MauledAgain

From the outset of this blog, I have made it a point to work Halloween into MauledAgain, usually looking for the silly or goofy but occasionally taking a more serious approach. The posts began with Taxing "Snack" or "Junk" Food (2004), and have continued through Halloween and Tax: Scared Yet? (2005), Happy Halloween: Chocolate Math and Tax Arithmetic (2006), Tricky Treating: Teaching Tax Trumps Tasty Tidbit Transfers (2007), Halloween Brings Out the Lunacy (2007), A Truly Frightening Halloween Candy Bar (2008), Unmasking the Deductibility of Halloween Costumes (2009), Happy Halloween: Revenue Department Scares Kids Into Abandoning Pumpkin Sales (2010), The Scary Part of Halloween Costume Sales Taxation (2011), Halloween Takes on a New Meaning and It Isn’t Happy (2012), Some Scary Halloween Thoughts (2013), The Inequality of Halloween? (2014), When Candy Isn’t Candy (2015), Beyond Scary: Tax-Based Halloween Costumes (2016), and Another Halloween Treat? I Think Not.

About a week ago, in Halloween is Spooky, Taxes on Halloween Treats Are Even Spookier, a writer at InformationStation, pointing out that Americans spend about $8.4 billion on Halloween costumes, decorations, greeting cards, and candy. The writer explained that in many states, the sales tax applies to the purchase of candy, even though most sales tax statutes exempt food and grocery items. In states that do not exempt candy, the rationale apparently is that candy is not food.

More than a decade ago, in Halloween and Tax: Scared Yet?, I described my surprise at discovering some candy bars contained flour and thus were not treated as candy for sales tax purposes in several states. In When Candy Isn’t Candy, I revisited the issue, pointing out the silliness that telling a child standing at the door with a sack or pillowcase that the candy bar being dropped into the container isn’t candy. Last year, in Another Halloween Treat? I Think Not, I addressed the notice from the Tennessee Department of Revenue explaining that candy is not eligible for the lower sales tax rate applicable to food and food ingredients because candy is not food.

Perhaps someone will argue that chocolate candy ought to fit within the sales tax exemption applicable to drugs. After all, chocolate is medicinal. Aside from all the other benefits of chocolate, the receipt of candy at Halloween makes people happy, and being happy brings good health, which is a good thing. Yes, I am doing my best to justify eating candy. It’s a taxing effort, and I don’t stand a ghost of a chance of persuading my physicians that it’s good for me to ingest sugar.

Perhaps the title of this commentary should be A Tax I Have Not Supported and Still Do Not Support, but that’s probably a bit too long. If I shorten it to A Tax I Have Not and Do Not Support, the grammar police will be disappointed.

Some readers of MauledAgain have concluded that I support unlimited taxation and taxes of every kind. Yet careful readers would have noted that not every tax gets my support. For example, I opposed the Philadelphia soda tax, and despite its survival when challenged in court, I continue to consider its to be flawed in many respects. It is an example of “It’s easy to tax this, so let’s tax it.”

Another tax that I have not only opposed but that has baffled me is the medical devices tax. It was enacted as part of the Affordable Care Act. When I first learned of it, I wondered, “Why tax something that is designed to lower the cost of health care?” My reasoning was that these devices prevent more expensive health problems in the future. To me, taxing medical devices was as unwise as taxing vaccines. Few, if any, states, for example, impose sales taxes on prescription drugs.

So why was an excise tax on medical devices enacted as part of the Affordable Care Act? Simply because it is a tax that raises revenue, and revenue is necessary to underwrite the costs of extending health care to more citizens. Why was this tax chosen rather than some other tax, for example, a tax on excess health care industry profits or on health care industry over-billings? Why not seek revenue from health insurance coverage denial decisions that turn out to be wrong and cost doctors, hospitals, and patients more money than they otherwise would have spent?

The tax has never gone into effect. It has been delayed several times. Proposals to eliminate it have surfaced since the day it was proposed. Some of those proposals have been passed by the House or the Senate, but somehow the two bodies haven’t managed to team up and get the tax removed. Now another effort is underway to remove the tax. Arguments in support of repeal, such as Wayne Winegarden’s piece in Forbes and a study by the Tax Foundation, are beginning to resurface.

Why all the bother if implementation of the tax keeps getting delayed? The primary problem is the uncertainty. The tax hangs like a sword over the medical device manufacturers who would pay the tax, making it difficult for them to engage in long-term planning. Some reports indicate that jobs in the industry have been lost because of the uncertainty. Readers of this blog know that I am not a fan of tax uncertainty.

So why has the tax not been removed? Because when computing long-term revenue for purposes of federal budgets, which must satisfy certain projections, the revenue expected from the tax is used to help meet those requirements. That is nonsense. What’s next, a proposed tax on breathing air that would come into effect in 2024 for purposes of balancing the long-term federal budget? Is it any wonder that I am among the vast majority of Americans who give the Congress very unfavorable ratings?

The health care system needs to be fixed. It’s a mess. It is saddled with inefficiency, price gouging, artificial restrictions, and insufficient preventive care. However it is fixed, if at all, a tax on what people should be doing, such as manufacturing medical devices, getting vaccinations, and exercising, ought not be burdened with a tax to fund the treatment of diseases and injiries caused by smoking, vaping, misuse of dangerous substances, drunk driving, reckless behavior, air pollution, water pollution, food pollution, and other activities and practices that are killing humans. Surely a species that calls itself sapiens sapiens can figure this out.

The idea of trying to amass tens of millions or billions of dollars has never appealed to me. What would I do with it? I don’t need it. But there are people who need it, because money breeds money, and those who never have, in their own minds, enough money, need every bit that they can get. Is it for bragging rights? Is it to purchase the world and lord over it as global god? Is it addiction? Is it compensation for some unrecognized subconscious shortcoming?

There are many ways of amassing money. Hard work. Luck. Winning the birth lottery. Theft, robbery, embezzlement, fraud. Investment. When it comes to investment, most people think of bank accounts, stocks, bonds, real estate, precious metals, and commodities. But there are other types of investment, available to those who already have amassed large sums of money. There’s the hedge fund. There’s private equity. They’re not secrets, though most Americans aren’t familiar with how they work.

Hedge funds pursue high risk investments in hopes of hitting it big. Private equity consists of funds not listed on a public exchange. In one sense, the sole proprietor who owns a $300,000 landscape business owns private equity, though those are not the sort of investments that come to mind when people familiar with private equity think of it.

What do hedge funds and private equity do? One path of investment is to acquire public companies and turn them private, or to invest in public companies that are in trouble and hope they turn it around. But increasingly, private equity and hedge funds are grabbing distressed businesses simply to extract the last bits of value and to abandon what’s left. As explained in this article, too often, when given the opportunity to turn a distressed business in the direction of modernization, hedge fund and private equity managers prefer to take out money than to invest enough to turn the business around. This is what has happened with Sears, in which a controlling interest was purchased by hedge fund ESL Investments. It failed. Toys ‘R’ Us was acquired by KRR, Bain Capital, and Vornado Realty Trust. It failed. It happened to Gymboree, another Bain Capital investment. It failed. It happened to Payless ShoeSource, owned by Blum Capital and Golden Gate Capital. It failed. It happened to Radio Shack, in which Standard General had a substantial interest. It failed. Twice. It happened to Fairway, owned by Blackstone. It failed. The same outcome fell upon The Limited, Wet Seal, Claire’s, Aeropostale, Nine West, Brookstone, David’s Bridal, and Sports Authority.

