Monday, October 16, 2017
Despite the failures of supply-side trickle-down voodoo economics, the current administration and some nostalgic members of Congress want to relive the failed experience of tax cuts for the wealthy. Recently, as described in this story, the chief cheerleader for making the wealthy even wealthier trotted out the disproven propaganda about enriching the rich. The plans being tossed about not only cut taxes for the wealthy, they will increase taxes for many people who are not wealthy, and not even close to being wealthy. Yet when the plan to enrich the rich is paraded in public, most of the people who show up don’t realize they are cheering for their own economic demise. One would think, and hope, that by now those who were fooled once by this nonsense would not fall again for the same trick. But as someone once told me, when I was young, if it weren’t for humans there would not be opportunities for con artists.
The hilarity of the recent tax cut rally wasn’t just the absurdity of people cheering for tax increases on themselves. It was the crass appeal to truckers, who were told that cutting taxes for the wealthy would create “more products to deliver.” First of all, as history has taught us, products are manufactured when there are people who want to purchase, and are economically in a position to purchase, those products. The wealthier wealthy have the products they need and want, and simply will stash their increased after-tax cash flow into their foreign bank accounts. Second of all, even if there were an increase in the number of manufactured products needing delivery, the impending flood of self-driving trucks, the flotilla of Amazon and other delivery drones, and the impending delivery of products by digital transmission to 3-D printers is writing on the wall for truckers nationwide. But, those who live in the past lack the ability to see, let alone understand, the future. When it comes to timing, the Future is Now always trumps Bring the Past Back Again.
It is frightening to watch people buy into claims that their taxes are going to be cut when not only is that not going to happen, their taxes are going to be increased. False promises are made because too many people are willing to bank on false promises. And when reality sets in, they seek to blame everyone except their own ignorance, their own failure to think, and their own unwillingness to grow intellectually.
Back in 2010, when I wrote Negotiating Tax Legislation: Lessons from Life, I suggested that the approach to jobs and tax cuts should be, “Give us jobs, and then we’ll give you a tax break.” As I expected, that approach didn’t find support among the wheelers and dealers who hold the nation’s purse strings and control its economy. I elaborated:
The tax-cut-extension advocates don’t like that sort of arrangement. Why? It compels them to put their money where their mouths are, so to speak. Yet that is how competent business entrepreneurs, savvy agents for athletes and other service-providers, and professional negotiators attain workable contracts.America has been down this tax cut road at the turn of the century. It led the nation to the wrong place. Why would anyone want to do this again? Why would anyone want to be fooled yet again?
The sort of deal-making underway in Washington resembles, not the approach of professional negotiators and seasoned business entrepreneurs, but the false promises of advantage seekers who populate not only every segment of the business world but a substantial part of personal life. Consumer complaints are replete with tales of vanishing businesses, warnings are issued regularly about the risks of dealing with fly-by-night home improvement companies and individuals, and it took the enactment of lemon laws to compel auto manufacturers to honor their contracts. Tales of woe sent to advice columnists are packed with familiar strains of the “he respected me in the morning .. not” song and the crushed hopes of those who believed what the other person said.
* * * * *
Years ago, the phrase “show me the money” entered into the vernacular. Perhaps it’s time to say, “show us the jobs.” Show us the jobs, the nation will reply in gratitude with a tax break. No jobs, no tax breaks. That’s how tax law inducement provisions work. The “no tax breaks, no jobs” threat is nothing more than bully posturing of the worst sort. There’s a reason the tax-cut-extension advocates don’t like the “show us the jobs, then get the tax break” approach. They know that they’ve created few jobs, particularly enduring jobs, in response to previous tax cuts, and that the nation will not see any sort of job surge with an extension of the tax cuts.
Despite warning after warning, people continue to hand over cash to home improvement con artists, and to engage in behavior they later come to regret when and because they discover they’ve been duped. Perhaps that explains why America continues to listen to, and even cave into, the siren songs of the pied pipers of tax cut grabbing.
Friday, October 13, 2017
I agree with Smiths’ first, second, fourth, and fifth observations. I agree that repealing the taxation of social security benefits would make the financial problem worse. I disagree with the scope of Smith’s third observation, and I disagree in part with his conclusion that repealing the taxation of social security benefits would solve the fairness problem.
My reason for disagreement rests on how the social security system works. Employees and employers make payments into the social security trust fund. Employees, when they retire or become disabled, and in certain instances their spouses, when they retire, and their dependents, if they are minors when the employee dies, receive lifetime benefits. Sometimes an employee collects less than what the employee paid into the system. One example is an unmarried employee who has no dependents who dies shortly before reaching retirement age. Far more often, though, employees, or their spouses and dependents, collect more than what the employee paid into the system.
When an employee collects more than what the employee paid into the social security system, the employee has income. It is fair to tax that income. The sensible way of doing this is to permit the employee to exclude social security benefits from gross income until the employee has received what the employee paid into the system. At that point, all of the benefits should be included in gross income. If those benefits are the retired employee’s entire gross income, the effect of the standard deduction and the personal exemption deduction would be to generate either zero tax or tax computed at the lowest rates. If the retired employee has substantial amounts of other income, the social security benefits would be taxed at higher, and perhaps the highest, rates.
Under the current system, some social security benefit recipients do not include any social security benefits in gross income, even when they receive more than they paid into the system. There is no double taxation in that situation. Others include some portion of the social security benefits in gross income, and often they live long enough so that the portion of social security benefits not included in gross income over the years is at least the amount that the person paid into the system. Again, there is no double taxation. Double taxation exists when the recipient dies before receiving back what was paid into the system, and yet includes some of the benefits in gross income. The reason for this inconsistency is that current law measure social security gross income with a bizarre formula that reflects the recipient’s adjusted gross income, certain adjustments, and varying portions of the social security benefits. Thus, some social security recipients encounter double taxation, but most do not.
