right to obtain more than a fraction of the revenue already owed," he says.

Despite bipartisan support, though, the bill has languished in Congress. "Many of the states have gotten somewhat frustrated waiting for Congress to act," Brewer says.

In 1992, the Supreme Court ruled that states couldn't require retailers to collect sales taxes unless the retailers had a physical presence in the state.

Increasingly, though, states have interpreted that requirement to include subsidiaries or affiliates of online retailers, or online retailers with a warehouse or distribution center in the state.

Critics say the measures would force online retailers to collect sales taxes in dozens of states and jurisdictions, with different rates and definitions of which products are taxable.

"A brick-and-mortar retailer only has to keep track of one sales tax rate," says Joseph Henchman, vice president for the Tax Foundation, a non-profit tax research group. "An online retailer would have to collect tax based on where their customer is located."

The administrative burden would be particularly difficult for small businesses that sell their products online, says Jerry Cerasale, senior vice president for the Direct Marketing Association.

These merchants could be forced to raise prices to cover the added compliance costs, Cerasale says.

"That's going to harm e-commerce, which is one of the few promising growth spots in this somewhat stagnant economy."

GAS TAX COULD BE REPLACED WITH A MILEAGE FEE

Story first appeared in USA TODAY.
The age of free driving could be coming to an end. With the advent of GPS navigation that electronically tracks how far you drive; more states are looking at charging drivers by the mile.
Oregon, for instance, is among several states that are taking a hard look at the idea. As proposed in the Oregon legislature, drivers could be charged 0.85 cents per mile through 2015, with the figure jumping to 1.85 cents per mile by 2018. The bill, for the moment, appears stalled. Texas and Minnesota are reportedly also taking a look.
Mileage fees would take the place of gasoline taxes, which will decrease as more fuel-efficient and electric cars are introduced. The Detroit Bureau says the typical American motorist getting a combined 25 mpg today pays just under 2 cents a mile in gas taxes.
Still, the Big Brother aspects of taxing by the mile are sure to make any such plan an uphill battle.

Baucus, Levin Say Congress Will Keep `Onerous' Minimum Tax From Increasing

Bloomberg

Congress will “do everything possible” to prevent the alternative-minimum tax from forcing 21 million households to pay an additional $66 billion in taxes this year, four lawmakers said in a letter to the Internal Revenue Service.

Max Baucus of Montana and Charles Grassley of Iowa, the chairman and top Republican on the Senate Finance Committee, urged IRS Commissioner Douglas Shulman today to prepare for the 2011 tax filing season by assuming the minimum tax will be adjusted for inflation. A delay in making the adjustment in 2007 held up processing of tax returns and refunds the following year.

“We will work to craft the AMT provision so that, in the aggregate, not one additional taxpayer faces higher taxes in 2010 due to the onerous AMT,” the senators wrote in the letter. It also was signed by Michigan Representatives Sander Levin and David Camp, the chairman and top Republican on the House Ways and Means Committee.

The lawmakers were responding to a Nov. 5 letter from Shulman in which he warned of delays in 2011 if legislation isn’t enacted “until late this year.”

“We will move as fast as we possibly can to implement any late tax law changes and minimize the impact to taxpayers,” Shulman wrote. “However, our implementation timelines are driven by careful planning and risk management. Changes to systems that handle the enormous transaction and dollar volume that the IRS manages cannot be completed without substantial engineering and testing work.”

Lame-Duck Session

Congress plans to act on the tax during a lame-duck session beginning Nov. 15.

The alternative-minimum tax was created in 1969 to prevent 155 wealthy Americans from avoiding any tax by claiming excessive deductions, credits and exemptions.

It replaces deductions such as those for medical expenses and state and local taxes with a flat exemption when the itemized deductions become too large compared to income. Amounts over the exemption are taxed at 26 percent or 28 percent, depending on the amount of income.

The tax wasn’t indexed for inflation and over time has affected Americans of more modest income. Congress has responded with a series of annual “patches” for inflation that raise the exemption amount.

