Via TaxProf, I found essay by economist Greg Mankiw, claiming that his actual income tax will be 83% under McCain and 93% under Obama. It's a surprising claim, but Mankiw has at least done the math. He argues that for any new income, he'd invest it, and let his kids inherit it. Thus: Let's suppose Greg Mankiw takes on an incremental job today and earns a dollar. How much, as a result, will he leave his kids in T years? The answer depends on four tax rates. First, I pay the combined income and payroll tax on the dollar earned. Second, I pay the corporate tax rate while the money is invested in a firm. Third, I pay the dividend and capital gains rate as I receive that return. And fourth, I pay the estate tax when I leave what has accumulated to my kids. Let t1 be the combined income and payroll tax rate, t2 be the corporate tax rate, t3 be the dividend and capital gains tax rate, and t4 be the estate tax rate. And let r be the before-tax rate of return on corporate capital. Then one dollar I earn today will yield my kids: (1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4). For my illustrative calculations, let me ...

The IRS has recently announced that hundreds of thousands of stimulus and rebate checks haven't made it to their intended recipients. You can blame out-of-date mailing addresses and social security number snafus. Fortunately, the IRS is bending over backwards to make sure these get delivered. They've publicized the issue (though 383,000 wrong addresses out of over 100 million tax filers doesn't call for much of a mea culpa), and they've whipped up some useful tools for curious taxpayers: Visit their Where's My Refund? service for information on your refund. Check Where's My Stimulus Payment? for stimulus payment data. It's almost inevitable that this will lead to a new a new generation of advance-fee frauds, so be on the lookout. An unsolicited email about how you can get the returns you're owed -- for just the smallest of fees! -- should be trashed immediately. One obvious question that comes up in a situation like this is: how much does this cost us, as taxpayers? Obviously, the IRS is holding on to money that would otherwise be ours to spend. Does the economy suffer for it? There are two popular theories, both supported by stirring rhetoric and elegant mathematics, and both leading to precisely opposite conclusions. The first is ...

According to a new study, yes: people earning $500,000 to $1 million understate their income by about 21%, compared to 8% for those earning $50,000 to $100,000. The first obvious response is outrage -- how dare they lie, when they're already so much better off? But a more practical question is to ask what we can do about this -- and whether we should do anything at all. To deal with tax evasion, you have to think like a tax evader. The first thing to do is to restate your term: the marginal tax rate isn't a tax rate -- it's the return on dishonesty. Someone taxed at 15% gets fifteen cents for every dollar worth of lies; someone taxed at 35% gets a hefty $.35 for every dollar of dishonesty. Next, you have to ask what they're thinking. First, stipulate that it's not a moral question to the tax evader. It's just a question of keeping as much money as possible. The decision to lie about income is just a practical question: what are the odds of getting caught, what is the punishment, and how much do you prefer certainty to risk? For example, let's say our unfriendly evader is looking into ...

Charles O'Byrne, a top aide to New York Governor David Patterson, refused to file income taxes for years. He now owes the state $300,000 and an apology -- he's been able to tender one of these on his own. What's surprising is that for someone earning so much -- his last salary was $178,000 per year -- and working directly for the state government, O'Byrne didn't get much attention from the tax authorities. From 2001 to 2005, he accumulated a six-figure debt without ever being asked to pay up. According to his lawyer, Richard Kestenbaum, he suffered from 'Non-Filer Syndrome', which made him too depressed to do his taxes, even though, "Most times, with professionals, these are very high-functioning people who otherwise complete all the other ordinary tasks of their life." But having a mental illness custom-tailored to explain your misbehavior isn't the only benefit from being Mr. O'Byrne. He was also able to raise money from Brian Krisberg (a politically active attorney) and Jean Kennedy Smith (yes, a Kennedy Kennedy). Thanks to this help, O'Byrne was able to pay off his debt -- though he was still finishing that up as of earlier this week. It's hard to imagine the average taxpayer being ...

Joe Wurzelbacher might think twice about getting involved in politics again. A week ago, Joe the Plumber was just another plumber. Now he is the Joe the Plumber, a more important political topic than the War in Iraq, and a more sensitive debate subject than abortion or gay marriage. How did Joe the Plumber find his way into the spotlight? First, he happened to be named 'Joe': every candidate wants a less insulting, more family-friendly replacement for "Joe Sixpack," and Joe the Plumber is definitely it. But more importantly, he touched on a crucial issue: what are the long-term effects of the Obama and McCain tax plans? In the video that made him famous, Joe sounds like his mind is made up, but he's in for a surprise: he asks Barack Obama about how a small plumbing business earning $250,000 to $280,000 would be affected by Obama's tax plans, and Obama responded with a blizzard of facts and figures about the new tax breaks, tax subsidies, and capital gains tax cuts that completely change the picture. Obama's extended remarks involve a bit of transparent double-talk: in his version, lower taxes on low income-earners would have allowed Joe to make more money, but higher ...

