“This is a game-changing strategy for the IRS. Initially, we will be focusing on individuals with tens of millions of dollars of assets or income. Going forward, we will take a unified look at the entire complex web of business entities controlled by a high wealth individual, which will enable us to better assess the risk such arrangements pose to tax compliance.

We want to better understand the entire complex economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise. We cannot do this by continuing to approach each tax return in the enterprise as a single and separate entity. We must understand and analyze the entire picture.”

Although individuals generally do not file balance sheets with their tax returns, their names and social security numbers are often linked to various business tax returns if they are partners or shareholders. In which case, balance sheets are generally presented, however, business assets are not necessarily those which are considered personal assets of the principals. The only exception is that of stock, the ownership of which is easily determinable through stock prices if it is a publicly held company. However, if the company is privately owned then the task of assessing value becomes far more complex.

We could not agree more wholeheartedly that complexity is the central focus of an IRS effort to examine individuals based upon net worth. Given the current format of reporting, there are few other options for guiding one toward a reasonable understanding of ones net worth. Social security numbers and employer identification numbers are tied to bank accounts, which brings up a whole new issue of privacy. And stock transactions are similarly traceable, however, the question that doesn’t seem to be answered by Shulman has more to do perhaps by the reasons for examinations based upon net worth.

Shulman talks about “control” being the guiding factor behind these examinations, however, control and net worth are two very distinct and separate concepts. One can have control without having any economic interest whatsoever. And with respect to trusts, actually giving up control to a trustee in an irrevocable trust allows for greater flexibility in meeting difficult challenges in areas such as estate planning in particular. Why then would a tax position that is often adverse to the taxpayer in which control is retained become a focal point of tax abuse?

There are, however, instances which experienced tax professionals understand well how economic risk is tied to control by certain individuals. In plain English, the mortgage meltdown was a prime example of how shady operations can be linked to those who control them. The inherent risk is that a corrupt business often leads to corrupt individuals. This awareness has often been employed in audits, however, in such cases the taxpayer has the right to be represented.

The comments by Commissioner Shulman raises more questions than it answers. It will be interesting to see if this story has legs and becomes the focus of the media and how this new posture translates itself in the ordinary interaction one has with the IRS. However, given the current climate at the IRS, high net worth individuals or those who simply exercise control in other entities and are not necessarily wealthy should be warned to be prepared for all possible questions concerning their financial affairs.

Much is being said about the power of the new media. One of the reasons why webtaxcpa.com became a blog is to get away from the usual methodology of waiting until after trends have set in to recognize them. Strictly speaking, finance is front and center as it has never before been. With the money supply mushrooming to satisfy the hunger for “safety”, the government’s ability to borrow seems almost limitless. And with a overly friendly Federal Reserve, the multiplier effect could only become amplified.

Strictly speaking, gold is vanishing quickly as a safe haven. So many dollars are in play now, most of which are held institutionally, meaning the so-called ’stimulus’ is being reserved for a while. Conservatism today means the wealthy are in hunker down mode. The market bubble they foisted upon investors in the name of a false sense of economic recovery is proving fruitless. It is the proverbial double whammy of investor shock: Loss of portfolio value while missing out on the new rising star, which is cash.

Cash positions will count for everything as dollars are unleashed on the economy and inflation sets in. The pecking order of this payout does not come in the form of capital gains or dividends, but rather the ones who will benefit the most are corporate bondholders. The debt of the major players will be wiped off the books, further devaluing key assets in return for cash. This means that for the shrewd investor hedging against inflation while maintaining equity will become tantamount to success.

This is the viewpoint of key economists, which we could cite, who specifically point to inflationary pressures coupled with devaluing asset values. The reason for the move at this time is key toward securing the financial structure of the big banks, who got handed bad assets in return for money from the government which they promised to pay back. To fill in the shortfall there will have to be a proverbial white knight, and this happens to be an abundance of cash from foreign central banks that the Federal Reserve doled out during the economic “crises” for precisely this kind of maneuver.

The Euro is falling against the dollar making European goods cheaper. Every good opportunity deserves a strategy, and regardless of the lullaby sung by the federal government to the Europeans and how wonderful their socialist system is, the bottom line is that the financial structure of the United States always comes out on top. Free markets allow for the building of vast economic empires. Contrary to what the pundits would have one believe, there is still money to be made in a world in which the commonly held politically correct version of the world is that of shrinking resources and too much competition from abroad. Nothing could be further from the truth as gold becomes tarnished and the dollar rises.

