MauledAgain

A recent case, Jusino v. Comr., T.C. Memo 2018-112, provides an example of when a tax issue can be resolved by following the simpler path rather than traversing a maze of definitional requirements. The taxpayers are the biological parents of two children, who were nine years and four years old as of the end of the taxable year in question. On January 15 of that year, the taxpayers’ parental rights with respect to the children were terminated by state court order. In September of that same year, the sister of the children’s biological mother adopted the children. The children had lived with their aunt since before the taxable year and during the taxable year. They visited with the taxpayers on some weekends and during the summer. Though the taxpayers occasionally purchased gifts for the children, their financial support was provided by their aunt who adopted them. The taxpayers claimed the children as dependents and the IRS disagreed, issuing a notice of deficiency denying the deductions. The taxpayers filed a petition with the Tax Court.

The Tax Court concluded that because the children did not have the same principal place of abode as the taxpayers for more than one-half of the taxable year, there was no need to determine whether they were qualifying children or qualifying relatives. The failure to share a principal place of abode was enough to disallow the taxpayers’ claimed deductions based on claiming the children as dependents.

I have seen summaries of this case describing the outcome as reflecting the impact of adoption, as though a person who has been adopted cannot be the qualifying child or qualifying relative of the biological parents. Yet, at least in some cases, such as this one, the adoption caused the children to become the nephew and niece of the biological parents. If, for example, the children and their aunt had lived in the same abode as did the taxpayers, then the Court would have needed to explore the other elements of the definition of qualifying child. Because the children met the age requirement and did not provide more than one-half of their own support, the question would have been whether they met the relationship test. After the adoption, both children were descendants of a sister of the biological mother and thus satisfied that test. But because they also were children of the adopting parent, the aunt, the rules applicable when two or more taxpayers can claim the same qualifying child would have needed to be examined.

Two things matter. First, if there are multiple paths to an answer to a tax question, take the simpler path. Second, don’t extrapolate a general rule from a case that is limited to a specific situation and rests on specific grounds. As pointed out in the preceding paragraph, the fact of an adoption, or, to mention another characterization I’ve observed, an award of custody, does not in and of itself foreclose or mandate a conclusion with respect to the child’s status as a qualifying child or qualifying relative. Extrapolating general rules from one anecdotal instance is a template for trouble.

For almost a decade I have been criticizing the so-called soda tax. It 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 several months short of 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?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, and What Is a Successful Tax?. And now, when it comes to Philadelphia’s soda tax, it turns out that my criticism failed to make a difference. As reported in numerous places, including this report, the Pennsylvania Supreme Court upheld Philadelphia’s right to impose the tax, rejecting the argument that the tax is a second sales tax on the items subject to it. A double sales tax is prohibited by Pennsylvania law, and by concluding that the Philadelphia soda tax is not a double sales tax, the court removed the last obstacle to its continued imposition and the spending of the revenue it raises.

In upholding the soda tax, four of the six Pennsylvania Supreme Court justices concluded that the soda tax was not a second sales tax because it is imposed on the distributors of the taxed items and not on the consumers, even though the distributors pass the tax onto the consumer. This is the sort of distinction drawn by lawyers that aggravates many non-lawyers. Technically, the court is correct. The court noted the tax is imposed even if the item on which the distributor paid the tax is not sold to a consumer.

The door is now open for Philadelphia to enact a “store exit” tax on stores for the privilege of allowing customers who entered the store to leave the store, based on the amount of money spent in the store by the customer. The tax would not violate Pennsylvania law because it would not be a double tax. Why? Because it would be imposed on the store and not on the consumer. To those who suggest that no one would ever propose or enact such a tax, I say, don’t be so confident. There even has been a to tax the air that people breathe. And I suppose at some point a tax on inhaling air will be treated as different from a tax on exhaling air, perhaps justified as not a double tax because the chemical content of inhaled air differs from the chemical content of exhaled air.

It’s outcomes and suggestions like these that inspire the anti-tax crowd. That’s sad, because opposition to all taxes because of one or two bad taxes is like disliking all people of a particular background because a few people of that background have behaved badly. If more people informed themselves about taxes and participated eagerly in the tax enactment and amendment process, the nation could end up with a much more rational tax system than now exists. But that requires giving reasoning skills priority over emotional reactions. Will that happen?

About a year and a half ago, in If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars, I explained that if the only way to make a private sector project economically viable is to grab taxpayer dollars, then the project isn’t worth doing. Now comes news of another example of why tax breaks should be denied to private sector projects that primarily benefit private individuals. According to this news report, a developer in Philadelphia wants the city to petition the Commonwealth of Pennsylvania, to approve tax-exempt status for more than five dozen parcels of real estate on which the developer intends to provide retail and office space, a hotel, and parking. For me, the question is, why does the developer need tax-exempt status? The answer is simple. It’s a matter of seeking maximum, rather than appropriate, profits. Profits at the expense of taxpayers is wrong.

The program that provides the tax-exempt status sought by the developer is designed to encourage investment in “underutilized or underdeveloped areas.” The area in which the developer is planning the project is what has been called “the hottest neighborhood in the country.” It is neither underutilized nor underdeveloped. Putting aside the question of whether the tax-exempt program in question is wise, it surely ought not be available in this instance. Seeking tax-exempt status in this situation is not unlike millionaires finding ways to get food stamps.

The developer claims that the tax-exempt status is necessary in order to attract financing for office development. If financing for office development in the area in question is a good thing, the banks and other lenders will step up. If they don’t, then either the developer is not one with whom they want to work, or the area is not one properly positioned at this time for office development. Either way, the private sector is speaking.

When people understandably complain about the city of Philadelphia “taxing everything,” a hyperbolic but reasonable concern, do they take into account the impact on revenue of tax breaks benefitting people with ability to pay? Do they realize that every tax break requires shifting tax burdens from those getting the breaks to those who are not necessarily in a position to finance the pet projects of those with ability to pay taxes? Perhaps if they did, they would let that analysis affect what they do at the polls.

One more point needs to be made. If the tax breaks are required, as the developer insists, to open up financing that otherwise would not be available, then isn’t the tax break simply a piece of investment in the property? If the banks and other lenders get interest on their loans, ought not the taxpayers get interest on the tax break advanced to the developer? Better yet, ought not the taxpayers, who are in effect financing part of the project, be treated as shareholders entitled to vote on decisions with respect to the project? Surely the developer would oppose paying interest to taxpayers or letting them vote, though grabbing tax revenue through tax breaks seems perfectly acceptable. There’s something wrong with that sort of approach to doing business. Either the project is worthwhile and can stand on its own in the private sector, or it ought to be shelved.

There are times when a project cannot stand on its own because the nature of the project makes it necessary yet financially unfeasible for the private sector. In these instances, it is appropriate for taxpayers to fund the enterprise but the enterprise must be owned and controlled by the taxpayers, that is, by a federal, state, or local government or an agency thereof. These are projects that have a direct, rather than indirect, effect on taxpayers and must be under the control of taxpayers. That is why I oppose privatization of public enterprise and why I oppose public grants to, and tax breaks for, private sector enterprises.

After reading the opinion in a recent Tax Court case, Najafpir v. Comr., T.C. Memo 2018-103, I asked myself what could the taxpayer have done to avoid the Tax Court’s approval of the IRS denial of the taxpayer’s claimed office-in-home deduction. I thought of an answer, but I’m not absolutely certain it would work, not so much from the tax side but from the contract side.

The taxpayer owned a business in called AA+ Smog Check. AA+ operated a smog inspection station in Burlingame, California. The taxpayer had established AA+ in 2007 as a sole proprietorship. During the taxable years at issue, AA+ was a test-only smog check station. The taxpayer was legally restricted to performing smog inspections and other minor maintenance work, such as oil changes. The minor maintenance work generated roughly 5 percent of AA+’s business.

