www.moneynews.com
2009 Reuters.

Friday, July 10, 2009 9:14 AM

ZURICH (Reuters) – Swiss bank UBS was braced on Friday for a high-stakes trial in the United States next week that could force it to reveal secret client data, as a last-minute deal remained elusive.

It was unclear whether UBS, one of the world’s largest wealth managers, could reach a settlement to the damaging tax row before a court hearing starts, weighing on its shares.

The hearing is due to begin in Miami on Monday.

“Finding a solution to the matter may take longer than just the next few days, although one can never rule out a last-minute deal,” a source familiar with the matter told Reuters when asked about the chances of a deal this weekend.

U.S. authorities have asked UBS to disclose the identity of 52,000 U.S. holders of secret Swiss accounts.

But UBS Chief Executive Oswald Gruebel told executives in an internal memo this week that the bank could not comply with the request because it would be in breach of Swiss criminal law.

Switzerland has vowed to prevent UBS from handing over client information to U.S. authorities, in an attempt to defend bank secrecy, and says the tax case targeting its biggest bank is souring diplomatic ties.

A UBS spokesman said the bank would be open to a solution stemming from talks between the Swiss and U.S. governments. But he declined to say whether a deal was in sight.

“The enforcement of the summons would require UBS to violate Swiss law. We have also stated that issues relating to the exchange of information in tax matters should be discussed and resolved between friendly governments,” he said.

Analysts say failure to resolve the tax row ahead of the court hearing in Miami would hurt UBS.

“It is impossible to predict the outcome. We are telling clients to be cautious,” Dirk Becker, a bank analyst at Kepler Equities. “I am sure talks are happening right now. If the trial starts, this would be a bad sign for UBS.”

On Wednesday, U.S. District Judge Alan Gold, set to preside over next week’s hearing, gave the Justice Department until noon (1600 GMT) on Sunday to say whether it is prepared to seize UBS assets in its bid to force it to disclose data, raising hopes that a settlement was in sight.

Shares in UBS were 2.2 percent lower at 12.66 Swiss francs at 1120 GMT against a 0.9 percent fall in the DJ Stoxx European Banking index.

FOCUS ON DATA, NOT MONEY

UBS Chairman Kaspar Villiger told Swiss television earlier this week that the focus of the tax dispute was access to the information related to U.S. clients of UBS. “This is not about a payment, it is about data,” Villiger said.

He also said that speculation of UBS having to pay billions of dollars in the tax dispute were completely unfounded.

Swiss media have said UBS risked having to pay 3 billion to 5 billion Swiss francs ($2.8 billion-$4.6 billion) to end the litigation.

“It’s certainly not about such sums,” Villiger said, without qualifying his comment any further.

He noted that the row concerns a civil summons and that UBS already paid for its mistakes when it agreed to pay $780 million to end an earlier criminal lawsuit in February. The bank disclosed around 250 client names on that occasion.

A separate source familiar with the situation said it was unlikely that any payment involved in the UBS civil summons would be above $1 billion.

“To charge them another 3 to 5 billion francs at a time when they (UBS) are facing an uncertain economic environment and are working on fixing their capital structure would be irresponsible,” the source said.

Switzerland, the world’s biggest offshore banking center, has said it will seize client data to stop UBS from handing it over to the Internal Revenue Service (IRS) to defend bank secrecy laws, saying the case is souring diplomatic ties.

But Swiss National Bank Chairman Jean-Pierre Roth said he expected a deal in the lawsuit against the country’s former flagship bank UBS in the United States.

“We have no doubt that this bilateral fight will be resolved,” Roth told the German daily Handelsblatt according to a version of the interview on the paper’s Web site.

moneynews.newsmax.com

Thursday, July 9, 2009 7:57 AM

By: Sean Hyman

In the past several weeks, three of the four BRIC nations ? Brazil, Russia, and China ?have expressed doubt over the dollar?s reserve status and expressed worries over the U.S. debt. India had been the only BRIC nation that had remained silent on the dollar issue, but that?s changed.

I wasn?t sure if India was going to hop on the bandwagon or not. However, they recently started singing with the rest of the BRIC choir in a chorus against the U.S. dollar.

In fact, on July 6, both Russia and India collectively said that the world economy is too reliant on the U.S. dollar and both called for changes in how $6.5 trillion in reserves are managed.

Amazingly, they voiced their concern publicly right before start of the G-8 countries meeting this week in Italy. All eyes will be on this meeting since the central bankers are present at this one and not just the finance ministers.

Evidently Russia intends to talk about how much a system based on the dollar and euro is flawed.

Just a few days earlier, economic advisers to India?s prime minister were reported to be urging him to diversify its foreign holdings away from the dollar.

Collectively, these BRIC nations are calling for a change. It may not happen overnight, but the sentiment could affect the greenback immediately.

The four BRIC nations are calling for a good portion of their reserves to be invested in the IMF?s Special Drawing Rights which are linked to a basket of currencies. Brazil, Russia, and China have already diverted some of their reserves into these and also into some newly issued IMF bonds.

It was bad enough for these countries to take this step, as far as the dollar is concerned, but now India is flexing its muscle with its $264 billion in foreign exchange reserves.

