ataxingmatter

Extenders Bill Subst. Amendment --third Senate try, moving in the wrong direction

The Senate leadership put out a new substitute amendment (S. Amdt. 4386) to the extenders bill passed by the House (H.R. 4213) on Wednesday, trying to get a few holdouts on board. (Link provides legislative text and further modifications.) The bill would now add about $35 billion to the deficit.

Changes include:

1) reducing federal Medicaid payments to states--a terrible idea in a period of significant state funding difficulties, and the vulnerable population served by Medicaid;

2) "repurposing" of stimulus monies--that is, treating amounts intended as part of the economic stimulus package but that remain unspent as offsets for expenditures in this package.   This is just relabelling items that already increased the deficit (because of the need to stimulate the economy after banks' greed and recklessness threw us into the Great Recession).  Stimulus funds, though, serve a real purpose in helping the economy and ordinary folks; the part of the extenders bill that relates to extending foolish tax cuts for businesss (such as the R&D credit that gives businesses a dollar for dollar tax reduction for expenses that they would have done anyway with the normal deduction permitted for business expenses) is now being paid for by stimulus monies whose spending would have been a real boost to the economy.

3) eliminating the advanced earned income tax credit--again, cutting programs that help the most vulnerable amongst us in order to provide "tax incentives" that aren't likely to accomplish their objectives

4) softening the application of the carried interest provision--you'd think that it would be a no-brainer to have Congress pass a change to the treatment of carried interest that would tax it all like the ordinary compensation income that it is.  Instead, these wealthy firms--private equity, hedge, venture capital, real estate--have lobbied intensively to preserve their special status of being able to earn compensation but pay taxes on it as though it were a privileged capital gain.  Baucus's latest change is even more elite-friendly--only 50% of the disposition income would be taxed at ordinary income rates (rather than the 75% that applies generally).  There will be no ordinary income recharacterization if all distributions and allocations are made pro rata based on capital contributions, and the retroactive elements of the bill (re loans issued to allow managers to buy partnership stakes in order to claim that they have a capital interset for their carried interest stake) will be removed.  The latter provision honors gamesmanship--the partnership that is going to give the managing partner an allocation attributable to compensation instead gives the partner first a loan with which the partner buys a capital interest and THEN a distribution on that capital interest, with which the partner pays off the loan.  For Congress to accept such a sham transaction that is intended to avoid the ordinary taxation of compensation for wealthy partners is nothing short of disgraceful.

Alan Simpson, Social Security, and the Deficit Reduction Predators

 President Obama's National Commission on Fiscal Responsibility is a worrisome entity, supported by those on the right like Peter Peterson, a billionaire hedge fund manager who has been trying to get rid of Social Security for years.  Instead of recognizing that the financial crisis and its aftermath are hurting millions of vulnerable citizens and considering appropriately what kind of actions can be taken to reduce deficits over the long run through methods that do not harm the more vulnerable among us, the commission is taking aim at the programs that are intended to form this nation's safety net (the "entitlements").  Rather than focus on eliminating most of Bush's tax cuts for corporations and individuals, the commission is apparently focussing on Social Security as a vulnerable target given the state of the economy after the bank-induced financial crisis.  This falls right into the hands of those who have long wanted to eliminate or privatize Social Security, in spite of the fact that Social Security is not the cause of the deficit (profligate bank speculation is the cause) and even though Social Security itself is nowhere near bankrupt (it produces a surplus) and even though the potential problems predicted for the far-out future can be easily handled later (75 years from now, who knows wht the economics of the US will look like; we could easily remove the cap on Social Security contributions and also tax capital income as well as labor income, with minimal increases in benefits for those at the top).

Alan Simpson is co-chair of the Commission.  I must admit I never respected him, or liked his snide elitism and or saw any hope for good policy from a commission that he co-chaired.  That is even more true now.   If you want to see  Simpson in full color, look at this video clip of Simpson responding to an interviewer after a commission meeting, from MoveOn.org Are you one of the "lesser people"? 

