MauledAgain

When the email from the Institute for Policy Innovation arrived, the headline caused me to think that I had missed a Supreme Court tax opinion. The headline to the commentary stated, “Supreme Court Correctly Rules on . . . SALT Deduction.” Upon closer examination, the headline was referring to an event that I had already noticed, that is, the Supreme Court’s denial of certiorari in a case challenging the $10,000 limitation on the deduction for state and local taxes. A denial of certiorari is not a ruling. It is not an affirmance of the decision from which the petition for certiorari is taken. It simply means that the Court does not want to decide the issue, perhaps at the moment, perhaps forever.

Despite the headline, I read the commentary. It turned out that the headline was the least of my concerns.

In the commentary, Tom Giovanetti praised the Supreme Court’s decision not to hear the challenge. He pointed out that the four states bringing the challenge – Connecticut, Maryland, New Jersey, and New York – are “four solid ‘blue,’ high-tax states.” He explained that before the limitation was enacted, “the federal tax code essentially subsidized high-tax blue states.” He asked, “Why care about your state’s high taxes if you can just deduct them all from your federal taxes?” The answer to his question is easy. If a person in facing a marginal 35 percent federal income tax rate is hit with a $1,000 increase in state taxes, it’s not as though the person’s federal income tax liability is reduced by $1,000. If it were, then it would be true that the person would not care about the increase. Rather, the $1,000 increase means that the person would be $650 out of pocket. Most people would care about that.

Worse, though, is the jab at high-tax “blue” states getting federal subsidization of state and local taxes and the implicit praise for the $10,000 limitation. Yet that is only a small piece of federal subsidization of states. A careful analysis of the relationship between federal and state taxes and subsidies tells a different story. As recently disclosed by various reports, including Wallet Hub, Money Geek, and Forbes, the overall picture is different. It’s a pattern that reaches back many years, as indicated, for example, in 2004 by the Tax Foundation as summarized in this TaxProf blog post. The most recent analyses disclose that eight of the ten states most dependent on federal government funding are red states. Of the nine states that sent more to the federal government in taxes than they received from the federal governent, seven were blue states, which also had higher per-capita GDPs than many of the red states near the top of the federal subsidy list. The eight states receiving the highest child tax credit per capita are red states. Attempts to dismiss these findings, such as this Hill commentary by an ALEC member muddies the analysis by pointing out that the top ten federally dependent states are not all red, that two red states are actually blue states, and that it makes sense for red states to be subsidized by blue states because blue states have higher per-capita GDPs and red states are most in need. The latter observation is, to me, an indictment of how the classic red-state low-tax, low-service (and less pervasive education) approach shortchanges its citizens.

Giovannetti does make an important point. He notes that the $10,000 limitation should be indexed for inflation. He is correct. He then proposes that both the limitation and “capital gains taxes” be indexed for inflation. I’m not sure whether he means that the tax liability on capital gains should be indexed or if capital gains should be indexed, but perhaps he means that taxpayers’ adjusted bases in capital assets should be indexed. If that is what he means, I agree. However, if capital asset adjusted basis is indexed then the justification for low rates on capital gains (and the limitation on the deduction of capital losses) disappears. The latter were enacted as admittedly rough solutions to the capital asset inflation problem. Pick one. Keeping both is excessive.

One of the articles I haven’t yet written, and perhaps never will, is one that rests on a list of dollar amounts in the Internal Revenue Code that are indexed for inflation and those that are not. Both lists are long, both keep growing, and I’ve not yet found or made the time to once again read the entire Internal Revenue Code to identify each provision in the two lists. Perhaps someone has done this sort of comprehensive survey with respect to the Internal Revenue Code as it exists for 2022; J.K. Lasser has a long list of some of the limitations not adjusted for inflation. Of course, some limitations not indexed for inflation immediately jump to mind even without looking at the list, such as the $250,000 and $500,000 limitations on the exclusion for gains from the sale of a personal residence, the base amounts and adjusted base amounts used in computing the portion of social security benefits included in gross income, the $25 deduction for business gifts, and the $5,250 exclusion for employer-provided education assistance. If the $10,000 limitation on the deduction for state and local taxes and the adjusted bases of capital assets are to be indexed, then so, too, should all of the other fixed dollar amounts in the Internal Revenue Code. That would advance the notion of tax fairness by helping not only the well-to-do who pay higher state and local income taxes and enjoy the ownership and sale of capital assets, but also the social security recipients with lower income and home sellers facing very high amounts of gain because of a housing market bubble but who otherwise have modest amounts of income.

When Giovannetti proposed increasing those two limitations, he asked, “Any takers?” If he included all fixed dollar amounts and not just those two, and agreed to dispose of the low capital gains rate and capital loss limitation band-aids, then I’m on board. For that idea, there isn’t any red or blue.

About a week ago, reader Morris directed me to story about a proposed tax. Thanks to being busy with other things, it’s just now that I can elaborate on my reply to reader Morris. My response to him was brief, and included this sentence: “It is a stupid idea.” Now I have time for the longer response.

The proposal, made by a member of Pittsburgh’s city council, would impose a one percent tax on college and technical school tuitions and medical bills in the city. Would the proceeds be used to help pay tuition for students from economically deprived backgrounds? No. Would the proceeds be used to help defray medical costs incurred by low-income individuals? No. The proceeds would be used to fund infrastructure. The tax would apply to the amount of medical bills before reduction by insurance payments.

Now, funding infrastructure is not a stupid idea. It’s necessary, and as readers of this blog know, I support increased in infrastructure funding because if infrastructure fails, people die, people are injured, the economy suffers, and the nations spirals even faster into disaster.

The question is who should pay for infrastructure? The answer is simple. It should be funded by those who use it and those who benefit from it. Of course, everyone benefits from infrastructure, so the challenge is figuring out how to apportion the cost of infrastructure among the population. Singling out two groups of people, many of whom are not in a position to handle a one percent increase in their living costs, is the stupid part of the idea. The outrageous part of the idea is imposing a one percent tax on someone’s $100,000 cancer treatment invoice even though insurance covers the entire $100,000.

One critic of the bill, Pittsburgh’s city controller, suggests that the proposal should be ditched and replaced with some sort of tax or user fee on non-profit medical facilities and higher-education institutions. If infrastructure in the city is funded with a tax from which those institutions are exempt, the controller’s idea has validity. But what about other non-profit institutions in the city? Why not include them? Why focus on institutions providing two of the most essential services required by people, that is, education and health? Why exempt non-profit institutions that are providing other essential services such as environmental protection? And why exempt non-profit institutions providing services that aren’t as essential as health?

Another critic suggested that the proposal was unworthy of support but at least served as a conversation starter. In all fairness, perhaps that was the goal of the council member who introduced the bill, though there are better ways to start conversations. At least now that council member has a way to ease out of the predicament in which he finds himself.

On top of the policy and fairness question, there is the not-so-slight legal obstacle. The tax is in the form of a sales tax, and a second-class city in Pennsylvania, which is how Pittsburgh is characterized by the legislature, has not been given authority to enact a sales tax.

