Archive for July, 2010
Monday, July 26th, 2010
A recent article in the Wall Street Journal discusses the current back-and-forth between Democrats and Republicans on whether or not to extend the Bush-era tax cuts.
Smeal’s Charles Enis takes it one step further to address the alternative minimum tax (AMT), which has already expired. He warns that, whether the Bush tax cuts stay or go, taxpayers will see a huge increase in rates.
To express my knee-jerk reaction to the confusion and uncertainty over tax provisions that are set to go away in about five months; I must borrow from the style of Coach Mora. Expiring tax cuts! Expiring tax cuts! Don’t talk about expiring tax cuts! The Alternative Minimum Tax (AMT) is the 800 lb. yeti. True, a non-act of Congress will usher in one of the greatest tax increases in history. Gone will be lower tax rates on wages, capital gains and dividends, enhanced tax credits, as well as marriage penalty relief, repeal of deduction phase-outs and estate taxes. However, these tax breaks vanish at the end of 2010. AMT relief expired seven months ago. If the annual AMT patch is a victim of Congressional inertia, AMT exemptions revert to year 2000 amounts, a decline from $74,600 to $45,000 for joint return filers, and from $46,700 to $33,750 for unmarried individuals.
As an example to illustrate this problem I use joint filers with salaries of $200,000, two dependents, and $20,000 in itemized deductions ($16,000 of which are disallowed for the AMT). Assume AMT exemptions are increased for 2010 but not for 2011. Their tax from 2010 to 2011 will increase from $34,556 to $42,250 (an increase of $7,684, or 22.24 percent), regardless of whether the Bush tax cuts are left intact or completely expire. This occurs because taxpayers pay the greater of the regular tax or the tentative minimum tax. The latter will exceed the former whether the tax cuts expire or not. However, if the AMT is fixed for 2010 and 2011, and all of the tax cuts expire, their tax will increase to $39,562 (an increase of $5,006, or 14.49 percent). In short, whether the Bush tax cuts are extended partially or in full, temporarily, or permanently, will not matter to the many taxpayers that will be caught in the AMT net unless it is fixed.
Because AMT relief must be enacted yearly, taxpayers are uncertain as to the extent a Congressional fix is forthcoming. For example, the AMT exemptions for 2007 were not passed until December 26, 2007. Forcing Americans to wait so long for Congress to act to temporarily delay a looming tax disaster cries out for a permanent resolution to the AMT issue. Solving the AMT problem should be a major topic included in debates about extending the tax cuts.
Thursday, July 22nd, 2010
Smeal’s Brian Davis weighs in on the financial reform bill signed into law by President Obama yesterday:
An old Army buddy once gave me his words of wisdom as we were dreaming of ways to change the world: “Proceed until apprehended.” Which, I did. Well, I eventually screwed up (but not before gallantly saving my client more than $1 million). When I asked my Army guru to opine about my next course of action, he smiled, wished me luck, and told me to “lay back and enjoy it.”
Obviously to anyone who has ran afoul of conventional thinking, if your risks turn out to be mistakes, then the consequences of your behavior will be less than rewarding. At least, going forward the best you can hope for is to lay back and enjoy it.
Welcome to FinReg.
A recent New York Times article says it all: Banks Seek to Keep Profits as New Oversight Rules Loom.
As everyone with an interest in the future wants to know—“Is this the regulatory panacea to cure all ills?” Of course not. But, FinReg is the next step in what democracy promises—change, by incremental change. Notice how vague the definitions are, and how vague the timing of compliance is as outlined by the legislation. The main provisions of the bill—the establishment of a derivative clearinghouse, limits on banks’ ability to trade on their own accounts, a consumer protection agency to oversee credit card practices, and some form of bankruptcy rules to unwind failing institutions—attack the main causes of the recent financial crisis.
I hate to use an overused phrase, but the devil is in the details. How well the new regulations and regulators perform will depend upon how the bureaucracy writes the specific rules to meet the new mandates. FinReg only lays out the architecture and goals of the new regulatory environment. The hard work will be done piecemeal as regulators write the rules and the banking lobby attempts to shift the effects of these rules in favor of their interests. Compliance is not required on most provisions for five years. As a result, we will not be able to sum up the performance of the bill for at least ten years or until the next crisis erupts. Stay tuned.
Tuesday, July 20th, 2010
Smeal’s J. Edward Ketz, associate professor of accounting, and other accounting experts recently submitted an amicus brief with the California Court of Appeal for the Second District in a pension case between Orange County and county employees.
In 2001, Orange County Supervisors voted to increase the multiplier used to calculate the retirement benefits of county employees from 2 percent to 3 percent, applying the change retroactively to all years of service. Years later, the current board of supervisors sued to overturn this increase on the grounds that it creates an unconstitutional liability on future tax revenues. The county lost the initial trial and is appealing.
In an op-ed in today’s Orange County Register, Ketz argues that the new benefits do indeed create liabilities that must be paid out of future years’ taxes:
Our brief begins by recalling the definition of a liability. Definitions by accounting standard-setters indicate that a liability is a probable future sacrifice that arises from a present obligation of a particular entity to supply assets or services to another entity sometime in the future because of a past transaction. A pension enhancement meets this definition.
- It is a present obligation of Orange County because the employees who stand to reap the benefits do not have to do anything else to receive them.
- Orange County has little ability to avoid having to sacrifice resources in the future unless some extraordinary event occurs, such as a court’s overturning the legality of the pension obligation.
- The obligating event has occurred; the former Board of Supervisors already agreed to the transaction.
… The Orange County case is both simple and exasperating. It is simple because the economics unmistakably demonstrates the creation of a financial liability that must be borne by the county. It is disturbing because some court cases have altered economic reality by politicizing the issues and allowing irresponsible politicians to create huge liabilities that possess the potential to destroy state and county economies.
Thursday, July 1st, 2010
“The number of buyers who signed contracts to purchase homes dropped in May to the lowest level on record, a sign the housing recovery can’t survive without government incentives,” The New York Times reports.
According to Smeal’s Austin Jaffe, “It’s an empirical fact that sales drop off directly after the expiration of tax credits.” Writing yesterday on Just Listed, the news blog of the Pennsylvania Association of Realtors, Jaffe says:
The increase in activity is stimulated by the government program, not necessarily in the form of additional purchases, just accelerated ones. In the period which follows the program, there are fewer purchasers left since they moved faster to get the rebate. Thus, the expectation is for a sluggish second half of 2010 in housing markets.
In addition, we continue to see low mortgage rates, typically a sufficient condition for strong housing demand. But not in this recession. The Fed finished purchasing mortgages and mortgage-backed securities this spring and the conventional wisdom is that this has kept interest rates lower than they would have been without the program. Yet the number of borrowers seeking a mortgage has fallen to its lowest level since May 1997.
As a result, Jaffe notes, “Without a reduction in unemployment or growth in household income, house prices will remain flat or perhaps ‘double dip’ (i.e., a new round of price declines will occur after recent months of stabilized prices).”