Taxation And Finance » Taxpayers

The Maximum Tax on Personal Service Income

american for fair taxation — Tue, 02 Feb 2010 18:51:50 +0000

The present study examines only long-term gains in excess of shortterm losses. The relevant marginal tax rate for most taxpayers is therefore half the tax rate on ordinary income as only half of such gains are included in taxable income. (After 31 October 1978 this inclusion rate was reduced to 40%.) The higher tax rate on inframarginal long-term gains used to offset short-term losses is neglected. We consider only the tax rate on marginal realizations of long-term gains for taxpayers with long-term gains in excess of short-term losses.

Although the general rule for tax rates on long-term gains is that they are half the ordinary rates (40% of ordinary rates after 31 October 1978), there are a number of other provisions of the tax code which affected the capital gains tax rate. These include the Alternative Tax Computation, the Additional Tax for Tax Preferences, the Maximum Tax on Personal Service Income, and the Alternative Minimum Tax. We consider each in turn, using detailed tabulation data from Statistics of Income to calculate its effect on capital gains tax rates.

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The Tax Rate on Ordinary Income

american for fair taxation — Fri, 15 Jan 2010 18:45:02 +0000

The Internal Revenue Code of 1954 distinguished between gains on assets held at least 6 months and those held longer. The former were taxed as ordinary income while the latter, termed long-term gains, were given a 50% exclusion from taxable income. However, this exclusion was limited to net capital gains, long-term gains in excess of short-term losses. Therefore, to the extent that long-term gains simply cancelled short-term losses, the long-term marginal tax rate equalled the shortterm rate, which was the same as the tax rate on ordinary income. (There were some exceptions to this tax treatment including S.1231 gains. These gains received capital gains treatment if positive but ordinary income treatment if negative.)

There remains some debate regarding the proper measure of capital gains for analysis. Minarik (1983) has argued that long-term gains in excess of any short-term loss is the only relevant measure of gains for considering the effect of tax rates and revenue implications. On the other hand, some analyses of capital gains, such as that by Feldstein and Slemrod (1982) have included net long-term capital losses in their calculation. These net losses are permitted only limited deductibility in the year taken, although they may be carried forward to offset future tax liability. In general, their inclusion would tend to decrease the apparent effectiveness of capital gains taxation in generating revenue and raise the apparent sensitivity of taxpayers to capital gains tax rates.

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The Effect of The Capital Gains Tax

american for fair taxation — Sun, 15 Nov 2009 18:25:57 +0000

The effect of the capital gains tax on the sale of capital assets and the realization of gains on these assets have been a matter of substantial academic and political controversy. Capital gains are only taxed when an asset is sold, and so inclusion of gains in taxable income is largely discretionary from the point of view of the taxpayer. As a result, sensitivity to tax rates is probably greater for capital gains income than for other kinds of income.

This sensitivity may take a number of forms. Capital gains and losses on assets held for less than a specified time period, currently 6 months, are taxed as ordinary income while gains and losses on assets held for longer periods of time are taxed at lower rates. Within limits specified by the tax law, taxpayers have an incentive to realize losses in the short term and gains in the long term. Planning of sales around this capital gains holding period was studied by Kaplan (1981), who concluded that eliminating the distinction between long-term and short-term gains, and taxing all assets under current long-term rules, would enhance capital gains tax revenue. Fredland, Gray, and Sunley (1968) also found that the length of the holding period had a significant effect on the timing of asset sales.

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Taxpayers And Tax Authorities

american for fair taxation — Tue, 27 Oct 2009 13:21:42 +0000

Tax authorities in different jurisdictions are likely to allocate individual multinational firms’ consolidated income across countries in different ways. This statement would be true even if tax authorities utilized the same transfer pricing methodology, given the sensitivity of one’s results to the particular “comparable companies” included in one’s sample (and, in the case of the CPM, the particular profit level indicator used).

However, as a practical matter, tax authorities are likely to use different transfer pricing methodologies in analyzing a given case.Most countries endorse the arm’s length standard in principle, and the U.S. and OECD provisions contain the same specific set of transfer pricing methodologies . However, the IRS has a clear predilection to use one particular profits-based method (the CPM), while OECD countries prefer transactions-based methods.

Different approved methodologies will generally produce different allocations of income, because the assumed unifying foundation across methods—primarily the basic concept of market equilibrium—does not in fact apply. The large number of cases handled by the competent authorities of different countries attests to this conundrum, which in turn creates the potential for double taxation on a significant scale.

Individual multinational corporations cannot accurately anticipate their country-specific tax liability in the absence of an Advance Pricing Agreement.Corporate taxpayers and tax authorities, respectively, also frequently utilize different firm samples and/or transfer pricing methodologies to determine their tax liability (taxpayers before an audit and tax authorities during an audit). Because the use of different samples and/or methods will often produce inconsistent results, firms acting in good faith may report substantially less income in a given jurisdiction than the tax authority in that jurisdiction believes is warranted.

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