MauledAgain

Many people, I suppose, would respond to the question, “Who benefits from tax breaks for the private sector?” with the answer, “The private sector.” And they would be correct. The better question, though, is “Who benefits from a tax break designed for a specific individual, entity, or industry?” The answer, most people would suggest, is “The specific individual, entity, or industry for whom it was designed.”

The follow-up question, “Should this tax break have been enacted?” surely would bring the answer, “No.” And that is because the overwhelming majority of Americans do not get as many tax breaks as do the specific individuals, entities, and industries that in recent years have procured all sorts of tax relief. How do they manage to get these tax breaks? They use a dual tactic. One is that they can afford to “own” legislators because they finance legislative campaigns. The other is that they can afford to hire PR experts who excel at convincing the public, and the few remaining independent legislators, that the tax break for a specific individual, entity, or industry is in fact an economic benefit for the public.

Readers of this blog know that I’m no fan of these targeted tax breaks. Interference in the so-called free market that causes the market to be less free, which is what these tax breaks do, is far worse than interference in the market necessitated by abuses of the market committed by those sufficiently powerful to twist the market. Of course, those who oppose regulatory control of market bullies are diehard supporters of market interference that benefits them.

A recent example caught my eye because of the stark contrast between promise and performance. According to this report, the city of New York’s Independent Budget Office examined the economic consequences of a real property tax break. The city gave the developer of One57, a luxury Manhattan condominium project, $65.6 million in real property tax reductions. In exchange, the developer promised to build affordable housing. It turns out that the developer spent $5.9 million to build 66 affordable apartment units in the Bronx. The Budget Office calculated that the city could have built almost 370 affordable housing units had it simply spent the $65.6 million directly to construct those units.

So where does the remaining $59.7 million go? The folks who can afford to purchase these condominium units enjoy a reduction in the annual cost of owning them, because they pay reduced real property taxes. These buyers are not people in need of affordable housing. In other words, a slice of the economic elite gets wealthier while those who should be benefitting from the tax break are short-changed.

The tax break in question was not limited to the one development. It cost the city roughly $1.1 billion annually. Why not just let the market for upscale residential housing sort itself out without paying wealthy people to do what they would be doing anyway?

Two recent Tax Court cases, published on the same day, illustrate the need for taxpayers to be careful when planning how to work out the economic effects of a divorce. Though the rules are fairly straight-forward, as tax rules go, it is easy to get into trouble, especially when alterations are made without thinking through all of the consequences.

In one case, Mehriary v. Comr., T.C. Memo 2015-126, the taxpayer and her eventual former husband agreed that he would have exclusive use, ownership, and possession of one of their residences, on Morton Road in New Bern, North Carolina, and that she would take their residence on Sweet Briar Road in the same town. He quitclaimed his interest in the Sweet Briar property to the taxpayer. They also agreed that the taxpayer would pay alimony to her former husband, in the amount of $4,000 each month for 60 months. These payments would be made to the bank holding the mortgage on the Morton property, and if the mortgage loan was paid in full, remaining payments would be made to the former husband. The agreement “advised the parties to seek the opinion and advice of a tax professional as to the tax ramifications of the agreement.” Subsequently, the taxpayer proposed a modification, under which the taxpayer would quitclaim the Sweet Briar property to her former husband in lieu of $80,000 of the alimony obligation, and he agreed. The taxpayer quitclaimed the property in February 2011, and in September 2011 requested the local court to modify the divorce decree to reflect the modification. The taxpayer deducted an $80,000 loss on her 2011 federal income tax return for the transfer of the Sweet Briar property, explaining at trial that she did so because her insurance company had characterized that property as an investment property.

The Tax Court held that the transfer of the Sweet Briar property was a transfer of property between former spouses incident to a divorce, and thus under section 1041 no gain or loss was permitted to be recognized by the taxpayer. The Tax Court also held that the taxpayer’s attempt to characterize the transfer as a deductible alimony payment failed because the transfer was not in cash, as required by section 71. Finally, the Tax Court upheld the imposition of a section 6662 accuracy-related penalty, pointing out, among other things, that the taxpayer had been advised to seek a tax professional’s opinion but that she did not introduce any evidence that she relied on professional tax advice.

In the other case, Muniz v. Comr., T.C. Memo 2015-125, the taxpayer and his eventual former wife agreed that he would pay alimony to her, along with $409 per month to cover health insurance for her and her son, followed by the lesser of $500 or the cost of health insurance for nine months. The former wife waived all rights to any other alimony payments. The parties then agreed to an order requiring the taxpayer to pay her $6,000 in satisfaction of the alimony obligation under the first agreement, and the taxpayer did so. The court reserved ruling on her request for attorney fees and costs. Subsequently, the court ordered the taxpayer to pay $45,000 to his former wife, which she characterized at trial as a settlement for attorney fees and division of marital assets. The taxpayer paid the $45,000, and deducted the payment. His former wife did not include it in gross income. The taxpayer is a licensed attorney, and also holds a CPA license which at some point he put on inactive status.

The Tax Court held that the $45,000 payment was not deductible alimony. It pointed out that the alimony covered by the first agreement did not add up to $45,000. It pointed out that the former wife waived rights to any other alimony aside from the $6,000 payment. The Tax Court also noted that the $45,000 appeared to be a property settlement. The court explained that under applicable state law, the obligation to pay the $45,000 survived the death of the former spouse, and thus failed to qualify as deductible alimony for federal income tax purposes. The court rejected the taxpayer’s argument that because making the $45,000 payment extinguished any additional obligation on his part to make payments to his former wife the payment was alimony, noting that there is no such test in the Internal Revenue Code or in applicable state law. Finally, the court upheld the imposition of a section 6662 accuracy-related penalty, pointing out, among other things, that the taxpayer did not explain what sources he used to determine his tax liability, that he did not consult a tax professional for advice, and that the fact he is a licensed attorney who at one time held a CPA license “should have alerted him to the fact that alimony is not deductible under section 215(a) unless it satisfies the requirements of section 71(b).

What makes these cases stand out is that in one of them the taxpayer was an attorney-CPA, though it isn’t clear he was a tax professional, and in the other, the taxpayer was advised to obtain advice from a tax professional. I wonder how many state judges ask parties in divorce cases if they have consulted a tax professional. I wonder how many attorneys representing parties in divorce cases advise their clients to do so or ask if they have done so. Not that doing this will eliminate these avoidable outcomes, but perhaps it will reduce the number of these unfortunate outcomes. The fact that both of these cases were handed down on the same day simply magnifies the prevalence of these sorts of situations.

As Pennsylvania moves deeper into budget crisis, rhetoric over the governor’s attempts to replace the shale impact fee with an extraction tax has escalated. The industry, ever protective of its already exalted status in Pennsylvania, has produced a variety of arguments attempting to justify what continues to be a farce. Pennsylvania remains the only state not to impose an extraction tax on the production of natural gas from shale. How that came about is, of course, another example of what the ultra-wealthy do with some of their dollars, namely, purchase legislatures willing to do their bidding.

