New Year’s day is almost here, and for millions of Americans, that means college football bowl games. Fans and alumni across the country are gearing up to root for their favorite school. LSU fans cry “Geaux Tigers!” ‘Bama fans chant “Roll, Tide, Roll!” But only one team will be champion come January 9.
Regardless of which gridiron gladiators we support for the BCS championship, Americans are #1 in another competition. That’s right, Americans cheat their government out of more tax dollars than the citizens of any other country in the world!
A recent study by the Tax Justice Network, a British think-tank dedicated to transparency in international finance, shows the U.S. government lost $337 billion annually to tax evasion. We’re followed by Brazil ($280 billion), Italy ($238 billion), Russia, Germany, France, Japan, China, U.K., and Spain. Overall, the study finds that worldwide tax evasion tops $3 trillion, or 5% of the world’s economy.
However, while Americans are #1 in absolute dollars lost to cheating, we’re not actually the biggest fibbers. The report attempts to quantify the size of each country’s “shadow economy” that hides from official view to avoid tax. Russia is the biggest loser here, with 44% of its Gross Domestic Product (GDP) lurking underground and evading tax. Brazil is next, with 39% of its economy hiding in the shadows. Our own shadow economy, at 8.6% of GDP, is actually the smallest of those top ten tax evaders listed above.
Looking at it from a different perspective, next to the cost of financing government, the cost of financing health care is perhaps our country’s biggest fiscal challenge. The Tax Justice Network’s report draws an interesting contrast between each country’s cost of tax cheating and cost of health care. Worldwide tax evasion costs an average of 55% of worldwide health care costs. But that average encompasses an enormous range. Here in the U.S., for example, tax evasion drains the equivalent of just 15% of our national health care budget. By contrast, in Bolivia, where the “shadow economy” accounts for 66% of GDP, tax evasion costs that nation more than four times the amount of their annual health care spending.
American tax cheats may even show a conscientious side. The Charities Aid Foundation, a British organization dedicated to encouraging efficient charitable giving, just released their World Giving Index 2011 report. They found that the U.S. is #1 in charitable giving, out of 153 countries surveyed. “Using data from Gallup’s Worldview World Poll,” the report says, “the results show that the USA is officially the most charitable nation in the world.” Now there’s something we can all take pride in this holiday season!
The irony here is that there are so many legal ways to pay less tax that nobody needs to cheat. Proactive planning is the key to paying less tax without having to hide in the shadows. As 2012 dawns, remember that we’re here to deliver that planning — for you, and for your family, friends, and colleagues as well.
Last year’s federal budget deficit topped $1.48 billion. With money so tight, you’d expect government to focus its efforts on those who really need the help. But that’s far from the case, according to Oklahoma Senator Tom Coburn. Last month, he released a 37-page report entitled Subsidies of the Rich and Famous, outlining “sheer Washington stupidity” that he claims costs taxpayers billions of dollars every year.
The first part of Coburn’s report focuses on direct payments like Social Security and Medicare benefits, unemployment benefits, and farm subsidies. (NBA star Scottie Pippen, rocker Bruce Springsteen, and billionaire broadcaster Ted Turner have all gotten federal farm subsidies.) But Coburn also heaps his scorn on specific tax breaks that he calls a “reverse Robin Hood style of wealth distribution.” He claims he’s not interested in raising rates on anyone. And he cautions against demonizing “those who are successful.” But he does want to means-test benefits, close loopholes, and limit deductions that pamper millionaires with “unnecessary welfare to create an appearance everyone is benefiting from federal programs.”
What sort of tax breaks have Senator Coburn so upset? Here are three:
“Subsidizing Millionaires’ Mansions”: For 2009, 143,441 out of the 235,413 taxpayers reporting incomes over $1 million claimed mortgage interest deductions, averaging $30,995 each.
Rental Expense Deduction: 69,074 of those million-dollar earners claimed a total of $12.5 billion in rental property expenses, including mortgage interest, cleaning and maintenance, and depreciation.
Gambling Losses Deduction: Finally, 8,225 of the top earners reported a total of $4.2 billion in gambling losses.
Coburn’s points seem reasonable at first glance. Does Oprah Winfrey really “need” a tax break for her $50 million California mansion? Should Vegas high-rollers count on us to bail them out when the dice come up snake eyes? On closer look, however, his objections may not hold up. The mortgage interest deduction, for example, is already limited to interest on $1 million of “acquisition indebtedness” on a primary residence and one additional residence, plus $100,000 of home equity indebtedness. Coburn would ditch the deductions for second homes and home equity interest, and drop the overall cap to $500,000 of indebtedness. But critics respond that over 11% of American homes are valued over $500,000, and limiting the deduction would cut home prices off at the knees at a time when they need all the support they can get.
Coburn’s objections to deducting rental real estate expenses and even gambling losses seem to make less sense. Paying tax on gross rents and gambling winnings? Rental real estate losses are already limited by “passive activity” rules. If millionaires can’t deduct their rental real estate expenses, they won’t invest in real estate at all. That would drag prices down in the same way as limiting mortgage interest deductions. And gambling losses are deductible only to the extent of gambling winnings. Is it fair to tax anyone, millionaire or not, on gross winnings without letting them net out losses?
As the economy continues to struggle, Washington gridlock intensifies — just look at the bickering over the payroll tax cut extension, which both parties say they want. And the 2012 presidential election draws near, we can expect to hear more rhetoric like Coburn’s. What do you think? Do tax breaks for millionaires offend your sense of fairness? Or should millionaires get to take advantage of the same rules as the rest of us?