So as you can see, as these emerging nations continue to develop, they are gaining more power.

Formerly, any meetings were between the seven or eight of the largest nations in the world. However, more and more we?re hearing about G-20 meetings which include many of the larger emerging-market nations.

So while these guys didn?t even have a voice just a few years ago, now they are having a huge influence in the shape of the global economy as they make a bigger splash in the global pond all the time.

This trend is unlikely to change anytime soon. In fact, the BRIC nations alone have so much in foreign reserves to throw around that they no longer can be ignored. Therefore, they?ve earned the right for their voice to be heard.

The times are changing. More countries are becoming more influential and gaining a bigger say in what is going on in the world. Many of these countries would like to see the dollar?s grip loosened.

This continues to hammer the buck and keeps it in its current downtrend. The only thing that keeps the buck?s decline from accelerating even greater are the voices out there that still say we?re in a deflationary environment.

However, once the next global advance is solidly under way, you will see the dollar?s descent accelerate against the major currencies of the world, but possibly even more against the emerging market currencies of the world such as the Brazilian real, Russian ruble, Indian rupee, and Chinese yuan.

www.moneynews.com

Friday, July 10, 2009 4:10 AM

WASHINGTON — Treasury Secretary Timothy Geithner is telling lawmakers the U.S. economy stumbled last year in part because the power and risks of an explosive derivatives market blindsided the government.

In congressional testimony prepared for delivery Friday, Geithner said the ease with which derivatives were bought and sold in an era of easy credit encouraged financial institutions and investors to take on too much risk.

At the same time, government regulators weren’t given the proper tools to mitigate those risks and protect the American consumer, he said.

The federal regulatory system “failed in its most basic responsibility to produce a stable and resilient system for providing credit and protecting consumers and investors,” he said.

Geithner was to appear before the House Financial Services Committee and the House Agriculture Committee, which share jurisdiction of derivatives. It will be his first appearance in the House since President Barack Obama laid out his plan to overhaul the regulatory framework governing the financial system. Geithner testified before the Senate Banking Committee in June.

Since then, the proposal has run up against much of the financial industry, which says it would raise costs and squash innovation.

Some lawmakers and federal regulators say they are skeptical, too. They question whether Obama wants to give too much power to the Federal Reserve.

Under the plan, which requires Congress’ blessing, the Fed would be put in charge of keeping large, influential institutions in check. A new consumer protection agency also would be created.

Additionally, Obama wants to regulate for the first time derivatives that are being privately traded “over the counter,” or away from an exchange.

Derivatives are financial instruments whose value are derived from something else, such as a mortgage-backed security or a commodity like oil.

In one infamous example, American International Group Inc. sold so-called credit-default swaps to protect investors against potential losses on mortgage-backed securities. When the housing market collapsed, AIG was unable to make good on its promises and took a $182 billion government bailout to keep from collapsing.

The allure of the over-the-counter derivative, as opposed to those swapped on exchanges, is that it can be individually negotiated and tailored to meet the specific needs of the buyer.

But Geithner said many investors used the instruments to evade regulation, exploit regulatory loopholes or minimize taxes.

Over-the-counter derivatives “grew explosively” in the past decade, with the face value of outstanding transactions rising sixfold to almost $700 trillion in 2008, he added.

“The apparent ease with which derivatives permitted risk to be transferred and managed during a period of global expansion and ample liquidity led financial institutions and investors to take on larger amounts of risk than was prudent,” he said.

www.moneynews.com
Agence France Presse.

Friday, July 10, 2009 7:55 AM

WASHINGTON ? Federal Reserve deputy chairman Donald Kohn on Thursday defended the U.S. central bank’s independence, saying congressional oversight could interfere with monetary policymaking.

If the Government Accountability Office (GAO), the investigative arm of Congress, were authorized to audit the Fed, that “could cast a chill on monetary policy deliberations,” Kohn told a House of Representatives committee.

He acknowledged that the possibility of expanding the audit authority of the GAO over the Fed “has recently been discussed.”

“Although Federal Reserve officials regularly explain the rationale for their policy decisions in public venues, the process of vetting ideas and proposals, many of which are never incorporated into policy decisions, could suffer from the threat of public disclosure,” Kohn said.

He also defended the Fed’s closed-door policy-setting meetings as vital for the financial markets and the public.

“The publication of the results of GAO audits related to monetary policy actions and deliberations could complicate and interfere with the communication of the FOMC’s intentions regarding monetary policy to financial markets and the public more broadly,” he said, referring to the Fed’s policy-setting Federal Open Market Committee.

Credit rating agencies, Kohn warned, would lower their ratings on the United States if the independence of the central bank seemed threatened, which would make it more costly for the government to borrow at a time when its deficit is soaring amid a recession.

Republican Representative Ron Paul, a libertarian-leaning former 2008 presidential candidate, has proposed legislation that would subject the Fed to political pressure through the GAO audits. Paul, who has advocated abolishing the Fed, claims his measure has the support of more than half the House.

Although critics accuse the Fed of being overly secretive about its operations and decision making, the central bank has made gains in transparency after chairman Ben Bernanke took office in 2006.

