MauledAgain

There’s a meme floating around on facebook, and perhaps elsewhere, that challenges people to “Name one thing that you learned in highschool [sic]… that you’ve never used in your adult life.”

Someone replied, “I’ve learned way more on my own than I ever did in school.”

Two thoughts ran through my brain. One, anyone who has children will be asked to help them as they traverse high school, and surely what was learned will be useful. The other, which is far more important, is that the most important thing one learns in high school is to learn how to learn. Yes, some of the bits of information that are learned end up not being used, or being made obsolete by scientific, technological, and social changes. But when someone claims to have learned on his or her own, that person might be forgetting that they would not have been able to learn unless they had learned to learn.

When I look back on my high school education, I realize the two most important things that I learned was how to learn and how to think. Those two go together. It’s difficult to learn without being able to think. Learning well requires thinking well. We need to learn how to learn and think. Unfortunately, some people never learn.

For as long as I’ve been writing this blog, I’ve been sharing a Thanksgiving post to express my gratitude for a variety of people, events, and things. Aside from 2008, when I did not post and I don’t have any recollection of why or how that happened, I’ve dedicated a post on or around Thanksgiving. I started in 2004, with Giving Thanks, and continued in 2005 with A Tax Thanksgiving, in 2006 with Giving Thanks, Again, in 2007 with Actio Gratiarum, in 2009 with Gratias Vectigalibus, in 2010 with Being Thankful for User Fees and Taxes, in 2011 with Two Short Words, Thank You, in 2012 with A Thanksgiving Litany, in 2013 with “Don’t Forget to Say Thank-You”, in 2014 with Giving Thanks: “No, Thank YOU!” , in 2015 with Thanks Again!, and in 2016 with Thankfully Repetitive.

As I stated the past four years, “I have presented litanies, bursts of Latin, descriptions of events and experiences for which I have been thankful, names of people and groups for whom I have appreciation, and situations for which I have offered gratitude. Together, these separate lists become a long catalog, and as I have done in previous years, I will do a lawyerly thing and incorporate them by reference. Why? Because I continue to be thankful for past blessings, and because some of those appreciated things continue even to this day.” When I re-read those lists, I realized that the people, events, and things for which I am appreciative are far from obsolete.

So once again I will look back at the past twelve months, and remember the people, events, and things for whom and for which I give thanks. If some of these seem repetitive, they are, for there are gifts in life that keep on giving:

• I am thankful for my grandson’s willingness to engage in facetime chats, though I think he is about ready to surpass me in the ability to engage all the features of an iPhone.
  
• I am thankful for my congregation’s new Director of Music Ministries, who in a just a few months has taught me, and others, all sorts of things about music and singing that have been a blessing.
  
• I am thankful that they let me ring the narthex bell.
  
• I am thankful for having had the opportunity to continue teaching law courses.
  
• I am thankful that the year of transitioning into what is misleadingly called retirement is behind me.
  
• I am thankful for the help people have provided as I continued to add information to the many genealogy databases I maintain.
  
• I am thankful for people being willing to read the things I write.
  
• I am thankful that the township installed speed limit and watch children signs on my street.

Ten years ago, in Giving Thanks, Again, I shared my Thanksgiving advice. I liked it so much that I repeated it again, in 2009 in Gratias Vectigalibus, yet again in 2013 in “Don’t Forget to Say Thank-You”, still again in 2014 in Giving Thanks: “No, Thank YOU!” , even yet again in 2015 in Thanks Again!, and even still again in Thankfully Repetitive. For me, it does not lose its impact:

Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.

I am thankful to have the opportunity to share those words yet again.

For years I have been arguing that tax cuts for the wealthy are not as beneficial for the economy and the economic well-being of all Americans as are tax cuts for the non-wealthy. Those cuts would permit vast numbers of Americans to purchase goods and services, thus requiring the providers of goods and services to hire more workers.

But the Senate, frozen into the disproven theory that cutting taxes for the wealthy is the way to go, is taking the position that perhaps tax cuts for the wealthy and for corporations, many of which are drowning in cash stored overseas, is an even better way to revive the American economy. Of course, those members of Congress who remain devoted to this theory are far more devoted to the funds pouring in from the campaign donors, who are the beneficiaries of the legislation, then they are to educating themselves with respect to economic reality. They haven’t yet learned that when theory meets reality, reality wins.

But it’s worse. Not only are the wealthy and corporations looking at years of reduced taxes, the rest of America is facing two paths. One, an immediate tax increase that remains in effect for year after year. The other, a tiny tax cut followed a few years later by tax increases that not only wipe out the tax cuts but increase taxes compared to what they are under current law. This isn’t my conclusion. It’s the conclusion of the Joint Committee on Finance, found in its report, Distribution Effects Of The Chairman's Modification To The Chairman's Mark Of The "Tax Cuts And Jobs Act," Scheduled For Markup By The Committee On Finance On November 16, 2017. Yes, it’s a bunch of numbers. But look closely at the minus signs that represent tax cuts, and where and when they disappear and tax increases show up.

To top it off, the report doesn’t even take into account the automatic cuts in Medicare and other programs required to satisfy budget constraints that the Congress doesn’t appear to be ready to dismiss. It surely fits with the plan to eliminate or privatize Medicare, Social Security, national defense, and everything else so that eventually the oligarchy owns everything.

By the time people realize what is happening, it will be too late. What a wonderful legacy the ignorant, enabling the evil, are constructing for the world.

Occasionally readers contact me to ask why I dislike wealthy people. I explain that I don’t dislike them, I simply think they don’t need any more tax cuts. Readers ask me why I describe the wealthy as a monolithic group. I admit that in the interest of making sentences readable, I don’t qualify the term wealthy with long phrases each time I use it. The context of my language should make it clear that it’s the wealthy who oppose paying taxes whose opinions are the target of my criticism and whose legislative and political machinations are the object of my derision. In other words, there are wealthy individuals who have sufficient understanding of economics to have concluded that the supply-side, trickle-down bill of goods that has been foisted on the American people is a crock of nonsense.

Recently, this perspective was reinforced when, according to this report more than 400 wealthy Americans signed a letter recommending to the Congress that it raise, rather than lower, taxes on millionaires and billionaires. They decried actions that would increase inequality, surely because they understand that, in the long run, inequality growth means everyone will lose, and that includes the wealthy. Put another way, they understand that the key to national financial well-being is demand-side economics. In other words, give the so-called job creators a reason to create jobs, that is, to meet demand.