Back to the drawing board they must go. It will be interesting to see what the next proposal turns out to be.

In previous commentaries, I have explained that suspending liquid fuel taxes in an effort to compensate for market fluctuations is a bad idea. I have explained why it is dangerous and foolish to reduce or suspend fuel taxes when gasoline or diesel prices rise in posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes, Road Taxes and User Fees as a Form of Pothole Insurance , and Death as a Price for Taxes and User Fees, Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, Suspending a State Gasoline Tax Sticks It to the Dealers, and Fuel Tax Reductions and Suspensions: Negative Impacts Even Wider Than Previously Discussed. Though the focus generally was on the federal gasoline tax, the same arguments apply to state taxes on gasoline and diesel fuel.

Now a candidate for governor of Pennsylvania, Bill McSwain, has promised to permanently cut the state’s gasoline tax by 50 percent. Two of the first questions that popped into my head, and that hopefully pop into the heads of every Pennsylvanian past the age of ten, is this: Does this mean cutting in half funding for the repair and maintenance of state highways, bridges, and tunnels? Does it mean eliminating the payment of state fuel tax revenue to the state police to fund police protection for towns whose residents are unwilling to pay for those services and prefer that the state’s motorists do so?

Cutting funding for road repair and maintenance in half is foolish, for all the reasons I have explained in previous commentaries. If you think there are too may potholes in Pennsylvania now, wait until funds for fixing them get axed. Perhaps McSwain has some plan to cut funding for some other important state service, because he claims he would be cutting, not raising, taxes. Nothing in his has press release explains how he would deal with the issue. According to this report, he did hint that he would make up the revenue shortfall by using American Rescue Plan money. Whether that is possible is debatable, and even if it were possible, what happens when the finite amount of ARP money is exhausted? Would kicking the can down the road simply create substantially higher taxes in the future that causes no concern for a present-day politician who thinks only in the moment?

On the other hand, cutting funding for police protection provided to an ever-growing list of towns whose residents want others to pay for their protection makes sense. Of course, a candidate for governor would risk losing tens of thousands, or more, votes if this plan were to be revealed before an election. And, of course, it would mean that these localities would need to raise taxes, which would leave people in those towns paying as much, if not more, taxes than they were paying before the reduction in state liquid fuel taxes. Not that such an outcome is a bad thing, because the residents of these towns ought not be getting free police protection at the expense of motorists throughout the state, but surely these folks ought to know the price they would be paying if they latch onto a promise of reduced fuel taxes.

Promises to cut taxes should be accompanied by explanations of collateral consequences. What spending will be cut? What other taxes or fees will be imposed? Of course, the “cutting taxes raises revenues through economic growth,” the classic and failed supply-side “trickle down” nonsense has failed time and again, and doesn’t even mesh well with the cutting of a tax such as the liquid fuel tax. Pothole-filled roads, collapsing bridges, and defective traffic lights are the exact opposite of what a growing economy needs.

When something is too good to be true, such as the joy of gasoline taxes being halved, there always is a catch. Whether it’s the free weekend at a resort, the free installation of some home improvement, or some other free item, there is some offsetting disadvantage. Sometimes it’s hidden in the fine print. Some times it isn’t even disclosed. Will Bill McSwain share the catch in his promise?

I’ve yet to read or see or hear anything that causes me to change my position that suspending liquid fuel taxes in an effort to compensate for market fluctuations is a bad idea. I have explained why it is dangerous and foolish to reduce or suspend fuel taxes when gasoline or diesel prices rise in posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes, Road Taxes and User Fees as a Form of Pothole Insurance , and Death as a Price for Taxes and User Fees, Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, and Suspending a State Gasoline Tax Sticks It to the Dealers. Though the focus generally was on the federal gasoline tax, the same arguments apply to state taxes on gasoline and diesel fuel.

Reader Morris has again happened upon another story offering yet another reason why suspending or reducing gasoline taxes has consequences that are overlooked even though they perhaps should be anticipated. This time, he alerted me to this story, that explains how suspending New York State’s fuel taxes would cost the New York City Metropolitan Transportation Authority as much as $400 million in funding if the taxes were suspended for a year. Perhaps I, too, failed to consider this sort of impact from reducing or suspending fuel taxes, because part of Pennsylvania’s fuel taxes is used to fund the state police. I addressed that issue in So Who Should Pay Taxes for Police Protection?, but did not consider what happens to state police funding if fuel tax revenue shrinks or dries up.

When asked about alternative sources of funding if the New York State gasoline tax is suspended, the chairperson of the MTA acknowledged that there were no other sources of which he was aware. I don’t think anyone has asked the Pennsylvania State Police what that department would do if Pennsylvania fuel taxes were suspended or reduced, but I suspect that the outcome very well would be continuation of its funding while the cuts would be made in the other activity supported by the tax, namely, repair and maintenance of roads and bridges. Of course, if that happens, the same people complaining about increases in the cost of gasoline and diesel, which are not caused by increases in the tax, most likely will be the same people complaining about increased deterioration in the state’s highways and bridges.

Dealing with the impact of significantly increased fuel taxes requires complex analysis. Most legislators do not have the sort of education and experience in economics, tax policy, engineering, corporate finance, and similar disciplines to craft solutions that work both long-term and without disadvantageous collateral consequences. Instead, they rely on lobbyists from various sectors, each of whom is advocating for a solution beneficial to their interests rather than the best interests of the general community. Similarly, lobbyists and campaign contributors steer legislators away from examining particular ingredients of inflation, such as business profits rising at rates far exceeding the rate at which the cost of products and services sold by businesses. To that disarray is added the misinformation spread by those who want the complaint spotlight to shine elsewhere, misinformation that causes substantial numbers of Americans to think that the President somehow caused gasoline prices to increase, and who do not give any attention to the fact gasoline prices have increase worldwide. That, of course, brings us back to the world of ignorance, and provides even yet another example of how ignorance is the most dangerous affliction for a species that calls itself sapiens sapiens.

When considering a decision, decision makers need to ask, “What happens if we do this?” The immediate impact is almost always easy to see. It’s the secondary effects, the collateral consequences, and the unintended and often harmful outcomes that get overlooked. The price paid for failing to “think it through,” a technique I continuously encourage law students to make part of their analytical toolbox, can be much more than a few dollars at a fuel pump. One way of doing this is to bounce ideas off other people, which is why I appreciate reader Morris having pointed out to me a collateral consequence, namely, the impact on other activities funded by fuel taxes, that I had previously analyzed but had not put into my list of reasons why reducing or suspending fuel taxes in reaction to market price fluctuations is a dangerous and foolish idea.

Over the years I have explained why suspending liquid fuel taxes in an effort to compensate for market fluctuations is a bad idea. I have done so in posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes, Road Taxes and User Fees as a Form of Pothole Insurance , and Death as a Price for Taxes and User Fees, and Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People. Though the focus generally was on the federal gasoline tax, the same arguments apply to state taxes on gasoline and diesel fuel.

