With the extended deadline for income taxes coming in just two days, it was appropriate – for me, at least – that today’s question posed to the candidates in the 2nd Congressional District by The Virginian Pilot focused on how they would restructure the federal tax system.
(As an aside, locating the article online us a bit like the federal tax code: a maze through which you must navigate lots of places in order to find the answer you are looking for. I expected to find article linked on the special page PilotOnline has set up for news about the House races. Not there. I searched using the candidates’ names. No dice. Finally, I searched using the exact title of the article as it appeared in the newspaper. That was the only way I could locate it.)
As I’ve heard her say on a number of occasions, incumbent Republican Thelma Drake is an advocate for a flat tax system.
Congress should enact a flat tax with a rate around 20 percent of income. There are several plans, but most of them eliminate deductions and put an end to the double taxation of income that is saved and invested. Personal exemption and dependent deductions would be dramatically raised so that low-income Americans would pay little or no income taxes. Americans could complete their 10 -line tax form online or on a postcard and pay their taxes in minutes, not hours or days.
One thing about the flat tax: it sounds good on paper. The devil is in the details. I’m not going to waste what little bit of energy I have today to go into them; suffice it to say, I’m no fan. However, I do believe that the code should be simpler, although given that the very first income tax returns that were filed in 1913 were 4 pages long (including two pages of instructions), I seriously doubt we will get to a postcard-sized tax return.
Allow me, though, to address one thing in Drake’s op ed:
The federal corporate tax rate of 35 percent is the second highest in the industrialized world.
This makes it sound as if the all corporations pay 35% on their profits, which is just not true. The 35% rate only applies to profits in excess of $10 million. Like the personal income tax, the federal corporate income tax is a graduated rate. (Strangely enough, taxable income of $15 mil to $18.3 mil is taxed at 38% and the the rate drops back down to 35% for amounts over that.)
Challenger Glenn Nye also wants a simplified tax system.
For the long term, we should shape our tax code to reflect our American priorities, in particular, strengthening middle-class families and supporting small businesses. I would work for a bipartisan solution to repeal the Alternative Minimum Tax, which threatens millions more families every year. I would push for tax credits for middle class families so they can afford college for their children and the significant increases in the cost of living that they are facing.
AMT is in the code for a reason. What should have happened with AMT was that it be, like other parts of the tax code, indexed for inflation. Why Congress keeps taking an annual band-aid approach to this easily solvable problem is beyond me. It’s not as if they don’t have other things to do.
Although I’ve heard him say it before, I am disappointed with this Nye position:
In a crisis, we simply cannot afford to take more capital out of our economic system. For that reason, I would vote to extend the Bush tax cuts for all Americans and oppose an increase in the capital gains tax to spur the economic investment we need.
Part of the reason for the mess that we are in, particularly the size of our deficit, is related to the Bush tax cuts. And those cuts do little or nothing for small businesses and middle class families. Finally, there is no way that we keep the Bush tax cuts and provide tax credits for the middle class.
Tomorrow’s final question is on Iraq and American’s obligation to the the Iraqi people.
VIVIAN J. PAIGE | All Politics is Local 
I am sorry vivian that Nye isn’t conforming to your ideology with regards to this issue.
“The 35% rate only applies to profits in excess of $10 million.”
True, but a bit disingenuous, since any income above $75k is taxed at 34% or more.
That 34% is still higher than the UK’s top rate of 28% (21% on income below 300 GPB). Germany’s rate is 20%, plus a municipal tax up to 11%, which is NOT payable by German operations in the U.S. So a German automaker in the U.S. pays 20% income tax, while our own pay 34% or more. A Japanese automaker would pay 30% corporate income tax.
That assumes that they even pay the tax. Correct me if I am wrong, but doesn’t our tax code only tax repatriated profits? I suspect that other countries do the same. So we have a system of taxation that rewards companies for moving their operations to other countries.
So, who pays the corporate taxes, anyway? If we believe Adam Smith (The Wealth of Nations, Book V, Chapter II, Part II, Article II “Taxes on Profit, or upon the Revenue arising from Stock”), profits on corporate income ultimately fall on the consumers, in the form of higher prices.
So the net result is to make our companies less competitive, and encourage them to move off-shore.
Simple answer that many companies have undertaken: S Corp.
Please explain, Vivian. How does an S-corp change things?
S Corps, as a general rule, pay no taxes. All of the income is passed through to the shareholders for inclusion on their personal returns.
A really cool trick? S Corps with ESOPs. That pretty much keeps the profits from being taxed until the employee-owner withdraws their money.
You should start charging for this, V. 🙂
You’re right 😉
Oh wait. I already do 😆
I do understand the ESOP trick — I used to work for such a company. But with more than 100 employees (shareholders), it could not be an S-corp.
And that explains why I’m a CPA and you are not, Mouse. If you were, you’d know that your “knowledge” is outdated. There was a rule change a number of years ago.
Well, it WAS a number of years ago. The company is well over 1500 employees now, and they sold out, so they are no longer employee-owned.
OK, now I am confused. Cornell Law says that there can be no more than 100 shareholders in an S Corporation (families counting as one shareholder). Is that not correct?
No surprise that you are confused, Mouse. A little knowledge is a dangerous thing.
Funny, but not answering the question. Are S Corps. no longer limited to 100 shareholders?
As MB pointed out, I get paid for this, Mouse. Since you seem to think that you know more about my line of work than I do, do the research yourself. And I refer you back to the first sentence of the second paragraph of my post as a starting point.
vivian, just answer mouse’s question for godsake!