Reading the names of those who signed the letter caused me to wonder whether the views of a wealthy person depend on whether that person created their own wealth or inherited it. Considering that more of the signers seemed to belong to the first group, it is possible, and logical, that those who started out poor or merely comfortable spent enough of their lives experiencing struggle, or at least economic limitation, and spent enough time surrounded by others in the same situation, to appreciate the intrinsic value of those who are not wealthy but whose demand for goods and services fuels the economy. They understand, therefore, the need for those folks to have sufficient economic wherewithal to make those purchases. On the other hand, those born into wealth, who spend their entire lives unaware of life without opulence, who circulate among others with wealth, and who isolate themselves from everyone else, are far more likely to lack the understanding of how valuable not-so-wealthy people are to the economic well-being of the wealthy. Of course, there are those among this latter group who, for one reason or another, realize this fact of economic life and become philanthropists, perhaps patterning after a parent or grandparent, or perhaps having had some sort of Damascus moment. But many do not, as they succumb to selfishness and greed, overcome by an addiction to money triggered by a deep insecurity that they will never have enough money to insure that they will not end up, as some did in 1929, on what they see as the wrong side of the tracks.

I applaud these individuals for having the courage to speak out. I doubt, though, that their words will have any positive effect on the wealthy individuals whose mantra is “more, more, more,” nor on the members of Congress who are so subservient to their campaign donors that they cannot realize they are in dysfunctional relationships with those persons. I fear that fixing this mess will require some sort of intervention. That is not a pleasant thought.

Several days ago, Benjy Sarlin, in They’ve Got Issues. Here’s Who Is Mad About the GOP Tax Plan, demonstrated that just about everyone is unhappy with “the GOP Tax Plan.” Context and timing suggest that it’s the House plan that is being examined, though much the same can be said about the Senate tax plan.

Sarlin focuses on eight aspects of the House plan that have encountered significant opposition. That opposition, in many instances, is more than polite commentary and borders on deep anger and even rage. Here is a summary of the people who are annoyed, upset, angry, or enraged about one or more of the proposals in the legislation: liberals, Senator Susan Collins, anti-tax conservatives, liberal groups, Senator Marco Rubio, deficit hawks, unions, Republicans from blue states, the AARP, home builders, realtors, graduate students, Ivy League universities, and teachers unions. That’s a short list. One could add those who believe in separation of church and state, the pro choice movement, environmentalists, some small business owners, many middle-class families, and others.

It is said that the best compromise is one that makes everyone angry, or at least, one that everyone finds objectionable in one way or another. There is some truth to this perspective. If everyone finds the compromise perfect, then no one is completely pleased with it. The problem with the Republican tax plans, in both the House and Senate, is that there are some people who are jumping with joy at the prospect of the plan being enacted.

The primary challenge to crafting effective tax reform is that tax reform requires the elimination of tax breaks. Giving up a tax break is unpalatable to the taxpayers who benefit from it, unless something is received in return. In theory, giving up a tax break in exchange for lower tax rates should, if the numbers play out appropriately, seal the deal. The problem with the Republican tax plans is that not everyone is being asked to give up their tax breaks, even though they are getting the benefit of lower tax rates and other offsets.

So the more important question is this: Who is NOT angry about the Republican tax plans? The list begins with owners of carried interests, corporations, multinational investors, and individuals worth more than $5 million. There are others. This so-called “tax reform” is nothing more than a shifting of even more wealth and income from the peasants, artisans, small business owners, and middle class to the oligarchy. It’s the oligarchy that can afford to buy Congress and direct it to enact laws that increase the wealth and power of the puppet-masters. As one member of Congress explained, “My donors are basically saying, ‘Get it done or don’t ever call me again.’” I wonder if he salutes or bows when he is given orders from the oligarchy.

Of course almost everyone is annoyed, upset, angry, or enraged when they examine the Republican “tax reform” hoax. What should matter is the collective identities of these individuals. Almost all of them have something in common that should bridge the divides fracturing the nation. They’re not members of, apologists for, or puppets of, the oligarchy. This entire sordid episode tells America quite a bit about its sickness, and what needs to be done to cure it. Failure to administer and take the required medicine will be fatal.

For decades, drafters of federal tax legislation have created names for the tax bills that are introduced in Congress. Most bills don’t make it out of committee, but a few are enacted. That’s when the name enters into the permanent tax legislation roll call.

Once upon a time, the names of most federal tax statutes were informative. For example, the Foreign Investors Tax Act of 1966 enacted and amended provisions affecting the tax treatment of non-citizens investing in United States assets. The Federal Tax Lien Act of 1966 revised the provisions dealing with federal tax liens. Of course, sometimes the name wasn’t very informative. For example, the Revenue Act of 1971 dealt with tax provisions, but that name did not reveal much of anything about the provisions it contained, other than they involved revenue and, logically, tax.

Very early in my tax career, I was in Washington, D.C., working on assorted tax legislation and Treasury regulations when along came the Tax Reduction and Simplification Act of 1977. Some people laughed, and some called me a cynic, when I tagged it as “legislation that neither reduces nor simplifies taxes.” Over time, increasing numbers of tax bills were given names designed to sell the product rather than provide information. So we were gifted with legislation such as The Middle Class Tax Relief and Job Creation Act of 2012 and the The Tax Increase Prevention Act of 2014. If those Congressional gifts did what their package label claimed, why would more legislation advertised as necessary to do the same thing be required?

So the latest offering is the Tax Cuts and Jobs Act. Will it cut taxes? It will, for some people. But there will be tens of millions of people whose federal income taxes will increase because of what’s in the Tax Cuts and Jobs Act. Perhaps truth-in-advertising ought to be required. The bill should be renamed the Tax Cuts for Our Friends, Tax Hikes for Those We Dislike, Perhaps Some Jobs for the Compliant, and Lots of Layoffs Act.

It appears that increasing numbers of Americans are looking beyond packaging and inspecting the contents, or trying on shoes and clothing, before purchasing merchandise. The same approach has its benefits when it comes to deciding whether to support or oppose legislation. It’s not the name that counts. It’s what’s inside. Check it out. See if it fits. You might be surprised.

Earlier this week, a letter to the editor appeared in the Philadelphia Inquirer. I cannot find it on line, and I have searched from time to time over several days. The letter is short:

I don’t understand the oft-repeated notion that only conservatives and Republicans want tax cuts. I am neither and I would love to see my taxes go down. So, Congress and President Trump, please do pass the largest tax cuts in U.S. history. But please also continue to fund vital government services and programs, and please don’t add to our national debt. Stefan Keller, Huntingdon, Pa.

So how does Congress cut taxes, continue to spend, and not increase national debt? Even if the current situation was one of balance, with revenues equaling expenditures, cutting taxes without increasing debt and without decreasing expenditures is arithmetically impossible.