The Fed routinely publishes edited minutes of its FOMC meetings three weeks after they are held.

www.cnsnews.com

Friday, July 10, 2009
By Matt Cover

Washington (CNSNews.com) – Senators who voted for the Obama administration’s $787-billion economic stimulus bill defended its performance, saying that despite a weaker-than-expected economy, the stimulus was not a failure and they were not disappointed in the results so far.

Republican supporters of the Obama economic plan said that even though the administration’s economic predictions proved wrong, the stimulus is still on the right track.

Sen. Sherrod Brown (D-Ohio) told CNSNews.com that the stimulus was not a failure and that the real need was for the administration to spend the money faster.

“It means they need to speed it up a bit,” he said. “[And] do all we can to help create demand for autos and houses and everything else.”

Brown said he was not disappointed in the stimulus, arguing that the economy’s poor performance was a result of past economic policies, not current ones.

“I’m disappointed in what’s happened to the economy,” he explained. “It really comes as a result of the last decade of bad trade policy, bad tax policy, deregulation–all the things that happened. The stimulus was written to deal with an unemployment rate that wasn’t as high as we thought it was going to be, as everybody thought it was going to be.”

Brown maintained that the economy would be worse without the stimulus, despite the fact that even the administration’s own predictions envisioned a better economic picture without the stimulus than the one today.

“I think it’s beginning to work,” said Brown. “I think it’d be worse if we hadn’t done it, like the auto bailout: It would be worse if we hadn’t done it.”

Sen. Roland Burris (D-Ill.) said that the stimulus was working just fine and that it would really kick in next year.

“The stimulus is not failing. As a matter of fact, we’re doing very good,” Burris said. “We’re doing very well, and it’s going to kick in more into the next fiscal year.”

Burris said that he was not disappointed at all, arguing that the economic numbers were not worse than expected, but that the administration just did not understand the economy well enough.

“The numbers weren’t worse. The situation was worse than what they [the administration] had understood. The stimulus is working,” he said.

Even one of the stimulus’ three Republican supporters came to its defense, saying it was never meant to be a “cure-all” and therefore could not be judged as a failure.

“The stimulus was never intended to be a cure-all,” Sen. Susan Collins (R-Maine) told CNSNews.com. “I do believe that its impact is being slowly felt and that it has kept unemployment from being higher than it otherwise would be.”

The stimulus’ Republican opponents said the historically high unemployment was absolutely a sign that the stimulus had failed. Sen. James Inhofe (R-Okla.) said he was not even surprised at the bad economic news, because he always knew the stimulus would fail.

“I don’t think it [failed] – I know it,” he told CNSNews.com. “I said at the time, there’s no stimulus in the stimulus bill. It was nothing but social engineering and welfare.”

Inhofe said that calls for a second stimulus were pointless. “That’s absurd,” he said. “Why put more money into something that doesn’t work?”

House Minority Leader John Boehner (R-Ohio) chimed in as well, beginning his weekly press conference with the declaration that the stimulus was a failure and saying that the administration had been wrong on the unemployment numbers and wrong about the impact of the stimulus spending.

“Ohio’s unemployment rate is above 10 percent. The nation’s unemployment continues to rise,” Boehner said. “The administration promised it would keep unemployment below eight percent. They promised the stimulus would create jobs immediately. It’s pretty clear now that the administration was wrong.”

Boehner highlighted as an example of the “wasteful” spending, the fact that $16 million in stimulus money had been spent on protecting the salt marsh harvest mouse, saying it was no wonder the public thought Congress was wrong.

“All the public sees is a lot of wasteful Washington spending, job-killing measures like energy and health care,” said Boehner, who added, “Oh, yes. We’ve got to take care of the salt water marsh mouse. No wonder the American people think we’re nuts.”

From WCTV

Posted: 6:12 PM May 12, 2009
Last Updated: 6:12 PM May 12, 2009
Reporter: La’Tasha Givens
Email Address: latasha.givens@wctv.tv

The talk about fair taxes continues to grow in the Rose City just weeks after the tea party protest held around the country

And one man is on a mission to tell people about other options. The Fair Tax Act would essentially get rid of federal income taxes. It would in turn charge consumers a higher tax on everyday retail items–allowing tax payers to keep all of their gross income from their paychecks.

John Layton, Thomasville Fair Tax Organizer says, “Sure everyone would like to have all their money. When you take your pay check and you look at it and see how much money is taken out it’s like wow, I would love to have that money in my pocket.”

Layton has started a letter writing campaign and is gaining support all over town. He will continue to host a series of meetings to inform residents about how much money he thinks the fair tax act would save them.

Technorati Tags: Fair Tax

We thank Kyle for all of his great work in supporting the FairTax and we wish him the best success in his upcoming National Debate Tournament!