The fix is easy. It is what should have been done originally. Social security recipients should include in gross income any benefits that exceed what the recipient paid into the system. When taxation of social security benefits was first enacted, I advocated what I have just proposed. The response was a claim that people don’t know what they paid into the social security system. That doesn’t matter. It doesn’t matter because the Social Security Administration knows. That information is readily available to anyone who has ever paid into the social security system. The process of starting with the “total paid into the system” number, and subtracting benefits each year until zero is reached, and then including all benefits in gross income is much easier, far less complex, and certainly far less bizarre than the current law mechanism for computing the portion of social security benefits included in gross income. Taking the approach I suggest eliminates double taxation. It eliminates the imposition of high marginal rates on social security benefits received by taxpayers with low taxable income. It eliminates the benchmark amounts, and thus eliminates the problems caused by failure to adjust those amounts for inflation.
Simply repealing the taxation of social security benefits does not solve the fairness problem. Repealing the taxation of social security benefits would provide more of a benefit to taxpayers who receive more benefits over their lifetimes, because those taxpayers would be excluding from gross income more economic gain than would taxpayers who receive fewer benefits over their lifetimes.
Six and seven years ago, I made these same points, and discussed my proposal in greater detail, in Taxation of Social Security Benefits: Inexplicable Inconsistency and Hidden Tax Increases, Getting Specific with Tax-Related Deficit Reduction Ideas: Making Section 85 Fairer and Simpler, and Retirees, Social Security, and Filing Tax Returns?. Since I wrote those commentaries, nothing has happened, or written, or said, or argued, that has changed my mind.
Wednesday, October 11, 2017
A little more than a week ago, in When Claiming a Dependent Has Adverse Tax Consequences, I described the reasoning and outcome in Gibson v. Comr., T.C. Memo 2017-187. The taxpayers claimed their son as a dependent, and ended up having their tax increased by the advance payments of the premium assistance tax credit paid to an insurance company on behalf of their son. I then posed this question:
Would it not have been better to not claim the son as a dependent?I then provide one answer:
If the taxpayers were entitled to claim their son as a dependent, which the facts suggest was the case, then failure to do so would not permit the son to claim the credit because the credit is denied to any individual with respect to whom a dependency exemption deduction is allowable to another taxpayer.Then I asked a second question:
But would failure to claim the son as a dependent, even though he qualifies as a dependent, eliminate the requirement that the advance premium payments made on his behalf be added to the taxpayers’ tax?I confessed the futility of my search for a definitive answer, and invited assistance:
I cannot find anything definitive that answers the question. If the answer is no, then failure to claim the son as a dependent, even though he qualifies, would be counterproductive. If the answer is yes, it still might not make sense to fail to claim the son as a dependent. Why? The son, not entitled to the credit because he could be claimed as a dependent, would be the one required to add the advance payments to his tax. Perhaps someone who has expertise in the intersection of tax law and health insurance law can share some insights.And, fortunately for my readers and myself, assistance arrived. It came in the form of an email from Christine Speidel, who is the Director of the Vermont Low-Income Taxpayer Clinic, and a Staff Attorney with the Office of the Health Care Advocate of Vermont Legal Aid, Inc. Christine’s explanation takes us through the complex maze encountered where tax law meets health care law. Christine wrote:
I read your post on Gibson v. Commissioner, the recent premium tax credit case. In the post, you ask who would have the APTC repayment obligation if Mr. and Mrs. Gibson had decided not to claim their son’s dependency exemption. I believe the son would have the repayment obligation in that case. Dependents cannot qualify for a PTC, but this doesn’t mean they can’t be liable for excess APTC.As horribly complex is the federal income tax law, even worse is healthcare law. Getting a handle on both is difficult, and so to Christine Speidel, on behalf of my readers and myself, I offer appreciation for her assistance in navigating this particular maze.
If nobody claims the personal exemption of an APTC recipient, Treasury Reg. § 1.36B-4(a)(1)(ii)(C) applies:(C) Responsibility for advance credit payments for an individual for whom no personal exemption deduction is claimed. If advance credit payments are made for coverage of an individual for whom no taxpayer claims a personal exemption deduction, the taxpayer who attested to the Exchange to the intention to claim a personal exemption deduction for the individual as part of the advance credit payment eligibility determination for coverage of the individual must reconcile the advance credit payments.The Treasury regulations and HHS Marketplace regulations are designed to mesh, so that somebody will always be on the hook for excess APTC. The Marketplace regulations are quite detailed about this.
Marketplaces can only award APTC to a “tax filer.” 45 CFR § 155.305(f). That term is defined to exclude tax dependents. 45 CFR § 155.300(a). Tax dependents are not allowed go out and get APTC on their own. An applicant for APTC must attest that they are a tax filer, and they also must attest to the individuals in their tax household. 45 CFR §§ 155.310(d)(2)(ii); 155.320(c)(3)(i)(A). The Marketplace must try to verify the information through the federal data hub or other electronic sources, and if that fails, it must request additional documentation from the applicant. 45 CFR § 155.320(c)(3)(i). A Marketplace must get income information from the applicant’s entire tax household, and it must verify that information before granting APTC. 45 CFR § 155.320(c).
I presume the Gibsons’ son signed up for his Marketplace plan as a non-dependent, single individual. I assume this because he was awarded APTC without his parents’ knowledge. Under the Marketplace regulations, the Gibsons’ son should have made an attestation that he would claim his personal exemption when he applied for APTC. In that case, he would be liable for APTC under the Treasury regulation above, if his parents did not claim his exemption.
The regulations are much tighter than what happens on the ground, though. It is possible that the Marketplace fell down on the job, and awarded APTC even though the Gibsons’ son did not represent himself as a “tax filer.” I do not think this would happen today, but it is possible with a 2014 plan, when the system was brand new to applicants and eligibility workers alike, and when many exchanges had operational and technological problems. On the facts we have, it’s hard to tell whether the Gibsons’ situation is entirely the son’s fault, or whether the exchange also messed up.
It is also interesting to compare the Marketplace application with the attestations required by the regulations. HHS model applications and instructions are posted online. The regular application asks for information about every person in the applicant’s tax household. However, the shorter application for a single adult doesn’t have an attestation about filing status – it’s just stated in the form instructions that tax dependents can’t use the short form. If the Gibsons’ son used a paper application, he might not have made an attestation about tax filing status. Most people apply online or over the phone, however, in which case the applicant would get initial questions about tax filing status. Presumably the IRS would try to pin the son with the repayment obligation even if he applied on paper. The short application form should probably be revised to comply with the Marketplace regulations on attestations.
