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 did the research, and posted the link to Cornell Law, from which I got the information. Since you are a professional, you must not need to do any research, but have the source at hand. I do not understand your reluctance to answer a simple question and provide the source.
Because a) I get paid for knowing this stuff and b) the answer isn’t simple.
The problem with folks like you, Mouse, is that you read the first sentence and stop. It never dawns on you to look any further. That’s why the adage “a little knowledge is a dangerous thing” exists.
I’ve given you all you need in order to come up with the answer. You are stubbornly clinging to the the notion that you understand ESOPs and S Corps and how to research complex issues, all of which have proven to be false.
Try Googling ESOPs and S Corporations.
And by the way – this whole thing started because you wanted to try to show that you knew more about corporate taxes than I. The argument put forth about the tax rate is a bogus one, particularly when about 2/3s of American corporations pay no taxes.
Here is the relevant section of the U.S. Code from the House or Representatives website, and this is the latest update to it.
Aside from the S Corps that have an ESOP, which appear to be limited to 100 owner/employees, passing the profits through to the owners incurs some tax liability on the profits. That tax is, according to Adam Smith’s reasoning, ultimately paid by the consumer. Moreover, the cost of computing that tax is also paid by the consumer.
So what is the sense in a corporate income tax which puts our companies at a disadvantage in the U.S., encourages them to shift their operations to other countries and not repatriate the profits, and ultimately falls on the consumers.
Did you Google as I told you? Obviously not, since you are still making an assumption that is NOT true.
Because a) I get paid for knowing this stuff
Come On Vivian! don’t give me that crap. I believe with your knowledge you can give a simple answer to mouse’s question
“[About] 2/3s of American corporations pay no taxes.” -vjp
…in any given year.
“About two-thirds of corporations operating in the United States did not pay taxes annually from 1998 to 2005….” -WaPo
Sort of. If a company paid taxes in 7 of the 8 years, can they be said to have not paid taxes annually, because they missed one year?
So let’s look at the actual report. Looking at Figure 2, we see that, for the eight-year span of 1998 to 2005, only 2.7% of the “Large USCCs” had no tax liability in all eight years. In fact, 45.1% of Large USCCs (“American” companies) paid taxes in all eight years.
So what about the those that are not large? Unfortunately, there is not a similar figure showing what percentage of ALL corporations (I have sent an email to the GAO asking for that information, but I doubt they have done the analysis), but like the large corporations, it is unlikely that it is the same companies reporting no tax liability year after year.
The study also did not include the S Corporations we are discussing, other pass-through corporations, and insurance companies filing 1120-L or 1120-PC forms. In 2005, there were almost twice as many S Corporations as USCCs (3,682,000 vs 1,895,000 — Appendix II, Table 2).
Furthermore, the Large USSCs, while only about 0.7% of All USSCs, had 73% of the gross receipts in 2005, and 89% of the total tax liability (Appendix II, Table 4).
Assuming this burden falls on the consumer, and that the poor are more likely to buy from Large USSCs such as General Mills, General Motors, and General Electric, the corporate income tax system is actually regressive.
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Yes, Vivian, I did a Google search. That’s how I found the actual LAW on the House of Representatives website. If you have information that contradicts this, please direct us to it.
and this entire comment thread shows you why, despite opposition from accountants who profit from complexity, the tax system needs an overhaul.
Indeed, Brian. Wouldn’t it be great if the talents of people such as Vivian could be put to better use than negotiating the complexities of the tax code? Think about that hidden tax on our productivity!
Well, while Vivian is plunging into the murky depths of the tax code to find the answer to my question, let’s go back to the issue of the post — reforming the tax code.
Vivian does not agree with Nye, and I don’t agree with Drake. A flat tax is a fantasy. Congress wields that power gleefully. A flat tax wouldn’t make it past the first committee hearing before it was chock full of exemptions, deductions, and “special” tax rates to punish the successful. Also, it still leaves the IRS thugs probing into your life.
Here’s the answer, for all of you.
And Brian, that’s why I said in my post that the tax code should be simpler.
BTW – Drake also proposed moving the filing deadline from 4/15 to 10/15. While I’d like the first deadline to be moved, please don’t make it so far into the year. I’ve got enough folks who wait til the last minute as it is (including the ones whose returns I’ve been working on today).
Vivian, MB seems to be implying you got your knowledge of the tax code at TCC. Is this true?
Rather off-topic, but I will put in a plug for our community college system. First, the courses are transferable to any state college, including ODU, UVA, and VPI. They are even transferable back to one’s high school! (Many people wish to take foreign languages that are not available in their public schools, but which are available at the community colleges.
Second, many of the teachers are absolutely first-rate. When the Ada programming language was still fairly new, I took a course from someone who not only worked in the language daily, but also was on the committee that designed the language. The language instructors I have had have all been native speakers, and one had been a teacher of German in Germany before coming here.
Our community colleges have also run programs for our gifted-and-talented young children in public schools, giving them hands-on experience in Chemistry, Physics, Biology, and Geology labs. (I don’t know if those programs are still running — that was long ago.)
I know you meant it as a joke, MB, but do not knock our community college system. The education there, certainly at TCC and NVCC, stands shoulder-to-shoulder with the first two years of any public college in the state, and it is much more affordable.
Now that the 15th has passed, let me correct all the BS that Mouse has posted.
1. Mouse fails to realize that an ESOP is a separate legal entity from its shareholders. As such, you cannot look at the number of shareholders within the entity itself as a limiting factor for the S Corp.
2. The law specifically changed effective 1/1/1998 to allow ESOPs to be a shareholder in S Corps.
Had he simply Googled ESOPs and S Corporations, he’d have found this IRS page which contains the relevant information.
Now – the 35% tax rate? Bogus.
See what effective use of Google does for you, Mouse?
As for my education, try Googling me.