A Taxing Blog

Friday, June 06, 2003
Section 302  
I have been working on the corporate tax book and just got to the chapter on redemptions. The question has come up (both in working on this chapter and on the taxprof listserv) whether section 302 has any relevance now that dividends and capital gains are taxed at the same rate. I see two reasons why section 302 is still relevant: (1) the shareholder's basis can only be used to offset gain if it is treated as an exchange under section 302 and (2) the gain can only offset a capital loss if it is treated as an exchange under section 302. Clearly, section 302 is not as important as it use to be, but I will still be discussing it in my corporate tax class. Any other thoughts or comments on this issue would be appreciated.

UPDATE: Cornell law professor Robert Green rightly points out that section 302 is still important for foreign taxpayers as they are generally subject to U.S. tax on dividends, but not on capital gains from sales of stock.

UPDATE 2: Gregg points out that 302 is still relevant for corporate shareholders. As before, corporate shareholders prefer dividend treatment (to get the DRD).

Thursday, June 05, 2003
Seante Passes Child Credit Bill
The New York Times has this story. As to the bill's chances in the House, the Times reports that DeLay "seemed to soften his position on the issue, saying the House would consider any legislation sent over by the Senate." But the Times also reports that a "senior House official," speaking on condition of anonymity, stated that "the House was unlikely to rubber-stamp the bill approved today. In addition to all of the provisions in the Senate bill, House leaders also want to make the increased child credit, now scheduled to expire after 2004, permanent for taxpayers eligible to receive it, the official said."

Senate Reaches Agreement on Extension of Child Credit
Reuters is reporting that the Senate has reached an agreement that would extend the enlarged child credit to taxpayers earning less than $26,000 (by making it refundable). The compromise would also extend the credit up the income scale, moving the beginning of the phase-out from $110,000 adjusted gross income to $150,000. The cost would be covered by increases in U.S. Customs fees. The bill could come to the Senate floor as early as this afternoon. It is unclear what will happen in the House. As widely reported yesterday, Tom DeLay says that the House will not consider the issue unless it is part of a larger package of more tax cuts. (The Exterminator seems to be smelling blood these days, and his appetite appears insatiable.) The White House yesterday suggested approval of what has now become the Senate compromise. And if the Administration weighs in, DeLay will probably have to cave.

Wednesday, June 04, 2003
According to the WSJ, Ebay will begin collecting VAT on the fees that it charges European users. Apparently, Ebay is doing this to comply with an EU law that imposes the VAT on on digital services.

Distribution Analyses from CTJ and Brookings/Urban
Today's Washington Post runs this front-page story on studies released by the left-leaning Citizens for Tax Justice and the Tax Policy Center (the joint Brookings-Urban Institute project) about the distribution of the federal tax burden in the wake of the recent tax bill. The studies included all federal taxes (although its not clear what assumptions they made as to the incidence of the corporate income tax). In short, they both conclude "that a broad swath of lower-middle, middle- and upper-middle-income people, as well as some rich Americans, will carry a greater share of the federal tax burden after the laws passed in the past three years are fully implemented. While taxes are scheduled to decline for all income groups, those earning more than $28,000 but less than $337,000 will end up paying a greater share of the taxes than they did before the changes."

Reverberations of the Federal Tax Bill in the States
Likely the first of many, the State of Montana has "decoupled" its definition of income from the Federal Government's with respect to dividends. S.B. 480, signed by the governor last week, provides that dividends shall be fully taxed as ordinary income under the Montana income tax. Most states conform in large measure to the federal definition of income, mandating only minor adjustments. In times of tight state budgets, more "decoupling" seems likely.
Update: Jeff has correctly pointed out that this is not really a decoupling from the federal definition of income, just a choice not to apply a more favorable rate. What happened is Montana actually enacted the bill before the compromise in Congress became final, and when it appeared that dividends might be excluded from the federal definition of income. Suffice it to say that dividends will not receive a favorable rate under Montana's personal income tax.

Tuesday, June 03, 2003
WSJ Editorial on Child Credit  
The WSJ has an editorial (registration required) today on the child credit issue.

Monday, June 02, 2003
Cars & Sales Taxes  
It'll be a slow blogging week for me, as I'm in LA getting some things ready for my move out here at the end of June.

This being LA, the first order of business was to buy a car --- which brought out a few taxing moments. My salesman, a nice guy (and an out-of-work actor, of course), kept getting confused about the amount of sales tax --- he had some trouble with the concept that the sales tax would vary depending on the options that I chose, and he kept forgetting to recalculate the tax.

Once we decided on a package and decided on a total amount to pay (inclusive of tax), we then had to work backwards to figure out the nominal pre-tax sales price. The math wouldn't work out exactly right --- so rather than the exact amount we agreed on, I saved a penny, which the "finance and insurance" guy took out of his pocket and gave me when I wrote the check. I wonder if that is a bizarre sales gimmick or something, designed to make me feel like they were treating me fairly down to the penny or something.

Negotiating the price reminded me just how hard it is to figure out who bears the burden of a sales tax. As a shorthand way of thinking about the problem, I tend to think that the consumer bears the burden of the tax -- so that if you raised the tax rate on a $20,000 car from 8% to 10%, a $400 difference, the $400 difference comes out of the consumers' pocket. But of course the price is negotiated on an after tax basis, so if I pay the same amount for the car, the dealership effectively bears the burden of the tax. The true answer probably lies somewhere in the middle.

The car-buying experience also gave me a chance to reflect on some of the negotiation tactics I talk about in my "Deals Workshop" seminar -- most amusing to me was how the junior salesman was always getting up to check with the sales manager about how much different options would cost, etc. This tactic is designed to give the junior guy an "out" --- an excuse like "Well, I'd like to do that for you but Bob says we just can't do it that way." The way to beat this tactic, of course, is to ask to negotiate with the boss directly.

I also accidentally reminded myself of one of the most effective negotiation tactic -- silence. People have a tendency to fill uncomfortable silences. At one point near the end of the negotiation, my mind wandered as I thought about when I wanted to pick up the car. The salesman eventually filled the silence by saying, "Okay, I can bring it down to $X" --- which was the counteroffer I was waiting to hear. It pays to have a high tolerance for uncomfortable silence -- or a mind that wanders off at just the right time.

Actually the car-buying experience was not terribly unpleasant. Maybe I got lucky and found a couple of nice salesmen. More likely, though, it's because I've lived through more difficult negotiations in practice. For most people buying a car is probably one of the more harrowing negotiations they have to face.

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