Tax Break

Where you gonna get the money?

The Tax Policy Center at the Brookings Institution has completed an analysis of presidential hopeful Mitt Romney’s tax platform, which basically lowers taxes for everyone, and it has one question: How is he going to make up for the revenue? “Without offsetting revenue increases or new spending cuts, Romney’s plan would significantly increase the budget deficit,” Howard Gleckman wrote on the Tax Policy Center’s blog.

Last week Romney went a step further in his proposed tax plan by slashing the income tax rates by 20 percent and doing away with the alternative minimum tax, which sets a floor on how small a tax rate an individual can have.

Republicans and Democrats in fact are shifting the debate from income tax reform to also include corporate tax rates. Both parties have introduced plans that will bring corporate taxes down below 30 percent from the current 35 percent rate. One big question involved in this debate, argues Christopher Papagianis for Reuters Opinion, is how each side will deal with how to tax consumption, and how the economy might or might not react differently to taxes on companies’ buying activity. A plan like the one already proposed by Rep. Paul Ryan “would have businesses determine their tax liability by subtracting total purchases from total sales. The BCT is then applied to the net receipts figure, which is also a way of expressing the added value contributed by the company.”

Tax Break highlighted a little surprise back in February that Citibank customers got when they began receiving 1099 tax forms in the mail from the bank. The taxable items, they found out, were the bonus frequent flier points that the bank was handing out as part of a “ThankYou Rewards” program. There seems to be a caveat behind every “thank you” a bank gives you, apparently. Now Citi customers have filed a class action lawsuit against the bank, while the IRS continues to ignore the entire situation. Forbes’ Kelly Phllips Erb looks on in confusion.

“Citibank is making it an issue. And I can’t for the life of me figure out why. It’s such a dogged pursuit of a tax matter that I’m willing to bet would not have been raised by the IRS otherwise.”

Some events in the week ahead:

Tuesday, March 6 – Thursday March 8
Government Accounting Standards Board meeting in Norwalk, Connecticut.

Tuesday, March 6
Senate Finance Committee Chairman Max Baucus to host a hearing on tax reform and incentives currently in the tax code for capital investment and manufacturing and their contributions to job creation and economic growth. 10:00 a.m. in Room 215 of the Dirksen Senate Office Building. Speakers include:

• Dr. Jane G. Gravelle, Senior Specialist in Economic Policy, Congressional Research Service
• Dr. Ike Brannon, Director of Economic Policy & Congressional Relations, American Action Forum
• Dr. Robert D. Atkinson, President, Information Technology and Innovation Foundation
• Dr. J.D. Foster, Norman B. Ture Senior Fellow in the Economics of Fiscal Policy, The Heritage Foundation
• Dr. Michelle Hanlon, Associate Professor of Accounting, Sloan School of Management, MIT

Tax wrinkles of owning a second home, a video breakdown with Reuters’ Personal Fiance editor Lauren Young.

* Investors gird for higher dividend taxes. Arden Dale – The Wall Street Journal. Financial advisers and their clients are starting to plan for, if not yet act on, a possible jump in taxes on dividends. Dividend-producing stocks have had a special attraction among investors in recent years, in part because of the lower-than-usual tax rates dividends have enjoyed for much of the past decade. Those low rates gained even more luster as the stock market tanked — driving up the dividend yields — while interest rates on savings accounts have been so low. A 2 percent dividend yield also looks more interesting to investors than it did before U.S. bond yields declined last year and remain near historical lows. Increases in taxes on dividends, capital gains and ordinary income all are currently planned, but dividends may be seeing one of the biggest changes. Link  

 * Credibility of Romney’s big tax cut questioned. James Politi and Richard McGregor – The Financial Times. Mitt Romney’s latest tax-cut proposals would result in $3.4 trillion in foregone revenue for the federal government, with revenues stuck at the very low level of 16 percent of gross domestic product for the next decade, according to a study by an independent think-tank. The calculations by the Tax Policy Center will raise questions about the fiscal rectitude of Romney’s economic plan at a time when the former Massachusetts governor is vowing to slash US budget deficits. Link  

