Friday, January 11, 2019

Another Weak Defense of the Soda Tax 

Though it had been a while since I last wrote about the Philadelphia soda tax, no sooner had I published my latest commentary in Imagine a Soda Tax Turned into a Health Tax, addressing the closing of a grocery store, than there appeared a Philadelphia Inquirer commentary arguing that the closure was not on account of the soda tax. As readers of this blog know, although its advocates continue to praise its existence, the soda tax fails to get my support because it is both too narrow and too broad. It applies to items that ought not be subjected to this sort of “health improvement” tax, and yet fails to apply to most of the food and beverage items that contribute to health problems. Very little of its revenues are directed into health improvement efforts. Though I haven’t paid much attention to the tax during the past year or so until last week, I had written about the soda tax since 2008, 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 Imagine a Soda Tax Turned into a Health Tax.

In that recent Philadelphia Inquirer commentary, Ptah Gabrie argues that the closure of the Shoprite was due to other factors. After pointing out that the owner of the grocery store purchased a mansion four years ago and owns other stores that turn a profit, Gabrie cites a study claiming that some Philadelphians were shifting from sugary beverages to bottled water. Aside from the fact that the financial condition of the store’s owner has nothing to do with the fact that the store’s revenues are insufficient to cover the cost of purchasing the items it sells and paying for utilities, insurance, workers’ salaries, and other costs, the decrease in soda consumption has not necessarily translated into reductions in residents’ weight or an increase in residents’ health. Perhaps the sweetness lacking in bottled water is being offset by consumption of more cake, pies, cookies, and doughnuts.

Gabrie claims that the store closed because it lacks a liquor license. Yet even if having a liquor license would have permitted the store to remain open, does not the sale of alcoholic beverages contribute to health problems?

Gabrie also claims that home delivery cut into the revenue of the store in question, and points out that the store did not offer home delivery. Is there any evidence that the number of shoppers at the store decreased because they were using home delivery from other sources, rather than on account of shopping across the city boundary?

Gabrie suggests that a new ShopRite roughly two miles away might be the reason that revenue declined at the closed store. Yet again there is a question of whether shoppers chose to go to that store rather than to a store across the city boundary. It is interesting to speculate, but empirical evidence would be much stronger.

Gabrie asks why, if the soda tax is causing shoppers at stores near the city boundary to shift their shopping to stores outside the city, has the Aldi store not closed. There are several possibilities. One is that the store also is not doing well but its owner is hanging on, hoping for a turnaround. Another is that many of the clientele of that store are not habitual soda drinkers and thus do not see the point in taking their shopping out of the city.

Gabrie writes, “New taxes will always be opposed by the corporations that stand to lose profits and by people who mindlessly oppose any progressive means of changing the way we live.” My opposition is not based on lost profits but on the disconnect between the soda tax and the articulated goal of making people healthier. As I’ve pointed out in previous posts, the soda tax reaches items that are healthy, and fails to reach most items that are not healthy. Gabrie adds, “Taxation is the only way to push people on the fence to the healthy side. Just look at the tobacco industry.” That’s too much of an overstatement. There are, for example, workplace incentives in the form of bonus payments and gym reimbursements that are positive reinforcements of healthy behavior.

Gabrie then claims, “It is a fact that soda and sugary beverages cause diabetes.” It was when I read this statement that I decided I really did need to respond. The fact is, as explained by a variety of sources, including the University of Rochester Medical Center, eating too much sugar does not cause diabetes. According to the American Diabetes Association, “Type 1 diabetes is caused by genetics and unknown factors that trigger the onset of the disease. Type 2 diabetes is not caused by sugar, but by genetics and lifestyle factors.” The Mayo Clinic adds that gestational diabetes is caused by the placenta producing hormones that make cells more resistant to insulin. According to these and other sources, it’s not the sugar that causes diabetes but the weight that the sugar can add to a person’s body mass, so it’s not just sugar and certainly not just soda that adds the weight. That brings us back to the inconsistency between a tax on selected healthy and unhealthy beverages but the lack of a tax on unhealthy food items that can be just as much a risk for adding diabetes-inducing body weight. How many of the advocates of the soda tax would support a bacon tax, a fried food tax, or a saturated fat tax?

