Barack Obama has an exciting new plan to raise revenue: make companies pay taxes on the money they earn. Okay, so it's not new, and it's not that exciting. But it is a little more complicated than that. Basically, the current plan is designed to tax income earned overseas, whether or not it's returned to the US. Right now, if Apple sells an iPod in Italy, they pay Italian taxes on their Italian income. As long as they keep the money in Italy, they don't have to pay US income taxes on it. The case for the plan is that it closes a giant loophole in the current tax scheme. And it's not as if companies will just stop selling overseas if they have to pay regular taxes on the money. If a sale is only worth making because of special tax advantages, it's probably a good thing to get rid of the tax issue. The case against it is that this is an extra tax on our best companies, and that it unfairly penalizes American workers. Consider someone who took a risk and joined Apple ten years ago, when their survival was in doubt. Now, they're ...

Nobody feels more strongly about high taxes than smokers do, and with good reason: it's incredibly easy for politicians to raise taxes on smoking, and the average non-smoker doesn't have a lot of sympathy. So it's no surprise that the news is full of stories about planned cigarette tax hikes. But why is it so easy to raise taxes on smokers? Why not bottled-water drinkers, car owners, or life insurance buyers? The reason is simple: cigarettes have the combination of addictive power and brand loyalty. Very few smokers give up if the cost of their smokes goes up 10% -- in fact, basically no other product has the long-term resistance to price changes. It's also popular among people who don't smoke. Most people are pretty happy to hear that someone else's vices are getting punished. In fact, people are willing to believe that smoking will get rarer if the price goes up (even though, so far, that has been only slightly true). So what should smokers think of this? If you spend much time reading about taxes, you'll find plenty of resentful smokers tired of paying so much per pack -- but notice that they're still paying, and will continue to pay even ...

People are still talking about it. Ed Barnett's IRS letter made him famous -- but there's something missing from the story: what did the IRS say about it? It's usually a bad idea for them to respond to someone who complains about taxes like this. The classic response to tax complaints is "You get what you pay for," but Barnett's tax rant dodged that question by listing all the things he did pay for. It could be hard to ignore the letter, too. The complaints are legitimate, and it's getting mentioned in blogs, forums, and newspapers nationwide. Here are a few possible responses: More responsiveness: if Barnett could have gotten in touch with someone at the IRS, he might not have had to write the letter at all. Lower taxes, more fees: taxes you pay for doing something well (buying a building that went up in price, getting a raise at your job) are less popular than taxes you pay for things that are neutral or harmful (like a mileage tax or a cigarette tax). If we switch to more of those taxes, we might see lower revenue, but we'd have fewer expenses as well. More transparency: this one is actually a possibility, and would definitely ...

Today the IRS stopped using private tax collectors. That's right: they won't let a single tax mercenary collect overdue taxes. This sounds great -- less money spent on expensive government contractors, and less of our private information being leaked out of the government. But is it really the right decision? The basic argument against private tax collectors is that we're paying them to go after money people already owe the government. If they're not afraid of the Feds, the argument goes, why would they fear some random company? If the companies don't have any way to convince people rationally, it's a fair assumption that they're just using dirtier tactics than the IRS, and making 25% of what they collect in the process! But what if there's a better way to do the collecting? Keep in mind that this is money the IRS usually doesn't expect to see again -- people know they owe it, and they just won't pay. So, instead of pressuring them into giving the full amount, why not let these private companies negotiate a discount? Here's how it would work. Instead of a contract, there would be an auction: the IRS would sell ...

The other day, California put its tax refunds on hold. Given their financial straits, that's not such a bad idea -- it was either that, or bouncing some checks, apparently. But California isn't the only one with bills to pay. What about people who were counting on a tax refund? There's a big difference between $100 in hand and a $100 check that's not in the mail now and won't be for some time. What's odd is that usually, we have a simple way of dealing with this problem: California has made plenty of promises to pay billions of dollars in the future to fund spending it wants now -- those promises are bonds. That's simpler than just telling taxpayers to wait and see: if the state gave people state bonds of value equal to the amount they were owed, some people could wait for the state to pay, but others could sell their bonds and use the cash now. Of course, the first objection is "What if everyone immediately sells their bonds, and the price drops too fast." Unlikely: the state owes some $57 billion in debt, so the extra debt from tax refunds would be a drop in the bucket. A more ...