From the perspective of the hedge funds and private equity, these aren’t tragedies. These have been good investments. From the perspective of employees, customers, and the malls in which these businesses rented space, these transactions have been disaster. Granted, retail stores have faced competition from their on-line counterparts, but would not saving one of these retailers included plans to go online? That didn’t happen. It didn’t happen because the new owners preferred not to put in even more money but to take out what was left. Worse, according to investment officer Jack Ablin, “many private equity investors lack the expertise to make the shift from traditional retail to online commerce.” Yet, surely they had the money to hire people who had the expertise. They didn’t, because, according to that investment officer, those investors “were also reluctant to commit more capital for the long-term to transform these struggling retailers.”

As noted in this article, “Moody's Investor Service said David's and Sears are both less likely to pay their creditors because they are owned by private-equity investment firms, whose ‘aggressive financial policies,’ heavy borrowing, and focus on taking money out of firms tend to result in a lower likelihood that retailers they own will pay their debts. Some 92 percent of companies owned by 16 large private equity firms are rated at junk-bond levels, compared to 40 percent of operator-owned or corporate-owned stores.” How does it work? According to Ted Gavin, a partner in a turnaround firm, "A lot of retailers that have gone belly-up are private-equity-owned. It's pretty constant. They make incestuous loans to these companies at high rates, and they charge excessive fees. Cumbersome debt burdens, and owners taking fees simply for being an owner, does nothing good, and can precipitate distress."

Thousands of stores have closed. Hundreds of thousands of jobs have disappeared, in numbers far greater than the handful of jobs created by expanding online retailers. Shopping malls sit vacant, or have become virtual ghost towns with a smattering of open stores. And there’s more.

Serendipitously, at about the same time I was reading the articles I’ve mentioned, I was made aware of a situation that cuts closer to home. More than thirty years ago, I became a customer of a small, local heating and air conditioning company. A decade later, that company was bought out by a larger company. Then a few years later, that larger company was bought out by an even larger company. A decade after that, the even larger company was bought out by a very large company. Each time, the office staff and technicians with whom I dealt carried on. Continuity prevailed. Very recently, a competitor company, owned by a private equity firm, gobbled up the company currently handling my heating and air conditioning services. It let most of the office staff and technicians go, the opposite of job creation. It has been grabbing every competitor it can, across a half dozen states. It is buying customers, in an effort to sell units rather than focus on maintenance and repair. It installs one brand, its technicians are expert only with that brand, and the advice to customers with other brands, no matter the age, is to purchase new units. It has decided not to renew most existing service contracts. Surely it is no secret that the company’s goal is to control the market, if not establish a monopoly. Reviews are mediocre at best and customers complain about high prices. When I called because I needed something adjusted on one of my heaters, I was told the company doesn’t service that unit. It did not matter that I have a service contract in place. Bigger is not better, and being a number rather than a customer with whom office staff and technicians are familiar also is not better. Well, it’s better for those private equity investors whose need for more money is unlimited and eternal.

Is it only a matter of time before private equity disease puts this company into the list of failed enterprises? I do not intend to sit around to see if that happens. It’s too risky. At the moment, there still exist some of those smaller, local operations much like the one with which I started some decades ago. As for the existing service contract, my plan is to terminate it once I have a new one in place with another company, ask for a refund, and learn how much effort it will take to get that refund.

I wonder how things would have turned out if tax cuts had not been handed out to these folks during the past two decades. I wonder if they would have had the resources to do what they have done, are doing, and intend to continue doing. Retail stores probably still would have failed – they have, for many decades – but the resources that remained would not have been channeled into the hands of those already drowning in wealth. Perhaps not as many stores would have closed. Perhaps not as many people would have lost jobs. Perhaps some businesses would have hired people willing and able to take them online.

There are many lessons to learn from these events. Sometimes learning a lesson is helpful for the future. Sometimes learning a lesson comes too late, and the future is altered forever, often in a bad way. Perhaps we have run out of time.

For almost a decade and a half, I have advocated the enactment of mileage-based road fees to replace the increasingly less effective and less efficient liquid fuels tax. One slice of my reasoning is not unlike the realization, a long time ago, that reliance on taxes imposed on telegraph messages wasn’t going to work once newer technology came along. I have explained how the mileage-based road fee works, and why it is the best solution on the table, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, and Progress on the Mileage-Based Road Fee Front?.

Now comes a report that the mileage-based road fee has become an issue in the race for governor of Illinois. According to Eric Zorn, Democratic candidate J. B. Pritzker has said that the mileage-based road fee is “something we should look at.” He added, “We have to be careful about how it gets implemented, and that’s why it should only be a test at this point.” The Republican candidate, Bruce Rauner responded, according to Zorn, with indignation, saying, “Pritzker came out and said, ‘Let's tax everybody by the miles they drive — let’s put a box in people’s cars — track how many miles when they drive to work, when they drive to school, when they go to the grocery store.’ That is big government, big taxing.” A Rauner campaign add claims, “He wants a car tax. How much is it going to cost us just to drive to a family member’s house?” Pritzker then deftly claimed that he “has never proposed a vehicle mileage tax.”

What a mess. Rauner’s only solution to the crumbling highway system in Illinois is to lower the wages of construction workers. Neither candidate is willing to support an expansion of the sales tax, or subjecting retirement income to the income tax.

Pritzker, in Zorn’s opinion, is cowardly for not fighting back and explaining why Rauner is wrong. I agree. He considers Rauner a coward for not offering any constructive ideas to deal with a serious problem. I agree.

It is clear from Rauner’s statements that he either does not understand the mileage-based road fee or despite understanding it, has chosen to engage in misrepresentation as part of his campaign. Collecting a tax to maintain roads on which people drive is not big government nor is it big taxing. It is simply the charging of a fee adequate to cover the costs of what is being provided to the people who pay the fee. He also fails to recognize, let alone mention, that enacting a mileage-based road fee would be accompanied by an elimination of the Illinois gasoline tax. He, and other opponents of the fee, fail to explain that road users have been paying less and less gasoline tax because their vehicles are more fuel efficient, yet their vehicles do as much, if not more, damage to the roads because most of the vehicles are just as heavy, if not heavier,.

Zorn advocates a shift to the mileage-base road fee, as do many other commentators, public policy analysts, economists, politicians, scientists, and people with a good bit of common sense. He notes, as I have, that the fee could be tailored at different rates based on the weight of vehicles, the residency of vehicle owners, the time of day, the density of the traffic, that the fee could be waived for charities, and that technology permits abating the fee for miles driven on toll roads. He notes that the biggest concern about the fee is privacy, an issue I put to rest in Mileage-Based Road Fees: Privatization and Privacy and Is the Mileage-Based Road Fee a Threat to Privacy?.