Wednesday, January 09, 2019

If It’s Real Property, It Should Be Subject to the Real Property Tax 

As reported in this article, the Pennsylvania Commonwealth Court has held that the land on which billboards are placed is subject to the real property tax even though the billboards themselves are not because of an exemption in the tax law for signs. The taxpayers have argued that the exemption for signs, which includes billboards, should also apply to that land.

Though generally it is easy to distinguish real property from personal property, there are items that appear to be one but that are the other. Billboards are one example. Unlike a portable trailer carrying a sign, which can be easily moved from place to place, a billboard structure is affixed to the land and not easily moved. Thus, but for the exemption in the statute, the billboard would be treated as part of the land, and thus, as real property. This is why a building is considered real property. Applying the same reasoning, the legislature also enacted exemptions for wind turbines and silos. Yet the legislature has not enacted exemptions for cell-phone towers despite enacting one for amusement park rides, so there is a bit of subjectivity in the drawing of the line between real and personal property.

Those who claim that the exemption for the billboard should extend to the land on which it sits claim that the Commonwealth Court decision will make things “taxable because there’s a rent being derived by the landlord or the property owner.” But that is not the basis for treating the land as real property despite the existence of personal property, the billboards, on the land. In fact, the position of the land owners is the position that, if extended, would open the door to the elimination of the real property tax on all but raw land. Should the land on which a person parks vehicles be exempt from the real property tax because vehicles are not subject to the real property tax? Should the land on which a person places patio furniture be exempt because furniture is not real property?

Another argument offered by the land owners and their representatives is the claim that the legislature intended to exempt the land from the real property tax. But the statute refers to “sign or sign structure” and not to “signs and the land on which they are situate.” If the legislature intended to exempt the land, which I doubt, the legislature needs to amend the statute to express in clear terms what it presumably intended. In effect, the legislature said, “In the absence of the exemption, the value of the billboard would be included in the value of the land for purposes of computing the real property tax because the billboard is affixed in the same way a building is affixed to the land, but because we have a soft spot in our hearts for the owners of the billboards, who often do not own but rent the land, we will treat the billboard differently from the way a building is treated.” That leaves the land as land, and subject to the tax.

So why would someone look at a statute that refers to a “sign or sign structure” and conclude that it applies to land? Perhaps for the same reason that someone tries to find a way of getting out from chores assigned by a parent. Perhaps for the same reason that some people, when there is an emergency or a call for volunteers, slink down in the chairs or turn away rather than pitching in.

Monday, January 07, 2019

Imagine a Soda Tax Turned into a Health Tax 

It has been a while since I last wrote about the Philadelphia soda tax. As readers of this blog know, although its advocates continue to praise its existence, the soda tax fails to get my support because it is both too narrow and too broad. It applies to items that ought not be subjected to this sort of “health improvement” tax, and yet fails to apply to most of the food and beverage items that contribute to health problems. Very little of its revenues are directed into health improvement efforts. Though I haven’t paid much attention to the tax during the past year or so, I have written about the soda tax since 2008, 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?, and Putting Funding Burdens on Those Who Pay the Soda Tax.

In the meantime, as summarized in this article, academic and business researchers have studied the impact of the tax. Advocates of the tax and opponents of the tax have found reasons to support and object to each of the studies, almost always reflecting an alignment between their views and the outcome of the study. Generally, it appears that stores have passed some or all of the tax on to customers, sales of beverages containing soda have dropped, and some customers have shifted their shopping to locations outside the city where the tax does not apply, causing sales at stores outside the city limits to increase.

