Monday, October 29, 2007

Charlie Rangel

Charlie Rangel plan on tinkering with the US tax code. Some of his ideas are good and some are bad.

It is interesting to watch both old Parties spin this...

Charlie Rangel is the Democrat in charge of the Ways and Means Committee in the House of Representatives. He just unveiled a plan to make some large changes to the Federal tax code. I have not been able to get all of the details yet; however, I have part of his plan.

First off please realize that he is going to split this into two pieces. He is going to do this because he has to have the law enacted in time for the IRS, accountants, and the software companies. He is splitting it into two pieces because it is too late in the year for any major changes. He is floating part of this plan just to see how it is received.

Let’s look at some of the items he is considering and whether they are good or bad:

Currently the top corporate tax rate is 35% (It is more complicated but we can use 35%). Charlie Rangel wants to lower the top corporate rate from 35% to 30.5%. I like lowering the top tax rate; however, it makes little sense considering some of the other things he wants to do…

The plan will repeal the domestic production credit. The domestic production credit was enacted to help American manufacturers. It is EXTREMELY complicated and should be repealed.

Charlie Rangel wants to prevent companies from using the LIFO (Last in First
Out) Inventory method. To make a long story short there are multiple methods that American companies can use to value their inventory. The most popular method by far is LIFO. LIFO is preferred because it defers taxes when prices of inventory are rising. Charlie Rangel wants to stop companies from using LIFO ever again. To make things even more complicated he wants to phase in the tax effects of the change from LIFO over eight years. This change would cost companies a lot of money in the year of implementation; it would also cost a lot for accountants to re-value all of the inventory based on another method.

The plan would also require companies to defer deductions for certain expenses of foreign subsidiaries of US companies until the money is repatriated to the US. I would need to learn more about this before deciding if it is good or bad; most likely I am in favor of it.

The plan would repeal the Alternative Minimum Tax (AMT). The AMT is an awful tax that should teach us something about Government and its frequent failures. This tax was enacted to make about 25 families pay more in taxes. Next year it is expected to hit 25 million taxpayers; most in the middle class. The AMT must be repealed; however, it will cost the Government a lot in revenue and will be hard to offset.

To pay for removing the AMT Charlie Rangel wants to levy a ”surcharge” of 4% on single
Filers who make above $150,000 and 4% on married filers who make above $200,000. Furthermore the “surcharge” would grow to 4.6% from those who make above half a million dollars a year. Something along these lines will be necessary to generate the money that they AMT used to generate; however this plan has some large flaws:

It penalizes married couples and I am against that. If married filers will have to pay a “surcharge” above $200,000 then single filers should have to pay the same “surcharge” at $100,000.

It is to be levied against gross income rather then adjusted gross income; this is inconsistent with the rest of the tax code. It should be one way or the other.

They plan on increasing the earned income tax credit by an unspecified amount.
This is a terrible idea. All the EIC does is subsidize low income families. With the EIC low income families are paid money by the Federal Government above and beyond what they pay in taxes. The EIC is the Republicans version of welfare. It should not be expanded.

They plan on increasing the standard deduction $425 for single filers and $850 for
Married filers filing a joint return. I am ok with this. Increasing the standard
Deduction actually makes the tax code less complicated since fewer people itemize. Increasing the standard deduction is a way to make low and middle income families pay less.

They plan on increasing the child tax credit for those families earning too little to
owe Federal taxes. Another terrible idea. Why do we need to give people more money back then they pay in? This just shifts income from one group to another.

They plan on extending some of the current tax breaks that are set to expire
Including: R&D Development credit, tax breaks for teachers buying school supplies, a deduction for State and local taxes. The R&D Development credit should be allowed to expire; it is just makes the tax code more complicated for no real gain. Tax breaks for teachers buying school supplies should be allowed to expire as well. The deduction for State and local taxes should be made permanent.

Part of the plan will be paid for by offsetting carried interest paid to financial managers as regular income and not as capital gains. This is a great idea and should have been done long ago.

They plan on taxing deferred compensation plans of offshore hedge funds. I would have to research this more; however, it is most likely a good idea.

Requiring financial service providers to give customers information on the basis
of sold securities. This will be a nightmare the year of implementation; however, it should have been done long ago.

The plan will “change current laws to require small businesses in the services
sector to pay payroll taxes for their workers.” I am not sure what this means;
However, small businesses in the service sector currently pay payroll taxes for their employees already. I assume they are saying that they are going to clamp down on Contractors and require more people to become employees. This could be a deal breaker and it could be yet another "accountant job creation act."

Mike Sylvester


Tim Zank said...

I've always been of the firm belief that leopards seldom change their spots, and with ol' Chuckles Rangel that couldn't be more true.

He's a career political hack in a $5,000 suit serving a constituency of New Yorks' more economically challenged. Now that he finally has a powerful appointment he is really dangerous. I'm no accountant, but I know damn well with this yutz shaping tax policy we are all in deep sh&t.

The only thing he has right is dumping the AMT.

gadfly said...

It sounds to me like another plan to add to the tons of pages in the current law. The Dems always have to play the "zero sum" game and "pay" for tax reductions while continuing to punish "the rich" (that is code for you and me).

Not a word about eliminating double taxation on savings, permanently codifying tax reductions already in place or simplifying tax through the use of consumption-based principles.

Charley's smoke screen must have an unhappy ending that I suspect is spelled "tax increase."

Jeff Pruitt said...


Please name a single piece of Rangel's proposal that would cause you to pay more in taxes

Anonymous said...

Someone said here re-valuing LIFO to FIFO would cost a lot of money in accounting fees and time. That is a crock.

First, anyone associated with financial statements and/or tax returns knows that in order to use LIFO, you also need a disclosure in the financial statement as to the value of LIFO. The tax return ACE computation tracks the difference annually in LIFO versus FIFO. The information is there. If anything compliance cost is LOWER because you need to simply track one method (FIFO), not two (LIFO & FIFO).

In all honesty, LIFO is a major tax shelter. Rangel's propose is to bring it into income over 8 years, so again, there is no major hit in the year of the law change. It is also not a tax increase - it is simply a recognition of tax that would one day be recognized anyway.

Also, few companies use LIFO. Some of the ones that do get a major tax deferral for it - as you can see in Rangel's numbers. Little taxpayers don't use it. Some of the smaller car dealers might.

LIFO also encourages the use of holding larger than necessary inventories because the book value is so low, that is also an inefficient use of cash - to hold so much inventory. It is accounted for at old, historical values, but you are still paying current rates for it - and thus it is using capital.

So AMT relief for LIFO....hmmm, everyone wants AMT relief, so it needs to be paid for. Uncle Sam cannot remove $50 Billion + of revenue and replace it with nothing. I don't care if it is a tax tht should have never been added in the first place - that's an irrelevant argument today. The money is being used - and has been used by Republicans and Democrats alike in their budgets for decades.

Also, Grassley was chairman of the Senate Finance Committee during all of the years of Bush's tenure when the Republicans controlled the Senate. He bitches today, but what did he do about AMT? Not a god damn thing. At least the Democrats have a plan - with some tough choices. The Republicans have what? Nothing. Oh they have the war on terror and fight for torture of prisioners. Good move for the average citizen in this country.

People need to get off their high horse and open their eyes to all of the monkey business going on. Rangel's plan is a start and its the first honest plan to come forward in a long time. He should be commended. Republicans?! Bitch, bitch, bitch. They sould like my wife and mother - never happy.