The taxpayer lived in a one-bedroom apartment four doors down the street from AA+. He paid rent of $1,450 per month, which entitled him to the use of the apartment, shared laundry facilities, and one-half of a shared two-car garage attached to the apartment building. The taxpayer did not park his car in the garage but instead used the space as business storage. As a smog check business owner, the taxpayer was required by California to keep certain invoices and records regarding smog checks for at least three years. Invoices must be kept on location for purposes of immediate inspection. AA+ had no formal office or storage space, and real estate in the area was expensive. Because the garage was so close to the AA+’s location, the taxpayer decided to use it as storage for his business records, including the smog inspection invoices that California required him to retain. In addition to these business records, the taxpayer also stored business-related items such as backup air compressors, printers, monitors for the smog machine, and various parts such as oil filters and wipers. He stored no personal items of note or value in the garage, other than some pencils and stationery.

On his federal income tax returns for 2009 through 2011, the taxpayer claimed home office expense deductions for the use of his garage. He argued that he was entitled to those deductions because the garage was used to store business records, he was required to maintain the records by the State of California, and the garage was the most convenient and inexpensive place to do so. The Tax Court explained that neither of the two possible exceptions to the denial, under section 280A(a), of deductions for expenses with respect to the use of a taxpayer’s residence applied. One exception, for expenses attributable to space allocable within a “dwelling unit which is used on a regular basis as a storage unit for the inventory or product samples of the taxpayer held for use in the taxpayer’s trade or business of selling products at retail or wholesale, but only if the dwelling unit is the sole fixed location of such trade or business,” did not apply because the taxpayer was not in the trade or business of selling products at retail or wholesale, and his business records and invoices do not constitute inventory. Nor did the exception for expenses allocable to a portion of the taxpayer’s dwelling that is used exclusively on a regular basis as the taxpayer’s principal place of business apply, because the garage was not exclusively used as his principal place of business.

The result seems harsh. The taxpayer operated a business, and stored business records and business-related items in a space for which he paid rent. The problem is that the space where he stored these items was available to the taxpayer because it was bundled with the apartment in which he lived. Would the deduction have been available had the taxpayer entered into a lease for the apartment unit and use of the laundry facilities, while causing AA+ to enter into a lease for use of the garage? The answer depends, in part, on information not available. Would it violate local law to treat the apartment unit and the garage as two properties subject to two different leases? My guess is, perhaps not, because there certainly are instances, at least in places with which I am familiar, in which the owner of a property on which there is a house and a barn, or a house and a garage, rents the house to one person, and the barn or garage to another. However, many jurisdictions have restrictions on this sort of splitting if it causes, or could cause, the number of household units on a property to exceed what is permissible under local zoning ordinances. Another concern would be the existence of prohibitions on renting to a business a property zoned for residential use; it is possible that the taxpayer’s use of the garage for business storage violated some local law though that was not raised in the Tax Court. Yet another obstacle might be the impact on insurance coverage of entering into two separate leases. If these, and other hurdles not coming to mind, are overcome, the IRS might still consider the identity of lessor and lessee to warrant application of a substance-over-form argument, one that it would probably raise even if the taxpayer put the business into a corporation or LLC treated as a corporation.

I doubt any of this occurred to the taxpayer when he set up his business and looked for a place to store the records he was required to keep. It is yet another example of how the complexity of the tax law gets in the way. Fiddling with tax rates to the advantage of the oligarchy does nothing to simplify a law riddled with complexity. To the extent that the tax law causes, or should cause, people to think about alternative ways of structuring a business that they otherwise would not need to consider, it creates impediments far worse than the mere existence of a tax. Section 280A was enacted because some taxpayers were being far from truthful when claiming business use of their home, yet in this case there is no question at all that the taxpayer was using the garage for business purposes and only for business purposes. Section 280A needs to be fixed.

As I noted a week ago, in A Strange Tax Proposal With Little Promise of Being Effective, there are taxes “enacted to discourage particular behavior or transactions.” As an example, I noted, “The goal of a tobacco tax, for example, is to eliminate the use of tobacco, and if it were successful, revenue from that tax would drop to zero.” So would legislators seeking tax revenue take steps to encourage tobacco purchases in order to increase tobacco tax revenues? Before considering that question to be silly, observe what the Pennsylvania legislature not very long ago.

As described in multiple reports, including this one, Pennsylvania legislators quietly and quickly inserted into tax legislation a provision that permitted the sale to unlicensed individuals a variety of aerial fireworks previously restricted to use by trained professionals. Prohibitions on the use of these aerial fireworks, such as forbidding use by minors and intoxicated individuals or within 150 feet of buildings, reflect the dangers of people shooting off explosives the way some people foolishly fire guns into the air in crowded neighborhoods on New Year’s Eve. People get hurt. Yes, the new legislation contains those restrictions, but what happened two weeks ago, with fireworks being set off close to neighbors’ homes at all hours of day and night, demonstrates the futility of expecting any sort of compliance. The new law permits the sale of “Roman candles, bottle rockets, firecrackers and some types of reloadable aerial shell launchers.”

The legislative change was inserted into the Pennsylvania tax law, rather than, say, provisions dealing with the use of explosives, because the new law came with a tax twist. Sales of fireworks are subject not only to the usual state and local sales taxes but also to a special, additional 12 percent sales tax on “amusement products.” Clearly the goal of the legislature was to raise revenue by widening the use of fireworks, dangerous as they are, and then imposing a tax on the sales.

In the meantime, fireworks vendors, according to this report, have sued the state not only because of the tax, which the industry claims violates the Pennsylvania constitution, but also because established vendors are subject to a variety of safety regulations either being ignored or not applicable to roadside fly-by-night vendors. The legislation permits temporary tent setups for fireworks sales but those are not required to have containment walls, sprinkler systems, or smoke alarms. Nor are there in place systems to ensure that the new tax, or even any sales tax, is being collected or remitted to the state.

Pennsylvania is not the only state to expand the list of permissible fireworks in an attempt to raise revenue. Though Indiana raised about the amount of revenue that was predicted, revenues in Georgia and West Virginia reached only one-fourth and one-third, respectively, of what legislators were told would be raised. The revenue estimators working on these legislative initiatives must be taking the same courses that have produced the supply-side economic theory advocates who also look upon their own proposals with far too much optimism.

This is what happens when legislation is rushed, squeeze into other bills, and enacted without public hearings and discussion. This is what happens when revenue policy is a patchwork of concepts rather than a reflection of an overall analysis of taxes, the economy, behavior, and social benefits. If the goal of the change in the fireworks law is to raise revenue, which defenders of the legislative package claim that it is, as reflected by its inclusion in the tax statutes, then the legislature must be counting on a huge surge in the purchase and use of these fireworks. An increase in fireworks sales and use surely will be accompanied by an increase in explosions, fires, personal injuries, and even death. Yes, it’s only a matter of time before someone loses a hand or gets blown up, but whatever it takes to raise revenue, well, perhaps cigarettes and alcohol should be sold to minors, especially because teenagers have quite a bit of purchasing power. As many commentators have noted, the legislature simply did not think through the impact of this change. That’s typical, and no less unsatisfactory.

Last week, I happened upon another television court show that involved tax return preparers, tax procedure, and some unseemly behavior. I knew it was going to be interesting when the title of the episode, Over-the-Top Accountant Con? popped up on the on-screen program guide as I was looking for the next television court show to watch as I worked on a genealogy database. Episode 172 of season 3 grabbed more of my attention than did the database. Of course, readers know this isn’t the first television court show dealing with tax issues that has grabbed my attention, and as usual, it was a repeat, for I had missed the original airing. I have commented on more than two dozen of these tax-related television court shows, starting with Judge Judy and Tax Law, and continuing with Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, and One of the Reasons Tax Law is Complicated.

The plaintiff had been incarcerated for 20 years and had not filed tax returns during that time because he had no income. After being released and getting a job, he met the defendant, a tax return preparer, through the defendant’s husband at an event where defendant was handing out business cards. The plaintiff needed to have his federal and state tax returns prepared.

