Our Taxing Times

Tax Cuts Extended

The House and Senate have approved a bill to extend the tax cuts. The Marriage Penalty, Child Tax Credit, and 10% tax brackets have been extended through 2010. The teacher's supplies deduction, and several AMT provisions have been extended through 2005. The relief will cost $146 billion over the next 10 years. The problem is that the bill had no provision to pay for the cuts.

AMT Changes Needed

The Alternative Minimum Tax was first devised to make sure that the high income taxpayers were paying tax. The AMT re-figures the tax without most tax deductions. The problem is that the levels for AMT have not changed since the law was enacted. However, income has increased to the level that more middle income taxpayers are finding themselves hit by this tax. This next tax year, 2004, 3.5% of returns will be subject to AMT. If nothing is done to the AMT, 25% of all tax returns will be subject to AMT by 2008. Tax reform has been a big topic in this campaign. AMT is the place to start if the candidates mean business.

National Sales Tax

Thanks to the TaxProf Blog for this link.
According to the The Institute on Taxation and Economic Policy, the proposed national sales tax will increase the taxes of 80% of all taxpayers. In their latest release, The Effect of Replacing Most Federal Taxes with a National Sales Tax: A State-by-State Analysis 9/1/04, ITEP shows that the lower and middle classes will be hit extra hard by a sales tax. On page 3 of their statement, ITEP points out:
# In virtually every state in the union, the bottom 80 percent of taxpayers would face
much higher taxes under a sales tax. Nationwide, these tax increases would
average about $3,200 a year.
# Put another way, on average the 80 percent of Americans in the middle- and lower income
ranges would pay 51 percent more in sales taxes than they now pay in the
federal taxes that the proposed national sales tax would replace.
# In contrast, the best-off one percent of all taxpayers nationwide would get average
tax reductions of about $225,000 each per year.
What really concerns me is that the sales tax rate will have to be 45 to 53% to break even. The bottom line is that a new $100 watch could cost me $151.30 to $160.30. What I would save on payroll taxes would be eaten by the sales tax and then some.

A good reason to E-file

According to a brochure I received at the IRS Forum, there were over 77.1 million return filed on paper last year (tax year 2003). Of those, 5.9% had errors which had to be corrected before a refund could be processed. In the same time period, there were 48.5 million returns e-filed and the error rate was .07%.
When you e-file, the computers involved check your math, verify all the SSNs and names, and rule out other major preparation errors. You know within a few hours if there are any problems and can correct the return. When the return is mailed in, you do not know for weeks if there is a problem. Usually, the first sign of trouble is when your refund does not show up when you expect it.
There are other good reasons to e-file but the best is catching any mistakes early.

What? A Budget Surplus?

In his acceptance speech last night, President Bush announced that we have a budget surplus and so we should cut taxes. Now, I would love to pay less in taxes, but I am very concerned about the surplus statement. According to the National Debt Awareness Center, the US National Debt is $7.3 TRILLION dollars. If we really do have a surplus, wouldn't it be better for the country to pay down the debt that to cut the taxes. The money saved on interest alone would be more than the savings on the reduced taxes.
The big question is where is that surplus? According to Budget Explorer, the 2004 budget deficit (not surplus) is over $500 billion dollars and projections for next year are showing at least $350 billion. How can we cut taxes when we are already spending more than we take in?