Friday, July 20, 2018
The program that provides the tax-exempt status sought by the developer is designed to encourage investment in “underutilized or underdeveloped areas.” The area in which the developer is planning the project is what has been called “the hottest neighborhood in the country.” It is neither underutilized nor underdeveloped. Putting aside the question of whether the tax-exempt program in question is wise, it surely ought not be available in this instance. Seeking tax-exempt status in this situation is not unlike millionaires finding ways to get food stamps.
The developer claims that the tax-exempt status is necessary in order to attract financing for office development. If financing for office development in the area in question is a good thing, the banks and other lenders will step up. If they don’t, then either the developer is not one with whom they want to work, or the area is not one properly positioned at this time for office development. Either way, the private sector is speaking.
When people understandably complain about the city of Philadelphia “taxing everything,” a hyperbolic but reasonable concern, do they take into account the impact on revenue of tax breaks benefitting people with ability to pay? Do they realize that every tax break requires shifting tax burdens from those getting the breaks to those who are not necessarily in a position to finance the pet projects of those with ability to pay taxes? Perhaps if they did, they would let that analysis affect what they do at the polls.
One more point needs to be made. If the tax breaks are required, as the developer insists, to open up financing that otherwise would not be available, then isn’t the tax break simply a piece of investment in the property? If the banks and other lenders get interest on their loans, ought not the taxpayers get interest on the tax break advanced to the developer? Better yet, ought not the taxpayers, who are in effect financing part of the project, be treated as shareholders entitled to vote on decisions with respect to the project? Surely the developer would oppose paying interest to taxpayers or letting them vote, though grabbing tax revenue through tax breaks seems perfectly acceptable. There’s something wrong with that sort of approach to doing business. Either the project is worthwhile and can stand on its own in the private sector, or it ought to be shelved.
There are times when a project cannot stand on its own because the nature of the project makes it necessary yet financially unfeasible for the private sector. In these instances, it is appropriate for taxpayers to fund the enterprise but the enterprise must be owned and controlled by the taxpayers, that is, by a federal, state, or local government or an agency thereof. These are projects that have a direct, rather than indirect, effect on taxpayers and must be under the control of taxpayers. That is why I oppose privatization of public enterprise and why I oppose public grants to, and tax breaks for, private sector enterprises.
Wednesday, July 18, 2018
The taxpayer owned a business in called AA+ Smog Check. AA+ operated a smog inspection station in Burlingame, California. The taxpayer had established AA+ in 2007 as a sole proprietorship. During the taxable years at issue, AA+ was a test-only smog check station. The taxpayer was legally restricted to performing smog inspections and other minor maintenance work, such as oil changes. The minor maintenance work generated roughly 5 percent of AA+’s business.
The taxpayer lived in a one-bedroom apartment four doors down the street from AA+. He paid rent of $1,450 per month, which entitled him to the use of the apartment, shared laundry facilities, and one-half of a shared two-car garage attached to the apartment building. The taxpayer did not park his car in the garage but instead used the space as business storage. As a smog check business owner, the taxpayer was required by California to keep certain invoices and records regarding smog checks for at least three years. Invoices must be kept on location for purposes of immediate inspection. AA+ had no formal office or storage space, and real estate in the area was expensive. Because the garage was so close to the AA+’s location, the taxpayer decided to use it as storage for his business records, including the smog inspection invoices that California required him to retain. In addition to these business records, the taxpayer also stored business-related items such as backup air compressors, printers, monitors for the smog machine, and various parts such as oil filters and wipers. He stored no personal items of note or value in the garage, other than some pencils and stationery.
On his federal income tax returns for 2009 through 2011, the taxpayer claimed home office expense deductions for the use of his garage. He argued that he was entitled to those deductions because the garage was used to store business records, he was required to maintain the records by the State of California, and the garage was the most convenient and inexpensive place to do so. The Tax Court explained that neither of the two possible exceptions to the denial, under section 280A(a), of deductions for expenses with respect to the use of a taxpayer’s residence applied. One exception, for expenses attributable to space allocable within a “dwelling unit which is used on a regular basis as a storage unit for the inventory or product samples of the taxpayer held for use in the taxpayer’s trade or business of selling products at retail or wholesale, but only if the dwelling unit is the sole fixed location of such trade or business,” did not apply because the taxpayer was not in the trade or business of selling products at retail or wholesale, and his business records and invoices do not constitute inventory. Nor did the exception for expenses allocable to a portion of the taxpayer’s dwelling that is used exclusively on a regular basis as the taxpayer’s principal place of business apply, because the garage was not exclusively used as his principal place of business.