One of the assertions made by the industry is laughable. According to this story, the president of the Marcellus Shale coalition claimed that replacing the impact fee with an extraction tax would increase the industry’s cost of doing business in Pennsylvania to the point that it would “divert investments to more hospitable states.” How? For one thing, all of the other states in which there is shale gas to extract have extraction taxes, so where are the “more hospitable” states? For another, so long as there is shale gas in Pennsylvania to extract and sell at a profit, the industry isn’t going to walk away and leave those profits in the ground.

However one wants to characterize this not-so-veiled threat, it is difficult to avoid calling it a bluff. The fact that even some members of the shale industry, including executives of some of the companies doing business in Pennsylvania, “recognize the need for a severance tax” demonstrates the thinness of the Coalition’s threat.

Those same executives “were amazed” that Pennsylvania, unlike all of the other states, has no severance tax. Reportedly, “they thought Pennsylvania was being a chump for not having one.” Of course. Chump. It’s what happens when those with a fiduciary duty to the people sell out to a handful of the oligarchy.

When all is said and done, the shale extraction industry is not leaving Pennsylvania. I doubt the governor takes the threat seriously. The question is whether the legislative chumps will wise up

There’s a difference between a tax and a fee. I explained it in Please, It’s Not a Tax. So why do some people use the word “tax” to describe a fee? As I explained in that post from six years ago, because it riles up the anti-tax crowd and generates opposition that would not otherwise show up. For most people, paying a fee for something in return is more palatable than paying a tax.

This nomenclature silliness has recently moved back to center stage. According to numerous reports, including this one, Republicans are using the word “fee” to describe an increase in the penalty imposed on businesses for failure to file a required Form 1099-MISC that is included in legislation currently being considered. So what’s wrong with that? Nothing, in and of itself, because payment of a penalty is tantamount to payment of a fee, because the person paying it does so because the person chose to do or not do something that triggers the penalty.

The problem is that when the same increase was included in legislation several years ago, the same Republicans – individuals, not just the party – raised a ruckus, calling the increase a tax. But now that it is part of legislation favored by Republicans, the name is changed. For example, Ryan Ellis of Americans for Tax Reform – Grover Norquist’s operation – wrote of the current legislation, “This is a fine for failing to comply with tax law, not a tax increase.” Yet several years ago, writing with respect to the same statutory language, Ellis described the increase in the penalty as a tax increase. Another official of Americans for Tax Reform did the same thing, claiming that the provision currently under consideration is not a tax increase, while describing the very same language in the earlier legislation as a tax increase. Requests for clarification of the inconsistency did not bring any sort of comprehensible explanation, other than to tag an opponent of the current legislation, who is a conservative activist as a “liberal Democrat.”

In the meantime, John Boehner is pushing Republicans to support the legislation and the penalty increase in it. This is the same John Boehner who several years called the exact same provision “one of Washington’s dumbest ideas.” The switch would make more sense if Boehner would announce that he changed his mind because he has shifted to a different political philosophy. But he has not. It’s also worth noting that the current legislation is being crafted in the same manner that brought Republican criticism of how the earlier legislation was enacted. This would make more sense if Boehner would step up and announce that he now approves of the very sort of tactic that he thought was horrible when it was employed by the other side of the aisle. Again, requests for clarification did not bring any sort of comprehensible explanation.

So what is it? A tax or a fee? Apparently, it’s whatever the politicians want to call it as part of the process of putting spin on what they are advocating. Of course, it would make much more sense to be transparent and honest. The problem with transparency and honesty is that it gets in the way of political power play, and exposes covert political deals for what they really are. And apparently the same sort of labeling is applied to people to fit the accusations that some people want to make. Expediency trumps integrity in post-modern America.

All of this leaves a bunch of Republicans who pledged to vote against tax increases finding themselves voting for tax increases, and thus violating the pledge that they took to an unelected self-appointed individual. Do they really think calling it something other than a tax increase excuses the vote? Apparently the answer is yes, because the person to whom the pledge was made has redefined the definition of what the pledge opposes.

And people wonder why this nation is in a mess. Rather than screaming, “Take back our country,” – and I wonder, from whom? – perhaps they need to vote, “Bring back integrity.” Or at least what little of it once existed in the political process.

It’s getting tiresome, this begging by wealthy people and entities for tax breaks. Actually, it’s not so much begging as it is blackmail. Wealthy individuals and corporations argue for tax breaks using a double-edged sword. They claim that because they do good things for the economy that they deserve tax breaks. They also threaten to pull out of particular areas, or to refrain from bringing operations into a particular area, if the tax break is not granted.

Readers of this blog know that this digging at the public trough is most visible when professional sports teams insist on building their empires on the backs of taxpayers. In So Who Are the Takers of Taxpayer Dollars?, I described a series of incidents in which the public, including those uninterested in a particular sport, were stuck with some or all of the cost of building palaces for the elite who can afford to own professional teams. Of course, they claim that the taxpayers get more than their money’s worth in return because of the alleged economic benefits of what taxpayers are being compelled to finance, often without having a vote on the matter. In “Give Us a Tax Break and We’ll Do Nice Things.” Not., I explained how these promises fail to materialize.

Now comes news that Disney wants to extend by 30 years a tax break that it negotiated in 1996. 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. 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.

Even the member of Anaheim Council who supported the exemption in 1996 opposes its extension. He woke up. How long until the rest of America wakes up? The morning it discovers there are no taxes and that a handful of oligarchs run their lives the way medieval nobility controlled the peasants? Or will America change course and say “no” to the wealthy who beg for tax breaks while criticizing the poor as takers?

A reader sent me this story, and asked a question. First, the story.

According to the story, the governor of Rhode Island has proposed a state property tax on second homes with values of $1,000,000 or more. Apparently the proposed tax is named after Taylor Swift, who purchased a mansion in the state two years ago. The usual debate over whether taxes are good or bad for the economy is underway. Nothing that I read added to the list of arguments made on both sides of the issue.

Second, the reader’s question. He asked, “If you could have a tax named after you what would it be?”

My answer? The understandable tax.

In every sense of the word. Think about it.

And then say it aloud. The Maule Tax. Say it again and again. Have fun.

Almost all taxpayers who retain tax return preparers to prepare their federal income tax returns do so because they find the task too challenging. They turn to tax return preparers because they are accustomed to handing tasks to experts when the requirements surpass the client’s level of competence. A handful of taxpayers probably could do their own returns but find it less expensive to pay someone to do the job.