Simpson refers to the vulnerable and elderly who count on receiving the Social Security insurance payments that they have funded as "lesser people."  That statement reflects his elitism.   Simpson is interested in pushing cuts on Social Security--claiming that "Social Security is bankrupt" (even though it runs a surplus); relying on the average life expectancy increase to justify changing the age (which fails to capture the reality of the varying life expectancies of poor (lower) and wealthy (much higher); treating the fact that the Social Security surplus has been used to fund government (including to make the deficit seem less to make possible Bush's tax cuts primarily targeted to the wealthy) with an internal IOU into the fund as justification for claiming that Social Security is "bankrupt" now (even though revenues from payroll taxes and interest paid by government indicates that the fund still receives more revenues than it pays out) and therefore government should not pay that money out to seniors; and apparently focusing on this manufactured problem rather than on the ways that the tax cuts and military expansion/warmongering under Bush contributed to the current deficit.   Simpson flat out misstates the history of the 1983 changes to create the trust fund surplus so that Social Security could cover baby boomers.  Further, Simpson makes no sense at all when he says that looking at the interest on government debt to Social Security as revenues to Social Security is  a "double hit on your own government." 

Why is it that there is all this talk of cutting benefits/increasing age limits for Social Security but very little acknowledgement that the "problem" may not even exist (it is based on very conservative actuarial estimates) and even less discussion these days of the idea that removing the Social Security earnings cap could  assure sufficient funding (especially if coupled with applying the tax to capital as well as labor income, which would help address income inequality, since small groups receive a growing share of capital income.  See Orr & Turner, Apr. 14, 2010, here, showing that the top 1% receive almost 60% of the capital income).  See, e.g., Josh Bivens, Removing the Social Security earnings Cap Virtually Eliminates Funding Gap, Economic Policy INstitute, Feb. 17, 2005 (noting that a mere 1.9 percentage-point increase in the existing payroll tax dedicated to Social Security would clase the projected funding gap over a 75-year period).  (Note that the cap has increased with inflation, so that it is slightly under $110,000 today.)

For various other takes on Simpson and on the focus on Social Security cuts to satisfy deficit hawks (instead of a focus on rebuilding the economy or deficit reduction measures that really make sense), see the following:

John Berry, Simpson's Comments Undermine Commission Efforts, Fiscal Times, June 20, 2010 .  Berry offers a succinct statement of the Social Security surplus:

Since Social Security finances were overhauled in 1983, tax revenues have far exceeded costs. That surplus went into the trust fund, was invested in Treasuries and has been earning interest for almost 30 years. Those annual surpluses meant that the government did not have to borrow as much from the public to finance whatever it spend money on.

Dean Baker, How to impress the bond markets, Guardian, Jun 21, 2010 [hat tip Mark Thoma at economists view]

The deficit hawks have been pushing the line in recent months that we have to make cuts in social security, along with some revenue increases, in order to reassure the bond markets about the creditworthiness of the US government. According to this argument, by taking tough steps (ie cutting social security benefits) we will have shown the bond markets that we are prepared to do what is necessary to keep our budget deficits within manageable levels.

There is some reason to question the merits of this argument. First off, the deficit hawks don't have an especially good track record in the insight category. Not one person among the leading crusaders was able to see the $8tn housing bubble that wrecked the economy. If they couldn't see something so huge that was right in front of their face, we might wonder about their ability to ascertain anything as amorphous as the sentiment of actors in bond markets.

Beale here:  Baker goes on to note that (i) Social Security is a strange object of fixation, since it can pay for future benefits through 2044 with no changes whatsoever and after that with relatively minor changes; (ii) cutting benefits for near-retirees, especially in light of the hit taken from the recent crisis, is "cruel and unwarranted" and "has the feeling of class bullies telling the rest of us that we have [to] beat up the weakest kid in the class in order to be admitted to the club;" better items to put on the table would be a financial transaction tax that cracks down on Wall Street or the drug costs paid to Big Pharma (10 times what they would cost in a competitive market without government patentmonopolies) or a public insurance option (CBO projected it would save $100 billion in just the first decade.

Trudy Lieberman, More Words of Wisdom from Alan Simpson, Columbia Journalism Review (hat tip--Angry Bear commenters)

What the dickens did Simpson mean by “the lesser people?” Did he mean everyone who doesn’t belong to the investment banking community, where a lot of the deficit commission acolytes come from, including Peter G. Peterson, who has been working to make Social Security reductions Solution Numero Uno for the deficit problem? (Peterson is a CJR funder.) Did he mean those with modest or low incomes, even the poor for whom Social Security is the major source of income in retirement and will continue to be for years to come?

***

If the commission does recommend cutting Social Security benefits by raising the retirement age for full benefits, members of Congress who vote on it will have some explaining to do for their constituents—especially those in their fifties who have paid a lot into the system, have lost their jobs, and might have to wait longer to collect benefits.