Chalk another one up to the genius of American finance, and investors everywhere will look back on these events as evidence that distractions from what goes on behind the scenes is almost without fail the worst path to take when wanting to hitch a ride on history. The joy of making good financial decisions does not necessarily spring from monetary gain but rather the wisdom gained from the experience. Think about this the next time you hear that the President or Congress is considering health care reform. Then ask yourself why anyone in Washington would be so dumb as to decimate one of the pillars of the financial empire of America, which is the insurance industry.

On the contrary, the old media paradigm has once again proven the WMD theory still works. If you repeat something long enough people will believe it. The all-consuming health care debate that wound up becoming nothing more than a faint whimper was the fitting exit for what was from the outset nothing more than political showmanship. Meanwhile, what was going on behind the scenes is the building of another epic leap forward for the U.S. financial juggernaut.

The results found that the average annual growth rate of “bytes consumed” is 5.4%, and  the sample which was used was from 1980 to 2008. Interestingly, the UCSD study found that television accounted for 41% of information time, and the Internet accounted for 16%.  Yet, relative to the length of time television and its traditional “network” have been around, the Internet is still in relative infancy in terms of information consumption.Television was increasingly being consumed via mobile devices, which is indicative of a preference by consumers of cross-platform devices.

Interestingly, the ten brands cited as likely to disappear in 2010 include names like Motorola, Newsweek, Palm, Borders, Blockbuster, Fannie Mae and Freddie Mac, and other names in the old brick and mortar media and finance category. This supports the theory that information is increasingly being consumed via mobile devices and is indicative of a preference by consumers for devices that circumvent the firewall between television and the Internet. Brands which are not positioned adequately on the Internet will likely not survive, where demand for content development, storage, and distribution will likely rise greatly.

One can deduce that information production on the Internet is still relatively new and not as developed as television, however, the death of brick and mortar media and technology names will likely hasten the speed with which television and the Internet eventually meet one another in terms of information production and consumption. Gaming is another large component of the UCSD study which is slated to compete with space as it becomes more reliant upon web-based delivery.

The search for a reason for the demise of certain media brands is pointing to the fact that the demand for information is far greater than the ability to store or transmit it. The year 2010 will likely spell doom for certain old media staples, while new media production, storage, and delivery capabilities will leap ahead at a rapid growth rate.

They say that those who do not learn from history are doomed to repeat it, therefore, given the example from the 1930’s it would be a fair statement to make at this time that those to whom money is owed will fair better than those who owe money. Countries like Japan are going to be hardest hit because the ratio of their national debt to GDP is over 2:1, whereas countries like the US in which the national debt is just over 100% of GDP will be less hurt.

Nonetheless, in the US there are definitely going to be record numbers of consumer-related debt defaults as inflation saps purchasing power. China will be hit hardest perhaps as the demand for their exports in the US dries up, while at the same time the US Treasuries they hold become worthless. In Europe, the prospects are less clear as regulatory measures for banks fail to be implemented by the EU, fomenting the worsening of their credit crises by creating bigger and bigger banks. However, countries like Hungary, Latvia, and Greece will be especially hard hit as rampant unemployment dogs their economies along with high levels of debt.

The employment picture is not rosy for those who require training because employers will not have resources to train new employees. The demand for experienced individuals will rise because there will be a natural tendency toward hands-on, problem-solving in an era of zero tolerance for mistakes. Depressions are unlike recessions in that recoveries take place in tiny baby steps rather than in large spurts of growth, however, both are natural economic occurrences and those who are experienced and knowledgeable in how to maneuver in either environment will be in demand.

Government spending will be forced to be reduced simply because of the sheer pressure on the economy exerted by lower wages throughout all sectors. The current debate about the size of government will be solved naturally by economic pressures. A renewed debate will arise in its place, which will be supported by a more realistic approach toward efficiency and education. This is indicative of the natural process of resetting the economic and social fabric back into sync with reality, which most all indications point to it being long overdue.

War is not an unlikely byproduct of this process as many try to cling to the past, however, this will be coupled with leaps in technological innovation as the euphoria over the replacement of the former methods of production and consumption balances out the pessimism arising from the failings of the past.

The following is from the Joint Tax Committee estimate of the revenue effects of the Reid bill. I have listed provisions with major revenue effects (+$20 B / 10 years) and a few others that have significant policy or political impacts. There are some smaller changes as well, which you can see for yourself in the 3-page document. All revenue figures are revenues raised over the ten-year period 2010-2019.