So what happens if the preparer makes a mistake? The taxpayer is not absolved. We were reminded again of this lesson by the Tax Court in the recent case of Devy v. Comr., T.C. Memo 2015-110. The taxpayer paid “Tax Whiz,” a tax return preparation business, to prepare and file his 2011 federal income tax return. The return included a claim for the American Opportunity credit. Because of the credit, the return reported a $1,853 refund due to the taxpayer. But the refund was intercepted and transmitted to the state of New York to satisfy an outstanding child support debt of the taxpayer. The taxpayer was not entitled to the credit because the taxpayer did not have any qualifying educational expenses in 2011. The taxpayer stipulated that he did not ask Tax Whiz to claim the credit. He also stipulated that he did not review the return before it was filed.

After the IRS issued a notice of deficiency, the taxpayer filed a petition in the Tax Court. The Tax Court held that the taxpayer was not entitled to the credit. The taxpayer’s argument that he had nothing to do with the claiming of the credit failed to change the outcome. The Tax Court, citing and quoting earlier cases, explained that taxpayers cannot avoid their duty to file accurate returns by retaining a tax return preparer.

The difficulty with this situation is that it presumes a taxpayer, in reviewing a return prepared by a professional, will spot errors even though the taxpayer put the task in the professional’s hands because the profession is the expert. It’s one thing for a taxpayer to notice, for example, that the amount of salary reported on the return is significantly lower than what the taxpayer knows was earned. It’s a totally different issue to expect taxpayers to identify errors that are beyond the skill set of the typical citizen. Once one moves past simple items such as wages, interest, dividends, and cash charitable contributions, it is easy to get caught in the web of complexity surrounding most deductions and credits.

This problem would not be so severe if the tax law were not so complicated. What makes it particularly disturbing is that most federal income tax law complexity is unnecessary, a result not of the complexity of life but a consequence of the smoke and mirrors constructed to disguise tax breaks and the inadequacies of using tax law to regulate behavior better handled by other laws and by agencies other than the IRS.

The only ray of sunshine in this mess is a perverse one. Perhaps taxpayers will sign up by the tens of thousands for tax courses that help them learn how to review the tax preparation work of their hired professionals. Just kidding. Most people won’t go near a tax course.

What should be done when the purpose of a tax is finished? Presumably, the tax should be repealed. We know, of course, that this doesn’t happen as often as one would expect, which would be every time. As nicely described in this article, it took 108 years for the federal government to stop collecting a telephone tax enacted to defray the cost of the Spanish-American War.

Taxes that are imposed on undesirable activities, the so-called “sin taxes,” present the same question. There is a tax on cigarettes, designed to do two things. One is to discourage people from smoking tobacco. The other is to provide funding for the costs borne by society because of smoking. One might think that if everyone stopped smoking, the tax would de facto suspend, because no one would be purchasing tobacco. But is it that simple?

Recently, e-cigarettes have caught on among some people trying to break their addiction to tobacco, as well as among people who resisted taking up tobacco but who were sold on the benefits of e-cigarettes. According to this report, Montgomery County, Maryland, plans to impose an excise tax on e-cigarettes. Supporters of the tax argue that e-cigarettes should be treated in the same manner as tobacco. Objectors claim that the tax is nothing more than a means of raising revenue, and that it will suppress the growth of a new industry.

It is tempting to conclude that the answer depends on whether the use of e-cigarettes should be treated as an undesirable activity or as one that generates societal costs that should be funded through a tax on their use. Those objecting to the Montgomery County excise tax claim that e-cigarettes are “far healthier” and that they help people stop using tobacco. There are two issues raised by these claims. One is whether e-cigarettes are healthier than tobacco products. On this question, the jury is out. Compare this study, concluding that e-cigarettes pose at least as many risks, with this commentary, claiming that e-cigarettes are healthier. The other issue is whether e-cigarettes, even if healthier than their tobacco counterparts, pose enough health risks to warrant treating them as tobacco, alcohol, and gambling, three things widely targeted by sin taxes.

Whether the tax would “kill” the e-cigarette business is problematic. Opponents of the tax argue that the tax won’t raise much revenue because users will make their purchases outside of the county, but if this is the case, then the industry would not suffer and surely not die. Opponents also claim that the use of e-cigarettes should not be subjected to sin tax because e-cigarette users are “trying to atone for their sins by quitting their use of tobacco.” That argument begs the question, because if the use of e-cigarettes is unhealthy, applying a sin tax can be justified. Exempting e-cigarettes from a sin tax simply because their use arguably isn’t as bad as the use of tobacco is as futile as arguing that muggings should be decriminalize because they’re not as bad as murders.

The decision to impose a tax on e-cigarettes requires something more than simply labeling them as just like tobacco. It requires a determination of whether the use of e-cigarettes poses societal risks and costs similar in nature to those posed by the use of tobacco, the use of alcohol, or gambling. If the use of e-cigarettes eventually causes tobacco use to cease, then the cigarette tax will disappear de facto. Whether an e-cigarette tax takes its place remains to be seen.

When, from time to time, I mention that I watch episodes of Judge Judy whenever I get the chance, sometimes the reaction is one of bewilderment, as though I’ve descended into the depths of letting myself be entranced by reality TV. Of course, there is reality TV and then there is reality TV. It’s one thing to be caught up in the over-hyped drama of people playing to the cameras. It’s quite a different thing to have the chance to observe what tax practitioners understand to be “life in all its fullness.”

Last week my attention was drawn to an assertion made by a defendant in a case heard by Judge Judy. This was not the first time her show generated material for this blog. In the past, I’ve shared my reactions to other cases, starting with Judge Judy and Tax Law, and continuing through 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, and So Does Anyone Pay Taxes?.

This time, a defendant was being sued by a former roommate, to whom he had not paid rent he ought to have paid. The defendant’s answers to the judge’s questions did not sit well with her. In answering one of the judge’s questions about where he lived, the defendant, referring to the premises shared with the plaintiff, claimed, “My things were here but I didn’t live there.” How one can live in a place other than where all of one’s things are raised eyebrows. When asked about his finances, a matter relevant to figuring out the economics of the rental arrangement, the defendant answered a question by explaining, “It’s a cash business so I don’t have to pay taxes.” Really? I wonder how many people in this country would have thought that was a guiding principle had Judge Judy not smartly set the record straight.

Ultimately, the defendant’s claim came back to smack him as Judge Judy explained her reasoning. “You dealt with her [the plaintiff roommate] the way you dealt with the IRS. ‘It’s a cash business so I don’t pay taxes.’” The defendant’s display of such nonsense and arrogance in dealing with his responsibilities cemented the decision against him. In other words, a person who confesses to being a tax cheat finds it difficult to convince people that he or she isn’t cheating on other matters.

So as I also tell people who wonder about my decision to invest time watching Judge Judy and other court shows, just because it’s entertaining doesn’t mean it isn’t educational. One can learn much more about people by observing them in and out of courtrooms than by studying assorted theories about human behavior. And that includes attitudes and actions involving taxation.