The defendant tax return preparer was not a CPA, had earned a bachelor’s degree in accounting, had worked for a CPA firm for 5 years, and then went out on her own for 3 years. She testified she takes continuing education courses. She held a full-time job aside from the tax preparation business, and prepares about 75 returns each year.

The plaintiff testified that the defendant quoted a price of $100 for doing the returns. When he asked about the 21-day fast refund process provided by the defendant, he said he was told it would be an additional $200. The defendant denied this, and claimed she billed by the hour. After preparing the returns, the defendant sent a $5,000 invoice to the plaintiff, of which $4,300 was for telephone calls. There was no retainer agreement.

The defendant testified that filing a return after 20 years of not filing returns would trigger an identity verification audit, and that this was the reason the plaintiff did not get his refund within 21 days. She claimed that she had previously told him there would be a delay if there were any problems, such as an identity verification audit. The defendant testified that a month after filing the federal return for the plaintiff, the IRS sent a letter to the plaintiff. The plaintiff denied receiving the letter.

The defendant claimed she had obtained a power of attorney from the plaintiff, but did not produce a copy of it because she was moving and the copy was allegedly in a box somewhere. The defendant testified that she communicated with the IRS and explained the plaintiff’s situation to the agency. The plaintiff testified that he was the only one who communicated with the IRS. He stated that he called the IRS, and then visited an IRS office, where he spoke with an agent. The agent gave the plaintiff a copy of the plaintiff’s tax transcript, on which there were no contacts recorded between the IRS and the defendant as the defendant had claimed.

The defendant received the federal income tax refund on the plaintiff’s behalf by having it deposited in her bank, held back $5,000 out of it for payment of the invoice, and remitted the balance, roughly $1,000, to the plaintiff. The plaintiff testified, and a copy of the return showed, that his income for the year was roughly $14,000. One of the judges suggested that the refund was held up by the IRS because of the size of the refund when compared to the amount of reported income.

The plaintiff also testified that when he did not get his state income tax refund, he contacted the state revenue department. Someone at that agency told him that the state tax refund was direct deposited into the defendant’s bank account. The defendant claimed she in turn paid the refund to the plaintiff, but there was a discrepancy between what was deposited into her account and what she said was remitted to the plaintiff. The defendant testified that because she processed four state income tax refunds on that day she could not explain the discrepancy and would need more time to determine to whom she sent each of the four checks she claimed to have sent to four clients, including the plaintiff.

One of the judges, looking at the invoice, asked the defendant for her time sheets. The defendant testified that they were in baggage lost by an airline. The invoice included charges for time that the defendant claimed to have been on the phone, on hold, with the IRS. She also billed the plaintiff for calls to the plaintiff, but the plaintiff produced his telephone records which showed that there were nowhere near as many calls between the plaintiff and defendant as the defendant charged. On one call that showed 5 minutes according to the plaintiff’s telephone bills, the defendant charged him for a one-hour call. On another call, lasting 2 minutes according to the plaintiff’s telephone bills, the defendant charged for one-half hour because her policy is to round up to the nearest half-hour. In response to sharp questioning by the judges, the defendant claimed that some of her phone calls with the plaintiff were on another telephone number of the plaintiff.

In conference, the judges found the defendant’s testimony to lack credibility. They considered the defendant’s behavior to be unreasonable, and her practice of charging for time spent on hold, when the defendant was or could have been doing other things, to be obnoxious. They held in favor of the plaintiff. The defendant protested, the court sent her from the courtroom, and announced that they would refer the case to the local prosecutor because they considered the defendants’ behavior to be a violation of at least several criminal statutes.

There are several lessons to be learned from this case. First, do not let tax return preparers receive your anticipated refund. Have the refund sent to you, directly or through deposit into your bank account. Second, preserve and backup evidence, so that even if an airline loses luggage or boxes are moved, there is an alternative source for the evidence. Third, do not lie, Fourth, do not try to take advantage of people. Fifth, do not sass judges when they are handing down their rulings.

When I read the Philadelphia Inquirer article describing $68 property tax refund checks mailed by Middletown Township in Bucks County, Pennsylvania, to its residents who own properties with structures on them, four thoughts crossed my mind. Perhaps there were more than four, but four stuck in my memory between the time I read the paper and the time I sat down at the keyboard

First, I thought, “how nice.” Who doesn’t like a refund of taxes, especially when it is caused by a larger-than-anticipated budget surplus?

Second, I thought, “Wait a minute. The way they did this might be a problem.” The refund were the same for each property owner whose land held a structure. Would it not have been better to have provided a refund proportional to the amount of township tax paid by the owner? I don’t know enough of the facts to conclude that there is any legal violation, but it certainly raises issues of fairness that are tolerable only because the amount of money involved isn’t very much. Consider two homeowners. One owns a $300,000 property and paid a township property tax of $300. The other owns a $600,000 property and paid a township property tax of $600. Each one has paid a tax equal to one-tenth of percent of the property’s value, consistent with the proposition that property taxes should be uniform – though in fact, because of warped assessments, special rebates, and other flaws, they aren’t. Each homeowner receives the $68 refund, so that the first homeowner has paid $232 and the second, $532. The first homeowner has paid a tax equal to .000773 percent of the property’s value, whereas the second homeowner has paid a tax equal to .000886 percent of the property’s value. Perhaps in this instance of a small refund, “rounding” might provide the escape route.

Third, I thought, “Why not save money and simply provide each property owner with a credit rather than mailing a check?” Present-day technology makes that an easy thing to do, and also makes it easy to calculate a proportional credit rather than an everyone-gets-the-same-amount check. Perhaps the supervisors, being politicians, wanted to put something in front of property owners who also are voters.

Fourth, I thought, “Here we go again, with misleading analysis.” That thought was a reaction to a comment by the director of policy analysis at the Commonwealth Foundation. She said, “It’s really impressive to see a local government that’s practicing spending restraint.” Yet the refunds originated with a budget surplus roughly $1,000,000 larger than expected. How did that happen? Was it spending cuts? Most of the surplus, more than eighty percent, came from the collection of delinquent taxes. What’s amazing is how the tax burdens on compliant taxpayers can be eased when those who don’t comply are forced to do so. What also wasn’t mentioned was the township’s decision to increase spending for the police force by hiring another officer.

Perhaps the most important message isn’t the mantra of “cut expenditures, shrink government, rip it out by the roots,” but “step up, contribute, do your share, don’t be a deadbeat, stop looking for tax breaks for yourself or your narrow special interest group.” Doing taxes right means taxes go down without services being impeded.

There are all sorts of taxes, designed to do a variety of things. Most are designed to raise revenue, though some are enacted to discourage particular behavior or transactions. The goal of a tobacco tax, for example, is to eliminate the use of tobacco, and if it were successful, revenue from that tax would drop to zero.

But it is possible to enact a tax designed to encourage a particular behavior or transactions. According to this report, Hong Kong is planning to impose a tax on unsold newly built apartments. The goal of the tax is to boost supply in what is considered to be the most expensive property market in the world. In theory, increasing supply should reduce prices. What I don’t understand is how a tax on unsold newly built apartments will lower prices or increase supply.

When the builder or developer of a property is subject to a new tax, it is not unlikely that some or all of the tax would be passed on to the buyer. That would increase, not decrease, prices. If the idea behind the proposal is that the developers and builders would reduce prices in order to accelerate the sale of the units, and if that succeeded in getting the units sold, the impact would be a reduction in supply. In turn, that would increase prices. The proposed tax would also have the effect, it seems, of discouraging developers and builders from constructing additional units because those would increase the inventory of unsold newly built apartments. That, too, would reduce supply and increase prices.

Proponents of the tax claim that it will deal with a situation in which “demand has surged ahead of a chronic under-supply of homes. Yet if there is a shortage, why are there unsold newly built apartments?

Analysts from several investment companies predict that the tax, if enacted, “won’t dent soaring prices.” They consider the proposed tax to be one that “developers can easily absorb” and characterize the “absolute level of tax as “relatively manageable.”