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Swiss lawmakers set for tax plan vote. Katherina Bart – Reuters. Swiss lawmakers are set to back a tax proposal with the United States on Wednesday in a move which could pave the way for Switzerland to settle a U.S. probe into Swiss banks and hidden offshore accounts. The lower house will vote on a proposal clarifying how Switzerland would hand over data on Americans suspected of dodging taxes at home. The proposal, which passed the upper house in December, seeks to backstop an expected deal over U.S. probes into 11 banks including Credit Suisse and Julius Baer. Link

* French front-runner pledges 75 percent tax bracket. Gabriele Parussini – The Wall Street Journal. French presidential front-runner François Hollande said taxpayers earning over 1 million euros ($1.34 million)a year would be subjected to a special 75 percent tax bracket should he be elected, underscoring heightened interest across Europe in raising taxes on the wealthiest individuals. Speaking on French television late Monday, the Socialist candidate lamented the “considerable increase” in French corporate executives’ pay, which he put at €2 million a year on average. His proposal caused an uproar in the ruling UMP party, and surprised even Hollande’s own advisers. President Nicolas Sarkozy pointed to the “appalling amateurism” of his opponent’s proposals. Link

* Barclays’ tax plans clash with sentiment. Megan Murphy, Sharlene Goff and Vanessa Houlder – The Financial Times. Has Barclays’ attempt to avoid more than 500 million pounds ($791.93 million) in UK tax dealt a lasting blow to the bank’s nascent efforts to put better citizenship at the heart of a new feel-good corporate agenda? The British Revenue & Customs’ announcement that it has closed down two “highly abusive” schemes designed by the bank has thrust Barclays’ tax practices back into the spotlight, at a time when the bank is trying to rebuild its reputation with politicians and the public. Barclays’ insiders say they are genuinely shocked by the government’s announcement, emphasising that both schemes had been signed off by the bank’s professional advisers and were voluntarily disclosed. Link

Democrats are hoping to peg their White House-proposed thirty percent tax on millionaires to major end-of-the- year fiscal deadlines — including the expiration of tax cuts for all Americans. They hope that will box Republicans into a corner.

Known as the Buffett rule, named for the billionaire investor who famously complained that his tax rate is lower than that of his secretary, the proposal has virtually no chance of moving on its own with Republicans in control of the U.S. House of Representatives and Democrats with only a razor-thin majority in the Senate.

Democrats hope that the looming expiration of tax cuts for all individuals enacted by former Republican president George W. Bush will motivate them. Plus polls show many Americans back raising taxes on the rich.

Welcome to the top tax and accounting headlines from Reuters and other sources.

* California likes Facebook IPO tax possibilities. Vauhini Vara – The Wall Street Journal. California could reap a tax windfall of as much as $2.5 billion from Facebook Inc.’s initial public offering, a state analyst said Monday, in the first official forecast of the IPO’s impact on the cash-strapped state. The offering is forecast to bring in $500 million of income-tax revenue through stock sales in fiscal 2012, ending in June, followed by $1.5 billion in 2013 and $450 million from 2014 to 2016, according to a report from the Legislative Analyst’s Office, a nonpartisan government entity that advises the legislature. Facebook has planned for an IPO this spring. Link 

* Barclays at center of UK tax avoidance clampdown. Steve Slater – Reuters. Barclays Plc said it was the bank at the centre of a clampdown by Britain on two tax avoidance schemes that the government said would close loopholes and raise more than 500 million pounds ($792 million) in tax. Barclays said it notified Britain’s tax office about its plan to buy back its own bonds, on which it and other banks have made hefty profits in recent years. Tax avoidance is legal, but the Treasury said on Monday the scheme and another one were “highly abusive.” Link  