The key to this mystery of arithmetic is the definition of the word “vital.” It is possible to avoid adding to the national debt by cutting expenditures in the same amount by which taxes are cut. The proposals on the table would require cutting much more than whatever constitutes “non-vital” expenditures. Though some might disagree, most Americans would consider as vital the portions of expenditures paying for defense, Medicare, social security, interest on the debt, interstate highway safety, protection against disease, and other expenses necessary for the health and safety of Americans. The only way to enact a huge tax cut without increasing national debt is to take an axe to Medicare, social security, defense spending, safety, and similar vital functions. There are people, though, who think that Social Security and Medicare should be cut, with the revenues from the taxes enacted to fund those programs being diverted to make up for the revenue shortfall caused by cutting taxes for the impoverished upper class.

There is no way of knowing if the letter writer is among the unfortunate millions whose taxes will be increased in order to offset some of the cost of dishing out tax breaks to the starving millionaires and billionaires of this nation. If he does suffer a tax increase, I have no doubt he will be unhappy, if not distressed and disappointed. He’ll end up with no tax cut, a larger national debt, and cuts in services that are vital to him.

Of course everyone likes tax cuts. Everyone prefers to live in a world with no taxes, where everything is free. Toss in perfect health, and no losses by one’s favorite teams, and paradise on earth would be close at hand. It doesn’t work that way, unfortunately. Yes, we could have a tax-free world, but it would be a high-price world, with money flowing freely into the pockets of the oligarchs who hold a monopoly on everything. Taxes are the price paid for freedom. The anti-tax crowd thinks that the absence of taxation is the equivalent of freedom, but it’s quite the opposite. Being constrained by taxes and government regulation is a far less horrible fate than being held hostage by private sector high prices and no mechanism with which to oust the tyrants.

So, Mr. Keller, though it would be nice to live in a world with reduced taxes, unreduced spending, and national debt eliminated or held in check, it’s no more possible than finding trees on which money grows. If you find one, let me know.

Years ago, a practicing tax attorney told me he didn’t pay attention to legislative proposals until they were about ready to be signed. He explained that there are so many proposals it’s too difficult to keep up with all of them. That’s true, and that’s why in practice I’d notice proposals, but once a bill came out of the Ways and Means Committee I gave it attention. As a blogger, I pay attention to all proposals, ever on the hunt for silly, absurd, outrageous, and unwise ideas. And when a major bill gets attention from Ways and Means, it makes sense to look at it even before it is sent to the House floor.

Though Ways and Means bills can be amended, and often are adjusted when taken into conference committee with the Senate, it is important to pay attention for several reasons. If something in the bill is disadvantageous to one’s clients, it makes sense to alert clients so they can decide if they want to lobby or otherwise take action. It also makes sense to give clients a chance to change plans if something in the bill looks as though it might be enacted and the proposed effective date gives some leeway to do so. It also makes sense to let one’s brain begin thinking about how planning and compliance decisions will be made in the shadow of newly enacted legislation that is on the horizon.

One of the things some people are doing with the current proposal is comparing the impact on their own tax situations. It’s not enough to think in terms of generalities, though I do see many articles being written along those lines. At some point there will be web sites that permit people to enter data and compare the outcome under current law and under the current proposal. As the proposal changes, and as the Senate cranks out its own legislation, these comparison tools will change. It takes time to program these tools, so be patient.

Anecdotally, more than a few people have told me that their federal income taxes will go UP under the House proposal. And none of these people are wealthy. They’re not even close to being wealthy. It could be that people who have estimated that their federal income taxes will go DOWN are unlikely to share that news because they are wary of encountering someone who’s not getting a tax reduction.

The lesson is clear. Before buying into the “everyone gets a tax cut” promise, do the math. Work the numbers. Decide which list you are on.

Those interested in tax law and tax policy are digging through the recently released House bill that proposes to amend the Internal Revenue Code and trying to figure out how, if at all, it will increase or decrease their own taxes or the tax burden on various segments of Americans. In the meantime, below most radars tax law administration continues. A recent Philadelphia Inquirer story demonstrates this reality.

A man working for Catholic Social Services in Philadelphia was able to access the names, dates of birth, and social security numbers of foster children under the care and supervision of his employer. He then sold that information to a group of tax return preparers who used it to generate dependency exemption deductions on tax returns. For each bundle of information, he was paid roughly $200 to $300. He sold the information for 321 children. The fraudulent deductions created with the stolen information were used on 283 tax returns, and generated significant refunds, with a total of $1.2 million in undeserved refunds being paid by the IRS.

The story broke three years ago when he entered a guilty plea to a long list of charges, but I didn’t notice it at the time. It did not get wide coverage, and certainly did not make headlines. Seven other individuals also were arrested and charged, and five of them were tax preparers working for the owner of a tax preparation company. He, too, was charged. The eighth person pleaded guilty four years ago, but details of her sentencing were sealed.

The social worker who stole the identities was sentenced last week to a prison term of two and a half years. The charges included aggravated identity theft, conspiracy, wire fraud, and aiding and abetting the preparation of false federal income tax returns.

It is this sort of behavior that undermines tax systems. By “this sort of behavior,” I include not only these rather obvious misdeeds but also the more sophisticated schemes that are much more difficult to detect. Every year hundreds of billions of dollars in taxes are evaded. That puts a higher burden on those who comply. In some instances, they are subjected to higher taxes. In some instances, they suffer the consequences of reduced services. Yet for some reason, there are people who, instead of being annoyed, upset, or even enraged that their financial position is being harmed by this sort of behavior, say nothing. Others even praise and admire those who appear, at least initially, to have struck a blow against taxation. In the meantime, many of them are looking for financial relief by the enactment of legislation. That’s a big tax thing. Yet so long as people ignore the law that the legislation enacts, the effectiveness of the legislation is undermined. One taxpayer stealing some identities and filing some false tax returns is a little tax thing when viewed against the backdrop of the entire tax system. Yet how many of the taxpayers whose federal income tax liabilities increase if and when the proposed legislation is enacted will resort to the same sort of behavior? What effect will that have on the tax system? It’s the little tax things, taken together, that often are bigger than the big tax thing.

Almost every savvy economist, and others, have figured out that the Republican tax plan will add at least a trillion dollars to the federal budget deficit, something that Republicans would not have tolerated before they shifted to a philosophy of enriching the rich with tax cuts. Rather than explaining why they are willing to do what they once opposed, Republicans are defending their actions by claiming that cutting taxes, and thus cutting revenue, won’t enlarge the deficit. How can that happen?

