Tax Law Blog | IRS Tax Attorneys

Tax changes are expected since the elect of President-elect Barack Obama and high-net-worth individuals are doing what they can to limit the damage to their bank accounts.

During his campaign, Obama said he would cut taxes for middle-class workers and that no one earning less than $250,000 would experience a tax increase. But he also said that “the wealthiest 2 percent” would pay more as the Bush-era tax cuts expire and rates return to their previous higher levels.
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The first annual IRS release of tax year 2006 individual income tax return statistics by selected descending cumulative percentiles classified by state is now available. This table shows statistics on income and tax by cumulative percentiles based on numbers of returns filed for each state and the District of Columbia. The information includes distributions of AGI and total income tax by descending cumulative percentiles of returns for the top 1%, 5%, 10%, 25%, and 50% of returns with positive amounts of AGI. The table was compiled from the master file of tax year 2006 income tax returns that were filed and processed by the IRS during calendar year 2007. Returns for prior years processed during calendar year 2007 were not included in this tabulation. Tax year 2006 is the only year that percentile data by state are available. Similar data for tax year 2007 are planned for release in the spring 2009.

The average U.S. AGI of taxpayers in the Top 1% is $392,645   Here are the states with the highest AGI of taxpayers in the Top 1%:

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A great Tax Firm are the Sheppard Law Offices who service to all 50 states.

George Bush will leave his successor with the highest national debt in US history, the White House announced today.

The American budget deficit is projected to reach $482bn next year, breaking the previous record high of $413bn set in 2004. White House officials blamed the sagging economy for the new deficit figure, which does not reflect about $80bn in Iraq war costs.

Barack Obama and senior Democrats in Congress pointed to a different culprit: the billion-dollar tax cuts that Bush pushed through in 2001 and John McCain has vowed to extend if elected president.

“These have been years of unprecedented fiscal irresponsibility,” Obama economic policy director Jason Furman said in a statement.

“Senator McCain is proposing to continue the same Bush economic policies that put our economy on this dangerous path and that will drive America even deeper into debt.”

The national debt fell to $162bn in 2007, bolstered by a rising stock market that triggered increased income tax receipts. The deficit figure rose to $389bn this year.

The last year of budget surpluses in America was 2001, when Bill Clinton left the White House. The rosy budget outlook at the time helped Bush win passage of $1.35bn in tax cuts during his first year in office.

The Bush administration points to the current economic slowdown, fuelled by the fall of the sub-prime housing market, as the factor driving the US debt higher. Tax rebates worth more than $150bn were given to many households earlier this year, adding to the deficit.

The war in Iraq has also had a major effect on the country’s rising debt. A report released this month by the non-partisan Congressional Research Service estimates the Iraq conflict has cost America $648bn - almost as much as the $686bn Vietnam war, in inflation-adjusted dollars.

Republicans in Congress were largely silent at the release of the damning debt figures. But Rahm Emanuel, the No 3 Democratic leader in the House of Representatives, took a caustic jab at Bush. “Mr President, we will be forever in your debt.”
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Abstract

Tax and fiscal policy will loom large in the next president’s domestic policy agenda. Nearly all of the tax cuts enacted since 2001 expire at the end of 2010 and the individual alternative minimum tax (AMT) threatens to ensnare tens of millions of Americans. While a permanent fix palatable to both political parties has proven elusive, both candidates have proposed major tax changes. This report describes how we performed our modeling and analysis, outlines the major tax proposals, and discusses the implications of their policies for the revenue raised, taxpayer economic activity, and the distribution of the tax burden.

Introduction

Tax and fiscal policy will loom large in the next president’s domestic policy agenda. Nearly all of the tax cuts enacted since 2001 expire at the end of 2010. The individual alternative minimum tax (AMT) threatens to ensnare tens of millions of Americans in a web of pointless complexity and higher taxes, but a permanent fix palatable to both political parties has proven elusive. In the past year, the federal budget deficit has ballooned, and, more worrisome, large projected increases in spending on Social Security, Medicare, and Medicaid will put unprecedented demands on federal government revenue sources in the coming decades.

Fundamental reform of our tax system is one way to resolve these problems, but, at least in part because reform creates both winners and losers, the leading presidential candidates have not addressed it seriously. Nonetheless, both candidates have proposed major changes to the nation’s tax laws. Senator McCain would permanently extend the 2001 and 2003 tax cuts, increase deductions for taxpayers supporting dependents, reduce the corporate income tax rate, and allow immediate deductions for investments in certain capital equipment. Senator Obama would permanently extend certain provisions of the 2001 and 2003 tax cuts primarily affecting taxpayers with incomes under $250,000 but repeal the cuts in the top two marginal income tax rates ahead of their scheduled expiration in 2010; increase the maximum rate on capital gains; raise the top tax rate on qualified dividends from its current level (but keep it below pre-2001 levels); and enact new and expanded targeted tax breaks for workers, retirees, homeowners, savers, students, and new farmers. Senator McCain proposes to extend permanently and increase the AMT “patch” that has prevented most individuals and families with incomes below $200,000 from being affected by the tax and lowered the tax for others, and in our interpretation of his proposal, Senator Obama would also extend the patch. Each candidate would also increase the estate tax exemption and reduce the estate tax rate compared with current law in 2011 and beyond, although Senator McCain would cut the tax much more than Senator Obama. Finally, each candidate promises to broaden the tax base and reduce corporate loopholes. McCain lists eight breaks for oil companies as targets but, other than that, is short on details for his pledge to eliminate “corporate welfare.” Obama identifies a variety of steps, including basis reporting for capital gains, taxing carried interest as ordinary income, and enacting sanctions on international tax havens that don’t cooperate with enforcement efforts, but he would also need additional as-yet-unspecified policies to achieve his revenue target for base broadening.

Although both candidates have at times stressed fiscal responsibility, their specific non-health tax proposals would reduce tax revenues by an estimated $4.2 trillion (McCain) and $2.8 trillion (Obama) over the next 10 years. Both candidates argue that their proposals should be scored against a “current policy” baseline instead of current law. Such a baseline assumes that the 2001 and 2003 tax cuts would be extended and the AMT patch made permanent. Against current policy, Senator Obama’s proposals would raise $800 billion and Senator McCain’s proposals lose $600 billion.

The two candidates’ tax plans would have sharply different distributional effects. Senator McCain’s tax cuts would primarily benefit those with very high incomes, almost all of whom would receive large tax cuts that would, on average, raise their after-tax incomes by more than twice the average for all households. Many fewer households at the bottom of the income distribution would get tax cuts and those tax cuts would be small as a share of after-tax income. In marked contrast, Senator Obama offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers. The largest tax cuts, as a share of income, would go to those at the bottom of the income distribution, while taxpayers with the highest income would see their taxes rise significantly.

The impact of the tax code on economic activity under each candidate’s policies would differ in several important ways. Under Senator McCain’s proposed policies, the top marginal rates (35 percent on individual income and 25 percent on corporate income) would be significantly lower than under Senator Obama’s plan (39.6 and 35 percent, respectively). McCain’s reduced individual and corporate rates could improve economic efficiency and increase domestic investment, but the larger future deficits would reduce and might completely negate any positive effect. In contrast, Senator Obama’s proposed new tax credits could encourage desirable behavior, particularly if the childless EITC and payroll tax rebate encourage additional labor supply among childless low-income individuals. However, he would also direct new subsidies at an already favored group—seniors —and an already favored activity—homeownership—which could probably be better directed elsewhere.

(End of excerpt. The entire report is available in PDF format.)