$700 billion. It's an incredible number. The Troubled Asset Relief program (abbreviated TARP, often just called "The Bailout") is an unprecedented spending spree. The closest comparison, the Marshall Plan, cost about $110 billion in present dollars, so the scope of the TARP is beyond that of any new government program. When people hear about $700 billion in new spending, their first reaction after scraping their jaw off the floor is to ask: "Who will pay for this?" with the sneaking suspicion that the answer is, as usual, "The taxpayers." But it's not that simple. The first important thing to realize about paying for the bailout is that it's not necessarily going to mean a higher tax rate or an end to tax refunds. Although the government will be spending more money, it's able to print up an effectively unlimited amount, so the usual rules can still apply. That said, doesn't that huge sum of money need to come from somewhere? Not quite. Most government spending involves gifts, with strings attached: the government spends money on social security, health care, law enforcement, defense, and many other services without charging directly for them, and pays for some things -- public parks, mail delivery -- with ...

Is it true that there's no law saying I have to pay income taxes? This is a common question on tax forums and discussion boards. Many websites and publications argue that paying taxes is illegal, immoral, unconstitutional, dishonest -- basically every synonym for evil except "fattening". The famous tax protestor Irwin Schiff calls income taxes "The Biggest Con." The rise of popular libertarian candidates like Ron Paul has caused many people to scrutinize the Constitution and reconsider current tax rates. So what's the big deal? Is it true that we don't owe taxes? Can we do anything about it? There are several common conversational gambits among tax protestors, but the most common is: "What law, specifically, requires us to pay income taxes?" That's as good an introduction as any to the subject. So we can deal with it quickly: the law is Title 26 of the United States code, Subtitle A, Chapter 1, Subchapter A, part I. It starts with "There is hereby imposed on the taxable income ... a tax determined in accordance with the following table." The Code goes into an excruciating amount of detail about what is taxable, what is not, who must pay, what doesn't count, etc. etc. etc. Many tax protestors will ...

Whether you're sitting on an employee options grant or day-trading puts and calls, taxes play an important part in determining how much money you keep from every trade. Here are some quick tips to get you started: When you are granted employee stock options, you won't pay taxes on the initial grant. This is one of the reasons options have been so popular. They're a great way to show someone that their work is recognized, but to give them an incentive to stick around for the long term. Since they're valuable from day one, they provide a nice incentive, but unlike other forms of incentive, they don't burden anyone with a cash outlay. When you do cash in your options, tax liability may become a problem. The size of the problem depends on how you structure things: if you exercise and then sell right away, you're hit with normal taxes. It's often a better idea to exercise and then hold for a year, so you get long-term capital gains treatment. The problem here is holding on: for many people, the shares from a stock option exercise are by far the largest position in the account, and it's often difficult to exercise these ...

As part of their Presidential campaigns, Barack Obama and John McCain have both proposed serious revisions to health care taxes. Since health care is a large and growing expense, and one subject to fairly Byzantine tax treatment, it's interesting to consider how each candidate's proposals will affect the average taxpayer. Obama's proposal calls for grafting some new systems onto our existing health care system: in addition to employer-provided plans, he would offer extra guarantees for children. He'd also create a Federal insurance program offering a minimal level of coverage, and require that all health plans meet the same minimum criteria as the national option. This proposal would also require insurers to either provide insurance for their employees or pay into a general insurance fund. From a tax standpoint, Obama's plan is to finance this with higher taxes on the wealthiest tax payers, and lower taxes overall. It might work -- though there's a significant risk: if the problem with the health care business is too much money being spent, then a plan requiring more money to be spent won't exactly improve matters. And surely taxing doctors, surgeons, anesthesiologists, and other highly-paid medical specialists won't do much to defray those costs. Taxpayers could ...

In retrospect, we'll view the last forty years as a bizarre aberration: during that time, speculation on an enormous scale was tolerated, celebrated, and even subsidized. The fact that this speculation occurred in residential real estate made it all the more insidious and dangerous. Looking over the last forty years (from when Fannie Mae was privatized to when it collapsed), it's clear that tax incentives played a huge role in creating the mortgage market, and in inflating the value of the real estate that fueled this market. The mortgage interest tax deduction made it seem smarter to invest money in a home rather than another means of savings. Of course, a tax exemption doesn't make homes any more comfortable, or improve the view: it just means that, relative to other investments, they're easier to borrow against. If they're easier for anyone to borrow against, their price will be higher than it otherwise could be -- so the interest tax exemption did not so much make homes a better investment as make them a worse investment you were compensated for making. That tax exemption alone would have been enough to inflate home prices, but only Fannie and Freddie could turn it into a self-sustaining ...