According to this Bloomberg report, Republican legislator Rob Portman shared his opinion that cutting taxes will decrease the deficit because “it’s going to get the economy moving.” Why does Portman think this is the case? He didn’t say, but it’s easy to figure out. When George W. Bush was president, and this same “tax cuts increase revenue” theory was being used to enact tax legislation that put the nation on a path to the economic meltdown of a decade ago, Portman was directing the White House Office of Management and Budget. So it’s obvious that Portman has been schooled in, and is an acolyte of, the disproven trickle-down supply-side economics approach that doesn’t work. So why, despite its failure, does Portman and his comrades continue to advance this theory? There are several reasons.

It is difficult to let go of long-held beliefs. It is easier to deny facts than to make changes in order to adapt to reality. It is difficult to say no when those who want to hear the word “yes” hold economic and political power and exercise it in self-serving ways. It is pretty much impossible to get elected nowadays without support from very wealthy benefactors, and there is an expectation that they will be repaid.

Plowing money into the hands of those who already have more than enough of it will not get the economy moving. Why? If the wealthy cannot move the economy with what they now have, they’re not going to move it with even more money. They will stash some of the cash abroad as they did at the turn of the century, and the rest will go into the next version of the bad investment scheme.

What moves the economy is consumer spending and consumer investment. Ninety-nine percent of consumers are not in the top one percent. The Republican tax plan does little, if nothing, for the ninety-nine percent. Worse, it actually increases federal tax liability for more than a few members of the ever-shrinking middle class. If all of the tax cuts were directed to low and middle income individuals, in fairly modest amounts, not only would it cost far less than a trillion or more dollars, it will get the economy moving. But that won’t happen? Why? Because no one in the low and middle income brackets has the financial power to put someone into office.

This plan did not work last time around. It will not work this time around. Like last time around, it will appear to work, for a short while. Then its effects will kick in. And who will be in the best economic position to weather the storm? Sadly, many of those who will be hurt most seriously are strong supporters of what is being touted as something other than what it is, namely, a repeat failure.

Back in late June, in Another One of Those Non-Arithmetic Tax Questions: What Is a Sport?, I described a dispute taking place in Europe that focused on the question of “what is a sport?” for purposes of applying the value-added tax on competition entry fees. I explained:

The value-added tax does not apply to fees paid to enter sports competitions. The English Bridge Union paid the tax on tournament entry fees, and sought a refund. British tax authorities refused, arguing that bridge is not a sport. So the dispute has reached the European Court of Justice, whose top advisor concluded that bridge indeed is a sport. Though not binding, the opinions of the advisor usually are followed by the court.

When the court handed down its decision a few days ago, it demonstrated why the adverb “usually” was necessary in the last quoted sentence. According to this report, the court concluded that “bridge, which is characterized by a physical element that appears to be negligible, is not covered by the concept of ‘sport.’” The English Bridge Union expressed disappointment with the result, arguing that bridge incorporates many attributes found in typically recognized sports, such as organized competition, training, and exertion.” Using those characteristics, one could conclude that law students participating in moot court competitions are engaged in sports. I’ve never asked the students if they perceive themselves as athletes when they are arguing in front of moot court judges.

Oddly, some European Union countries treat bridge as a sport because, in accordance with European Union law, a competition is treated as a sport if it provides benefits to physical or mental well being. Yet other European Union countries reached the opposite conclusion. The decision by the European Court of Justice will probably cause that first group of nations to change their position.

Using “provides benefits to physical or mental well being” as a test for whether an activity is a sport is unwise. Remembering that activities qualifying as a sport are exempt from the value added tax, that test would sweep almost all activity into the definition of a sport. Does bridge provide mental well being? Apparently. So, too, do listening to music, watching movies, and doing crossword puzzles. So if those and similar activities were conducted in a competitive environment, they would qualify for the tax exemption.

What puzzles me is why the drafters of the value added tax legislation did not take time to craft a practical definition of sport that would eliminate the need to debate the matter, and that would preclude the current situation of different member nations reaching different conclusions. But sometimes legislators think that “everyone knows” what a word means, when, in reality, almost every word can generate a debate about its meaning. Would a formal debate about the meaning of the word “sport” in the value added tax statutes qualify as a sport?

I concluded Another One of Those Non-Arithmetic Tax Questions: What Is a Sport? with these words:

About a year ago, Newsweek published an article focusing on the definition of sport, in the context of the Olympics, and coverage of activities by ESPN, an acronym that includes “S” for “Sports.” As one might expect, people disagreed on whether particular activities qualified as a sport. Among those described as generating controversy were auto racing, cheerleading, cheese-rolling, chess, cup-stacking, ferret-legging, golf, hot dog eating, poker, spelling bees, video games (“esports”), and wife-carrying.

Perhaps arguing about taxes is a sport.

. And perhaps if I entered MauledAgain into a blog competition, I’d be engaging in a sport. Not that it matters, because the European Union value added tax isn’t applicable, but then I could call myself an athlete. Or something like that.

From the outset, 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), and Beyond Scary: Tax-Based Halloween Costumes (2016).

Now, just in time for Halloween, the Tennessee Department of Revenue has treated us to Notice #17-22. In this notice, the Department explains that the sales and use taxes apply to sales of candy, and are not eligible for a lower rate applicable to food and food ingredients, because state law “does not define candy as food or food ingredients.” The Department shared its definition of candy: “Candy is defined as a preparation of sugar, honey or other natural or artificial sweeteners in combination with chocolate, fruits, nuts or other ingredients or flavorings in the form of bars, drops or pieces. A candy preparation is made by means of heating, coloring, molding or otherwise processing any of the above ingredients.” The Notice provides definitions of bars, drops, and pieces, explains that the inclusion of certain items does not prevent an item from being candy, and that it doesn’t matter whether natural or artificial sweeteners are included. The Notice also explains that an item containing flour is not candy, and that items that must be refrigerated according to their label are not candy.

The Notice also presents a list of items considered to be candy. These include “Baking bars (sweet or semi-sweet), beer nuts, breath mints, cake decorations (excluding frosting), candy bars (without flour), caramel or other candy-coated popcorn, caramel or other candy-coated apples, cereal bars (without flour), chewing gum, chocolate chips (sweet or semi-sweet), chocolate covered or honey roasted nuts or seeds, chocolate covered potato chips, dried fruit (with sweeteners), peanut brittle, marshmallows, and yogurt covered raisins.”

This is not the first time I have wandered into the tricky question of whether an item is or is not candy. 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. Talk about a frightening Halloween experience for a little one, to say nothing of the confusion and trauma that could afflict the youngster.

Just as those earlier discussions taught me something that I did not know, namely, that some candy bars contain flour, this time I learned that a person can purchase chocolate covered potato chips. Are they kidding me? Really? But here is the absolutely horrifying possibility. Telling a child that a candy bar containing flour is candy is bad enough. Imagine handing out chocolate covered potato chips tomorrow night and telling the children that it’s candy. That is beyond scary.

