Bain Capital Subpoenaed on Taxes

Bain Capital, the Venture Capital Firm that has become synonymous with Mitt Romney’s personal fortune, has been subpoenaed by NY Attorney General Eric Schneiderman for possible rampant tax evasion practices.

This blog has been critical over the years of the special tax treatment afforded to profits made from Capital Gains – profit made as an increase on investments - which is only taxed at rates of about 15%. Common wage labor is taxed at rates up to 38%. This creates a tax system that rewards stock and investment trading – which amasses wealth but creates no products or jobs - and punishes the actual creation of goods and services.

This is the legal tax code of course, but Bain is being investigating for making Management Fees charged to clients ‘appear’ to be investment income, rather than the fees they actually are.

Bain (and other firms) have a history of “waiving” the actual Management Fees they charge their clients; but in the place of these fees, they require the clients to place some of their investments in a fund for Bain, so that Bain receives the income from the investment; hence, the money Bain receives is taxed at 15% for capital gains rather than being taxed at 38% for the raw income from a fee.

I will remain a broken record on this issue, especially on Labor Day weekend: income from gambling with financial instruments must not be taxed less than the income earned by construction workers and firefighters and nurses and dressmakers who earn wages for providing the nation’s goods and services.

Whether Bain’s approach is legal or a tax-evading subterfuge will be settled in the court system.

Whether it is ethical and desirable as public policy, in light of how we tax honest labor, is much clearer.

2011: The Year for GLBT Federal Income Tax Civil Disobedience

For as long as there has been a federal income tax (1917), the federal government has asked taxpayers to indicate their marital status on their tax forms. Taxpayers need not prove their status, they need only swear that all the information contained on the form is true.

And so, come April 15, I, along with other gay and lesbian couples in New Hampshire and other states permitting same-sex marriage, will have a choice: we can check off "married" on page 1 of our 1040, and sign the bottom of page 2 in good conscience that our return is truthful, or we can call ourselves 'single,' and sign that statement, knowing that calling ourselves 'single' would be a patent lie under state law.

The choice, of course, has both legal and financial consequences: two people filing as married pay far less in federal income tax than those same two people filing as single, especially if there is a large income disparity between them. It is even worse when one spouse adds the other to their health insurance: gay and lesbian couples get taxed on "imputed income," the amount of the "additional income" that the federal government pretends we have based on the value of our spouse's health insurance policy. For an average middle-class working couple, this amounts to more than $3,000 annually in federal income tax.

The problem stems from "DOMA," the so-called "Defense of Marriage Act," a 1996 law that privides a federal government definition of marriage as only between a man and a woman.

Constitutionally, it is not the federal government's jurisdiction to define marriage. There is no federal Constitutional provision permitting a federal law in this arena. Marriage laws are very specifically creatures of state jurisdiction. In Rhode Island, first cousins can marry; In Illinois they can as long as they can not bear children; in Oregon they can if one was adopted; while in New Hampshire and Pennsylvania there is no first-cousin marriage permitted at all. The rules for who can and who can not get married are state-specific, and the federal government has always accepted the definitions of the states, even though they differed from state to state. By imposing DOMA, the federal government has involved itself in a sphere that is clearly not within it's own jurisdiction, but, under the 10th Amendment, "reserved to the states or to the people." At least one federal judge, in a case brought by the Commonwealth of Massachusetts, has ruled that DOMA is Unconstitutional for precisely the reasons we have been arguing in this blog.

And so, I am choosing to engage in an act of civil disobedience under federal law, because this year I will choose to answer my marital status honestly under state law, and I am asking other married gay and lesbian couples to join me.

One can only wonder how the Feds will choose to pursue this:

Nowhere on the federal income tax form do they request 'gender'.

Millions of Americans file Joint Income Tax returns annually.

Any effort by the IRS to root through millions of tax returns and try to determine genders would be a cost-prohibitive nightmare for them.

If every gay married couple that gets 'caught' files objections with the IRS and then takes them to court, citing the Unconstitutionality of DOMA, it is likely that the IRS court calendar with result in a logjam...and time is on our side as all the existing suits wind their way through the courts.

So, on April 15, I will be checking "married," and I will be signing a sworn oath that I have told the truth.

Let the feds argue in court that I was wrong for so doing. And while I will do it alone if necessary, I invite other couples in our situation to join us.