Perhaps the problem is a mismatch of demand with ability to pay. If housing unit prices were within reach of a sufficient number of potential purchasers, inventory of newly built units would not stagnate. Hong Kong, however, suffers from the same economic disease as does the United States and too many other nations, namely, income and wealth inequality that is out of control. According to this report, as of a year ago Hong Kong’s wealth gap had reached an historic high, with the top ten percent earning roughly 44 times what the poorest ten percent pull in.

The solution is not a tax on unsold newly constructed units. That does nothing to restore equilibrium to a market warped by inequality. A tax on excess building profits would generate revenue that could be used to reduce taxes on those with low incomes. Though opponents of taxation claim that such a tax would put developers out of business, the fact that the land cannot expatriate itself and the fact that there still are after-tax profits to be made ensure that someone would step in to fill in the vacuum even if a developer did withdraw from the market. According to this commentary, Hong Kong developers are hoarding land. So perhaps a tax on undeveloped land would be effective, though it would be contrary to the goal of preserving open spaces. Hong Kong’s population increases, which are a factor in the housing shortage problem, demonstrates the tension between unbridled population growth and a finite earth. That problem is one I have addressed in several posts, including Can Tax Rebates Help Prove Malthus Wrong?, and it ought not be a surprise to anyone that nothing in the ten years since I wrote that commentary has changed my outlook other than to strengthen it and make me even more pessimistic.

Hong Kong has a problem. Hong Kong is the canary in the coal mine. Today, Hong Kong, tomorrow, our nation. Until those whose money addictions have caused the problem are deprived of the ability to continue their depredations and worsen world economies, the preclusion of all but the economic elite from life’s basic necessities will become increasingly widespread and potentially very dangerous. Taxes on unsold newly constructed housing units are not the answer and will not solve the problem.

About a year ago, in Learning from the Tax Experiences of Others, I reacted favorably to reports that the Republican governor of Oklahoma insisted on tax increases to repair the damage caused by the unwise tax slashing that Oklahoma, following the examples of Kansas, Louisiana, and some other states, had enacted. The governor prevailed, and the Oklahoma legislature enacted the requested increases. Those increases were minimal, and did not provide any resources for increasing teacher pay in the state. Oklahoma ranks second to last in teacher pay, teachers have not had raises since 2007, and they threatened a walkout. Three months ago, a majority of the Oklahoma legislature, again recognizing the strength of practical tax reality and ignoring the disproven philosophical theories of the anti-tax lobbies, enacted increases of $1 per cigarette pack, 3 cents per gasoline gallon, 6 cents per diesel gallon, an increase in the oil and gas production tax, and a cap on itemized deductions. Using this revenue, the legislature approved increases in teacher pay averaging $6,100, not the $10,000 the teachers were seeking, and amounting to an average of $550 for each of the years that the teachers went without raises.

Almost immediately, the anti-tax lobbies roared into action. One group put together a plan to gather signatures for a referendum putting repeal of these tax increases on the November ballot. According to this report, the Oklahoma Supreme Court rejected the referendum initiative because of insufficient signatures, and the group behind the initiative decided to abandon its effort. It claimed it was not given enough time to obtain the signatures, but perhaps the problem was an insufficient number of voters willing to sign. Perhaps they failed to notice, as the report explains, that “Many of the anti-tax Republicans in the House who voted against the package faced primary opposition this year.” Two were defeated in primaries, and others failed to obtain majorities, thus facing runoff elections. At least some people seem to be waking up to the damage caused by supply-side economic theory nonsense.

The strikingly amazing aspect of this situation is the claim by the anti-tax group pushing the referendum that it is “not opposed to raising teacher pay” but that “state leaders should have found other ways to fund the raises without raising taxes.” How? What are the practical suggestions? They aren’t forthcoming because these anti-tax groups realize that the moment they share the alternatives, even more people will recognize the failures of the anti-tax philosophy. There are two alternatives. One alternative is to reduce the number of teachers, using what would have been paid to the fired teachers to increase the pay of those who remain. Of course, this approach would put more stress and work requirements on the remaining teachers, and further weaken education in a state that needs better, not weaker, education. The other alternative is to take funding from other programs and shift it to teacher pay. Identifying the programs to be defunded for this purpose would cause all sorts of harms. Do the people of Oklahoma want reduced road repair funds? Reduced police, fire, and EMT services? Reduced tornado warning system and shelter funding? Worthwhile programs, goods, and services are not free, nor cheap. The mentality of the anti-tax groups who claim they support one or more programs, goods, and services reflects an inability to understand this reality. So long as they persist in their approach, income and wealth inequality will continue to increase, real wages will continue to decline, the middle class will continue to shrink, and the strength of the nation will continue to weaken. Enough already, supply-siders. You’ve had your chance. In fact, you’ve had multiple chances at the federal level and in far too many states. You tried. You failed. It’s time to step aside and let the rest of us have our turn.

Readers of this blog know that I abhor ignorance. In theory, ignorance, unlike, say, bad weather, can be eliminated. In practice, putting an end to ignorance is becoming increasingly difficult, particularly because there are evil people who encourage the spread of ignorance. One of the most ignorant assertions that I have been hearing and reading recently is the moronic claim that “illegal immigrants don’t pay taxes.” For example, almost three weeks ago, someone using the name BaryOwen wrote on a reddit forum, that “illegal immigrants don’t pay taxes.” At about the same time, on Chris Hayes’ twitter feed, someone using the name blujkts wrote, “ILLEGAL immigrants DON’T PAY TAXES BECAUSE THEY”RE UNCODUMENTED.” Two weeks ago, on a 4chan board, someone hiding as Anonymous told us, “Illegal immigrants don’t pay taxes, dumb s***s. None have social security cards.” The erroneous claim that people in the country illegally don’t pay taxes has been around for quite some time. Eight years ago, the New York Times reported that a New York Times/CBS poll revealed that of the respondents, “Three quarters said that, over all, illegal immigrants were a drain on the economy because they did not all pay taxes but used public services like hospitals and schools.”

We probably will never know, at least before the Last Judgment, who started this misstatement. But we do know that way too many people heard it and repeated it, without thinking about it and without checking it out. This isn’t the sort of issue on which deep rocket-science research is required. It’s a matter of common sense to think about the practical realities of life. So, for example, one could think, “Hmm. If someone not in the country legally makes a purchase, do they escape paying sales tax?” The answer, which should pop into just about everyone’s brain, is “Of course not.” Or, what if that person purchases gasoline? Do they pay the gasoline tax? Certainly. What if the person buys a tobacco product, or an alcoholic beverage, or telephone service? Do they pay the taxes imposed on those transactions? Most certainly. Moving to the big ones, do these folks pay federal and state income taxes? Do they pay social security taxes? Folklore might cause people to think, no, because they’re all being paid in cash. But a wee bit of research, a skill that should have been learned somewhere along the way in a person’s K-12 journey, reveals that most individuals who are not in the country legally but who are working are not paid in cash, have taxes withheld from their pay, receive Forms W-2, and file income tax returns. Some end up overpaying and do not receive their refunds. None of them qualify for social security benefits even though they are paying into the system.

When Anonymous added the nonsense that illegal immigrants don’t pay taxes because they don’t have social security taxes, that person took the ignorance up a few notches. Social security cards have nothing to do with the paying of sales taxes, gasoline taxes, tobacco taxes, alcohol taxes, or phone taxes. They have nothing to do with the paying of income taxes and have nothing to do with the paying of social security taxes. It is amusing that someone whose statements reveal a complete ignorance of reality has the courage to use the word “dumb” in describing those who know what they are writing about.

It’s difficult to erase ignorance through education when the purveyors of falsehoods are flooding the world with their harmful lies and taking steps to take over the education systems that are designed to make propaganda more difficult to spread, easier to detect, and easier to rebut. If we haven’t yet reached the tipping point, we almost certainly will, very soon, unless people wake up, exercise their thinking skills, engage their brains, and push back against those who don’t have the best interests of Americans at heart. Otherwise, celebrating “independence” will be celebrating a theory with little practical meaning.