There have been years when children have stepped away from the house yelling, “Make sure you stop here. He’s handing out four-pack Reese’s Peanut Butter Cups.” I just cannot wrap my head around kids yelling, “Make sure you stop here. He’s handing out chocolate covered potato chips.” Now watch. Someone will email me and tell me they’re quite the treat and are all the rage. Boo.

During the past several weeks, mainstream media, social media, and every other sort of publication has been filled with discussion about what I call the Great Amazon Giveaway. Amazon announced it wants to move some of its operations to a new location. States and cities are tossing all sorts of what theyc call incentives in attempts to get Amazon to relocate to their particular corner of the world. According to this report, New Jersey is offering $7 billion in tax credits, and California is putting $300 million or $1 billion in tax breaks on the table depending on whose proposal one considers. According to this story, Pennsylvania, buried in a budget crisis and facing deficits, plans to offer $1 billion in tax incentives. According to another report, 238 cities and states have jumped onto the Amazon tax break bandwagon.

The rationale for dishing out tax breaks to successful businesses is the belief that by enticing the business to transfer or begin operations in a particular place, that area will become awash in economic benefits, particularly jobs. In Amazon’s case, the number being tossed about is 50,000 new jobs. What’s often left out of the equation is the increased burden on the area in question when those 50,000 jobs bring tens of thousands of people moving into a place that doesn’t have the capacity to handle the demands of a population surge. In addition to the direct costs of providing services to a larger population, such as the need to hire more police, firefighters, sanitation workers, and teachers, there are indirect costs, such as more traffic congestion. Who pays for these increased costs? The people who live in that area.

So I wonder what would happen if no one offered any tax incentives. Perhaps Amazon would expand its existing facilities, though apparently there are business reasons why it wants to move some of its operations to another part of the country. What would Amazon do if there were no tax incentives? It would do what businesses did for decades before the great tax break giveaway game commenced. It would determine its needs, in terms of transportation, climate, population demographics, geography, and similar factors. It would analyze various locations, measuring the extent to which each potential site matched well with Amazon’s business needs.

Of course, it won’t play out that way. There’s too much potential gain for politicians, and because at least one or some are willing to play the game with taxpayers’ money, others will jump in for fear of losing out, even though, eventually, only one location will become the selected site. The only way the game stops is taxpayer-motivated amendment to state Constitutions to put an end to handing out tax breaks to specific recipients when those breaks are not available to taxpayers generally. That, too, will not happen, because too many people are easily convinced that giving money to someone else will make them economically prosperous.

Still, wouldn’t it be fun to watch what would happen if all of the politicians said to all of the successful businesses looking for more money, “No tax breaks for you”? Though the businesses arguing for these benefits often argue to the contrary, there is no doubt that the world would not end.

According to numerous reports, including this one from Bloomberg, Treasury Secretary Steven Mnuchin announced that, contrary to the President’s assertion that the Republican tax plan would not generate net tax cuts for the wealthy, the plan will include such cuts. Mnuchin explained, “it’s hard not to give tax cuts to the wealthy.” Really? It’s very easy to craft a tax plan that leaves the wealthy with the same overall tax burden, even if it includes removal of some deductions and credits offset by rate adjustments.

Mnuchin drags out the worn-out cry that the top x percent of taxpayers pay more than x percent of income taxes. Of course they do. That’s what the income tax was designed to do. It was designed to prevent the increasingly accelerating income and wealth disparity cycle that crushed the nation in the 1890s and will crush the nation again if people continue to misunderstand economic reality, and continue to worship disproven economic theory.

Mnuchin also claimed that, “The math, given how much you are collecting, is just hard to do.” Nonsense. If Mnuchin is confounded by this sort of math, perhaps he can find less challenging tasks in another career track. The math claim is an obvious deflective mechanism offered in defense of what has been the plan all along, namely, shifting increasing amounts of income and wealth into the hands of a self-chosen elite.

Another comment by Mnuchin’s also demonstrated his misunderstanding of the federal tax system. Referring to the proposed repeal of the estate tax, Mnuchin supported the idea by asking, “Why should people have to pay taxes again when they die?” The answer, Mr. Secretary, is that they don’t. The bulk of what is taxed under the estate tax reflects unrealized gains that were never subject to the income tax. As readers of this blog know, I would support a repeal of the estate tax if it were coupled with taxation of unrealized gains at death. Why? Because removing an entire tax system, the estate tax, would simplify the tax system and simplify people’s lives. What looms ahead is going to wreck many lives.

Just say no.

Though its advocates continue to praise its existence, the soda tax fails to get my support because it is both too narrow and too broad. It applies to items that ought not be subjected to this sort of “health improvement” tax, and yet fails to apply to most of the food and beverage items that contribute to health problems. I have written about the soda tax for almost ten years, in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, and Is the Soda Tax and Ice Tax?.

Recently, as described in this story, the Philadelphia City Controller conducted a survey of businesses in the city to determine the impact of the tax. The Controller contacted 1,600 businesses and 741 replied. Of those 741 businesses, 88 percent suffered revenue losses since the tax went into effect, and for almost 60 percent those losses exceeded 10 percent. One store saw its revenue drop 70 percent. This is not surprising. When people go outside the city limits, which in some cases means crossing the street, and in others, crossing a bridge, they not only shift their soda purchases to another business, they also shift other purchases.

Though some elected officials in Cook County, Illinois, which includes Chicago, followed Philadelphia’s example in enacting a soda tax, just two months later they had seen and heard enough. After some of those who had voted for the tax changed their minds, another vote was held and the tax was repealed. Apparently they didn’t wait for an extensive survey of businesses.

Defenders of the tax pointed to the various programs funded by the tax in an attempt to demonstrate positive economic impacts of the tax. Those impacts, even if they are as substantial as claimed, do not substitute for the need to have a connection between what is being taxed and what is funded by the tax. Do drinkers of certain beverages have some sort of deeper responsibility to fund pre-K schools than do people who drink other beverages or eat certain foods? Are the drinkers of certain beverages the only ones who benefit from the expansion of pre-K school programs?

On Monday, in Fool Us Once on Taxes, Shame on You, Fool Us Twice . . . , I criticized the unwillingness of those who advocate tax cuts for the wealthy to admit the failure of their approach to tax policy. Every time that federal income taxes have been cut, and the bulk of the cuts have gone to the wealthy, everyone else has suffered and the economy’s performance then exacerbated that suffering.

