Federal Government Policy Issues
Discussion and information on selected policy issues concerning tax, foreign relations, energy and other significant policies. The intent is to provide data and analysis that will assist in determining the appropriateness of the policy. Any posts containing rants, personal attacks on officials or other posters or which do not concisely present a point of information will not be published.Saturday, June 10, 2006
Tax Issues - Miscellaneous Tax Issues
This topic covers miscellaneous proposals to reform tax policy such as the repeal of the Estate Tax.
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ESTATE TAX
It was clever of the Bush Administration to refer to the Estate Tax as the Death Tax. This creative marketing move probably led to an increase in the support for the repeal of the Estate Tax.
First of all, it is not really accurate to call the Estate Tax the Death Tax. The deceased person does not pay the tax. Rather, it is the living person who inherits the assets who pays the Estate Tax.
Currently, the first $2 Million ($4 million for a couple) of an estate is exempt from the tax. At this exemption level, it is estimated that there will be only 12,600 families that will pay any estate tax for 2006. This exemption is scheduled to increase to $3.5 million ($7 million per couple) in 2009. At this higher income level, only 7,200 families are expected to pay a federal estate tax.
The cost of the repeal of the Estate Tax would be about $1 trillion over 10 years. As this lost revenue would need to be recouped someplace, the single mom working as a waitress would have to pay more tax so that Paris Hilton would have more money to buy her dog a new diamond necklace.
Some people have made the argument that the deceased person has already paid taxes on their estate so it is unfair to tax their beneficiary upon the inheritance. Every dollar of income to someone comes from someone else who has already paid income tax on the money so I don't see how this argument applies. Who should Paris Hilton not have to pay tax on money she inherits but did not earn while the single mom working as a waitress has to pay tax on her earnings?
A fundamental principle of the American economic system is merit. If you work hard, get appropriate training and education then you should do well. The repeal of the Estate Tax does not promote the principles of opportunity and merit.
It was clever of the Bush Administration to refer to the Estate Tax as the Death Tax. This creative marketing move probably led to an increase in the support for the repeal of the Estate Tax.
First of all, it is not really accurate to call the Estate Tax the Death Tax. The deceased person does not pay the tax. Rather, it is the living person who inherits the assets who pays the Estate Tax.
Currently, the first $2 Million ($4 million for a couple) of an estate is exempt from the tax. At this exemption level, it is estimated that there will be only 12,600 families that will pay any estate tax for 2006. This exemption is scheduled to increase to $3.5 million ($7 million per couple) in 2009. At this higher income level, only 7,200 families are expected to pay a federal estate tax.
The cost of the repeal of the Estate Tax would be about $1 trillion over 10 years. As this lost revenue would need to be recouped someplace, the single mom working as a waitress would have to pay more tax so that Paris Hilton would have more money to buy her dog a new diamond necklace.
Some people have made the argument that the deceased person has already paid taxes on their estate so it is unfair to tax their beneficiary upon the inheritance. Every dollar of income to someone comes from someone else who has already paid income tax on the money so I don't see how this argument applies. Who should Paris Hilton not have to pay tax on money she inherits but did not earn while the single mom working as a waitress has to pay tax on her earnings?
A fundamental principle of the American economic system is merit. If you work hard, get appropriate training and education then you should do well. The repeal of the Estate Tax does not promote the principles of opportunity and merit.
Warren Buffet and Bill Gates also oppose the repeal of the estate tax because they realize that the tax revenue would need to be recovered someplace else. Less than one percent of estates ever end up paying any estate tax so this only affects a small affluent segment of the population.
The arguement that the deceased has already paid taxes on their estate is not entirely true as well. Many wealthy persons have estates that include real estate, investments and stocks with low tax basis that actually avoid capital gains taxes as they get stepped up to market value when the investor dies. An estate tax (not a capital gains tax) is only due if the value of the estate is above the exemption level.
The arguement that the deceased has already paid taxes on their estate is not entirely true as well. Many wealthy persons have estates that include real estate, investments and stocks with low tax basis that actually avoid capital gains taxes as they get stepped up to market value when the investor dies. An estate tax (not a capital gains tax) is only due if the value of the estate is above the exemption level.