Having the son reconcile his APTC might not be a bad result for the family. If the Gibsons dropped their son’s dependency exemption, and their son filed his 2014 taxes as a dependent and reconciled his APTC, at least he would get the benefit of repayment limitations based on his income. Treas. Reg. § 1.36B-4(a)(3). He would likely have to repay much less than the full amount of APTC. Repayment limitations are based on “household income.” Fortunately for taxpayers, the definition of household income only considers individuals whose personal exemptions are claimed on the tax return. Treas. Reg. § 1.36B-1(e). If the son is actually a dependent for 2014, he probably has fairly low income and would only have to repay $300. This would be a better solution for the family overall.
Monday, October 09, 2017
Now comes news that the IRS awarded a multi-million-dollar fraud-prevention contract to Equifax. That’s not unlike hiring an embezzler to conduct an audit. The IRS did not open the opportunity to any other company.
Reaction to the awarding of the contract has spanned the partisan gap. In this report, one can find statements made by members of Congress, all of which criticized both the IRS and Equifax. Objections were made not only to the fact that a company with insecure data protection continues to have access to tax information, but also to the process by which Equifax obtained the contract.
According to this story, the claim by the IRS that it had no choice but to award the contract to Equifax has been refuted by the Government Accountability Office. It turns out that another, unidentified, company had been awarded the contract, but Equifax protested having the contract shifted to another company. The IRS concluded that it had no choice but to allow Equifax to continue providing identify protection services for taxpayers accessing data through IRS websites, but the GAO explained that the unidentified company could have been awarded the contract pending resolution of the Equifax protest.
This is no way to run a business, to run a government agency, or to run a nation. The lack of care and the lack of accountability are diseases contributing to the overall decline of the nation’s economic health. Those who claims simplifying the tax system will reduce the risk of identity theft are wrong. It doesn’t matter whether a person’s tax return has 2 lines, 20 lines, or 200 lines, because no matter the number of lines, identifying information will be on the return.
It is time for change, throughout the private sector and government. It is time to protect Americans and hold corporations, corporate executives, government agencies, and government officials accountable for the mess that deregulation has enabled.
Friday, October 06, 2017
An example of this one-time revenue grab made the news a few days ago. Though Pennsylvania legislators have been negotiating in secret, keeping their constituents and the public they are required to serve in the dark, word leaked that one proposed revenue raising provision would apply the sales tax to items purchased by businesses for sale to customers. In other words, the sales tax would be collected sooner. Items purchased this fiscal year but not yet sold would be subject to the tax. Of course, that would increase revenue this year. But what would happen next year? Because the sales tax had already been paid, when those items are sold, the revenue that would have been generated next year is reduced. It would be offset by imposing the sales tax on items purchased next year by businesses for the following year, so sales tax revenue next year would be the same as it would have been without the provision. That is why the proposal is a one-time revenue grab. Once word leaked out, opposition from businesses, unions, and others caused the legislators to set it aside.
From time to time, Pennsylvania legislators propose the sale of the state-operated liquor store system to provide revenue to offset spending. But how often can that trick be used? Once the system is sold, it’s not available for sale in the following year. Selling assets to fund operations is a signal that the entity’s finances are in trouble.
It’s not just governments that play this game. For the past several years, I have been getting a stream of postal letters from the water company, inviting me to pay a lump sum for insurance against damages to the water line from the main to the meter. The one-time payment would protect the line at least until the house is sold. Someone apparently came up with the idea of infusing the revenue stream with payments that, once made, would not be made again. So, if by some strange twist, every customer paid the lump sum premium, the company’s financial statements look good. But what happens the following year? There’s probably some other one-time revenue enhancement lurking in the wings.
The challenge, to governments and businesses, is matching revenue with expenses. Banks and other lenders, of course, encourage borrowing to make up the deficits, but that’s because the interest on those loans enhance the revenue of the banks and lenders. Borrowing works only if it is a timing or bridge assist, that is, the source of the revenue with which to repay the loan is in place. Too often, individuals, businesses, and governments borrow without having a stream of revenue available to pay the interest and principal.
It’s one thing for an individual to mess up with failing to match revenue and expenses. When a business miscalculates, its failure can cost employees their jobs, and customers their orders and service. When a government miscalculates, or more specifically, when legislators miscalculates, it can cost much more than jobs, safety, and health, as it already has in Pennsylvania while the legislative stalemate enters its fourth month. The price of legislative miscalculation can be the loss of freedom, and even national identity.
Wednesday, October 04, 2017
The Tax Policy That Worked for the Few and Not for the Many Last Time, and It Will Be a Repeat This Time
Readers of this blog know that I have no faith in the promises advanced by proponents of tax cuts for the wealthy. The claim that the increases in after-tax flows accruing to the wealthy will trickle down to everyone else has been proven, to put it nicely, erroneous. The claim that tax cuts for the wealthy create jobs flies in the face of evidence that most job creation arises from overwhelming demand by consumers who have money to spend. I have written about the flaws of supply-side economics and trickle-down theory in numerous posts, including Job Creation and Tax Reductions and The Tax Fake That Will Not Die.
The state of Kansas has gifted the nation with a sad, but instructive, lesson in why tax cuts for the wealthy are so destructive economically and socially. In A Tax Policy Turn-Around?, I explained how the Kansas income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. In A New Play in the Make-the-Rich-Richer Game Plan, I described how Kansas politicians have been struggling to find a way to undo the damage caused by those ill-advised tax cuts for the wealthy. In When a Tax Theory Fails: Own Up or Make Excuses?, I pointed out that the Kansas experienced removed all doubt that the theory is shameful. In Do Tax Cuts for the Wealthy Create Jobs?, I described recent data showing that the rate of job creation in Kansas was one-fifth the rate in Missouri, a state that did not subscribe to the outlandish tax cuts for the wealthy that Kansas legislators had embraced. In Kansas Trickle-Down Failures Continue to Flood the State and The Kansas Trickle-Down Tax Theory Failure Has Consequences, I described how large decreases in tax revenue, the opposite of what is promised by the supply-side theorists, triggered cuts in public education, and in turn stoked the fires of voter frustration. The voter reaction, however, did not push out of office enough supply-side supporters. In Who Pays the Price for Trickle-Down Tax Policy Failures?, I described how the governor of Kansas, who claimed that tax cuts for the wealthy would generate increased revenues, proposed to deal with the resulting revenue shortfall by cutting spending for essential services. In Kansas As a Role Model for Tax Policy?, I shared the news that the Kansas policy of cutting taxes for the wealthy with the unwarranted promise of resulting revenue increases and economic prosperity is on the verge of total collapse.