Recently, in a letter to the editor of the Philadelphia Inquirer, a letter than I cannot find on the paper’s web site, Paul Benedict reacted to a recent article about private companies fixing potholes. I wrote about this recent development in A Hidden Tax Question, in which I pointed out that private individuals and companies do all sorts of volunteer work that otherwise would be expected of government.

Paul Benedict argues that private repair of potholes “tells us that it appears the federal and state gasoline taxes that most of us pay are not going toward much-needed road repairs.” After pointing out that “Pennsylvania has the highest gasoline tax in the country” and “receives all the revenue” from the Turnpike, he asks “Where are all these funds going?” He also asks, “Why does it take so long for municipalities to fix potholes?”

The answer is simple. There is insufficient gasoline tax and other revenue to fix all the roads, bridges, and tunnels that are in disrepair. Even if there was sufficient revenue, there is no logistical way to repair all potholes the day after each one appears. Potholes tend to appear in clusters, usually after a freeze-thaw-freeze-thaw cycle. So it is not unreasonable, though it is frustrating, that it takes days and weeks for potholes to be repaired.

Paul Benedict’s questions can be answered by examining the revenues and expenditures of the Pennsylvania Department of Transportation and the local counties and municipalities. The Department of Transportation 2017-2018 actual, available, and budget can be found at the Commonwealth Budget, beginning on page E41-1. The department is responsible not only for pothole repairs, but also for bridge repairs, bridge reconstruction, road repairs, road reconstruction, construction of new roads and bridges, hiring and training employees, promoting road safety, maintaining signs, clearing drains, the list is long.

The recent increase in the Pennsylvania gasoline tax was earmarked for rebuilding crumbling bridges and highways. A chunk of Pennsylvania Turnpike revenue is used to fund maintenance and repair of the state’s portion of the toll-free Interstate 80. It helps to analyze the facts.

To repair potholes more quickly, the authorities responsible for fixing potholes have three choices. They can persuade the legislature and local governments to provide more revenue. They can divert funds from other projects. They can find ways to reduce the costs. The first approach requires either higher taxes, which won’t find support, or diversion of funds from other departments, which won’t sit well with those who benefit from what those other departments, such state police protection, public health regulation, and environmental care. Imagine having potholes repaired overnight at the expense of eliminating the state police. The second approach requires diversion of funds from road and bridge repairs, drain cleaning, etc. Imagine having potholes repaired overnight at the expense of being on a bridge when it falls into a river. The third approach, a favorite among anti-tax groups, requires finding the huge amounts of waste that the privatization advocated claim exist but rarely can find in more than de minimis amounts, or worse, reducing worker pay. Though some relish the idea of paying workers minimum wage or less, that idea is inconsistent with vibrant economic growth.

The bottom line is that we get what we pay for. Asking for pothole repair, or any other service, to be increased because there are more potholes, more robberies, or more chemical spills, while expecting to pay the same price is unreasonable. Perhaps paying the true cost of the transportation infrastructure people claim to want would be less burdensome if people’s wages, adjusted for inflation, had not remained stagnant over the past 35 years while the oligarchy has stuffed its pockets and overseas accounts with tax breaks. It’s not easy to see and understand the big picture, but it’s necessary.

Advocates of tax cuts for wealthy individuals and corporations not only continue to hold fast to their disproven theories, and not only crow about their December 2017 success in adding more tax cuts to those previously handed out to the elite, but continue to push for even more tax cuts. I suppose they won’t stop until all the wealthy individuals and corporations are paying zero taxes. And perhaps they won’t stop at that point, but will then propose that everyone else pay taxes to the oligarchs.

About a week ago, Christian E. Weller, in The Data Do Not Support Supply-Side Economics, explained why the claim that the wealthy individuals and corporations being granted the privilege of bearing less and less of the burden of keeping the nation running would use their tax break windfalls to create jobs and increase wages for American workers is nonsense. The proof isn’t in theoretical rebuttal of a flawed theory. It’s in the practical reality of what is happening on the ground.

Several weeks ago, the Federal Reserve disclosed that corporations have more money, but have not increased domestic investments. Keep in mind that for every paltry several-hundred-dollar-after-taxes bonus for one worker, some other worker lost a job. For every small increase in an hourly rate, there was an offsetting layoff somewhere else. Where did the additional cash go? Corporations held some of their windfalls, and plowed most of the rest into stock buybacks and dividends, benefits that accrue to very few working people.

In some future post I will explain how similar claims with respect to tariffs, namely, that increasing tariffs on imports is good for America and Americans, reflects the same defective thinking as does the supply-side theory of tax policy, a theory that its inventor now admits was a mistake. It’s sad that when someone makes a mistake, too often others are the ones who pay the price. It’s even sadder when the people paying the price for mistakes they did not make continue to support the perpetrators of the mistakes that cause the harm. Holding on to flawed theories, enduring the adverse consequences, and continuing to rally behind those inflicting the pain isn’t admirable perseverance. It’s foolish stubbornness.

It was the first part of the headline to this Philadelphia Inquirer article that caught my eye and caused me to think of tax. The headline read, “He gave a $125K gift to Jefferson, expecting it would help get a marijuana growing license. Was it pay-to-play?” It ought not be difficult to guess what tax issue popped into my head. But first, the facts.

The story is confusing. Stories often are, when people are wheeling and dealing, jockeying for position, and trying to get the upper hand. It involves Pennsylvania’s foray into the world of legalized marijuana and cannabis research. Matthew Mallory, described as a marijuana entrepreneur, pledged $250,000 to Thomas Jefferson University, expecting that in return he would obtain an alliance giving him an edge in launching a medical marijuana business in Pennsylvania by getting a special relationship with Lake Erie College of Osteopathic Medicine. He paid half of the pledge, but two weeks later learned that Thomas Jefferson University would not be helping him as he expected. Mallory asked Thomas Jefferson University to return the money, but it refused. Mallory complained to the attorney general, but was told the university was not required to return the money. Mallory has explained, “I didn’t want to [make the donation], but we were told, ‘If you don’t do it, you’re not going to be part of this program.’” An official of Thomas Jefferson University stated that “There was never a promise of special favor with the commonwealth or any institution,” and the University denies giving any promises to Mallory. According to the University, Mallory’s gift gave his company simply the opportunity to be listed as a “founding supporter” of the University’s Lambert Center for the Study of Medicinal Cannabis and Hemp. Because the additional details aren’t germane to the tax question, they are not summarized in this commentator but can be found in the article. The entire sequences of events is typical of what happens when a pot of gold suddenly appears at the end of a road and the race is on.

So what was my thought? Suppose Mallory got what he expected. Would his “donation” qualify as a charitable contribution for tax purposes? Thomas Jefferson University qualifies as a charity for these purposes, so two questions popped into my head. First, to qualify as a charitable contribution, the gift must not be in exchange for anything of economic significance. So getting tagged as a “founding supporter” or having one’s name plastered on a wall doesn’t get in the way, but surely getting the benefit of a business affiliation, a marijuana growing license, or assistance in getting such a license is enough of a “quid pro quo” to bar the deduction. Now that Mallory isn’t getting anything, if he does not succeed in getting his money back, the anticipated quid pro quo ought not stand in the way. Second, if the donation is to assist in the development of marijuana cultivation, distribution, and research, which is illegal under federal law, and if the donation is not for something in return, is a deduction for the donation barred on tax law public policy grounds because of the federal restrictions, much like section 280E prohibits cultivators and distributors operating legally under state law from claiming their business deductions? In this era of say-one-thing-today-the-opposite-tomorrow-and-the-next-day-deny-having-said-anything-at-all-about-the-matter politics and public leadership in the nation’s capital, taking a guess at the answer is more of a gamble than predicting who wins the Super Bowl next year.