Obama's Debt-Reduction Commission: Income Tax & the Mortgage Interest Deduction

This week, leaders of a special bi-partisan White House Commission on Deficit Reduction released some of its preliminary recommendations. The recommendations, to be finalized next month, touch on hot-button issues such as the federal tax code (particularly the mortgage interest deduction and tax brackets), military spending, the corporate income tax, and social security. Interest groups on both the Left and Right immediately criticized those areas where their particular ox was gored.

But frankly, we think the Obama Commission is on the right track, and the suggestions deserve support. In fact, if anything, we think the proposal can be made even bolder than it is (My friends who are anti-tax advocates, real estate agents, and home-owners are screaming, "What?!?!?") We will attempt to address these in a series of separate posts. Today, we tackle the mortgage interest deduction and tax brackets.

Here are the Facts: The federal government's financial state has never been worse. EVER.

The current National Debt - the amount our expenses have exceeded our tax revenues - is at 13.7 trillion dollars. To put that in perspective, the total value of all the goods and services created in the United States over the course a year (our GDP)...is between 13 and 14 Trillion....which means our debt is as great as everything we are capable of producing. Or, put another way, the debt is $42,000 per man, woman, and child in the US.

And that is just the current debt. Since the US actually borrows money to engage in deficit spending, interest is continually added to this figure. Currently, almost 25 cents of every tax dollar goes simply to pay the interest on this debt. That's 25 cents that could otherwise be used for actual productive purposes...instead, that interest is paid to institutions enormous enough to be able to lend money to the US government to fund its deficit spending: The government of China, Goldman-Sachs, Lloyds of London, Credit-Suisse, the House of Saud, Morgan Stanley, and Citibank.

As long as we continue to pay interest like this, we are institutionalizing a situation where wealth leaves the hands of the general citizenry and is concentrated in the hands of those who already have enormous wealth. In other words: The rich get richer, while the poor - and the middle class, and our children - get poorer.

NEVER have we been this close to a financial catastrophe. And the time for playing politics is over.

According to the Wall Street Journal, "...The preliminary plan in its current form would end or cap a wide range of breaks relied on by the middle class—including the deduction for home-mortgage interest....To compensate, one version of the plan would dramatically lower and simplify individual rates, to 9%, 15% and 24%.."

Let's take these one at a time.

Home Mortgage Interest Deduction: This is one of the favorite income tax deductions used by middle class, home-owning Americans. (I wonder how many homeowners who are worried about the federal deficit will be willing to support changes in their personal sacred cow?)

The Federal Income Tax is, supposedly, a "Progressive Tax," meaning that the more money you make, a higher percentage of that income is paid in income tax. Of course, that's the theory...in reality, the use of deductions like the Home mortgage interest deduction actually reverses this, and places a higher tax burden on those with less wealth.

When a new mortgage is made for a home, the homeowner pays mostly interest in the earliest years. A new mortgage that runs $1500/month, for instance, might be as much as $1,400 interest and $100 in principle each month. The portion that represents interest is deducted from the homeowners gross income before the tax rate is applied. In the above example, a family earning $50,000/year could have an annual deduction of $16,800, reducing their taxable income to $33,200. The same family, if they were renting their home for $1,500 month, would have a deduction of ZERO. The Home Mortgage interest deduction results in penalizing those with fewer assets and rewarding those who already have wealth in the form of real estate assets. Rather then being a "progressive" tax, this deduction creates the opposite result.

In addition to these two families having different "taxable income," the renter may actually have to pay a larger tax rate because of the Federal Income Tax "Brackets:" A family making over $68,000 is taxed at 25%, while a family making $67,000 is only taxed at 15%. As a result, the mortgage interest deduction has become an almost necessary deduction used by American families to push them down into lower tax brackets to avoid punitively high taxes...again, at the expense of those who rent, or who bought their homes years ago, and have no such deductions, who must pick up the slack.

Bottom line: if Americans are to 'get on board' with the elimination of the mortgage interest deduction, they must first be convinced that it is part of a comprehensive tax reform package that is not going to drown them in taxes.


Tax Brackets: The Federal tax code currently utilizes six tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. The commission is proposing reducing this to only three tax brackets: 9%, 15%, and 24%. This still leaves the problem that taxpayers will seek deductions to 'push' them down into lower tax brackets. The time has come for a long-discussed, long-overdue idea: a simple Flat Tax. The commission (and more importantly, Congress) should be convinced to eliminate tax brackets altogether, and use a simple percent applied to income, with no 'deductions' for special vested interests.

A legitimate argument against a Flat Tax is that those at the very lowest end of the income earning spectrum are hurt. Not only are they unable to meet basic needs of shelter, heat, clothing, food, transportation, and health care...now they would need to pay 10% of what little they make to the government, further impoverishing them.