The result seems harsh. The taxpayer operated a business, and stored business records and business-related items in a space for which he paid rent. The problem is that the space where he stored these items was available to the taxpayer because it was bundled with the apartment in which he lived. Would the deduction have been available had the taxpayer entered into a lease for the apartment unit and use of the laundry facilities, while causing AA+ to enter into a lease for use of the garage? The answer depends, in part, on information not available. Would it violate local law to treat the apartment unit and the garage as two properties subject to two different leases? My guess is, perhaps not, because there certainly are instances, at least in places with which I am familiar, in which the owner of a property on which there is a house and a barn, or a house and a garage, rents the house to one person, and the barn or garage to another. However, many jurisdictions have restrictions on this sort of splitting if it causes, or could cause, the number of household units on a property to exceed what is permissible under local zoning ordinances. Another concern would be the existence of prohibitions on renting to a business a property zoned for residential use; it is possible that the taxpayer’s use of the garage for business storage violated some local law though that was not raised in the Tax Court. Yet another obstacle might be the impact on insurance coverage of entering into two separate leases. If these, and other hurdles not coming to mind, are overcome, the IRS might still consider the identity of lessor and lessee to warrant application of a substance-over-form argument, one that it would probably raise even if the taxpayer put the business into a corporation or LLC treated as a corporation.
I doubt any of this occurred to the taxpayer when he set up his business and looked for a place to store the records he was required to keep. It is yet another example of how the complexity of the tax law gets in the way. Fiddling with tax rates to the advantage of the oligarchy does nothing to simplify a law riddled with complexity. To the extent that the tax law causes, or should cause, people to think about alternative ways of structuring a business that they otherwise would not need to consider, it creates impediments far worse than the mere existence of a tax. Section 280A was enacted because some taxpayers were being far from truthful when claiming business use of their home, yet in this case there is no question at all that the taxpayer was using the garage for business purposes and only for business purposes. Section 280A needs to be fixed.
Monday, July 16, 2018
As described in multiple reports, including this one, Pennsylvania legislators quietly and quickly inserted into tax legislation a provision that permitted the sale to unlicensed individuals a variety of aerial fireworks previously restricted to use by trained professionals. Prohibitions on the use of these aerial fireworks, such as forbidding use by minors and intoxicated individuals or within 150 feet of buildings, reflect the dangers of people shooting off explosives the way some people foolishly fire guns into the air in crowded neighborhoods on New Year’s Eve. People get hurt. Yes, the new legislation contains those restrictions, but what happened two weeks ago, with fireworks being set off close to neighbors’ homes at all hours of day and night, demonstrates the futility of expecting any sort of compliance. The new law permits the sale of “Roman candles, bottle rockets, firecrackers and some types of reloadable aerial shell launchers.”
The legislative change was inserted into the Pennsylvania tax law, rather than, say, provisions dealing with the use of explosives, because the new law came with a tax twist. Sales of fireworks are subject not only to the usual state and local sales taxes but also to a special, additional 12 percent sales tax on “amusement products.” Clearly the goal of the legislature was to raise revenue by widening the use of fireworks, dangerous as they are, and then imposing a tax on the sales.
In the meantime, fireworks vendors, according to this report, have sued the state not only because of the tax, which the industry claims violates the Pennsylvania constitution, but also because established vendors are subject to a variety of safety regulations either being ignored or not applicable to roadside fly-by-night vendors. The legislation permits temporary tent setups for fireworks sales but those are not required to have containment walls, sprinkler systems, or smoke alarms. Nor are there in place systems to ensure that the new tax, or even any sales tax, is being collected or remitted to the state.
Pennsylvania is not the only state to expand the list of permissible fireworks in an attempt to raise revenue. Though Indiana raised about the amount of revenue that was predicted, revenues in Georgia and West Virginia reached only one-fourth and one-third, respectively, of what legislators were told would be raised. The revenue estimators working on these legislative initiatives must be taking the same courses that have produced the supply-side economic theory advocates who also look upon their own proposals with far too much optimism.
This is what happens when legislation is rushed, squeeze into other bills, and enacted without public hearings and discussion. This is what happens when revenue policy is a patchwork of concepts rather than a reflection of an overall analysis of taxes, the economy, behavior, and social benefits. If the goal of the change in the fireworks law is to raise revenue, which defenders of the legislative package claim that it is, as reflected by its inclusion in the tax statutes, then the legislature must be counting on a huge surge in the purchase and use of these fireworks. An increase in fireworks sales and use surely will be accompanied by an increase in explosions, fires, personal injuries, and even death. Yes, it’s only a matter of time before someone loses a hand or gets blown up, but whatever it takes to raise revenue, well, perhaps cigarettes and alcohol should be sold to minors, especially because teenagers have quite a bit of purchasing power. As many commentators have noted, the legislature simply did not think through the impact of this change. That’s typical, and no less unsatisfactory.
Friday, July 13, 2018
The plaintiff had been incarcerated for 20 years and had not filed tax returns during that time because he had no income. After being released and getting a job, he met the defendant, a tax return preparer, through the defendant’s husband at an event where defendant was handing out business cards. The plaintiff needed to have his federal and state tax returns prepared.
