MauledAgain

A recent Tax Court decision, Plato v. Comr., T.C. Memo 2018-7, demonstrates how not to go about getting one’s spouse to sign off on a proposed joint return. It’s not the way I would have advised someone to do it.

The taxpayer and his wife separated in December 2007. Their community property assets were liquidated subject to a stipulation order in December 2007. The taxpayer prepared and signed a federal income tax return for 2007, reporting a filing status of married filing jointly and a tax liability of $46,073. On April 15, 2008, the taxpayer left the joint return and a check for $46,073 “under the mat at the front door” of his wife’s residence for her to sign and mail to the IRS. No evidence was presented showing that the return was mailed or that the check was negotiated. The taxpayer did not request an extension of time to file the joint return, but he asked his wife to request an extension. Neither the request for an extension of time nor the joint return was filed with the IRS.

The IRS prepared a substitute for return for 2007. Based on the substitute for return, the IRS issued a notice of deficiency to the taxpayer, determining a deficiency and additions to tax for 2007. During the course of the examination and after the notice of deficiency was issued, the taxpayer submitted a 2007 federal income tax return, reporting a filing status of married filing separately, and tendered a payment of $43,490 with the separate return. The IRS accepted the payment, and it was the basis for the recalculation of the additions to tax for which the IRS determined that the taxpayer was liable.

Because the IRS and the taxpayer had resolved the issue of tax liability, the Tax Court was left with deciding whether the additions to tax determined by the IRS should be upheld. The taxpayer’s attempt to avoid the addition to tax for failure to file a timely return, based on his having left the joint return with his wife along with a check and his history of filing tax returns in a timely manner, did not convince the court. The court noted that prior cases had established that a taxpayer cannot rely on an agent to file a timely tax return, and that failure to obtain a spouse’s signature on a joint return when the couple is separated does not per se constitute reasonable cause for failing to file the return in a timely manner.

The taxpayer escaped the addition to tax for failure to pay tax shown on the return because the IRS did not place into the record the necessary forms to meet its burden of production. Another failure by the IRS to meet its burden of production spared the taxpayer the addition to tax for failure to pay estimated tax.

There are safe and prudent ways to obtain a spouse’s signature on a joint return. Though the fact that a couple is separated can make the process more challenging, it is inappropriately risky to leave a tax return and a check under a doormat. The list of things that could happen to the return and the check is long, and I’ll let readers imagine the possibilities. For starters, consider various wild and domestic animals and weather. In fact, it’s quite possible that the taxpayer’s wife never found the return and check. The better course of action would be to arrange a meeting. Even handing the return and check to the other spouse poses risks, because the other spouse can forget to sign and mail the return. Though it is tempting to think that couples who are not separated don’t face challenges, think of what might happen if the return and check are left on the kitchen counter. This time, for starters, consider domestic animals and children.

It is no secret I am not a fan of supply-side economics or trickle-down theory. The reason is simple. They don’t work. They’ve been tried. They have failed. Technically, they do work. They work for a small group of oligarchs. So, to be precise, the reason I don’t support them is that they don’t work for America or the vast majority of its people.

We’ve been told that handing $1.5 trillion in tax breaks mostly to big corporations and the wealthy nonetheless is a good thing because they will create jobs. But what have they been doing? They have been handing out crumb-size bonus payments, cutting jobs, and shying away from raising wages, as I have described in Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, and Oh, Those Bonus Payments! Much Ado About Almost Nothing. Yes, here and there a corporation has raised wages a bit, but the overall picture isn’t one of money flooding into the hands of the middle-income and poverty-level households.

Now comes news, as reported by various sources, including this one, that another beneficiary of tax cuts is doing some cutting itself. Kimberly-Clark Corporation has announced it will layoff roughly 5,500 employees and close 10 of its plants. According to this report, that’s about 13 percent of its workforce. Though its revenue has decreased somewhat over the past five years, its earnings increased 1 percent in the last quarter of 2017, and its adjusted earnings per share rose 8.3 percent. Its total revenue in 2018 was $18.3 billion, an increase over 2017, and its operating profit was $3.3 billion. The company plans to increase its dividend by 3.1 percent. In addition, as this report reveals, the company anticipates a lower tax rate in 2018 than it faced in 2017. In other words, this is a company that isn’t hurting financially, and if it wanted to scale back, surely could let attrition, rather than job deprivation, be the pathway to implementing its plans.

This situation is more proof that cutting taxes for big corporations doesn’t save American jobs nor prevent the closing of American manufacturing plants. According to this report, Kimberly-Clark plans to use the tax cut to pay for the restructuring plan that includes the layoffs. In other words, it costs money to get rid of workers, and tax breaks are being used to finance layoffs.

I wonder how the roughly 5,500 workers who find themselves on the street with no job feel about the tax cut that will save them a few dollars. I wonder how they feel about the claim that cutting taxes for big corporations is a better approach than cutting taxes for the poor and middle class, especially considering that cutting taxes for big corporations and the wealthy hasn’t helped the poor and middle class when it’s happened in the past. I wonder how many of them, if any, has thought about supply-side economics and trickle-down theory, examined the history, or thought that when voting, they were voting in favor of that approach to managing the national economy. I wonder how many of them celebrated when the tax cut legislation was enacted, thinking it would be a good thing for them, only now to discover not only would it not lift them up economically, it is financing their trip to joblessness. I wonder if they went into work thinking they would be getting a bonus, and not the dreaded pink slip. I wonder if they realize that the people who claimed to have their back didn’t.

A week ago, in Makers and Takers, Red and Blue, Federal Tax Deductions and State Taxes, I examined William Baldwin’s list of eight states where he concludes “takers” are driving out the makers and the correlation of the tax rates in those states with their dependence on, or contribution to, federal revenue. I noted:

On closer examination, as demonstrated by WalletHub’s 2017’s Most & Least Federally Dependent States, it turns out that the four “red” states in Baldwin’s list – Alaska, Louisiana, Mississippi, and West Virginia – rank among the most federally dependent states, ranking 2, 5, 12, and 23. On the other hand, the four “blue” states on his list – California, Connecticut, Illinois, and New York – rank among the least federally dependent states, ranking 34, 42, 46, and 47. In other words, the “red” states can pull off their “come here, taxes are low, but services are high” campaigns because federal money pours into those states from “blue” states whose residents finance the low-tax ride that “red” state residents enjoy. This isn’t a new revelation. In The Colors of Making and Taking and More Tax Colors, I explored the disparity between the states that held to progressive tax and economic policies and those that held to regressive tax and economic policies.