Here is Kyle’s Script:

“Extra, Extra, Read All about It! Stock Market crashes as Americans are taxed more and more!” Isn’t that the headline we hear every day? I don’t know about you, but I am tired of hearing that over and over. Here’s one we definitely won’t hear; “Extra, Extra, Read All about It! American economy saved by successful tax reform!” But wait; there is one possibility…the Fair Tax. This has the potential to make that head line and more! The unfortunate thing is, our politicians reject almost anything beneficial for the American people and try to find quick and easy fixes, band-aid solutions if you will. Well, this may take a little bit longer to implement, but it sure is worth it! Let me explain…
Our tax system is broken let’s look at the first fact. No one knows the whole tax code. In 1938, Franklin Delano Roosevelt wrote a letter to the IRS Commissioner asking him to figure out how much he owed in taxes because the tax code was so confusing that the President could not figure it out. Let’s look at a very troubling fact. If the tax code was written in a book about this wide and this long, then it would be 8 feet tall! It is outrageous that “we the people” could even allow this to happen; but even more outrageous is that fact that we’re still using a tax code designed for the 20th century. Yes, it’s true; all the major tax code legislation that our system is based upon is from the early to mid 20th century. We need a change in this system. Every century, no matter what you’re dealing with, there is a major change in the way things are done. The best example I have is the transportation revolution of the 20th century. In the 19th century, we rode horse and buggy up until the point where we transitioned to the Model-T Ford at the beginning of the 20th century. Just like that horse and buggy, our tax code, just isn’t efficient anymore. We can’t keep running on something that doesn’t work. It’s like you’re still driving a car, day after day, knowing that it needs a new tire. And each day that the tire doesn’t get changed, the worse it gets. And eventually, we’re going to break down. That’s definitely something that we don’t need right now. Along with the fact that the system is outdated, it’s a system that penalizes productivity. That means the harder you work, the less percentage of money you’re going to keep. But facts are facts, and the truth is, the average American will make more money not working at all, then they would working two jobs. That just shows that our system is broken. Not only is the tax system broken, so is the organization that runs it, the IRS.
The IRS is the worst government agency and truly the most irresponsibly run agency in the country. Because of their irresponsibility, we get inefficiency. And this inefficiency leads to the waste of our tax dollars by paying to keep the IRS running, inefficiently. The money that they receive every year from the government to keep them running, is used ineffectively. Let me point something out; we spend ten billion dollars a year to keep the doors of the IRS open. Not only is this money wasted, the employees’ time is wasted as well. The employees that work for the IRS are very intelligent and capable people. Was the IRS gone, they could become accountants and work to help people save their money in order to further future. Now, imagine with me what we could do if we closed the IRS and kept that extra 10 billion dollars a year. We could use it to pay off debt! After ten years, that’s a 100 billion dollar surplus coming from where the IRS was. Or, even better, we could reinvest this money elsewhere. We can pay off Social Security or Medicare. We could start looking at repairing roads, bridges, and highways. We could even use it for green energy research. If we put the “Going out of Business” sign on the front door of the IRS, it will be much more beneficial to the country. And there’s only one plan out there right now that will do that. Ladies and gentlemen, I present to you, the FairTax.
The FairTax was created in 1994 by graduates from Harvard and Stanford University and was declared by these business experts, the best way to run our tax system. Even though it was made in the 1990’s, it’s still applicable today. The FairTax eliminates all taxes and puts in place a simple 23% sales tax. With the elimination of all taxes, April 15th becomes another beautiful spring day. Now, you don’t have to go to the post office to mail your tax returns. You can go on a picnic with your family in the park! And instead of looking at the second number on your paycheck, you can now look at the first and take home every cent you have earned! It’s about time Americans get what we’ve earned. Not only does the FairTax get rid of our current tax system, it gets rid of the IRS as well! So there you have it, our faulty tax system is gone and so is its manager, the IRS. Well, some of you may ask, why 23%? Isn’t that a little high? In the FairTax program, there’s a monthly check called the Prebate. Based on your income, you get a certain amount of money in this government check that you receive monthly. The more money you make, the less money you get in your prebate check, the less money you make the more money you get in your prebate check. This money in the Prebate check comes from some of the taxes they’ve collected from us so we get a little bit back of what we’ve paid. According to the FairTax Calculator on FairTax.org, for a married couple with two children making 50,000 dollars per year, they would get twelve and a half percent more spendable income. It’s that simple. The FairTax is the fastest and most effective solution in our situation.
The debate will go on, but it’s time that we fight for change. Let me tell you a story in closing. My friend, Charlie Prochaska of FairTaxSOWEGA, was going through a hard financial time in his family last year and worked overtime to try to make some extra money to help. He usually works 40 hours in a work week. That week he worked 100 hours that week, 60 hours overtime. When he got his paycheck, he did the math. In that additional 60 hours, he made 100 dollars, that’s it. It’s sad that our tax code can do that to us. This just shows we need the FairTax. This tax system will change the America we know. In the Constitution, the 16th amendment requires us pay the income tax. The FairTax will deem that amendment null and void. Isn’t that what America needs in these economic hard times? It’s time that we stand up and fight to change this situation. We need to fight the system and save our country. Ladies and gentlemen, I implore you to stand with me in fighting this battle for our freedom and our prosperity. Thank you.

Great Job Kyle and Thank you for promoting FairTax on this national platform!! (Please feel free to leave your comments for Kyle in the comments sections below.)

From http://online.wsj.com/article/SB123846422014872229-email.html

Lawrence Summers, President Obama’s chief economic adviser, declared recently that “Let’s be very clear: There are no, no tax increases this year. There are no, no tax increases next year.” Oh yes, yes, there are. The President’s budget calls for the largest increase in the death tax in U.S. history in 2010.