The defendant tax return preparer was not a CPA, had earned a bachelor’s degree in accounting, had worked for a CPA firm for 5 years, and then went out on her own for 3 years. She testified she takes continuing education courses. She held a full-time job aside from the tax preparation business, and prepares about 75 returns each year.
The plaintiff testified that the defendant quoted a price of $100 for doing the returns. When he asked about the 21-day fast refund process provided by the defendant, he said he was told it would be an additional $200. The defendant denied this, and claimed she billed by the hour. After preparing the returns, the defendant sent a $5,000 invoice to the plaintiff, of which $4,300 was for telephone calls. There was no retainer agreement.
The defendant testified that filing a return after 20 years of not filing returns would trigger an identity verification audit, and that this was the reason the plaintiff did not get his refund within 21 days. She claimed that she had previously told him there would be a delay if there were any problems, such as an identity verification audit. The defendant testified that a month after filing the federal return for the plaintiff, the IRS sent a letter to the plaintiff. The plaintiff denied receiving the letter.
The defendant claimed she had obtained a power of attorney from the plaintiff, but did not produce a copy of it because she was moving and the copy was allegedly in a box somewhere. The defendant testified that she communicated with the IRS and explained the plaintiff’s situation to the agency. The plaintiff testified that he was the only one who communicated with the IRS. He stated that he called the IRS, and then visited an IRS office, where he spoke with an agent. The agent gave the plaintiff a copy of the plaintiff’s tax transcript, on which there were no contacts recorded between the IRS and the defendant as the defendant had claimed.
The defendant received the federal income tax refund on the plaintiff’s behalf by having it deposited in her bank, held back $5,000 out of it for payment of the invoice, and remitted the balance, roughly $1,000, to the plaintiff. The plaintiff testified, and a copy of the return showed, that his income for the year was roughly $14,000. One of the judges suggested that the refund was held up by the IRS because of the size of the refund when compared to the amount of reported income.
The plaintiff also testified that when he did not get his state income tax refund, he contacted the state revenue department. Someone at that agency told him that the state tax refund was direct deposited into the defendant’s bank account. The defendant claimed she in turn paid the refund to the plaintiff, but there was a discrepancy between what was deposited into her account and what she said was remitted to the plaintiff. The defendant testified that because she processed four state income tax refunds on that day she could not explain the discrepancy and would need more time to determine to whom she sent each of the four checks she claimed to have sent to four clients, including the plaintiff.
One of the judges, looking at the invoice, asked the defendant for her time sheets. The defendant testified that they were in baggage lost by an airline. The invoice included charges for time that the defendant claimed to have been on the phone, on hold, with the IRS. She also billed the plaintiff for calls to the plaintiff, but the plaintiff produced his telephone records which showed that there were nowhere near as many calls between the plaintiff and defendant as the defendant charged. On one call that showed 5 minutes according to the plaintiff’s telephone bills, the defendant charged him for a one-hour call. On another call, lasting 2 minutes according to the plaintiff’s telephone bills, the defendant charged for one-half hour because her policy is to round up to the nearest half-hour. In response to sharp questioning by the judges, the defendant claimed that some of her phone calls with the plaintiff were on another telephone number of the plaintiff.
In conference, the judges found the defendant’s testimony to lack credibility. They considered the defendant’s behavior to be unreasonable, and her practice of charging for time spent on hold, when the defendant was or could have been doing other things, to be obnoxious. They held in favor of the plaintiff. The defendant protested, the court sent her from the courtroom, and announced that they would refer the case to the local prosecutor because they considered the defendants’ behavior to be a violation of at least several criminal statutes.
There are several lessons to be learned from this case. First, do not let tax return preparers receive your anticipated refund. Have the refund sent to you, directly or through deposit into your bank account. Second, preserve and backup evidence, so that even if an airline loses luggage or boxes are moved, there is an alternative source for the evidence. Third, do not lie, Fourth, do not try to take advantage of people. Fifth, do not sass judges when they are handing down their rulings.
Wednesday, July 11, 2018
First, I thought, “how nice.” Who doesn’t like a refund of taxes, especially when it is caused by a larger-than-anticipated budget surplus?
Second, I thought, “Wait a minute. The way they did this might be a problem.” The refund were the same for each property owner whose land held a structure. Would it not have been better to have provided a refund proportional to the amount of township tax paid by the owner? I don’t know enough of the facts to conclude that there is any legal violation, but it certainly raises issues of fairness that are tolerable only because the amount of money involved isn’t very much. Consider two homeowners. One owns a $300,000 property and paid a township property tax of $300. The other owns a $600,000 property and paid a township property tax of $600. Each one has paid a tax equal to one-tenth of percent of the property’s value, consistent with the proposition that property taxes should be uniform – though in fact, because of warped assessments, special rebates, and other flaws, they aren’t. Each homeowner receives the $68 refund, so that the first homeowner has paid $232 and the second, $532. The first homeowner has paid a tax equal to .000773 percent of the property’s value, whereas the second homeowner has paid a tax equal to .000886 percent of the property’s value. Perhaps in this instance of a small refund, “rounding” might provide the escape route.