Several days ago, I was informed that WalletHub had released its 2018’s Most & Least Educated States in America. Curious, I looked to see where those eight states ranked. The four “red” states in Baldwin’s list – Alaska, Louisiana, Mississippi, and West Virginia – rank 25, 48, 50, and 49, respectively. The four “blue” states on his list – California, Connecticut, Illinois, and New York – rank
26, 3, 13 , and 12, respectively.

Is there a lesson to be learned here? Is this simply coincidental correlation? Or is it a matter of causation? Could it be that states with higher taxes provide higher quality education to its citizens? Could it be that using money for improving the minds and brains of Americans is more valuable than using money to acquire power and control over Americans? Does educational disparity have something to do with the ability to distinguish facts from fake news, truth from propaganda, and false promises from aspirations and hope? Does it have something to do with the ability to understand and analyze issues before reaching conclusions? Does educational disparity have something to do with the reason voters in “red” and “blue” states vote as they do?

For years I have complained about the “dumbing down” of America. Reducing analyses to a handful of characters and sound bites does nothing to assist the nation in holding its place in the international order. In the long run, education matters.

So what will YOU do with your tax cut? That question assumes you will be getting one, so apologies to those of you who come out on the wrong side of the tax break giveaway. A good guess is that most people getting tax cuts will use the several hundred dollars to buy food and clothing that they and their children desperately need, pay off credit card debt, or hold it for the next financial crisis. Those making the latter choice, if the option is available because they and their children are adequately fed and clothed, are probably remembering what happened the last time huge tax cuts caused a flood of money to flow into the hands of those who clearly don’t worry about food or clothing for the children, or vacations or luxury items, for that matter. That money found its way into bad investments that eventually fell apart, sending the nation’s economy and household budgets into the tank.

So what are the wealthy and the corporations going to do with their tax cuts? Supposedly they are creating jobs, but the track record so far is that they are handing out crumb-size bonus payments, cutting jobs, and shying away from raising wages, as I have described in Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, and Oh, Those Bonus Payments! Much Ado About Almost Nothing. Yes, here and there a corporation has raised wages a bit, but the overall picture isn’t one of money flooding into the hands of the middle-income and poverty-level households. The overwhelming percentage of the $1.5 trillion in tax cuts goes to corporations and the wealthy, as this report explains.

Now, news has emerged that with days after the House passed its version of the tax bill, Charles Koch gave $500,000 to Paul Ryan to finance Ryan’s campaign aspirations. The Koch brothers spent enormous amounts of money pushing for passage of the tax breaks, which turned out to be worth billions for them and their enterprises, not only financing lobbying efforts but also paying for advertisements designed to “persuade” average Americans that the tax breaks were all about helping the poor and middle class and not the wealthy. Turns out that it was about providing more funds to buy more members of Congress in order to get more tax cuts in order to buy even more members of Congress, a process that stops when the oligarchy owns the government not only de facto but de jure.

There’s no question that the tax legislation was designed to enable the oligarch agenda. As widely reported, in articles such as this one, several White House staff and some Congressional Republicans admitted that the two groups most excited about the legislation were “big money political donors and wealthy CEOs.” No kidding. There’s no doubt that Republicans expect big money contributions to provide the means to counteract the pushback expected from the overwhelming number of American voters who, according to poll after poll, have continually expressed disappointment in the giveaway. One member of Congress admitted, “My donors are basically saying, ‘Get it done or don’t ever call me again.’”

What must be remembered is that numerous studies confirm what many, but not enough, people realize. The wealthy have a disproportionate impact on government policies even though they support policies opposed by a majority of Americans, in many instances, by most Americans.

Though one billionaire can shovel half a million dollars into a campaign, 50,000 ordinary Americans can each put $10 into an opposing campaign. Does this work? No. For every millionaire, there are roughly 35 American adults. Yet few millionaires can afford to dish out $500,000 to buy a member of Congress. For every multimillionaire, there are almost 500 American adults. That’s on one-hundredth of the number needed to turn the tide of income and wealth inequality that is now on the precipice of destroying democracy and turning the nation into a private fiefdom of the manor born.

Supporters of the tax break handout to corporations are gloating over the announcement by Apple that its planned activities over the next five years will “contribute” more than $250 billion to the U.S. economy. There is nothing in the announcement that justifies attributing that claim to the recent tax legislation, and most of what Apple describes as its future plans are activities in which it had already planned to engage. Its claim that it will create 20,000 jobs isn’t guaranteed, and in fact a footnote to the announcement makes it clear that its claims are projections. Nor is there any guarantee that those jobs will be overseas jobs being brought back to this country or jobs restricted to American territory.

One of the “look how wonderful we are” boasts in the announcement is the anticipation, again, not a promise or guarantee, that Apple will bring back some or all of the cash it stashed overseas as part of a plan to reduce its tax payments to rates far below the supposedly economy-killing rate that the recent legislation chopped down. The new rate is still higher than Apple’s effective rate. So why is it bringing back some or all of its cash? I think it’s because of a fear that if it doesn’t repatriate the money now, the opportunity to do so might very well disappear with the next Congress, along with a much stiffer price for dealing with the issue. It’s almost like a temporary tax amnesty program. In fact, it is. For corporations, not individuals.

But here is the kicker. Apple then claims that the $38 billion in taxes that it anticipates paying on account of the repatriation “would likely be the largest of its kind ever made.” I suppose Apple wants everyone reading the announcement, or the stories based on it, to view Apple as an extremely patriotic taxpayer, making a generous payment to the Treasury. That payment, though, is nothing more than the accumulation of some, not all, perhaps a small fraction, of the taxes Apple avoided by stashing its profits, and jobs, overseas.

Suppose an individual neglects to pay taxes, or schemes and manipulates his or her transactions so that taxes are postponed. When others finally get fed up and persuade legislators or revenue officials to do something to get those unpaid taxes paid, will that individual get a ticker-tape parade in recognition of the very large payment that must be made?