Paul Krugman, Zombies Have Already Killed the Deficit Commission, Jun.21, 2010

Simpson has resurrected the old nonsense about how Social Security will be bankrupt as soon as payroll tax revenues fall short of benefit payments, never mind the quarter century of surpluses that came first. ...

Social Security is a government program funded by a dedicated tax. There are two ways to look at this. First, you can simply view the program as part of the general federal budget, with the the dedicated tax bit just a formality. And there’s a lot to be said for that point of view; if you take it, benefits are a federal cost, payroll taxes a source of revenue, and they don’t really have anything to do with each other.

Alternatively, you can look at Social Security on its own. And as a practical matter, this has considerable significance too; as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits. ...

But ... you can’t have it both ways. You can’t say that for the last 25 years, when Social Security ran surpluses, well, that didn’t mean anything, because it’s just part of the federal government — but when payroll taxes fall short of benefits, even though there’s lots of money in the trust fund, Social Security is broke.

David Cay Johnston has noticed a tax giveaway through FERC

[hat tip to Tax Prof; edited to correct typo and provide links]

David CAy Johnston, writing in Tax Notes, has focused on a tax giveaway that most of us have missed--a provision that permits partnerships that own pipelines to charge consumers for a tax that they don't actually pay, resulting in considerable profits for the partners of the partnerships with little or no accompanying tax liability.  See Master LImited Partnerships: Paying Other People's Taxes, 129 Tax Notes 1393 (Jun. 21, 2010), available for free at tax.com, here.   There's also a brief explanatory video by Johnston, here.  This pipeline policy stems from the Federal Energy Regulatory Commission and a 2007 court decision upholding the shift.  ExxonMobil Oil Corp v. FERC, 487 F.3d 945 (DC Cir. 2007).

As Johnston explains:

For a traditional corporate owned pipeline, these costs include the corporate income tax on company profits. However, the income taxes ofn individual investors have never before counted as a cost of providing service.  .... [But] even though the MLP does not pay the corporate income tax, FERC lets MLP pipelines include income tax in the rates charged to customers.  FERC policy assumes the top marginal rate.  Since the only income tax paid is by individual owners, this means that the rates include the individual income tax the MLP investors owe.  In other words, you are forced to pay the income taxes of the MLP investors when you buy natural gas or petroleum products that were transported on [a publicly traded partnership's] pipeline.  Id.

In fact, Johnston notes, the consumers pay the partners' income taxes "even if they are only 'potential' taxes."  The result is incredible profits for partners in the partnership owning the pipelines.

The math here is stunning. When rates include a tax that does not exist, the investors make out like, well, bandits. Investors in an MLP pocket 75 percent more inn after-tax profits than they would if they invested in a traditional corporation owning a pipeline.  Id.

FERC lost the originall BP West Coast case, so then it just issued a statement of policy, with private meetings between commissioners and lobbyists to agree to a general rule allowing a maximum tax to be in included in the rate calculation, even if there were no business level tax to affect business profits (and only individual investor taxes, which are not costs of any business).  The court allowed this new policy to survive, based on extraordinary deference to the agency, even for an arbitrary and capricious standard of review.  Isn't it clear that allowing an agency to decide that companies that operate through non-taxed partnerships can nonetheless increase their rates by a non-paid tax is an arbitrary and capririous decision that is unfair to regulated entities as well as to consumers--especially when the order of magnitude is considered--$1.6 billion a year for gas pipelines and $1.3 billion a year for petroleum pipelines.  Johnston notes that such pipelines consequently have rent-like profits of 42% of revenues, four times the typical margin for the 12,000 largest corporations.

Further, this tax shifting is inflated by FERC's own regulatory practices.

FERC has acknowledged that there is some over-collection by oil pipelines and yet it continues to grant rate hikes based not on costs, but on an index. ...[T]he overcollection is pure profit except for the income tax burden, which is shifted to customers.  Id. at 1395

Johnston makes two important points (paraphrased here):

1. Every industry has an incentive to get this treatment, since the "tax" is hidden from consumers and goes directly to industry investors' bottom lines, resulting in a small charge to everybody and a huge gain to the industry investors
2. It would be very simple for Congress to pass this advantage along to more industries, just by a minor change to the loophole exempting industries from the publicly traded partnership provisions intended result (treating publicly traded partnerships like corporations subject to the corporate tax).