Now the effort to reduce, and eventually eliminate, taxes on the nation’s self-appointed nobility has again returned to the center of the Washington, D.C., spotlight. Proposals to repeal the estate tax offer nothing to the vast majority of Americans who are not subject to the estate tax because their economic situation does not contribute to the economic instability that the estate tax is designed to prevent. Proposals to reduce income tax rates do far more for the wealthy than they do for the rapidly shrinking middle class. Given the revenue cost of these giveaways, supporters of these foolish ideas are divided, with some willing to let federal budget deficits skyrocket and the anti-deficit segment seeking to reduce or eliminate tax provisions that chiefly benefit the middle class. Preliminary examination of different versions of the packages under consideration reveal that many middle-class individuals and families will face increases federal tax bills. Unfortunately, most of these people are unaware that they are about to be skewered by tax “reform” being peddled to them as reductions in their tax liabilities.
Though not everyone who is a taxpayer in 2017 was old enough to be filing tax returns the last time this nation fell for these false promises, most of today’s taxpayers should remember, and hopefully do remember, not only the claims made in 2002, the changes in tax law enacted that year, and the economic consequences that devastated the nation six years later after the bad plans had been given sufficient time to percolate below the surface.
If America falls yet again to these false promises, then because of the tremendously larger scale of what is being planned, what happens when the consequences show up in the early to mid 2020s will make the Great Depression pale in comparison. By then, the beneficiaries of this wealth transfer will have retreated to the safety of their private islands, protected by their private armies, and laughing at the ease with which they restored feudalism while people were so distracted by arguments over the definitions of socialism and fascism.
Monday, October 02, 2017
A cautionary example of this unexpected consequence was provided recently by the United States Tax Court in Gibson v. Comr., T.C. Memo 2017-187. The taxpayers filed a joint return for 2014. During 2014 and 2015, their adult son did not live with them. He held a job, and at some point during 2014, the son used an address in another town, an address that was not the taxpayers’ address. For 11 months during 2014, the son obtained health insurance from Human Employers Health Plan of Georgia, which the son obtained though an application with the Health Insurance Marketplace. Humana collected premiums of $4,628.80, which were paid through the mechanism of advance payments of the premium assistance tax credit under section 36B. Monthly invoices for September through December of 2014 sent to the son at his separate address showed a gross monthly premium of $420.80, an offsetting Advance Premium Tax Credit of $420.80, and a balance due of zero. In mid-January of 2015, Form 1095-A was sent to the son at his separate address, showing the advance payments of the premium assistance tax credit that had been made to Humana in 2014. On January 1, 2015, the son enrolled in a Blue Cross Blue Shield plan offered by his employer.
On their 2014 joint income tax return, the taxpayers claimed their son as a dependent. The IRS did not dispute the son’s status as a dependent. The taxpayers claimed a refund of $6,880 on the return, reflecting the excess of the tax withheld from their reported income over the tax reported due. They did not report the advance payments of the premium assistance tax credit on their return. When they filed their return they were not aware that the son had obtained the Humana policy or that the advance payments had been made to Humana in 2014 for the son’s policy.
The IRS determined that the taxpayers tax should be increased to reflect the advance payments of the premium assistance tax credit to Humana on the son’s behalf during 2014. This caused a deficiency of tax that reduced the taxpayers’ claimed refund by $4,628.80.
As the Tax Court explained, section 36B permits eligible taxpayers, those with household incomes between 100 percent and 400 percent of the Federal poverty line, to claim the premium assistance tax credit for health insurance covering dependents, and dependents may not claim the credit on their own returns. Though advance payments of the premium assistance tax credit are made directly to the insurer during the taxable year, advance payments of the premium assistance tax credit made on behalf of a taxpayer or members of the taxpayer’s household, including dependent children, must be reported on the taxpayer’s federal income tax return. If the advance payments exceed the premium assistance tax credit to which the taxpayer is entitled, the excess increases the tax owed by the taxpayer and reduces any refund otherwise payable.
Because their income exceeded 400 percent of the federal poverty line, the taxpayers were not entitled to any amount of premium assistance tax credit. The entire amount of the advance payments of the premium assistance tax credit on their son’s behalf paid to Humana by the Health Insurance Marketplace during 2014 increased the taxpayers’ tax owed and reduced their claimed refund. It was on this basis that the IRS determined a deficiency and reduced the claimed refund.
The taxpayers did not deny that their reported income level made them ineligible for the premium assistance tax credit. They disagreed that their son received insurance from Humana, and therefore they disagreed whether any advance payments of the premium assistance tax credit were made to Humana on their son’s behalf. The son, unable to testify at the trial, provided a signed affidavit in which he claimed that he had only employer-provided Blue Cross insurance and that he did not receive a Form 1095-A showing advance payments of the premium assistance tax credit on his behalf to Humana. The Tax Court, however, pointed out that the reliable evidence presented to it established that the son’s recollection about his insurance coverage was “mistaken.” That evidence included business records from the son’s employer, from Humana, and from the Health Insurance Marketplace. It established that the son’s Blue Cross coverage did not begin until 2015, that he was covered by the Humana policy in 2014, and that Humana received advance payments of premium assistance tax credits to offset the son’s insurance premiums.
The court pointed out that it did not doubt the taxpayers’ testimony that they believed that their son did not have an insurance policy from Humana. The fact that their son did not live with the taxpayers led the court to conclude that it believed their testimony that they were unaware of the insurance coverage and any confirming information that was mailed to him. Thus, because the taxpayers did not dispute that their reported income level made them ineligible for the premium assistance tax credit, their tax was increased, and their refund reduced, by the amounts prepaid to Humana on their son’s behalf during 2014.