Now one of the chief advocates of enriching the wealthy even more, who happens to be a member of the wealthy elite, has trotted out another idiotic explanation, one that resonates with those who don’t bother to study history, examine tax reduction plans, and compute what the different proposals would do to their own financial situation. This time, according to this report, the claim is that if the nominal top corporate tax rate is cut from 35 percent to 20 percent, the average U.S. household will see its income increase by at least $4,000 each year and perhaps by as much as $9,000. Perhaps that average reflects $100 for one household and $7,900 for another. But aside from the distraction of “average,” the assertion has another flaw. There are roughly 126 million households in the United States. If the average household receives a $4,000 income increase – that isn’t $4,000 for each household but an average – the benefit would total $504 billion. Yet if the corporate income tax were eliminated, in other words, if the rate was reduced to zero, corporations would be spared only $300 billion. How can letting corporations stop paying $300 billion in taxes generate $504 billion for American households? Put aside the fact that even if $504 could be generated, most of it would not end up with the 98 percent whose consumer demand fuels the economy. The absurdity of the arithmetic becomes even more apparent if the $9,000 figure is used.

Advocates claim that corporations would use the $300 billion, though actually a cut of the rate from 35 percent to 20 percent would not generate a corporate tax reduction of $300 billion, to “create” jobs. There are two reasons this claim doesn’t withstand sharp scrutiny. First, jobs are not created unless workers are needed, and workers are needed if there is a demand, which provides revenue to fund the jobs. Second, if a corporation has the funds, and most do, it can hire an employee, thus reducing its taxable income and its taxes. Put another way, the tax rate on the portion of revenue channeled to worker pay is zero. Third, the reduction in tax payments by corporations will end up in the hands of shareholders and highly compensated executive employees. What that means is that $300 billion, or some lesser amount, but certainly not $504 billion, will end up mostly in the pockets of a small fraction of the population. Yet people hear this “cut taxes” chant and rush to join the rally, without stopping to figure out that there’s nothing in it for them, unless they happen to be corporate executives or big-time shareholders.

The chair of the White House Council of Economic Advisers argues that lowering the rate will encourage corporations to bring back profits held overseas, which would be used for salaries. Yet corporations can bring those profits back now, tax-free, if they use the money to pay workers. The profits get added to gross income and in turn the payments to the workers reduces taxable income. It’s a wash in terms of effect on taxes.

In 2012, the Treasury Department did an analysis that demonstrated how the reduction in corporate taxes would end up in the hands of investors, reaching the same conclusion as have many other studies. That report, which had been available online, was removed by the administration. I wonder why. Perhaps making it more difficult for people to get to the heart of the issue is a necessary prerequisite for railroading yet another tax break for the wealthy through the economic landscape of America.

Economists have called this particular claim “absurd” and “fake math.” I have another word for it. Three letters. Guess.

Today is one of those occasional days when I turn away from tax issues. Today I focus on the First Amendment. Why today? Because several days ago, an Indiana state legislator drafted proposed legislation that leaves me staring in amazement at the ignorance and absurdity of the proposal.

As described in various news stories, including this one, Jim Lucas, an Indiana Republican has proposed that journalists register, be fingerprinted by police, and be vetted for “character and reputation.” Journalist would be defined as anyone writing or broadcasting news for a newspaper, magazine, website, television station, or ration station. Surely I fit this definition, and because there are people in Indiana who read this blog, I suppose Jim Lucas would want me to register, and then visit Indiana to be fingerprinted. Also included in the proposal is a provision treating “committing journalism without a license” within 500 feet of a school or on a school bus as a felony, rather than a misdemeanor. People with felony or domestic batter convictions would be denied journalism licenses. Though the proposal has not been introduced as a bill, Lucas did not promise not to do so.

Unquestionably, this proposal violates the First Amendment. If posed on a Constitutional Law exam, it would be classified as one of those “get these questions correct and you at least pass the course” question. So is Jim Lucas ignorant of the First Amendment and what it protects? Or is he being absurd, deliberately so or negligently?

Lucas claims that he took a state law requiring a license to carry a handgun in public, and tweaked it to apply to journalists. Apparently, Lucas doesn’t like the state gun licensing law. Apparently, he prefers letting anyone who wants to carry a gun to do so. That position is either ignorant or absurd. Perhaps it’s both. Lucas thinks that it is wrong to license Constitutional rights, though his interpretation of Constitutional rights receives far from unanimous agreement in this country.

It gets better. Someone pointed out to Lucas that courts have consistently held that the First Amendment prohibits licensing the press, Lucas explained that “he does not believe legal precedence and case law are important.” He dislikes the fact that the First Amendment protects journalists who lie. There are remedies for lies that cause damage, but a good guess is that anyone with no respect for judicial opinions and legal rules has no idea how that area of law works.

Nor does Lucas seem to have studied history. He claims, “The irony is that every despotic government has employed speech and propaganda in their rise to tyranny while freedom fighters use guns to fight them.” Actually, despotic governments have started their reach for power by strangling the free press, which opens the door to propaganda, and then used guns to repress democracy. It’s at that point freedom fighters have used both free speech and guns to fight back against those whose addiction to power, and money, trumps their sense of civilization, decency, humanity, and goodness.

One First Amendment expert noted that if the Lucas proposal were enacted, it would be struck down. He suggested, “Maybe we should license state legislators.” But isn’t one of the hallmarks of American democracy the Constitutional right of citizens to run for, and be elected to, public office even though they are ignorant of Constitutional or other law, uneducated with respect to the issues facing their constituencies, dismissive of the needs and concerns of those they consider unworthy, willing to violate the law, or supportive of principles and practices contrary to American Constitutional democracy? It is up to voters to screen out these sorts of candidates. Sadly, voters increasingly fail to do so, in part because they have become less capable of doing so and less willing to do so.

In the meantime, I have no intention of registering. I remain convinced that the First Amendment is first for a reason.

Seven years ago, in Negotiating Tax Legislation: Lessons from Life, I opposed the attempts by those advocating tax cuts for the wealthy to extend the Bush tax cuts. Though the advocates of tax cuts for the wealthy claimed that the extension would created jobs, the track record belied their claims. In numerous commentaries, I have explained why tax cuts for the wealthy do not create jobs, why jobs are created by demand, and how demand is strengthened by boosting the economic position of the middle and lower economic classes. The only tax cuts that create the jobs that the nation needs are tax cuts for the bottom 98 percent.

Despite the failures of supply-side trickle-down voodoo economics, the current administration and some nostalgic members of Congress want to relive the failed experience of tax cuts for the wealthy. Recently, as described in this story, the chief cheerleader for making the wealthy even wealthier trotted out the disproven propaganda about enriching the rich. The plans being tossed about not only cut taxes for the wealthy, they will increase taxes for many people who are not wealthy, and not even close to being wealthy. Yet when the plan to enrich the rich is paraded in public, most of the people who show up don’t realize they are cheering for their own economic demise. One would think, and hope, that by now those who were fooled once by this nonsense would not fall again for the same trick. But as someone once told me, when I was young, if it weren’t for humans there would not be opportunities for con artists.

