Tax Questions for Presidential (and VP) Candidates

http://www.debates.org/

We are hearing a lot about tax reforms from candidates, but not much on specifics that are really needed.  For example, saying you want a 25% or 28% corporate rate is specific, but that is just the tip of the iceberg.  The rest of the iceberg (I guess the part under the water) are the details of HOW you get to a revenue neutral, lowered rate?  And another related and difficult question is what additional measures you might add if corporate rates are a lot lower than the top individual tax rate (to prevent income shifting).

I have a short article in the AICPA Tax Insider (10/11/12) - Questions about tax reform for the presidential candidates.  Do you think any will get asked?  answered?

What do you think? Tweet

Romney's "Bucket" Idea

In a Fox News interview before the first presidential debate, Governor Romney referred to a "$17,000 bucket" as part of his tax reform plan that includes lowering tax rates below the 2012 levels. He said people can fill the bucket with mortgage interest deduction, charitable contributions, etc.  He also suggested that higher income folks might get a smaller bucket. See "Romney pitches 'bucket'-list tax reform plan ahead of debate," 10/3/12. Details are sketchy. For example, does the bucket include personal exemptions?

Today, only 1/3 of individuals itemize their deductions, meaning they have deductions greater than these 2011 standard deduction amounts:

  Single     $5,800

  Head of household  $8,500

  Married filing jointly  $11,600

The personal exemption amount in 2011 was $3,700. For data on itemized deductions, see a recent Tax Policy Center addition on distribution of itemized deductions - here.

This is an interesting idea. I'm not sure what the reasonable dollar amount should be, it also depends on the rate. I think that the "bucket amount" should at least be equal to what a family of four would get today from the standard deduction + personal exemptions. Having that dollar amount drop as income rises brings some vertical equity into the system that should help bring greater equity than what would be the case with Romney's proposed fewer bracket, lower rate structure.

Romney avoids having to say what deductions he would eliminate or reduce. He leaves it to individuals to decide what do deduct within the dollar limit. Of course, given that more itemizers likely have more than $17,000 of deductions, why not just convert the bucket idea into a very large standard deduction (that might phase down as income rises). That brings simplification in that no one would need to track there deductions.

The bucket idea is unlikely to be popular among charitable organizations concerned that the change might reduce charitable contributions. Realtors, home builders and home owners with debt also might no like the idea as the "bucket amount" may be less than their mortgage interest. They would need to see how that interacts with the lower tax rate Romney is proposing.

What do you think?

Tweet

Romney and Property Tax Deductions

La Jolla means "The Jewel." It is located 12 miles north of Downtown San Diego.

 The Los Angeles Times reports that Mitt and Ann Romney received a property tax readjustment downwards on a La Jolla (San Diego) home they purchased in 2008 for $12 million. Per the report, they now save about $109,000 annually in property taxes. [Robin Abcarian, "Romneys, caught in housing bust, got tax cut in La Jolla," 8/5/12]

Their 2010 tax return reports they paid $226K of real estate taxes (Schedule A). They also owed AMT so likely did not get any benefit of the taxes on their federal return. But without the AMT, the federal deduction for the property taxes would provide up to a 35% tax savings for the Romneys. I have asked the question before and will again, why should the income tax subsidize the expenses of this second home? (See 5/3/12 post.) 

Many people (including me) call for repeal of the AMT. That will cost over $70 billion per year. One way to pay for it would be to repeal the property tax deduction on second (and third and more) homes, as well as cap the deduction for a principal residence based on the median home value for the particular region, for example.

Some tax planning for the Romneys - take the $109K savings and donate it to the State of California. That deduction is also allowed for regular tax and AMT.  Which points out another revenue offset likely needed for when AMT is repealed, a limitation on the charitable contribution deduction. Perhaps only allowing deductions for donations that exceed some percentage of one's income.

What do you think?

Will Obama and Romney list the tax subsidies they will cut for lowered rates?

The calls for lower tax rates come along with vague calls for cutting tax expenditures or base broadening. I say vague because we rarely hear which specific deductions, exclusions or credits will be cut or scaled back. I say rarely because there are a few example. President Obama's FY2013 budget calls for cutting back on some preferential rules for oil, gas and coal producers.