The lesson, unfortunately, is that avoiding taxes is something that can be rewarded, if the person or entity doing so operates on a scale sufficiently large to dictate the terms of satisfying the tax debt. Once upon a time, people and companies in this sort of situation would hang their literal or figurative heads in shame. Now, shameful things have been re-branded as matters of pride.

William Baldwin has taken a look at the impact of the recently enacted limitation on the deduction of state and local taxes for federal income tax purposes. In Financial Sinkhole States in the Trump Tax Era, he concludes that the reduction in the deduction is equivalent an increase in the cost of living for people residing in states that have relatively higher taxes. This, in turn, he suggests, will stimulate relocations from those states to states with relatively lower taxes. He focuses on eight states that he calls sinkhole states because the population dependent on the state, namely state government employees, welfare recipients, and retired state employees receiving pensions, exceed the number of “population feeding it.” Baldwin computes the “population feeding it” by calling the folks in that group “makers” and then explaining that, “The maker count is the sum of private-sector employment and federal employment. These are the people whose taxes pay the bills to keep the state government going.” So clearly he considers the state taxes paid by state government employees and retirees to be irrelevant, and those individuals to be something other than makers. His computations do not take into account the value of the services rendered by state employees. Nor do they take into account the burdens imposed by those among the “population feeding it” when they rely on state-funded benefits or engage in fraudulent and dangerous activities that threaten the lives and economic security of the state’s residents. His use of the terms “makers” and “takers,” along with his use of the phrase “productive workers” to describe non-government employees, reveal the underlying assumptions driving his analysis.

What Baldwin overlooks is the application of “makers and takers” analyses to the states themselves. Baldwin identified eight states where he concludes the takers are driving out, or will drive out in greater numbers, the makers. Those states are Alaska, California, Connecticut, Illinois, Louisiana, Mississippi, New York, and West Virginia. Four are “red” states and four are “blue” states. Keep in mind that almost all “blue” states are considered to be places where the new limitation in the state and local tax deduction will, in effect, increase the cost of living there, while almost all “red” states engage in the “low tax” approach that devalues government and idolizes the so-called free market private sector.

On closer examination, as demonstrated by WalletHub’s 2017’s Most & Least Federally Dependent States, it turns out that the four “red” states in Baldwin’s list – Alaska, Louisiana, Mississippi, and West Virginia – rank among the most federally dependent states, ranking 2, 5, 12, and 23. On the other hand, the four “blue” states on his list – California, Connecticut, Illinois, and New York – rank among the least federally dependent states, ranking 34, 42, 46, and 47. In other words, the “red” states can pull off their “come here, taxes are low, but services are high” campaigns because federal money pours into those states from “blue” states whose residents finance the low-tax ride that “red” state residents enjoy. This isn’t a new revelation. In The Colors of Making and Taking and More Tax Colors, I explored the disparity between the states that held to progressive tax and economic policies and those that held to regressive tax and economic policies.

The flow of money from “blue” states to “red” states is one of the primary reasons Republican-controlled Congresses don’t cut federal spending as their majority members promised during campaigns. When they get to Washington and see where the money goes, they realize that following through on their promises will cause “red” states to face a choice between eliminating services or raising taxes. I touched on this inconsistency, at the state level, in Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?.

The recent tax legislation increases the extent to which “blue” states fund “red” states. Although litigation has been threatened and political maneuvering is underway, it is unlikely that much will change until the next step in Baldwin’s scenario is underway. Let’s suppose he is right, and taxpayers flee “blue” states for “red” states to reduce their tax burdens. The “blue” states will need to raise taxes even more, or cut services, or both. Eventually, the people Baldwin and others call “takers” will also leave the “blue” states and flock to the “red” states, which by then will be turning purple and even blue, as they face the consequences of “blue” state funding disappearing as “blue” states sink into the holes Baldwin predicts will swallow them up. When the “blue” states fall into the mess that Baldwin and others predict, the “red” states will go down with them.

There are those who rejoice at the clever way in which the recent tax legislation puts “blue” state taxpayers at a disadvantage. It is yet another salvo in the ongoing economic war between “red” and “blue” states. Every time someone points to New York or California as examples of how progressive tax and economic policies are failures, someone else points to Kansas and Louisiana as examples of how regressive tax and economic policies are failures. Those who are rejoicing at the prospect of “blue” states and their accompanying tax and economic policies failing ought to pause and consider the cost of such an outcome, and remember that there are “red” states in even worse economic condition. Once those “blue” states go down as Baldwin and others predict or hope or expect or worry, the “red” states will not be unscathed. Insularity is not a viable economic or tax policy option in a global world. That approach went out the window many decades ago.

Two weeks ago, in Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, I explained the deceptiveness of the big deal being made of $1,000 bonus payments to employees in efforts to justify the tax legislation giveaway to corporations and oligarchs. I argued that the $1,000 bonus will be dwarfed by the consequences of the spending cuts that the Congress will enact in order to reduce the deficit caused by its sellout of America. A bit later, in That Bonus Payment Ruse Gets Bigger, I repeated my criticism, noting that the at least some of the employers handing out bonus payments were laying off employees, cutting purchase orders, and increasing prices charged to customers. If the tax cuts were what their advocates claimed they are, the recipients of the tax cuts would have no need to la off employees, cut purchase orders, or increase prices charged to customers. They are doing those things because they are plowing the tax cut funds into the wallets and off-shore bank accounts of people already drowning in the money to which they are addicted.

In several of my posts, I have referred to these bonus payments as crumbs. Indeed, when compared to the size of the tax cuts received by the employers, the bonus payments amount to one, two, perhaps five percent of the tax cut money. It’s like that when the gluttons dominate the buffet table.

Now comes news that required me to find a word that describes a piece of bread smaller than a crumb. I did not succeed, unless a molecule or an atom qualifies, but at that stage the substance isn’t bread. Perhaps speck might suffice.