The dependency exemption deduction for 2014 was $3,950. Although the taxpayers’ adjusted gross income and taxable income was not provided by the opinion, at best it saved them roughly $1,600 in tax liability. The price that they paid was $4,628.80. Would it not have been better to not claim the son as a dependent? If the taxpayers were entitled to claim their son as a dependent, which the facts suggest was the case, then failure to do so would not permit the son to claim the credit because the credit is denied to any individual with respect to whom a dependency exemption deduction is allowable to another taxpayer. But would failure to claim the son as a dependent, even though he qualifies as a dependent, eliminate the requirement that the advance premium payments made on his behalf be added to the taxpayers’ tax? I cannot find anything definitive that answers the question. If the answer is no, then failure to claim the son as a dependent, even though he qualifies, would be counterproductive. If the answer is yes, it still might not make sense to fail to claim the son as a dependent. Why? The son, not entitled to the credit because he could be claimed as a dependent, would be the one required to add the advance payments to his tax. Perhaps someone who has expertise in the intersection of tax law and health insurance law can share some insights.
Friday, September 29, 2017
About a week ago, a reader shared with me another example of how age determination challenges can arise. The story involves a now-deceased older relative of the reader. This relative was born early in January. The person at the hospital filling out the birth certificate made the same sort of error many people do when writing checks early in a new year. That person wrote the year that had closed. So instead of showing, for example, the birth as January 3, 2017, it was recorded as January 3, 2016. The reader’s relative knew that the certificate was wrong, but always used the correct birth date. When the relative retired from a teaching position and applied for social security benefits at the age of 65, both the state teacher’s pension system and the Social Security Administration insisted that the reader’s relative was 66, and computed benefits using the age of 66. According to the reader, his relative’s “protestations were ignored.”
Had the reader’s relative not have a sense of integrity, the relative could have obtained a driver’s license at age 15, and could have made alcohol purchases at age 20. Surely those things did not happen, not by a person with the integrity to protest use of the wrong age. I wonder if any other person born in January, especially early in January, has had the birth recorded with the wrong year for this same reason. And I wonder how many went through life as a year older than their true age. And I wonder if it worked to anyone’s disadvantage, such as being called up for the military draft a year sooner than ought to have happened.
Wednesday, September 27, 2017
Recently, in a Philadelphia Inquirer viewpoint, Adam N. Michel proclaims, “Want to boost wages for workers? Cut corporate taxes.” His arguments deserve analysis.
Michel begins by asserting that “wages rise when the demand for workers increases.” This is true. The challenge is to identify what causes increases in demand for workers. Michel denies that corporate tax cuts don’t simply increase profits for owners, shareholders, and top hat employees. Instead, he attempts to prove that if corporations receive tax cuts, they will increase worker salaries, hire more workers, or both.
Michel begins by claiming that this nation’s corporate income tax rate is one of the highest in the world. What Michel ignores is that statutory tax rate are relevant only when a profitable corporation has positive taxable income. The statutory tax rate is meaningless to corporations that offset economic profits with tax shelter and other losses. Michel also ignores the effect of tax credits, which can reduce and eliminate tax liability based on statutory tax rates. If a corporation has sufficient artificial and other losses, or credits, or both, a 100 percent statutory rate has no practical adverse effect.
Michel also claims that high tax rates discourage investment in workers. He claims that business investment in machinery and technology make employees more productive. A good chunk of business investment in machinery and technology causes job loss, as machines and robots replace human workers. That’s job dissolution, not job creation.
Michel then asserts that because businesses invest in machinery and technology, employees become more productive, causing profits to increase, and thus permitting businesses to hire more workers. That’s utter nonsense. When installation of machinery and robots cause higher productivity, it can, but does not necessarily, increase profits, but it leads to more purchases of machinery and robots, not the hiring of more workers. Worse, no matter how productive a business is, profits will not increase, and will decrease, if demand fails to increase or, as often happens, decreases. Demand decreases when people lose jobs and when people’s real income declines.
Michel then proclaims that increasing business investment would increase wages by at least 13 percent, and perhaps as high as 20 percent or more. Anyone who believes that sales pitch might be in the market for any version of the “give me more money and you’ll get richer” ploys that can be found whichever way one turns.
When taxes are cut for businesses and high-income individuals, they do not give existing employees pay raises. How do we know that? Because despite a parade of tax cuts for the wealthy and businesses since 1981, real incomes for Americans, other than the sheltered top tier, have remained stagnant. Nor do they run out and hire people. They don’t do that because they have no need for employees. What will the new employee do if the existing employees are handling existing demand? If demand increases, businesses will hire new employees, despite tax rates, because increased demand will increase profits. Granted, businesses prefer the highest possible after-tax return, but a positive after-tax return of any amount is better than the zero profit increase that takes place if a business facing increased demand decides to ignore it and not hire workers to help meet it.
Michel misses another point. Compensation is deductible, and some forms of compensation generate tax credits. The mere act of hiring a worker reduces the taxable income and the tax liability of a business. It’s that simple.
Michel is correct that anemic economic growth is afflicting the nation. What he ignores is the link between income and wealth inequality on the one hand, and stagnation in demand on the other. Smart business owners understand, as did Henry Ford, that if their workers cannot afford to sell the products offered by the business, the business won’t be around for very long.
I repeat, with a few tweaks, what I wrote seven years ago in Job Creation and Tax Reductions:
What will create jobs is an increase in demand, 90 percent of which comes from the 99 percent who are not in the economic top one percent, and the best way to stimulate demand among the 99 percent is to [give them] tax cuts. Ironically, where work needs to be done, such as highway and bridge repair and maintenance, refurbishment of public infrastructure such as storm sewer systems, firehouses, schools, sanitary sewage systems and plants, dams, national cybersecurity, and similar public improvements, the advocates of tax cuts for the wealthy hold a position that guarantees the lack of funding for most, if not all, of what needs to be done to keep the nation vibrant in a changing world economy.Time and again, we’ve been down the road Michel suggests, and time and again the economy gets lost, becomes stuck, and crashes. That road doesn’t get us there. It’s time to take another road.