Politics is a likely reason for the vagueness.  I suspect that most voters think the cuts would be for corporations  because they think that is where the bulk of benefits go.  But that is incorrect. Per data from the Joint Committee on Taxation, the largest tax break for individuals is the exclusion for employer-provided health insurance which costs $659.4 billion for 2010-2014. In contract, the most costly corporate tax expenditure is about 1/10 that size (it is for deferral of active income of controlled foreign corporations and costs $70.6 over the same five year period).

Here is an excerpt of a chart from the JCT report (JCX-15-11, page 25):

Clearly, to truly generate revenue to reduce both the corporate and individual rates, individual tax expenditures will need to be reduced.  There are additional good reasons to reduce or eliminate many of them, such as equity/fairness, neutrality, economic efficiency and simplicity.

What politicians need to be asking is - why do 70% of individuals want to subsidize home ownership for 30% of individuals who deduct mortgage interest?  Why do we spend roughly $90 billion per year to help middle and upper income individuals buy a more expensive home than they would otherwise purchase? Why do we subsidize borrowing to help someone purchase a vacation home?

But, how willing are politicians to do this when the questions are most likely to be misunderstood because the public has not been exposed to the data on the cost of tax expenditures and how inefficient and inequitable they are.

Yet, some of that may be starting. H.R. 6169 that passed in the House on August 2 refers to much of  the above as spending and subsidies.

What do you think?

Romney, second homes and challenges of needed tax reform

Mr. Romney was right to suggest a deduction that should end is the one for interest on debt on a second home. There is no reason for the tax law to subsidize ownership of a second home. While Romney only suggested it for high income individuals, he got some flack for it and backed down. This is a good indication that tax reform won't happen because individuals want to keep special rules even if they make the tax law more complex, inequitable and need high tax rates to support them. See, for example this article from the newsobserver.com.

A few more observations:

1. Romney doesn't have mortgage debt - check his Schedule A. This is not surprising. With his wealth and low interest rates, why have a mortgage?

2. The mortgage interest deduction on a second home doesn't affect many people. First, only 1/3 of individuals even itemize deductions and not all of them even have a debt on their personal residence and most don't own a second home.  Also, many high income like Romney, likely don't have debt on their second home.

3. There is no reason for the tax law to incentivize ownership of a second home so this deduction should have disappeared back in the Tax Reform Act of 1986.

4. How will tax reform happen if candidates aren't bold enough to take the time to educate the public on the reasons why this (any many other tax breaks) should go away?  The "cost" of the second home mortgage deduction could be used more equitably to benefit more taxpayers.

5. The mortgage interest deduction should be fixed as suggested by President Bush's Tax Advisory Panel - remove the deduction for home equity loans and second home mortgages and reduce the limit for acquisition debt on a principal residence to be closer to the regional median home price and convert the deduction to a credit.  See pages 61 and 70.

6. While Romney doesn't have debt on his homes, he paid and reported $226,000 of property tax on his 2010 Schedule A.  I would not be surprised if the aggregate amount of property tax paid on second homes exceeds the mortgage interest (because Schedule A of 1040 doesn't require mortgage interest or property taxes to be reported separately for principal residences and other residences, I don't think the data is readily available).  Why doesn't he also suggest that only property taxes on a principal residence be deductible?  After all, there is no need for others to subsidize property taxes paid on homes beyond the first one (and even for the first home, there should be a cap). Note that many individuals lose their property tax deduction due to AMT.

What do you think?

Pushing for specifics on tax reform proposals

There are quite a few vague tax reform proposals being touted by presidential candidates today. We have 9-9-9, variations of a flat tax, a reformed income tax and a corporate down to at least 20%. What is missing are the specifics of the proposals. Without fairly complete legislative language, it is impossible to really understand what is being suggested.

I have an article in this week's AICPA Tax Insider that summarizes most of these proposals based on what candidates have said so far or posted to their website (which are all still fairly general). The short article includes some suggestions for what additional information is needed and how to critique the proposals. A reference list (link) is included with links to the various proposals.

Check it out - Pushing For Specifics on Tax Reform Proposals.

What do you think?