And he notes that such treatment of monoplies is disturbing as a matter of principle, violating "two long-standing principles of rate regulation that are fundamental to fairness and integrity"--that owners be entitled to recover costs and earn a reasonable return on equity and that customers only be charged for actdual expenses.  This is a trend towards "corporate socialism, under which profits are concentrated through government action and losses are socialized through bailouts."

UBS agreement ratification; US wealthy taxpayer scramble

After a showdown between the upper and lower houses of the Swiss Parliament, the Parliament has ratified the US-Swiss agreement providing for the release of US accountholder information on about 4500 accounts.  See Taxpayers may have 'mere hours' to reveal UBS accounts, Bloomberg.com, June 17, 2010 (at 5 pm).  Ratification was required because of a Swiss court decision in January, which determined that the agreement violated Swiss law.  Ratification had stalled in Parliament, where the upper house ratified the US-Swiss agreement for release of thousands of UBS accountholders' information to the US, but the lower house balked and then insisted on requiring a public referendum on the issue.  Under deadline pressure however--the parliamentary session ends tomorrow, and any referendum would have extended well beyond the deadline under the agreement for handing over the information--the Swiss buckled under and both houses ratified the agreement without requiring a referendum.

It is likely that the names will start flowing very soon, which moves the ball back to the US.  The voluntary disclosure program that provided some assurance of limited penalties has ended.  But voluntary disclosure may still be the better decision for anyone who might be among the revealed accounts.  Not only are the penalties for nonreporting rather draconian, since multiple year failure to disclose can lead to multiple year penalties that well exceed the amount in the account, but there is a potential for civil and criminal charges.  A taxpayer who comes forward may be able to forestall the worst, but a taxpayer who is discovered without having come forward likely will get little leniency.

The Bloomberg.com article noted above quotes fellow tax lawyer and ABA Standards Committee officer Scott Michel (Caplin & Drysdale, DC) who got two calls today from panicked taxpayers hoping to be able to disclose accounts before the IRS gets their name.   May they scramble quickly--perhaps it will not only save them some of the money in their account but also teach them some much-needed humility.

This is a significant victory for the US, and hopefully,, together with FATCA's passage, the beginning of the death knell for banks in banking secrecy jurisdictions serving as accommodation parties to US taxpayers' evasion of taxes.

Links worth noting

Reagan Revolution Home to Roost--in Charts (hat tip, fellow ABers)

These charts that suggest that everything that is bad today started getting much worse around 1981 when the free marketarian deregulate-militarize-privatize- taxcut approach of the Reagan administration took hold.

If you have any doubts about corporate anarchy or about how well the "free market" greed creed of big corporations serves the interest of we the people, go back to the BP oil spill and look at the relative unimportance of preventing harmful spills to all of the major oil companies as revealed in their testimony at a Congressional hearing and in their cheap, copy-cat "plans" for dealing with big spills.  Washington Post, Lawmakers attack plans oil companies had in place for dealing with spills.

Jeffrey Cooper, Ghosts of 1932: The Lost History of Estate and Gift Taxation, 9 Fla. Tax Rev. 877 (2010) (downloadable from SSRN) (hat tip:  Tax Prof)

This paper is worth reading, especially for those who think that current progressive discussion of the importance of an estate tax as a backstop to undue concentration of wealth is some new fangled idea that needs to be squelched before it can take hold.  Fact is, the estate tax enacted in 1916 was intended for two purposes:  to raise revenues and to limit wealth concentration.

Here's a quote from the beginning of the paper:

"[The estate tax enacted in 1916] became a core element of the nation‟s increasingly progressive tax system, an agent of social change embracing the ideals of Theodore Roosevelt and Andrew Carnegie and designed to help reverse the inequitable division of wealth resulting from the Gilded Age."  [citations omitted]

Small Business Jobs Tax Relief Act of 2010 passes House

I'm amazed at the way Congress whines about deficits and then goes about passing even more tax cuts that primarily benefit the upper class.

Today (june 15) the House passed (247-170) a revenue-cutting measure for the benefit of "small business" (which usually means, for the benefit of those upper-crust owners of their own businesses).   HR 5486.   Joint Committee on taxation technical explanation; Estimated Revenue Effects.