Zorn points out something I’ve tried to emphasize in my advocacy for the mileage-based road fee. He states, “But under such a user-pays system, what we pay would more fairly reflect the benefit each of us receives from having access to a smooth network of roads.” Perhaps what inspires the opposition is the sense of entitlement that has infected so many people, rich and poor alike, that they ought not be required to pay for what they take, what they use, and what they damage or destroy. What makes it worse is the inability of so many people to understand that it makes more sense to pay this fee, even if it amounts to more than the gas tax being paid, than it does to run the risk of paying multiple times more for car repairs, injuries, and even deaths caused by deficient highways, because those events are almost certain to happen to most people over a long enough period of time. Ignorance, whether Rauner’s inability to understand the mileage-based road fee or taxpayers’ inability to think through the arithmetic, once again demonstrates why it is the underlying reason for so many problems and the chief threat to the evolution and survival of the human species.

Ignorance is high on my list of dislikes. Unlike some things that I don’t like, ignorance can be avoided, and in most instances it is easily avoided. When ignorance is prevalence, liars find it easier to do their evil work. Readers of this blog know that dislike ignorance of any kind, and though I tend to focus on tax ignorance, I also pay attention to financial ignorance and some other types of the malady. I’ve written about it so often that I doubt I can find every post in which I described the ill effects of ignorance. Some of them include Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, Tax Ignorance in the Comics, Tax Meets Constitutional Law Ignorance, Ignorance in the Face of Facts, Ignorance of Any Kind, Aside from Tax, Reaching New Lows With Tax Ignorance, and Rampant Ignorance About Taxes, and Everything Else, Becoming An Even Bigger Threat.

What prompts me to write today is a new manifestation of ignorance circulating on social media. Typeset in various solid color backgrounds are these words: “Were any of you aware that ALL the Democrats voted AGAINST the 2.8% Social Security cost of living increase?” My distaste has nothing to do with the political party that is mentioned, for surely the same nonsense with a different political party being mentioned will surface someday, but reflects my disgust at the inability of Americans who vote to understand that there has been no vote against Social Security cost of living increases. As an aside, note that the clown who wrote this message doesn’t bother to specify whether those allegedly voting against the increase were members of the House, the Senate, a state legislature, or participants in a referendum. That, of course, is a red flag that can be noticed by those who understand what they ought to understand.

Social Security cost of living increases are automatic. As described in the Social Security Administration’s explanation, legislation enacted in 1973 provides a formula that measures the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, known as CPI-W, which is calculated each month by the Bureau of Labor Statistics. The cost of living adjustment equals the percentage increase, if any, in CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year in which there was a cost of living adjustment.

This is not the first time nonsense about social security cost of living increases has circulated. A few years ago, when inflation was so low there was no increase, someone or some organization tried to pin the outcome on Congress, as described in this rebuttal of that ignorant claim. And a decade ago, another, or perhaps the same, person or organization tried to pin the lack of an increase on certain members of Congress, even though the reason for no increase was the fact that the cost of living had gone down due to plunging oil prices, as noted in this FactCheck article.

Why does this ignorant nonsense keep popping up? Notice that it pops up when there is no increase and now, even when there is an increase. Someone or some organization or group of organizations with an agenda is behind this, just as someone or some organization or group of organizations is behind all of the nonsensical and ignorant misinformation being spewed into modern culture. My guess is that the goal is distraction, to avert people’s eyes and ears from the now openly expressed plans to cut or eliminate Social Security, Medicare, and Medicaid. Perhaps it is some sort of damage control.

The antidote, as I’ve expressed for decades, is education. It’s a question of whether enough humans, who insanely call themselves sapiens sapiens, can figure out how to use their brains to think for themselves and to ponder the likelihood of a claim being true, false, or half-baked before spreading it among others. Being theological for a moment, I consider the Last Judgment not so much the “here are a list of your sins” authoritative approach preached by some denominations, but a matter of educational discourse beginning with a statement and question, “I gave you many gifts, including a brain. What did you do with them?” We will have all eternity to ponder the responses. Heaven may be the satisfaction of realizing we did our best despite occasional failures, and Hell may simply be the realization that we didn’t take full advantage of the ability to think for ourselves, recognize truth, and despise ignorance and lies.

Three years ago, in When the Rich Beg, for Tax Breaks, I wrote about the request by Disney Corp. to extend by 30 years a tax break it negotiated in 1996. As I explained in that commentary:

The exemption provides that if the city of Anaheim ever enacts an entertainment gate tax, it will not apply to Disneyland. Anaheim has not enacted such a tax, but faced with increasing financial pressures, it’s not guaranteed that it would not enact such a tax in the future.

So what is the basis for Disney escaping the tax? Apparently it plans an expansion of Disneyland, which it promises will several thousand construction jobs and about 2,000 permanent jobs.

I criticized this reasoning as follows:

The problem with this justification is that every business and every individual contributes to the creation of jobs, and those jobs benefit the economy because the individuals holding the jobs earn money that they spend, in turn infusing economic energy into businesses. Even self-employed individuals ratchet up the economy. If creating a job justifies tax breaks, then everyone is entitled to being exempt from taxation. Of course, that’s part of the plan. Without taxes, there is no government. Necessary services would be privatized, far beyond what already has been put into the hands of the back-room oligarchs, and instead of paying taxes, citizens would be paying fees to enormous enterprises who could charge what they want, as there would be no government to regulate them or district attorneys or attorneys general to prosecute them for mistreating the citizenry, oh excuse me, the serfs.

So if Disney doesn’t receive its desired tax break, what would it do? Pack up and leave? The cost of doing so far exceeds the value of the tax break. Refuse to expand its facility? Perhaps, but again, it would be cutting off its nose to spite its face. No, what it would do is add the tax to the cost of a ticket. And that makes sense. It shifts to those making use of the services provided by Anaheim to Disney a cost that otherwise would be imposed on all taxpayers, including those who do not benefit from, or make use of, Disneyland.

Reader Morris has alerted me to news from a few weeks ago that the exemption preventing Anaheim from subjecting Disney to a gate tax, along with other tax breaks, will not be renewed. What’s interesting about this development is that the city council voted unanimously to terminate the exemptions and tax breaks after Disney officials asked them to do so. The president of Disneyland Resort called the tax breaks “divisive.” It appears, though, that by relinquishing those tax breaks, Disney qualifies for an exemption from a question on next month’s ballot that would raise the minimum wage to $18 per hour by 2022 for employees of companies receiving tax breaks from Anaheim. Disney has financed opposition to the ballot question.

Though some expressed hope that the request to terminate the tax breaks “signals a new era of goodwill and trust between Orange County’s largest city and its largest employer,” continuing debates among city officials about the role Disney plays in Anaheim politics suggests that goodwill is not in the spotlight.

When I read the headline of the article reader Morris sent me, “Anaheim council accedes to Disney’s request, nixes tax breaks,” I thought, “Great. A large corporation has seen the light.” Then I read the article. Oh, well, they say hope springs eternal. Perhaps it is foolish of me to think that those focused on the acquisition of dollars and infinite growth of the “bottom line” would discover the wisdom of moderation and balance.

Readers of this blog know that I am not a fan of supply-side trickle-down economic theory and the tax policy based on it. One of my many commentaries on the topic closely analyzed the failure of the theory in Kansas, as described in Kansas Demonstrates Again Why Supply-Side Economics Fails. As I had written in an earlier post, The Tax Fake That Will Not Die, “Supply-side economics is a fake.”