Readers of MauledAgain know that I consider Grover Norquist to be an anti-tax bully. In Debunking Tax Myths?, I shared opinions expressed by others who share my position, and criticized the commentators who defend Norquist and his tactics, in particular one commentator who disputes claims that “Republicans are in the thrall of one Grover Norquist.” In If the Government Collects It, Is It Necessarily a Tax?, I explained that “Grover Norquist is not a tax guru. He does not practice tax law, nor tax accounting. He is not a commercial tax return preparer. He would struggle to earn points on any well-designed tax law exam.” In Tax Policy, Elections, and Money, I shared my thoughts about why and how he has so much influence, pointed out that his goal, in his own words, is to “drown [government] in the bathtub,” explained that he grew up economically privileged without encountering economic deprivation, criticized his maneuvers that bypass representative government, and suggested that his antipathy toward taxes and government has roots in psychological abuse suffered at the hands of a cruel parent.

Now comes a report of how Norquist strong-armed the Louisiana legislature into enacting a completely bizarre piece of legislation that raises taxes while appearing not to raise taxes. It is so bizarre and difficult to explain that one legislator moved to change the name of the act to the “DUMB Act,” an acronym for Don’t Understand Meaning of Bill Act. But I will try.

Louisiana faces a huge budget deficit. That comes as no surprise to those of us who insist that cutting taxes for the wealthy does not raise revenue. And that’s what happened in Louisiana. What should have been done is enactment of legislation to undo what clearly was another mistake from “make the wealthy wealthier” club. But that could not happen because Louisiana’s governor and many of its legislators have taken the “Norquist pledge,” putting the aims of an unelected lobbyist above their fiduciary duty to all the people.

So a plan was devised. The legislation increased the state cigarette tax. It also created a $1,600 fee for each of the 220,000 students in the state university system. But the fee would be matched with a tax credit, which would be paid to the universities by funneling to them the money from the cigarette tax increase. How is this not a tax increase? I don’t know. But the overall effect of the legislation somehow comes out as revenue-neutral, which satisfies Norquist’s anti-tax stance. How do we know that? Before the legislation was introduced, Louisiana’s governor met privately with Norquist to get his approval, which he obtained. Isn’t that amazing? A state governor is not permitted to do anything that affects taxation without getting clearance from America’s non-elected, self-declared “guru” of taxation. Norquist, not surprisingly, claimed that what some legislators called a “purely fictional, procedural, phantom, paper tax credit” was not his creation.

The legislature included the bizarre tax credit in the legislation, because the governor threatened to veto the bill if the gimmick was removed from it. Without the gimmick, the only options were to repeal the previously enacted unwise tax cuts or to make further cuts in education and other state services. In other words, the price for the anti-tax bullying became obvious, as it has in the other states bullied into unwise fiscal decisions. The gimmick permitted the governor to stay in the good graces of Norquist, whose support he needs as he attempts to spread his fiscal failings nationally with a presidential run. The legislature went along with this nonsense because, as one explained, “Our love for higher education is greater than the embarrassment over the instrument.”

The writer of the article reveals that many Louisiana legislators have “soured” on Norquist, resenting the need to “please a Washington power-broker, rather than local constituents” in working out local and state issues. The writer suggests that this time, “Norquist may well have pushed his anti-tax crusade too far.” Only time will tell if Americans throughout the nation catch on, as have some legislators in Louisiana and other states, and as have some taxpayers throughout the nation. I liken the anti-tax movement to the pleas of a child who wants to eat nothing but ice cream. Maturity brings the realization that what seems to be wonderful is, in the long run, damaging. Maturity also brings the end of bullying, the end to enabling bullies, and the willingness to stand up to bullies and bullying. Placation isn’t going to work, either in the short run or in the long run.

A story from two years ago with tax roots is now going viral, as a recent addendum to the story notes. Discussions about what was reported has taken off on sites such as this one.

The tax at the center of the story is a bike tax proposed in the state of Washington. Supporters argue that bicyclists use roads financed by vehicles subject to fuel taxes, and that bicyclists should share in the cost of maintaining the roads. Opponents point out only four percent of the cost of maintaining roads and streets in Seattle come from taxes and fees connected to road use, and that state-wide only 25 percent comes from road taxes. The balance comes from taxes and fees paid by taxpayers generally.

The issues that can be debated about the wisdom of subjecting bicycles or bicyclists to a tax are not unlike those presented by the nonpayment of fuel taxes with respect to electric vehicles. There are a variety of proposals addressing the questions. But the proposed bicycle tax inspired an argument that grabbed attention two years ago and is again getting noticed.

When responding to a constituent who objected to the proposed tax, a Republican member of the Washington legislature rejected the claim that bicycling is good for the environment because bicyclists have “an increased heart rate and respiration.” Accordingly, he argued that a person riding a bicycle is “giving off more CO2” than if the person were “driving in a car.” He then confessed to not having “done any analysis” of the CO2 amounts produced by bicyclists as compared to cars. He then added the disproven claim that people who ride bicycles do not contribute taxes or fees to road upkeep.

What hasn’t received as much attention is the fact that the legislator apologized for the “carbon emissions line” of the email that he had sent. He described it as “over the top,” as an issue that should not have entered the discussion about the proposed tax, and was “a poor job” of articulating his point that a bicyclist does “not necessarily have a zero-carbon footprint.” He offered that he had “always recognized that bicycling emits less carbon than cars.”

This clearly is a case of speaking or writing too quickly. That’s an affliction from which all of us suffer, to a greater or lesser extent. Unlike the legislator in question, most politicians fail to rectify their errors, perhaps because they consider the making of an apology to be a weakness easily exploited in the political game. In all fairness, the tendency to speak or write too quickly has been amplified by digital technology riding the crest of the instant gratification culture, even though that same digital technology makes it easier to ascertain facts while yet making it easier for the purveyors of falsehoods to make their lies look true.

The tax in question was a $25 fee on bicycles costing more than $500. To me, that’s a tax probably not worth enacting because, among other things, its presents issues of administration inefficiency and appears too easy to circumvent. On the other hand, making bicycles subject to a mileage-based road use fee, at a small fraction of the rate applicable to automobiles, doesn’t seem to be any more efficient. In the world of privatization and monetization, are we going to see toll booths on bike lanes? Or worse, a carbon tax applied to each person’s exhalation of CO2?

Back in January, in A New Play in the Make-the-Rich-Richer Game Plan, I explained how Kansas politicians were struggling with the need to repair a fiscal mess. The problem, coming as no surprise to those who understand taxation, is that the tax cuts for the wealthy enacted by Kansas Republicans “backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been.” Among the many proposals to deal with the state budget deficit were several that fell heavily on those not wealthy. These proposals would eliminate sales and income tax exemptions, increase alcohol and tobacco taxes, and raise sales taxes.