So, for example, this bill gives a 100% exclusion for the sale of small business stock.  It used to be a 50% exclusion, dropping the rate from the 28% that would have otherwise applied to section 1202 stock sales down to 14%.  Congress already added a temporary exclusion of 75% (from 09-10).  Now it drops it to zero% for original issuance stock held for five years that is acquired between March 15 2010-Jan 1 2012.  It includes an expensing provision.  Corporations in general are already sitting on more cash than they've had for decades, without investing it. Why would this tax expenditure make them invest any more than they would have done anyway?  Not likely.  Same for smaller businesses.  Either they think investment will pay off and would have invested anyway, or they don't think it will pay off so won't invest just because there's a tax incentive to it.

The bill also limits penalties for companies that engage in reportable transactions.  This has been heavily lobbied for ever since the strict liability penalty was enacted.The penalty originally enacted was intended to be tough enough to discourage advisers and taxpayers from engaging in sham shelter transactions.  Congress is now loosening the penalty to make it proportional to the tax savings.  Those who've read my blog know that a penalty would actually need to be about 1800% to discourage noncompliance, because of the advantages to the taxpayer of the audit lottery and the infrequency of intensive audits that can catch shelter problems.  In that context, relaxing the penalty provision makes no sense at all.  Congress is essentially saying to small businesses--go on and engage in those transactions you guys; we really didn't mean to get too touch on you.

Sander Levin justifies the bill as helping create jobs.  I have strong doubts that investors are going to give their capital away just because they get an exclusion for the gain.   Investors will enjoy the exclusion if it applies, but they won't give the money unless they think they're going to make money.  And if they think they are going to make money, they would have invested anyway without this provision.

Update on HR4213 in Senate: no deduction for punitive damages as offset

Today the Senate voted (60-37) to adopt S. Amdt. 4344, proposed by Reid, to the extenders bill (HR 4213) that will esxtend the closing date deadline for first-time home buyers to claim the home buyer tax credit by 90 days.  The payfor is the elimination of the deduction for punitive damages, with the corresponding requirement that a recipient of a punitive damage award include it in income.

One of the good things about the pay-for rule is that the provisions used are often sound tax policy.  It seems foolish to call something "punitive" damages and then let the corporation deduct them to lower its tax bill.  Like the carried interest provision (although it appears it will be watered down to a half measure), these revenue provisions are taking care of problems in the Code that should have been acted on independently.  But better as pay-fors than not at all.  Especially where the measure being paid-for is a temporary one, and the needed change is made permanently.  (Somebody else made that point in a blog I read recently, but I can't recall offhand and didn't save the link.  Hat Tip anyway.

Not Tax: are police stops "private conversations" of police that are non-recordable without consent under privacy laws?

Some readers have complained that my views are consistently pro-government.  I suspect that is because I argue that taxpayers should be treated as having a duty to try to get their tax liabilities right, and that our tax rules let the better-to-do amongst us off too easily on paying taxes.  But I don't think government is perfect (nowhere near); I don't think all current spending patterns are sacrosanct (we overspend enormously on the military and underspend enormously on public infrastructure and human capital development); I certainly don't think government agents are flawless (to err is human, and to err more often than one would think possible is political) and I do think government sometimes (even in some cases frequently) abuses the powers it has, including failure to regulate when it should and excessive regulation when it shouldn't.

So here's one example of a situation in which I think government misuses its policing powers against its own citizens.  In this case, a Maryland man faces a possibility of 16 years in prison for an alleged violation of Maryland's wiretapping law, which does not allow recording of "private" conversations without consent of both parties.  Traffic stop video on YouTube sparks debate on police use of Md. wiretap laws, Washington Post. The man was riding his motorcycle with a helmet camera on, recording his trip as he frequently did.  He was pulled over and stopped by a gun-wielding nonuniformed officer in an unmarked car.  When he released the tape, he was charged with violating the law.  Police in Maryland apparently think they have every right to videotape their arrests from their car cameras, but that citizens have no right to videotape them making arrests.

Surely an officer on duty is performing in public and has no expectations of privacy in his on-duty conversations, except in rare exceptions (such as when he is conducting an undercover operation with an informant, as suggested in the piece).  Otherwise, the state is taking a gigantic step towards a police state, one in which police have all the rights and cannot be held accountable when they break the rules because the best evidence isn't allowed to exist (or if it exists, isn't allowed to be used against them).

The judge should make clear that an interpretation of a law meant to protect individuals was not meant to protect police from having the sun shine on them when they are on duty.  This case should be dismissed. 