1. 40% excise tax on health coverage in excess of $8,500 (individuals) / $23,000 (families). Amounts are indexed for inflation by CPI-U + 1% – begins in 2013 – $149 B tax increase
2. Additional 0.5% Medicare (Hospital Insurance) tax on wages in excess of $200,000 ($250,000 for joint filers) – begins in 2013 – $54 B tax increase
3. Impose annual fee on manufacturers and importers of branded drugs – begins in 2010 – $22 B tax increase
4. Impose annual fee on manufacturers and importers of certain medical devices – begins in 2010 – $19 B tax increase
5. Impose annual fee on manufacturers and importers of certain medical devices – begins in 2010 – $60 B tax increase
6. Cut in half (to $500K) the amount of an executive’s compensation that a health plan can deduct from its corporate income taxes – begins in 2013 – $600 million tax increase
7. Impose 5% excise tax on cosmetic surgery and similar procedures – begins for surgery in 2010 – $6 B tax increase!
In total the bill would raise taxes by $370 B over ten years.

Here’s some reaction to these provisions. Updates since Wednesday night are in bold/italics.

Excise tax on high-cost plans (§9001, beginning on page 1979)

It appears Leader Reid did, as rumored, raise slightly the limits in the Kerry excise tax on high cost plans, exempting some slightly more expensive health plans from taxation. It appears he substituted (2), the new Medicare payroll tax increase to cover the lost revenue.

The amounts in (1), relative to the Finance Committee, look like the result of an aggregate constraint from the unions. The Baucus / Finance Committee bill had limits of $8K / $21K and raised $201 B. The Reid limits of $8.5K / $21K are only slightly different, but raise $149 B. It looks like someone said “Get the Kerry tax number down from $200 B to under $150 B.”

From my perspective, this is crazy. Reid and Senate Democrats now have to defend themselves on two major tax increase policies rather than one. If you’re going to take the political hit for the Kerry tax on high cost plans, you might as well squeeze as much revenue as possible out of it. I assume he did this because someone forced him by threatening to oppose the bill (unions? one or more Senators?).

Medicare payroll tax increase (§9015, beginning on page 2040)

Wow. It’s incredible that a Democratic leader would propose this.

Current law:

>Wages up to $106,800 in 2009 (and in 2010) are subject to payroll taxes of 15.3%: 12.4% Social Security + 2.9% Medicare.
>Wages above $106,800 are subject to payroll taxes of 2.9%.

My reading of §9014 of the bill tells me that Leader Reid proposes the following addition (changes in italics):

>For individuals, wages between $106,800 and $200,000 for individuals are subject to payroll taxes of 2.9%.
>For individuals, wages above $200,000 are subject to payroll taxes of 3.4%. That’s a 0.5 percentage point tax increase. So for each $1K you make above $200K, you would pay $5 more in payroll taxes.
>For joint filers, wages between $106,800 and $250,000 for individuals are subject to payroll taxes of 2.9%.
>For individuals, wages above $250,000 are subject to payroll taxes of 3.4%. That’s a 0.5 percentage point tax increase. So for each $1K you make above $250K, you would pay $5 more in payroll taxes.
>These threshold amounts of $200K and $250K are not indexed for inflation or wages, so more real income in each subsequent year will be subject to the 0.5 percentage point tax increase.
>The additional 0.5 percentage point tax increase comes on the employee side, so you still pay income taxes on these additional amounts of taxes paid.

With this proposal, Senator Reid is leading Democrats across a major philosophical threshold. Since Social Security was created in the 30’s and Medicare in 1965, payroll tax revenues have been “dedicated” to financing these programs. While not all funding to finance Medicare comes from payroll taxes, all funding from the Medicare payroll tax finances Medicare. In other words, the 2.9% Hospital Insurance payroll tax that you and your employer pay on your wages is all supposed to offset Medicare spending. That is part of the social insurance model, in which everyone pays in a fraction of their wages, and everyone receives benefits later.

I am not a fan of the social insurance model, because it is non-transparent: most people think their individual taxes paid are being used to finance their benefits, when in fact the funds are used to subsidize other people’s benefits. But the social insurance model and dedicated payroll taxes have been a core principle of Social Security and Medicare financing since they were created, and advocates (especially on the Left) of those programs have fiercely defended this principle.

Leader Reid’s bill would use new Medicare payroll taxes to finance a new health entitlement outside of Medicare. His bill would turn Medicare payroll taxes into a general financing mechanism like the income tax. There is a slippery-slope argument against this that I would normally expect from the Left. If Republicans (or my former boss) had proposed this, I would expect AARP to come unglued and raise fears among seniors that, if this proposal becomes law, future Congresses might take payroll tax revenues and use them for highways or defense or other non-social insurance spending. I am interested to see how AARP reacts. Will they support the Reid bill as they did the House bill? (Reporters: There’s a story for you. Ask AARP.)