It should be obvious what this debate is all about. It’s about greed. Hiding the role of greed as the motivating factor for misrepresentations and half-truths becomes difficult when people can see the true agenda. If the wealthy[, corporations, and businesses] wanted to create jobs, they could be creating jobs as I write while getting tax benefits in the form of deductions and even, in some instances, credits. Instead, they hold the nation hostage while claiming, falsely, that jobs will be created only if [there are tax cuts for corporations, businesses, and the wealthy].
Monday, September 25, 2017
The title of the post, IRS Revenue Code Section 280: A Tax Potpourri, was yet another example of the idiocy of referring to the Internal Revenue Code as the IRS Revenue Code. Think about it. Is there Really an Internal Revenue Service Revenue Code? Please. This is not the first time I have tried to help people understand the difference between the IRS and the Internal Revenue Code. That difference matters, as I have explained in posts such as Is Tax Ignorance Contagious?, Code-Size Ignorance Knows No Boundaries, and Intentional Misleading Tax References.
But it quickly became far worse than nomenclature sloppiness. The blog post in question was a complaint that “the government decided to dump into one place,” namely, the now correctly designated “Internal Revenue Code section 280,” what the writer called “a conglomeration, a potpourri, and a mass of all kinds of stuff.” Curious, I continued to read. The writer explained, “We’re dealing with a lot of subsections in 280. I’m going to be going through A, B, C, D, E, F, G, and H.” Immediately, I realized that the writer did not understand how the Internal Revenue Code was structured. The writer does not understand the difference between a Code section and a Code subsection, nor does the writer understand how Code sections are numbered.
The numbering system of the Internal Revenue Code follows a pattern. This pattern was adopted when the Internal Revenue Code of 1954 was enacted, replacing the Internal Revenue Code of 1939. The pattern in the Internal Revenue Code of 1954 was followed when the Internal Revenue Code of 1986, the current version, was enacted. Essentially, the drafters identified the topics addressed by the Code. They grouped these topics and then grouped the groupings. Because the Internal Revenue Code is title 26 of the United States Code, the highest level of groupings were designated subtitles. Subtitle A deals with income taxes, subtitle B deals with estate and gift taxes, subtitle C deals with employment taxes, and so on. In turn, subtitles are divided into chapters. For example, chapter 1 of subtitle A deals with normal taxes and surtaxes, whereas chapter 2 deals with tax on self-employment income, and so on. Chapters are divided into subchapters. For example, subchapter A of chapter 1 of subtitle A deals with determination of tax liability, subchapter B deals with computation of taxable income, and the somewhat well-known subchapter S deals with what everyone knows as “subchapter S corporations,” or simply, “S corporations.” In turn, subchapters are divided into parts, and some, but not all, parts are divided into subparts.
The assignment of numbers to Code sections was designed to “leave room” for future legislation. Thus, for example, part I of subchapter A of chapter 1 of subtitle A starts with section 1. It ends with section 5. Part II of that subchapter starts with section 11. There is no section 6, nor 7, 8, 9, or 10. Turning to subchapter B of chapter 1 of subtitle A, which deals with the computation of taxable income, part I, dealing with the definition of gross income, adjusted gross income, taxable income, etc., begins with section 61 and ends with section 68, part II, items specifically included in gross income, begins with section 71. Part IX of subchapter A of chapter 1 of subtitle A deals with “Items Not Deductible.” It begins with section 261. Part X, which deals with Terminal Railroad Corporations and Their Shareholders, starts at section 281. Presumably, when this assignment was made, the drafters of the 1954 Code figured that leaving sections 261 through 280 for nondeductible items would be sufficient. They were wrong.
By 1976, Congress reached section 280, which limited deductions for expenditures attributable to the production of films, sound recordings, books and similar properties. In the same year, Congress wanted to add limitations on deductions attributable to personal residences, specifically, home offices, in-home child care facilities, and vacation homes. It could not use section 281, because that was already in use, and renumbering Code sections and moving them around was considered to be even more confusing. So Congress resorted to a technique it had used on previous occasions when it had “run out of numbers,” and concluded that the next number would be section 280A. Not subsection 280A, but section 280A. It did NOT insert the personal residence deduction limitations into section 280. In 1976, Congress also enacted limitations on deductions attributable to the demolition of structures, and put those into section 280B. Over the years, Congress continued to add deduction limitations, in response to maneuvers in which taxpayers engaged, and eventually added section 280C, section 280D, section 280E, section 280F, section 280G, and section 280H. These are each separate sections. They are not part of section 280. The language in each of these sections is not part of section 280, and thus cannot be considered to have been “dumped into section 280.”
Most of these sections have subsections. Thus, for example, section 280A has subsections (a) through (g). Notice that subsections are designated by lower-case western alphabet letters in parentheses. In contrast, when letters are part of section numbers, they are in upper-case and there is no intervening parenthesis or other punctuation. Granted, it is strange that Code numbers contain letters, but that is a quirk with which tax professionals need to be familiar. A similar set of constructs deal with the lettering and numbering of paragraphs, subparagraphs, clauses, subclauses, and more, which I explained in, for example, Internal Revenue Code: Small Change, New Feature, New Look.
Thus, to call section 280A a subsection would generate absurd challenges and ridiculous outcomes when trying to describe 280A(a). Would it be “subsection 280A subsection a”? Would it be “subsection a of subsection 280A”? Please.
When I teach the basic federal income tax course, I give the students materials to assist them in understanding how the Internal Revenue Code is structured and how its elements are arranged and designated. I do the same with Treasury Regulations, which have their own arrangement and terminology. I do this because understanding cross-references, citations in judicial opinions, and tax law analysis requires an appreciation of how the Code and the regulations are arranged and designated. It’s a foundation element of tax law practice.
