Last Year Was a Very Unfortunate One to Be Wealthy and French, Even By French Standards

Posted on by Caleb Newquist

More than 8,000 French households' tax bills topped 100 percent of their income last year, the business newspaper Les Echos reported on Saturday, citing Finance Ministry data. The newspaper said that the exceptionally high level of taxation was due to a one-off levy last year on 2011 incomes for households with assets of more than 1.3 million euros ($1.67 million). President Francois Hollande's Socialist government imposed the tax surcharge last year, shortly after taking office, to offset the impact of a rebate scheme created by its conservative predecessor to cap an individual's overall taxation at 50 percent of income. [Reuters via TaxProf]

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Tax Experts Weigh in on the Fiscal Commission Report

Plenty is being said about Bowles and Simpson’s Fiscal Commission report but we prefer to go with experts on the matter. Some musings from around the tax blogosphere

Joe Kristan loves the zero option, harkening back to the Reagan days:

If no “tax expenditures” were added back, the plan would reduce individual rates to 8, 14 and 23%, with a flat 26% corporate rate. There would be no reduced rate for capital gains, greatly simplifying tax lives for most of us.

This is an excellent idea. I would only apply more of the savings to reducing rates and add a dividends paid deduction to integrate the individual and corporate systems — a huge simplification. Nancy Pelosi isn’t crazfriends didn’t like the first zero option either.

From the aforementioned Tax Policy Center:

[T]his proposal is so provocative it almost seems as if Bowles and Simpson realize they have no chance of building consensus on their own commission. As a result, they may have decided to take their best shot now rather than watch their plan get nibbled to death. If so, it may not have been a bad idea. The fiscal panel may fade away in shame, but I have a feeling this plan may live on.

Tax Foundation’s Tax Policy Blog notes there’s plenty of displeasure to go around:

On the spending side, hawks will wince at the defense cuts while defenders of entitlement spending will dislike the higher retirement age and lower cost-of-living adjustments. One line item calls for all earmarks to be eliminated. Federal employee unions will not like the idea of a 3-year federal pay freeze and a reduction in non-defense employment by 10 percent through attrition.

On the tax side, there are certainly tax hikes for tax-haters to hate: gas taxes, dividend and capital gains taxes, and payroll taxes on high earners. Also, the revenue cap that the chairmen suggest, 21% of GDP, is higher than revenue has been in two generations.

Robert Flach is pleasantly surprised by the report but warns:

By just saying “add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero expenditure low” without limitations or restrictions we all know that the supporters of every single existing “tax expenditure”, as well as proposed new ones, will fund a lobby to throw money at Congress to keep or add their particular benefit. And individual Congresscritters will negotiate back and forth – “I’ll support your tax break if you support mine”. Before you know it we will end up with the same mucking fess we have now!

Meanwhile Dan Meyers needs oxygen:

[T]he report was nothing if not breathtakingly audacious by Washington standards.

Kay Bell notes the contention that has already begun over Social Security:

The debate over what typically is an inviolable government benefits program (remember Dubya’s failed attempt to privatize Social Security?) is going to rage for a bit…Perhaps most of the other members are as upset with the Social Security and tax suggestions as a lot of other people are right now. When the points of view of those 16 other commission members are taken into account, some of the recommendations might change … or disappear.

As Joe mentioned above, Nancy Pelosi hates the report, quoted by The Hill as, “simply unacceptable,” plus we gave you Dick Durbin’s thoughts yesterday.

Personally, we’re fans of the report because if nothing else, it forces politicians to entertain real solutions rather than hide behind the bullshit rhetoric we hear about “tax reform” and “cut spending.” And finally, as Gerald Seib writes at the Journal, there aren’t any more excuses:

By making their ideas public, they made it harder for other commission members to run and hide. The commission now can’t simply bury controversial or unpopular ideas. It has to say to the world that it has rejected them and take responsibility for having done so.

It’s about time.

Tax Court: Don’t Bet Your Bass on Those Hobby Losses

One of the promised benefits of feminism was that both men and women would reap benefits from allowing women to achieve their potential in the workforce. And for Mr. Steve Lowe, it absolutely worked that way.

The Tax Court gives a hint at Mrs. Lowe’s achieved potential:

During the years at issue petitioner wife (Mrs. Lowe) worked full time as a “controller” for Fry Steel Co., where she has worked for over 38 years. She earned $177,219 and $184,181 in 2005 and 2006, respectively, with an additional $12,000 per year for taking notes at the board of directors meetings.

And how did that work out for Mr. Lowe?

In 2005 Mr. Lowe fits run by either American Bass, FLW Strem Series, or Western Outdoor News (WON) and reported gross income on petitioners’ Schedule C of $4,241. In 2006 Mr. Lowe fished in 15 tournaments run by those same organizations and reported $10,932 of gross income. The entry fees ranged from $280 to $825 with an additional $325 for a “coangler” amateur in FLW events.

Yes, Mrs. Lowe’s empowerment enabled her to hold down a fulfilling and well-paid job, freeing her husband to follow his dreams – to go fishing every day.

The only thing that could possibly be better than fishing every day while your wife brings home a nice paycheck is to get a tax deduction for fishing every day while your wife brings home a nice paycheck. And Mr. Lowe gave it a try, deducting $49,067 of fishing expenses in 2005. Unfortunately, he hooked a snag.

The tax law disallows losses from activities “not engaged in for profit” – the so-called “hobby loss” rules. The Tax Court summed it up (my emphasis):

Mrs. Lowe earned substantial income from her job at Fry Steel Co., and the losses from Mr. Lowe’s fishing activity resulted in substantial tax benefits. During the years at issue Mrs. Lowe earned an average of about $180,000 a year from her job, and petitioners were able to deduct an average of about $41,000 per year on their joint Federal income tax returns due to Mr. Lowe’s fishing activity losses. Mr. Lowe was not employed before the fishing activity and was able to pursue this activity because of Mrs. Lowe’s substantial income. We also note that Mr. Lowe fished for recreation and pleasure long before commencing his competitive bass fishing activity. He clearly enjoyed that activity and likely would have incurred significant fishing costs yearly for personal pleasure had he not conducted his claimed business activity.

The case illustrates some hobby loss red flags:

• The activity loses money and shows no sign of doing otherwise – It’s fishing, for heavens’s sake.

• The losses offset significant other income – If you would be getting the earned income credit otherwise, the IRS doesn’t invoke the hobby loss rules.

• The activity is fun – If your money-losing business can be perceived as fun – like fishing, say, or playing slots – it’s that much harder to convince the IRS that you’re really in it for profit. Remember, though, that even miserable activities (like selling Amway or writing blog posts) can run afoul of the hobby loss rules.

So Mr. Lowe lost his deductions. The Tax Court waived penalties, though, and Mr. Lowe, as far as we know, still can fish every day while his wife works. Millions of red-blooded men would take that deal, even without tax deductions.

Joe Kristan is a shareholder of Roth & Company, P.C. in Des Moines, Iowa, author of the Tax Update Blog and Going Concern contributor. You can see all of his posts for GC here.