Now comes news that the Kansas legislature has enacted a series of tax amendments in an attempt to fix the fiscal catastrophe that has afflicted the state. According to this report, the changes increase the sales tax, expands the sales tax to include not only food but also clothing, cars, and prescription medicines, provides a restricted nonrefundable income tax credit for sales taxes paid by low-income workers who have children, increase the cigarette tax, reduces the state income tax deduction for real property taxes and mortgage interest.

The legislation does not roll back the tax rate cuts enacted in 2012 that caused the problem. This leaves untouched a bundle of tax cuts that had the perverse effect of increasing tax liabilities for the poor. For the most part, the legislation does not affect small business owners. The Republican governor’s explanation is that his tax policy is to spare small business owners because they create jobs. However, the jobs promised three years ago when the tax cuts were enacted have not appeared. That’s no surprise, because small business owners aren’t going to hire more employees when their businesses aren’t experiencing increased sales. Increased sales require low and middle income taxpayers, who constitute the vast majority of potential business transactions, to have disposable income to use in patronizing the small businesses. The governor also proposed reducing the earned income tax credit, persuaded the legislature to cut food stamp and welfare benefits, and resisted an attempt to reduce the sales tax rate on food.

Some commentators predict that Kansas residents living close to Missouri will travel there to purchase groceries, saving as much as $550 annually in sales taxes. Increases sales taxes paid by Kansas businesses probably will be passed along to customers, adding to the amount ordinary people are paying to finance the tax cuts for the wealthy. How all of this will boost the Kansas economy into anything worthy of admiration remains a mystery to all but the self-deceived advocates of playing puppet to the oligarchy.

According to this analysis, the legislation leaves in place most of the tax exemption for “pass-through” income, which caused hundreds of millions in revenue losses as businesses restructured, on paper, in order to qualify for the tax break. Only 6 percent of the revenue raised by the legislation to pay for the tax cut mistake comes from those who have taken advantage of, and will continue to take advantage of, this tax exemption. The governor threatened to veto any legislation that eliminated the unjustified provision that has become a tax give-away.

Almost all of the tax cuts in the 2012 legislation went to a privileged few in Kansas at the top of the income scale. And yet, according to analysts, more than 60 percent of the revenue raised to eliminate the deficit caused by the 2012 give-away comes from taxpayers who are not part of that elite group, and arguably most of the rest also comes from them. Of course, the legislature could have done what I suggested, that is, taking the high road by repealing the tax cuts for the wealthy and demanding that the beneficiaries of those tax cuts repay the state, with interest, for having failed to produce the promised jobs and economic paradise that they dangled as bait to get their unwarranted benefits. But the legislature chose not to take the high road.

The only good news in this story is something I shared in A Tax Policy Turn-Around?. Republican governors, eyeing the Kansas debacle, are pulling back from across-the-board tax cut proposals, though apparently some continue to speak in terms of cutting taxes.

The bad news is summed up in the headline to one of the cited reports: After Cutting Taxes On The Rich, Kansas Will Raise Taxes On The Poor To Pay For It. Indeed. About the only thing trickling down is misery.

As one of my readers put it, absurd claims about the size of the Internal Revenue Code is one of my favorite topics. Indeed it is. My exploration of this persistent misrepresentation began more than ten years ago in Bush Pages Through the Tax Code?, and continued with Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, Code-Sized Ignorance Discussion Also Is Growing, The Scary Specter of Code Size Ignorance, and Code Size Claim Shrinks But Not Enough.

Though it disturbs me when someone repeats the misrepresentation about the size of the Internal Revenue Code, it doesn’t surprise me when it comes from someone who isn’t involved with tax policy and taxation. Politicians who repeat this erroneous claim should know better, and are in a position to inform themselves, but very few politicians know much about tax policy or taxation beyond the talking points that their handlers provide them. On the other hand, when those who should know better and who profess to be experts in tax policy speak or write about the size of the Internal Revenue Code, they owe it to themselves and to their audiences to get the facts right.

Why does it matter? If a person with common sense visits a physician and is told to drink a quart of turpentine every evening, that person isn’t going to trust anything else that the physician advises. By now, with at least ten years of corrective explanation available not only from myself but from others, it makes no sense at all that two academics, one a fellow of an economic institute and the other a professor of economics would assert that the tax code, as of 2010, was “nearly 72,000 pages long.” It wouldn’t take much research to figure out that this claim is way off the mark. Perhaps getting a copy of the Internal Revenue Code and counting the pages -- even using a method of extrapolation – would generate something much closer to the correct number than grabbing something off the internet.

It’s unfortunate that these two commentators begin their article with this claim. Usually, when I start to read something that puts forth a serious factual error I set it aside. In this instance, I continued to read, wondering if I would find any other errors. Like the other advocates of the “flat tax,” including a presidential candidate who a few days ago shared his particular version, they claim that complexity is eliminated by setting the tax rate at one percentage and eliminating all deductions. They fail to mention issues of timing, such as cash versus accrual, installment sales, or nonrecognition, make no attempt to consider the application of any tax to partnerships and LLCs, ignore the treatment of cost of goods sold, and make no attempt to discuss basis. As I explained in, among other posts, The Flat Tax Myth Won’t Die, those who understand taxation don’t accept simplistic flat tax proposals as anything even close to solving the complexity problem.

As a consequence, readers who stop reading when they see the 72,000-page silliness miss the valid claims that the authors offer. They point out that politicians buy votes with tax breaks for their “preferred constituencies,” a polite phrase for puppetmasters. Yes, the IRS makes mistakes when answering taxpayer questions. Absolutely, it is better to judge politicians by what they do after being elected than simply by what they say they will do. Indeed, tax law complexity provides cover for hiding tax breaks dished out to those rich enough to buy them.

So I’m left with one conclusion. Though the authors identify the problem – namely, the ownership of Congress by the oligarchy, though they don’t put it in those terms – they go off track when it comes to finding a solution. And that conclusion is reinforced when my confidence is shattered at the outset, after wondering what do they really know and understand, and then realizing the answer is, not all that they need to know and understand.

Sometimes I wonder, when it appears that people exhibit ignorance, if they actually lack understanding and knowledge or simply are pretending to be deficient in order to accomplish some other goal. If it’s the latter, my admiration is withheld because that sort of approach lacks transparency. If it’s the former, I remain baffled at the inability of so many people to understand the use tax. In many posts, such as Taxing the Internet, Taxing the Internet: Reprise, Back to the Internet Taxation Future, A Lesson in Use Tax Collection, Collecting the Use Tax: An Ever-Present Issue, A Peek at the Production of Tax Ignorance, Tax Collection Obligation is Not a Taxing Power Issue, Collecting An Existing Tax is Not a Tax Increase, How Difficult Is It to Understand Use Taxes?, Apparently, It’s Rather Difficult to Understand Use Taxes, and Counting Tax Chickens Before They Hatch, I have tried to explain how the use tax works. It’s rather simple. When a resident of a state with a sales tax makes a purchase in another state and brings the item back into the state, that resident must pay a use tax. Of course, compliance is unsatisfactory. The only items with respect to which states manage to collect most of the use tax that is due are items requiring title, such as vehicles, boats, airplanes, and a few similar items. The rise of Internet commerce has made it even more difficult for states to collect the use tax, because the number of people who crossed state lines to make purchases to bring home is dwarfed by the number of people who can make out-of-state purchases without leaving their home or business. So, of course, states want out-of-state retailers to collect the use tax on their behalf, even if the retailer has no physical presence with the state.

