Monday, April 27, 2015

Graduated or progressive tax rates

I like the idea that individual income taxes are based on graduated or progressive rates and schedules. The idea is, the more money you make, the more you pay in taxes.  

At present US individual income taxes are based on graduated or progressive rates and schedules. 

However, before the rate or schedule is applied to a person’s income, various deductions, exemptions and credits are allowed.  Therefore, the actual income a person earns is not the income subject to taxes.  Technically, the adjusted or net or “taxable income” is the income taxed.

So while the concept of graduated or progressive rates and schedules seems to be accepted in the US, the passage of laws allowing deductions, exemptions and credits throws the general principle off balance for individuals.  The result is that people with high incomes do not necessarily pay high taxes.

Friday, April 17, 2015

IRS Home Office Rules vs. Registered Cayman Islands Address

Why is it easier for a US Corporation to set itself up in the Cayman Islands than it is for a self-employed person to deduct the expenses of his home office?

US Senator Bernie Sanders (Ind. VT.) recently “introduced a bill to stop profitable corporations from sheltering income overseas in the Cayman Islands and other tax havens to avoid paying U.S. taxes. The legislation also would end tax breaks for companies that ship jobs and factories overseas.”  

Sanders stated that: “Eighty-three of the Fortune 100 companies in the United States have used offshore tax havens to lower their taxes, according to the most recent Government Accountability Office study.

At a news conference, Sanders showed a photo of a building in the Cayman Islands that is the registered address of more than 18,000 companies.

In my opinion, the following proposed rules and laws should be adopted:

(1)  The IRS should develop place of business requirements that would prohibit companies from using phony addresses, as do apparently the 18,000 companies referred to by Sanders.
(2)  The IRS has stringent rules for the small businessperson who might want to deduct a home office.  Shouldn’t the rules for companies claiming an overseas address be at least as realistic as the home office ones?  See IRS publication 587 and IRS Form 8829.
(3)  All vendors doing business with the US Government should certify in their bids how much US income tax attributable to the vendor's business activity (whether it is a corporation, a subchapter S corporation, a partnership, a self-employed person, or any other entity) was paid in the past three years.
(4)  The US Government should not do business with any vendor that paid no US income tax attributable to the vendor’s business activity in any of the past three years. 
(5)  Any exception to this law, for example for national security purposes, may be made by the US President or the appropriate Cabinet Secretary only after an Executive Order is published.