This could actually be addressed with one simple adjustment to the Flat Tax.

Each year, the Federal Government determines the 'poverty' level; in 2010, for a family of 4, that figure is $22,050. If one agrees that no family should be pushed into poverty because of taxes, then A Flat Tax could be applied to Gross Income less the poverty level income amount for that year. In other words, our family of 4 above, making $50,000, would subtract $22,050 from their gross income, and be taxed on the remaining $27,950. If the tax rate was a flat 15%, that family would pay 4,192 in taxes, regardless of whether they owned or rented. A family earning less than $22,050 would pay nothing; a family earning $200,000 would pay $30,000.

Simplification of the tax code by enacting a single Flat Tax rate, applied only to earnings above the poverty level, would eliminate the need for taxpayers to seek out special deductions, make the federal income tax far more equitable than it currently is, and help move us back on a track towards fiscal sanity.

Of course, now that we have hopefully calmed some of the real estate agents fears, the accountants who thrive on the Byzantine tax code will be up in arms....

Fiscal Conservatives: Ending DOMA is a responsible step

Robert and Carl* are a gay couple who have been together for several years. They live in a state that permits same-sex marriage, and recently tied the knot in a Church ceremony. Like many other married couples, they have established a stable home and are active members of their community. Carl is healthy but lives with a manageable medical condition. Like approximately 1.1 million other Americans, Carl is HIV positive.

Today, HIV positive people are living long, normal, healthy lives…as long as they receive proper medical care. Highly Active Anti-Retroviral Therapy (HAART), a combination of three medications, is now the standard treatment to battle HIV. While quite effective one of the major downsides of treatment is cost. Carl’s three medications run about $2,200 per month…a figure that is quite typical. This, of course, does not include approximately six blood tests and physicians appointments per year, bringing his treatment costs to about $3,000 per month.

The US Congress recognized the steep cost of treatment when they reauthorized the Ryan White Care Act in 2009 by a vote of 408-9. This Act authorizes the expenditure of over $2 billion annually to assist with HIV outreach and treatment. It is the ‘payer of last resort,’ and income guidelines are applied towards recipients, but still it is estimated that some 30% of HIV positive individuals receive some assistance through this program.

More comprehensive coverage, of course, is available through private insurance. More than 25% of Americans work for an employer that offers domestic partner benefits; 51% percent of Fortune 500 companies offer domestic partner health benefits; and 37% of all Americans live in states where some legal protection of same-sex partner arrangements exist (marriage, civil unions, or domestic partner benefits.)

Back to Robert and Carl.

Robert has a full-time, secure job, and both he and his employer contribute towards Roberts’ health insurance. When Robert married Carl, they looked forward to Carl’s being added to Roberts policy as a spouse, thus providing not only coverage for Carl’s HIV medicine, but for the entire range of normal health care for which the typical American might visit the doctor or the hospital. Robert, who had been married before, had already had his children (and formerly, an ex-wife), on his family policy.

Enter the federal Defense of Marriage Act (“DOMA”).

Under DOMA, the federal government agencies are prohibited from recognizing the validity of same-sex unions of any kind, even when they are authorized under state law. This is a significant change to federal-state relationships, since Family Law issues have always been decided at the state level. As a result, in Rhode Island, Alabama, and Alaska first cousins may legally marry, while in Louisiana, New Hampshire, and Pennsylvania such marriages are illegal. The Federal government dos not take a stand on this issue: they accept first-cousin marriages from Alaska as legal, but would reject the validity of first-cousin marriages illegally performed in Pennsylvania. In other words, the federal government normally accepts the states’ definition of marriage as authoritative in the matter of marriage.

Under DOMA, however, the federal government will not consider a same-sex marriage, validly performed under state law, as a valid marriage under federal law. And that has serious federal income tax implications.

When Robert added Carl, his lawful spouse, to his family health insurance, his HR office informed him that since Carl was not a spouse under federal law, Robert would have to pay taxes on “imputed income” to Carl. “Imputed Income is the addition of the value of cash/non-cash compensation to an employees’ taxable wages,” and both federal income taxes and FICA (Social Security) taxes are assessed against the value of this imputed income.

Robert was shocked when he saw his next paycheck. In order to cover the imputed value of providing health insurance to his spouse – an action that is never applied to an opposite-sex spouse – his employer had withheld an additional $450/month from his paycheck.