H&R Block

For this tax year, about 21 million additional households would face an average tax increase of between $3,000 and $5,000 unless Congress raises the exemption, said Kathy Pickering, executive director of the Tax Institute at H&R Block Inc. in Kansas City, Missouri, the nation’s largest preparer of tax returns.

The lawmakers said they are drafting legislation to set the 2010 exemptions at $72,450 for married taxpayers filing jointly and $47,450 for singles. The exemptions currently are $45,000 and $33,750.

If lawmakers don’t adopt the patch, Pickering said, a family of five with $50,000 in income and a child in college would pay more taxes.

Without the patch, the minimum tax would have its greatest effect on large families and residents of states with high taxes, such as California and New York, because exemptions for children and deductions for state and local taxes are denied under the AMT. People earning between about $75,000 and $500,000 would be most likely to pay the tax, she said.

Balance Due

“Those who were looking forward to getting a refund wouldn’t be getting one and some would have a balance due they would otherwise not have expected,” she said.

In 2007, Congress didn’t renew the patch until Dec. 26. The leaders of the tax-writing Senate Finance and House Ways and Means committees sent a letter the previous Oct. 30 to the IRS saying they planned to adopt the tax adjustment.

Because of the late change, the IRS didn’t start accepting tax return filings until mid-February 2008, delaying refunds for about 4 million households that usually file tax returns in January.

IRS spokesman Anthony Burke said the letter from the lawmakers “will be very helpful.” The IRS expects to process about 140 million individual tax returns in 2011 and distribute almost $300 billion in tax refunds, Shulman’s letter said.

Booze Tax Hikes May Reduce Alcohol-Related Problems

Bloomberg / BusinessWeek

Boosting taxes on alcohol leads to lower rates of alcohol-related disease, injury, death and crime, researchers say.

University of Florida investigators analyzed 50 published papers that estimated the health and social effects of alcohol taxes or prices. The study authors concluded that higher alcohol taxes have a greater impact than drinking prevention programs such as Alcoholics Anonymous.

The results of the meta-analysis suggest that doubling the average state tax on alcohol would result, on average, in a 35 percent reduction in alcohol-related deaths, an 11 percent reduction in traffic crash deaths, a 6 percent reduction in sexually transmitted diseases, a 2 percent reduction in violence and a 1.4 percent reduction in crime.

The study findings were released online Sept. 23 in advance of publication in the November print issue of the American Journal of Public Health.

The findings "clearly show increasing the price of alcohol will result in significant reductions in many of the undesirable outcomes associated with drinking," lead author Alexander C. Wagenaar, a professor of health outcomes and policy at the University of Florida College of Medicine, said in a news release from the Robert Wood Johnson Foundation.

"Simply adjusting decades-old tax rates to account for inflation could save thousands of lives and billions of dollars in law enforcement and health care costs," Wagenaar added.

In a previous study, the same team of researchers found that a 10 percent increase in alcohol price leads to a 5 percent reduction in alcohol consumption.

"Taken together, these two studies establish beyond any reasonable doubt that, as the price of alcohol goes up, alcohol consumption and the rates of adverse outcomes related to consumption go down," Wagenaar said.

"The strength of these findings suggests that tax increases may be the most effective way we have to prevent excessive drinking -- and also have drinkers pay more of their fair share for the damages caused and costs incurred," he concluded.

The study was funded by the Robert Wood Johnson Foundation, a philanthropy devoted to public health.

In a news release issued Thursday afternoon, Distilled Spirits Council Vice President Lisa Hawkins said: "Numerous studies, including research from the National Institute on Alcohol Abuse and Alcoholism, show that alcohol abusers are the least sensitive to tax increases. It is the moderate responsible consumer who cuts back the most when prices rise.

"According to scientific studies, moderate alcohol consumption is associated with the lowest all-cause mortality compared to non-drinkers. It makes no sense to penalize moderate drinkers to pay for the abuse of a few, particularly when raising taxes will not reduce problems associated with abuse. For example, according to government statistics, there is no relationship between alcohol excise tax rates and alcohol-related traffic fatalities," she said.

New Tax Breaks for Small Businesses

Market Watch

The Small Business Jobs and Credit Act is about to be signed into law. New high-level, expensive government posts have been created. There’s money for Small Business Administration loans and state governments, and a few new tax provisions — including the good, the bad and the downright sneaky.