Now comes news that the owner of a Shoprite grocery store in West Philadelphia will close. The owner has explained that because of the soda tax, revenue at the store has dropped from $30.5 million in 2016, before the tax went into effect, to $23.4 million in 2018. The store is just blocks from the city limits, and it would be no surprise to learn that when people go to a store outside the city to avoid the soda tax they also purchase everything else on their grocery shopping list. The Shoprite’s owner concluded that the store has become unprofitable, losing more than $1 million each year since the tax went into effect. This Shoprite is not the owner’s only city grocery store, as he owns six other stores in the city. Those stores also have suffered revenue decreases but not to the extent of the store within blocks of the city limits.

The impact of the closure is unhealthy. The owner had opened this store and the others in what are called “food deserts,” places in cities where access to fresh groceries is limited or non-existent. Customers who shopped at this store despite the soda tax because they lack transportation to stores six, ten, or fifteen blocks away now face serious challenges in finding places to shop for food, even though the owner of the store has suggested he will offer ride shares. Employees of the closed store will be transferred to the owner’s other stores, but as employees of those stores leave, they will not be replaced, adding to the 200 positions already left unfilled because of slumping sales at those other stores. These are rather high prices to pay for a program that is generating less revenue than projected, and that has seen its projected revenue revised downward several times.

A spokesperson for the mayor, the chief cheerleader for the tax, responded by claiming that there was no “evidence that the tax has had any impact on sales.” The evidence I see is rather clear, so it would be helpful to know what sort of evidence the mayor seeks. The spokesperson pointed to several of those studies summarized above, but those did not focus on any particular store or area of the city, but rather looked at overall trends. The mayor continues to insist that because the tax is imposed on beverage distributors, they could absorb it rather than pass it on to customers, but the practical reality of the tax is that it gets passed on to customers.

Imagine if the tax was imposed on all items containing substances harmful to health, and not just beverages that contain sugar. Imagine if the tax did not apply, as it does, to items that are not harmful to health. The impact of the tax would be much less significant, because it would be spread over a much larger array of unhealthy food items, such as doughnuts, pastries, cakes, bacon, cheese curls, candy, and other items that contribute as much, if not more, to the poor health of America as does soda. Imagine if the revenue generated from the tax was used to improve health habits, dietary decisions, and medical care. Imagine if there was a connection between the impact of the tax and the purposes to which its revenues were dedicated. Imagine.

Friday, January 04, 2019

Tax News: Good or Bad? 

Three days ago, reader Morris directed my attention to a four-and-a-half-year-old BBC Report that explored why bad news dominates the headlines and television news. All of us are familiar with the teasers that promote the 11:00 evening news on local television stations that almost always highlights a car crash, a shooting, a fire, or some other catastrophic event. When was the last time “Man Finds His Long Lost Sister” the lead story?

Morris asked me a series of questions. He asked:
Do you blog more bad tax news stories than good tax news stories?

How do you define bad vs good tax stories?

Is it possible that the same story or the same tax circumstances could be good news for one or more persons and bad news for one or more persons?

Are you drawn to bad news stories {headlines} when writing your blog? If so, why?
After realizing I had never thought about this perspective on my blog writing, I did a bit of thinking. Here is what I concluded. Stories with bad tax results for someone do get my attention, perhaps because the “Maxine filed her taxes and didn’t get audited” story doesn’t ever appear. And to the extent I am drawn to stories with bad tax results, it’s because the lesson to be learned from what someone did wrong can make a stronger impression on readers than the highlighting of someone’s routine and correct reaction to a tax issue.

Yet it is the third question posed by Morris that is most important. Yes, the same tax story can be good news for one or more persons and bad news for others. Why? To the extent the story is about someone who failed to do something correctly when filing taxes and who was audited, there is bad news for that person but good news for everyone else who has filed correctly. So in some sense, it is not possible to tag a tax story as “good” or “bad” because the adjective depends on the viewpoint of the reader. Thus, perhaps I should conclude that I don’t blog more bad tax stories or good tax stories because all tax stories are both good and bad from a universal perspective. From my own personal perspective, at least some of the tax stories I report and analyze are good or bad, but many of them are both. Consider the story of someone who does something bad with respect to taxes, from my viewpoint and the viewpoint perhaps of most others, but in which I find something good because there is the opportunity to help others avoid the same mistake.