The hilarity of the recent tax cut rally wasn’t just the absurdity of people cheering for tax increases on themselves. It was the crass appeal to truckers, who were told that cutting taxes for the wealthy would create “more products to deliver.” First of all, as history has taught us, products are manufactured when there are people who want to purchase, and are economically in a position to purchase, those products. The wealthier wealthy have the products they need and want, and simply will stash their increased after-tax cash flow into their foreign bank accounts. Second of all, even if there were an increase in the number of manufactured products needing delivery, the impending flood of self-driving trucks, the flotilla of Amazon and other delivery drones, and the impending delivery of products by digital transmission to 3-D printers is writing on the wall for truckers nationwide. But, those who live in the past lack the ability to see, let alone understand, the future. When it comes to timing, the Future is Now always trumps Bring the Past Back Again.

It is frightening to watch people buy into claims that their taxes are going to be cut when not only is that not going to happen, their taxes are going to be increased. False promises are made because too many people are willing to bank on false promises. And when reality sets in, they seek to blame everyone except their own ignorance, their own failure to think, and their own unwillingness to grow intellectually.

Back in 2010, when I wrote Negotiating Tax Legislation: Lessons from Life, I suggested that the approach to jobs and tax cuts should be, “Give us jobs, and then we’ll give you a tax break.” As I expected, that approach didn’t find support among the wheelers and dealers who hold the nation’s purse strings and control its economy. I elaborated:

The tax-cut-extension advocates don’t like that sort of arrangement. Why? It compels them to put their money where their mouths are, so to speak. Yet that is how competent business entrepreneurs, savvy agents for athletes and other service-providers, and professional negotiators attain workable contracts.

The sort of deal-making underway in Washington resembles, not the approach of professional negotiators and seasoned business entrepreneurs, but the false promises of advantage seekers who populate not only every segment of the business world but a substantial part of personal life. Consumer complaints are replete with tales of vanishing businesses, warnings are issued regularly about the risks of dealing with fly-by-night home improvement companies and individuals, and it took the enactment of lemon laws to compel auto manufacturers to honor their contracts. Tales of woe sent to advice columnists are packed with familiar strains of the “he respected me in the morning .. not” song and the crushed hopes of those who believed what the other person said.

* * * * *

Years ago, the phrase “show me the money” entered into the vernacular. Perhaps it’s time to say, “show us the jobs.” Show us the jobs, the nation will reply in gratitude with a tax break. No jobs, no tax breaks. That’s how tax law inducement provisions work. The “no tax breaks, no jobs” threat is nothing more than bully posturing of the worst sort. There’s a reason the tax-cut-extension advocates don’t like the “show us the jobs, then get the tax break” approach. They know that they’ve created few jobs, particularly enduring jobs, in response to previous tax cuts, and that the nation will not see any sort of job surge with an extension of the tax cuts.

Despite warning after warning, people continue to hand over cash to home improvement con artists, and to engage in behavior they later come to regret when and because they discover they’ve been duped. Perhaps that explains why America continues to listen to, and even cave into, the siren songs of the pied pipers of tax cut grabbing.

America has been down this tax cut road at the turn of the century. It led the nation to the wrong place. Why would anyone want to do this again? Why would anyone want to be fooled yet again?

A reader directed my attention to a Brenton Smith commentary addressing the taxation of social security benefits. Smith shared the thoughts of one of his readers, who brought to Smith’s attention a proposal to repeal the taxation of social security benefits. Smith noted that the “reader is understandably upset with the current rules, which border on the bizarre.” Smith offered several observations. First, that the taxation of social security benefits was “intended to levy fees on people with ‘substantial outside income.’” Second, that the taxation of social security benefits subject “people slightly above poverty with marginal tax rates that are among the highest in the entire tax code.” Third, that the taxation of social security benefits “represent double taxation.” Fourth, that the rules for taxing social security benefits are “unfair and also horribly complex.” Fifth, the benchmark amounts applicable under current law are not adjusted for inflation, which causes lower income taxpayers to be taxed on social security benefits that would not be taxed if the benchmark amounts were adjusted for inflation . Smith explained why repealing the taxation of social security benefits “would solve the fairness problem by making the financial problem even worse.”

I agree with Smiths’ first, second, fourth, and fifth observations. I agree that repealing the taxation of social security benefits would make the financial problem worse. I disagree with the scope of Smith’s third observation, and I disagree in part with his conclusion that repealing the taxation of social security benefits would solve the fairness problem.

My reason for disagreement rests on how the social security system works. Employees and employers make payments into the social security trust fund. Employees, when they retire or become disabled, and in certain instances their spouses, when they retire, and their dependents, if they are minors when the employee dies, receive lifetime benefits. Sometimes an employee collects less than what the employee paid into the system. One example is an unmarried employee who has no dependents who dies shortly before reaching retirement age. Far more often, though, employees, or their spouses and dependents, collect more than what the employee paid into the system.

When an employee collects more than what the employee paid into the social security system, the employee has income. It is fair to tax that income. The sensible way of doing this is to permit the employee to exclude social security benefits from gross income until the employee has received what the employee paid into the system. At that point, all of the benefits should be included in gross income. If those benefits are the retired employee’s entire gross income, the effect of the standard deduction and the personal exemption deduction would be to generate either zero tax or tax computed at the lowest rates. If the retired employee has substantial amounts of other income, the social security benefits would be taxed at higher, and perhaps the highest, rates.

Under the current system, some social security benefit recipients do not include any social security benefits in gross income, even when they receive more than they paid into the system. There is no double taxation in that situation. Others include some portion of the social security benefits in gross income, and often they live long enough so that the portion of social security benefits not included in gross income over the years is at least the amount that the person paid into the system. Again, there is no double taxation. Double taxation exists when the recipient dies before receiving back what was paid into the system, and yet includes some of the benefits in gross income. The reason for this inconsistency is that current law measure social security gross income with a bizarre formula that reflects the recipient’s adjusted gross income, certain adjustments, and varying portions of the social security benefits. Thus, some social security recipients encounter double taxation, but most do not.

The fix is easy. It is what should have been done originally. Social security recipients should include in gross income any benefits that exceed what the recipient paid into the system. When taxation of social security benefits was first enacted, I advocated what I have just proposed. The response was a claim that people don’t know what they paid into the social security system. That doesn’t matter. It doesn’t matter because the Social Security Administration knows. That information is readily available to anyone who has ever paid into the social security system. The process of starting with the “total paid into the system” number, and subtracting benefits each year until zero is reached, and then including all benefits in gross income is much easier, far less complex, and certainly far less bizarre than the current law mechanism for computing the portion of social security benefits included in gross income. Taking the approach I suggest eliminates double taxation. It eliminates the imposition of high marginal rates on social security benefits received by taxpayers with low taxable income. It eliminates the benchmark amounts, and thus eliminates the problems caused by failure to adjust those amounts for inflation.