Several days ago, Noah Smith looked at the results of the latest federal supply-side trickle-down exercise. In his Philadelphia Inquirer article, Smith examined the impact of the 2017 tax cuts. He explains that those cuts, particularly the corporate tax cuts, were supposed to generate wage increases. Like its predecessor supply-side tax cuts, this tax cut also failed to do what tax cut advocates expected and advertised. Despite those previous failures, the supply-side acolytes claimed that corporate tax cuts would be more effective because corporate tax rates were relative higher, corporate taxes affect not only the wealthy but also employees and customers, and corporate taxes are more harmful to investment than individual taxes. How did that work out?

At first glance, tax cut proponents shine the spotlight on an apparently booming economy, a small uptick in corporate investment, and unemployment is low. Smith points out that perhaps some, or even much, of the economic growth is doe to “demand-side fiscal stimulus effects.” Yet wages remain stagnant. Higher employment among low-wage job holders doesn’t do much for those who are trying to make ends meet. Smith describes studies showing that “Two common measures of real wages are still below the peaks they hit in the third quarter of 2017.” Another study concluded that a comparison of “the size of the effective tax cuts received by various industries with the change in their wages between the first half of 2017 and the first half of 2018” did not reveal any correlation between the two. The same study concluded that there was “no correlation between tax cuts and employment changes at the industry level.” According to Smith, “That's bad news, since more hiring and tighter labor markets should be the mechanism by which corporate tax cuts raise wages.” Yes, it’s bad news for wage earners, and it ought to be bad news for supply-side theory devotees.

Smith then dismisses those bonus payments praised by the tax-cut folks. Smith concludes that the bonus trend was “exaggerated,” and that an economic study demonstrated that the bonuses did not generate a significant increase in 2018 compensation. Smith notes that the study implies that the bonus claims “were mostly a publicity move.” No kidding. Again, readers of MauledAgain know that I have consistently characterized the bonus payments as what they really are, namely, crumbs, as explained in posts such as Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, Oh, Those Bonus Payments! Much Ado About Almost Nothing, Much More Ado About Almost Nothing, You’re Doing What With Those Tax Cuts?, Arguing About Tax Crumbs, and Don’t Want a Crumb? Here’s Dessert But Give Back Your Appetizer and Beverage.
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Smith asks, “So, what's going on? Why isn't the tax cut raising wages?” He gives two answers. First, he suggests, “Perhaps the impact of tax cuts will be felt only over a period of years rather than months. After all, it's important not to read too much into short-term economic data.” Second, he explains, “ But, it also might be the case that the supply-siders are simply wrong. Perhaps those who believed that a substantial amount of the corporate tax cut would go to workers were doing their empirical studies incorrectly, or plugging the wrong numbers into their models. Or maybe U.S. corporations were simply so successful at avoiding taxes before the tax cut that the new lower rate hasn't really done anything other than to allow them to save money on accountants and lawyers.” Or perhaps the belief that people grabbing tax cuts will share what they took from the buffet with the people at the back of the line ignores the practical reality of greed and money addiction among the oligarchs.

Smith closes with a prediction. He writes, “ Either way, if Trump's corporate tax cuts end up having no observable effect on workers' pay, it will be the final blow to the supply-side worldview.” Putting aside the fact that these aren’t Trump’s corporate tax cuts but a tax giveaway to corporations advocated by many Republicans long before Trump arrived on the political scene, the question is, will the next inevitable economic and financial crash dissuade the supply-siders and convert them to the realistic demand-side approach? Two years ago, in Tax Perspectives of the Wealthy: Observing the Writing on the Wall, I wrote, “The death of supply-side, trickle-down economic theory is a slow one, but its final breath draws nearer.” Yet a year later, the title of one of my posts revealed my dismay at the inability of supply-siders to recognize the failure of their dream: The Tax Fake That Will Not Die. I now worry which dies first, stubborn supply-side ignorance or the American economy and the nation and dreams that depend on it.

A few days ago, the Philadelphia Inquirer ran an article that discussed how the two candidates for the state’s governorship were dealing with tax issues. The article began by noting that in response to a recent poll asking voters to identify the most important issue in the race, the most popular answer was “taxes.” I expected to learn that 30, 40, 60 percent of voters considered tax issues to be the most important. I was surprised. Only 12 percent identified taxes as the most important issue. Next on the list, at 10 percent, was education.

The most disliked tax in Pennsylvania is the real property tax. I’ve written about this antipathy toward real property taxes in several posts, including Killing the Geese, Taxes and School Funding, A Perplexing Tax Vote Decision, Which Do You Prefer: Income Tax, Earned Income Tax, Sales Tax, Property Tax?, and Pennsylvania’s “Eliminate the Property Tax” Effort Surfaces Again. The underlying theme is the series of proposals to eliminate that tax, and as I have pointed out repeatedly, the challenge is finding replacement revenue.

According to the Philadelphia Inquirer article, the two candidates, who have slightly different approaches to the issue, apparently have not put the question in the spotlight. The Republican candidate supports eliminating the real property tax to the extent imposed by school districts, but not those imposed by municipalities and counties, but does not reveal the extent to which he would raise other taxes to make up the lost revenue. Four years ago, the incumbent Democratic candidate, while campaigning, advocated reform or repeal of the real property tax, but since his proposal in his first budget to replace the tax with an increase in sales and income taxes was rejected by the legislature, he has been silent.

Commentators explain that solving the real property tax problem is difficult. One problem is that the governor cannot dictate what local governments and school districts do with the tax, in terms of rates. State funding for education can affect what school districts do, but those spending decisions are primarily the bailiwick of the legislature. Even though Pennsylvania voters approved an amendment to the state constitution permitting the legislature to exempt primary residences from the real property tax, the legislature has done nothing in response.

Not surprisingly, though the Democratic incumbent’s budget proposal four years ago, the one that was rejected, increased sales and income taxes, the Republican challenger co-sponsored legislation along the same lines, though he also has claimed that he would reduce government spending to reduce the need to increase other taxes. Oddly, the incumbent governor does not support the legislation co-sponsored by his opponent because he does not want to raise the sales tax rate on certain items nor subject certain tax-exempt items to the sales tax.

What the state needs is a serious conversation about how its citizens want to pay for the services that they demand. The discussion requires evaluating the impact of different types of taxes, identifying which segments of the citizenry are most affected by different permutations of the various taxes, considering the fairness of how tax burdens are distributed, and estimating the revenues generated by different taxes. It is a complex topic, it does not lend itself to sound bites and tweets, and needs to be free of hyperbole, misstatements, propaganda, and the influence of special interest groups and lobbyist money.

In my criticism of the 2017 tax legislation that handed large tax breaks to big corporations and the wealthy at the cost of exploding federal budget deficits and unsustainable increases in public debt, I used the word “crumbs” to describe the tiny net tax breaks handed to the typical taxpayer. I also used the word “crumbs” to describe the puny bonus payments and alleged pay increases that were held up by the tax cut acolytes as “proof” that their failed supply-side trickle-down economic policy works. Some of the commentaries in which I explained the difference between feasting at the table and being a dog to whom crumbs are tossed include Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, Oh, Those Bonus Payments! Much Ado About Almost Nothing, Much More Ado About Almost Nothing, You’re Doing What With Those Tax Cuts?, and Arguing About Tax Crumbs. In Arguing About Tax Crumbs. I defended the use of the term, by myself and others, against outcries from those who disliked the characterization even though the relationship between the size of a crumb or two to a full loaf is pretty much in line with the relationship between the size of tax cuts provided to the wealthy and the size of tax cuts and bonus payments available to typical Americans.