What sort of news caused be to think about bread pieces smaller than crumbs falling from the table? It turns out, according to many reports, including this one from Business Insider, that the $1,000 bonus payments being made by Walmart – an employer that also is laying off workers – are limited to employees with at least 20 years of service. Most Walmart employees haven’t accrued that much time. The bonus is smaller for employees with less service time. Though Walmart has not publicized how much of a bonus payment is being made to an employee with a particular number of years of service, it did explain, as reported in several places, including ThinkProgess, that the bonus payments will total $400 million. Walmart has roughly 2.1 million employees. Simple arithmetic tells us that the average bonus is $190. That’s a far cry from $1,000. If $1,000 is a crumb, and it is, considering the size of the tax cuts, $190 is, at best, a speck.

Years ago, when I was a child and I found a nickel, someone said to me, “Don’t spend it all in one place,” and laughed. It would be cruel to give the same smart-aleck advice to the unfortunate person who gets a $50 or $100 bonus from an employer who stands to enjoy an $18 billion benefit from this latest trickle-down scam that even its inventor has admitted is a failure.

Several weeks ago, in So What About Those State Taxes? Surprise?, I pointed out that “The recently enacted federal tax legislation not only affects federal income tax liability but also changes state income tax liability for most taxpayers living or working in states with an income tax,” because “Most state income taxes are linked in some way to the federal income tax system.” A little more than a week ago, in What Losing Federal Personal and Dependency Exemptions Does to Michigan (and Other) Taxpayers , I described the uncertainty facing Michigan as legislators, economists, and tax professionals debate whether it is necessary to amend the state’s tax laws to prevent Michigan taxpayers from losing the Michigan personal and dependency exemption deduction. I pointed out that necessary or not, it would be wise to clarify the matter.

It seems that Michigan’s governor and legislature is taking the sensible and careful route. According to various stories, including this Detroit News article, the governor is proposing legislation to set the Michigan exemption independent of federal tax law. The legislature appears willing to enact the proposal, though it would not be surprising if it was tweaked a bit, because getting the numbers just right not only is difficult in terms of computation but also challenging in terms of the meaning of “just right.” The Lieutenant Governor explained that the proposal probably reduces tax revenue a little bit, in contrast to the $840 million tax increase that Michigan taxpayers would otherwise face in 2018 and the $1.6 billion increase they would face in 2019. For many taxpayers, the state tax increase that would otherwise occur would more than wipe out the mere pittance of a federal income tax decrease that most Americans will see.

An alternative, reducing state income tax rates, has little support because it would cause some Michigan taxpayers to face tax increases, some to face tax decreases, and the rest to maintain close to the status quo. Proponents of the exemption restoration consider it to be the simplest, and fairest, solution. It is.

This problem affects many more states than Michigan. Louisiana, for example, as I discussed last week in State Tax Increases Cut the Tax Cuts faces similar issues. By relying on federal adjusted gross income, taxable income, exemptions, or other items, states are at the mercy of whatever the Congress does. Would it make sense, as a few states have done, to avoid relying on federal items in computing state income tax? Yes and no. Doing so avoids the chaos bred by the latest trickle-down Congressional nonsense. But it leaves each state with the legislative, administrative, and judicial burden of resolving each definition and each issue independently. Even the states that separately compute state taxable income rely on federal definitions of certain underlying items.

This is a story that will grow, as more and more state revenue departments finish their analyses and present their findings to state governors and legislatures. And it will continue to grow as state legislatures consider how to react. Unfortunately, most taxpayers aren’t paying attention to these issues.

Reader Morris directed my attention to a letter to the editor of the Santa Cruz Sentinel. Helena Robertson claims that “Social Security is not funded through federal taxes,” and the newspaper used that claim as the headline for the letter. Robertson explained that “Social Security is financed through a dedicated payroll tax. . . interest earnings . . . revenue from taxation of OASDI benefits . . . and reimbursements from the General Fund of the Treasury.” Though Robertson’s litany of the sources of funding for Social Security is essentially correct, she is wrong in concluding that the payroll tax to which she refers is not a federal tax. It indeed is a federal tax. It is not a federal income tax, which perhaps is what Robertson was trying to say. My guess is that Robertson was trying to provide a foundation for dealing with the upcoming attacks on Social Security, along with Medicare and Medicaid, that will be justified by a hypocritical concern about the federal budget deficit and accumulated federal debt. Robertson’s point, which she did not articulate but which every American above the age of 12 needs to understand, is that deficits caused by cuts in federal income taxes ought not be reduced by cutting spending funded by federal payroll and self-employment taxes. That stunt is just another piece of the plan by which the wealthy oligarchs running the country scheme to take even more from the poor and middle class.

Two weeks ago, in So What About Those State Taxes? Surprise?, I pointed out that “The recently enacted federal tax legislation not only affects federal income tax liability but also changes state income tax liability for most taxpayers living or working in states with an income tax,” because “Most state income taxes are linked in some way to the federal income tax system.” Last week, in What Losing Federal Personal and Dependency Exemptions Does to Michigan (and Other) Taxpayers , I described the uncertainty facing Michigan as legislators, economists, and tax professionals debate whether it is necessary to amend the state’s tax laws to prevent Michigan taxpayers from losing the Michigan personal and dependency exemption deduction. I pointed out that necessary or not, it would be wise to clarify the matter.

Now comes a story out of Louisiana describing the adverse effect on Louisiana taxpayers of the tax legislation enacted in Washington, D.C. According to the story, there are two major effects that will cause most, if not almost all, Louisiana taxpayers to face automatic state tax hikes. First, Louisiana permits its taxpayers to deduct the federal income taxes that they pay. Any Louisiana taxpayer whose federal income tax liability decreases will have a lower state deduction, and thus a higher state taxable income and resulting higher state income tax. Second, Louisiana permits its taxpayers to deduct some of their federal itemized deductions. To the extent that a Louisiana taxpayer shifts from itemizing deductions for federal income tax purposes to claiming the federal standard deduction, that taxpayer will lose the itemized deductions that otherwise would be deducted on the Louisiana income tax return.

The Louisiana legislature could ameliorate these effects by amending state tax law to permit taxpayers to deduct, for example, 110 percent or 120 percent of federal income tax liability. It could increase the Louisiana standard deduction, or permit deduction of itemized deductions that would have been claimed on the federal income tax return had the 2017 legislation not been enacted.