Third, I thought, “Why not save money and simply provide each property owner with a credit rather than mailing a check?” Present-day technology makes that an easy thing to do, and also makes it easy to calculate a proportional credit rather than an everyone-gets-the-same-amount check. Perhaps the supervisors, being politicians, wanted to put something in front of property owners who also are voters.
Fourth, I thought, “Here we go again, with misleading analysis.” That thought was a reaction to a comment by the director of policy analysis at the Commonwealth Foundation. She said, “It’s really impressive to see a local government that’s practicing spending restraint.” Yet the refunds originated with a budget surplus roughly $1,000,000 larger than expected. How did that happen? Was it spending cuts? Most of the surplus, more than eighty percent, came from the collection of delinquent taxes. What’s amazing is how the tax burdens on compliant taxpayers can be eased when those who don’t comply are forced to do so. What also wasn’t mentioned was the township’s decision to increase spending for the police force by hiring another officer.
Perhaps the most important message isn’t the mantra of “cut expenditures, shrink government, rip it out by the roots,” but “step up, contribute, do your share, don’t be a deadbeat, stop looking for tax breaks for yourself or your narrow special interest group.” Doing taxes right means taxes go down without services being impeded.
Monday, July 09, 2018
But it is possible to enact a tax designed to encourage a particular behavior or transactions. According to this report, Hong Kong is planning to impose a tax on unsold newly built apartments. The goal of the tax is to boost supply in what is considered to be the most expensive property market in the world. In theory, increasing supply should reduce prices. What I don’t understand is how a tax on unsold newly built apartments will lower prices or increase supply.
When the builder or developer of a property is subject to a new tax, it is not unlikely that some or all of the tax would be passed on to the buyer. That would increase, not decrease, prices. If the idea behind the proposal is that the developers and builders would reduce prices in order to accelerate the sale of the units, and if that succeeded in getting the units sold, the impact would be a reduction in supply. In turn, that would increase prices. The proposed tax would also have the effect, it seems, of discouraging developers and builders from constructing additional units because those would increase the inventory of unsold newly built apartments. That, too, would reduce supply and increase prices.
Proponents of the tax claim that it will deal with a situation in which “demand has surged ahead of a chronic under-supply of homes. Yet if there is a shortage, why are there unsold newly built apartments?
Analysts from several investment companies predict that the tax, if enacted, “won’t dent soaring prices.” They consider the proposed tax to be one that “developers can easily absorb” and characterize the “absolute level of tax as “relatively manageable.”
Perhaps the problem is a mismatch of demand with ability to pay. If housing unit prices were within reach of a sufficient number of potential purchasers, inventory of newly built units would not stagnate. Hong Kong, however, suffers from the same economic disease as does the United States and too many other nations, namely, income and wealth inequality that is out of control. According to this report, as of a year ago Hong Kong’s wealth gap had reached an historic high, with the top ten percent earning roughly 44 times what the poorest ten percent pull in.
The solution is not a tax on unsold newly constructed units. That does nothing to restore equilibrium to a market warped by inequality. A tax on excess building profits would generate revenue that could be used to reduce taxes on those with low incomes. Though opponents of taxation claim that such a tax would put developers out of business, the fact that the land cannot expatriate itself and the fact that there still are after-tax profits to be made ensure that someone would step in to fill in the vacuum even if a developer did withdraw from the market. According to this commentary, Hong Kong developers are hoarding land. So perhaps a tax on undeveloped land would be effective, though it would be contrary to the goal of preserving open spaces. Hong Kong’s population increases, which are a factor in the housing shortage problem, demonstrates the tension between unbridled population growth and a finite earth. That problem is one I have addressed in several posts, including Can Tax Rebates Help Prove Malthus Wrong?, and it ought not be a surprise to anyone that nothing in the ten years since I wrote that commentary has changed my outlook other than to strengthen it and make me even more pessimistic.
Hong Kong has a problem. Hong Kong is the canary in the coal mine. Today, Hong Kong, tomorrow, our nation. Until those whose money addictions have caused the problem are deprived of the ability to continue their depredations and worsen world economies, the preclusion of all but the economic elite from life’s basic necessities will become increasingly widespread and potentially very dangerous. Taxes on unsold newly constructed housing units are not the answer and will not solve the problem.
Friday, July 06, 2018
Almost immediately, the anti-tax lobbies roared into action. One group put together a plan to gather signatures for a referendum putting repeal of these tax increases on the November ballot. According to this report, the Oklahoma Supreme Court rejected the referendum initiative because of insufficient signatures, and the group behind the initiative decided to abandon its effort. It claimed it was not given enough time to obtain the signatures, but perhaps the problem was an insufficient number of voters willing to sign. Perhaps they failed to notice, as the report explains, that “Many of the anti-tax Republicans in the House who voted against the package faced primary opposition this year.” Two were defeated in primaries, and others failed to obtain majorities, thus facing runoff elections. At least some people seem to be waking up to the damage caused by supply-side economic theory nonsense.