2001 & 2003 Tax Rate Benefits
The 2004 tax return statistics have now been published by the IRS. 2004 is the most recent full year of federal tax data that incorporates all of the tax changes made in the 2001 and 2003 tax legislation.
The method for calculating the savings of the reduced tax rates below is as follows:
1) Determine the mid-point tax rate for each AGI income bracket published in the IRS stats.
2) Subtract the new tax rate (5% or 15% depending on income) from the marginal tax rate determined in step one above.
3) Multiply the reduced tax rate percentage by the qualified dividends or long term capital gains total income for the bracket to determine the dollar amount saved by the filers in the individual bracket.
For instance, if for a given bracket the marginal tax rate was 33% then the tax rate reduction would be 18% (33% - 15%).
As a result of the 2001 and 2003 tax legislation, qualified dividends and long term capital gains (LTCG) are taxed at a 5% rate through Adjusted Gross Incomes (AGI) of $79K and 15% for higher income levels.
Qualified Dividends
Total reported qualified dividends in 2004 were $104.8b. 73.2% of total qualified dividends were reported on returns with AGI's of $100K or more.
For purposes of determining savings, qualified dividends on returns with AGI's of $75K or more are considered to be taxed at a 15% rate because stats published by the IRS are in AGI income groups that do not break at $79.5K.
12.9% of the savings were to returns with less than $100K of AGI, 44.7% of the savings was for filers with AGI of 1 million or more.
Long Term Capital Gains
A total of $466.9 billion in (LTCG) was reported on a total of 8.67 million returns. 48.5% of the total reported LTCG was reported on returns with an AGI of $1 million or more, 78.57% on returns with and AGI of $100K or more.
79% of the LTCG tax savings were made by filers with an AGI of $200K or more, 61.3% on returns with and AGI of $1 million or more and 31.8% by the 8,052 returns with an AGI of $10 million or more.
See http://www.irs.gov/pub/irs-soi/04in14ar.xls for the raw data.
The 2004 tax return statistics have now been published by the IRS. 2004 is the most recent full year of federal tax data that incorporates all of the tax changes made in the 2001 and 2003 tax legislation.
The method for calculating the savings of the reduced tax rates below is as follows:
1) Determine the mid-point tax rate for each AGI income bracket published in the IRS stats.
2) Subtract the new tax rate (5% or 15% depending on income) from the marginal tax rate determined in step one above.
3) Multiply the reduced tax rate percentage by the qualified dividends or long term capital gains total income for the bracket to determine the dollar amount saved by the filers in the individual bracket.
For instance, if for a given bracket the marginal tax rate was 33% then the tax rate reduction would be 18% (33% - 15%).
As a result of the 2001 and 2003 tax legislation, qualified dividends and long term capital gains (LTCG) are taxed at a 5% rate through Adjusted Gross Incomes (AGI) of $79K and 15% for higher income levels.
Qualified Dividends
Total reported qualified dividends in 2004 were $104.8b. 73.2% of total qualified dividends were reported on returns with AGI's of $100K or more.
For purposes of determining savings, qualified dividends on returns with AGI's of $75K or more are considered to be taxed at a 15% rate because stats published by the IRS are in AGI income groups that do not break at $79.5K.
12.9% of the savings were to returns with less than $100K of AGI, 44.7% of the savings was for filers with AGI of 1 million or more.
Long Term Capital Gains
A total of $466.9 billion in (LTCG) was reported on a total of 8.67 million returns. 48.5% of the total reported LTCG was reported on returns with an AGI of $1 million or more, 78.57% on returns with and AGI of $100K or more.
79% of the LTCG tax savings were made by filers with an AGI of $200K or more, 61.3% on returns with and AGI of $1 million or more and 31.8% by the 8,052 returns with an AGI of $10 million or more.
See http://www.irs.gov/pub/irs-soi/04in14ar.xls for the raw data.