Thanks to reader Morris, who directed me to this story, it turns out that suspending the gasoline tax can have unintended disadvantageous consequences for fuel dealers. Understanding the problem requires a bit of background. Though in some instances fuel taxes are paid by customers at the pump and then remitted by the dealer to the appropriate jurisdiction, in Connecticut the fuel tax is paid by the dealer when they get a delivery of fuel from the wholesaler, who then remits the tax to Connecticut. So when the state announced a tax “holiday” the customers expected prices to drop immediately by the amount of the tax. If dealers do that, they are selling the gasoline for less than what they paid because they are unable to recoup the tax that they have already paid to Connecticut through the wholesaler. Dealers who delay reducing the price of gasoline until they have sold the gasoline on which they have already paid the tax are then accused of price gouging. The Attorney General of Connecticut is threatening to fine the dealers for not immediately reducing prices by the amount of the tax. It’s not a small matter, as estimates suggest about $3.5 million in taxes have been paid by dealers on fuel sitting in their storage tanks waiting to be sold to customers. In the meantime, the governor announced that people probably will need to wait for “days” before seeing the benefit of the tax holiday.

Statements from the Connecticut Attorney General suggest to me that he does not understand cost accounting. He claimed, “You cannot in any way shape or form levy the 25 cent-per-gallon tax. You can’t back-date it, you can’t forward-date it and you can’t hedge your inventory.” In other words, he is telling the dealers, “You paid the tax, we are giving a tax holiday to your customers, so you can’t collect the tax from them.” What does this do? It causes the dealers to lose money when they sell the gasoline in their storage tanks. The Attorney General also claimed that “gas stations retailers were trying to make money from the gas tax holiday,” and asked the public to report any dealer who did not drop prices by the 25-cent-per-gallon tax. He doesn’t seem to understand that attempting to avoid losing money because of a sunk cost is not price gouging. Considering that gasoline dealers make a profit of a few pennies per gallon, not being able to recoup a 25-cent-per-gallon tax already paid will put dealers into dire financial straits, perhaps put some into bankruptcy, and possibly lead to enough station closures to create panic buying and shortages.

Dealers are asking the state to refund the roughly $3.5 million paid on gasoline sitting in storage tanks waiting to be sold. That would eliminate the losses faced by the dealers if they sell the gasoline after reducing the per-gallon price by 25 cents. Though some legislators agreed, the proposal was not enacted. According to the dealers, when a similar situation arose in Maryland, the state issued credits as a way of offsetting the already-paid tax.

There now is another reason to add to the list of reasons gasoline tax reductions, suspensions, and “holidays” are unwise ideas. These grandstanding gimmicks cause delays in road, bridge, and tunnel maintenance and repair, in turn generating more accidents, property damage, personal injuries, and deaths when vehicles hit potholes or other unrepaired structural elements. They encourage increased demand, which in turn increases prices. And they put dealers in Connecticut, and perhaps other states, into financial distress.

Too often, legislators fail to “think it all the way through” when they rush to enact attention-grabbing, vote-collecting gimmicks. The short-term benefits end up being wiped out, and then some, by the long-term damage.

Let’s put one and one and one together:

1. New York’s governor, as reported in many sources, including this one, has agreed to take steps to have the state contribute $600 million and Erie County contribute $250 million to the cost of building a new stadium for the Buffalo Bills.

2. The owner of the Buffalo Bills, Terry Pergula, is worth, according to the Forbes 400, $5.7 billion. A year ago he was worth $5.4 billion, and in 2016, $4.1 billion.

Interlude: Those who are unfamiliar with my opposition to public funding of, and tax breaks for, businesses owned by multimillionaires and billionaires can peruse my previous commentaries, including Tax Revenues and D.C. Baseball, four years ago in Putting Tax Money Where the Tax Mouth Is, Taking Tax Money Without Giving Back: Another Reality, and Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, Taking and Giving Back, If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars, Is Tax and Spend Acceptable When It’s “Tax the Poor and Spend on the Wealthy”?, Tax Breaks for Broken Promises: Not A Good Exchange, Tax Breaks for Wealthy People Who Pretend to Be Poor, When One Tax Break Giveaway Isn’t Enough, It’s Not Just Sports Franchise Owners Grasping at Tax Breaks, and Grabbing Tax Breaks, Sports Franchises, Casinos, and Now, a Water Park. Of course, New York’s governor is praising the proposal as justified by the typical “doing good for the public” and “creating lots of jobs” claims, but as I explained in Grabbing Tax Breaks, Sports Franchises, Casinos, and Now, a Water Park. “but this reasoning would support tax breaks for almost everyone, thus destroying government and civilization.”

3. A few days before reaching the agreement with the owner of the Buffalo Bills, New York’s governor proposed a budget that, as reported in various sources, including this one, reduces the funding of the Office of Children and Family Services by $800 million.

Now do the math.

About a month ago, in Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, I explained why reducing or suspending gasoline and other fuel taxes is an unwise idea. I explained that doing so would cause delays in road, bridge, and tunnel maintenance and repair, in turn generating more accidents, property damage, personal injuries, and deaths when vehicles hit potholes or other unrepaired structural elements.

I described fuel tax reductions and suspensions as “a reverse lottery. Instead of paying $1 for a chance to win $10,000, motorists would be getting a few dollars for a chance to avoid hitting a pothole or being on a bridge as it collapses. Instead of a lucky few or a lucky one, there will be an unlucky few.” I noted that suspending a tax that would save people less than $100 in a full year “is like using a garden hose to fight a forest fire.” And I characterized these fuel tax suspensions as “window dressing,” simply “a maneuver designed to help as elections approach,” with a “ ‘look what I did for you’ boast rest[ing] on a $97 savings, offset of course by the bills for new tires, repaired suspensions, refurbished wheels, medical care, and funeral expenses.”

I have made these arguments in other commentaries during the past decade in posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes, Road Taxes and User Fees as a Form of Pothole Insurance , and Death as a Price for Taxes and User Fees. I have noted that, “As bad as refusal to keep highway user fees and taxes in line with increases in the cost of living, it is even more foolish to cut those taxes and user fees.”

Today I became aware of yet another reason to avoid reducing or suspending gasoline and other fuel taxes. In Costly Gasoline Spurs Tax Cuts That May Delay Demand Destruction, Saket Sundria points out that these tax reductions and suspensions will discourage people from taking steps to reduce demand for gasoline. Why is that important? Demand is an element in the cost of anything. As demand increases, prices increase, and as demand drops, prices drop. Reducing demand for gasoline reduces its price, at least in a genuinely free market which, of course, does not exist, and thus discouraging reduced demand is inconsistent with the goal of reducing price. Thus, reducing or suspending fuel taxes may very well cause less reduction in demand, and even increases in demand, thus causing prices to increase, which is contrary to what drivers seeking tax suspensions are trying to achieve. Sundria makes an excellent point, and I welcome it as another argument against foolish fuel tax reductions and suspensions. Thinking things through to their logical end, as Sundria has done and as I try to do, is a challenge from which too many people flee. Unfortunately, Sundria’s analysis, like my commentaries on the issue, falls on the deaf ears of officials anxious to appeal to voter emotion in order to get re-elected.