Perhaps a good example of the difficulty in tagging a tax story as good or bad are the commentaries I have shared with respect to the 2017 tax legislation. From the short-term perspective of those who hauled in huge tax cuts, that was a good story. From the perspective of those who did not get any tax cuts, or perhaps a crumb or two, or who even were afflicted with a tax increase, that was a bad story. The long-term perspective might cause some of those who considered the legislation to be good news to change their minds, although there surely will be some who would consider the news to be good no matter what happens.

For me, the primary good news is that there are tax stories on which I can comment. Perhaps for those who disagree with my analyses or dislike my tax philosophy, the bad news is that there are tax stories on which I can comment. The fact that the world will not run out of tax stories is good news or bad news, depending on how a person views that prospect.

Wednesday, January 02, 2019

Tax Ignorance or Bad Writing? 

A few days ago, reader Morris directed me to a web site and asked me, “tax ignorance or bad writing.” Curious, I took a look, and spotted several statements at least some of which had inspired reader Morris to send the note to me. Perhaps he saw other questionable statements that I overlooked. Here they are:
* * * For instance, if you receive money from life insurance proceeds, a gift or an inheritance, rather than work-related wages, calculating your taxable income can become more complex. * * *

* * *

The list of what type of revenue is taxable, according to the IRS, is long, but a good way to understand what you should report and what you don't need to is to think about earned income versus unearned income. If you earned it, report it as taxable income. If you didn't earn the income, you probably don't have to report it.

* * *

If you receive long-term disability benefits before you're retired, that's also considered taxable income. Union strike benefits are also taxable, as are jury duty fees. Unemployment benefits are also considered taxable income. So are royalties and license payments, interest or dividends from investments and severance pay from a previous place of employment. Even money you win from a game show is considered taxable income.

* * *

Here are some of the types of income categories that you must pay taxes on:
* * *
Capital gains and losses.
* * *
Rental income and expenses.
* * *
401(k) plans.

* * *

What is nontaxable income?
As a general rule, among what you don't have to report includes gifts and money you inherit, child support payments, welfare benefits, damage awards for physical injury or illness, cash rebates from a dealer or manufacturer for an item you purchase and reimbursements for qualified adoption expenses. Still, there are some exceptions. For instance, while you won't have to pay an inheritance tax on the federal level, six states – Iowa, Kentucky, Maryland, New Jersey, Nebraska and Pennsylvania – currently collect an inheritance tax. Inheriting property versus money can also sometimes involve paying taxes.

* * *

Here are some of the types of income categories that are not taxed:

* * *
Life insurance reimbursements for medical expenses not previously deducted.

* * *
My conclusion is that we’re looking at some bad writing. The primary problem is the insistence on trying to define taxable income by listing items that are or are not included in GROSS income, which is not the same as taxable income. Deductions can offset some or all of a person’s gross income. So it is wrong to state that any particular amount of income is included in taxable income because it is premature to determine the impact of that income until deductions are taken into account.

A related problem is the attempt to bunch losses and deductions with gains and income when trying to define income. A person does not “pay taxes on” capital gains and losses. A person must include capital gains in gross income. Capital losses can offset those gains in the process of computing taxable income. Taxes are not paid on capital losses. The same is true of rental expenses.

Nor is it correct to state that if a person receives a gift or inheritance, “calculating your taxable income can become more complex.” Gifts and inheritances are not included in gross income, and thus are not included in taxable income. They are left out of the process, so there is no way they can make the process of computing taxable income more complex. On a related note, the sudden shift into state inheritance taxes is confusing because inheritance taxes have nothing to do with the computation of federal taxable income.

The idea that a 401(k) plan is a type of income is bewildering. Distributions from 401(k) plans are what get considered in determing gross income. Do reimbursements for medical expenses come from life insurance, or do they come from health insurance?

