MauledAgain

More than 14 years ago, in Internal Revenue Code: Small Change, New Feature, New Look, I posed the question of what names should be given to two components of Internal Revenue Code section 4980I(b)(3)(C)(iii)(II)(aa) and (bb). I explained that although 4980I was the section, (b) was the subsection, (3) was the paragraph, (C) was the subparagraph, (iii) was the clause, and (II) was the subclause, I did not know nor could I find a name for (aa) and (bb).

Yesterday reader Morris sent me an email captioned, “The search of 14 years is over.” I must confess that during those 14 years I had not been actively searching for an answer. But reader Morris came upon what appears to be an answer.

According to this Wikipedia article, the name for (aa) and (bb) is item, and the name for the next component, (AA) and (BB), etc., is subitem. The Wikipedia article, apparently written in 2018, and updated in 2021, cites two sources, one of which I cannot find though it has been archived. The other source, the Detailed Guide to the United State Code Content and Features from the Office of the Law Revision Counsel for the United States Code, states, “Sections are often subdivided into a combination of smaller units such as subsections, paragraphs, subparagraphs, clauses, subclauses, and items.“ The Guide does provide a date for its creation or updates. The Wikipedia article citation to the Guide states, “Archived from the original on November 26, 2022. Retrieved February 2, 2021.”

It appears that the designation of “item” and “subitem” for the (aa) and (AA) components of the Internal Revenue Code is a fairly recent development. I’m certain that when the Guide was first written there was no need for those designations because legislation had not become as complicated as it now is, creating the need for deep levels of substructures.

If I were still teaching the introductory federal income taxation course, I would need to update the materials I provided to the students. Though I am no longer teaching that course, I decided to provide this update to the question so that those who do teach the course and give attention to the structure of the Internal Revenue Code (and Treasury Regulations) can update their materials. Because I know that there are at least a handful of law faculty using parts of the materials I developed it made sense to me to share this new information (that came to me thanks to reader Morris). I also figured that readers of this blog, many of whom are tax professionals or otherwise interested in tax, would benefit from knowing that (aa) and (AA) have been given names.

The headline in this advice column surely catches the eye of many people as it caught mine. It’s simple and entice. It suggests, “How to make $100,000 or more and pay no income taxes” Many people think of the verb “make” in this respect as including “making money” by having a job. The advice on what someone should do to get their federal income taxes down to zero works, but there’s a catch. It requires that the person’s income consist of qualified dividends and long-term capital gains. Specifically, the advice applies to married couples though there is similar reasoning for unmarried taxpayers. The explanation? According to the advice, “The big thing to know, however, is that you can recognize as much as $94,050 in qualified investment income as a married couple and pay no income. Tack on another $29,200 in income that is tax-free from a standard deduction, and you can escape income tax on at least $123,250.”

So who can set up their finances to fit within the advice? Someone who earns their income by working? No, because wages are not long-term capital gains and they aren’t qualified dividends. Someone who adds to their wages by putting money in the bank an earning some interest? No, because interest payments are not long-term capital gains and they aren’t qualified dividends.

So who can arrange their finances so that their income consists of long-term capital gains and qualified dividends? Someone who has sufficient capital to generate $94,050 of those items. How much capital is required depends on the rates of return that one assumes would apply. A safe guess would be somewhere in the vicinity of $1.5 to $2.0 million.

But there’s another catch. If a person with sufficient capital to generate this sort of income also has wages, interest, or other ordinary income, some or all of the untaxed $123,250 will be taxed. So who’s still eligible to do the “pay zero taxes” thing? Someone with sufficient but not too much capital, who keeps their qualified long-term capital gains and qualified dividends within the zero-tax range, who doesn’t need or have any other type of income. There aren’t very many people who will end up taking advantage of the “pay zero tax” arrangement.

So it’s understandable when most Americans consider the federal income tax to be skewed in favor of the investing class and not workers. It is so skewed. What is missing in most instances is taking the next step, from recognizing the biases in the federal income tax, understanding how and why they came to exist, and then taking steps to vote for legislators who are willing to change the law so that it doesn’t disfavor those who need to work to make a living. That’s a tall order, because those who benefit from the skewed income tax law are the ones with the wherewithal to finance the campaigns of legislators who are unwilling to balance the income tax law but rather want to make it even more favorable to those who benefit from the imbalance. And, no, throwing a few crumbs to low-income wage earners does very little to help them and does nothing for the disappearing middle class.

I understand why people don’t want to pay taxes. People don’t want to pay for anything, at least until (and unless) they think about the consequences of trying to get something for nothing. Most people understand that trying to get a person to mow their lawn for free, or serve them a restaurant meal for free, is wrong for so many reasons, both legally and morally. Yet they don’t have the same hesitation when it comes to trying to get public services for free. I think the reason is that there is a more attenuated connection between taxes and public services than there is between the direct payment to the lawn mowing person or the restaurant. And that is where the education system has failed the nation, because too many people do not realize the extent of the public services they receive without being aware that they are benefitting. Why? Because they take them for granted.

So, no, I have no interest, if even I could somehow fit within the suggested financial structure, in paying zero taxes. Why? Because I know that if I pay no taxes I ought not expect anyone else to pay taxes. And I know what would happen if no one paid taxes. I do wish everyone else also would know what would happen. Then the “pay zero taxes” ploys would fall on deaf ears.