Talking Shop Blog

Yesterday we covered some reasons for extending all of the current Bush tax rates, including the rates for those with “household” incomes over $250,000 ( http://blogs.duganlopatka.com/general/2010/11/11/crs-report-on-bush-tax-cuts/ ).

The CRS Report also offers some reasons for not extending the top rates. Here’s our take on a couple of them:

Revenue loss – Not extending the Bush tax rates would raise an estimated $680 billion in additional revenue over the next decade.

Comment: Let’s focus on cutting federal spending first. And as we’ve said many times, now’s not the time to raise taxes in this weak economy.

Ability-to-Pay – The report notes that “taxpayers in the top rate brackets received the largest tax reductions from the Bush tax cuts. Consequently, they are seen as the group that can best afford to give back some of the tax cut”.

Comment: Tax rates were too high before the Bush cuts and that’s why the rates were lowered. Higher income earners did receive the largest tax reductions – but that’s because they paid a disproportionate share of federal tax revenues to start with (and still do).

There is some merit to the ability to pay argument at some level. Certainly people like Bill Gates and Warren Buffet can probably “afford” to pay higher taxes.

But what about the business owner with, let’s say $500,000 in business profits?  “Profits” don’t equate to cash in pocket. Those profits may be tied up in accounts receivable, inventory, working capital needs and debt repayments. 

The bottom line is $500,000 in profits doesn’t mean you have $200,000 in cash to pay in taxes.

Congress starts the lame duck session on Monday. Let the debates begin.

The Congressional Research Service (CRS) is the public policy research arm of Congress.

Last week the CRS issued a report titled “Raising the Tax Rates on High-Income Taxpayers: Pros and Cons”.

The report, which will be cited by both sides during the Congressional debate on extending the Bush tax cuts, notes the following:

“Congress faces decisions:

• whether to permit some or all of the Bush tax cuts to expire as scheduled on December 31, 2010;

• whether to extend some or all of the tax cuts and, if they are extended, whether temporarily or permanently; and

 • whether to modify some of the tax provisions before extending them—by adopting some or all of the Obama Administration’s upper-income tax proposals, for example.”

The report offers a number of reasons for extending all of the current rates including 1) its bad timing in a weak economy; 2) we should cut spending instead of raising taxes and 3) the negative “incentive” for small business.

We agree with all of the above.

Tomorrow – the CRS Report reasons for not extending the top rates.

The election is over but Illinois Governor Pat Quinn is back on the campaign trail. He’s making the rounds lobbying for his proposed tax increase.

Quinn still calls it “a 1 percent tax surcharge for education”. We call it a tax hike.

Webster has several definitions of the word “surcharge”, including these:

Noun:  “An additional tax or cost” ; “an excessive load or burden”.

Verb: “Overcharge”.

And they offer some interesting synonyms, like “gouge”, “soak” and “sting”.

As we’ve noted before, Quinn’s proposal would increase the tax rate from 3% to 4% on the individual side,  a 33% increase.

That 33% increase would also apply to most small and mid-sized businesses, since these companies are generally organized as proprietorships, partnerships, LLCs or “S Corporations”.

That means the business income is taxed on the owners’ personal returns at the individual tax rate.

Now’s not the time to impose an added cost on small and mid-sized businesses.

You can see how the proposed tax increase would affect you.

Here’s the link to our “Surcharge Calculator”, which we call a Tax Calculator:

http://www.duganlopatka.com/resources/governor-quinn-tax-proposal-calculator

Last week the IRS released some inflation adjusted items for 2011.

These include the “kiddie tax” exemption, the adoption credit and medical savings accounts (MSAs), to name a few.

The guidance does not address the “big ticket” items, including the 2011 tax rates and withholding tables, the personal exemption, dependent exemption, standard deduction, child credit and popular education credits, including the Hope Scholarship and Lifetime Learning Credits.

The IRS expects Congress to address these in the lame duck session.

We’ll know the make-up of the new Congress after the election results are tallied tomorrow night.

We won’t know what the 2011 tax rates are until Congress comes back to town the week of November 15.

Stay tuned.