When you were a kid in school, you probably forgot your homework once or twice. And you probably came up with some sort of excuse to weasel out of trouble, right? ‘Fess up now — did the dog ever really eat your homework?
Now that you’re all grown up, you’ve got a different set of assignments you have to turn in. Few of them are more important than your annual tax return. Of course, even grownups sometimes forget their homework. But the IRS won’t be buying that school kid whine!
Take supermodel Christie Brinkley, for example. Earlier this month, the IRS filed a lien for $531,720 in unpaid taxes against the “Uptown Girl’s” $30 million country estate in swanky Bridgehampton, NY. That unpaid balance, of course, is also subject to interest compounded daily and a 0.5% monthly late payment penalty. Brinkley’s publicist told E! Online that she “was surprised to hear today that a tax lien has been filed, and has instructed her team to resolve the matter immediately.” Brinkley herself stated that “I have been, and remain focused on my whole family as both my parents navigate serious health issues.”
At least Brinkley is facing the music willingly. Rapper Bow Wow — who must not think his “real” name (Shad Gregory Moss) gives him the street cred he wants — is putting up more of a fight. In November, the IRS filed a $91,105.61 lien against him for taxes dating back to 2006, when he was just 19 years old. But Bow Wow isn’t taking this one lying down, declaring “we all know not to believe anything the media writes or blogs.” And Bow Wow isn’t the only rapper to run afoul of the IRS. In August, Beanie Sigel pleaded guilty to failing to file tax returns for three years in a row. (Prosecutors believe he owes up to $700,000 more in unpaid taxes dating back to the 1990s, but the statute of limitations has run out.) And in July, Ja Rule earned 28 months of federal housing for failing to file returns for tax losses from 2004 through 2008.
Rappers aren’t the only musicians who don’t always pay their taxes. Back in April, the IRS hit former Black Sabbath frontman and reality star Ozzy Osbourne with liens totaling over $2 million for unpaid taxes from 2007, 2008, and 2009. Ozzy’s wife Sharon took to the “twitterverse” to admit her finances had gone off the rails. “You can’t rely on anyone but yourself,” she tweeted. “You have to be on top of your own business affairs. My fault…lesson learned.”
And musicians, in turn, aren’t the only celebrities who don’t pay taxes. Former Green Bay Packers left guard Frederick “Fuzzy” Thurston dominated the frozen tundra of Lambeau Field from 1959-1967, then opened a chain of restaurants called the Left Guard after retiring. He and his partners withheld taxes from their employees’ paychecks — just like they were supposed to — but they didn’t actually pay the bill. Way back in 1984, the court flagged him with a $190,806 penalty for “roughing the IRS.” With interest, that bill has grown to $1.7 million. Federal marshalls even seized his Super Bowl II ring commemorating Green Bay’s 33-14 victory over Oakland to help pay!
Of course, our job is to make sure you don’t need excuses for not paying your taxes. Proper planning is the key to making that bill affordable, and making sure you don’t ever have to tell the IRS that the dog ate your homework!
This week marks the 70th anniversary of the bombing of Pearl Harbor that propelled the United States “officially” into World War II. The consequences of that single event still reverberate today, in dozens of unseen ways — including how you pay the taxes that support the national security apparatus that works to prevent such an attack from ever happening again.
World War II has been called the single most significant event in world history. So it’s no surprise that financing the war led to some of the most significant taxes in history.
The Roosevelt administration had been gearing up to support the war effort long before the actual attack. When bombers struck on December 7, 1941, taxes were already high by historical standards. There were a dizzying 32 tax brackets, starting at 10% and topping out at 79% on incomes over $1 million, 80% on incomes over $2 million, and 81% on income over $5 million.
Just a few short months after the attack, in April, 1942, President Roosevelt proposed a 100% top rate! At a time of “grave national danger,” he argued, “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year” (roughly $300,000 in today’s dollars). Patriotic Americans were eager to pay more to support the war effort — starlet Ann Sheridan, known as Hollywood’s “Oomph girl,” even famously announced “I regret that I have only one salary to give for my country.”
Roosevelt never got his 100% rate. However, the Revenue Act of 1942 raised top rates to 88% on incomes over $200,000. (It also introduced the first deductions for medical expenses and personal investment expenses.) By 1944, the bottom rate had more than doubled to 23%, and the top rate reached reached an all-time high of 94%.
World War II also marked the introduction of payroll withholding, which is the “dirty little secret” that makes today’s tax system work. Traditionally, the government had collected taxes “in arrears,” when taxpayers actually filed their returns. But as the war accelerated, government couldn’t wait for the new, higher taxes. That created a problem, though — how could Americans afford to pay their 1942 taxes at the same time employers were withholding tax on 1943 income? To solve that problem, the Current Tax Payment Act of 1943 actually cancelled 75-100% of the lower of 1942 or 1943 individual tax liability.
Tax rates remained high for decades following the war. It wasn’t until President Reagan took office in 1981 that the top rate dropped below 70%. Today’s top rate of 35% is actually low by historical standards — and tax collections are at post-war lows as well.
Seventy years after that sunny Sunday morning at Pearl Harbor, the world is once again safe for democracy. Yes, we face real threats to our security, ranging from Iran’s pursuit of nuclear weapons to China’s growing economic might. But none threaten us so directly as did World War II’s Axis powers. Military spending, which reached 42% of Gross Domestic Product in 1942, has fallen to just 6% today — even accounting for wars in Iraq and Afghanistan.
The generation that fought the war is often called the “Greatest Generation.” What would those who made such awesome sacrifices back then think of today’s tax debates? Would they side with those who feel “taxed enough already” to support today’s peacetime needs? Or would they side with those who call for more sacrifice from the wealthiest Americans? What do you think?