Simply repealing the taxation of social security benefits does not solve the fairness problem. Repealing the taxation of social security benefits would provide more of a benefit to taxpayers who receive more benefits over their lifetimes, because those taxpayers would be excluding from gross income more economic gain than would taxpayers who receive fewer benefits over their lifetimes.

Six and seven years ago, I made these same points, and discussed my proposal in greater detail, in Taxation of Social Security Benefits: Inexplicable Inconsistency and Hidden Tax Increases, Getting Specific with Tax-Related Deficit Reduction Ideas: Making Section 85 Fairer and Simpler, and Retirees, Social Security, and Filing Tax Returns?. Since I wrote those commentaries, nothing has happened, or written, or said, or argued, that has changed my mind.

A little more than a week ago, in When Claiming a Dependent Has Adverse Tax Consequences, I described the reasoning and outcome in Gibson v. Comr., T.C. Memo 2017-187. The taxpayers claimed their son as a dependent, and ended up having their tax increased by the advance payments of the premium assistance tax credit paid to an insurance company on behalf of their son. I then posed this question:

Would it not have been better to not claim the son as a dependent?

I then provide one answer:

If the taxpayers were entitled to claim their son as a dependent, which the facts suggest was the case, then failure to do so would not permit the son to claim the credit because the credit is denied to any individual with respect to whom a dependency exemption deduction is allowable to another taxpayer.

Then I asked a second question:

But would failure to claim the son as a dependent, even though he qualifies as a dependent, eliminate the requirement that the advance premium payments made on his behalf be added to the taxpayers’ tax?

I confessed the futility of my search for a definitive answer, and invited assistance:

I cannot find anything definitive that answers the question. If the answer is no, then failure to claim the son as a dependent, even though he qualifies, would be counterproductive. If the answer is yes, it still might not make sense to fail to claim the son as a dependent. Why? The son, not entitled to the credit because he could be claimed as a dependent, would be the one required to add the advance payments to his tax. Perhaps someone who has expertise in the intersection of tax law and health insurance law can share some insights.

And, fortunately for my readers and myself, assistance arrived. It came in the form of an email from Christine Speidel, who is the Director of the Vermont Low-Income Taxpayer Clinic, and a Staff Attorney with the Office of the Health Care Advocate of Vermont Legal Aid, Inc. Christine’s explanation takes us through the complex maze encountered where tax law meets health care law. Christine wrote:

I read your post on Gibson v. Commissioner, the recent premium tax credit case. In the post, you ask who would have the APTC repayment obligation if Mr. and Mrs. Gibson had decided not to claim their son’s dependency exemption. I believe the son would have the repayment obligation in that case. Dependents cannot qualify for a PTC, but this doesn’t mean they can’t be liable for excess APTC.

If nobody claims the personal exemption of an APTC recipient, Treasury Reg. § 1.36B-4(a)(1)(ii)(C) applies:

(C) Responsibility for advance credit payments for an individual for whom no personal exemption deduction is claimed. If advance credit payments are made for coverage of an individual for whom no taxpayer claims a personal exemption deduction, the taxpayer who attested to the Exchange to the intention to claim a personal exemption deduction for the individual as part of the advance credit payment eligibility determination for coverage of the individual must reconcile the advance credit payments.

The Treasury regulations and HHS Marketplace regulations are designed to mesh, so that somebody will always be on the hook for excess APTC. The Marketplace regulations are quite detailed about this.

Marketplaces can only award APTC to a “tax filer.” 45 CFR § 155.305(f). That term is defined to exclude tax dependents. 45 CFR § 155.300(a). Tax dependents are not allowed go out and get APTC on their own. An applicant for APTC must attest that they are a tax filer, and they also must attest to the individuals in their tax household. 45 CFR §§ 155.310(d)(2)(ii); 155.320(c)(3)(i)(A). The Marketplace must try to verify the information through the federal data hub or other electronic sources, and if that fails, it must request additional documentation from the applicant. 45 CFR § 155.320(c)(3)(i). A Marketplace must get income information from the applicant’s entire tax household, and it must verify that information before granting APTC. 45 CFR § 155.320(c).

I presume the Gibsons’ son signed up for his Marketplace plan as a non-dependent, single individual. I assume this because he was awarded APTC without his parents’ knowledge. Under the Marketplace regulations, the Gibsons’ son should have made an attestation that he would claim his personal exemption when he applied for APTC. In that case, he would be liable for APTC under the Treasury regulation above, if his parents did not claim his exemption.

The regulations are much tighter than what happens on the ground, though. It is possible that the Marketplace fell down on the job, and awarded APTC even though the Gibsons’ son did not represent himself as a “tax filer.” I do not think this would happen today, but it is possible with a 2014 plan, when the system was brand new to applicants and eligibility workers alike, and when many exchanges had operational and technological problems. On the facts we have, it’s hard to tell whether the Gibsons’ situation is entirely the son’s fault, or whether the exchange also messed up.

It is also interesting to compare the Marketplace application with the attestations required by the regulations. HHS model applications and instructions are posted online. The regular application asks for information about every person in the applicant’s tax household. However, the shorter application for a single adult doesn’t have an attestation about filing status – it’s just stated in the form instructions that tax dependents can’t use the short form. If the Gibsons’ son used a paper application, he might not have made an attestation about tax filing status. Most people apply online or over the phone, however, in which case the applicant would get initial questions about tax filing status. Presumably the IRS would try to pin the son with the repayment obligation even if he applied on paper. The short application form should probably be revised to comply with the Marketplace regulations on attestations.

Having the son reconcile his APTC might not be a bad result for the family. If the Gibsons dropped their son’s dependency exemption, and their son filed his 2014 taxes as a dependent and reconciled his APTC, at least he would get the benefit of repayment limitations based on his income. Treas. Reg. § 1.36B-4(a)(3). He would likely have to repay much less than the full amount of APTC. Repayment limitations are based on “household income.” Fortunately for taxpayers, the definition of household income only considers individuals whose personal exemptions are claimed on the tax return. Treas. Reg. § 1.36B-1(e). If the son is actually a dependent for 2014, he probably has fairly low income and would only have to repay $300. This would be a better solution for the family overall.

As horribly complex is the federal income tax law, even worse is healthcare law. Getting a handle on both is difficult, and so to Christine Speidel, on behalf of my readers and myself, I offer appreciation for her assistance in navigating this particular maze.