HR4213's S Corp provision

Joe Kristan doesn't like the S Corp provision, and thinks my support for the less-than-perfect provision is ill-conceived.  See  A One-Hitter is "Not Perfect"--This is something else, June 3, 2010.

Now, I think that having an S Corp provision, even though it  ended up somewhat complicated because it was drafted as a compromise to focus only on those S Corps where it is clear that the services of a few owner/service providers is the basis of the S Corp business, is a step in the right direction.  Without it, we have the specter of continued use of the S Corp entity to avoid payroll taxes, where very well paid doctors, lawyers and other service providers magically convert compensation income to non-compensation income, and avoid paying payroll taxes on most of it. 

Joe has some good points, nonetheless, that merit a rebuttal. 

1)  The language in swection 413 of the bill--such as "principal assets" and "reputation and skill"-- may not be interpreted in the same way by all readers of the text. 

True, but most likely only because those readers are trying to find an ambuiguity or indeterminancy to claim substantial authority (based on statutory interpretation) to avoid the application of the provision.  Good regulations can and I am sure will provide depth to the words "principal assets" and "reputation and skill" in the provision, but this complaint is picking at straws--admittedly the kinds of straws that practitioners trying to find loopholes for their clients love to pick at.  We all know what kinds of businesses this bill is intened to impact. 

Reputation and skill as keywords may cause some stumbling, since tax advisers and accountants are used to considering more specific terms for the intangible assets of a business, such as "goodwill", "knowhow", "customer base".  Was this intentional or just sloppy drafting?  One might argue that these terms are broad enough to include all three of the more traditional intangible assets, and that they are intended to capture a broad-scope set of intangibles that the service provider brings to bear on the services provided. 

2) It can be gamed

Most provisions can be gamed.  And many tax practitioners spend a good bit of their waking time thinking about how to game a particular requirement, even though they "know" that the requirement is aimed at exactly their client's situation.  Regretably, until we have a "more likely than not" base confidence level requirement for positions taken on returns or advised, this will likely continue.  That means that regulations will need to provide incentives for complying with the purpose of the statute.

For example, Joe suggests that a business that is a service business might  just buy the office that it currently rents and then claim that its principal asset is the physical building and thus it is not subject to the provision.  Surely this would not satisfy the purpose or literal language of the statute.  Why?  Because it's the services that make the business a business.  So principal asset should not  be interpreted to permit service providers to stuff their corporation with passive assets like real estate or securities and then claim that those passive assets are the "principal asset" of the business so the provision is inapplicable to them.

The IRS should likely include an anti-abuse provision in the regs, noting that the statute will be interpreted in light of its purpose to end the gambit of converting compensation income to distributions that are not subject to the payroll tax.  The regs should likely include some examples that demonstrate that passive assets  or equipment/office space for service providers do not count.

3)  It discriminates against smaller firms

This would be true, to the extent that firms with 10-20 or more service providers operate in S Corp form rather than partnership form. (I need to check this out--I suspect Congress was using a "rough justice" measure of the predominant type of firm that was abusing the S corp formation to avoid payroll taxes, but I haven't looked at this empirically). 

But again, as a start it is better than nothing.  We in fact have many provisions that treat firms differently even though they are similarly situated.  That is not ideal in tax, but it happens because one or another person in Congress fights for a particular constituent and wins an exemption or because the less than complete bill is the only thing that can get passed.  HOpefully Congress will revisit the issue once the hullabaloo is over, and remedy such irregularities.  Removing exemptions, elections, and similar provisions is generally a good idea.  But having a bill that addresses the largest group of payroll tax avoiders is much better than continuing to not deal with this issue.   But see item 4.

4) It could have been simpler and more workable.

This is a good point.  The rules for S corps could have been changed across the board, treating all income from firms whose business is the provision of services as subject to the payroll tax, regardless of number of service providers.  

Of course, I suspect Congress couldn't pass such an across the board change.  So while I would prefer a better bill, it is much better to deal with the lion's share of this issue than not to deal with it at all.

