MauledAgain

As readers of this blog know, I am not a fan of using the tax law to encourage or discourage behavior. If a taxing authority wants to encourage but not require people to do something, perhaps because it has no authority to require the behavior, it can pay them directly. Despite all the professed reasons for complicating tax laws, the reason governments, federal and state, use the tax law is because, deep down, they trust their revenue agencies more than the agencies responsible for the sort of behavior being encouraged. This approach, though I don’t like it, at least has a quid pro quo, namely, the taxpayer gets the tax break only if the taxpayer does what the tax break requires the taxpayer to do.

The worst way to use the tax law to encourage behavior is to hand out tax breaks without requiring anything in return other than promises. Promises too often are made to be broken. This is why the legislation enacted in December is proving to be a long-term failure. It came with promises of increased pay and increased production, but it did nothing to require those things. So a few bonus crumbs of several hundred dollars were handed to a small fraction of the work force, an even smaller group picked up a $1,000 bonus, and tens of thousands of individuals lost their jobs.

A good example of why strings-free tax cuts is a bad approach to stimulating the economy is provided by another in the ever-growing list of large corporations that, having been the beneficiaries of huge tax reductions, do the opposite of stimulating the economy. As reported in many stories, including this one, Pfizer has announced that it is terminating its research into cures or treatments for Alzheimer’s and Parkinson’s disease. It also is terminating the jobs of 300 workers. Surely if someone said, “Gee, we expected you would use that huge tax cut, amounting to at least $5,000,000,000, to increase research and hire people,” the response would be either, “We promised no such thing,” or “What we’re doing is better for everyone than expanding research and hiring people,” the translation being, “What we’re doing is better for our highly compensated executives and our shareholders.” The key to that translation is Pfizer’s planned $10 billion share buyback. Do the decision makers in the Congress and at these corporations not understand that the key to increased sales in the future is a consumer class with money to spend, something that doesn’t happen when inflation outpaces raises, when one-time bonus payments fail to reappear, when workers are laid off, and when income and wealth inequality grow rather than diminish?

Of course, this is not earth-shaking news. In 2004, a similar tax break, permitting companies to repatriate foreign earnings without the otherwise applicable tax consequences generated layoffs, share buybacks, and increases in the compensation of the executives. The beneficiaries of this tax break had promised to hire more employees and increase business investment. It’s just so easy to make a promise when there are no adverse consequences to breaking it. The corporations can break their promises and their tax cuts are not rescinded. The Congress breaks its promises and Americans let it get away with its failures, time and again.

Though I dislike using the tax law to encourage behavior, Congress should at least have the good sense to tie the tax break to the promised hiring, the promised research, the promised price cuts, the promised pay raises, and everything else the tax cut advocates dished out during their slick marketing campaign. But, I suppose, after enough workers are fired, after enough people realize they are worse off than they were two years ago, let alone ten years ago, perhaps Americans will shut the door on these tax cut sales pitches and demand accountability, including accountability in the form of tax cuts tied to performance rather than to promises.

Recent news about increased approval of the recent federal tax legislation, such as this report, is generating celebrations among the legislation’s advocates. In particular, they are delighted that in some polls, fifty-one percent of Americans approve of the legislation, up from 37 percent in December. When I read these stories, I think of fans who leave stadiums and arenas during the last two minutes of a game that they think is over.

What seems to be driving the approval is a combination of personal experience by a handful of taxpayers, and expectations by many others that the bonus payments others are receiving will come their way. In both instances, time will tell. Many of those who see decreased federal withholding in their paychecks will be surprised to discover in early 2019 that their refunds are smaller and, in some instances, taxes will be due. Most of those expecting their employers to announce a bonus will find their dreams turned into nightmares. And speaking of nightmares, imagine the delight of workers in Louisiana, who are discovering what I described in State Tax Increases Cut the Tax Cuts. According to this story, these folks will see their paychecks go down because of increased state tax withholding. This will also happen in other states, but it will take longer. And, of course, looming on the horizon are those Medicare, Medicaid, and Social Security cuts that are planned by the tax cut advocates to offset the revenue losses generated by those tax cuts.