The strikingly amazing aspect of this situation is the claim by the anti-tax group pushing the referendum that it is “not opposed to raising teacher pay” but that “state leaders should have found other ways to fund the raises without raising taxes.” How? What are the practical suggestions? They aren’t forthcoming because these anti-tax groups realize that the moment they share the alternatives, even more people will recognize the failures of the anti-tax philosophy. There are two alternatives. One alternative is to reduce the number of teachers, using what would have been paid to the fired teachers to increase the pay of those who remain. Of course, this approach would put more stress and work requirements on the remaining teachers, and further weaken education in a state that needs better, not weaker, education. The other alternative is to take funding from other programs and shift it to teacher pay. Identifying the programs to be defunded for this purpose would cause all sorts of harms. Do the people of Oklahoma want reduced road repair funds? Reduced police, fire, and EMT services? Reduced tornado warning system and shelter funding? Worthwhile programs, goods, and services are not free, nor cheap. The mentality of the anti-tax groups who claim they support one or more programs, goods, and services reflects an inability to understand this reality. So long as they persist in their approach, income and wealth inequality will continue to increase, real wages will continue to decline, the middle class will continue to shrink, and the strength of the nation will continue to weaken. Enough already, supply-siders. You’ve had your chance. In fact, you’ve had multiple chances at the federal level and in far too many states. You tried. You failed. It’s time to step aside and let the rest of us have our turn.
Wednesday, July 04, 2018
We probably will never know, at least before the Last Judgment, who started this misstatement. But we do know that way too many people heard it and repeated it, without thinking about it and without checking it out. This isn’t the sort of issue on which deep rocket-science research is required. It’s a matter of common sense to think about the practical realities of life. So, for example, one could think, “Hmm. If someone not in the country legally makes a purchase, do they escape paying sales tax?” The answer, which should pop into just about everyone’s brain, is “Of course not.” Or, what if that person purchases gasoline? Do they pay the gasoline tax? Certainly. What if the person buys a tobacco product, or an alcoholic beverage, or telephone service? Do they pay the taxes imposed on those transactions? Most certainly. Moving to the big ones, do these folks pay federal and state income taxes? Do they pay social security taxes? Folklore might cause people to think, no, because they’re all being paid in cash. But a wee bit of research, a skill that should have been learned somewhere along the way in a person’s K-12 journey, reveals that most individuals who are not in the country legally but who are working are not paid in cash, have taxes withheld from their pay, receive Forms W-2, and file income tax returns. Some end up overpaying and do not receive their refunds. None of them qualify for social security benefits even though they are paying into the system.
When Anonymous added the nonsense that illegal immigrants don’t pay taxes because they don’t have social security taxes, that person took the ignorance up a few notches. Social security cards have nothing to do with the paying of sales taxes, gasoline taxes, tobacco taxes, alcohol taxes, or phone taxes. They have nothing to do with the paying of income taxes and have nothing to do with the paying of social security taxes. It is amusing that someone whose statements reveal a complete ignorance of reality has the courage to use the word “dumb” in describing those who know what they are writing about.
It’s difficult to erase ignorance through education when the purveyors of falsehoods are flooding the world with their harmful lies and taking steps to take over the education systems that are designed to make propaganda more difficult to spread, easier to detect, and easier to rebut. If we haven’t yet reached the tipping point, we almost certainly will, very soon, unless people wake up, exercise their thinking skills, engage their brains, and push back against those who don’t have the best interests of Americans at heart. Otherwise, celebrating “independence” will be celebrating a theory with little practical meaning.
Monday, July 02, 2018
Paul Benedict argues that private repair of potholes “tells us that it appears the federal and state gasoline taxes that most of us pay are not going toward much-needed road repairs.” After pointing out that “Pennsylvania has the highest gasoline tax in the country” and “receives all the revenue” from the Turnpike, he asks “Where are all these funds going?” He also asks, “Why does it take so long for municipalities to fix potholes?”
The answer is simple. There is insufficient gasoline tax and other revenue to fix all the roads, bridges, and tunnels that are in disrepair. Even if there was sufficient revenue, there is no logistical way to repair all potholes the day after each one appears. Potholes tend to appear in clusters, usually after a freeze-thaw-freeze-thaw cycle. So it is not unreasonable, though it is frustrating, that it takes days and weeks for potholes to be repaired.
Paul Benedict’s questions can be answered by examining the revenues and expenditures of the Pennsylvania Department of Transportation and the local counties and municipalities. The Department of Transportation 2017-2018 actual, available, and budget can be found at the Commonwealth Budget, beginning on page E41-1. The department is responsible not only for pothole repairs, but also for bridge repairs, bridge reconstruction, road repairs, road reconstruction, construction of new roads and bridges, hiring and training employees, promoting road safety, maintaining signs, clearing drains, the list is long.