Cell phones are no longer listed property. Excuse my rejoicing, but this has been a nuisance for years. As long as cell phones were considered listed property, you were required to keep logs of personal versus business use. Corporations were hit hard on audits when staff used their company phones to call family and friends.

Were you keeping logs, or paying your company back for your personal use? Neither was anyone else. Frankly, no one really wanted to enforce those rules. After all, IRS staff were using their cell phones personally, too.

More time for bonus depreciation

Bonus depreciation was extended to Dec. 31, 2010. It was set to expire on Dec. 31 last year, but it got a reprieve. New business assets you bought since Jan. 1 of 2010 are apt to qualify for a 50% special depreciation deduction. The assets must have a recovery period of 7 years or less.

Because bonus depreciation is back, you may deduct up to $8,000 on the purchase of your new car. That, along with regular depreciation, allows you up to $11,060 worth of depreciation for the first year, according the experts at CCH, a Wolters Kluwer business.

Small-business health insurance

This has always been baffling. Small-business owners may reduce their taxable income for the cost of self-employed health insurance. But they have not been permitted to reduce their self-employment taxes by the cost of the health insurance.

For 2010 only, the health-insurance deduction will reduce your self-employment taxes, too. Why only for one year? Can you imagine the form changes IRS will have to make to change Schedule C for 2010 and then remember to change it back for 2011? This should have been permanent — like the cell phones.

Penalty relief — big time

The tax code hits businesses with penalties of 75% for not reporting “tax shelter” activities. Some of those penalties have been much higher than any possible benefit the business owner or investor ever got from the investment. In fact, many of the small business hit by these penalties didn’t even know they were engaging in tax-shelter activities.

According to CCH, since June 2009 the IRS has exercised forbearance in collecting some of those penalties. For now, if you were hit by those penalties after Dec. 31, 2006, the revisions to IRC section 6707A may have dramatically reduced the ceilings on your penalties. Sit down with your tax pro to see just how you’ve been affected. This may be a good opportunity to file some amended returns.

Good for really small businesses
If you’re the owner of a really small business, you perhaps tend to operate it using your own savings, personal loans, credit cards, and so forth, as a primary source of capitalization. That means you start out with a limited budget and pray that your clever marketing moves will generate enough money to cover operations, quickly. Sometimes that works.

The deduction for start-up costs has increased from $5,000 to $10,000 during 2010 and 2011. And, before, you lost this benefit if your start-up costs were $50,000. That has increased to $60,000. This will be a big help to the ma-and-pa-type start-ups. Remember, though, the business must have opened its doors during 2010 if you want to take advantage of writing off those start-up costs. So be sure to start selling something before Dec. 31.

Good for bigger small businesses, real-estate investors

Everyone’s favorite political football, Section 179 depreciation, just jumped from $250,000 to $500,000 for 2010 and 2011. The amount of assets your business may purchase before you are too big to qualify for this benefit also rose, from $800,000 to $2 million. In 2012, the Section 179 deduction will return to $25,000, with an asset purchase limit of $200,000. Unless, of course, it changes again.

Naturally, this increase does not apply to the behemoth personal vehicles. Those are still limited to a deduction of $25,000 in the year of purchase.

Certain real estate is now eligible for Section 179 benefits, according to Spidell Publishing Inc.: qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.

Remember, to keep this Section 179 benefit, the asset you purchased must continue to be used for business for its entire tax life. If you stop using a 5-year asset, or sell it after 3 years, you must pay back the Section 179 benefit. Most people don’t realize that this applies to things like your computers, video cams, and other small, but expensive electronics that tend to be replaced every year or two.

Sneaky provision

Qualified Small-Business Stock (QSBS) has special provisions to encourage investors to risk their money in new, start-up corporations. If the company fails, there are generous provisions to write off part of the losses quickly. There are incentives allowing certain capital-gains exclusions when the stocks are sold.