2001 & 2003 Tax Rate Changes for 2005
Following is the distribution of the savings accruing to tax filers for the rate reductions for Long Term Capital Gains (LTCG) and qualified dividends passed in the 2001 and 2003 Tax Acts. This analysis is based on IRS data for all returns filed for the 2005 tax year. Performing the analysis required that certain assumptions and generalizations be made which cause this analysis to approximate the distribution of savings. For instance, the actual tax rate used to calculate the savings from the reduced tax rates assumes that all tax returns are filed as Married Filing Jointly because the IRS data does not provide the detailed income data by tax filing status. Using the married Filing Jointly status would tend to understate the savings resulting from the rate reductions. All long term capital gains and qualified dividends above other taxable income up to $63,700 are taxed at a 5% rate and then at a rate of 15% beyond $63,700. The income brackets below are Adjusted Gross Income (AGI) brackets which include all income including capital gains minus certain deductions such as IRA contributions, education and moving expenses, etc. The tax rates used to calculate savings are based on net taxable income which, generally, is adjusted gross income minus the standard or itemized deduction and the personal exemptions.
QUALIFIED DIVIDENDS
The reduced rates for qualified dividends reduced tax receipts in 2005 by $19.3 billion. 35% of the total qualified dividends were reported on returns with an AGI of $1 million or more, 60% with an AGI of $200K or more and 75% with an AGI of $100K or more. 33.7% of the tax savings accrued to returns with an AGI of $2 million or more, 58.1% to returns with an AGI of $500K or more and 89.1% to returns with an AGI of $100K ore more. The benefit of the reduced rates is greater to the higher income brackets because the reduction in rates is greater. For instance, the tax rate on a return with taxable income of $1 million is 32.2% so the rate reduction to 15% is 17.2%. The tax rate on a return with a taxable income of $50K is 13.4% so the rate reduction to 5% is 8.4%.
LONG TERM CAPITAL GAINS
The data on Long Term Capital Gains (LTCG) will be presented in 2 ways. The data immediately below does not adjust for things like long term capital gain loss carryovers and does not include S Corporations and partnerships. Call it the base LTCG.
The reduced rates for LTCG base reduced tax receipts in 2005 by $98.47 billion. 47.5% of the base LTCG was reported on returns with an AGI of $2 million or more, 67.1% on returns with an AGI of $500K or more and 81.3% on returns with an AGI of $200K or more. 62.8% of the savings accrued to returns with an AGI of $2 million or more, 84.5% to returns with an AGI of $500K or more and 93.5% to returns with an AGI of $200K or more. The benefit of the reduced rates is greater to the higher income brackets because the reduction in rates is greater.
The following LTCG attempts to calculate the total ‘net’ LTCG and includes other categories of LTCG and is calculated as follows:
LTCG – Long Term Capital Loss + Net LTCG on the sale of a capital assets – Net Long Term Capital Loss on the sale of a capital asset – Long Term Capital Loss Carryover + LTCG from other forms (2119, 4797, etc.) – Long Term Capital Loss from other forms + LTCG from S Corporations and partnerships – Long Term Capital Loss from S Corporations and partnerships.
Before presenting the results of the analysis, I should say that I found the results to be surprising. The net LTCG method of analysis completely eliminated the savings resulting from the reduced tax rates, on average, to all tax filers with an adjusted gross income below $100K. These filers had disproportionate amounts of long term capital loss carryovers and long term capital losses in 2005. Remember that all long term capital losses from the tax year and up to $3K of carryover long term losses are subtracted from your LTCG for the current year. If your net LTCG is 0 then you would not have any taxable LTCG and your benefit from the reduced rates would be 0. Keep in mind that the analysis is presented for income groups. Although a number of individuals in these income groups with an AGI of less than $100K will realize some benefit from the reduced rates, most of the benefits were eliminated due to the offsetting losses.
Using the net LTCG analysis, 55% of the benefits accrued to returns with an AGI of $5 million or more, 82.8% to returns with an AGI of $1 million or more and 99.4% to returns with an AGI of $200K or more. I believe that this net LTCG analysis understates the benefit of the LTCG rate reduction to returns with an AGI below $100K but not by much.