Tax cut advocates know that this tax cut euphoria is short-term. It is designed to last until after the November 2018 elections. Then, when people start seeing the reality, they will need to wait another two years to send a message. And by then, another ruse of some sort will have been concocted and sold to a continually unsuspecting public. One doesn’t need to fool all of the people all of the time. One just needs to fool some of the people some of the time. How long will it take before fooling more than a few people becomes impossible because people have insisted on, and obtained, sufficient education to wipe out the ignorance?

Friday a week ago the legislation to keep the federal government operating became law. But that legislation did much more. Among other things, it restored some tax deductions and credits that had expired more than a year ago. What does this mean in practice? It means that tax forms already prepared, printed, and made available online are incorrect. It means that tax preparation software is incorrect. It means that some taxpayers who already filed 2017 tax returns need to amend those returns. It means that the IRS must reprint forms and retool its software. It means that tax software developers must recode their products. It means that taxpayers using tax preparation software must download and install updates. Note that all of this must occur during tax filing season.

Is this any way to run a country? Of course not. But the Congress isn’t known for its ability to run a country, let alone run it efficiently and effectively. Do the members of Congress and members of their staff understand that changing the rules after the game has been played is foolish, dangerous, and thoroughly inappropriate? Do any of them understand how the tax return filing process works? Do they understand that in order to prepare and file tax returns in February, March, and early April, preparations must begin in the previous fall and be finished by the middle of January? Do they understand how much time and money must be expended by ordinary citizens and the IRS to accommodate this poor planning by the Congress? The operating rule should be simple. If you want something to apply to a particular taxable year, enact legislation by October 1. Otherwise, it’s too late. That sort of rule, however, apparently doesn’t apply to the privileged few who are accustomed to having everyone else bow and scrape to appease their royal highnesses.

Understandably, Americans are fed up with how the federal government, especially the Congress, operates. So they claim to vote for “change,” but all that has been accomplished is “more of the same.” When people are poised to complain about something that the federal government has done, is doing, or is about to do, perhaps they ought to ask themselves if the candidates for whom they voted are responsible for the mess. If the answer is yes, then the person ready to complain should remember that they have contributed to the problem and enabled the chaos.

Last week I learned of the passing of Leonard L. Silverstein. I had the good fortune to have known Leonard for many years. In 1983, when I returned to teach at Villanova, one of my colleagues, then writing for what was then BNA Tax Management, Inc. (and now is Bloomberg Tax), asked me if I was interested in updating the Portfolio on Income Averaging. I knew what portfolios were, because we had used several in one of my law school tax courses because there was no casebook or textbook on the market for that particular advanced course. I still own those portfolios.

It didn't take very long, as I completed my J.D. education and entered practice, to discover that BNA Tax Management portfolios were the best and most-used tax references available, though calling them references is insufficient. They offered, and still offer, detailed commentary, explanations, examples, hints, and other analyses that have, for decades, helped tax practitioners provide advice and guidance to their clients. Over the decades, the scope of the portfolio series grew. An idea that started when Leonard realized the tax practice world needed help with the newly enacted Internal Revenue Code of 1954 blossomed into multiple sets of treatises, books, and digital materials that blanketed global tax issues and accounting practice. What he created and shepherded through the years made a huge difference in the lives not only of tax practitioners aware of the portfolios but also of client taxpayers who may or may not have known that those portfolios had provided value to their planning and their litigation issues.

As part of the process of being accepted as an author, I spoke with Leonard, who, in effect, interviewed me. It went well, I wrote the portfolio, and then I was asked to write another, and another, and another, until eventually I had written seventeen. Writing those portfolios, chapters in the Tax Practice Series, and other writing projects kept me in contact with Leonard for almost 35 years.

From time to time Leonard would call me, or invite me to a meeting, where he would pick my brain. One of the many things that impressed me was his deep interest in technology. Born into a generation often unfairly stereotyped as technology adverse, he would read a story about a technological development and immediately ask how it could be used to improve the tax practice world, specifically, how it could make Portfolios and other products and services more useful to subscribers. When a two-person venture of which I was one member suggested ways to move the Portfolios into cyberspace and add features that technology could provide, Leonard jumped at the ideas. He was ever supportive, even though for other reasons it took more than a few years for the transition to occur. Without his support and enthusiasm, perhaps it would not have happened or happened quickly enough for the market.