As a middle-class income-earner, the loss of an additional $5,400 annually was too much to absorb. Robert removed Carl from his health insurance policy, and Carl applied for – and received – HIV coverage under the Ryan White Act.

The sad reality is that without DOMA, Carl could have been added to a private insurance policy just as any other spouse could be, without the punishing effect of federal taxes associated with imputed income.

Because of DOMA, American taxpayers will now pay a minimum of $36,000 annually for Carl. And this is just a single instance of a pattern that is replicated across the nation.

There are over 1.1 million HIV positive Americans. 30% receive assistance through the Two Billion dollar plus Ryan White Care Act. Close to half might currently or eventually be eligible for private insurance coverage through spouses, civil unions, domestic partnership arrangements, or company policies.

Fiscal Conservatives, take note: one of the single most significant actions you could take to reduce spending and taxpayer burden, while improving health care provisions for hundreds of thousands of Americans, is to repeal the provision of DOMA that prohibits federal recognition of valid state marriages.

The only real question is whether you believe that punishing homosexual couples is a more important public policy goal.

*Robert and Carl are not their real names, but they are real people and the dollar figures and story are entirely accurate.
--------------------------

SOURCES:

CDC 'HIV Prevalence Estimates -- United States, 2006' MMWR 57(39), 3 October 2008
http://health.msn.com/health-topics/articlepage.aspx?cp-documentid=100057404
http://aids.about.com/od/hivmedicationfactsheets/a/drugcost.htm
AIDS Drug Assistance Programs (ADAPs) - Henry J. Kaiser Family Foundation Fact Sheet
U.S. Census Bureau. “County Business Patterns: 2000.”
Human Rights Campaign, “State of the Workplace: 2006.”
http://www.haasjr.org/index.php
http://definitions.uslegal.com/i/imputed-income/

The Federal Tax Code...time for GLBT Civil Disobedience

For as long as there has been a federal income tax (only since 1917), the federal government has asked taxpayers to indicate their marital status. Taxpayers need not prove their status, they need only swear that all the information contained on the form is true.

And so, come April 15, I, along with other gay and lesbian couples in New Hampshire and other states permitting same-sex marriage, will have a choice: we can check off "married" on page 1 of our 1040, and sign the bottom of page 2 in good conscience that our return is truthful, or we can call ourselves 'single,' and sign that statement, knowing that calling ourselves 'single' would be a patent lie under state law.

The choice, of course, has both legal and financial consequences: two people filing as married pay far less in federal income tax than those same two people filing as single, especially if there is a large income disparity between them.

And so, for the first time in decades, I will actually engage in an act of civil disobedience under federal law, because I am choosing to answer honestly under state law. (One has to wonder, of course, just how the Feds will choose to pursue this: nowhere on the federal income tax form do they request 'gender'.) And if and when they do uncover it, and charge me with increased taxes and penalties and late fees, I will challenge it in federal court as long and as far as I am able.

And if even a small part of the 600,000+ gay couples in this country do the same, it will be a federal court logjam the likes of which we have never seen.

The problem, of course, stems from "DOMA," the so-called "Defense of Marriage Act," a 1996 law that contains two provisions. The first guarantees each state the right not to recognize a same-gender union performed in another state (mere political pandering, as the courts had already long-ruled that states had that right.) The second provision states that the federal government would define marriage as only between a man and a woman.

The problem with that approach, of course, is that it is not the federal government's jurisdiction to define marriage. There is no federal Constitutional provision permitting a federal law in this arena.

In fact, marriage laws are very specifically creatures of state jurisdiction. Nebraska law requires that couples be 19 if they don't have parental consent, while 17 year olds can marry with parental consent; in Hawaii those as young as 15 can marry with parental consent. Alabama and Kansas permit common-law marriage; most states no longer do. In Idaho, females must be tested for Rubella, and In New York, tests for sickle cell anemia may be required before marriage. In Rhode Island, first cousins can marry; In Illinois they can as long as they can not bear children; in Oregon they can if one was adopted; while in New Hampshire and Pennsylvania there is no first-cousin marriage permitted at all.

The rules for who can and who can not get married are state-specific, and the federal government has always accepted the definitions of the states, even though they differed from state to state. By imposing DOMA, the federal government has involved itself in a sphere that is clearly not within it's own jurisdiction, but, under the 10th Amendment, "reserved to the states or to the people."

So, on April 15, I will be checking "married," and I will be signing a sworn oath that I have told the truth.

Let the feds argue in court that I was wrong for so doing. And while I will do it alone if necessary, I invite other couples in our situation to join us.