QSBS investors have been getting a boost lately. Historically, we were able to exclude 50% of certain profits, if the stock had been held for five years or more. Then, it got pushed up to 75% of profits, for QSBS purchased after Feb. 17, 2009, and before Jan. 1, 2011 — with a special alternative minimum tax rate. The latest law increases the exclusion from tax to 100% for QSBS purchased after March 15, 2010, and before Jan. 1, 2012.

That sounds generous. Except for the little clause in the new law that says paragraph 7 of Code Section 57 does not apply. Congress took away the special alternative-minimum tax treatment. In other words, you exclude 100% of the gains from your regular income tax and pay 28% in AMT, or higher once the low capital-gains rates expire next year.

Waste of taxpayer resources

An interesting little feature of this bill “prohibits the use of funds under this Act to pay the salary of an individual officially disciplined for viewing, downloading, or exchanging pornography on a federal government computer while performing official federal duties.”

How much salary reduction do you expect to see from this? Or will the cost to enforce this be higher than the savings?

And more…

There are several other provisions that will enhance or confuse your business experience. Wait about two weeks for your tax professional to get up-to-date on all the details. Then make an appointment to do some planning. Definitely get a business tax tune-up before October ends so you can take advantage of tax benefits on money you’ve already spent, and see if that frees up money for some expansion or marketing. Or just to pay off some bills.

Allowing Bush Tax Cuts to Expire would Balance the Federal Deficit

Washington Post

 

The tax cuts at the heart of a fierce pre-election battle on Capitol Hill were designed when the economy was booming, the federal budget was in surplus and George W. Bush was campaigning for president on a promise to return the extra cash to taxpayers.

Today, the economy is sluggish and the national debt is soaring to worrisome levels. As lawmakers bicker over whether to extend the Bush-era tax cuts, not just for the middle class but also for the wealthy, many economists and budget analysts say there's a simple way to curb borrowing: Let the tax cuts expire for everyone.

Official and independent budget estimates show that letting tax rates spring back to pre-Bush levels for all taxpayers would bring the country within striking distance of meeting President Obama's goal of balancing the budget, excluding interest payments on the debt, by 2015.

"If we actually ended the Bush-era tax cuts, that would pretty much do it," Obama's recently departed budget director, Peter Orszag, said in an interview last week with CNN's Fareed Zakaria. "If you do a bit on the spending side and then end the tax cuts, you pretty much get there."

But for all the election-year hand-wringing about deficits, no one in Washington is talking about letting the tax cuts lapse on schedule in January. Instead, Senate Republicans have offered a measure that would extend all the cuts, adding nearly $4 trillion to the debt over the next decade. This week, Senate Democrats say they plan to unveil a bill that would preserve most of the cuts for most Americans. That would add nearly $2 trillion to deficits by 2020.

Obama argues that allowing the cuts to expire for the wealthiest 3 million taxpayers - one of the chief differences between the two Senate proposals - is more fiscally responsible than the GOP's position. "The first thing you do when you're in a hole is not dig it deeper," he said at a town hall meeting Monday in Washington.

But the Democrats' plan also represents a pretty big shovel, budget analysts said.

"Both parties are being disingenuous here," said Robert Bixby, executive director of the nonprofit Concord Coalition, which advocates balanced budgets. "When I hear the Democrats saying Republicans are willing to add to the deficit, well, the Democrats are willing to add $2 trillion to the deficit themselves. The Democrats are doing almost as much damage to the deficit as the Republicans are."

Although the down economy might offer good reason to keep tax rates low for another year or two, putting more money in the hands of consumers, Bixby and other budget experts say it makes no sense to maintain that level of taxation permanently when the government is borrowing more than 40 cents of every dollar it spends.

The nonpartisan Congressional Budget Office predicts that the economy would be stronger with the cuts, but only through 2012, when the extra borrowing they require "would reduce or 'crowd out' investment in productive capital." Even former Federal Reserve chairman Alan Greenspan, an early advocate of the cuts, now says Congress should let them expire.

"I am very much in favor of tax cuts, but not with borrowed money," Greenspan said in an interview last month.

The budget outlook was far rosier when Bush conceived the cuts, which were one of the biggest tax reductions since World War II. Thanks to tax increases and robust economic growth, the Clinton administration had balanced the budget for the first time since the 1960s and was starting to pay down the national debt.