But it is unlikely that the Louisiana legislature will take steps to shield its taxpayers from this “looks good at first, isn’t so great after further review” situation. Why? Louisiana presently faces a billion-dollar budget deficit. Revenue increases are welcome. How much of an increase in state taxes will the federal tax legislation generate? Computations are underway, but officials already are using the word “significant.”

What is given by one hand is taken away by the other. Too many Americans don’t look at both hands. What a shame.

A bit more than a week ago, in Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, I explained the deceptiveness of the big deal being made of $1,000 bonus payments to employees in efforts to justify the tax legislation giveaway to corporations and oligarchs. I argued that the $1,000 bonus will be dwarfed by the consequences of the spending cuts that the Congress will enact in order to reduce the deficit caused by its sellout of America.

But it’s worse that I thought. At least we are being given the opportunity to see through the charade.

As reported in various stories, including Fortune article, Southwest Airlines plans to give its employees a $1,000 bonus. According to this Bloomberg report, the bonus will cost Southwest $70 million, while the tax changes will add between $1 billion to $1.5 billion to the airline’s bottom line. “Here, employee, have a crumb.” Worse, the same report describes Southwest’s decision to delay some of its Boeing orders, causing one analyst to describe it as a bad day for Boeing. I wonder how many Boeing employees will be getting a pink slip.

It’s not just employees getting the short end of the deal. According to various reports, including this one, Comcast plans to deliver $1,000 bonuses to its employees. Generous? At the same time, it also is being reported that Comcast is raising its rates. So its customers apparently are paying for those bonus payments. Why is there a need to raise rates if a huge infusion of cash is coming in from that corporate rate cut?

In the meantime, employees of non-profit employers aren’t getting a bonus. This includes government employees. That’s right. Those police officers, fire fighters, EMTs, non-profit institution health care workers, and others who are no less deserving of a bonus will face not only an empty bonus envelope but risk pay cuts and being laid off, as the tax cut giveaway will require cuts in federal financial support of state and local services.

When I see posts on facebook about people who voted for the cabal running the federal government lamenting the broken promises, stressing over things like cuts in funding for programs that keep people alive with food and health care, and crying, “This isn’t what I voted for. This isn’t what I expected,” I cringe. Was it that difficult to pay attention and let knowledge push out the ignorance. Did these people not hear what Michael Bloomberg told the nation?

It amazes me how some people can remain so devoted to those who treat them so badly. Politics has become one huge dysfunctional relationship.

Last week, in So What About Those State Taxes? Surprise?, I pointed out that “The recently enacted federal tax legislation not only affects federal income tax liability but also changes state income tax liability for most taxpayers living or working in states with an income tax,” because “Most state income taxes are linked in some way to the federal income tax system.”

A reader pointed me to a Detroit Free Press article explaining that the changes to federal income tax law will increase state income tax liabilities for Michigan taxpayers by $1.4 billion. The principal reason for this impact is the loss of federal personal and dependency exemptions in the federal income tax law. Under current Michigan income tax law, the computation of Michigan taxable income begins with federal adjusted gross income, is increased and decreased by a variety of adjustments, and is decreased by $4,000 for each personal and dependency exemption claimed on the taxpayer’s federal income tax return, as illustrated by the Michigan income tax form.

Of course, this last-minute development has caused Michigan politicians to examine and discuss what to do about the situation. Many suggest doing something to prevent this outcome, including enacting a Michigan exemption not tied to the federal income tax system. Others want to lower the rate, but face opposition from advocates for higher tax relief for the poor and middle class. Still others want the state to let its tax revenue increase, because they predict that it will be needed to offset expected cuts in direct and indirect federal financial assistance to states.

What caught my attention was a dispute about the impact of the loss of the federal personal and dependency exemptions. Many Michigan tax experts agree that with that loss, taxpayers will be claiming zero exemptions on their federal income tax returns and thus will enter zero on their Michigan income tax returns where it requests the “Number of exemptions claimed on” the federal return. Yet one economist argues that the elimination of the federal personal and dependency exemption deduction simply means that it has been reduced to zero for purposes of computing federal income taxes but that it has not been eliminated. This economist informed the Michigan Department of Treasury that no legislative action is required and that “Michigan's income tax payers will not lose their state income tax exemptions ... and will not be subjected to a large income tax hike.” He might be correct. According to Michigan Compiled Laws section 206.30(2), the Michigan exemption deduction is based on the “number of personal or dependency exemptions allowable on the taxpayer's federal income tax return pursuant to the internal revenue code.” Section 151(d)(5), as enacted by section 11041 of Public Law 115-97 reduces the federal exemption amount to zero and then provides that “For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under this section.” Though it is modified by “For purposes of any other provision of this title,” and not “For all purposes, including state income tax computations,” the reference in Michigan law to the “number of personal or dependency exemptions allowable on the taxpayer’s federal income tax return” should be sufficient to preserve the Michigan deduction.

Two concerns for Michigan are apparent. First, the instruction on the Michigan income tax return and the explanation in the instruction booklet that refer to exemptions “claimed on the taxpayer’s federal income tax return” need to be changed. Why? Because taxpayers will not be claiming exemptions on the federal return. The reference will need to be to exemptions “allowable for federal income tax purposes,” or, “exemptions that would be claimed on the federal income tax return if the federal exemption amount were other than zero.” I doubt that the revised Form 1040 will still include a line for personal and dependency exemptions so that all taxpayers can insert a meaningless zero. It is possible that the revised Form 1040 will continue to ask for identification of dependents for other purposes, but it also is possible that the request for dependency information will be relocated to forms for credits or which that information is necessary. It is likely that identification of personal exemptions, in contrast to dependency exemptions, will be requested. And that leads to the second concern. Michigan taxpayers, along with those in other states with similar statutory and instruction language, will need to figure out what their federal personal and dependency exemptions would have been had the federal income tax law not been changed, even though they don’t necessarily need to do that when filling out their federal income tax returns. Developers of tax preparation software surely are not overjoyed.