The recent increase in the Pennsylvania gasoline tax was earmarked for rebuilding crumbling bridges and highways. A chunk of Pennsylvania Turnpike revenue is used to fund maintenance and repair of the state’s portion of the toll-free Interstate 80. It helps to analyze the facts.
To repair potholes more quickly, the authorities responsible for fixing potholes have three choices. They can persuade the legislature and local governments to provide more revenue. They can divert funds from other projects. They can find ways to reduce the costs. The first approach requires either higher taxes, which won’t find support, or diversion of funds from other departments, which won’t sit well with those who benefit from what those other departments, such state police protection, public health regulation, and environmental care. Imagine having potholes repaired overnight at the expense of eliminating the state police. The second approach requires diversion of funds from road and bridge repairs, drain cleaning, etc. Imagine having potholes repaired overnight at the expense of being on a bridge when it falls into a river. The third approach, a favorite among anti-tax groups, requires finding the huge amounts of waste that the privatization advocated claim exist but rarely can find in more than de minimis amounts, or worse, reducing worker pay. Though some relish the idea of paying workers minimum wage or less, that idea is inconsistent with vibrant economic growth.
The bottom line is that we get what we pay for. Asking for pothole repair, or any other service, to be increased because there are more potholes, more robberies, or more chemical spills, while expecting to pay the same price is unreasonable. Perhaps paying the true cost of the transportation infrastructure people claim to want would be less burdensome if people’s wages, adjusted for inflation, had not remained stagnant over the past 35 years while the oligarchy has stuffed its pockets and overseas accounts with tax breaks. It’s not easy to see and understand the big picture, but it’s necessary.
Friday, June 29, 2018
About a week ago, Christian E. Weller, in The Data Do Not Support Supply-Side Economics, explained why the claim that the wealthy individuals and corporations being granted the privilege of bearing less and less of the burden of keeping the nation running would use their tax break windfalls to create jobs and increase wages for American workers is nonsense. The proof isn’t in theoretical rebuttal of a flawed theory. It’s in the practical reality of what is happening on the ground.
Several weeks ago, the Federal Reserve disclosed that corporations have more money, but have not increased domestic investments. Keep in mind that for every paltry several-hundred-dollar-after-taxes bonus for one worker, some other worker lost a job. For every small increase in an hourly rate, there was an offsetting layoff somewhere else. Where did the additional cash go? Corporations held some of their windfalls, and plowed most of the rest into stock buybacks and dividends, benefits that accrue to very few working people.
In some future post I will explain how similar claims with respect to tariffs, namely, that increasing tariffs on imports is good for America and Americans, reflects the same defective thinking as does the supply-side theory of tax policy, a theory that its inventor now admits was a mistake. It’s sad that when someone makes a mistake, too often others are the ones who pay the price. It’s even sadder when the people paying the price for mistakes they did not make continue to support the perpetrators of the mistakes that cause the harm. Holding on to flawed theories, enduring the adverse consequences, and continuing to rally behind those inflicting the pain isn’t admirable perseverance. It’s foolish stubbornness.
Wednesday, June 27, 2018
The story is confusing. Stories often are, when people are wheeling and dealing, jockeying for position, and trying to get the upper hand. It involves Pennsylvania’s foray into the world of legalized marijuana and cannabis research. Matthew Mallory, described as a marijuana entrepreneur, pledged $250,000 to Thomas Jefferson University, expecting that in return he would obtain an alliance giving him an edge in launching a medical marijuana business in Pennsylvania by getting a special relationship with Lake Erie College of Osteopathic Medicine. He paid half of the pledge, but two weeks later learned that Thomas Jefferson University would not be helping him as he expected. Mallory asked Thomas Jefferson University to return the money, but it refused. Mallory complained to the attorney general, but was told the university was not required to return the money. Mallory has explained, “I didn’t want to [make the donation], but we were told, ‘If you don’t do it, you’re not going to be part of this program.’” An official of Thomas Jefferson University stated that “There was never a promise of special favor with the commonwealth or any institution,” and the University denies giving any promises to Mallory. According to the University, Mallory’s gift gave his company simply the opportunity to be listed as a “founding supporter” of the University’s Lambert Center for the Study of Medicinal Cannabis and Hemp. Because the additional details aren’t germane to the tax question, they are not summarized in this commentator but can be found in the article. The entire sequences of events is typical of what happens when a pot of gold suddenly appears at the end of a road and the race is on.