Bush pushed the cuts through a Republican Congress in 2001 and 2003, lowering levies on inherited estates, dividends, capital gains and income at all levels. He wiped out a de facto tax penalty on married couples filing jointly, doubled the child tax credit and created a 10 percent tax bracket at the very bottom of the income scale. At the upper end, he cut the top rate from 39.6 percent to 35 percent.

Lawmakers also revised the alternative minimum tax (AMT), an expensive parallel tax structure that would otherwise have deprived millions of people of the benefits of the cuts. That added billions more to the cost.

What would it cost to keep the cuts now? Preserving them all, with the AMT fix, would reduce revenue by nearly $3.9 trillion over the next decade, according to the CBO. The extra borrowing would tack an additional $1 trillion onto the nation's interest payments, the CBO says.

Defenders of the tax cuts say that those costs are irrelevant and that the real problem is rising levels of federal spending.

"Washington is scheduled to spend $46 trillion over the next decade. I wish the people who are focusing on criticizing the tax cuts would focus on the $46 trillion in runaway spending," said Brian Riedl, a budget expert at the Heritage Foundation. "The numbers are very scary, and even economically painful tax increases will not make a very large dent in the budget deficit."

But a paper to be released Tuesday by the Center for American Progress (CAP) shows how difficult it would be to stabilize the debt solely through spending cuts. If all the tax cuts were extended, Congress would have to cut $325 billion in 2015 alone to get the deficit down to Obama's target of 3 percent of the gross domestic product. If the cuts were preserved only for the household incomes less than $250,000 a year, as Obama has proposed, Congress would still have to cut $255 billion.

A one-year reduction of either size would amount to the sharpest cut in federal spending "since the military demobilization after World War II," said Michael Ettlinger, the paper's co-author and CAP's vice president for economic policy.

Ettlinger and co-author Michael Linden conclude that closing the gap would require "really painful and politically difficult" actions, such as slashing highway funding and agriculture subsidies by two-thirds and taking deep bites out of Pell college grants, the Pentagon, housing assistance - even Social Security.

Ettlinger is not among those who call on Obama to let the Bush tax cuts expire, saying it would break the president's campaign pledge to protect the middle class. Still, he added, "we're going to have to put revenue on the table."

So far, neither the White House nor congressional leaders have come up with a plan to avoid trillions in fresh borrowing if the tax cuts are extended - and that's making moderates in both parties nervous. After Senate Minority Leader Mitch McConnell (R-Ky.) put out his nearly $4 trillion tax plan last week, several Senate Republicans said they would prefer a less expensive temporary extension of two to three years.

Meanwhile, more than 30 House Democrats have signed a letter calling on Speaker Nancy Pelosi (D-Calif.) to consider extending all the cuts temporarily - a plan that would not only cost less but also let them avoid raising taxes on the wealthy in an election year.

Expiring Tax Cuts hit Taxpayers at every Level

Associated Press

 

Here's some pressure for lawmakers: If they don't reach agreement on extending soon-to-expire Bush-era tax cuts, nearly all their constituents back home will get big tax increases.

A typical family of four with a household income of $50,000 a year would have to pay $2,900 more in taxes in 2011, according to a new analysis by Deloitte Tax LLP, a tax consulting firm. The same family making $100,000 a year would see its taxes rise by $4,500.

Wealthier families face even bigger tax hikes. A family of four making $500,000 a year would pay $10,800 more in taxes. The same family making $1 million a year would get a tax increase of $53,200.

The estimates are based on total household income, including wages, capital gains and qualified dividends. The estimated tax bills take into account typical deductions at each income level.

Democrats have been arguing for much of the past decade that tax cuts enacted in 2001 and 2003 under former President George W. Bush provided a windfall for the wealthy. That's true, but they also reduced taxes for the working poor, the middle class, and just about everyone in between.

Those tax cuts expire at the end of the year, setting the stage for a high-stakes debate just before congressional elections in November. If Congress fails to act, families at every income level will see more taxes being withheld from their paychecks come January.

The tax cuts enacted in 2001 and 2003 reduced marginal income tax rates at every level. They also provided a wide range of income tax breaks for education, families with children and married couples.