The first time I entered Leonard’s office, I noticed the photographs. These photographs told me how respected he was in the world of taxation. The photographs were of Leonard with each of the nation’s Presidents from the time he entered practice until the last time I was in his office, about six years ago. It dawned on me that not much happened in the tax world without Leonard being involved, and that nothing happened in the tax world of which Leonard was unaware.

He and I had other conversations that extended beyond taxation. He loved to ask me about my teaching, about my students, how they were learning, what sorts of things I did in the classroom, and whether I was getting students to focus on the sorts of issues and thought processes he considered important to the development and education of the next group to enter the tax practice world. From time to time, we talked about life. His life extended far beyond taxation, as is apparent from his obituary.

I will miss Leonard. He clearly has had a significant impact on my professional experience. I learned from him. Through him I saw, and still see, the world of tax and the atmosphere of the nation’s capital in ways that are very different from how most people see them and from how I would have seen them. He helped me become a better tax person.

The world, and the tax practice world, needs more people like Leonard Silverstein. It is difficult to open or look at a Portfolio without his face and his voice popping into my head. I hope it is that way for everyone else who makes use of a Bloomberg Tax product or service. Without Leonard Silverstein, it would not exist. He made a difference.

The tax legislation enacted in December of last year adds roughly $1.7 Trillion to the national debt. Even some opponents of increasing the national debt voted for the legislation. Most of the revenue lost on account of the legislation comes from tax cuts for large corporations and wealthy individuals. Some not-so-wealthy individuals face tax increases, but those increases aren’t financing that $1.7 trillion bill that will come due someday.

Now there is reason to think that opponents of increasing the national debt had good reason not to worry about the inconsistency between voting for the legislation and increasing the national debt. The answer is in the budget proposed by the Administration, which might come as a shock to some people once they look at it closely, but perhaps was expected all along by the advocates of tax cuts for the wealthy. The proposal is to slash $1.5 trillion from Medicare, Medicaid, food stamps, and other programs that assist, wait, the poor and the middle class.

Though this stupidity might seem quite clever in the short term to those who are engineering what has been happening, in the long run it is counterproductive even to the interests of the oligarchs and others who support supply-side economics, trickle-down theory, and other outdated, disproven, and foolish approaches to governance.

Once the two percent of Americans who received those overhyped $200 and $300 bonus payments realize that that income falls far short of making up for the loss of all the programs being reduced or eliminated, will it be too late for them also to realize that voting for candidates based on their words rather than on their actions is just as foolish as the decisions being made by the candidates who prevailed?

The federal tax legislation passed in December limits the deduction for state and local taxes to $10,000. In some states, many taxpayers‘ state and local tax bills exceed that amount by more than a little bit. In some instances, their state and local tax bills can reach two, three, four, or more times the limit. State and local politicians in these states, who rightfully view the limitation as a siphoning of funds from their states to states traditionally dependent on the federal income tax revenue they like to criticize, have taken several approaches to dealing with the issue. Some states are suing the federal government. Some states, including those joining in the litigation, are trying to find ways to make state and local tax payments that exceed $10,000 deductible.

One idea that has gained traction, most recently in New Jersey according to this story is to replace the state and local taxes, or at least some portion of them, with payments to charitable funds. Why do this? Though the federal tax law has for decades imposed limitations on charitable contribution deductions, those limitations are so generous that they would prevent the deduction only in the most unusual of circumstances.

Advocates of this approach admit that they are unsure if the idea will work. The governor, who is pushing for the plan, “can’t guarantee . . . success.” But he, and others, see little harm in trying. Most agree that the state would need to enact legislation to implement the plan.

Perhaps my conclusion will break their hearts. The plan won’t work. Here’s why.

To be deductible as a charitable contribution, a payment must satisfy several requirements. One of those requirements is that the payment be voluntary. Another is that the payment not be a quid pro quo.