In addition, Social Security and Medicare payroll taxes have always worked from the bottom of the wage scale upward, because they are traditionally tied to benefit eligibility. Leader Reid is now creating a “donut hole” in which there are three rate “brackets.” This initiates and lays the groundwork for the future expansion of a progressive tax rate structure for payroll taxes. This makes it easier for future lawmakers to raise payroll taxes to finance other parts of government, because they’re just “taxing the rich.” While the Reid proposal applies only to wages at the top of the distribution, the principle would be in place to justify raising payroll taxes in that $106K – $200K in the future. Watch out.

Both of these are enormous precedents, long-term structural game changers in how we finance our government.

The non-indexing for inflation raises an interesting question about whether it breaks President Obama’s pledge. Was his $250K limit in real or nominal dollars?

This provision is a big risk for moderate Senate Democrats.

Tax experts – it looks like they’re doing something tricky by using “taxpayer” rather than “individual” as in §3101(b) of the I.R.C. I invite further explanation if this is significant.

Taxes on branded drugs, medical devices, and health plans (§9008 on page 2010, §9009 on page 2020, and §9010 on page 2026)

The drug tax is a tax on “Big Pharma.” Bigger drug companies would pay higher taxes. For instance, a branded drug company with sales of $5M – $125M would pay taxes on only 10% of its gross sales, while one with >$400 M of sales would pay taxes based on 100% of its gross sales. (See p. 2012 of the bill.)

It is also applied only to brand name drugs, not generics. I would like to hear the policy rationale for this. The political rationale is simple: shaft the big brand-name Pharma companies. With exceptions, brand-name drug companies generally lean R, generic drug companies generally lean D.

In each case, I expect the providers will pass most of the tax increase on to consumers in the form of higher prices.

There are also a bunch of reporting requirements that at first glance look as if they are laying the intellectual groundwork for the future imposition of price controls. I invite further explanation from someone with expertise in drug pricing and rebates.

I know of no legitimate policy rationale for any of these taxes. They are derived from the following logic:

> If the government spends more on health insurance, these two industries would make more money.
> The government needs tax revenues.
> So we’ll tax these industries to capture some of their increased revenues.

Shafting the health plan executives (§9014 on page 2035)

I’m torn between hating the policy and chuckling at the political naivete of leaders of the health insurance industry. Unlike the taxes on big Pharma and medical device firms, here Leader Reid is going after the health plan executives’ individual compensation. He’s making it more expensive for a health plan to pay its executives more than $500K. Note that the higher taxes would apply to income earned paid in 2013 or later, even if that income was earned as early as 2010.

It’s terrible policy to single out the compensation of any particular industry. Wall Street – if this becomes law, you’re next in the crosshairs.

This is gratuitous political punishment of an unpopular constituency. The section is titled “Limitation on excessive remuneration paid by certain health insurance providers.” It raises $600 M over 10 years, and is thus insignificant as a pay-for.

How’s that political alliance working out for you guys?

Rather than trying to repeal this section, I’ll bet some creative Republican Senator offers an amendment to extend it to trial attorneys involved in medical malpractice cases.

Cosmetic surgery tax (§9017 on page 2045)

The federal government would impose a 5% sales tax on cosmetic surgery. Late-night comedians will love this.

I can’t think of another case where the Feds would impose a sales tax. Governors and Mayors usually regard sales taxes as “their turf.” I wonder if they’ll fight this.

Update: Best guess is that it does not apply to braces, but would apply to teeth whitening.

Joint Tax estimates this new tax would raise $5.8 B over ten years. That’s a lot of cosmetic surgery.

This tax would violate the President’s pledge not to raise taxes on those with annual income below $250K.

It would apply to surgery performed beginning in 2010, so get your work done before the new year.

Keith Hennessey is the former Assistant to the U.S. President for Economic Policy and Director of the U.S. National Economic Council. He was appointed to the position in November 2007 by President George W. Bush, and served until the end of Bush’s second term in office. Mr. Hennessey served in the White House since August 2002, when he was appointed to his previous position of Deputy Assistant to the U.S. President for Economic Policy and Deputy Director of the U.S. National Economic Council.

Hennessey holds a B.S. in Mathematics and Political Science from Stanford University as well as a Master of Public Policy from the John F. Kennedy School of Government at Harvard. The title of his Harvard public policy thesis was Unintended Consequences: Critical Assumptions in the Clinton Health Plan.