The announcement of this tax increase is buried in footnote 1 on page 127 of the President’s budget. That note reads: “The estate tax is maintained at its 2009 parameters.” This means the death tax won’t fall to zero next year as scheduled under current law, but estates will be taxed instead at up to 45%, with an exemption level of $3.5 million (or $7 million for a couple). Better not plan on dying next year after all.

This controversy dates back to George W. Bush’s first tax cut in 2001 that phased down the estate tax from 55% to 45% this year and then to zero next year. Although that 10-year tax law was to expire in 2011, meaning that the death tax rate would go all the way back to 55%, the political expectation was that once the estate tax was gone for even one year, it would never return.

And that is no doubt why the Obama Administration wants to make sure it never hits zero. It doesn’t seem to matter that the vast majority of the money in an estate was already taxed when the money was earned. Liberals counter that the estate tax is “fair” because it is only paid by the richest 2% of American families. This ignores that much of the long-term saving and small business investment in America is motivated by the ability to pass on wealth to the next generation.

The importance of intergenerational wealth transfers was first measured in a National Bureau of Economic Research study in 1980. That study looked at wealth and savings over the first three-quarters of the 20th century and found that “intergenerational transfers account for the vast majority of aggregate U.S. capital formation.” The co-author of that study was . . . Lawrence Summers.

Many economists had previously believed in “the life-cycle theory” of savings, which postulates that workers are motivated to save with a goal of spending it down to zero in retirement. Mr. Summers and coauthor Laurence Kotlikoff showed that patterns of savings don’t validate that model; they found that between 41% and 66% of capital stock was transferred either by bequests at death or through trusts and lifetime gifts. A major motivation for saving and building businesses is to pass assets on so children and grandchildren have a better life.

What all this means is that the higher the estate tax, the lower the incentive to reinvest in family businesses. Former Congressional Budget Office director Douglas Holtz-Eakin recently used the Summers study as a springboard to compare the economic cost of a 45% estate tax versus a zero rate. He finds that the long-term impact of eliminating the death tax would be to increase small business capital investment by $1.6 trillion. This additional investment would create 1.5 million new jobs.

In other words, by raising the estate tax in the name of fairness, Mr. Obama won’t merely bring back from the dead one of the most despised of all federal taxes, and not merely splinter many family-owned enterprises. He will also forfeit half the jobs he hopes to gain from his $787 billion stimulus bill. Maybe that’s why the news of this unwise tax increase was hidden in a footnote.

THE GLOBAL TAX REVOLUTION

Few policymakers today want to regulate trade and capital flows as countries did in the 1950s, but dangerous movements are afoot to control and limit tax competition. Policymakers in international organizations such as the Organization for Economic Co-operation and Development (OECD), the European Commission and the United Nations (UN) want to turn back the clock and create an OPEC for taxes to insulate governments from tax competition, say authors Chris Edwards and Daniel Mitchell, in their new book, “Global Tax Revolution.”

The good news is that the United States is uniquely situated to protect and advance global tax competition. Edwards and Mitchell recommend U.S. policymakers:

* Use American influence inside the OECD to kill the anti-tax competition project; the United States is the biggest funder of the OECD, providing nearly one-fourth the organization’s budget, meaning that we have the ability to block further attacks by the organization on lower-tax jurisdictions.
* Reject European Union invitations to participate in cartel-like tax initiatives, such as the savings tax directive.
* Block possible UN schemes for global taxes, global tax regulations and a global tax organization; fortunately, the United Nations has not made much progress toward those ends, but these ideas are often discussed and may come to fruition unless tax-payers remain vigilant.
* Oppose efforts to change U.S. tax policies in anti-competitive ways or to expand the reach of the U.S. worldwide tax system; also, efforts to by U.S. policymakers to blacklist low-tax nations and jurisdictions should be rejected.

One way to help ensure that American policies stay on the side of international tax competition is for us to proceed with domestic tax reform. With America’s current tax system, politicians often fret about companies moving profits to the Cayman Islands and the like, and they are susceptible to siding with high-tax countries on tax policy matters. However, if we proceed with major tax reforms and make the United States a magnet for investment and jobs, it will be much easier for policymakers and the public to understand the benefits of open tax competition, explain Edwards and Mitchell.

Source: Chris Edwards and Daniel Mitchell, “Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It,” Cato Institute, September 2008.
For more information:

http://www.catostore.org/index.asp?fa=ProductDetails&method=&pid=1441407

For more on Taxes:

http://www.ncpa.org/sub/dpd/index.php?Article_Category=20

The report – available on line here (The Complexity of the Tax Code) – is a 12 page pdf file. Here is the text of the report without the footnotes and graphs:

Taxpayer Advocate Service — 2008 Annual Report to Congress — Volume One 3
The Complexity of the Tax Code MSP #1
Most Serious Problems #1
The Complexity of the Tax Code
Definition of Problem – The most serious problem facing taxpayers is the complexity of the Internal Revenue Code.
Analysis of Problem – The largest source of compliance burdens for taxpayers – and the IRS – is the overwhelming complexity of the tax code. The only meaningful way to reduce these burdens is to simplify the tax code enormously.
Consider the following:

• According to a TAS analysis of IRS data, U.S. taxpayers and businesses spend about 7.6 billion hours a year complying with the filing requirements of the Internal Revenue Code.2 And that figure does not even include the millions of additional hours that taxpayers must spend when they are required to respond to an IRS notice or an audit.
• If tax compliance were an industry, it would be one of the largest in the United States. To consume 7.6 billion hours, the “tax industry” requires the equivalent of 3.8 million full-time workers.
• Compliance costs are huge both in absolute terms and relative to the amount of tax revenue collected. Based on Bureau of Labor Statistics (BLS) data on the hourly cost of an employee, TAS estimates that the costs of complying with the individual and corporate income tax requirements in 2006 amounted to $193 billion – or a staggering 14 percent of aggregate income tax receipts.
• Since the beginning of 2001, there have been more than 3,250 changes to the tax code, an average of more than one a day, including more than 500 changes in 2008 alone.
• The Code has grown so long that it has become challenging even to figure out how long it is. A search of the Code conducted in the course of preparing this report turned up 3.7 million words.6 A 2001 study published by the Joint Committee on Taxation put the number of words in the Code at that time at 1,395,000.7 A 2005 report by a tax research organization put the number of words at 2.1 million, and notably, found that the number of words in the Code has more than tripled since 1975.
  Tax regulations, which are issued by the Treasury Department to provide guidance on the meaning of the Internal Revenue Code, now stand about a foot tall.   The CCH Standard Federal Tax Reporter, a leading publication for tax professionals that summarizes administrative guidance and judicial decisions issued under each section of the Code, now comprises 25 volumes and takes up nine feet of shelf space.  Two companies publish newsletters daily that report on new developments in the field of taxation; the print editions often run 50-100 pages and the electronic databases contain substantially more detailed information.
• The complexity of the Code leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them either to overpay their tax or to become subject to IRS enforcement action for mistaken underpayments of tax. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.
• Individual taxpayers find the return preparation process so overwhelming that more than 80 percent pay transaction fees to help them file their returns. About 60 percent12 pay preparers to do the job,13 and another 22 percent purchase tax software to help them perform the calculations themselves.
• The Code contains no comprehensive Taxpayer Bill of Rights that explicitly and transparently sets out taxpayer rights and obligations.15 Taxpayers do have rights, but they are scattered throughout the Code and the Internal Revenue Manual and are neither easily accessible nor written in plain language that most taxpayers can understand.

The Office of the Taxpayer Advocate sees dozens of examples of the impact of tax law complexity each year. Here are some key illustrations:

• Excessive Number of Education and Retirement Savings Incentives. The Code currently contains at least 11 incentives to encourage taxpayers to save for and spend on education; the eligibility requirements, definitions of common terms, income level thresholds, phase-out ranges, and inflation adjustments vary from provision to provision.17 The Code also contains at least 16 incentives to encourage taxpayers to save for retirement; these incentives are subject to different sets of rules governing eligibility, contribution limits, taxation of contributions and distributions, withdrawals, availability of loans, and portability.18 Taxpayers wishing to choose the optimal vehicle to save for college must know the difference between a Section 529 plan, a Coverdell Education Savings Account, and the Hope and Lifetime Learning Credits, among other alternatives. Taxpayers wishing to choose the optimal plan in which to save for retirement must know the difference between a traditional IRA, a Roth IRA, a Section 401(k) plan, a Section 403(b) plan, and a SARSEP, among others.
  The point of a tax incentive, almost by definition, is to encourage certain types of economic behavior. But taxpayers can only respond to incentives if they know they exist and understand them. Choice is good, but too much choice is overwhelming. It is not reasonable to expect the average taxpayer to learn the details of at least 27 education and retirement incentives to determine which ones provide the best fit.
• The Alternative Minimum Tax (AMT). The AMT concept, originally enacted in response to a report that 155 high-income taxpayers had paid no tax for the 1966 tax year, now effectively requires taxpayers to compute their taxes twice – once under the regular rules and again under the AMT regime – and then to pay the higher of the two amounts.21 The AMT was originally conceived to prevent wealthy taxpayers from escaping tax liability through the use of tax-avoidance transactions. However, most of the significant tax loopholes that enabled taxpayers to escape tax at the time the AMT was written have long since been closed, and it is now estimated that about 77 percent of the additional income subject to tax under the AMT is attributable simply to family size or residing in a high-tax state.22 Few people think of having children or living in a high-tax state as a tax avoidance maneuver, but under the unique logic of the AMT, that is how those actions are treated. Yet government has become so dependent on AMT revenue that Congress to date has been unwilling to make permanent changes in law to curtail the AMT, and it is not likely that such changes will be made outside the context of major tax reform.
• Tax Consequences of Mortgage Foreclosures and Canceled Debts. Most financially distressed individuals who lose their homes to foreclosure or cannot pay off their car loans, credit card balances, student loans, or medical bills probably do not realize that
  their delinquency may increase their tax liabilities, but it often does. If a creditor writes off a debt, the tax code generally treats the amount of the canceled debt as taxable income to the debtor. Congress has carved out a number of exclusions, including a recently enacted exclusion to help homeowners whose mortgage debts are canceled when their houses are foreclosed upon and sold.25 However, taxpayers do not receive the benefit of these exclusions automatically. A taxpayer must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to claim an exclusion. Form 982 is extremely complex, and very few taxpayers or preparers are familiar with it. The IRS estimates that it takes business taxpayers ten hours and 43 minutes to complete the form,26 and the form is not included in many tax software packages available to taxpayers.
  IRS data shows that approximately two million Forms 1099-C, Cancellation of Debt, are issued to taxpayers each year reporting canceled debts.27 The National Taxpayer Advocate estimates that tens of thousands and possibly hundreds of thousands of taxpayers who qualify to exclude canceled debts from gross income do not file Form 982 to claim allowable exclusions. Instead, some of these taxpayers unnecessarily include the amount of the canceled debt in gross income, and other taxpayers who fail to include it unnecessarily face IRS examinations and tax assessments.
• Earned Income Tax Credit (EITC) Complexity. About 22 million low income taxpayers claim the EITC each year.30 The eligibility requirements and computations are complex, yet EITC recipients are relatively less able to understand complex rules and less likely to speak English as their primary language, creating a recipe for confusion. EITC complexity leads to improper claims by taxpayers – some intentional but many inadvertent – and to improper denials by the IRS. A 2004 TAS study surveyed cases in which the IRS denied an EITC claim on audit but the taxpayer asked the IRS to reconsider its findings. Despite the initial IRS denials, the study found that taxpayers ultimately obtained some or all of the EITC amount they had claimed on their returns in 43 percent of the cases (and they received, on average, 94 percent of the amount they had originally claimed). Another window into EITC complexity: One might expect that low income taxpayers would be less likely to need return preparers because their sources of income are often limited to wages and perhaps interest income, yet 72.5 percent of taxpayers who claim the EITC use tax preparers.
• Proliferating Tax Sunsets. The tax code contains more than 100 provisions that are temporary and set to expire soon, up from about 21 in 1992. Tax benefits have increasingly been enacted for a limited number of years in order to reduce their cost for budget-scoring purposes. Although most such benefits are periodically renewed, some are not. For example, the AMT patch and the deductions for state and local taxes and for tuition and fees paid to a post-secondary institution are generally renewed for one or two years at a time, but the extensions are not guaranteed and the amount of the AMT patch is generally changed with each renewal. If taxpayers do not know whether a tax benefit will remain in the Code, the incentive is less likely to influence their decision-making, thereby undermining its purpose. The uncertainty associated with an expiring tax benefit also makes it difficult for taxpayers to estimate their tax liabilities and pay the correct amount of estimated tax, potentially subjecting them to penalties and causing disillusionment with the tax system.
• Phase-out Complexity. More than half of all individual income tax returns filed each year are affected by the phase-out of certain tax benefits. A common phase-out relates to the deduction allowed for personal exemptions. For example, a married couple with two minor children is generally allowed to claim four personal exemptions if they file a joint return, with each deduction worth $3,500 ($14,000 in the aggregate) in tax year 2008.35 If the family’s adjusted gross income (AGI) exceeds a certain threshold, however, the exemption amount is phased out at a rate of two percentage points for each additional $2,500 (or fraction thereof) of income. Thus, under permanent law, the benefits of the personal exemptions would fully phase out over a $125,000 income range. But under a temporary provision that will sunset after 2009, the phase-out is capped at one-third of the exemption amount. Thus, the phase-out may not reduce the exemption amount below $2,333 per family member ($9,332 in the aggregate). This computation is not obvious to the average taxpayer, and as noted, there are about 100 phase-outs that operate in this manner. Like tax sunsets, phase-outs are largely used to reduce the cost of tax provisions for budget-scoring purposes. However, phase-outs add substantial complexity and create marginal “rate bubbles” – income ranges within which an additional dollar of income earned by a relatively low income taxpayer is taxed at a higher rate than an additional dollar of income earned by a relatively high income taxpayer. This inequity is largely hidden by the complexity of the phase-out calculations.
• Unclaimed Telephone Excise Tax Refunds. In 2006, taxpayers were permitted to claim a one-time tax credit for telephone excise taxes that the government concluded it had improperly collected in the past.38 The amount of the credit ranged from $30 to $60, depending on the number of personal exemptions the taxpayer was entitled to claim on the return.39 No substantiation was required unless a taxpayer claimed a larger amount, so this credit was essentially free money. Yet IRS data show that 28 percent of eligible taxpayers (37 million out of 133.2 million) did not claim the credit. The only plausible explanation is that taxpayers missed the credit because of the complexity of the law and the tax forms.
• Burgeoning Penalties. The number of civil penalties in the Code has grown from about 14 in 1954 to approximately 130 today.42 Penalties should be designed to enhance voluntary tax compliance, but they also should be reasonable and can only influence future taxpayer behavior if taxpayers are aware that the penalties exist. As a consequence of “penalty creep,” some penalties are obscure or unduly harsh. For example, Section 6707A of the Code, which was enacted in 2004 to combat tax shelters, imposes a minimum penalty of $100,000 per individual per year and $200,000 per entity per year for a failure to disclose a “listed transaction.”43 The penalty reflects strict liability – the IRS must impose the penalty even if the taxpayer derived little or no tax benefit, even if the taxpayer had no reason to know the transaction was questionable, and even if the transaction was not “listed” until years after the taxpayer’s return was filed and the transaction was complete. Taxpayers cannot challenge this penalty in court. As a result, an individual who does business as an S corporation and who entered into a transaction that he did not know was listed and that provided little or no tax savings would face an automatic $300,000 penalty per year. In addition, the usual three-year statute of limitations on tax assessments does not apply in the case of listed transactions,44 so if the taxpayer entered into a listed transaction that was reflected on his return for ten years, he would face an automatic $3 million penalty overall. TAS has about 40 cases in its inventory involving non-rescindable Section 6707A penalties,45 and we understand the IRS is considering this penalty in hundreds of additional cases. If Congress does not change the law quickly, this penalty may bankrupt middle-class families that had no intention of entering into a tax shelter.
• Small Business Burdens. Small business taxpayers face a particularly bewildering array of laws, including a patchwork set of rules that governs the depreciation of equipment, numerous and overlapping filing requirements for employment taxes, and a vague set of factors that govern the classification of workers as either employees or independent contractors and that can keep businesses and the IRS battling each other for years with no obvious “correct” answer.