In the latest attempt to deal with this issue, Representative Jason Chaffetz has introduced the Remote Transaction Parity Act (RTPA), which would authorize states to require all retailers to collect the use tax if they sell products in the state. Bricks and mortar stores want this sort of legislation because they consider themselves to be at a disadvantage caused by the online retailer’s ability to refrain from collect the use tax that the brick and mortar stores must collect in the form of a sales tax. It is important to note that this disadvantage existed long before there was an internet, such as in the case of Pennsylvania residents shopping in the no-sales-tax state of Delaware. The Retail Industry Leaders Association (RILA) supports the RTPA because it would “restore basic free market competition for retailers” and eliminate the “free pass” given to online businesses that are “little more than a government subsidy.” RILA argues that they “want everyone to play by the same rules.” In contrast, the Institute for Policy Innovation (IPI) opposes the RTPA because it “opens the gates to an unprecedented expansion of taxation and taxpayer harassment by out-of-state tax collectors,” and fails to “solve the core issue of nexus, or where precisely an electronic transaction takes place.” By eliminating the requirement that businesses must have a physical connection with a state before the state can require it to collect use tax, IPI argues that RTPA would open the door to every state being permit to audit businesses in every other state.

For me, it is easy to see that RILA and IPI are arguing past each other. When IPI argues, for example, that RTPA would require “consumers, [to] pay taxes in the state where the customer resides,” it overlooks the fact that under law that has been around for decades, a consumer living in a state with a sales tax must pay use tax on items purchased in other states and brought into the state. So the issue, as I have repeatedly pointed out, is not a matter of whether a tax exists, but who should be responsible for seeing to it that the tax is paid. The ultimate responsibility is on the consumer, and the imposition of collection requirements on a retailer arises when the retailer avails itself of the state’s services by making itself present in the state. The question of what constitutes presence in the state when a transaction takes place over the Internet is the key issue, and here, IPI makes a good point by noting that RTPA doesn’t address that question. On the other hand, when RILA considers the inability of Pennsylvania to require a Delaware merchant to collect Pennsylvania use tax when selling items in Delaware to a Pennsylvania visitor to be some sort of government subsidy, it ignores the practical reality that the Delaware merchant chose to do business in Delaware and Pennsylvania, and that if there is a subsidy, it is the choice of Delaware not to impose a sales tax.

So what’s the answer? I proposed a solution in Tax Collection Obligation is Not a Taxing Power Issue:

Perhaps a better approach is for states to seek voluntary contracts with out-of-state retailers, compensating them for serving as tax collectors. There may be state Constitutional provisions or legislation that prohibits contracting tax collection to out-of-state individuals or entities, though I doubt that is the case. For some businesses, being compensated to engage in use tax collection might help the bottom line.

Taking this route is more consistent with free market principles than is converting out-of-state businesses into involuntary workers.

Perhaps we have been handed another clue in the great mystery of why tax laws don’t get fixed. It’s common knowledge that one reason for tax law complexity is the attempt to disguise a provision aimed at a select few. And it’s no secret that another reason is the entrenched opposition by tax break beneficiaries to removal of what is an overall burden on everyone else. But perhaps a no less significant reason is the inability of politicians to understand how existing tax law functions.

An example of the problem popped up last week, according to this story. New Jersey Governor Chris Christie, who harbors hopes of becoming the next president, claimed that one reason for the nation’s economic troubles is that United States corporations are taxed twice on income earned overseas. His assertion overlooks the foreign tax credit, designed and implemented to prevent the very thing that Christie claims is happening. Christie’s shallow understanding of federal income tax law was corroborated by his pinning the blame for the nonexistent double taxation on the IRS. So common is this misunderstanding – or perhaps so successful has been the campaign by Congress to blame the IRS for the existence of the federal income tax – that the writer of the article made the same error, rebutting Christie’s bizarre claim with the explanation that “the IRS provides a foreign tax credit to prevent double taxation.” With apologies to those who try to excuse away the error, it is the CONGRESS that enacted the foreign tax credit.

Rejections of Christie’s claim, which he has made in multiple speeches, also came from others. The co-director of the nonpartisan Tax Policy Center called Christie’s statement “wrong.” A former Treasury analyst who worked in both the Clinton and Bush administrations was a bit gentler, saying that “Governor Christie appears to be confused.” But confusion is simply one reason for being wrong. Another reason is ignorance, which can generate a wrong answer without any confusion entering the picture.

From my perspective, Christie is not confused. I’m confident he knows very well that what he is saying is wrong, but repeats it because is sound good. It riles up the anti-tax crowd, a group whose support Christie needs to nurture. These sorts of misrepresentations are hallmarks of campaigns that cannot succeed with the truth. When I read or hear this type of inaccuracy, lie, or exaggeration, my first thought is that the person has insufficient confidence in what they are peddling that they feel a need to pump up the hype. It’s a reaction I don’t limit to politicians, as I also invoke it when dealing with advertising and sales pitches. Oh, wait, is there really any difference?

What concerns me most is when someone trying to get a repair job demonstrates ignorance of what needs to be fixed. I’ve listened, for example, to enough support-line technicians tell me things about software to avoid implementing their suggestions. Not that I haven’t encountered ones who knew their craft, or repair personnel who got the job done correctly the first time around. So when I hear someone campaigning and asking to be elected to a job reveal a lack of understanding about a basic principle of federal income taxation, I shudder at the thought of putting that person in charge. It would be too easy for those trying to game the system to game that person.

In a National Review commentary, Tom Giovanetti of the Institute for Policy Innovation proposes that every law and regulation expire after five years and that every agency terminate after ten years. Legislators would then have the opportunity to consider revival.

In theory, there is some merit to the idea. Economies change, nations evolve, culture morphs, people transform. But in practical reality, the proposal is a nightmare. But even some of the arguments Giovanetti offers in support of the theory fail to withstand scrutiny.

He begins by comparing law to milk, which goes bad. Yet anyone who proposes throwing out all of the food and beverages in a home or establishment based on the expiration date of milk not only would be wasting money but also endangering the health of the residents and survival of the business. Just as one should cull beverages and food from the freezer, refrigerator, and pantry based on individual analysis, so, too, laws should be repealed based on individual analysis and not some one-date-fits-all mindless dumping.