Though it’s a well-settled principle that taxpayers who file fraudulent returns cannot escape the resulting fraud penalties by filing amended returns, a recent Tax Court case, Gaskin v. Comr., T.C. Memo 2018-89, reminds everyone, or perhaps lets some people know for the first time, that once the fraudulent return has been filed, that’s it. Unlike video games, there is no reset button. Unlike the “redo” opportunities sometimes afforded to novices, particularly children and other first learners, a fraudulent tax return cannot be set aside through a “redo” maneuver.

The facts of the case, when boiled down, are simple. The husband taxpayer filed fraudulent tax returns for 2008 through 2011 with intent to evade tax. He omitted gross income from each return. The IRS examination of the returns led to a criminal investigation that started in 2012, and indictment in 2015, and a plea agreement in 2015. In August 2014, while the criminal investigation was underway, the husband taxpayer filed amended returns for each of the four years, reporting additional adjusted gross income and tax. In 2016 the IRS assessed the tax shown on the amended returns.

In the plea agreement, the husband taxpayer agreed to amounts of adjusted gross income and tax higher than those reported on the amended returns. The IRS issued a notice of deficiency for 2008, 2010, and 2011, and asserted fraud penalties for 2008 through 2011. The penalties were based on the differences between the tax determined in the notice of deficiency and the tax liabilities reported on the original fraudulent returns. At trial, the husband taxpayer admitted to filing fraudulent returns and conceded the deficiencies in tax. However, he contested the fraud penalties.

The husband taxpayer argued that the deficiencies based on the difference between the tax determined in the notice of deficiency and the taxes reported on the amended returns were due to honest mistake. Thus, he concluded that no fraud penalty should apply to that portion of the deficiency. Further, he argued that because the deficiency reflected the difference between the tax determined in the notice of deficiency and the taxes reported on the amended returns, the fraud penalties should not apply.

The Tax Court noted that the regulations treat the amount shown on an amended return as an amount not shown as the tax by the taxpayer on his return for purposes of computing the fraud penalty. The court pointed out that in 1984 the Supreme Court held that “a taxpayer who submits a fraudulent return does not purge the fraud by subsequent voluntary disclosure; the fraud was committed, and the offense completed, when the original return was prepared and filed.” The Tax Court also pointed out it had followed that principle in a 1996 case in which it held that the filing of an amended return after an audit started did not purge the original fraudulent filing or fraudulent intent.

There are so many things in life and death that cannot be “undone.” There is no need to list them here, though when asked to make such a list, most people would not include “the filing of a fraudulent tax return.” Perhaps the prevalence of video and similar games with reset buttons makes it more difficult for people to understand that some decisions have consequences that cannot be “undone.” I wonder if a “if you file a fraudulent return you cannot escape penalties by amending the return” warning will fit on that postcard return that has been promised.

According to this report, brought to my attention by reader Morris, bills have been introduced in both houses of the Michigan legislature to lower the voting age from 18 to 16. The rationale, as expressed by Michigan state senator David Knezek, is simple. "We allow 16-year-olds to go off and get jobs and pay taxes, but we fail to allow them to exercise their voice come election time. Young people are setting aside their differences and identifying issues they think need to change. And they can do everything to get that change except vote." Changing the voting age requires amendments to federal and state constitutions, which in turn requires approval by legislatures and by voters. In many instances the proposal would need legislative approval by more than simple majority.

Though it is an interesting, and perhaps logical, proposition, the idea of matching the right to vote with the payment of taxes poses a variety of problems. Certainly denying voting rights to individuals who do not pay taxes would not pass muster. Permitting anyone who pays taxes to vote would add to the voter registration rolls youngsters who pay sales taxes on purchases made with money that they earned performing work that youngsters under the age of 16 are permitted to do. I speak from experience. I started my first job when I was eight years old, and I have paid sales taxes ever since. But I wasn’t voting at that age, or at twice that age. I wonder, if I had the right to vote, if I would have exercised it wisely. Perhaps. Perhaps not. I think linking the right to vote to the payment of taxes is not a good idea.

One of the arguments against permitting 16-year-olds to vote is that they lack sufficient experience, insight, wisdom, understanding, and knowledge. The problem with that argument is that there are far too many people over the age of 18 who lack sufficient wisdom, understanding, or knowledge. Perhaps the benchmark should be attaining a sufficiently high score on a knowledge and wisdom test, applicable to citizens of all ages. Imagine, under such a plan, there might be a few twelve-year-old youngsters voting, and more than a handful of middle-aged individuals barred from the voting booth for lacking what citizens ought to have.

The paper that published the report asked people, “What do you think?” Of the 1,514 people who voted, 61 percent chose, “No: 16 is too young,” 30 percent chose, “Yes: They can handle it,” and 9 percent went with, “Either age is find by me.” What we don’t know is how many of the 1,514 poll participants were younger than 18 years of age.

But hang on. It won’t be long before the next voting question pops up. Should robots with artificial intelligence be permitted to vote?

Reader Morris alerted me to something of which I was unaware. He began by directing my attention to this story written by the city manager of Milford, Delaware, explaining why he accepted Domino’s Pizza’s offer to provide $5,000 of assistance in filling potholes in the town. Like most local jurisdictions, especially those constrained by the siren song of the anti-tax crowd, Milford faced highway repair and maintenance costs that exceeded its revenue resources. So why is Domino’s Pizza doing this? According to another article to which reader Morris alerted me, the pizza chain has embarked on a “Paving for Pizza” campaign, ostensibly to “smooth the ride home” for pizza deliveries. And, yes, from a third story noted by reader Morris, Domino’s Pizza is “enjoying a feast of national media coverage.” The cost to the pizza company is low, because it is making $5,000 grants to as many as 20 cities or towns. That’s $100,000. For Domino’s Pizza, that is close to petty cash. Wherever a pothole is fixed with grant money, the put their tagline and logo on the asphalt. They also ask for cellphone photos of the work being done, to be used in advertising campaigns.

Reader Morris posed two questions to me. First, “Is there anything wrong with Domino's Pizza or other large corporations fixing potholes for publicity?” Second, “Should basic maintenance of public roads be handed off to corporations for marketing stunts?”

My response to reader Morris was short and simple, though it consisted of two parts. First, “Why not? Think of all the groups that get a sign (publicity) for taking over the litter cleanup for a stretch of highway. It’s a fair trade-off. “ Of course, some of the people picking up litter on designated stretches of highway aren’t running a business and thus whatever publicity they get is, at best, local fame. Some people who do this volunteer work are anonymous, and often decline having their names on a sign. Sadly, they are outnumbered by those who want the recognition, for business or other reasons. Even more unfortunate is the fact that both of those groups are outnumbered by those who can but fail to pitch in, thinking that their taxes are sufficient to cover the costs. Of course, that’s not the case.

Yet lurking behind that tax policy question was another one. The second part of my reply to reader Morris was probably inspired by decades of writing exam questions. “Another question is whether someone doing a service in exchange for publicity/advertising has compensation gross income.” Why do I think the answer is yes? A person who wants publicity in the form of a billboard, sign, a logo painted on a wall or street, or an advertisement on a web site or in a magazine or newspaper can pay cash, giving the owner of the billboard or other media gross income and giving the person making the payment a possible business expense deduction if the person is carrying on a trade or business. But suppose the person seeking the advertising offers, not cash, but goods or services. In this barter situation, the owner of the billboard or other media still has gross income, and the person who performs services has compensation gross income for performing services, or sales revenue if exchanging goods.

The key is valuation. Suppose a private construction company, instead of providing cash, offers the services of several of its employees to fill potholes. Keeping it simple, and ignoring the question of who provides the asphalt and the likelihood that all sorts of other legal questions, such as liability for injuries, complicate the picture, the construction company would have gross income equal to the value of the services, and an offsetting business expense deduction, for advertising, in the same amount. Computing the amount would be fairly easy, because it would reflect the hourly wages of the employees doing the work. But suppose several private individuals not operating a business enter into an agreement to pick up litter along a highway every week, and the state or locality posts one of those signs that acknowledge the work that those individuals are doing. There’s no offsetting deduction to the gross income. What is the value of the sign? Does it even have value? As a practical matter, even if it has value, it is probably so low that it’s not worth the IRS or a state revenue department paying attention.