The architects' trade association is lobbying against the bill with a similar list of complaints.  They argue that requiring these service providers to pay payroll taxes will kill the economy.  Funny how these groups never argue that ordinary workers on salary shouldn't have to pay payrool taxes, even though of course those ordinary workers would rather have more income.  Sure, S corporation shareholders/service providers would rather have as much profits as possible from their corporations without payroll taxation.  But payroll taxation on their compensation isn't going to make the business go out of business.  It will not be on gross income, after all, but on the excess after the regular expenses of earning that services income.  The service providers/owners will have less take home pay, but they will be for once paying their fair share of the tax burden that ordinary workers have been paying all along.  I don't think "the economy will crash (at least for these service providers)" argument holds water--the additional tax won't cause the business to fold, but it might make the service providers work harder so they can still earn the same in spite of paying their due share of the payroll tax burden.

They also argue that the IRS already has sufficient tools at its disposal to prevent the conversion of compensation to profit distribution without payroll taxation.  But in fact that provision is extraordinarily difficult to enforce because of the subjective nature of what is "reasonable" compensation, and the time such audits and cases require is a huge drain on the limited resources for enforcement.  Having a bright-line rule for S corporations moves the ball forward (even though there will be at least some initial jousting over whether the provision applies to a particular S corporation).

FATCA (foreign account tax compliance act--or is it the anti-fatcat act?)

The attention of US tax enforcement has been focused on offshore issues for some time.  Of course, the most conspicuous part of that has been the ongoing dispute with UBS, a Swiss bank that facilitated tax evasion by US taxpayers under the Swiss banking secrecy rules.  After some breakthroughs, the US was at the point of prosecuting the bank and got it to agree to release information on 4500 of the most significant accounts.  But then a Swiss court intervened, requiring a parliamentary approval of the agreement. The upper house approved, but the lower house balked.  The upper house has now re-approved the measure, with the hope that the lower house will now act in time to have the agreement approved before the June 18 end of the session.  Meantime, Germany has purchased information on about 20,000 Swiss secret accounts, in its extensive efforts to stem tax evasion.  The US initiated a voluntary disclosure program, which netted about 15,000 accountholders.  All of those efforts mean that there will be lots more information to track back to the perpetrators, and a much greater possibility that those trying to evade taxes or assist people in evading taxes will be caught.  That is all good news.

Further, as part of the HIRE Act, Congress passed a number of provisions earlier this year intended to make it much harder for wealthy Americans to hide assets offshore and evade paying their fair share of taxes on the income from those financial assets.   That part of the HIRE act is called "FATCA"--the foreign account tax compliance act, and is a major step forward in requiring information reporting about offshore assets and backing that requirement up with penalties.  A big part of FATCA is a requirement that foreign banks must either agree to disclose information about US investors or be subject to the statutory withholding regime (a 30% rate).

Doug Shulman spoke to OECD on June 8 about the US efforts to ensure greater tax compliance in the face of globalization.  The following is an excerpt of those remarks in which he discusses FATCA.  The full speech is available here.

Transparency has also been enhanced through the U.S. Qualified Intermediary – or “QI” Program. Since 2001, the QI system has provided the United States a way to work with foreign financial institutions to ensure that investors in offshore accounts are indeed eligible for the relief from our source-based withholding taxes that they claim, and the system has worked effectively. However, the system is not without its limitations. The QI information-gathering rules are focused mainly on ensuring that withholding tax relief is appropriate, and almost no detailed information flows from the QIs to the IRS about the identity, income or overall tax position of any accountholder. Moreover, not all foreign financial institutions choose to be a QI.

Enter center stage the Foreign Accounts Tax Compliance Act – or FATCA – which was enacted this year as part of the HIRE Act. This is the most important development in international information reporting in a generation. It is a big step forward in our efforts to reduce tax evasion by creating transparency and accountability in the offshore financial markets.

FATCA provides IRS with the tools we need to crack down on Americans hiding assets overseas. Let me speak to some of the Act’s broad policy provisions and what they mean to taxpayers and foreign financial institutions. At its core, FATCA makes it much more difficult for US individuals to hide assets in offshore accounts. First, it increases information reporting by U.S. taxpayers holding financial assets outside the United States and imposes stiff penalties for failure to comply. It expands due diligence standards, so that we have a better line of sight to U.S. beneficial owners of accounts.  It also ramps up the stakes for foreign financial institutions that will have to agree to disclose U.S. investors to the IRS or feel the pain of a substantial new withholding tax on U.S. income and gains.

I also believe that the mere enactment of FATCA should prompt preparers and advisors to expand their due diligence regarding offshore account issues, including, but not limited to income tax reporting. Overall, FATCA makes the world a much riskier place for US taxpayers still trying to hide their money anywhere around the world.