Taxpayers who file as single or head-of-household can claim a credit of 10 percent of the purchase price up to $8,000 ($6,500 for repeat buyers), if their adjusted gross income is less than $125,000. Married couples filing jointly must have an adjusted gross income of less than $225,000. Partial credits are available to single or head-of-household taxpayers whose adjusted gross income is between $125,000 and $145,000, and for married couples who file jointly whose adjusted gross income is between $225,000 and $245,000.

The tax credit is for homes that are purchased after November 6, 2009 and before May 1, 2010. If a sales contract is signed by April 30, 2010, taxpayers will qualify for the credit if escrow closes by July 1, 2010. The credit is refundable, and if the amount of income tax owed is less than the credit the taxpayer will be refunded the difference. The credit applies to all homes with a purchase price of less than $800,000. The tax credit does not have to be repaid unless the taxpayer sells or stops using the home as their principal residence within three years after the date of purchase.

Even though we are not an investment web site, we nevertheless urge you to visit these two sites because their goal is to cut through the media hype and bring you the unvarnished truth. By analyzing these charts below, one does in fact come away with the impression that at least there is often a gap between the government’s statistics as they really are and what they say they are. This type of suspicion is rampant today, which is fueling the growth of sites which proclaim to have all the answers.

However, I admit that I have often thought of what it must feel like to have a crystal ball. I would imagine the first thing one would do if they had one is not to tell a soul about it, which is how I view the financial world. With government tax policy all over the map nowadays, and the results of which are at best are questionable if not downright unbelievable, some of the best the world has to offer in financial minds have turned up on the Internet. If they cannot tell the future, then they certainly come across as believable when discussing past economic results and drawing parallels from them.

The best minds always seem to be those who are able to look back and examine the past and draw conclusions quickly about the times in which we live today. This is the greatness of wisdom that everyone cherishes – if only they possessed it. Sometimes just giving in to the hard cold reality is all it takes. Those who are on the forefront of the trends take on a tremendous risk, which is why the reward is so great for those whose wisdom is justified.

Financial inspiration is basically derived from a combination of pursuits: Fed policy, tax laws, which are then woven into accounting rules, and the results of which are economic reporting. When one is speaking with a financial professional, it is no less similar in the dimension of ethics than of seeing a doctor or an attorney. Those who pursue the truth of the economy and how it works are by definition professionals, and they owe their clients an honest point of view without a personal bias. One has to be able to understand economic policy and how that connects with tax policies because both are working in tandem to drive the economy. If one leaves out one part of the equation then quite simply put there isn’t a leg to stand on in the realm of credibility.

In a decidedly tempestuous financial environment, these pillars of support are under attack. People are questioning economists and financial professionals as never before. There is a lot of suspicion of the financial world, much of which is fueled by a lack of balanced financial information in the mainstream media and is largely justifiable. Other “structural” problems have occurred as evidenced by the mortgage fiasco, involving the banks, whose threshold for pain depends upon the size. “Too big to fail” is perhaps the financial catchphrase of the past decade. A less catchy yet nonetheless understood financial term “structural” will haunt us for years to come, well into the 2010’s. The economy is showing that size does matter, and there cannot be sustained blows in increased rapidity and intensity without “structural” problems occurring. Names like Enron and Worldcom pale in comparison to the direct hits to the economy at the close of the first decade of the new millennium.

There is no doubt, however, that the economy will survive. The question is, who will survive with it. There will always be an information gap between those who profess to have the proverbial financial crystal ball and those who doubt them. Both sides are locked into battle as gold takes center stage. The gold standard is arguably now in place in the stock market. Equities are being discussed in terms of their gold value. Is this a harbinger of things to come? You can see what Peter Schiff has to say about it in the video that appears aside the charts below from shadowstats.com ["SGS"].

Finding inspiration in terms of knowing which way the economy is headed is often merely a matter of simple listening. A doctor can only tell you what he thinks about ones state of health at that precise moment or what it was before by looking on a patient’s chart. However, if the patient smokes, does not exercise or eat right, doesn’t get enough sleep, and is simply indulging themselves in things which they shouldn’t then there is usually a price to pay for that behavior. A good doctor is allowed to say things, which serve to caution a patient with respect to known dangers. Having an open mind and engaging in critical thinking are important factors to consider when finding where your financial compass points.

(And take a quick look at M1 according to the Federal Reserve – in blue – which confirms the SGS forecasts that M1 is rising rapidly and fueling inflationary fears – even hyperinflation.)