But suppose the persons doing the litter pickup or filling potholes are provided with a real property tax credit for their services. What are the consequences? Presumably, the lower real estate tax bill would reduce the deduction for taxes paid. In light of the newly enacted, tax-raising provision of the tax “cut” legislation, perhaps a way around the new $10,000 cap is to permit people to reduce their real estate taxes by performing services that state and local governments would otherwise need to underwrite. Or would those sorts of arrangements cause revenue officials to treat these individuals, and companies, as performing services for compensation?

When I ask if there should be limits on tax credits, I am not referring to dollar or percentage caps that limit the amount of the credit. I am referring to subject matter limitations. The Internal Revenue Code is packed with credits. State tax laws duplicate many of those credits, and then add hundreds more. I am not referring to payment credits, such as the credits for income taxes withheld from wages or estimated income tax payments. I am referring to what could be called policy credits. Federal and state tax laws provide credits for adopting children, for purchasing energy-efficient appliances, for purchasing certain alternative energy vehicles, for purchasing homes, for engaging in research, for clinical testing of certain drugs, for hiring veterans, qualified ex-felons, and other members of “targeted groups,” for making contributions to environmental protection funds, for producing movies, for purchasing automated external defibrillators, for producing musical and theatrical performances, and for being an active volunteer fire fighter or ambulance worker, to name but a few.

Proponents of these sorts of tax credits argue that these credits are financial incentives encouraging people to engage in behavior considered beneficial for society. One of my objections to using tax credits for these purposes is that it requires IRS and revenue department personnel to become experts in all sorts of activities, giving an advantage to taxpayers who choose to abuse the credits. If behavior is to be encouraged, it ought to be regulated and administered through agencies staffed with experts in the behavior in question. Another objection is the selectivity of the activities chosen for tax credits. Most, if not all, of the purposes for which tax credits are available surely qualify as worthy. But for every activity generating a tax credit there are five or ten or twenty activities that are no less worthy but that have not been deemed deserving of a tax credit. Another problem with policy tax credits is that we do not know who is taking advantage of the tax break, whereas direct spending programs permit taxpayers to identify the recipients.

People who read MauledAgain know that I am not a fan of policy tax credits. For example, in More Criticism of Non-Tax Tax Credits, I explained how the use of policy credits permits legislators to escape accountability for spending taxpayer money.

So it was no surprise when, several days ago, reader Morris directed my attention to a report about a new tax credit in New Mexico for hiring foster children, and asked, “Is this a good idea for a tax credit.” I doubt my reply was unexpected. “Of course not. What’s next, a tax credit for coming to a full stop at a stop sign?” To that I could add proposals for tax credits earned for driving without texting, opening doors for people carrying babies, picking up trash in the streets, reading to disadvantaged children, and that doesn’t even begin the list.

One of the objections raised by the anti-tax crowd to income and wealth taxes is the redistribution of money from those who are taxed to those who benefit from government spending. Yet the same crowd is comfortable with, and rarely criticizes, policy tax credits, which are simply another form of spending disguised in ways that permit legislators to hide their giveaways under the radar. Every dollar shelled out in a policy tax credit either comes from a taxpayer today or from a taxpayer tomorrow when the budget deficits come home to roost.

Of course it is a good thing to hire foster children. It’s also a good thing to hire veterans, and disadvantage individuals, and the homeless, and and and. But programs to encourage targeted hiring ought to be administered by agencies with employment expertise, not revenue departments, and funded with grants and payments that permit all taxpayers to identify the recipients.

My prediction is that the list of tax credits will continue to grow. Professional politicians and their lobbyist companions aren’t going to surrender what is a good thing for them until America wakes up. That’s unlikely to happen anytime soon.

Reader Morris sent me a link to an article of a little more than a week ago. In the article, Joseph Lawler reports on comments made by JPMorgan Chase CEO Jamie Dimon. Dimon was defending the December tax cuts against criticism that most companies are using most of their tax breaks to pay dividends and buy back stock, which puts most of the tax break money in the hands of the wealthy. Dimon argued, “"I think it’s a tremendous error for people to think there’s something wrong with stock buybacks and dividends. That is a natural function of capital markets and the proper deployment of capital." He continued to explain that “Companies return money to investors when they don’t have a good use for it.” Investors then “put the money to a higher and better use." He capped his defense with this gem, “"For the life of me, I don’t understand how anyone can say that’s a bad thing. That is coming from people who are basically ignorant of how capital markets function."

Reader Morris asked me, “Is Jamie Dimon correct by stating ‘criticism of stock buybacks is basic ignorance of economy?’” My response to Morris was a short one:

Dimon’s defense of dividend increases and stock buy-backs is a variation on trickle-down. The company could (1) reduce its prices (helps the average person), (2) raise wages (helps the average person), or (3) increase payouts to the wealthy (helps the wealthy). The notion that the wealthy who get these funds would then do things that benefit average people is, well, about as accurate as the notion that tax cuts for the wealthy help the average person.

To that I add the following:

To the extent that “companies . . . don’t have a good use for” the tax break money, it demonstrates that the begging and lobbying for the tax breaks on the basis that the money was needed to create jobs and raise wages was yet another empty promise to which too many people either succumbed or adopted as their own in exchange for votes, money, or some other consideration. If capital markets cannot recognize the need to put the money in the hands of consumers who will buy the companies’ goods and services, then the capital markets are flawed. But, of course, those who carefully study capital markets know that they are flawed. The experience of a decade ago proves that point.

As far as the ignorance question goes, I didn’t answer Morris directly. Those who criticize how capital markets function are fully aware of how they function, but also are aware of how the way capital markets function benefits a handful of people and leaves everyone else behind. Economic data showing the trends of the last 37 years proves that point. None of this is a matter of ignorance. Supporters of tax breaks for the wealthy riding on nonsensical trickle-down economic theory and supporters of demand-side economic theory all know quite well the practical reality of the marketplace. Left unregulated, it spirals in the direction in income and wealth inequality and the destruction of civilized society in favor of oligarchies free from resistance in the voting booth.

Sometimes stories teach lessons much more efficiently, and interestingly, than do recitations of law and policy. In his recent report Daniel C. Vock shares a sad tale of how tax aversion is causing misery for everyone, including those who detest taxes and resist them at all costs.

The story takes place in Mississippi. It begins 31 years ago, when those opposing the governor’s plan to eliminate elected transportation commissioners and put control of highways under the governor’s control devised a plan to raise the gasoline tax by five cents and use the revenue to build four-lane highways, which at the time were far and few in the state. The prediction was that the improved highways would attract businesses that could not ship good using the state’s antiquated two-lane roads. The legislature passed the bill, the governor vetoed it, and the legislature overrode the veto. More than a thousand miles of four-lane highways were built and, indeed, businesses, including Nissan and Toyota, opened facilities in Mississippi.

But there was a problem. The revenue was sufficient to build the roads, but there were no sources of funding to maintain and repair the roads. Over the years, gasoline tax revenues decreased for the same reason they did in other places, namely, vehicles became more fuel efficient. Like too many jurisdictions, Mississippi did not index its gasoline tax for inflation. So while inflation increased by 108 percent during those 31 years, and construction costs rose by 217 percent, gasoline tax revenues increased by a barely noticeable 1.6 percent.

The outcome could have been, and should have been, predicted. Roads and bridges began to fall apart. Many are in such bad shape that they need to be rebuilt rather than simply repaired; rebuilding costs roughly ten times the cost of repair. State transportation officials have told legislators that fixing the roads and bridges requires at least a $400 million annual permanent revenue increase. Expansion of existing roads in areas where the population and business are growing isn’t happening. Congestion spreads. Motorists face more costs from sitting in traffic.

So transportation officials, supporters, some members of the public taking advantage of sitting down and letting themselves get educated about the facts, business groups, and some others have lobbied the Mississippi legislature. They failed. Within a week, the state shut down 83 bridges because they are deficient and unsafe. During the ensuing weeks, more were closed. As of the time Vock wrote his report, about 500 bridges are closed. Many are in rural areas, perhaps where anti-tax sentiment breathes most strongly. Mississippi motorists face 40 to 50 mile detours. First responders cannot get to incidents as quickly as necessary.