Thus, it is distressing to read “They just buried all kinds of things in there [section 280].” Aside from the fact that the “things” that are described are NOT in section 280, it is disappointing that the writer did not comprehend that what sections 280A through 280H address are non-deductible expenditures, not ‘all kinds of things.” It is also distressing to read “So, in section 280, we’ve got automobiles.” No, we do NOT. There is nothing in section 280 about automobiles. Limitations on deduction of automobile expenditures is in section 280F. Then, when reading, “There are probably 15 different code sections here, but they dumped them all into one,” I realized that the writer of the commentary surely did not understand much, if anything, about the Internal Revenue Code. So who is this writer? I don’t know the person’s name. It’s not mentioned. The writer describes himself or herself as “an expert in the Internal Revenue Manual,” as someone who “worked there [the IRS] for 30 years,” and who has “been teaching for another 20 years.” My guess is that the writer is not a lawyer, has not studied tax from the “Code first” approach that tax lawyers and most other tax professionals use, and uses the “begin with the Internal Revenue Manual or someone’s paraphrased analysis” approach that some of my students – specifically, some of the undergraduate accounting majors – unsuccessfully insist that I use in my courses.
In all fairness, most of the writer’s commentary is a description of tax rules and cases dealing with issues to which sections 280A through 280H are applicable. Though presented in a somewhat stream-of-consciousness pattern, there is useful information in the commentary. It is unfortunate that those reading the commentary, and those attending the presentations of which the commentary appears to be a transcript, are totally misled with respect to how the Internal Revenue Code is arranged, and are left with the impression that the material in sections 280A through 280H are part of section 280. It is unfortunate that they are left with the impression that there is no coherent and logical structure behind the arrangement and designation of Code sections and that sections 280A through 280H are not a dumping ground but a series of deduction limitation provisions. It is unfortunate that they are left with the wrong impression of what sections and subsections are.
Sometimes I think that trying to stem the storm surge of ignorance is as futile as holding one’s finger in a dike while the waves crash over it. But I will continue my efforts to educate the world. At the very least, it’s therapeutic. Perhaps somewhere, someone will read something I write and think, “Aha.” That is the blessing of teaching that generates a beneficial result.
Friday, September 22, 2017
The most recent Judge Judy that I viewed, but for which I cannot find a link, was difficult to follow, because the parties disagreed with respect to the facts, and at certain points provided different answers to the a question when it was repeated. The plaintiff’s daughter-in-law had formerly been married to the defendant. The daughter-in-law and the defendant had two children before their relationship ended. The daughter-in-law and the plaintiff’s son married, and had one child.
Until some point in 2016, or perhaps 2015, the defendant’s two children lived with him. At first he claimed that he had custody and they lived with him until June of 2016, but then he admitted that his two children lived with their mother, the plaintiff’s daughter-in-law. He then stated that he had custody in 2014 and 2015, but the plaintiff agreed only that the defendant had custody during 2014 and the first half of 2015.
At some point, the defendant became homeless and surrendered custody of his two children to their mother. He also commented that he and the children lived with his aunt, but it was unclear for how long, because the parties also cross-talked in arguing that point.
So at some point in 2016, or perhaps in 2015, the plaintiff’s daughter-in-law and her husband, the plaintiff’s son, ended up with custody of all three of the daughter-in-law’s children. The daughter-in-law and her husband somehow became caught up in illegal drugs, and Child Protective Services threatened to take all three children. At that point, in the fall of 2016, the plaintiff took custody of all three children. However, the oldest child of the defendant had issues, so eventually that child ended up in a group therapeutic foster home. The defendant asserted that he visited the other child several times while that child was in the plaintiff’s custody.
When filing his income tax return for 2016, the defendant claimed dependence exemption deductions for his two children. When asked, he explained that he had also claimed two exemptions for the children in 2014 and previous years. The plaintiff sued the defendant because she wanted to claim the children as dependents.
Judge Judy remarked that the parties needed to take the custody issue back to family court. She concluded that the two children had spent most of their lives with their father. She dismissed the plaintiff’s claim.
Judge Judy did not decide, nor did she need to decide, who was entitled to dependency exemption deductions for the two children. Answering that question, even if it was within the scope of the case, would require additional facts. Because the children were step-children of the plaintiff’s son, and thus step-grandchildren, the only relationship test that they possibly could meet is that of someone residing in the plaintiff’s home for the entire year. Even if that had been so, and it wasn’t, there were other requirements that would have been met. Whether the defendant or the children’s mother was entitled to the exemption is a different question, and it did not need to be resolved in order to conclude that the plaintiff had no claim.
This case provides an excellent example of one of the several reasons tax law is complicated. It is simple to state that a person is entitled to claim a dependency exemption deduction for a child, but that simple rule is impossible to apply when the facts become complicated. Who is a child? What about step-children? Adopted children? Foster children? Children of separated or divorced parents? Children who are shuttled from home to home? Children who are in and out of the foster care system? Children in the custody of the state? Each one of these situations requires a rule. Suddenly the simple, conceptual rule is joined by a parade of additional rules. The applicable law becomes complicated. Worse, each of the terms used in the additional rules requires definitions and imposes conditions.
Though it’s true that a good chunk of tax law complexity arises from provisions enacted to benefit the privileged few, or to satisfy special interests, another chunk of tax law is complicated because life is complicated. People live complicated lives and engage in complicated transactions. Business owners, business entities, trusts, and estates also engage in complicated transactions. And so long as that is how life progresses, it is highly unlikely that tax laws will become simple.
Wednesday, September 20, 2017
Using this logic, doubling the price of a product should increase sales. Charging admission for events that had been free should boost attendance. This is the same sort of reverse tax logic that claims lowering tax rates to near zero will generate huge increases in tax revenue.
I’m being nice using the word reverse. A much better phrase to use is twisted tax logic.
Monday, September 18, 2017
According to a new survey from HNTB Corporation, 70 percent of Americans are willing to pay higher taxes and tolls to build, repair, and maintain roads, tunnels, and bridges. Some prefer higher taxes, some prefer tolls and fees, and some prefer a combination. If those taxes and tolls were guaranteed to be used only for transportation projects, the approval percentage increases from 70 to 84. According to the survey, 80 percent support tolls on existing highways, including interstate highways, if the revenue was used for specific purpose. Of those polled, 41 percent support tolls to reduce congestion, 40 percent support tolls to improve safety, 34 percent support tolls to add capacity, and 21 percent support tolls to add or improve adjacent public transportation to relieve congestion. The other 20 percent are opposed to tolls under all circumstances. Apparently they were not asked how they would fund highway repairs.