Taxes on capital gains and dividends were reduced, while the federal estate tax was gradually repealed, though only for this year.

President Barack Obama wants to extend the tax cuts for individuals making less than $200,000 and joint filers making less than $250,000 in adjusted gross income. That's income from wages, capital gains and dividends, before standard deductions and exemptions are subtracted.

Republicans and a growing number of Democrats in Congress want to extend all the tax cuts, at least temporarily.

On Thursday, House Republican Leader John Boehner of Ohio said he wants an up-or-down vote on extending all the tax cuts before congressional elections in November.

"Raising taxes on anyone, especially small businesses, is the wrong thing to do in a struggling economy," Boehner said. "On the issue of job killing tax hikes the American people are not going to accept anything less than the vote that they deserve."

House Speaker Nancy Pelosi, D-Calif., wouldn't commit to vote on any tax proposals before the election. She did, however, pledge to address them by the end of the year.

"The only thing I can tell you is that the tax cuts for the middle class will be extended this Congress," Pelosi told reporters Thursday.

More than half the country backs raising taxes on the richest Americans, according to a new Associated Press-GfK Poll. The survey showed that by 54 percent to 44 percent, most people support raising taxes on the highest earners.

In a breakdown of the numbers, 39 percent agree with Obama, while 15 percent favor raising taxes on everyone by allowing the cuts to expire at year's end. Still, 44 percent say the existing tax cuts should remain in place for everyone, including the wealthy.

While Obama's plan would spare about 97 percent of tax filers, it would mean big tax increases for the wealthy.

Under Obama's plan, a family of four making $325,000 a year would get a tax increase of $5,400, while the same family making $1 million a year would get a tax increase of $56,300, according to the analysis by Deloitte Tax.

A family of four making $5 million a year would get a tax increase of $325,600.

Pelosi said the nation cannot afford to extend tax cuts for top earners.

"I see no justification for going into debt to foreign countries to underwrite and subsidize tax cuts for the wealthiest people in America," Pelosi said.

Making all the tax cuts permanent would add about $3.9 trillion to the national debt over the next decade, according to congressional estimates. Obama's plan would cost a little more than $3 trillion over the same period.

Greenspan Calls for Repeal of All the Bush Tax Cuts

NY Times

It was not enough, it seems, for Alan Greenspan, the former Federal Reserve chairman and a self-described lifelong Republican libertarian, to call for stringent government regulation of giant banks, as he did a few months ago.

Now Mr. Greenspan is wading into the most fierce economic policy debate in Washington — what to do with the tax cuts adopted, in large part because of his implicit backing, under President George W. Bush — with a position not only contrary to Republican orthodoxy, but decidedly to the left of President Obama.

Rather than keeping tax rates steady for all but the wealthiest Americans, as the White House wants, Mr. Greenspan is calling for the complete repeal of the 2001 and 2003 tax cuts, brushing aside the arguments of Republicans and even a few Democrats that doing so could threaten the already shaky economic recovery.

“I’m in favor of tax cuts, but not with borrowed money,” Mr. Greenspan, 84, said Friday in a telephone interview. “Our choices right now are not between good and better; they’re between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about.”

Mr. Greenspan, who led the Fed for 18 years until he retired in 2006, warns that without drastic action to increase federal revenue and reduce the long-term growth in health care costs, bond investors could make a run on Treasury securities, driving up the nation’s borrowing costs and leading to another global economic crisis. This is not the first time Mr. Greenspan has urged fiscal restraint; he warned in 2008 that the country could not afford the tax cuts proposed by Senator John McCain, the Republican presidential candidate. But his sweeping call for rescinding the Bush tax cuts, which he has articulated in a recent appearance on “Meet the Press” and an interview with The Financial Times, among other settings, has rankled former colleagues.

“Such a large tax increase in the middle of a period of sluggish economic growth would be a very bad idea,” said R. Glenn Hubbard, who as chairman of the White House Council of Economic Advisers from 2001 to 2003 was an architect of the tax cuts.

“Our choices right now are not between good and better; they’re between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about.”