So what was my thought? Suppose Mallory got what he expected. Would his “donation” qualify as a charitable contribution for tax purposes? Thomas Jefferson University qualifies as a charity for these purposes, so two questions popped into my head. First, to qualify as a charitable contribution, the gift must not be in exchange for anything of economic significance. So getting tagged as a “founding supporter” or having one’s name plastered on a wall doesn’t get in the way, but surely getting the benefit of a business affiliation, a marijuana growing license, or assistance in getting such a license is enough of a “quid pro quo” to bar the deduction. Now that Mallory isn’t getting anything, if he does not succeed in getting his money back, the anticipated quid pro quo ought not stand in the way. Second, if the donation is to assist in the development of marijuana cultivation, distribution, and research, which is illegal under federal law, and if the donation is not for something in return, is a deduction for the donation barred on tax law public policy grounds because of the federal restrictions, much like section 280E prohibits cultivators and distributors operating legally under state law from claiming their business deductions? In this era of say-one-thing-today-the-opposite-tomorrow-and-the-next-day-deny-having-said-anything-at-all-about-the-matter politics and public leadership in the nation’s capital, taking a guess at the answer is more of a gamble than predicting who wins the Super Bowl next year.
Monday, June 25, 2018
The facts of the case, when boiled down, are simple. The husband taxpayer filed fraudulent tax returns for 2008 through 2011 with intent to evade tax. He omitted gross income from each return. The IRS examination of the returns led to a criminal investigation that started in 2012, and indictment in 2015, and a plea agreement in 2015. In August 2014, while the criminal investigation was underway, the husband taxpayer filed amended returns for each of the four years, reporting additional adjusted gross income and tax. In 2016 the IRS assessed the tax shown on the amended returns.
In the plea agreement, the husband taxpayer agreed to amounts of adjusted gross income and tax higher than those reported on the amended returns. The IRS issued a notice of deficiency for 2008, 2010, and 2011, and asserted fraud penalties for 2008 through 2011. The penalties were based on the differences between the tax determined in the notice of deficiency and the tax liabilities reported on the original fraudulent returns. At trial, the husband taxpayer admitted to filing fraudulent returns and conceded the deficiencies in tax. However, he contested the fraud penalties.
The husband taxpayer argued that the deficiencies based on the difference between the tax determined in the notice of deficiency and the taxes reported on the amended returns were due to honest mistake. Thus, he concluded that no fraud penalty should apply to that portion of the deficiency. Further, he argued that because the deficiency reflected the difference between the tax determined in the notice of deficiency and the taxes reported on the amended returns, the fraud penalties should not apply.
The Tax Court noted that the regulations treat the amount shown on an amended return as an amount not shown as the tax by the taxpayer on his return for purposes of computing the fraud penalty. The court pointed out that in 1984 the Supreme Court held that “a taxpayer who submits a fraudulent return does not purge the fraud by subsequent voluntary disclosure; the fraud was committed, and the offense completed, when the original return was prepared and filed.” The Tax Court also pointed out it had followed that principle in a 1996 case in which it held that the filing of an amended return after an audit started did not purge the original fraudulent filing or fraudulent intent.
There are so many things in life and death that cannot be “undone.” There is no need to list them here, though when asked to make such a list, most people would not include “the filing of a fraudulent tax return.” Perhaps the prevalence of video and similar games with reset buttons makes it more difficult for people to understand that some decisions have consequences that cannot be “undone.” I wonder if a “if you file a fraudulent return you cannot escape penalties by amending the return” warning will fit on that postcard return that has been promised.
Friday, June 22, 2018
Though it is an interesting, and perhaps logical, proposition, the idea of matching the right to vote with the payment of taxes poses a variety of problems. Certainly denying voting rights to individuals who do not pay taxes would not pass muster. Permitting anyone who pays taxes to vote would add to the voter registration rolls youngsters who pay sales taxes on purchases made with money that they earned performing work that youngsters under the age of 16 are permitted to do. I speak from experience. I started my first job when I was eight years old, and I have paid sales taxes ever since. But I wasn’t voting at that age, or at twice that age. I wonder, if I had the right to vote, if I would have exercised it wisely. Perhaps. Perhaps not. I think linking the right to vote to the payment of taxes is not a good idea.
One of the arguments against permitting 16-year-olds to vote is that they lack sufficient experience, insight, wisdom, understanding, and knowledge. The problem with that argument is that there are far too many people over the age of 18 who lack sufficient wisdom, understanding, or knowledge. Perhaps the benchmark should be attaining a sufficiently high score on a knowledge and wisdom test, applicable to citizens of all ages. Imagine, under such a plan, there might be a few twelve-year-old youngsters voting, and more than a handful of middle-aged individuals barred from the voting booth for lacking what citizens ought to have.
The paper that published the report asked people, “What do you think?” Of the 1,514 people who voted, 61 percent chose, “No: 16 is too young,” 30 percent chose, “Yes: They can handle it,” and 9 percent went with, “Either age is find by me.” What we don’t know is how many of the 1,514 poll participants were younger than 18 years of age.
But hang on. It won’t be long before the next voting question pops up. Should robots with artificial intelligence be permitted to vote?
Wednesday, June 20, 2018
Reader Morris posed two questions to me. First, “Is there anything wrong with Domino's Pizza or other large corporations fixing potholes for publicity?” Second, “Should basic maintenance of public roads be handed off to corporations for marketing stunts?”