Recent news about Amazon’s pay hikes for its workers sheds even more light on the smoke-and-mirrors aspect of the buffet table greed of the oligarchy. As reported in this story, many Amazon workers, overjoyed at the initial disclosure of a new $15 per hour Amazon minimum wage, discovered that Amazon will stop giving its workers stock options and has terminated its monthly bonus payments. Workers who did what I suggest everyone do when dealing with financial decision, that is, “run the numbers,” discovered that after getting a wage increase but losing stock options and bonus payments, their total compensation will go DOWN, not up. I wonder which Amazon employee figured out the public relations stunt that essentially permits the company to cut pay for some employees, leave pay the same for others, but yet proclaim it is raising worker pay. Some workers are not getting raises because their pay already exceeds $15 per hour but they will be losing their bonuses and stock options. Others are getting increases of $1 or $2 per hour, which is insufficient to offset the loss of bonuses and stock options. The pay raises will consume less than one percent of Amazon’s revenue, and will be more than offset by the curtailment of bonus payments and stock options. Some part-time workers will benefit from the changes.

It appears from the reactions of Amazon employees that increasing numbers of people are finding a way to look past the smoke and mirrors and to see the reality hidden by the tweets and sound bites, to discern the truth from inside the maze of misrepresentations, exaggerations, and out-of-context claims. The worship of the bottom line, considered almost divine the closer it gets to infinity, is a manifestation of the calamitous consequences of money addiction. Something is very wrong and hopefully not only is here a quick diagnosis of the disease by enough people but also a fast discovery of a cure.

So now comes the latest report on consumer spending, as discussed in this article. The increase in consumer borrowing in August was much more than predicted, and much more than the July increase. Increases occurred in auto loans, student loans, and credit card balances. Why? If those December 2017 tax cuts, touted as benefitting all Americans, worked as their advocates claim, cash would be trickling down, and the need to borrow would decrease, and surely not increase. What about those bonus payments that the tax cut advocates held up as proof that trickle-down economic theory works? When I and others described them as crumbs, as discussed in Arguing About Tax Crumbs, we were criticized, yet it seems that in order to buy cars, get an education, or purchase anything else, Americans who are not members of the economic elite must resort to ever-increasing amounts of debt. So it turns out that one of the biggest assets in the portfolios of the oligarchy is the debt owed by everyone else (too many of whom continue to adore, support, vote for, and defend the very folks to whom they are indebted).

Almost three-quarters of economic activity is fueled by household spending. Household spending has increased because consumer borrowing is increasing at a rapid rate. In other words, when people rejoice at economic growth reports, they are rejoicing at increases in the amount that poor and middle-class Americans owe to the billionaires. Anyone who studies economic history knows how this story plays out. Good luck.

Reactions to the New York Times story about the Trump family alleged tax fraud and related tax schemes has brought a flood of demands for release of Donald Trump’s tax returns, demands that he be charged with tax fraud, inquiries about the likelihood of IRS audits, and discussions about the implications of the report and the possibility of additional information being uncovered. None of that is surprising, either the information that has been disclosed, the allegations, or the reactions.

What did surprise me was the reaction of John Crudele in his New York Post commentary. The headline for the commentary, “Why I doubt Trump evaded paying taxes” reflects his conclusion that “I don’t know whether Donald Trump was screwing around on his income taxes like The New York Times alleges or not.” That’s the only logical position one can take. Yes, one can guess, suspect, believe, wonder, and perhaps even worry. But to “know” is not yet possible. More information is needed. What surprised me is not the doubt, but the justification for the doubt.

What convinces Crudele to doubt the conclusion reached in the New York Times story? Crudele describes information from “a very good source” that when New York investigated a large group of taxpayers in the 1980s for possible sales tax evasion, Trump came out clean, having paid all of the sales taxes that he owed. Apparently at the time, “a lot of rich folks were having their purchases shipped to states with lower sales taxes.” If I were to guess or speculate, I would hesitate to think that people who were not “rich folks” might also have been engaging in this approach. Perhaps people, rich or not, are still doing this.

But should the fact that a person paid sales taxes weaken the claim that the person did not pay all of the income, estate, gift, or other taxes that the person should have paid? Should the fact that a person pays her electric bill be interpreted as meaning that she pays her lawn care bill? Should the fact that a person does not rob banks carry weight in arguing that the person does not embezzle? Should the fact that a person has never been issued a speeding ticket be a factor in concluding that the person did not fail to stop at a stop sign?

Almost every criminal has obeyed some laws. Almost every law-abiding person has violated some law, ordinance, or regulation, perhaps unknowingly. The fact that someone paid sales tax is irrelevant in determining whether that person did or did not pay an income tax, a gift tax, an estate tax, or even a highway toll.

Several days ago, Carolyn Hax was presented with a question that she answered in her advice question. The question caught my eye because the word “legally” was in the first line. But the question did not reveal the tax aspect. Here is what the person wrote:

Is it tacky or deceitful to legally get married as much as nine months in advance of a wedding ceremony? I'm recently engaged (yay!) to a great guy. We chose a date nearly a year from now because my fiance travels for work all through the spring, and we want to accommodate parents, stepparents, and family traveling from many other states.

However, we're both small-business owners and it looks like it would benefit us financially to marry before 2018 is over. I recently told a friend this idea and she was appalled, that it amounted to us putting on a "show" wedding. For me and my fiance, getting legally married as a business/tax decision doesn't have any of the emotional meaning that standing up in front of our friends and family would.

We're having a "no gifts" wedding, so it doesn't feel like we're even asking friends for anything other than joining us for a celebration of vows. Is my friend right, could it be perceived as dishonest? Should we keep this idea to ourselves?

What mattered more to me than Carolyn’s response was the fact that the tax law was putting two people in what they perceived to be a quandary, causing them, or at least one of them, anguish, and motivating at least one of them to write a letter to an advice columnist. It would not be surprising if the two people invested time in discussing what they ought to do.

Carolyn’s answer made sense. So what if the celebration ceremony takes place at a time after the marriage ceremony. She pointed out that getting married one day and having the celebration at a later date “doesn’t hurt anyone.” She noted that it is not uncommon for memorial services to be held months after a burial. She also explained that no matter what the couple decided, there will be people who are critical of the decision, so why bother “chasing approval.”

Yet it is unfortunate that the tax law put this couple in a bind. Accelerating the marriage in order to reduce taxes probably has happened more than a few times. Usually, if the decision to move up the date is made in time, it doesn’t create the logistical problems facing the couple in question. Or, if all or almost all of the guests live nearby, the logistical challenge might not be so overwhelming. I suspect that this couple was put into this time-crunched decision situation because the changes in the tax law were rushed through the Congress, and put into effect before people and businesses have had a chance to adjust. Note that this couple is not alone in trying to make decisions because of the tax law changes, though for most businesses dealing with this conundrum the problem is lack of guidance to interpret a badly written tax law. Hopefully the couple has had good advice and doesn’t discover a few months or a year later when filing their tax return that they would have been better off not accelerating the wedding.