All of this further reinforces the inescapable fact that the Congress did a slipshod job of dealing with tax “reform” and “simplification.” It did not reform the tax law nor did it simplify the tax law. It simply let the donor class, the 150-some families that now run the country, grab whatever they could grab in step one of a multi-step “return to feudalism and call it free market capitalism” plan that ought to be called “socialism for the oligarchy.”

Like most Americans, I do not hold Congress in high regard. Actually, I think the Congress has failed miserably in meeting its obligations to serve America. It has increasingly focused on serving the desires of those who fund their election campaigns.

When it comes to taxation, the quality of tax legislation, policy aside, has decreased over the past several decades. The number of technical amendments that are required continues to increase. Mistakes are rampant. Ambiguous terminology propagates wildly. Bewilderment among tax professionals grows and grows, as making sense of what is written in the legislation becomes more and more of a challenge with decreasing likelihood of success and widening frustration.

One particular pair of provisions illustrates the incompetence of how Congress deals with taxation. In the recently enacted legislation is a new section 864(c)(8) and a new section 1446(f). Section 864(c)(8) provides that a nonresident alien individual’s or foreign corporation’s gain or loss from the disposition of a partnership interest is effectively connected with the conduct of a trade or business in the United States to the extent that the person would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value. The new provision applies to dispositions occurring after November 26, 2017. New section 1446(f)(1) provides that if any portion of the gain on disposition of a partnership interest would be treated under new section 864(c)(8) as effectively connected with the conduct of a trade or business within the United States (“effectively connected gain”), then the transferee must withhold a tax equal to 10 percent of the amount realized on the disposition. There is an exception if the transferor provides an affidavit to the transferee stating that the transferor is not a foreign person. The Treasury is authorized to issue regulations or guidance necessary to carry out the purposes of new section 1446(f), including application of the exception. New section 1446(f) applies to sales, exchanges, or other dispositions occurring after December 31, 2017.

Taxpayers and others affected by these new provisions have informed Treasury and the IRS that compliance without guidance presents significant practical problems. There are a variety of situations in which a transferee will be unable to determine whether it must withhold under new section 1446(f). If dispositions take place through a broker, the broker is permitted to withhold on behalf of the transferee but without guidance, brokers are unable to do so.

The solution advanced by the Treasury, explained in IRS Notice 2018-18 is to suspend withholding under new section 1446(f) with respect to publicly traded partnership interests. It intends to issue regulations or guidance in the future, and those rules would be prospective. They also will include transition rules to allow sufficient time to prepare systems and processes for compliance.

Putting aside the question of whether the Treasury can suspend withholding required by the Internal Revenue Code, consider how practical reality meant nothing to the Congress when it enacted these new provisions. It enacted, in late December, withholding requirements effective on January 1. Though it provided for the issuance of regulations and guidance, it assumed that regulations and guidance could be produced in several days, and during a holiday period. That cannot happen, and any member of Congress involved in drafting or voting on tax legislation has an obligation to understand that it takes months, and sometimes years, to analyze provisions, identify issues, allow for public comment, and propose, let alone adopt, regulations or guidance. Worse, the Congress assumed that transferees, brokers, and their bookkeepers, accountants, and tax professional advisors, together with their programmers, could put together the necessary procedures and software in that same period of several days.

This is what happens when a Congress, in a rush to satisfy greedy donor oligarchs, throws together a mish-mash of provisions that have not been vetted, have not been subject to public scrutiny, have not been drafted with comments from those who are affected, have not been aired in public hearings, and that have been jammed down the throat of a nation the overwhelming majority of whose citizens opposed the sloppy and ill-advised greed-grab.

Considering that a good bit of the newly enacted legislation poses similar problems, both in terms of interpretation and application as well as in redesign of software and business operating procedures, will the Treasury suspend enforcement of those provisions while it tries to put together regulations and guidance in a feeble attempt to fix the mess that the Congress has created? Should it? Does the Congress even understand this issue? Or is it too busy getting instructions from its handlers for the next batch of badly written and ill-advised legislation?

Is it any wonder that Americans hold its Congress in such low esteem? Is it not sufficiently shocking to Americans that the members of Congress, aside from a few brave but outshouted and outvoted members, doesn’t really care what Americans think?

A reader pointed me to a Detroit Free Press article explaining that the Michigan Public Service Commission has directed regulated public utilities to analyze the impact of the recently enacted federal income tax cuts on their financial position and to propose how the tax savings will generate reductions in utility bills for consumers. This is an important, though in the scheme of things minor, outcome of the recent legislation. It is important because if corporations and businesses getting tax cuts reduced prices across the board, consumers – the largest and most important component of a capitalist economy – would benefit and in turn spend their cost savings to spark genuine, in contrast to bubbled, economic growth. It is minor because regulated public utilities are a tiny piece of the economy.

Imagine if corporations and businesses were required to use their tax cuts to reduce the prices of their goods and services rather than using them to engage in mergers, buy back stock, increase dividends, or toss bonus crumbs to some employees while axing thousands of jobs. Not only are those sorts of regulations going to be enacted, the same folks who brought us the tax cuts favoring the oligarchy also have on their agenda the elimination of every regulation they can find a way to trash. These folks praising the evisceration of the EPA and its regulations haven’t yet disclosed how they expect Americans to deal with filthy air and polluted drinking water. I’m sure the wealthy think they will be able to avoid those consequences for themselves. Just imagine what the deregulation of public utilities will do to most Americans. So that drop in the bucket of shifting tax cuts to consumers might not last very long.

For months, I have been criticizing the Republican tax legislation for a variety of reasons. I have also criticized the defenses that its supporters have tossed at the American people. For example, in Another Word for Fake Tax Math, I pointed out the absurdity of claiming that the legislation would increase American household income by $4,000 per year.

Shortly after the tax legislation was signed into law, its supporters began celebrating as well-timed press releases began to emerge from a handful of corporations that will benefit immensely from it. For example, as reported by Forbes and others, AT&T announced it would pay a $1,000 bonus to each of its roughly 200,000 U.S. employees. Supporters of the tax “reform” roared in self-congratulations.

