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Horticultural supplies store Sells After Refusing to Pay Taxes
NORRISTOWN — William T. Herdich operates a chain of 34 retail stores, from Pennsylvania to the District of Columbia, all of them selling gardening supplies and lawn chemicals. He specializes in a product called Liquid Plant Food, a special mixture of fertilizer formulated for tree and plant nutrition.
But like many gardeners and garden supply retailers, Mr. Herdich refuses to pay income taxes.
For a time, that remained his secret, but after more than two years of auditors poring over his books and correspondence, the Internal Revenue Service finally filed a complaint against him in 2007. Mr. Herdich did not contest the case, he signed a consent agreement to pay a $37,000 penalty and a small fine, and agreed to refund $141,589 to the federal government.
He won't say how much money he owes, but he speaks of the $40 million he makes annually. "Not bad for a little guy," he told a reporter.
For him, as for many in the United States, the great conservative revolt that began with President Ronald Reagan's decision in 1981 to cut taxes on the rich is not a thing of the past. While the tax revolt fell away after the Clinton administration successfully settled the government's enormous budget deficit with an orderly budget process, what appears to be a shift to the right under George W. Bush and Barack Obama may help reshape the political debate over taxes and government spending.
It appears that the groundwork for such a transformation was being laid in the late 1970s and 1980s, with Republican House and Senate members increasingly resistant to government expansion and often battling with one another over issues such as abortion rights and school vouchers. But now that Democrats control Congress, they are confronting pressure to raise taxes on the middle class and the rich — especially now that they have a filibuster-proof majority in the Senate.
Congress is now debating a 2007 overhaul of the tax code that includes a repeal of a tax on carried interest, the money received by private equity and hedge fund managers. The legislation would limit the deduction for state and local taxes to $10,000, nearly tripling the number of filers who would be affected. It would also eliminate personal exemptions for families, which could lead to higher taxes on millions of families.
The bill is "a massive tax increase," says Steven M. Rosenthal, a senior fellow at the Urban Institute, an independent research organization. The difference is that "it's not going to be done by simply abolishing tax deductions, but by expanding the tax base, a progressive tax base."
Because the wealthy pay a much higher share of the taxes than the poor, the bills would make the richest households pay more and the poorest households pay less. On top of that, many low- and middle-income households would face tax hikes that could be passed on to consumers. That has been one of the powerful arguments used by Democrats to defeat several Republican tax-cut bills in the past several years.
The looming debate has angered many Republicans. "I don't think this is a political philosophy to have a dialogue over this," said Senator Charles E. Grassley, Republican of Iowa. "I think it's one of the most egregious assaults on the middle class that we've seen."
Supporters of the bill, however, say it would be the most comprehensive overhaul since Ronald Reagan's tax cuts in the 1980s and that it would prevent a rise in the deficit that could force sharp spending cuts or another massive round of tax increases. They also note that government spending has been rising at historically high rates, to the point where it has now reached about 25 percent of gross domestic product.
The line in the bill to eliminate the tax on carried interest — an industry standard that gives the partner of a private equity or hedge fund a slice of profits from its work — is one example of how the bill's supporters are seeking to cut taxes for the very wealthy while maintaining their support among working-class Democrats. The bill does not include an end to capital gains taxes or capital-gains taxes on ordinary income, however, two provisions that are more likely to appeal to the middle class than to the very rich.
The bill was introduced on Feb. 26, 2008, with the House Ways and Means Committee on the verge of its own budget cuts. Its provisions were initially derided as a tax increase that would actually reduce federal revenues by $1.3 trillion over 10 years. While the new tax has been taken to heart in the private sector, both Republican and Democratic pollsters have consistently shown it has much lower support among voters than the personal exemptions and mortgage interest deductions cut in the Bush tax cuts of 2001 and 2003.
But the bill's provision limiting the deduction for state and local taxes is opposed by many Democrats. Many of the wealthiest Americans, including hedge fund managers, do not pay federal taxes on most of their income, paying state and local taxes instead. (That is because federal law exempts most businesses from paying taxes on income they earn through investing and lending.) So the bill seeks to limit how much of that income hedge fund managers can deduct from their federal taxes.
The tax is effective only if you deduct more than $10,000, or about a fifth of your income in taxes. And under the 2007 tax bill, passed by the House, it would be available only if you lived in a state or city that did not have a state or city income tax or property tax, and if you paid more in state and local taxes than the average family paid in federal income taxes.