If New Jersey enacts legislation that reduces some portion of state and local taxes and replaces that payment obligation with a requirement that taxpayers make payments to a charitable fund, then there is no charitable contribution deduction because the payment is not voluntary. If the payment is made voluntary, state and local revenues will decrease because surely there will be many taxpayers who choose not to make a voluntary payment.

If New Jersey enacts legislation that reduces some portion of state and local taxes and replaces that payment obligation with a requirement that taxpayers make payments to a charitable fund, then there is no charitable contribution deduction because the payment is a quid pro quo. First, the payment can be viewed as a transfer of money in exchange for lower tax bills. Second, the payment can be viewed as a transfer of money in exchange for state and local government services.

One supporter of the plan pointed to tax credits offered in other states for charitable contributions. The flaw in that comparison is that those credits are provided by the state legislatures as reductions in state and local taxes, not as attempts to recharacterize state and local taxes as charitable contributions for purposes of the federal income tax.

I’m not alone in concluding that this attempt to cloak state and local taxes in the garb of charitable contributions will not work. As Jared Walczak of the Tax Foundation, put it, “IRS and Treasury officials weren't born yesterday. They will see right through these proposals, recognizing the contributions for what they are: payment of taxes."

Readers of this blog know that I consider the December 2017 tax legislation to be unwise, misdirected, and harmful to the economy. I have shared some of my thoughts in Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, Oh, Those Bonus Payments! Much Ado About Almost Nothing, and Much More Ado About Almost Nothing. These commentaries explain in part why I think funneling tax cuts to the wealthy and to large corporations fails to infuse the middle class and the poor with the resources needed to stimulate the economy based on genuine, long-term demand. The few crumbs being tossed to a very small portion of the consumer class isn’t enough.

Now comes more bad news. Verizon has announced that “Tax-reform legislation will have a positive impact to cash flow from operations in 2018 of approximately $3.5 billion to $4 billion." What does it plan to do with this money? It plans to spend between $17.0 billion and $17.8 billion for capital expenditures in 2018, compared to the $17.2 billion it spent in 2017. In other words, Verizon’s tax cut money isn’t going to other businesses. Verizon announced it will give stock shares to its employees. Its 155,000 employees will share $400 million in stock, which amounts to less than $2,600 per employee. Crumbs. Surely the employees would prefer cash. So where is that tax cut money going? It’s going to “be used primarily to strengthen Verizon’s balance sheet.” In other words, it’s going to the owners. Though there are shareholders among those in the consumer class, keep in mind that the richest ten percent of Americans own 84 percent of the stock market. So when someone claims that tax cuts are good for stock ownership, the translation is that it’s very good for the richest ten percent, and lets a few more crumbs fall down to the other 90 percent. That’s not good long-term planning for the economy or the nation.

It’s a problem no one wants. It’s a problem many people, perhaps most people, have encountered or at least have seen. Geese descend on a lawn, a sports field, a park, a golf course, or any open area, and begin to leave mementoes of their visits. What they leave is slippery, smelly, unpleasant, and unattractive. So most people facing these rude visitors would try to find ways to discourage their return. It’s not easy. The internet is full of web sites with advice on getting rid of the geese, and businesses have sprung up offering geese removal services.

The geese don’t care whether the owner of the property they are polluting is rich or poor. One would assume that a wealthy individual, unlike most people whose income barely covers existing bills, or falls short, can pay some experts to show up and deal with the problem. But for a New Jersey billionaire, according to this article, the solution is to refuse to pay his real property taxes. This fellow claims that he has tried all sorts of devices to keep the geese off his property, and that they have not worked. It is unclear whether he himself has been out stringing up fishing line, installing decoys, and spraying liquids, or whether he has paid someone to do this. Surely he has the resources to pay someone, and surely if they fail to delivery he can refuse to pay the bill.

Why is this billionaire refusing to pay his property taxes because geese are fouling his property? He argues that the geese problem is reducing the value of his property. That probably is true, and he has the option of seeking a revaluation, and surely a revaluation will not reduce his taxes to zero. Instead, he claims that the town has an obligation to solve the problem. The town’s position is that it’s a private property problem. Apparently this billionaire thinks that his taxes are paid for the purpose of financing geese removal and that failure of the town to live up to its end of the contract he unilaterally wants to impose on it justifies his nonpayment of the real estate taxes. Interestingly, the taxes he currently is refusing to pay are school taxes. The logic behind refusing to pay for school funding because the town is not solving a private property owner’s problem escapes me.