The notion that “a good way to understand what you should report and what you don't need to is to think about earned income versus unearned income. If you earned it, report it as taxable income. If you didn't earn the income, you probably don't have to report it” is completely wrong. Earned income, in the federal income tax world, is income derived from performing services. Some earned income is included in gross income, and some earned income Is excluded from gross income. Unearned income refers to income from investments, and again, some unearned income is included in gross income and some unearned income is excluded from gross income.

I think what leads to the bad writing is the ever-increasing demand for sound bites and tweets, as Americans, and others, seem to be losing the ability to process multi-step analyses, to hear or read comprehensive descriptions, or to understand complete sets of instructions. This tendency to reduce things to overly simplistic sound bites and tweets nourishes the tendency of too many people to look at things as binary possibilities rather than as realities on a spectrum. The article to which reader Morris directed my attention can easily be fixed, but it would require the addition of at least several sentences, or perhaps two or three paragraphs. When the reaction becomes, “Oh, but readers won’t last that long,” I fear that the same could be said of everything else that depends on having attention spans of more than 15 seconds. The willingness to humor and enable those short attention spans leads to bad writing, which in turn increases ignorance, which in turn leads to more bad and erroneous writing, which in turn spirals us down, down, down, eventually into oblivion.

Monday, December 31, 2018

So Which Is It? Good Tax News or Bad Tax News? 

Last Wednesday, Channel 10 News in Roanoke, Virginia, published a story in which the owner of a tax preparation company opined that as the 2019 tax filing season approached, most taxpayers filing 2018 federal income tax returns would encounter good news, in the form of lower taxes, because of the 2017 tax legislation. He pointed out that tax brackets “came down a little bit,” that the standard deduction had been increased, and that the child tax credit had doubled.

Last Wednesday, Channel 10 News in Rochester, New York, published a story in which the tax expert at a local accounting firm warned that bad news was on the horizon. He explained that because of the reduction in withholding during 2018, many taxpayers would find themselves receiving smaller refunds than they had received in the past or even find themselves needing to pay more taxes when they file their 2018 returns. He pointed out that most of the tax breaks in the 2017 legislation benefit businesses.

So which is it? Good news or bad news? Those who have been reading MauledAgain know the answer. In a series of commentaries, including The Realities of Income Tax Withholding, Indeed, Check Your Withholding, and Do It Now, and Time Runs Out on Tax Withholding Adjustments, I have cautioned people against getting excited about take-home pay increases that will be offset, to a greater or lesser extent, by refund reductions and tax due amounts when filing season rolls around in 2019.

Of course, tax refunds and underpayments are but one piece of a person’s financial situation, though for many people who are accustomed to banking on a refund of a certain size, March and April surely will bring bad news. But even if someone’s refund remains the same, other bad financial news, such as a crashing stock market, price increases and bankruptcies triggered by unwise tariffs, and escalating health care costs exacerbated by lobbying, will continue to combine to make people’s financial situation miserable. Unless, of course, they happen to be among the oligarchs and their acolytes who benefit from this economic instability that undermines the American dream. My conclusion? It’s bad news.

Friday, December 28, 2018

How Not to Dispute a Tax 

A guy goes to a restaurant, orders take-out, is presented with the bill, and blows a fuse when he sees that the sales tax has been applied. So what does he do? He pulls a gun on the restaurant’s owner. Law school hypothetical? No. It’s the reality of the insanity. It happened in Cleveland, Ohio, as described in this report.

It indeed is sad that the combination of ignorance and dominant limbic systems is tearing apart the fabric of the species. Is it that difficult to teach, and to learn, that the restaurant owner did not enact the sales tax, nor make it applicable to take-out food? Is it that difficult to grow up and learn how to react sensibly and rationally when encountering a problem in the presence of someone who is not responsible for the problem?

There are arguments for and against sales taxes on food. There are arguments for and against imposing the sales tax on take-out orders but not on in-house dining. Some of those arguments are strong, and others are weak. But the place for dealing with the issue isn’t at the restaurant checkout line. It’s in the legislature’s chamber, in the offices of legislators, in town meetings, in editorials and commentaries, on radio, on television, and in other places where civilized, rational, and intelligent conversation can occur.