We need a tax law that does not make the marital status of a taxpayer relevant. That can be done by treating people as individuals and not using the tax law to encourage or discourage marriage. The issues of marriage penalty and marriage bonus have been discussed by tax commentators for decades. Congress, however, continues to be mired in the distant past when it comes to the interaction of tax with present-day relationships. I doubt we will see any repairs in the near future.

When I taught the basic income tax course, one of the questions that popped up early in the semester was, “What is income?” That question must be answered before turning to the question of whether an item of income is included in, or excluded from, gross income. One of the elements in the definition of income is the principle that there needs to be an accession to wealth. It is for that reason when a person borrows money there is no income, and thus no gross income, because the increase in cash is offset by an increase in the obligation to repay, and thus the person is not wealthier. Similarly, withdrawing previously taxed money from a savings account does not generate income because the taxpayer is simply moving money from one pocket to another.

These principles came into play in the recent case of Park v. Comr., T.C. Summ. Op. 2018-46. The taxpayer, a member of the military, purchased a house in 2208 and took out a first and second mortgage with a bank. In 2011, the taxpayer fell behind in making payments on the mortgages but he resumed making payments in May 2012. During 2014, the taxpayer received a $13,508.58 check from the bank, and cashed it. The check was accompanied by a letter that stated, “[b]ased on a recent review of your account, we may not have provided you with the level of service you deserve, and are providing you with this check.” The letter suggested that the taxpayer might wish to consult with someone about any possible tax consequences of receiving the funds, and included a telephone number for him to call if he had any questions. The letter thanked the taxpayer for his military service. The taxpayer called the telephone number several times, but was unable to obtain any additional information. The taxpayer concluded that he had overpaid his mortgages during the time he was deployed overseas, and so he did not report any portion of the $13,508.38 on his 2014 federal income tax return. The bank sent the IRS a Form 1099-MISC, reporting other income of $12,789, and a Form 1099-INT, reporting interest income of $719 from the bank to the taxpayer for 2014. Because the taxpayer did not report those amounts on his return, the IRS issued a notice of deficiency on June 6, 2016, determining that the taxpayer had failed to report income from the bank. Several weeks later, the taxpayer filed a petition with the Tax Court.

The taxpayer explained that it was his understanding that the funds were not taxable income because they represented a return of overpayments on the mortgages. He issued a subpoena to the bank for records related to the check, but the bank replied that it was “unable to locate any accounts or records requested with the information provided.” The IRS argued that the taxpayer failed to provide credible evidence that its determination was incorrect.

The taxpayer argued that the bank’s issuance of the Forms 1099 was a mistake. The Tax Court noted that the letter from the bank indicated that it had made a mistake and was “correcting a wrong it had committed” with respect to the taxpayer’s accounts. The Court concluded that the taxpayer presented credible evidence that $12,789 of the payment was a return of an overpayment, and that the other $719 was interest on the overpayments that was required to be included in gross income. In other words, the taxpayer, by overpaying on the mortgage, moved money from one account to another, and when the bank returned the overpayments, the taxpayer, in effect, moved the money from the second account back to the first.

The taxpayer had to endure this judicial proceeding, investing time and energy, and probably some funds, because the bank made a number of mistakes. The bank failed to explain in its letter how it computed the amount of the check and why it concluded there had been an error. Perhaps the bank was taking money out of the taxpayer’s checking account to apply to the mortgage at the same time that it was receiving checks from the taxpayer. The bank failed to maintain records and thus was unable to reply to the subpoena with any information useful to the taxpayer. Or perhaps the bank had the records but was unable to find them. Or perhaps the bank had the records but did not want to become involved in the case. The bank failed to explain the basis on which it concluded that a Form 1099-MISC had to be issued. In other words, the bank inconvenienced its customer. The issuance of a Form 1099 is a serious matter and ought not be left to computers and software, which is surely what happened in this instance. Just wait until the robots start decided to issue Forms 1099. Can a robot be sued? That is an issue I’ll leave for others to discuss on blogs dealing with torts, contracts, and crimes. Incidentally, imagine what could have happened to this taxpayer had the IRS prepared his return based on the information it had.

Readers of this blog know that I am an advocate of user fees in situations where user fees make more sense and are more efficient than using general tax revenues. Perhaps the most widespread user fee is the highway, bridge, and tunnel toll. It is no surprise that just as people try to find ways to avoid general taxes, they also look for ways to avoid user fees, including tolls. Most income tax evasion methods aren’t material for great movies, and evading user fees on tobacco and liquor often involves smuggling, which has found its way into movies and television shows.

Though evasion of income taxes and tobacco and cigarette duties has inspired all sorts of creativity, toll evasion seems to have taken the art of creativity to a new level. Reader Morris pointed me to a YouTube video in which Florida state troopers stop toll evaders using a variety of tricks in attempts to escape the photographing of their license plates by toll plaza cameras. Take a look, it’s eye opening, and as warned at the end, don’t try any of these “techniques.”

I can attest that the license plate photography system works. Recently I drove to Massachusetts and Rhode Island, and when I drove through the New Jersey Turnpike exit to get on the Garden State Parkway the E-Z Pass sign said “GO TOLL UNPAID.” Huh? I knew I had enough funds in the E-Z Pass account. I encountered the same message at the Garden State Parkway toll booths, but of course there’s no messaging in high-speed E-Z Pass lanes. So on my return I checked with the E-Z Pass folks. It turned out that my transponder was more than 16 years old, and the customer service representative said to me, “You have a transponder from the Stone Age. We’ll swap it out for a new one.” In the meantime, the Pennsylvania Turnpike Authority, the New Jersey Turnpike Authority, the agency that operates the Garden State Parkway, and the New York Thruway Authority (which collects the Tappan Zee Bridge toll) used the photo of my license plate to charge my E-Z Pass account. There were no penalties, and it was obvious I was not evading tolls. The new transponder is smaller and different from the old one. I had not known that transponders can “go bad,” so a tip: if your E-Z Pass transponder is more than five years old, ask for a replacement. It’s free of charge.

A reader pointed me to an article describing something that rarely happens. The author of the article points out that when someone does what happened in this instance, “[p]eople wonder if you’re crazy.” Indeed.

Mat Ishbia, the CEO of United Shore, a wholesale mortgage lender, explained what happened. His company, located in Troy, Michigan, needed more space. It eventually found a suitable location in Pontiac, Michigan. In Michigan, tax breaks are handed out like candy to “almost any company making a major move to or within Michigan.” The tax break industry in Michigan is huge, involving hundreds of politicians and lobbyists.

After deciding on the move, United Shore learned that it qualified for $1.9 million in tax breaks. Thinking that government regulations would require it to invest money in environmental and other features that its officers did not think were necessary, United Shore applied for and received the $1.9 million, intending to use it to finance these features. But as rehabilitation proceeded, United Shore discovered that it didn’t need to install those features. That’s when the allegedly crazy decision was made.