The geese appear to provide a convenient pretext for this billionaire. He plans to file class action litigation on behalf of property owners who think their taxes are too high. His claims that the property tax valuation process needs repair are not without merit, but surely there are other ways to contribute to the betterment of the public good. Why not establish a foundation to fund the training and expertise that he explains tax assessors need, and to provide management improvements so that the assessors make better use of their time that he claims is necessary. For a billionaire who supports education and health care, as this guy does, it’s a no-brainer to put some money to work finding ways to fix the geese problem. He might even make money if he comes up with a solution.

There’s an inconsistency in adding to the list of things someone wants a government to do while at the same time trying to reduce the revenue available to that government. Money that could be used to deal with the geese problem will be diverted to pay the legal fees of defending the litigation that has been promised. Perhaps money can buy principle, as he claims is the case, but it appears that money cannot buy common sense.

So the supply-side trickle-down crowd pushed a bad tax bill through the Congress. Then, as I discussed in If A Tax Act is So Wonderful, Why the Need to Promote It?, they decided they needed to hype the legislation because they want to erase the image of wealthy individuals and large corporations gobbling up most of the tax cuts while ordinary Americans get tax cut crumbs.

Perhaps that is why Paul Ryan, according to numerous stories, including this one, decided to issue a tweet sharng the news that a public high school secretary was “pleasantly surprised her pay went up $1.50 a week.” Technically, her gross pay is unchanged. Her take-home pay was reduced because the employer withheld $1.50 less in federal income taxes.

What the secretary didn’t mention, probably because, like most Americans, she is unaware of the issue, is whether the withholding decrease is too much. If it is, she will end up with a smaller refund in the early months of 2019 or, worse, find herself writing a check or making an electronic funds transfer to the U.S. Treasury. Why? There has been too little time for the IRS to issue revised withholding tables that are sufficiently accurate. Taxpayers should run pro forma analyses to determine if their withholding has decreased by too much, but very few people do that sort of computation. Instead, they rely on the IRS and employers to “do the right thing.” Though usually well-intentioned, the IRS and employers don’t always get it right.

Perhaps the secretary was pleasantly surprised because she’s one of those people who don’t pay attention to news, tunes out of political discussions, and perhaps is among the half of eligible voters who didn’t bother to go to the polls in November of 2016. Would she be pleasantly or unpleasantly surprised to learn that while she banks an additional $1.50 per week, the Koch Brothers stand to gain $1,400,000,000 and tossed $500,000 into Paul Ryan’s pockets as a thank-you gift?

Shortly after posting the tweet, Ryan deleted it. The California’s Lieutenant Governor’s reaction was not unlike mine and that of many others: “Guess someone told Paul Ryan you shouldn't go around praising yourself for giving a working person an extra $1.50 a week.” It is just amazing to me how oligarchs and their puppets think they deserve high praise, obedience, and votes because they hand tax cut crumbs to ordinary Americans. I suppose they take this approach because they can, and because enough Americans buy into their propaganda. At some point, will enough Americans wake up? Or will it take the next great crash to motivate people to learn something about long-term economic and tax policy?

Several weeks ago, in Oh, Those Bonus Payments! Much Ado About Almost Nothing, I elaborated on two previous posts, Those Tax-Cut Inspired Bonus Payments? Just Another Ruse and That Bonus Payment Ruse Gets Bigger, in which I explained the crumb-like nature of the pennies per hour that are being handed to some workers. In in Oh, Those Bonus Payments! Much Ado About Almost Nothing, I shared the news that Walmart’s trumpeted $1,000 bonus is actually a $1,000 bonus for a handful of employees. The average bonus is $190, which means some employees will be tossed a twenty-dollar bill and expected to dance with joy. Reports are that in many instances, these bonus payments have been announced but not paid.