* “Big Four” auditors brace for big changes in China. Rachel Armstrong – Reuters. The Big Four global audit firms, which dominate the Chinese market, are negotiating with Beijing to lessen the impact of forced changes that could mean only accountants with Chinese qualifications can be partners in their audit practices. The overhaul comes at a delicate time for an audit industry reeling from a rash of accounting scandals at Chinese companies. Any reduction in the audit capacity of KPMG, Deloitte, Ernst & Young and PricewaterhouseCoopers (PWC) would increase foreign regulators’ and investors’ concerns about Chinese auditing. Link

U.S. Republican presidential candidate Rick Santorum addresses supporters during a campaign stop in Michigan. REUTERS/Rebecca Cook

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Tangled tax code primed for pruning. John McKinnon – The Wall Street Journal. President Barack Obama’s business-tax-overhaul plan underscores the growing likelihood of a serious effort to revamp the nation’s much-criticized tax system, no matter who wins the White House. The question now isn’t whether a tax rewrite will happen, but how far it will go, and whether it will stop at business rules or also extend to individuals. Increasingly the answer appears to be that the entire tax code, all 70,000 pages, could be in play. Powerful dynamics are reducing the significance of partisan differences. One is the expiration of Bush tax breaks at the end of 2012. A broad tax overhaul could give each party a way to break the cycle of short-term tax extensions that is frustrating businesses and individuals. Another is the government’s grim fiscal situation. Many Democrats and even some Republicans see a streamlined tax system as a way to generate more revenue. Link

* Plans for US manufacturing may yield more votes than jobs. Andy Sullivan – Reuters. U.S. factories are hiring again, and Democratic President Barack Obama and some of his Republican rivals are pitching tax breaks to fuel a rebound in manufacturing and help rebuild a battered middle class. Economists on the left and the right say promises to bring back factory work may yield more votes than jobs. Industry experts say the United States is long past the days when steel mills, auto plants and machine shops boosted millions of unskilled Americans into the middle class. Economists say the middle class would benefit more from efforts to boost the economy as a whole, rather than a particular sector such as manufacturing. Link 

Window shopping in Tokyo's Ginza district REUTERS/Toru Hanai

Welcome to the top tax and accounting headlines from Reuters and other sources.

•    Romney narrows the gap on Santorum. Richard McGregor in Washington and Anna Fifield in Mesa, Arizona – Financial Times. Republican presidential hopeful Mitt Romney will outline his tax plans in a speech in Detroit on Friday that has been moved from a ballroom in the city convention center to Ford Field, home of Detroit’s football Lions, to accommodate an expected large crowd. It’s his first detailed outline of the economic and tax plan he would take into the November election and it comes four days before the Michigan and Arizona primaries. Link

•    Giving tax edge to manufacturing carries risks. Kathleen Madigan – The Wall Street Journal. The U.S. tax code is a mess. Favoring one sector over others will only make it messier. U.S. President Barack Obama and GOP candidate Rick Santorum recently released proposals that would give manufacturing enterprises a tax break. Santorum advocates factories pay no federal income tax at all. The goal is to make manufacturing a contributor of economic growth and a provider of middle-class paying jobs. The unintended consequences, however, are likely to be businesses gaming the system for a cheaper tax rate and a government policy that values some jobs over ones that are needed more. While certain employees, companies and regions will benefit, the U.S. economy as a whole is unlikely to be better off from the proposed tax changes. Link

•    AIG profit surges on tax benefit. Erik Holm and Serena Ng – The Wall Street Journal. American International Group Inc. reported profit of $19.8 billion in the fourth quarter, thanks to a large tax benefit the bailed-out insurer booked after predicting it can keep generating profits in coming years. AIG recognized $17.7 billion in tax benefits in the last three months of 2011. AIG’s tax boost came about from the reversal of write-downs it had taken to lower the value of its deferred-tax assets, which are unused tax credits and deductions that can be used to defray future tax bills. The insurer had taken those write-downs starting in 2008, when it suffered huge losses during the financial crisis. What changed, AIG said, is that it expects to report sustainable future profits that will enable it to use its deferred tax assets after all. Link

A couple may have split, but that’s no reason to send more than necessary to Uncle Sam, explains Reuters personal finance editor Lauren Young. In this video she walks through the question: who should take the kids as a tax deduction?