According to Ishbia, once it was determined that the tax break money wasn’t necessary, because the company did what it was planning to do from the outset, the company returned the $1.9 million. Ishbia explained, "We feel it’s better for the city to give that money to schools, children or other causes that need the money more than we do. It was disingenuous to take money that we were going to spend anyway. It wasn't our place to spend it. Once we figured out that we weren't doing anything above and beyond, it was thanks but no thanks." Ishbia rejected suggestions that the money be donated to charity, because, "It's not my place to take their money to donate to charities. We didn't take any handout as a business to get to where we are today and we're not starting today. Let them use it for the right thing. It's not my money. It's the taxpayers' money, and it shouldn't be coming to United Shore."

This nation needs more CEOs like Mat Ishbia, and fewer that resort to what I call the blackmail approach. Too many companies threaten to move out of an area if they don’t get tax incentives. Ishbia explained that United Shore was going to stay in Michigan no matter what.

Supporters of these sorts of tax breaks claim that doing business “still requires a helping hand from the government to overcome rising construction costs and a negative image.” In a free market, if the business produces worthwhile products or offers worthwhile services, it will flourish without needing corporate welfare. If its prices are too high for its consumers, it ought to use that huge lobbying industry to promote demand-side tax cuts and move-up economic policy. The only redeeming factor about Michigan’s tax breaks is that they are “performance-based, meaning the company gets nothing if it doesn't build the expansion and hire all the promised workers.”

To quote Ishbia again, “Hopefully, we kick-start a trend of companies not taking money when it’s not needed. That’s how cities can really grow.” There’s a lesson for the stubborn supply-side trickle-down acolytes who like to keep pretending they have the key to economic prosperity but lack the ability to see the failure of their economic ideology. Failure, at least, for all but the oligarchs who benefit from it.

Most American anti-tax advocates understand and usually admit that they have a choice. Cutting taxes requires increasing budget deficits, cutting spending, or doing some of both. What’s interesting is that most anti-tax advocates also disdain budget deficits, so when they cut taxes they are implicitly signaling that they plan to cut spending. Of course, tipping one’s spending cut proposals would generate overwhelming resistance to the tax cuts, so, as we’ve seen, it was only after the recent tax cuts were enacted that increasing numbers of tax cut advocates own up to their specific spending cut plans. That’s not going to end well.

In the meantime, according to this report, the government of China promised to simultaneously cut taxes, increase spending, and reduce the budget deficit. The only way something this promise could be fulfilled is if the tax rate cuts generated so much more economic activity that tax revenues increased in an amount sufficient not only to offset the revenue losses caused by the rate cuts but also to provide funds for the additional spending, to say nothing of even more revenue to eliminate the budget deficit. Considering that every American attempt to increase taxes by cutting tax rates, justified by reliance on the totally failed and flawed supply-side economic theory and trickle-down nonsense, it is truly mind-boggling that anyone would claim that they could cut taxes while increasing spending and reducing budget deficits.

Sensible economists understand this. According to the report, one top Chinese economist said, “It’s impossible to cut tax, maintain government expenditure growth but not adjust the deficit at the same time." That some people don’t understand this demonstrates the dangers of fiscal ignorance.

Now it’s getting closer to “from famine to feast.” After going quite some time between opportunities to comment on television court show episodes, I was presented with a third Judge Judy case within the span of a week and a half. An indication of how often these opportunities pop up is evident from the parade of commentaries I have written, 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, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, and Another Easy Tax Issue for Judge Judy.

One layer of facts in the case were simple. Father and mother married, had a daughter, and later divorced. Mother remarried, to stepfather. The stepfather and the mother sued the daughter’s father, claiming that he owed them half of his tax refund for 2017. Why? They argued that the father took the dependency exemption deduction for the daughter even though he had agreed that the mother and stepfather could do so.

The mother claimed that there was an agreement for her to claim the dependency exemption deduction for the daughter so that she could keep the daughter on the mother’s health insurance. It is at this point that the facts get murky, if not downright impossible to figure out. According to the mother, the daughter was on the mother’s health insurance for 2016. The father testified that the daughter was on his insurance for part of 2016. The parties seemed to agree that the daugher lived with the father in 2017, but was covered by the mother’s health insurance for first three months of 2017.

In response to questions from Judge Judy, the mother admitted that she did not pay child support to the father. The mother’s claim that she supported the daughter because she purchased clothes for the daughter was tossed aside by Judge Judy. Judge Judy asked if the father paid child support for the brief periods when the daughter lived with the mother and stepfather, and the answer was yes.

Judge Judy dismissed the mother’s and stepfather’s claim, noting that she thought the stepfather was the moving force behind the litigation. She explained that the father was entitled to the dependency exemption deduction because he supported the daughter, the daughter lived with him, and though she didn’t specifically mention it, there was no written evidence of the alleged agreement.

Then Judge Judy dismissed the father’s counterclaim. The father was claiming that the mother owed him damages because the mother had claimed the daughter on her 2016 return even though the daughter had lived with the father for that year and he had supported her. Judge Judy pointed out that the father had not sued the mother, despite the passage of time, until he was sued by the mother and the stepfather. The father admitted that he would not have sued the mother had he not been sued.

Several lessons pop up from this case. First, when divorced individuals deal with dependency exemption deductions, they need to get professional advice. Though the dependency exemption deduction has been suspended and might even be removed permanently, determining whether someone is a dependent continues to have relevance for other purposes of the tax code, so it continues to make sense to get professional help. Second, every financial agreement between divorced parents should be in writing and also should be reviewed by a professional. Third, it can be unwise to hold a claim in one’s back pocket for use only if facing a lawsuit, for the reason Judge Judy explained. If the claim matters, bring it. If it’s not brought, it’s difficult to show at a later time that it matters.

Reader Morris contacted me last week with a question and a controversial answer. He asked, “Is yoga considered exercise for sales tax purposes?” he included some additional information, which permitted me to learn that six years ago, in a decision that escaped my attention at the time, the New York State Department of Taxation and Finance issued an advisory opinion describing the meaning of “weight control salon, health salon, or gymnasium” for purposes of the New York City sales tax.

New York City imposes its sales tax on receipts from “every sale of services by weight control salons, health salons, gymnasiums, Turkish and sauna bath and similar establishments and every charge for the use of such facilities.” The Department concluded that “A gymnasium is commonly understood to be an indoor facility where sporting and/or exercise activities take place.” It concluded that if facilities provide Pilates classes they are gymnasiums, because Pilates classes constitute exercise activities. However, if a facility provides only yoga instruction, it is not a “weight control salon, health salon, or gymnasium” because “instruction in yoga is not an exercise activity because yoga generally includes within its teachings not simply physical exercise, but activities such as meditation, spiritual chanting, breathing techniques, and relaxation skills.”

Two years later, in a Tax Bulletin, the Department made its position clear. “A facility that provides yoga instruction only is not considered a health and fitness facility. * * * However, if yoga classes are taught in a facility that also provides exercise equipment or Pilates classes and otherwise qualifies as a health and fitness facility, the charges for yoga instruction are subject to New York City’s local sales tax.”

The decision has met contrasting reactions. According to an article that appeared shortly after the advisory opinion was issued, some yoga studio owners were delighted, claiming that paying the sales tax would put them out of business, and that if they raised their prices to cover the tax they would lose customers. One owner claimed that the 4.5 percent tax would require raising the $18 fee to $22. It is unclear why a 4.5 percent tax would require a 22 percent increase in the fee. Some yoga instructors defended the decision by explaining that the physical activity aspect of yoga is a “bonus” because yoga is “a holistic discipline” and that the benefit to health “comes not from physical activity, but the practice of meditation and breathing."