According to this Philadelphia Inquirer report, gubernatorial candidate Josh Shapiro has proposed using “surplus * * * federal pandemic aid” to “send payments to car-owning households.” The proposal is a reaction to increases in gasoline prices, though those prices have edged downward in recent days. Shapiro also has proposed eliminating state sales and gross receipts taxes on cell phone bills. Unlike his proposal to expand the property tax and rebate program, which provides monetary assistance to low-income individuals, the proposal to pay $250 per vehicle to households regardless of the economic status of the householders makes no sense. Though increased gasoline taxes, which incidentally are not as high in real terms as they have been in the past, are a financial burden for low-income and some middle-income families, it is difficult if not impossible to visualize a person with $500,000 or more of annual income agonizing over how to meet expenses when the cost of gasoline goes up by $97 annually for the average motorist (as I explained in Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People). Worse, though excluding corporate and government vehicles from the payout, the proposal does not appear to limit what is paid to the multi-millionaire who collects vehicles and has several dozen sitting in the 30-car garage of a multi-million-dollar palatial residence. Don’t think these exist? Imagine this abode being located in Pennsylvania with its garage filled to capacity. How badly in need of $250 per vehicle would the owners be?

Understandably, a refined proposal that takes into account income levels and includes limitations on the number and type of qualifying vehicles per household requires more words and more detail. Understandably, trying to convey a refined proposal in the context of a political campaign, in a sound bite, or on a political placard is difficult, especially in this age of character-limited tweets and abbreviated attention spans. That, however, is no excuse for not giving due deference to wise policy and the precision it requires.

WalletHub has released its 2022 tax survey. It’s worth a look. A variety of questions were posed to respondents, and six tax law professors were asked to offer their thoughts on why some of the questions generated the results that were obtained.

Of all the questions, one that got my special attention this time around was one that was not posed to the six tax law professors. Specifically, when asked “Do you think any of your neighbors cheat on their taxes?,” 52 percent answered “no,” and 48 percent answered “yes.” So through extrapolation, half of Americans think their neighbors are cheating on their taxes. Note that the other questions and answers were just as interesting, but they were similar or identical to questions asked in previous WalletHub tax surveys that I mentioned in earlier commentaries, such as If Not Tax Return Preparation, What Else?, and So What Would YOU Do to Avoid Taxes?.

Does the perception that half of American taxpayers are cheating match reality? Without some sort of comprehensive audit, the best that can be done is to rely on other measurement methods. For example, in a 2020 CreditKarma survey, “only about 6% of survey respondents said they have knowingly cheated on their income taxes. Which means that the majority, roughly 94%, said they’ve never knowingly cheated.” I see two problems with this survey. Surely there were respondents who had cheated but lied, perhaps because they worried that somehow the IRS would track them down through the survey response database. And is it possible to unknowingly cheat? I think not. Carelessness and mistakes do not rise to the level of cheating without intention, and by definition there is no intention when the error is unknowing. Negligence, yes, but negligence is not intentional.

A 2019 article from Vox, carrying the headline “More people are cheating on their taxes, but fewer are going to jail,” offers some additional insights into the question. The article suggests several questions. When it mentions the millions of Americans who fail to file tax returns, should those individuals be considered cheaters? Technically, they are not committing tax fraud because they are not making any representations or misrepresentations about their income, deductions, credits, or other tax factors because they aren’t making any representation at all. But I suspect many people would consider someone who fails to file, even if not taking affirmative steps to hide income, as cheaters. The article shares IRS information that as of 2017 about 6.9 million employers failed to pay their payroll taxes, and that the number of employers not paying those taxes in at least five years tripled from about 5,000 in 1998 to about 17,000 in 2015. We don’t know, when people are responding to the question asking them if they think any of their neighbors are cheating on their taxes, if they are thinking only about income taxes or also taking into account payroll and other taxes, and whether they are thinking of federal or federal, state, and local taxes.

Last year, according to many reports, including this Reuters article, the IRS Commissioner measured the tax gap, the difference between what taxpayers paid and what they should have paid, as one trillion dollars, more than double what it was estimated to be ten years ago. He attributed the gap not simply to mistakes but also to affirmative evasion through cryptocurrencies, overseas transactions, and deliberate misclassification of business income. What remained unmentioned was what percentage of taxpayers are contributing to the portion of the tax gap that reflects cheating. Is it a growth in the number of cheaters? Is it an increase in the amount of evaded tax liabilities by the same small handful of mostly wealthy individuals whose incomes have soared and therefore whose opportunities to cheat, in terms of tax dollars, have also increased?

On its website, EPCaine & Associates reproduces a graphic from a Tax Foundation report that I cannot find, in part because there is no link on the website to the report. It is a 2013 report that estimates the number of people who cheat on their taxes as 1.6 million. Without seeing the report, it is difficult if not impossible to determine if that is an estimate with respect to income taxes or with respect to income, payroll, excise, and other taxes, and it also is unclear whether it refers to federal or federal, state and local taxes though the graphic appears to refer to federal taxes because it focuses on the IRS.

So the answer to the question, “Does the perception that half of American taxpayers are cheating match reality?” is a simple, “I don’t know.” I don’t think anyone knows. We could come close to knowing, if every tax return at every level of government were audited. Even that would not necessarily reveal cheating with respect to taxes for which returns are not filed and that can be evaded through other sorts of activities. Of course, neither the resources of time and money for, nor the tolerance of, such wholesale audits exist. It’s not unlike a question, “Do you think any of your neighbors cheat on their spouses, committed partners, significant others, etc.?” and the issue of whether the response matches reality, the answer to which requires an answer to the question, “How many people cheat on their spouses, committed partners, significant others, etc.?” I will leave those discussions to others.

Inflation is running rampant, though not quite as outrageous as it was in the 1970s. Almost everyone – more on that in a few paragraphs – is unhappy and distressed. That’s understandable. People forced to choose between food and medicine, or between diapers for an infant and school supplies for the first grader, are struggling. Solutions are demanded. Solutions are needed. Solutions to problems require thinking. Careful thinking.

So into this challenge step some members of Congress, led by Representative Tom O’Halleran and Senator Mark Kelly, have introduced legislation to suspend the federal gasoline tax. Under the proposal the tax would not be collected during 2022. According to the sponsors, “The bill would help lower high gas costs for Arizona families by temporarily suspending the 18.4 cent federal gas tax until January 1, 2023.” Both lead sponsors are from Arizona, though presumably they intend to claim that it would help families across the country. But it wouldn’t.

During the past decade, I have explained why it is cheaper, in the long run, to increase taxes and user fees dedicated to highway, bridge, and tunnel maintenance and repairs than to wait until the invoices for new tires, repaired suspensions, refurbished wheels, medical care, and funeral expenses arrive. I have written about the challenges posed by this particular American short-sightedness in posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes, Road Taxes and User Fees as a Form of Pothole Insurance , and Death as a Price for Taxes and User Fees. As bad as refusal to keep highway user fees and taxes in line with increases in the cost of living, it is even more foolish to cut those taxes and user fees.

