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Monday, July 16, 2018

Raising Tax Revenue By Encouraging Risky Behavior 

As I noted a week ago, in A Strange Tax Proposal With Little Promise of Being Effective, there are taxes “enacted to discourage particular behavior or transactions.” As an example, I noted, “The goal of a tobacco tax, for example, is to eliminate the use of tobacco, and if it were successful, revenue from that tax would drop to zero.” So would legislators seeking tax revenue take steps to encourage tobacco purchases in order to increase tobacco tax revenues? Before considering that question to be silly, observe what the Pennsylvania legislature not very long ago.

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

How Not to Be a Tax Return Preparer 

Last week, I happened upon another television court show that involved tax return preparers, tax procedure, and some unseemly behavior. I knew it was going to be interesting when the title of the episode, Over-the-Top Accountant Con? popped up on the on-screen program guide as I was looking for the next television court show to watch as I worked on a genealogy database. Episode 172 of season 3 grabbed more of my attention than did the database. Of course, readers know this isn’t the first television court show dealing with tax issues that has grabbed my attention, and as usual, it was a repeat, for I had missed the original airing. I have commented on more than two dozen of these tax-related television court shows, starting with Judge Judy and Tax Law, and continuing with Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, and One of the Reasons Tax Law is Complicated.

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

Property Tax Refund: Four Thoughts 

When I read the Philadelphia Inquirer article describing $68 property tax refund checks mailed by Middletown Township in Bucks County, Pennsylvania, to its residents who own properties with structures on them, four thoughts crossed my mind. Perhaps there were more than four, but four stuck in my memory between the time I read the paper and the time I sat down at the keyboard

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

A Strange Tax Proposal With Little Promise of Being Effective 

There are all sorts of taxes, designed to do a variety of things. Most are designed to raise revenue, though some are enacted to discourage particular behavior or transactions. The goal of a tobacco tax, for example, is to eliminate the use of tobacco, and if it were successful, revenue from that tax would drop to zero.

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

When Will the Anti-Tax Folks Ever Learn? 

About a year ago, in Learning from the Tax Experiences of Others, I reacted favorably to reports that the Republican governor of Oklahoma insisted on tax increases to repair the damage caused by the unwise tax slashing that Oklahoma, following the examples of Kansas, Louisiana, and some other states, had enacted. The governor prevailed, and the Oklahoma legislature enacted the requested increases. Those increases were minimal, and did not provide any resources for increasing teacher pay in the state. Oklahoma ranks second to last in teacher pay, teachers have not had raises since 2007, and they threatened a walkout. Three months ago, a majority of the Oklahoma legislature, again recognizing the strength of practical tax reality and ignoring the disproven philosophical theories of the anti-tax lobbies, enacted increases of $1 per cigarette pack, 3 cents per gasoline gallon, 6 cents per diesel gallon, an increase in the oil and gas production tax, and a cap on itemized deductions. Using this revenue, the legislature approved increases in teacher pay averaging $6,100, not the $10,000 the teachers were seeking, and amounting to an average of $550 for each of the years that the teachers went without raises.

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

Rampant Ignorance About Taxes, and Everything Else, Becoming An Even Bigger Threat 

Readers of this blog know that I abhor ignorance. In theory, ignorance, unlike, say, bad weather, can be eliminated. In practice, putting an end to ignorance is becoming increasingly difficult, particularly because there are evil people who encourage the spread of ignorance. One of the most ignorant assertions that I have been hearing and reading recently is the moronic claim that “illegal immigrants don’t pay taxes.” For example, almost three weeks ago, someone using the name BaryOwen wrote on a reddit forum, that “illegal immigrants don’t pay taxes.” At about the same time, on Chris Hayes’ twitter feed, someone using the name blujkts wrote, “ILLEGAL immigrants DON’T PAY TAXES BECAUSE THEY”RE UNCODUMENTED.” Two weeks ago, on a 4chan board, someone hiding as Anonymous told us, “Illegal immigrants don’t pay taxes, dumb s***s. None have social security cards.” The erroneous claim that people in the country illegally don’t pay taxes has been around for quite some time. Eight years ago, the New York Times reported that a New York Times/CBS poll revealed that of the respondents, “Three quarters said that, over all, illegal immigrants were a drain on the economy because they did not all pay taxes but used public services like hospitals and schools.”

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

Tracking the Use of Tax Revenue 

Recently, in a letter to the editor of the Philadelphia Inquirer, a letter than I cannot find on the paper’s web site, Paul Benedict reacted to a recent article about private companies fixing potholes. I wrote about this recent development in A Hidden Tax Question, in which I pointed out that private individuals and companies do all sorts of volunteer work that otherwise would be expected of government.

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.

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