But other yoga instructors were unhappy with the decision. One explained, "To say that yoga isn't fitness is absurd." This person pointed out that Pilates and yoga share the characteristics of not being “a mindless series of exercises as one would follow in a gym or a fitness center.” Both use “practices of breathing and concentration, as well as a focus on the connection between mind, body and spirit.”

So when my physician asks me if I am getting exercise, do I limit my response to the time I am working out at the gym? If I were taking yoga classes, would I not count that time as exercise time? When my physician asks me if I am getting exercise, I relate not only the time at the gym and the time I spend walking in the neighborhood primarily to burn calories and get exercise and secondarily to see what’s going on in the neighborhood, but also the walking I do in connection with other activities for which the primary purpose of moving isn’t to get exercise, but to get someplace, to walk through a store warehouse, to do home repairs, and to accomplish a variety of other tasks that require me to move my body. True, for sales tax purposes, the focus isn’t on “exercise” but on facilities that provide the opportunity to exercise. To conclude that yoga is not exercise simply because it also involves mental and spiritual aspects would require the logical corollary that working out at my gym doesn’t constitute exercise because of the intellectual aspects provided by ongoing conversation and intellectual discussions in which I, and others, engage while we are moving our bodies.

All of this demonstrates the futility of trying to design sales taxes that have exceptions, because every exception opens up debate about its scope, and tempts people to craft transactions in ways that fall within an exception. It also demonstrates yet again that tax law is packed with issues that don’t involve numbers.

Some months ago, Philadelphia’s City Council passed legislation, by a bare 9-8 vote, described in this article, to impose a one percent tax on new construction. The rationale for the tax was the need for revenue caused by revenue shortfalls arising from property tax abatements on new construction. The mayor had until last Thursday to decide whether to approve the legislation or to reject it. Instead, as explained in this report, the mayor and City Council reached a compromise and the pending legislation was withdrawn.

Under the compromise, as the property tax abatement expires on properties, the revenue generated by that expiration will be funneled into the city’s Housing Trust Fund. Revenue from the proposed one percent construction tax would also have been directed into that fund. Additional revenue for the fund will come from voluntary contributions made by developers who want zoning allowances for height, floor area, or density.

This entire drama illustrates the problems with tax breaks. To often, the amount of revenue given up by the break exceeds the actual revenue generated by whatever it is the tax break is encouraging. It’s not enough that the advocates of the tax break make promises. They must deliver. In the case of the Philadelphia tax abatement, the determination that something needs to be done ought not generate an offsetting tax. It ought to generate a reduction or elimination of the tax break. Several Philadelphia officials made that clear throughout the debate. To quote one, "There need to be changes in the 10-year tax abatement." Of course.

Taxing a tax break makes no sense. It’s goofy.

In a recent case, Gartlan v. Comr., T.C. Summ. Op. 2018-42, the taxpayer asked the Tax Court to create an exception to the statute based on policy but the Tax Court declined to do so. Unfortunately, the case demonstrates yet again the deteriorating state of legislative drafting skills in the Congress.

In 2015 the taxpayer was enrolled in a health insurance plan offered through an insurance exchange created under the Affordable Care Act. He paid monthly health insurance premiums of $383.45, totaling $4,601.40 for the year. In January 2016 the Department of Health and Human Services issued to the taxpayer a Form 1095-A, Health Insurance Marketplace Statement, reporting that in 2015 no advance premium assistance payments had been made on his behalf. On October 16, 2016, the taxpayer timely filed a Form 1040
for 2015, reporting business income of $1,163, deductions of $82 and $1,880 for self-employment tax and student loan interest, respectively, and adjusted gross income of $799. The taxpayer attached to his tax return a Form 8962, Premium Tax Credit, and claimed a premium tax credit of $3,156. The taxpayer reported a household size of one person and modified AGI of $799.

The IRS determined that the taxpayer was ineligible for the premium tax credit because he is not an “applicable taxpayer” within the meaning of section 36B(c)(1). The taxpayer asserted that he was entitled to the credit under a special rule for taxpayers with household income below 100 percent of the Federal poverty line and should be treated as an applicable taxpayer consistent with the policy objectives underlying section 36B.

Under section 36B, a refundable premium tax credit is available to applicable taxpayers. An applicable taxpayer is a taxpayer whose household income for a taxable year equals or exceeds 100 percent, but does not exceed 400 percent, of the Federal poverty line for the taxpayer’s household size. For this purpose, household income is the taxpayer’s modified AGI plus modified AGI of family members for whom the taxpayer properly claims personal exemption deductions and who were required to file a Federal income tax return. Modified AGI is adjusted gross income increased by certain items of income normally excluded from gross income.

Section 1.36B-2(b)(6)(i) of the regulations provides an exception to the general definition of an applicable taxpayer. It provides that a taxpayer whose household income for a taxable year is less than 100 percent of the Federal poverty line for the taxpayer’s
family size is treated as an applicable taxpayer for the taxable year if four conditions are satisfied. First, the taxpayer or a family member must enroll in a qualified health plan through an exchange for one or more months during the taxable year. Second, an exchange estimates at the time of enrollment that the taxpayer’s household income will be at least 100 percent but not more
than 400 percent of the Federal poverty line for the taxable year. Third, advance credit payments are authorized and paid for one or
more months during the taxable year. Fourth, the taxpayer would be an applicable taxpayer if the taxpayer’s household income for the taxable year was at least 100 but not more than 400 percent of the Federal poverty line for the taxpayer’s family size.

The taxpayer and the IRS agreed that the taxpayer’s household size was limited to one person and that his modified AGI for 2015 was $799. Because his modified AGI was below $11,670 (100 percent of the Federal poverty line for 2015), he does not qualify as an applicable taxpayer under the general rule. The court concluded that the taxpayer did not qualify for the regulatory exception because the second and third conditions were not satisfied.

The taxpayer claimed that he should be treated as an applicable taxpayer who eligible for the credit because he falls within the class of persons that the statute was intended to assist, even if, because of circumstances beyond his control, he did not satisfy the regulatory exception. The taxpayer argued that the policy behind the credit is to provide advance premium assistance payments to taxpayers, like him, who cannot afford to pay some or all of the cost of health insurance. He explained that advance premium assistance payments should have been made on his behalf, but were not so made because there was no relationship between the State of Delaware, the exchange, and his insurance carrier that could facilitate the contribution and receipt of advance payments.

The Tax Court explained that although it was not unsympathetic to the taxpayer’s situation, it is bound by the statute as written and by the accompanying regulations consistent with the statute. Thus, because the taxpayer’s modified AGI was below eligible levels and he did not satisfy the conditions for the regulatory exception, no other outcome was possible. The court then suggested that the taxpayer’s recourse was to eek a legislative remedy. The chances of the taxpayer succeeding in that effort are pretty much the same as the taxpayer’s chances of prevailing in his Tax Court litigation. It is unfortunate that increasingly Congress enacts legislation drafted by uncoordinated lobbying groups and pushed through at a pace that prohibits careful examination that would reveal the sort of flaw that tripped up the taxpayer in this case. But until Congress puts the nation over political party, this style of legislation is unlikely to be replaced with an approach beneficial to all Americans.