My response to reader Morris was short and simple, though it consisted of two parts. First, “Why not? Think of all the groups that get a sign (publicity) for taking over the litter cleanup for a stretch of highway. It’s a fair trade-off. “ Of course, some of the people picking up litter on designated stretches of highway aren’t running a business and thus whatever publicity they get is, at best, local fame. Some people who do this volunteer work are anonymous, and often decline having their names on a sign. Sadly, they are outnumbered by those who want the recognition, for business or other reasons. Even more unfortunate is the fact that both of those groups are outnumbered by those who can but fail to pitch in, thinking that their taxes are sufficient to cover the costs. Of course, that’s not the case.
Yet lurking behind that tax policy question was another one. The second part of my reply to reader Morris was probably inspired by decades of writing exam questions. “Another question is whether someone doing a service in exchange for publicity/advertising has compensation gross income.” Why do I think the answer is yes? A person who wants publicity in the form of a billboard, sign, a logo painted on a wall or street, or an advertisement on a web site or in a magazine or newspaper can pay cash, giving the owner of the billboard or other media gross income and giving the person making the payment a possible business expense deduction if the person is carrying on a trade or business. But suppose the person seeking the advertising offers, not cash, but goods or services. In this barter situation, the owner of the billboard or other media still has gross income, and the person who performs services has compensation gross income for performing services, or sales revenue if exchanging goods.
The key is valuation. Suppose a private construction company, instead of providing cash, offers the services of several of its employees to fill potholes. Keeping it simple, and ignoring the question of who provides the asphalt and the likelihood that all sorts of other legal questions, such as liability for injuries, complicate the picture, the construction company would have gross income equal to the value of the services, and an offsetting business expense deduction, for advertising, in the same amount. Computing the amount would be fairly easy, because it would reflect the hourly wages of the employees doing the work. But suppose several private individuals not operating a business enter into an agreement to pick up litter along a highway every week, and the state or locality posts one of those signs that acknowledge the work that those individuals are doing. There’s no offsetting deduction to the gross income. What is the value of the sign? Does it even have value? As a practical matter, even if it has value, it is probably so low that it’s not worth the IRS or a state revenue department paying attention.
But suppose the persons doing the litter pickup or filling potholes are provided with a real property tax credit for their services. What are the consequences? Presumably, the lower real estate tax bill would reduce the deduction for taxes paid. In light of the newly enacted, tax-raising provision of the tax “cut” legislation, perhaps a way around the new $10,000 cap is to permit people to reduce their real estate taxes by performing services that state and local governments would otherwise need to underwrite. Or would those sorts of arrangements cause revenue officials to treat these individuals, and companies, as performing services for compensation?
Monday, June 18, 2018
Proponents of these sorts of tax credits argue that these credits are financial incentives encouraging people to engage in behavior considered beneficial for society. One of my objections to using tax credits for these purposes is that it requires IRS and revenue department personnel to become experts in all sorts of activities, giving an advantage to taxpayers who choose to abuse the credits. If behavior is to be encouraged, it ought to be regulated and administered through agencies staffed with experts in the behavior in question. Another objection is the selectivity of the activities chosen for tax credits. Most, if not all, of the purposes for which tax credits are available surely qualify as worthy. But for every activity generating a tax credit there are five or ten or twenty activities that are no less worthy but that have not been deemed deserving of a tax credit. Another problem with policy tax credits is that we do not know who is taking advantage of the tax break, whereas direct spending programs permit taxpayers to identify the recipients.
People who read MauledAgain know that I am not a fan of policy tax credits. For example, in More Criticism of Non-Tax Tax Credits, I explained how the use of policy credits permits legislators to escape accountability for spending taxpayer money.
So it was no surprise when, several days ago, reader Morris directed my attention to a report about a new tax credit in New Mexico for hiring foster children, and asked, “Is this a good idea for a tax credit.” I doubt my reply was unexpected. “Of course not. What’s next, a tax credit for coming to a full stop at a stop sign?” To that I could add proposals for tax credits earned for driving without texting, opening doors for people carrying babies, picking up trash in the streets, reading to disadvantaged children, and that doesn’t even begin the list.
One of the objections raised by the anti-tax crowd to income and wealth taxes is the redistribution of money from those who are taxed to those who benefit from government spending. Yet the same crowd is comfortable with, and rarely criticizes, policy tax credits, which are simply another form of spending disguised in ways that permit legislators to hide their giveaways under the radar. Every dollar shelled out in a policy tax credit either comes from a taxpayer today or from a taxpayer tomorrow when the budget deficits come home to roost.
Of course it is a good thing to hire foster children. It’s also a good thing to hire veterans, and disadvantage individuals, and the homeless, and and and. But programs to encourage targeted hiring ought to be administered by agencies with employment expertise, not revenue departments, and funded with grants and payments that permit all taxpayers to identify the recipients.
My prediction is that the list of tax credits will continue to grow. Professional politicians and their lobbyist companions aren’t going to surrender what is a good thing for them until America wakes up. That’s unlikely to happen anytime soon.