Though they didn’t catch the guy, they know who he is. So it’s a matter of time. Perhaps the judge will sentence him to, among other things, attendance at tax school where he can wipe away at least some of his ignorance. Perhaps somewhere there is a “how to grow up and resolve tax problems without a gun” school. If there is, he can take classes there, too.

Wednesday, December 26, 2018

How Not To Practice Law: Fake Taxes 

Reader Morris brought my attention to this story out of New Zealand. An attorney included in invoices to clients a $100 charge for what he called a “Land Transfer Tax,” a “Land Transfer Tax Statement,” or a “Land Transfer Tax Statement for LINZ.” Complaints were made, and a lawyer’s standards committee concluded that the lawyer had engaged in unsatisfactory conduct, and had violated the Lawyers and Conveyancers Act because he misled and deceived his clients. The lawyer admitted that the tax did not exist, that the $100 amounts collected from clients were not transferred to a third-party, and that he had been wrong to charge the fake tax to his clients. The committee directed the lawyer to reimburse the clients, and also ordered him to pay $500 in costs.

Why did the lawyer do this? He claimed that he was trying to get compensated for the time he spent trying to learn how to comply with amendments to anti-money laundering legislation. This explanation must be considered in light of the committee’s determination that the lawyer did not disclose to his clients that he was charging additional fees to cover his overhead and additional fees for office expenses. On top of that, the lawyer did not provide proper goods and services tax invoices to his clients.

Perhaps it was the result of carelessness. Perhaps it was the result of a knowing intent to rack up more revenue. Perhaps it was the result of ignorance. Perhaps it was the result of incompetence. Probably it was a combination or two or more of those factors. Whatever it was, it should serve as a lesson to other attorneys, not just in New Zealand but also in the United States and elsewhere. The lesson is simple. Be honest and transparent in dealing with clients.

Monday, December 24, 2018

So a Tax Cut Incentive Didn’t Work As Promised, But I Am Not Surprised 

One of the “features” of the 2017 tax legislation providing substantial tax breaks to corporations and the wealthy was a reduction in the tax rate applicable to corporate earnings stashed overseas which had not been brought back into this country because, allegedly, corporate tax rates were too high. So the proponents of the corporate tax breaks argued that lowering the tax rate would bring $4 trillion in cash to come back from overseas. In Another Tax Cut Failure, I explained that according to this Bloomberg report, corporations repatriated $295 billion of earnings during the first quarter of 2018, the quarter after the legislation was enacted, and $184 billion during the second quarter. The report estimated that only between $50 and $100 billion would be repatriated during the third quarter. Now, according to a recent Bloomberg report, the actual amount has been computed, and it is a mere $92.7 billion. According to the same report, a Morgan Stanley analytical team issued a note disclosing that “The sharp drop and trend trajectory is surprising.” Isn’t that baffling? People are surprised that a tax break for large corporations isn’t doing what it was promised to do? In contrast, I would have been surprised had the tax break even come close to having the promised effect. So through three quarters, only $572 billion has returned, barely halfway to ONE trillion dollars, and nowhere near FOUR trillion dollars.

The failure of this giveaway turns out to be worse than expected. The repatriated amounts are not entirely attributable to the tax break. For example, during the third quarter of 2017, before the tax legislation was enacted, corporations brought $55 billion back into the country. So of that $93 billion, only $38 billion can be said to be a consequence of the giveaway. Consider how many companies routinely bring back profits and are now getting a tax break even if they aren’t increasing the amount of profits they are repatriating.

The tax break should have been limited to the increase in repatriated earnings. That’s the same approach I have proposed for job creation tax cuts, namely, prove that the jobs were created and then there is a tax break. So prove that more profits were repatriated than had been repatriated in previous years, and then there is a tax break. I’ve yet to be given a good reason to ignore that approach.