Following is the distribution of the savings accruing to tax filers for the rate reductions for Long Term Capital Gains (LTCG) and qualified dividends passed in the 2001 and 2003 Tax Acts. This analysis is based on IRS data for all returns filed for the 2005 tax year. Performing the analysis required that certain assumptions and generalizations be made which cause this analysis to approximate the distribution of savings. For instance, the actual tax rate used to calculate the savings from the reduced tax rates assumes that all tax returns are filed as Married Filing Jointly because the IRS data does not provide the detailed income data by tax filing status. Using the married Filing Jointly status would tend to understate the savings resulting from the rate reductions. All long term capital gains and qualified dividends above other taxable income up to $63,700 are taxed at a 5% rate and then at a rate of 15% beyond $63,700. The income brackets below are Adjusted Gross Income (AGI) brackets which include all income including capital gains minus certain deductions such as IRA contributions, education and moving expenses, etc. The tax rates used to calculate savings are based on net taxable income which, generally, is adjusted gross income minus the standard or itemized deduction and the personal exemptions.
QUALIFIED DIVIDENDS
The reduced rates for qualified dividends reduced tax receipts in 2005 by $19.3 billion. 35% of the total qualified dividends were reported on returns with an AGI of $1 million or more, 60% with an AGI of $200K or more and 75% with an AGI of $100K or more. 33.7% of the tax savings accrued to returns with an AGI of $2 million or more, 58.1% to returns with an AGI of $500K or more and 89.1% to returns with an AGI of $100K ore more. The benefit of the reduced rates is greater to the higher income brackets because the reduction in rates is greater. For instance, the tax rate on a return with taxable income of $1 million is 32.2% so the rate reduction to 15% is 17.2%. The tax rate on a return with a taxable income of $50K is 13.4% so the rate reduction to 5% is 8.4%.
LONG TERM CAPITAL GAINS
The data on Long Term Capital Gains (LTCG) will be presented in 2 ways. The data immediately below does not adjust for things like long term capital gain loss carryovers and does not include S Corporations and partnerships. Call it the base LTCG.
The reduced rates for LTCG base reduced tax receipts in 2005 by $98.47 billion. 47.5% of the base LTCG was reported on returns with an AGI of $2 million or more, 67.1% on returns with an AGI of $500K or more and 81.3% on returns with an AGI of $200K or more. 62.8% of the savings accrued to returns with an AGI of $2 million or more, 84.5% to returns with an AGI of $500K or more and 93.5% to returns with an AGI of $200K or more. The benefit of the reduced rates is greater to the higher income brackets because the reduction in rates is greater.
The following LTCG attempts to calculate the total ‘net’ LTCG and includes other categories of LTCG and is calculated as follows:
LTCG – Long Term Capital Loss + Net LTCG on the sale of a capital assets – Net Long Term Capital Loss on the sale of a capital asset – Long Term Capital Loss Carryover + LTCG from other forms (2119, 4797, etc.) – Long Term Capital Loss from other forms + LTCG from S Corporations and partnerships – Long Term Capital Loss from S Corporations and partnerships.
Before presenting the results of the analysis, I should say that I found the results to be surprising. The net LTCG method of analysis completely eliminated the savings resulting from the reduced tax rates, on average, to all tax filers with an adjusted gross income below $100K. These filers had disproportionate amounts of long term capital loss carryovers and long term capital losses in 2005. Remember that all long term capital losses from the tax year and up to $3K of carryover long term losses are subtracted from your LTCG for the current year. If your net LTCG is 0 then you would not have any taxable LTCG and your benefit from the reduced rates would be 0. Keep in mind that the analysis is presented for income groups. Although a number of individuals in these income groups with an AGI of less than $100K will realize some benefit from the reduced rates, most of the benefits were eliminated due to the offsetting losses.
Using the net LTCG analysis, 55% of the benefits accrued to returns with an AGI of $5 million or more, 82.8% to returns with an AGI of $1 million or more and 99.4% to returns with an AGI of $200K or more. I believe that this net LTCG analysis understates the benefit of the LTCG rate reduction to returns with an AGI below $100K but not by much.
For an analysis of the impact of the 2001 and 2003 Tax Act changes on 2007 tax receipts as reported by the IRS, see http://jmsviews.blogspot.com/2009/09/impact-of-2001-2003-tax-reform.html
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