Closer analysis, though, reveals the reality of what lies underneath the press releases. Consider AT&T’s situation. First, the bonus will not cost it $200 million (200,000 x $1,000). Why? Because AT&T will deduct those bonuses in 2017, and thus, as explained by this Fortune report, will save $70 million in federal taxes. Though not mentioned, AT&T also will save state taxes, probably in the low tens of millions. The net cost to AT&T is not $200 million but on the order of $110 to $120 million, perhaps less. Second, the bonuses would have been paid in any event, in early 2018, but by committing to payment now, AT&T, an accrual-method taxpayer, can deduct the payment in 2017 rather than in 2018 when its tax savings would be less. Third, a few days later, according to numerous reports, including this one, AT&T announced plans to lay off more than a thousand workers. Using a rough estimate of $50,000 salaries and benefits, AT&T stands to cut its expenses, net of taxes, by at least $50 million a year beginning in 2018. In some ways, it is possible to consider those laid-off employees as paying the price for those touted bonus payments. Fourth, AT&T did not need tax cuts to fund these bonuses, considering that it has almost $50 billion in cash reserves.

Similar analyses can be done for the handful of other companies that are tossing a few pennies at employees while laying off others. The CEOs of hundreds of other companies, responding to a Merrill Lynch survey, described in this report, revealed that the tax cuts, coming on top of huge cash reserves and record profits, will be used to buy back stock and to engage in mergers. Those moves reduce jobs. They don’t create them. Those moves reduce competition and raise prices. Those moves further enrich the oligarchs.

So when the smoke clears and the mirrors are removed, corporate cash reserves will grow, some employees at a handful of companies will get a few crumbs, and others, perhaps many others, will lose their jobs. Next year, when Congress bows yet again to the desires of the oligarchs and cuts Medicare and Social Security, ostensibly to reduce the horrible deficit, the employees receiving the a tiny bonus might set it aside to make up for their health and financial needs in retirement. If they think that the a few dollars will make up what they stand to lose, they will be engaging in the same sort of misguided reasoning that has led this country to the mess in which it now finds itself.

The recently enacted federal tax legislation not only affects federal income tax liability but also changes state income tax liability for most taxpayers living or working in states with an income tax. Why? Most state income taxes are linked in some way to the federal income tax system.

One example includes the six states that compute state taxable income by reference to federal taxable income. The recent federal income tax changes remove many deductions, thus increasing taxable income, while reducing rates somewhat. Unless the state also reduces its rates, its taxpayers will be applying the same rates to a higher taxable income. Though state legislators might welcome this infusion of additional revenue, its taxpayers will not be pleased. Many will be surprised.

Another example includes the roughly two dozen states that allow itemized deductions by reference to itemized deductions for federal income tax purposes. Because itemized deductions for federal income tax purposes have been reduced, taxpayers in these states who itemize deductions for state income tax purposes, a group that includes taxpayers who do not itemize for federal purposes, face higher taxable incomes and thus higher state income tax liabilities.

Yet another example are state income tax credits based on federal income tax credits. Because some federal income tax credits have been repealed or modified, the effect on state income tax liabilities in these states generally will be an increase for some taxpayers.

Similar situations exist with respect to state corporate income taxes and other business taxes that use federal taxable income or other federal items as a beginning point for, or part of, the computation of state tax liability. It would not be surprising to tax experts, though perhaps surprising and certainly unpleasant to taxpayers, to learn that state tax liabilities have increased. In some instances, if a state tax system incorporates particular federal corporate deductions, business taxpayers might experience state tax liability decreases.

As is the case with determining whether someone’s federal income tax liability will be reduced, and if so, for how long, by the legislation, the only accurate analysis is to run the numbers. Relying on generalizations, averages, or other simplistic observations is useless for a person or business doing tax planning.

One important lesson is that when running the numbers to determine the effect of this legislation, the impact on state tax liabilities must be taken into account. In the many instances where federal income tax liability has decreased by a small amount, there very well may be a state tax liability increase that not only wipes out the federal tax reduction but generates an overall increase in tax liability for the taxpayer.

Another important lesson is that state legislatures must now analyze the situation and decide what, if anything, to do. Some legislatures will welcome the additional revenue. Others will discover that corporate and business tax revenues will decrease. In some states, individual income tax revenue will increase and business tax revenue will decrease. In other states, tax revenue from both groups will increase.

But I doubt in the rush to placate their campaign donors and serve the oligarchs, the members of Congress and the Administration responsible for this horrific federal tax legislation considered any of these issues. These issues did not, and do not, matter to them. Nor do the tens of millions of taxpayers now facing state tax liability increases.

A week ago, in Giant Tax Cut for Christmas? Ha Ha Ha or Ho Ho Ho?, I criticized the absurdity of the President’s claim that Americans would receive “a giant tax cut for Christmas.” A one or two percent reduction in tax liability is not “giant.” A 30 or 50 percent reduction might qualify as “giant,” but unless someone is a member of the oligarchy or the owner of a huge corporation, those sorts of tax reductions aren’t in anyone’s fireplace stocking.

Some commentators are tagging the enactment of the legislation as “Taxmas.” That term has been around, with a different meaning, for a few years. For example, the Urban Dictionary defines it as the “period after the end of the financial year when you get your tax return.” The chief architect of this first step in eviscerating or eliminating Medicare, Medicaid, and Social Security used the word in the first line of his ridiculous ode to the oligarchs.

A tax-teaching colleague and friend at another law school pointed out that there is a bilingual meaning to the term. Roughly translated, it means “more tax.” Indeed, that’s what it is for the unfortunate folks not given a short ride on the “here’s a few crumbs” holiday train.

My reply is that, spoken aloud, the term has yet another meaning. It’s a tax mess. Indeed it is. Riddled with drafting errors, consequences unforeseen by its advocates but easily spotted by the tax experts whose advice was not sought nor heeded, inconsistencies, huge opportunities for game playing by those able to afford clever tax advice, and long-term tax increases ignored by those enjoying the momentary short-term tidbit of a dime today to pay a dollar next year, the legislation qualifies as one of the worst, if not the worst, Congressional work products ever seen in this nation.

As is said of gifts, it is the thought that counts. Too many Americans have no idea of what members of Congress and their placated oligarchic donors are actually thinking. Ignore the words. Talk is cheap. Consider the actions, and the actions that await the nation. Sometimes that carbon in the stocking isn’t a diamond but is coal.

