Capital Gains Elimination?

During last night’s acceptance speech from Barack Obama, I heard many generalities with few specifics. I may have heard a different speech than Keith Olbermann. Obama did give one specific proposal regarding taxes. He promised to eliminate capital gains taxes for the small businesses and the startups that will create the high-wage, high-tech jobs of tomorrow. This was an odd statement for a few reasons.

Corporations don’t have a preferential capital gains rate. Corporations are taxed on capital gains at regular tax rates to a maximum of 35%. So if he is eliminating the capital gains rate on small businesses, is he essentially reducing the tax rate to zero? What defines ‘small businesses’? The interesting thing is startups and small businesses rarely have capital gain transactions, regardless of the tax implications. Capital gains only arise from selling capital assets. Small businesses generally earn income from selling services or inventory. Both of those occurrences generate ordinary income and would not benefit at all from Obama’s buzzword banter.

Back in March, Obama said capital gains rates needed to be raised. He said he would not go higher than Bill Clinton’s 28% rate, but mentioned 20% and 25%. Does this mean that Obama believes individual savers should pay more in capital gains while businesses should pay nothing?

If reducing or eliminating capital gains for businesses would create jobs, wouldn’t reducing or eliminating capital gains for individuals create economic growth. It certainly did in the 90’s when the Republicans reduced the rates from 28% to 20% through the Taxpayer Relief Act of 1997. That directly led to 3 straight years of superb growth.

My cynical side says that the Democrats know the evidence is overwhelming that low capital gains rates lead to economic growth which actually leads to higher tax revenues. This, however, is an issue that they cannot go toe to toe with Republicans and win. So, they decide to use the ‘Cut Capital Gains’ terminology. That way when properly challenged on their proposal to raise capital gains taxes, they can reply ‘No. We’re going to cut capital gains taxes’, even though it is meaningless.

Now, I’m all for low capital gains. But I’m more in favor of politicians not using smoke and mirrors to hide tax increases like Obama advocated in March with a ‘tax cut’ that doesn’t exist because nobody will qualify for it.

The World's Oldest Profession Collides With the 2nd Oldest Profession

James Smith of North Carolina pled guilty yesterday to tax evasion. The government charged Smith with mischaracterizing his transactions with Soft Touch Promotions, a prostitution ring. He deducted the payments as business deductions and classified them as meals and entertainment and advertising.

Now, I can see where someone might classify this as entertainment. But in that scenario you would only be able to deduct half of the $700 per hour charge and you would need to document who accompanied you and the purpose. I really don't want to think about any meals Mr. Smith was eating.

But Advertising? Unless Mr. Smith has a Red Clay Industries tattoo in a place only visible when the clothes come off, that seems destined to be discovered under audit. Although, since the Charlotte Observer says he is in the construction industry, maybe he felt it necessary to show off his wood.

I'll Gladly Give You a Tax Credit Today for a Mortgage Tomorrow

I don't think Wimpy actually had anything to do with the lastest tax reform coming out of Washington. What is being packaged as a tax credit to spur activity in the housing market amounts to an interest free mortgage for up to $7,500 to be repaid over 15 years.

CNN has brief summary with comments from the usual suspects such as National Association of Realtors. I will comment on this in more depth very soon, but I certainly feel that what Congress is doing gets more and more bizarre everyday.

The Job

It may not be long before this is a common sight.

http://www.youtube.com/watch?v=3XGJq8wrw5I

Sin Tax

This Wall Street Journal Op-ed tells of the trouble the State of Maryland is having balancing the budget on the backs of smokers.

In 2007, Maryland's legislature raised the cigarette tax to $2 per pack. Now that cigarette sales have plummeted by 25% the state is in fiscal crisis again. Many people would conclude this is a good sign and that behavior modification is the ultimate purpose of 'sin taxes'. The problem is that instead of 25% fewer cigarettes being consummed, most likely these cigarettes are being brought across neighboring state lines where the price can save as much as $15 per carton.

The Maryland lawmakers have now made it a crime to bring more than two cartons of cigarettes into the state that weren't purchased in Maryland. This blatantly says that Maryland isn't so much concerned for the health and well-being of its citizens as it is in making money on people's destructive habits.

Maryland isn't the only jurisdiction to encounter this problem, but it illustrates the problem with these taxes. Are state and local governments trying to keep Americans from sinning or just trying to become a financial partner in such behavior?

All the Incorrect Tax Information That's Fit to Print

If your tax accountant ever worked for the New York Times change accountants as fast as you can! This correction (You'll probably want to bookmark this site. It's humor is priceless) indicates that people at the Times don't understand the difference between gross sales and net taxable income.

An article on Wednesday about a Government Accountability Office study reporting on the percentage of corporations that paid no federal income taxes from 1998 through 2005 gave an incorrect figure for the estimated tax liability of the 1.3 million companies covered by the study. It is not $875 billion. The correct amount cannot be calculated because it would be based on the companies paying the standard rate of 35 percent on their net income, a figure that is not available. (The incorrect figure of $875 billion was based on the companies paying the standard rate on their $2.5 trillion in gross sales.)

So, the paper publishes an article to rally the anti-corporate troops about industrial titans who make money hand over fist without paying any taxes. Then follows that with a correction essentially saying 'Never mind, we have no idea how to compute taxable income.' I'm sure there's no agenda here.

Your Honor, That Money I Paid to Have an IRS Agent Killed was a Deductible Business Expense and I Intend to Prove It!

Randy Nowack of Florida reasoned it would be cheaper to pay $10,000 for murder than $300,000 in taxes. If convicted, he could face 20 years imprisonment and a fine of $250,000. Apparently, that information wasn't factored into this menace's decision model.