History Speaks FDR's Tax "Higher Mathematics"
The following is a letter mailed in 1938 by President Roosevelt to his tax commissioner asking for help in calculating his taxes.
My dear Commissioner Helvering:-
I am enclosing my income tax return for the calendar year 1937, together with my check for $15,000.
I am wholly unable to figure out the amount of the tax for the following reasons: The first twenty days of January, 1937, were part of my first term of office and to those twenty days the income tax rate of March 4, 1933 apply. To the other 345 days of the year 1937, the income tax rates as they existed on January 30, 1937 apply. As this is a problem in higher mathematics, may I ask that the Bureau let me know the amount of the balance due? The payment of $15,000 doubtless represents a good deal more than half of what the eventual tax will be.
Very sincerely yours,
If FDR found the tax system in 1937 confusing, one shudders to think what he would do with the Alternative Minimum Tax.
|
Chart of the Month
Hauser's Law, as postulated by economist William Hauser, is the proposition that the percentage of GDP collected by the federal government remains relatively steady (16%-20%) regardless of how high top marginal rates are.
| Hauser's Law | Top |
Asset Class Returns
Through November 30th, 2012
Returns assume dividend reinvestment and do not include any types of management fees, transaction costs or expenses.
Top
|
Commentary
Higher Rates or Less Deductions?
The debate in Washington since the election has largely focused on whether to raise the marginal rates highest income earners -economic royalist to FDR in 1936-(President Obama and the Democrats) or reduce the deductions and loopholes in the tax code (Speaker Boehner and the Republicans). Generally left out of the discussion is how these changes will affect the alternative minimum tax (AMT). As a refresher, the AMT is a separate tax calculation from the regular income tax code - and the taxpayer pays whichever tax calculation is highest. The AMT disallows many of the deductions that are available in the regular tax code - notably property taxes and state income taxes. Because they live in a high tax area of the country, many filers in the New York metro area pay the alternative minimum tax and not the tax as calculated by the regular tax code. In fact New York and New Jersey are the states with the two highest percentage of AMT tax payers. As shown by the chart below, New Yorkers are nearly twice as likely to pay AMT than residents of other states:
The percentage of AMT payers for New York City residents is likely to be significantly higher than for the state. Technically this is because the highest effective federal tax rate, when you are allowed to deduct local taxes, is not much higher than the AMT rate. In our experience, most city residents have to be earning well over $1,000,000 dollars before they leave the AMT and pay via the regular tax code. That level is not much lower for the surrounding region. Which brings up one of the great ironies of the AMT; it was enacted to make sure the top 0.1% of income earners paid a minimum tax level but now AMT revenue is mostly connected from those way below that threshold. As the chart below shows, 90% of AMT revenue is collected from those making less than $500,000 a year.
So how will AMT taxpayers be affected by the different plans being bandied around Washington, D.C.? Well under the President's higher rate scheme, more people will get out of the AMT - because they are paying a higher amount via the regular tax code. The higher rates mean the effective tax level for these taxpayers, even after deducting local taxes, is much higher than the AMT rate. What would happen under the Republican scheme to limit deductions is less clear. If those deductions focused on the mortgage interest and charitable deduction and had a high limit before they were disallowed there would be relatively little affect for most AMT payers. However, if those deduction limits focused on state and local taxes, that would raise the taxes on many AMT payers - again because they are moved to the regular tax code. The deduction of state and local taxes is effectively a subsidy to high tax areas such as New York. This will create a conundrum in that Democrats generally favor higher tax revenues, and nominally at least, greater tax reform, the fact is that any of these efforts are likely to inflict the greatest costs to the high tax - and mostly Democratic leaning - states.
Top |
InnerHarbor Advisors, LLC
420 Lexington Ave, NYC 10170
212-949-0494
Managing Partners:
|
Copyright © 2009-2012. InnerHarbor Advisors, LLC
|