Now comes news that Home Depot is emulating Walmart. Only those employees with 20 years of service will receive a $1,000 bonus. How many Home Depot employees have been with that company for 20 or more years. Surely nowhere near 100 percent, 50 percent, 25 percent, or even 10 percent. Employees with two to four years of service will receive $250. Those with fewer than two years of service will receive $200. What’s the average? Somewhere between $200 and $1,000, but surely closer to $200 because there are so few long-tenured employees. Even using $500 as the average, the bonus payments will cost Home Depot $190,000,000 before taking into account the tax savings from the tax deduction for the bonus payments. Shortly before the tax legislation was signed, but as it was making its final journey through Congress, Home Depot announced a $15,000,000,000 share buyback program for its shareholders. Count the zeroes in each number.

Those bonus payments amount to pennies per hour. But it’s not a raise. There’s no promise of a bonus payment in 2019. Employees receiving a bonus cannot commit to higher long-term expense commitments. They will not be able to commit to higher monthly mortgage payments, higher monthly rents, higher monthly car payments, or much of anything.

Though those who pushed the unwise tax legislation through Congress claim that it will toss thousands of dollars into each household, no one should expect such a result, as I explained in Another Word for Fake Tax Math. According to a Reuters/Ipso poll released about a week ago, only two percent of American adults responded that they are getting a raise or bonus as a result of the tax legislation. For almost everyone, their economic challenges continue.

All of this propaganda is working, at least on some Americans. According to a Monmouth University poll the percentage of Americans who approve of the tax legislation increased from 26 percent to 44 percent, while those disapproving of it fell from 47 percent to 44 percent. I wonder how many of those people who changed their minds, even though the legislation wasn’t changed, suddenly figured that they, too, would be getting a raise or bonus. By the time people realize that their economic condition hasn’t improved or hasn’t improved by much more than a crumb, will it be too late for them to undo the votes that they will come to regret? That happens, as is evident from the number of people finally waking up to Michael Bloomberg’s warning that they failed to heed. In the meantime, the cash flowing into the hands of oligarchs and large corporations will contribute to inflationary pressure, making economic conditions even more difficult for ordinary people, even those dancing with joy because they received a $300 bonus on which they must pay taxes. It’s just too bad that so many Americans are incapable or unwilling to learn economics, analyze economic trends, understand long-term impacts, avoid being blinded by temporary economic distractions, and evaluate politicians on the basis of performance and not cheap talk. While they are so excited about what amounts to pretty much nothing, their future economic chances are being undercut. This is not going to end well, except for the rich and powerful.

According to this recent story, the Koch brothers have announced that they are willing to spend as much as $20 million “to promote the tax law.” Senator John Cornyn of Texas admitted that “Republicans will need to fight to sell their tax overhaul.” He claimed that this is necessary in order “to combat the misinformation and the naysayers.”

My attitude about advertising and marketing does not mesh with the views held by most people in those industries. To me, advertising and marketing are necessary when a product or service is new, so that what’s being sold can be brought to the attention of the public. It also is necessary if new information needs to be shared, such as the reduction of a price or a change in a product or service in response to competition or customer suggestions and concerns. What is not necessary is advertising to hype a successful product. Almost all, if not all, of the hottest selling products and services have benefitted from word of mouth, or, in the digital age, by “going viral.”

If the Republican tax act is so wonderful, people will realize that without someone needing to beg them to think that it is so. When people open their weekly paychecks and discover another $100,000, oh, wait, my mistake, discover another $8, will they dance in the streets and tell their friends how wonderful the Republican tax plan has made their lives? When they receive the layoff notice, will they sing praises to the architects and devotees of trickle-down-not? When they read in the paper or learn online that the store where they are employed is closing, will they write thank-you notes to the Congress that is within the grasp of the Koch brothers and other oligarchs? When they are starving and are permitted to eat the crumbs that fall from the table, will they bow in abject gratitude to those who have made their lives miserable? Will $20 million of “advertising” change their minds and convince them that being treated badly is a wonderful experience?

Let’s face it. Last time around, people figured out pretty quickly what went wrong with cutting taxes while increasing spending. So this time, the purveyors of supply-side economic theory are emulating the child who tells the parent when the parent walks in the door, “I didn’t break the cookie jar.” Hopefully the planned propaganda campaign will be just as effective as a preemptive strike.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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