Mr. Hubbard, who teaches at Columbia Business School, said a debate over the proper size of government was needed, but would not occur until the 2010 or 2012 elections. “Calls for repealing the tax cuts are more about politics than economics,” he added.

Even liberal economists who concur with the need for higher taxes have not been eager to embrace Mr. Greenspan. “His concern about the current deficit seems to ignore the state of the economy,” said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning organization. “It is hard not to believe that politics is playing some role in his positions.”

While Mr. Greenspan did not endorse a specific approach, his broad support for the tax cuts nearly a decade ago was pivotal in securing one of the Bush administration’s top domestic policy goals and in providing political cover for members of Congress.

Now, in response to accusations of political expediency, Mr. Greenspan says his approach has been consistent: supporting tax cuts when surpluses loomed, and endorsing revenue increases now that deficits are the leading worry. He also says his earlier endorsement of tax cuts was made with important caveats that were later ignored by policy makers and the public.

To begin with, he says he believed the tax cuts in 2001 were primarily needed to avoid the economic distortions caused by “surpluses as far as the eye could see,” as many economists at the time projected.

The dot-com boom in the late ’90s led to a surge in tax revenue, less from capital-gains taxes than from the conversions of stock-option grants. While the temporary nature of those revenue increases was perceived, Mr. Greenspan says, the combination of soaring tax receipts and long-term productivity gains led economists at the Fed, at the Office of Management and Budget and at the Congressional Budget Office to believe that the surpluses were very real.

That, in turn, caused the central bank to worry that one of its primary levers for the conduct of monetary policy — the purchase and sale of Treasury securities — would no longer be available.

“I was against deficits, but I was also equally against surpluses,” Mr. Greenspan said.

Mr. Greenspan also emphasizes that the tax cuts should have adhered to so-called pay-go rules, which require that tax cuts or new spending should not add to the federal deficit.

Pay-go rules were adopted as part of the 1990 budget deal between President George Bush and the Democratic-controlled Congress, but were scrapped in 2002, when his son, George W. Bush, was president.

“Unfortunately, the surplus disabled pay-go because pay-go implied the existence of a deficit,” Mr. Greenspan said. “When the deficit disappeared, the concept of pay-go became meaningless.”

While Mr. Greenspan’s reputation has been tarnished — given the Fed’s failures to pop the real estate bubble and to rein in subprime mortgage lending — his perspective, born of decades of data-crunching, has made him a figure revered by many in the markets. His opinion still carries considerable weight and his views on the tax cuts will reverberate in the debate next month in Congress.

“Unlike in World War II, when we knew that military spending and deficits would fall sharply, our current understanding of the future is extremely limited,” Mr. Greenspan said. “There’s an especially high level of uncertainty in forecasting Medicare.”

He said the country’s fiscal problems could not be solved by higher taxes alone. “We are going to have to confront a major surge in medical entitlement spending. Irrespective of what you say should be done on the tax side, you still have to cut some benefits on the expenditure side.”

Mr. Greenspan, who is known for his political skills and his connections in both parties, bemoaned the political gridlock in the capital.

“We have known that the tax cuts were going to expire at the end of 2010 for nearly a decade but nobody did anything to address the issue,” he said.

Asked whether higher taxes in 2011 could choke off the nascent recovery, Mr. Greenspan replied: “It is risky, but the choice of not doing it is far riskier. It is the difference between bad and worse, but in neither case do I think the evidence suggests that it would be the tipping point for the economy.”

Mr. Greenspan added that the relationship between taxation and growth was still not well understood. “I don’t think anybody can know exactly what the impact of these taxes is on G.D.P.,” he said, referring to gross domestic product, the broadest measure of output. “We put them through econometric models that have a very poor record forecasting recession. Conclusions based on such models must be suspect.”

At the Group of 20 meeting in Toronto in June, leaders of the world’s biggest economies agreed to halve their governments’ deficits by 2013. But Mr. Greenspan noted that even after debt-stricken Greece enacted emergency austerity measures, the markets remained skeptical.

“I thought that meeting was quite good, and very effective and important,” he said. “But it’s one thing to have a fiscal projection and quite another to have the markets believe it.”