So how is it that we are told that Americans, or at least a majority of them, oppose taxes, fees, and tolls, and yet surveys – the HTNB poll being but one – indicate that most Americans support taxes, fees, and tolls for transportation infrastructure? Have Americans changed their minds? Or has there been a misrepresentation of American opinion, making the desires of an elite few appear to be the clamor of the general populace? Perhaps it is a mixture of both.
It is not unlikely that Americans, having seen the real-world impact of the theoretical tax-cuts-for-the-few-benefit-the-many nonsense, are beginning to understand the connection between government revenue and life convenience. For several decades, resistance to increases in fees and taxes, such as the liquid fuels tax, has gifted Americans with more potholes and the attendant costs, both human and monetary, of inadequate funding. How many Americans realize that during the past four years, 26 states have increased liquid fuels taxes?
The key, I think, is making certain that Americans receive services in exchange for the taxes that they pay. There appear to be people who think that they should go through life enjoying public benefits, such as roads, without paying taxes. Though some might take that position through selfishness, there surely are those whose attitude arises from ignorance. It is essential that public officials explain to constituents where their tax, fee, and toll dollars go. Eventually, the anti-tax crowd, aside from the anti-government anarchists, will realize that Americans do not oppose taxes or even tax increases, but oppose irrational taxes, inexcusable tax systems, and oligarchic tax policies.
Friday, September 15, 2017
Critics of the income tax, who see it as too complicated, often point to the sales tax as an example of a simple tax. Yet the sales tax is not simple, as anyone who has dug through the list of items subject to, and exempt from, the tax can attest. Worse, there isn’t one sales tax, but dozens, even hundreds, because sales taxes apply at state and local levels. Accompanying the sales tax is the use tax, designed to fill in the gap caused by taxpayers subject to a sales tax making purchases outside the jurisdiction. During the past decade, the rise in online purchases has generated sales and use tax revenue declines.
For years, enforcement has relied on voluntary reporting. Not surprisingly, compliance has been terrible. With the onset of online transactions, jurisdictions turned increasingly to the vendors, trying to compel or persuade them to collect the use tax on behalf of the jurisdiction. Success has been spotty. I have written about this challenge in more than a dozen commentaries, starting with Taxing the Internet, and continuing through Taxing the Internet: Reprise, Back to the Internet Taxation Future, A Lesson in Use Tax Collection, Collecting the Use Tax: An Ever-Present Issue, A Peek at the Production of Tax Ignorance, Tax Collection Obligation is Not a Taxing Power Issue, Collecting An Existing Tax is Not a Tax Increase, How Difficult Is It to Understand Use Taxes?, Apparently, It’s Rather Difficult to Understand Use Taxes, and Counting Tax Chickens Before They Hatch, A Tax Fray Between the Bricks and Mortar Stores and the Online Merchant Community, and Using the Free Market to Collect The Use Tax.
The Vermont Tax Department, according to this story, is trying to boost voluntary compliance. It is inviting Vermont residents to pay past due use taxes, with an incentive in the form of interest and penalty waivers. Vermont offers two methods of computing the tax. One is to maintain a list of all purchases subject to the use tax, to add up the prices, and to multiply by the tax rate. The other is to pay an amount based on the taxpayer’s adjusted gross income.
The choice presented to Vermont taxpayers illustrates the tension between complexity and fairness. Keeping track of all out-of-state and online purchases is inconvenient, perhaps annoying, and usually difficult. At the time of each purchase, or thereafter, the taxpayer must determine if the item is subject to, or exempt from, the use tax, and must also determine whether the item was brought back to, or shipped into, Vermont. Calculating a tax based on adjusted gross income is much simpler, but it generates unfair results because two people with the same adjusted gross income ought not pay the same use tax if one has made many taxable purchases and the other has made far fewer taxable purchases. The latter situation arises if the person saves a substantial portion of income, or makes large payments for nontaxable expenses, such as tuition.
The choice presented to Vermont taxpayers is not unlike the choice given to taxpayers who are, or were, eligible to deduct state and local sales and use taxes on their federal income tax returns. Taxpayers can keep track of what they paid, or use a table based on income, state of residence, and number of exemptions. The table is very popular, but in this instance the perception of unfairness is dampened by the fact it is generating a tax benefit and not a tax liability even though economically one can demonstrate differences in tax liability when using the table in comparison to using itemized receipts.
It has been known for as long as taxation has existed that every attempt to make a tax fairer requires adding complexity. Every exception, exemption, reduction, alternative, or adjustment requires additional language and lines on tax forms. Every one of those tweaks opens up additional possibilities for disagreement and generates additional hours of research, preparation, compliance, disagreement, and litigation. Even though many people clamor for a simple tax system, there is no doubt that implementation of a simple system, or even a simpler system than now exists, will generate as many, or more, cries for fairness that erodes the simplicity. This is a tax fact of which no taxpayer should be ignorant.
Wednesday, September 13, 2017
When something new is proposed, it is not uncommon for many people, even if they are not natural skeptics, to hesitate and to doubt. A fine way to overcome doubts before committing to a permanent change is to sample the idea, to test the concept, to try a temporary test, or to engage in a pilot program. That is what states have been doing with the mileage-based road fee proposal. According to the Mileage-Based User Fee Alliance, at least 9 states, one city, and one multistate interstate group have engaged in, or are engaging in, pilot projects. Now comes news that Utah is preparing to set up a pilot project.
As more states, and localities, experiment with mileage-based road fees, and as the pilot projects continue to return mostly positive outcomes, general acceptance of the idea will grow. Better yet, as the pilot projects are undertaken, snags in the implementation can be identified and worked out, improvements can be made, and more can be learned about the best way to explain how mileage-based road fees work. Like the often-mentioned snowball rolling down the hill, this trend suggests that mileage-based road fees have a better chance of being universally adopted long before self-driving vehicles totally displace vehicles with human drivers.