I pointed out the problem in Paying the Price for Anti-Tax Damage, in which I reacted to some anti-tax legislators realizing the long-term danger in their position when I wrote:

Some Republican legislators and politicians are beginning to realize that their promises in earlier years that tax cuts would not cause reductions in services were ill-founded. Hit a pothole, incur hundreds of dollars or more of repair costs, and those tax cuts or avoided tax increases pale in comparison. Decades of disinvestment in the arteries that supply the nation’s economy are now coming home to roost. The foolishness of the anti-tax pledge is being revealed for the menace that it is. Of course, people were warned – by me and others – but too many did not listen, and now everyone is paying the price.

Note that the current proposal is being advanced by Democrats and the chatter is that Republicans won’t go along. Politics indeed makes for strange alliances.

What’s being proposed is a reverse lottery. Instead of paying $1 for a chance to win $10,000, motorists would be getting a few dollars for a chance to avoid hitting a pothole or being on a bridge as it collapses. Instead of a lucky few or a lucky one, there will be an unlucky few. In this time of so much self-centeredness, and the absurd optimism held by some who think – or perhaps feel – that they will encounter only good fortune and never be touched by bad luck, it is not surprising that a proposal putting the chance of tiny economic benefits for an individual is considered worth the price to be paid by a community which will suffer when the unlucky crash after hitting a pothole or go tumbling into a ravine when a bridge collapses.

Worse, relieving people of an 18 cent per gallon gasoline tax is like using a garden hose to fight a forest fire. The average American drives about 13,000 miles a year, plus or minus a bit. The average car gets about 25 miles per gallon. So the average gasoline purchase is about 540 gallons per year. Suspending the gasoline tax would save the average motorist about $97 in a year. Granted, for some folks, $97 is a welcome amount but the folks for whom $97 is a significant amount are unlikely to be driving 13,000 miles a year let alone even owning a vehicle.

Offering a federal gasoline tax cut as a “remedy” for inflation is nothing more than window dressing. It is a maneuver designed to help as elections approach and the “look what I did for you” boast rests on a $97 savings, offset of course by the bills for new tires, repaired suspensions, refurbished wheels, medical care, and funeral expenses.

High inflation hurts. I doubt that it hurts the wealthy very much given that the stock market provides an offset. But high inflation is walloping the poor and much of the middle class. They need help. But a suspension of a puny gasoline tax is a drop in the bucket, and for those who suffer the consequences of transportation funding being shut-off, in the form of property damage, personal injury, and death, it will be devastating.

I have been writing about the soda tax for about 14 years, though I haven’t written very much in recent years, perhaps because I have said all that I think needs to be said. My thoughts can be found 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, Imagine a Soda Tax Turned into a Health Tax, Another Weak Defense of the Soda Tax, Unintended Consequences in the Soda Tax World, The Soda Tax “War” and a Pathway to Tax Peace, and The Primary Goal of the Philadelphia Soda Tax: Not a Reduction in Soda Consumption.

But occasionally a story or an email comes along that re-awakens the part of my brain that focuses on the soda tax. Several days ago a reader alerted me to this story, with the eye-catching headline, “Seattle's Soda Tax Goes Horribly Wrong.” The report described a study comparing Seattle, which enacted a soda tax, and Portland, which did not, and determined that in Seattle sales of beer, though not wine, increased as sales of soda decreased. Though beer, and wine, are taxed in Seattle, they are taxed at what amounts to a lower per-ounce rate. The article points out that 16 ounces of regular soda has roughly 140 calories whereas beer has roughly 200 calories for the same amount.

The reader who sent the email wrote, “I believe you predicted this result several years ago.” I replied that I did not think I had addressed this consequence of a soda tax, instead focusing on other issues. Those included the silliness of taxing sugary beverages but not other products containing sugar, of language that brought beverages within the scope of the tax that are healthy rather than unhealthy, shortfalls in predicted revenues, discrepancies between planned and actual uses of the revenue, and litigation over the tax.

But as I sat down to write this post, I searched my blog and discovered that two years ago, in Unintended Consequences in the Soda Tax World, I had described reports and studies showing that the same thing happened in Philadelphia, though as soda consumption decreased, there was an increase not only in the consumption of beer, but also wine and certain liquors. Though I did not predict this result, I did write about it, which means that the part of my brain that focuses on the soda tax did not fully awaken when I read the email.

In my reply I also shared a question that popped into my brain after reading the email. Are children, who also consume significant amounts of soda, also shifting to beer? Hopefully not. And now I add more questions. So is soda consumption among Seattle children not declining? Is it declining and being replaced with some other beverage? If so, is it a beverage that does not appeal to former soda-drinking adults as much as beer? And, I suppose, in the meantime, people of all ages continue to consume donuts, cookies, pies, cakes, and candy, so what is happening to sugar consumption?

From time to time I write about the antics of tax return preparers who commit fraud, though I don’t write about every indictment, conviction, and sentencing because those number in the thousands. Instead, I select those that I think are of greater interest. Those commentaries include Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, Don’t Get Burned By a Tax Return Preparer, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, Overused Fraudulent Tax Return Preparation Ploys, and The Slippery Slope of Tax Return Preparation Fraud.

This time, the press release from the Department of Justice looked like many of the other announcements describing the sentencing of a tax return preparer convicted of preparing false tax returns. According to the press release, a Maryland woman was sentenced to three years in prison for preparing 13 false income tax returns that collectively sought more than $6.6 million in fake refunds. But unlike many situations in which a tax return preparer sets up shop in a particular locality and commits fraud when clients walk in the door or otherwise contact the preparer, this woman was part of a scheme in which she and others held seminars throughout the country in which they promoted the use of fraudulent schemes.

The details of those schemes had been set out in an earlier press release, in which the Department of Justice announced it had filed a complaint seeking a permanent injunction against the preparer and her tax preparation business. The complaint alleged that her scheme used a so-called “redemption theory,” in which individuals claim that the federal government keeps secret accounts for citizens that can be accessed by filing certain forms with the IRS. In this instance the preparer filed fraudulent IRS Forms 1099-A (Acquisition or Abandonment of Secured Property) and 8281 (Information Return for Publicly Offered Original Issue Discount Instruments) for her clients, with information that set up huge but false refunds totaling in the million. The “redemption theory” has been rejected multiple times by the IRS and by the courts. An excellent description of the theory, its creation and spread, the damage it causes, and its repeated rejection can be found in this Hartford Current article from ten years ago.

In a subsequent press release, the Department of Justice announced that it had obtained an indictment charging the preparer and two others with conspiracy to defraud the United States by aiding and assisting in preparing false trust tax returns and by filing their own false amended personal income tax returns. The preparer was also charged with helping the other two prepare their false amended returns. The three who were charged, working with a fourth individual, prepared tax returns claiming false withholding and false credits. When the IRS tried to recoup a $500,000 false refund issued to one of the trusts, the preparer conspired with the others to obstruct the IRS.