I wonder what the infant whose birthday is being celebrated today would think about all of this. No, actually, I don’t wonder. He told us, “Take care! Be on your guard against all kinds of greed; for one's life does not consist in the abundance of his possessions.” Did we listen?

There is something very wrong with the American political system. That’s not news, at least not to those who carefully observe, study, and analyze the machinations of politicians and the majority of oligarchs who support them financially and whose bidding most of them eagerly do. Unfortunately, many Americans could care less about these issues, worrying instead about trivial matters that mean nothing in the long run.

The Republican tax plan is a magnificent demonstration of the dysfunctional national political system. According to one poll, FIFTY-FIVE percent of Americans oppose it, and only 33 percent support it. According to another poll, only 26 percent support the plan. Other polls show similar results.

So how is it that legislation with very little public support and significant public opposition gets approved by the Congress and the Administration? The answer is simple. It’s for the same reason that the policies of medieval kingdoms followed the instructions of royalty and nobility no matter what the peasants preferred. It’s the same reason that the policies of dictators trump the wishes of the citizenry.

The only thing heartening about this situation is that at least half of Americans realize what is happening. Unfortunately, thanks to gerrymandering, voter suppression, and domestic and foreign propaganda, the majority no longer controls what happens. By the time the dust settles from the economic implosion this legislation will generate within a few years, the majority will be even weaker and the oligarchy much richer and much stronger.

There’s a commentary going viral on the world wide web and social media that clearly is designed to suck Americans into supporting a terrible tax proposal. It takes five of the strongest arguments against the giveaway to corporations and wealthy individuals, labels them as “myths,” and then trots out false information to deflect attention from the truth.

The first claim is that the legislation will generate $4,000 per household. I disposed of this falsehood in Another Word for Fake Tax Math. It’s too bad some people will stick to their lies even after their mendacity is highlighted.

The second claim is that the “Senate tax bill increases the amount of taxes paid by the rich.” Increases? That is laughable. The tax brackets applicable to the rich are decreased, and even the strongest supporters of the legislation crow about the reduction of taxes on the alleged “job creating” wealthy. One would think that those defending this monstrosity of tax legislation would at least coordinate their false advertising.

The third claim is that “93 percent of taxpayers would see a tax cut or no change in 2019.” What is omitted is the unfortunate news that by 2025, at least 25 percent of taxpayers, almost all in the lower and middle brackets, will experience tax increases.

The fourth claim is that repealing the Affordable Care Act individual mandate will not “force anyone to give up their coverage.” But eliminating the mandate also eliminates subsidies, and when those disappear, millions of Americans will lose their health insurance coverage.

The fifth claim is that repealing the Affordable Care Act individual mandate will not raise insurance premiums. Where do people without health insurance go when they have a health problem? The emergency room. Are they turned away because they have no insurance and cannot afford to pay? No. Who pays? The hospital, which then raises its rates, which then cause insurance companies to raise premiums, which means that those with health insurance pay higher premiums to subsidize those without health insurance. Because this happens in the private sector, everyone in the chain takes their cut. It’s far less efficient than if it is handled through a non-profit government agency.

The sixth claim is that “when business taxes go down, worker’s wages go up.” That is nonsense. I explained the truth about this absurd claim in Tax Cut Cash To Be Used for Job Creation?. Corporate executives are admitting they are not raising wages nor creating jobs, but either adding to already huge stockpiles of cash or increasing dividends to high-end investors. Corporations do not need more cash, and they surely haven’t been adding jobs and increasing wages with the hoards of cash they already hold.

The seventh claim is that “American corporations pay a federal income tax rate of 35 percent.” No, they do not. That is the nominal rate, and most corporations, after taking into account a variety of tax breaks, end up paying at an average rate of half that percentage. Some even pay at a rate of zero, and a few even receive payments rather than making payments.

The eighth claim is that this tax legislation will not increase the federal budget deficit. The basis for this claim is the same nonsense that infects trickle-down and supply-side economic theory. The idea that the economy will blossom when money is funneled to corporations and wealthy individuals overlooks the simple fact that what drives an economy is demand. If a nation wants higher demand, cut the taxes of those who are not in the top one, two, or even five percent of the income and wealthy array. But the money-addicted who control the government and their allies won’t tolerate that sort of approach, because they lack the ability to understand that letting go of cries for tax cuts now means a much better long-term economic benefit for everyone, and they lack the courage to try.

The last time this absurd approach to tax policy was adopted, the nation got a short-term money “sugar high” and then the economy crashed in one of the worst recessions in the nation’s history. This time, because the cuts are so much larger, the high will be bigger, probably shorter, and the crash will be even worse.

If the manufacturers of this tax propaganda are so sure of themselves, surely they would be willing to agree to my A Debt Prevention Tax Cut Escrow Proposal. Let’s see if they can put THEIR money where their mouths are.

According to several reports, including this one, the President announced, “We want to give you, the American people, a giant tax cut for Christmas. And when I say giant, I mean giant.”

So how big is a “giant” tax cut? According to the President, “The typical family of four earning $75,000 will see an income tax cut of more than $2,000, slashing their tax bill in half. It's going to be a lot of money. You're going to have an extra $2,000.” Aside from the fact that a lot of American families of four earning $75,000 aren’t going to see a $2,000 tax cut, because that number is an average and a handful of such families will reap much larger tax breaks, $2,000 is not “giant.” Nor is it “a lot” of money. Spread over a year, $2,000 is $38.46 per week. Nor was any mention made of the fact that the tax cut disappears after a few years and then all of these families will be hit with tax increases.

So who gets the “giant” tax cut? One guess, folks. It’s not the poor and lower middle class, who are in most need of economic assistance. Of course, it’s the wealthy. For those earning more than $1,000,000, the average tax cut, as reported here, will be $114,000. Now, that is “giant.” For those earning more than $10,000,000, the average tax cut, according to this analysis, will be $700,000. Those in the bottom one-fifth of the income scale, incidentally, will see, on average, $60, or slightly more than a dollar a week.

The only thing giant about all of this con game nonsense is the pile of dung that will need to be shoveled up when the inevitable tax-cut-driven crash occurs two or three years from now. And we know who will get stuck with that job.