Giovanetti compares the situation to the ability of the nation to amend the Constitution. This comparison is badly flawed. The drafters of the Constitution provided for review and amendment, and were not so idiotic as to propose that the Constitution expire every five years. Just imagine how that would play out. The best single-word description is anarchy.

Giovanetti tries to support his proposal with an example, specifically, the expiration date of section 215 of the Patriot Act. Busy praising the fact that the expiration date forced legislative review of the provision, he overlooks another more important fact, which is that for several days, the American intelligence and defense communities were blind. Congress, in its usual dilatory and irresponsible way, failed to deal with the expiration date until after the expiration. Sensible homeowners don’t throw out expired milk and then let the children go unnourished because the stores are closed. Sensible people plan ahead. The United States Congress is incapable of doing that, mostly because those elected are so bound to vote-gathering and fund-raising that they have little time to do their jobs and uphold their fiduciary duties. The track record of state and local legislators isn’t any better.

Giovanetti praises the expiration date of section 215 of the Patriot Act as forcing Congress ‘to actually do something rather than nothing.” But the fact Congress did something is no guarantee that it will deviate from what Giovanetti concedes is its usual pattern, that is, doing nothing. A wonderful case in point is the failure of Congress to deal with the funding of American infrastructure while Americans die, suffer injuries, and incur economic costs exceeding what the nation would pay if Congress did what it ought to do rather than quaking in its boots at the sight of the unelected Grover Norquist gang.

And even with staggered five-year expiration dates, there is no way that Congress could deal with a re-examination of 20 percent of every law and regulation during the relatively few days it is in session. The best that would happen, which is still worse than worst, is the enactment of laws written by paid and unpaid devotees of the oligarchy. The worst that would happen, which is even more catastrophic, is that the nation would descend into chaos. That sort of chaos would encourage and empower those who want to impose an oligarchic dictatorship on the nation, subjecting freedom to monetization by pretending to be advocates of freedom for all yet reserving power unto itself.

Though Giovanetti provides a bad example of how his proposal would work as proof that it would work, he overlooks some of the most egregious instances of using expiration dates in legislation. Of course, I am referring to the federal tax law, so stuffed with expiration dates that extender legislation often deals with dozens and sometimes hundreds of “expiring provisions.” The effect on the economy is nothing less than a drag-down, as the uncertainty paralyzes businesses because entrepreneurs don’t know what the rules are or what they will be. And why does Congress do this? One reason is to circumvent its own requirement that the cost of tax breaks be limited. The other is to provide leverage for fund-raising, by using the threat of non-renewal to extract campaign contributions from the very people who supposedly are being helped by the provision. Sometimes it appears that the tax savings from an extension simply circulate back to members of Congress as campaign contributions. Giovanetti’s proposal simply would give members of Congress a much-longer list of arm-twisting tools, and leverage to hold the nation hostage by delaying extensions until a pet project of the oligarchy is enacted.

One can only imagine what will happen when all traffic laws expire on January 1, 2019, or when restrictions on the private ownership of nuclear weapons expire on January 1, 2018. It might be fun to play theoretical games pondering the consequences of child abuse laws expiring in 2021, or bank robbery statutes reaching sunset in 2022, but the practical realities of life suggest that this isn’t simply nonsense but a threat to civilization.

The task of the Congress should be to review existing laws and regulations and amend those that need repair, while identifying those that work well and that should be permitted to continue without being terminated arbitrarily. Giovanetti argues, “Wouldn’t it be a good idea for every law, regulation, and agency to be forced to justify its existence every once in a while?” Of course, but that is an argument in support of review and revision. One cannot justify one’s existence if one is first killed and then supposedly given the chance to provide justification. Giovanetti has it backwards.

Five-year plans were the policy linchpin of the Soviet Union, and goodness, how well did that work? It doesn’t make sense to base American legislative policy on that model.

Readers of this blog know that on my list of pet peeves – a list that keeps growing – is the foolishness of letting the nation’s infrastructure crumble while the anti-tax and anti-government crowd stands in the way of maintaining the arteries through which the economy circulates. I’ve written about the short-sightedness of this strategy in posts such as Liquid Fuels Tax Increases on the Table, You Get What You Vote For, Zap the Tax Zappers, Potholes: Poster Children for Why Tax Increases Save Money, When Tax and User Fee Increases are Cheaper, Yet Another Reason Taxes and User Fee Increases Are Cheaper, When Potholes Meet Privatization, When Tax Cuts Matter More Than Pothole Repair, Back to Taxes and Potholes, and Battle Over Highway Infrastructure Taxation Heats Up in Alabama.

Now comes news that heavy vehicles, including tour buses, have been banned from Memorial Bridge, which connects popular tourist attractions on either side of the Potomac River. Why? The bridge is corroded, and it won’t take much to bring it down. The bridge is under the jurisdiction of the Park Service. The problem? The cost of fixing the bridge is bigger than the Park Service’s entire bridge and road budget.

To drive home the seriousness of the nation’s decaying economic underpinnings, at about the time the bridge was being closed to heavy vehicles, a water main near the Capitol broke. It generated even more traffic jams in a city afflicted with constant traffic problems because of infrastructure deficiencies, and left an office building with no water. Bringing in bottled water doesn’t make the restrooms functional.

There are more than 60,000 structurally deficient bridges in this country. Do you drive on any of them? Most people surely cross at least one, if not every day, perhaps every week or month. Do you think you might win the “on the bridge when it collapsed” lottery?

In the meantime, Congress adjourned without dealing with the problem. Held hostage by legislators elected by citizens who seem intent on winning the bridge collapse lottery, these individuals with a fiduciary duty owed to the nation’s citizens cower in fear of the unelected Grover Norquist and his gang of fiscal bullies. These fools, who claim to act in the interest of America, have left the nation falling further behind other countries, such as China, which spends four times more than does the United States, in terms of percentage of GDP, and which now has 19,000 miles of high-speed rail. The Norquist cabal is pushing legislation that forbids the use of federal funds to build high-speed rail. Most of these geniuses are up front when it comes to harping about the threat allegedly posed by China to the national security of our nation.

The “starve the beast” mentality that makes for a good sound bite or tweet, is a Trojan horse that hides the true deprivation. It ought to go by its real name of “starve the non-oligarchs.” It’s not a matter of a nutrition shortage. There are, and have been, more than enough resources, but those have been wasted on needless war and funneled into the hands of greedy oligarchs through tax cuts and loopholes that hide tax breaks.

Those unfortunate enough to be in a vehicle caught on a collapsing bridge probably aren’t thinking about this. But their survivors, at some point, will wonder why they stood by and did nothing while the nation was being destroyed. How many people will need to die before the nation wakes up?

Perhaps more breakdowns in the nation’s capital will catch the attention of legislators. Perhaps when it hits close to home it might wake them up.