In yet another press release, the Department of Justice announced that the preparer was convicted of preparing three false income tax returns that claimed more than $1.1 million in fraudulent refunds. These chargers related to the indictment announced in the press release described in the preceding paragraph. It was on these and other charges that the preparer was sentenced as described in the second paragraph of this blog post.

Though it is not unusual for tax return preparers who engage in fraudulent practices to learn from one another, probably through networks and communications that extend nationwide, it was news to me that they actively campaign across the country seeking victims to use in their fraudulent schemes. If fraudulent tax return preparation isn’t just a matter of local preparers engaging in copycat techniques, but part of a national scheme, the danger posed by fraudulent tax return preparation is much more serious than it already has been perceived to be.

Perhaps more developments await this particular preparer and the others involved in this latest episode, but it seems to me that three years in prison is far too short a sentence. A mortgage underwriter who engaged in the same fraudulent technique, as described in It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns and who procured $4 million in false refunds was sentenced not only to restitution but also 12 years in prison. How is it, then, that someone who procures $6.6 million in false refunds and engages in a national campaign to market the scheme receives a sentence of only three years? Fifty percent more false refunds but only 25 percent of the sentence? Perhaps this preparer is cooperating in some manner with authorities. Or perhaps she had a better lawyer.

While doing some background research after reading an article that Reader Morris invited me to read, the subject of which is not the focus of this commentary, I came upon a tweet that reacted to the news that the federal government had seized $3.6 billion in Bitcoin. The details have been reported in a variety of sources, including this article.

The tweet that popped up, because in its thread there were comments related to the separate and different issue discussed in the article from reader Morris, caught my eye. According to this tweet, reacting to someone else’s earlier tweet referencing the seizure, “This is enough money to give each person in the world a half a billion dollars but guessing the government will just keep it for themselves.”

Because I enjoy numbers, I did two quick computations. First, using 7.9 billion as the population of the world, clearly a rough number because even as I write and as readers read this the population keeps changing, I figured that it would take $3,950,000,000,000,000,000 to provide each of the 7.9 people in the world 500 million dollars. That’s three quintillion nine hundred fifty quadrillion dollars. That’s much, much more than $3.6 billion dollars. My second computation was to figure out how much money each person in the world would get if the $3.6 billion were to be distributed equally to each person. The answer? Slightly more than 45.5 cents.

So before anyone joins a “distribute the seized bitcoin to each person in the world equally” campaign, they should consider whether it’s worth it. It’s not. But I wonder, would anyone jump on to such a campaign? The answer is “probably.”

Curious, I did a bit more research and discovered that, according to Politifact.com someone in 2021 had posted on Instragram this question: “If Bezos has 200 billion dollas, and there’s 7 billion people on earth, why can’t we each get a billion and (he’d) be left with 193 billion dollas.” The Instagram post received, as of the time the Politifact commentator, Krishnan Anantharaman was writing, more than 128,000 likes. That’s frightening. As Anantharaman explained, the answer to the question is, “There’s a reason we can’t, and it’s not selfishness or the gift tax. It’s arithmetic.” Indeed.

Anantharaman did the same two computations that I did and, yes, I did mine before finding his commentary on the seized Bitcoin redistribution comment. According to Anantharaman, using world population estimates at the time he was writing, it would require 7.8 quintillion dollars to give every person in the world $1 billion. Or, put another way, rounding up Bezos’ actual wealth of $197 billion to an even $200 and then distributing it equally among every person in the world would generate roughly $25 for each person.

What’s frightening isn’t just the math-deficient tweet and the math-deficient Instagram post. What’s even more frightening is the number of people who react(ed) emotionally, with a “sounds good to me so let me click the ‘like’ button” approach to what in reality demands critical thinking. Perhaps someone looked at the numbers, did the math, and agreed with the conclusions put forth in the tweet and the post. I doubt it. I am very confident that the “looks good, like it” mentality that is eroding respect for science is what generated all of those ‘like’ reactions. Arithmetic can be challenging when first encountered, but the existence of calculators makes it accessible for almost everyone. But it takes time to stop and investigate, to pause and compute, to take a deep breath and think. It’s no wonder that the skills requiring deep, intense, and time-consuming efforts are falling out of favor among a growing segment of the population. These sorts of no-think reactions characterized by the lack of investigation, research, thinking, and computation threaten the very pillars on which advanced civilization rests.

I know that in many instances headlines are not written by the author of the story to which the headline is attached. Sometimes the story author writes the headline. I don’t know what the practice is for Yahoo stories, such as this one, in which the headline proclaims, “The IRS already has all your income tax data – so why do Americans still have to file their taxes?” My reaction to the headline was along the lines of "You've got to be kidding me." The story is another defense of the Ready Return concept, in which the federal government prepares the tax return for taxpayers, who may or may not accept the consequences with or without reviewing the IRS work. I have explained, in many commentaries, why the Ready Return concept does not work with tax systems such as the federal income tax, in contrast to other types of taxes such as real property taxes. For those interested, my commentaries on the flaws of Ready Return include Hi, I'm from the Government and I'm Here to Help You ..... Do Your Tax Return, ReadyReturn Not a Ready Answer, Ready It Was Not: The Demise of California’s Government-Prepared Tax Return Experiment, As Halloween Looms, Making Sure Dead Tax Ideas Stay Dead, Oh, No! This Tax Idea Isn’t Ready for Its Coffin, Getting Ready for More Tax Errors of the Ominous Kind, Federal Ready Return: Theoretically Attractive, Pragmatically Unworkable, First Ready Return, Next Ready Vote?, 14-part series, Simplifying theTax Return Process, Surely This Does Not Boost Confidence In The ReadyReturn Proposal, Imagine ReadyReturn Afflicted with This Sort of IRS Error, Debating the ReadyReturn Proposal, In Writing, and Yet Another Reason the IRS is Not Ready for ReadyReturn. I also published a 14-part series on the concept’s shortcomings, with an index, and engaged in a published debate, Perspectives on Two Proposals for Tax Filing Simplification, with Prof. Joseph Bankman, one of the most vigorous proponents for government-prepared tax returns.

Nonetheless, several points made by Professor Beverly Moran deserve further scrutiny. She offers several arguments that are enticing on the surface but lack sufficient foundation.

Moran argues that “Return-free filing is not difficult” because “[a]t least 30 countries permit return-free filing. However, the income tax systems in those countries are different. If the United States adopted a system similar to those, then perhaps Ready Return would have a better chance of being effective and efficient, but what comes along with those other systems are programs and policies repugnant to enough Americans to make the proposition politically dead on arrival.

Moran argues that “In a no-return system, the government reveals its knowledge of the taxpayer’s income before the taxpayer files,” pointing out that “95% of American taxpayers receive at least one of more than 30 types of information returns that let the government know their exact income.” Though it is true that 95 percent of American taxpayers receive at least one information return, it is not true that this lets the IRS know their exact income. All sorts of income escapes information returns. Letting taxpayers think that “the IRS is taking care of it” increases substantially the number of instances in which income not reported on an information return ends up not being reported. And with the IRS continually struggling to audit returns, the odds of that unreported income being detected would drop even more. Putting responsibility on taxpayers to prepare, or to observe and verify what is being prepared on, returns enhances the sense of civic responsibility so critical to preservation of democracy.