MauledAgain has a great article on how just one set of tax rules for small business -- section 179 -- has changed during the last few decades. He points out that the level of expenses small businesses can easily write off has fluctuated from $5000 (1983) to $125,000 (2007-11) except for when it's $250,000 (2008), and may be kept at the same $250,000 level in the future. There are good and sensible reasons to think that an easy deduction like this would do some good. The paperwork (and plain vanilla work) on depreciating $25,000 worth of expenses is a nightmare compared to that of figuring out $25,000 more on a $500,000 budget, so this does reduce the bureaucratic load on a small business. There's even something to be said for tweaking the amount -- a number too small, and you don't get the desired effect; a number too big, and you run into the same problem (a business spending $250,000 per year getting the same kind of tax break as another business one twentieth the size). But what can't be justified is the practice of constantly fiddling with the deduction. Someone planning their future expenditures in 1983 could assume a pretty predictable tax ...

Via MauledAgain, I found a fascinating story about New Jersey's tax on telephone poles owned by the 'dominant provider' in the state. As Maule points out, it's a hard law to understand: it's not just about revenue or beautification, because this would apply to taxing any phone company, not just the largest. He adds: One wonders why a tax would be imposed only on the dominant provider. Was it an attempt to disadvantage the market leader in order to boost the competition and level the playing field? It is a rather interesting way to spread the wealth. Imagine an income tax imposed only on the largest software company, the biggest bank, the top-paid baseball player, and so on. Why should New Jersey think twice before imposing such a tax? The worst scenario is a "race for second place". Imagine that this tax works out to a tax of 5% on a company's income. Now, imagine that in New Jersey, Verizon makes $100 million each year (before the tax), and AT&T makes $96 million (again, before the tax). If Verizon finds a way to blow a little more than $4 million, so they earn less than AT&T, they can dodge the ...

A New York Times editorial by Robert Frank suggests a higher future tax on consumption in order to pay for higher government spending now. He makes a few good points, but seems to miss the larger picture. It is better to tax consumption than savings, because this encourages responsible behavior. As far as the US tax system is concerned, investing in a startup is as economically useful an activity as buying a huge amount of Fritos (the difference being that if your Fritos turn out to be more delicious than you expected, you aren't hit with a capital gains tax). It's not a good idea to raise taxes during a recession, even if you plan for the tax increases to take effect later. Someone who is considering, say, an advanced degree in mechanical engineering might be discouraged by the fact that his future earnings will be taxed, even if current earnings aren't. Sadly, the people whom this affects the most (the ones who make long-term plans, and stick with them) are also responsible for a huge fraction of total tax revenues. On a related note, defining investment is pretty difficult. A 'prestige' stock someone buys so they can look down on people who ...

Today's taxosphere focused on some pretty surprising political developments. After a landslide Presidential victory and a strong showing in Congressional elections, Democrats are considering -- cuts on income taxes and corporate taxes. Or are they? Via TaxProf, I found this incredible story of a UK government tax service that was shut down when twelve million users had their data compromised due to a single lost memory card this aptly demonstrates that it's always important to know you can trust the tax services you work with (if you're given a choice, of course). Russ Fox is disappointed in the election, which he views as bad for the country but good for the tax-preparing business. We will have a Congress where both the House and Senate are controlled by the Democrats (though it appears that Republicans will have enough votes to filibuster in the Senate). In the past, when this has occurred taxes have gone up. I've always viewed a divided government as a very dangerous thing, because the easiest way to negotiate is logrolling: we might find ourselves spending more on Republican pet projects, in order to convince those Republicans to play along with huge new Democratic programs. According to Kay Bell at Don't Mess With ...

Although most people were paying closer attention to the Presidential election, some local votes might have a bigger impact in the long run: Massachusetts voted against a ballot initiative to end their state income tax, surprisingly basically nobody. According to the AP, "virtually every elected official in the state" opposed the initiative. Interestingly enough, one third of the voters supported it, even though opponents spent ten times as much on ads. Apparentlty the voters in Massachusetts have a hard time electing anyone who feels the way they do about taxes. On the other hand, Maine voters decided to abolish taxes on beer and soda, thanks in no part to funding from the beverage industry. In a move that only a committee of committees could have dreamed up, this measure was somehow attached to a statewide health insurance rule which had previously been funded by charging the insurance companies directly. Michigan, Massachussets, and California weighed legalizing certain vices, which could make them eligible for taxation. Michigan legalized medical marijuana, and Massachussets decriminalized the regular kind, while California stopped short of allowing prostitution in San Francisco. And even though Americans are having more trouble saving than ever, voters were happy to approve billions of dollars in ...