Putting it mildly, Volk writes, “Today, anti-tax groups like Americans for Prosperity are very influential in Mississippi. That organization, for example, spent at least $10,000 last year on direct mail and digital marketing to praise Lt. Gov. Tate Reeves, who presides over the Senate, for thwarting efforts to raise the state’s gas tax or to use tax proceeds from online purchases to fund transportation. Eleven of the state’s 52 senators attended an Americans for Prosperity event last year where several promised not to raise the gas tax.” Grover Norquist must be proud. I wonder if these folks cheer when a house or barn burns down because the firefighters could not get there in time, or when a child hit with a seizure or an adult suffering a heart attack dies because the ambulance needed to go 40 miles out of the way. The state director of Americans for Prosperity defends the legislators failure to deal with the problem because they, along with the governor, “all campaigned on being for lower taxes, smaller government and less regulation. People are living up to what they promised voters. Voters are overwhelmingly opposed to increasing the gas tax.” Of course they did, because they fell for the propaganda. Or perhaps they, too, are cheering the house fire and the deaths, and luxuriating in those 50-mile detours. Or perhaps they live in areas where those afflictions become something that “is someone else’s problem.”

A county engineer concludes his explanation of how, over the years, the lack of funding has caused things to deteriorate, by saying, “We’re going backwards.” Indeed. That’s what insufficient public revenue to support public services will do. It reverses the path of civilization and nations and opens the door to barbarism.

The idea of reducing or eliminating taxes, to say nothing of opposing tax increases, is one of those grand theories that rests on foolish assumptions that shrinkage and eventual elimination of government – to be replaced of course, by an authoritarian oligarchy beyond the reach of the voting booth – and that carries enough “buzz” to resonate well in sound bites. People are sucked in. Yet when practical reality raises its head, it crushed theory. In this case, it very well may crush not only those whose anti-tax cult addiction threatens the lives of Mississippi residents but also those who recognize the danger but whose words of warning are ignored.

So I add Mississippi to the list of states whose subscription to the anti-tax movement has caused nothing but pain and misery. It joins Kansas, Louisiana, and Oklahoma as experiments whose outcomes should cause all Americans to resist following their example and imposing those failed ideas on the entire nation. I have my doubts that enough Americans will understand the danger until it’s way too late.

A recent case, Johnson v. Comr., T.C. Summ. Op. 2018-31, provides an opportunity to examine whether it is the theory or the practical application that makes tax law so aggravating. Of course, it could be both.

On his 2014 federal income tax return, the taxpayer claimed dependency exemption deductions for his two children and a child tax credit. He also claimed an earned income tax credit but that’s not within the focus of this discussion. In support of his claims, the taxpayer attached a schedule EIC on which he represented that the children resided with him for seven months during the year. The IRS disallowed the claimed dependency exemption deductions, the child credit, and the earned income tax credit.

The taxpayer had been married, and he and his then wife had two children, born respectively in 1999 and 2000. The taxpayer and his wife divorced in or about 2008. The support and custody agreement into which they entered provided for the taxpayer and his former wife to have joint legal custody of the children, with the former wife having sole physical custody but with the taxpayer having “access to the children” for one weekend per month, for one month during the summer school vacation, and on Christmas, New Year’s, and Easter in “odd” years and on Thanksgiving in “even” years. The agreement also provided that “every year, the children’s birthday shall be spent with Mom if it’s during school or during the week. And, if it happens to fall on a weekend, then Dad has a right to have the children on the children’s birthday.” The agreement also provided that “Mother’s Day will always be spent with Mom; Father’s Day with Dad.” At trial, the taxpayer testified that although there were no formal modifications made to the agreement by, or under the auspices of, the family court, he and his former wife informally made “adjustments as needed” between themselves.

The taxpayer and his son, no longer a minor at the time of trial, testified that the children stayed with their mother during the school week but that the children otherwise stayed with petitioner every weekend and holiday and throughout summer vacation. They testified that the children were picked up after school on Friday and dropped off Sunday night. The taxpayer acknowledged that “every once in a while” the children “might go to California for a holiday with their mother,” that they saw their mother during the summer, though “very rarely, and that he had the children for “the majority” of the holidays but not every holiday, although according to petitioner it was “a very rare occasion” when he did not. During 2014 the taxpayer’s former wife lived in Gaithersburg, Maryland, where the children attended public school. During 2014 the taxpayer lived in Baltimore, Maryland.

The Court explained that the parties agreed that the taxpayer met the requirements for treating each children as a qualifying child, except for the requirement that the children have the same principal place of abode as the taxpayer for more than one-half of the taxable year. The taxpayer argued that the children spent both a majority of hours and a majority of days with him in 2014. However, the court characterized the record as “much too wanting to support an analysis by hours, as any such analysis requires supposition and assumption.” Instead, the court decided that “only an analysis by days is possible.” But then the court concluded that “at best, given the meager record, any meaningful analysis can be based only on the number of nights that the children slept in the home of each parent.

In his brief, the taxpayer claimed that the children spent every weekend, every holiday, and the entire summer break with him and that the children were never with their mother other than during the school week. The court characterized this as “improbable.” For example, the court wondered why the children, who were teenagers in 2014, “were so willing to be away from school friends for so much of the time,” and whether it was likely that “a boy and a girl” were so inseparable “that each always slept in the same parent’s home as the other.” Although the court noted that it is not bound to accept testimony that is improbable, unreasonable, or questionable, it would nevertheless, “indulge” the taxpayer and proceed with the analysis advocated by the taxpayer. The court, however, concluded that it was more likely that on school holidays in the middle of the school week the children “continued to reside with their mother in order to more conveniently complete the school week” and that it was unlikely the children would travel to Baltimore for just one night.

The court pointed out that the number of nights that the children slept in the home of each parent could not be decided with certainty or any degree of incontestable precision on the limited record in the case. Each party’s analysis and the court’s independent analysis demonstrated that the issue was exceptionally close. However, after weighing all the available evidence, and keeping in mind the taxpayer’s burden of proof, the court concluded that the children spent 175 nights at the taxpayer’s home in 2014, and that, because 175 nights is less than one-half of the calendar year, the taxpayer had not proved that children had the same principal place of abode as he did for more than one-half of the taxable year. Because the taxpayer was not the custodial parent, and because there was no evidence of a written declaration by the taxpayer’s former wife who was the custodial parent agreeing to shift the dependency exemption to the taxpayer, the disallowance of the dependency exemption deduction and the child tax credit were upheld.

The theory is not particularly complicated. One requirement for classifying a child as a qualifying child is that the child have the same principal place of abode as the taxpayer for more than one-half of the year. Yet determining a person’s principal place of abode requires counting nights, and proving to the IRS and to a court that the number of nights equals or exceeds 183, or, in a leap year, exceeds 183. This is where the practical reality shows up. How many separated and divorced parents know that it is essential, for tax purposes, to keep logs or similar records of which children spent which night with which parent? How many, know that it is essential to do this, actually do this? How many intend to do this, and try, but caught up in the whirlwind of life with children, with school events, doctor appointments, sporting, dance, literary, musical, and other lessons, vacations, and other activities, forget to make a notation? I can almost hear some people advocating the use of Alexa or similar technological “assistants” to keep track of this sort of information, and I suppose the advocates of ReadyReturn would suggest that the information Alexa and similar devices gather from people’s homes be transmitted to the IRS so that the IRS can prepare the taxpayer’s return with the data needed to determine if the taxpayer is entitled to the various tax benefits related to a child.

So what is most aggravating? The theory? Or the need to keep track of just about everything one’s child does? We are spending more time reporting what we are doing that we spend doing what we are doing. Surely there is a better way. Unless it is found soon, the tax system will collapse of its own weight. So, too, will everything dependent on taxes.