By focusing on income and information returns, Moran ignores the many taxpayers whose returns contain more than income information. Depending on the year, between 12 and 30 percent of taxpayers, a not insignificant number, itemize deductions. The IRS does not know what these taxpayers paid in medical expenses, or gave to charity. Teachers who do not itemize might nonetheless claim an above-the-line deduction for certain teaching-related expenditures, another item of which the IRS is unaware. If a taxpayer has a child during the taxable year, thus creating or increasing deductions and credits tied to children, the IRS has no knowledge of information that impacts the taxpayer’s return. Many of these taxpayers do not itemize but nonetheless qualify for credits. And in some instances a child no longer qualifies, often for reasons of which the IRS is unaware. The IRS won’t know if a taxpayer becomes eligible to claim the credit for the elderly and the disabled, or adopts a child, or pays for education justifying the American Opportunity and Lifetime Learning Credits, or purchases property eligible for the residential energy credit. These are just a few examples of why the IRS cannot prepare most taxpayers’ returns, and should not be presumed to be able to prepare any returns accurately, unless the next step in the Ready Return movement is to have every monetary transaction, family change, health care decision, and physical life change reported to the IRS. It is easy to imagine the slippery slope once a federal Ready Return is enacted, along the lines of the IRS and Ready Return advocates exclaiming, “This can’t be done unless we have access to taxpayers’ complete financial records.” And that would be a starter.

Of course, Ready Return could work for an income tax system that is as simple as something like the real property tax. The real property tax has only two variables, namely value and rate, though complicating exemptions have crept into most real property tax systems. Supporters of Ready Return, who justify their position on the need to help taxpayers deal with an increasingly complicated federal income tax system, would gather more support if instead of offering the unworkable Ready Return band-aid, they pushed for the sort of simplification of the federal income tax that would make Ready Return work as simply as do real property tax systems. But that would require jettisoning all of the provisions that are in the income tax law because Congress trusts the IRS more than it trusts the appropriate agency to implement its policy decisions. I daresay many, if not most or even all, Ready Return advocates would balk at stripping the federal income tax law for individuals down to a system of all income being reported and subjected to a set of rates, with no deductions or credits, leaving aside of course the taxation of businesses including sole proprietorships.

Worse, Ready Return would make it easier for those who keep complicating the Internal Revenue Code to set aside worries about the impact of a new deduction or credit on taxpayers because “Ready Return will shelter them from the impact on tax return preparation.” It would also encourage more legislators to saddle the Internal Revenue Code with provisions that belong elsewhere or even nowhere. Imagine huge chunks of American health care, child care, employment, education, and other policies being left to the whims of Ready Return. Of course, as I’ve pointed out in my other commentaries, taxpayers would still need to invest time and money in auditing the IRS-prepared return. Having been both a writer and and editor for almost all of my professional life and beyond my professional life, I subscribe to the proposition that it is easier (and more fun) to do the writing than to work through what someone else has written.

It’s been about a year since I last wrote about a television court show. The ones I watched during that period either had nothing related to tax or were repeats. Actually, most were repeats, and were among the cases discussed in commentaries such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, Does Failure to Pay Real Property Taxes Make the Owner a Squatter?, Beware of the Partner’s Tax Lien, Trying to Make Sense of a “Conspiracy to Commit Tax Fraud”, Tax Payment Failure Exposes Auto Registration and Identity Fraud, and A Taxing WhatAboutIsm Attempt.

This time, in episode 242 of Judge Judy’s twentieth season first aired in 2016, the plaintiff entered into an arrangement with the defendant, under which the plaintiff would purchase a truck and the defendant would drive the truck. The plaintiff explained that he paid for the truck but put title in the defendant’s name because when the plaintiff tried to purchase the truck, the dealer would not title it in the plaintiff’s name because the plaintiff did not have a commercial driver’s license. Judge Judy observed that the plaintiff was wrong when he tried to purchase the truck without having the required license. The plaintiff describe the relationship as a partnership. He then testified that he lent money to the defendant, and when the defendant was unable to pay the loan, the defendant agreed to have the plaintiff withhold amounts from each of the paychecks from the plaintiff to the defendant. Later in his testimony, the plaintiff referred to the defendant as an independent contractor. Judge Judy asked the plaintiff to explain the discrepancy. The plaintiff replied, “He was my partner but when it came time to issue 1099s to him he was an independent contractor.” Judge Judy laughed and said, “That’s the second thing you did wrong,” referring to the constantly changing description of the relationship and the inconsistency between issuing paychecks but also Forms 1099. Judge Judy then explained the difference between partners and independent contractors. She didn’t point out that an employment is different from those two types of relationships.

The plaintiff stumbled while trying to explain why he was suing for payment of a loan allegedly satisfied by withholding amounts from the defendant’s paychecks. He tried to claim that there was a second loan, but his testimony was so confusing and inconsistent with documentary evidence, including a cashed check, that Judge Judy dismissed his case. Neither party was a lawyer, and it appeared that neither party had consulted a lawyer when setting up their business arrangement.

The lesson is simple. Decide how the business will be structured, execute documents consistent with that decision, and act in accordance with the decision. Trying to be both a partnership and an independent contractor arrangement while engaged in a business relationship, trying to have an entity be simultaneously a partnership and an S corporation for the same purpose, and trying to treat another party as both an employee and independent contractor with respect to the same transaction are all examples of inconsistencies that eventually lead to confusion and disadvantageous outcomes.

Reader Morris brought my attention to a proposal advanced by an economics professor at the University of South Carolina and one of his students. The idea can be expressed simply, and though its advocates claim it will generate simplification of the federal income tax filing and audit system, it is another theory that fails in the face of practical reality.

The idea? “Biennial filing and collection of taxes.” This idea is not new nor original to the professor and his student. Jay Soled proposed a two-year tax accounting period back in 1997, in “A Proposal to Lengthen the Tax Accounting Period,” 14 Am Journal of Tax Policy 35. That same year,, the idea was incorporated into a Senate Bill 261, which was primarily a proposal to shift Congressional budgeting from an annual to a biennial process of budgeting and making appropriations. The proposed legislation failed.

The professor and his student argue, on The Indicator from Planet Money, that their idea would create “a system in which Americans would pay our taxes not once a year, but once every two years.” My immediate reaction was a simple one. “They think Americans pay taxes once a year?” Americans pay taxes throughout the year. They pay taxes each time an employer withholds and remits income taxes to the Treasury on their behalf. They pay estimated income taxes as often as every quarter. The idea that taxes are paid only once a year, when a return is filed, is inconsistent with the reality of the federal income tax payment system.

But let’s turn to the proposal. There are all sorts of problems at the practical level.