Recommendation
The National Taxpayer Advocate recommends that Congress substantially simplify the Internal Revenue Code.

America’s taxpayers deserve a simpler and less burdensome tax system that enables them to comply with their tax obligations expeditiously – not one that requires them to spend 7.6 billion hours filing their returns every year, thereby consuming the equivalent of 3.8 million full-time workers. Taxpayers deserve a tax system that enables them to prepare their returns cheaply – not one that requires them to pay practitioners for help, as nearly 61 percent of individual taxpayers and 74 percent of unincorporated business taxpayers do today. Taxpayers deserve more clarity about their rights and obligations under the tax code in the form of a Taxpayer Bill of Rights. Taxpayers deserve a tax system that enables them to make wise choices about education and retirement savings – without having to wade through the details of at least 27 tax-favored alternatives. Taxpayers deserve a tax system that enables them to compute their tax liabilities fairly and transparently – not one that effectively requires them to compute their tax liability under two sets of rules (the regular rules and the AMT rules) and often to pay more tax under the AMT regime simply because they engaged in the “tax-avoidance behavior” of having children or living in a high-tax state.

Taxpayers deserve better than a tax system so complex that honest taxpayers often overpay while sophisticated taxpayers often find loopholes, and so complex that 37 million taxpayers could fail to claim a tax credit because they did not know it was available. Taxpayers deserve better than a tax system that gives financially distressed taxpayers a tax break when they default on their mortgage or other consumer debts and the debts are canceled – but then makes claiming the tax break so burdensome that many and probably most eligible taxpayers do not claim it. Low income taxpayers deserve a simpler set of rules by which determine EITC eligibility.

Taxpayers deserve certainty about which provisions will remain in the tax code so they can plan accordingly – without having to regularly grapple with uncertainty because more than 100 provisions sunset regularly and may or may not be renewed or modified. Taxpayers deserve to understand exactly how their tax liabilities are computed – not provisions like phase-outs, which make the computations seem impenetrable and subject lower income taxpayers to higher marginal tax rates than upper income taxpayers. Taxpayers deserve simplicity and proportionality in the penalty rules; it is not reasonable that a taxpayer who claims minimal or even no tax savings may face a mandatory, non-waivable $300,000 penalty per year for failing to file a disclosure form that he may not even know he is required to file.

These are a few aspects of a system that requires pervasive reform. The good news is that there is widespread agreement on the need for tax simplification. The National Taxpayer Advocate has previously identified the complexity of the tax code as the most serious problem facing taxpayers, members of Congress regularly complain about the complexity of the Code, and in 2005, an advisory panel created by President Bush to study the federal tax system delivered a detailed report with substantive recommendations. The bad news is that despite widespread agreement on the need for tax simplification, there has not yet been sustained action to make it happen.

To assist the Congress in pursuing tax simplification, we offer a number of proposals in the Legislative Recommendations section of this report, including recommendations to streamline the education and retirement savings incentives, repeal the AMT, allow taxpayers to exclude modest amounts of canceled debts from income without filing Form 982, simplify the family status provisions of the Code, reduce tax sunset and phase-out provisions, and revise the penalty structure.

The National Taxpayer Advocate continues to view tax simplification as essential and urges the new administration and the new Congress to make it a priority. In doing so, she recommends that emphasis be given to six core principles:

1. The tax system should not “entrap” taxpayers.
2. The tax laws should be simple enough so that most taxpayers can prepare their own returns without professional help, simple enough so that taxpayers can compute their tax liabilities on a single form, and simple enough so that IRS telephone assistors can fully and accurately answer taxpayers’ questions.
3. The tax laws should anticipate the largest areas of noncompliance and minimize the opportunities for such noncompliance.
4. The tax laws should provide some choices, but not too many choices.
5. Where the tax laws provide for refundable credits, they should be designed in a way that is administrable; and
6. The tax system should incorporate a periodic review of the tax code – in short, a sanity check.

Be sure and read What is the FairTax? and Herman Cain’s Top Ten Advantages of the FairTax.