Almost two years ago, in Lap Dance Tax?, I first wrote about the attempt by Philadelphia to impose its amusement tax on fees paid for lap dances. I continued the saga in Tax Review Board Strips City’s Lap Dance Tax Attempt, Philadelphia Lap Dance Tax Effort Bumped Up to Court, Which Grinds It Down, and The Lap Dance Tax Dance Marathon. Ultimately, the city of Philadelphia lost.

A few days ago, a reader alerted me to reports out of Albany, New York that a judge has issued a split decision on New York’s attempt to impose its sales tax on revenues collected by a strip club. According to the judge, the sales tax, which does not apply to amounts paid for “a dramatic or musical arts performance,” did not apply to proceeds paid to observe pole dancing because pole dancing is artistic. But, the judge held, amounts paid for lap dances are subject to the sales tax because lap dances lack “artistic merit.” The judge’s opinion, though long, is well worth reading.

Despite having a fairly good grasp of tax law generally, and a passable understanding of sales taxation, I would have struggled with this case because, as others can attest, I don’t quite understand art. That is to say, I don’t understand why something is or is not art, and have concluded, perhaps erroneously, that in some sense everything is art. According to the opinion, lap dancing did not qualify as art because they were not choreographed, the performers did not select the music, the room in which they were performed was not a stage, the performers were limited in what they were permitted to do, and the goal of management and performers was to maximize revenue. I am puzzled by any sense that art requires a stage, or that a person performing art cannot be restricted in what is said or done. Performers who follow a playwright’s script are no less constrained, and yet their performances are accepted as art no matter the definition. And though most artists and artistic venues struggle to make money, there are plenty of unquestionably artistic performances that generate enormous amounts of money.

Yet the best part of the New York case is the revelation that an undercover tax investigator “paid at least 15 visits to the club in the line of duty and received one or two lap dances each time.” I suppose now when I people ask me about my law specialties, my answer will need to qualify the word “tax.” And when I tell people, including my students, that tax law is fun, I will probably need to add yet another qualification.

When debate turns to federal income tax policy, one of the issues focuses on the acceptability of the progressive nature of the tax. Those who see income and wealth inequality as a menace to democracy, as I do, consider progressivity to be a good mechanism for stopping the otherwise inevitable spiral into someone winning all the money in life’s grand game of economic Monopoly. Those who see tax and government as something to be curtailed or even eliminated try to gain support by arguing that no one should pay a higher percentage of tax than anyone else does.

But one of the underlying premises of this discussion turns out to be flawed. The federal income tax is not progressive. This isn’t just a matter of Mitt Romney and his secretary. It’s a matter of ascertaining whether income and wealth inequality ought to be tagged as the 99 percent versus one percent. It turns out that the nation’s economic divide is not so simple.

According to newly-released statistics for taxable year 2012 from the IRS, the average federal income tax rate is skewed in a manner that makes it both and neither progressive. The average federal income tax rate is total income tax divided by adjusted gross income. According to the IRS, in 2012 the average tax rate for income categories was as follows:

Top 50 percent 14.33%
Top 40 percent 14.98%
Top 30 percent 15.81%
Top 25 percent 16.35%
Top 20 percent 17.04%
Top 10 percent 19.21%
Top 5 percent 20.97%
Top 4 percent 21.44%
Top 3 percent 21.97%
Top 2 percent 22.52%
Top 1 percent 22.83%
Top 0.1 percent 21.67%
Top 0.01 percent 19.53%
Top 0.001 percent 17.60%

See the problem? The average tax rate goes down as the income of taxpayers in the upper income brackets increases. But it’s even worse, because the IRS is computing average tax rate by comparing tax liability with adjusted gross income. Adjusted gross income does not include a variety of income items that are excluded because they fit within an exclusion. Though exclusions are available to all taxpayers for all sorts of things, some of the most significant exclusions are of much more use to taxpayers with higher incomes. For example, interest on tax-exempt bonds is not included in adjusted gross income because it is excluded from gross income. I suspect that if these exclusions were taken into account, and the average tax rate were computed using total economic income rather than adjusted gross income as the denominator, the average rates for all categories would go down, but would go down by proportionately greater amounts in the upper categories. In other words, the skewing demonstrated by the information from 2012 tax returns would be worse.

So perhaps it’s not a matter of 99 percent versus one percent. Perhaps it’s more like 99.9 percent versus 0.1 percent. Does it matter? For me, it foretells what happens once the 99 percent is reduced to poverty and turned into serfs economically dependent on the one percent. At that point the 0.1 percent will turn to eliminating the economic position of the bottom 90 percent of the top one percent. And then the top 0.01 percent, and in turn, the top 0.001 percent will seek to eliminate everyone else. And then? Eventually one person will own the one corporation that owns everything, including people, nations, and nominal governments. What is worrisome is that there are too many people who think that they, or one of their descendants, can win this “game.” That’s why they vote against their own economic self-interest, and support those who, in the long run, care nothing for them. But the “game” is rigged, and the losers have lost even though they don’t know yet that they have lost. If they want to win something, realizing that the grand prize isn’t there for them to take, they will support the elimination of a grand prize and vote for policies that unrig the game.

According to a recent news report describing efforts by the Philadelphia School Reform Commission to deal with the underfunding of city schools, “There is little appetite for a tax increase to help Philadelphia schools.” The point was rephrased by another speaker who explained, “There’s no appetite in this city for raising taxes.” No kidding. In this country, there is no appetite whatsoever for tax increases of any kind to fund anything. It is a widespread and fatal malady.

Of course human instinct is to resist paying taxes and to grab whatever can be grabbed. People face a choice. They can push beyond instinct and permit rational analysis to prevail, recognizing that to receive one must give. Or they can invent falsified reasoning, grab while condemning those who grab, and find every which way to get without giving.

It’s not just taxes. It’s everything. I hear people complain about paying for food, gasoline, theater tickets, clothing, tuition, health care, lawn maintenance, and every other service or merchandise one can list. And it’s not about price. True, there are people who claim that they don’t mind paying $5 but find $8 to be too much. That reaction has been around for a long time. But now there are increasing numbers of people who ask, “Why should I pay for this?” And it is to this limbic system dominance that the merchants of hate direct their efforts, subtly and not-so-subtly fertilizing the philosophy that crops should be picked by people who are not paid and whose choice is nothing more than to find another plantation on which to work.

It would not surprise me to discover that the connection between expecting to receive without paying has its roots in how a person is raised. Someone who goes through the first few decades of life being handed anything and everything find the world a difficult place in which to live when the world is a place where one must pay in order to receive. Resentment against those who take without giving – and that group includes people in every economic stratum – fuels the attempt by takers to point the finger at other takers.

What’s missing isn’t something that can be found in tax policy, economic decisions, or rules and regulations. It’s something that requires an adjustment to the nation’s culture. The “me generation” – a term that I first met in the waning weeks of the American Civilization course at Penn many decades ago – has turned out to be everything that it was foretold to be, and worse.