The proponents argue that their idea “would minimize taxpayer and paperwork burdens, free up IRS funding, and result in a de facto doubling of the audit rate.” They argue that shifting to biennial filing would cut in half the number of returns that the IRS must process. They waffle on whether all taxpayers would file in the same year or if taxpayers would be divided into two groups. But unless half the returns were filed one year and half filed another year, the proposal would require the IRS either to keep its filing system and associated employees operating and working every year, or to go through a process of letting employees go and then two years later finding far more new employees who need to be trained than if employees had stayed on board. Biennial returns would contain twice as much information and would require IRS computers to double the amount of matching that would need to be done. Would employers, charities, banks, and other institutions that report information want to re-tool their system so that Forms W-2, Forms 1099, and contribution statements go out in even years for some employees, investors, and donors, and odd years for others? If the proposal puts half of taxpayers in two-year periods ending in odd years and the other half in two-year periods ending in even years, what happens when an odd-year person marries an even-year person and they want to file a joint return? Will taxpayers need to fill out a new form, “Application to Change from Even-Year to Odd-Year or Odd-Year to Even-Year Filing Period?” If they do so, would there be a one-year filing or a three-year filing to re-align the filing periods? What does that do the the cumulative effect of progressive rate applied to bunched income or halved income? Of course there would be more, not less, complexity.

Would taxpayer burdens and paperwork be minimized? Of course not. In addition to the additional complexities described in the preceding paragraph with respect to biennial filing, taxpayers would need to collect and retain, and then go through, twice as much information for each biennial filing. The idea that an employer would issue one Form W-2 for a two-year period of employment not only runs into the “some employees are even year and the others are odd year filers” issue previously mentioned, but as a practical matter increasing numbers of individuals are changing jobs more frequently, and thus face the prospect of additional Forms W-2. The same can be said for investors and Forms 1099. Individuals who donate to charities almost certainly would be retaining and going through twice as many tax-compliant thank you notifications from the charities. To deal with these sorts of issues, the proponents suggest that each biennial return would contain two columns, one for each year. This is the equivalent of filing two returns. It does nothing to reduce taxpayer information acquisition and retention.

The idea that cutting the number of returns that are filed would double the audit rate ignores the fact that each audit would need to cover twice as many taxpayer transactions, twice as many documents, and analysis of taxpayer activities over a period twice as long as associated with an annually filed return. It also means reaching back one additional year in time to find information. If there is some bit of economy of scale savings it is minimal. The proponents claim that the time needed to audit a two-year return would not be double the time needed to audit a one-year return, but they offer no empirical studies to support that claim. In fact, with their proposed two-year return being nothing more than two returns on one piece of paper, so to speak, it isn’t very different from what happens now when multiple returns are audited at the same time.

The proposal would not free up IRS funding, presumably for use in other IRS functions such as taxpayer assistance and increased operators on the phone lines. Even aside from transitional costs, the IRS would still need the same number of auditors, or more. It would need to increase training expenditures because there would be more employee turnover if all returns were filed in the same year.

There is another problem inherent in the proposal. The more often a task is undertaken, the easier it is to remember how to do the task and the more likely it is to remember to do the task. Consider the difference between doing something every day, such as checking email, and doing something four times a year, such as going online to pay estimated taxes. It is easier to remember “every April 15,” than to remember “every other April 15,” and it is easier to do something once each year than once every two years. Imagine the fun in a family in which the two parents luckily are both even-year filers and the two children are odd-year filers. The practical effect of doing the returns, or visiting a tax return preparer each year, but for different members of the household, creates far more confusion and complexity rather than any sort of simplification or cost savings.

There’s another twist. Most employees choose to have more taxes withheld from their pay because they want to avoid owing additional amounts in April and, in some cases, because they like the psychological effect of a refund. Most taxpayers filing estimated taxes do the same thing. But instead of getting a refund every April, they will need to wait an additional year because the refund would be issued every other year.

What happens if the federal biennial filing idea is enacted but states don’t go along? Taxpayers would need to put together a pro forma federal return for their “off year” in order to figure out their state income tax situation. In a state like Pennsylvania, there would be no reduction of required time and effort to file a state income tax return. However this problem would be worked out, it would generate more, not less, complexity.

The proponents then shift into a defense of ReadyReturn, making the same easily rebutted arguments that other proponents of that idea have made.* They do so not only to support that idea, but to predict opposition to their biennial filing proposal from the same folks who oppose ReadyReturn. That is probably a safe prediction, though it would not be surprising if persons not opposed to ReadyReturn found reasons to object to the biennial filing idea. The proponents suggest that companies opposing ReadyReturn because it would cut revenue would react in the same manner to their biennial filing proposal. I disagree. For one thing, even with ReadyReturn taxpayers would need to purchase tax preparation software or hire a professional to review the pre-prepared return that more than likely will have errors. And, as suggested by the example of the household with individuals on both the odd and even year filing, tax preparation software would need to be purchased each year even if a biennial system were to be adopted, and there would not be a 50 percent reduction in sales of, and revenue from, tax preparation software sales. And, of course, unless states went along with the biennial filing idea, taxpayers would still need to deal with filing every year and would need to purchase tax preparation software.

It is no wonder that the biennial idea did not get enacted back in 1997. Details matter. Practical reality overshadows theory. Even if it provided savings in money and time, the biennial filing proposal would require far more additional complexity than currently exists. Though the proponents of biennial filing created their idea in order to deal with existing complexity and IRS funding shortages, their proposal is misdirected. The solution to both of those problems sits with the Congress, a Congress seemingly incapable of working for the betterment of all Americans rather than their own partisan interests. The Congress needs to simplify the tax law, rather than using it and complicating it in order to appease their partisan money sources, and the Congress needs to fund the IRS adequately rather than playing to the self-centered crowd. The biennial filing proposal, like ReadyReturn, concedes defeat in the effort to get Congress to act responsibly and instead would shift onto taxpayers the burden of working through the mess created by the Congress. If as much time and effort were plowed into reforming Congress as is invested in proposals such as biennial filing and ReadyReturn, perhaps not only the tax mess but a lot of other messes would be cleaned up rather quickly and easily.

* For those interested, my commentaries on the flaws of Ready Return include Hi, I'm from the Government and I'm Here to Help You ..... Do Your Tax Return, ReadyReturn Not a Ready Answer, Ready It Was Not: The Demise of California’s Government-Prepared Tax Return Experiment, As Halloween Looms, Making Sure Dead Tax Ideas Stay Dead, Oh, No! This Tax Idea Isn’t Ready for Its Coffin, Getting Ready for More Tax Errors of the Ominous Kind, Federal Ready Return: Theoretically Attractive, Pragmatically Unworkable, First Ready Return, Next Ready Vote?, 14-part series, Simplifying theTax Return Process, Surely This Does Not Boost Confidence In The ReadyReturn Proposal, Imagine ReadyReturn Afflicted with This Sort of IRS Error, Debating the ReadyReturn Proposal, In Writing, and Yet Another Reason the IRS is Not Ready for ReadyReturn. I also published a 14-part series on the concept’s shortcomings, with an index, and engaged in a published debate, Perspectives on Two Proposals for Tax Filing Simplification, with Prof. Joseph Bankman, one of the most vigorous proponents for government-prepared tax returns.