The trend is clear, and it would not be surprising to see the amount of repatriated profits drop even more during the fourth quarter of 2018. Even if one is generous and assumes that quarterly repatriation remains level at $90 billion, it will take ten more years to bring back a total of $4 trillion in profits stashed overseas. According to that recent Bloomberg report, the director of fiscal policy as American Action Forum has suggested that the amount of profits stashed overseas is closer to $2.5 trillion. So, once again, false promises have been dished out to Americans in order to funnel more money into the hands of starving wealthy individuals and bankrupt corporations awash in cash and profits. Will Americans continue to vote for the people who are doing this to them?

Friday, December 21, 2018

Time Runs Out on Tax Withholding Adjustments 

Back in August, in Indeed, Check Your Withholding, and Do It Now, I shared the IRS news release that appeared a week after I had offered, in The Realities of Income Tax Withholding, my advice on the need for people to adjust their income tax withholding to avoid unpleasant surprises in the early months of 2019 when they were filing their federal income tax returns. The IRS advice and my advice could be summed up in the same three words: Check your withholding.

I had explained the reason people needed to check withholding two weeks before I published Indeed, Check Your Withholding, and Do It Now. In The Realities of Income Tax Withholding, I discussed the extent to which the revised withholding tables will cause taxpayers to owe tax, or receive smaller refunds, in early 2019. I explained:
My guess is that the number of taxpayers who need to pay more in April will be more than 21 percent. There have been claims that the Administration and certain members of Congress want ordinary taxpayers to think that the 2017 tax legislation significantly benefits them, even though more than 80 percent of the tax breaks in the legislation accrue to large corporations and wealthy individuals. What better way to do this than to increase take-home pay through reductions in tax withholding? Happy wage earners will react in November, and then, in March and April, discover that some, perhaps all, of that extra take-home pay was nothing but a temporary boost in cash while they scramble to come up with money to pay the tax due on their returns. When this claim was raised in December, the Secretary of the Treasury called it ”another ridiculous charge." Tell that to the people who will be writing checks in March and April. But tell them now, or in September, or in October, when this information will be more valuable to them. Learning this in early 2019 will be too late.
So how did people react? According to this report from the Motley Fool, referring to a Jackson Hewitt survey that I cannot find online, most Americans did nothing. According to the survey, only 28 percent reviewed and updated their withholding, roughly 13 percent were unsure, and almost 60 percent had not done so.

The IRS had warned, as I had in different language, that “Waiting means there are fewer pay periods to withhold the necessary federal tax – so more tax will have to be withheld from each remaining paycheck.” At this point, very few people who want to change their withholding can do so. And those who can are limited in the amount of additional tax that can be withheld. Put simply, it’s too late. Unfortunately, in March and April many taxpayers are going to see a dollar amount on the “additional tax due” line, including many taxpayers who are accustomed to receiving a refund. An extra $10 or $20 per week, or $100 per month in a paycheck isn’t all that great if instead of an $800 refund a person needs to pay $600. At least some of the people facing this outcome might wonder or ask aloud, “So who’s getting those tax cuts?” By now, they would know the answer if they had been reading this blog. They would know that the answer might be articulated as, “Not you.”

Wednesday, December 19, 2018

The Disadvantages of Postponing Tax Increases 

Local governments generally impose taxes to pay for services to their residents. Among those services are police protection, fire protection, hazardous material removal, street lights, traffic signs and signals, trash collection, recycling, libraries, snow plowing, and a long list of other benefits. Not every jurisdiction provides all of these services but all jurisdictions provide at least some of them.

Local officials continually explain their desire to avoid raising taxes. To do this, they cut services or find ways to provide the same services for a cheaper cost, which often causes a reduction in the quality of services. Over time, the cost of providing services increases as costs generally increase. Workers need raises to keep up with inflation. Materials purchased from third-party suppliers increase in cost.

What happens when the postponement of tax increases can no longer be maintained? An answer can be found in this report, which explains that the local property tax in Allentown, Pennsylvania, will increase 26 percent next year. One need not be a tax expert to predict the reactions of property owners. Yet there is another twist. Somehow, for 13 years, the city managed to avoid increases in the property tax. In retrospect, would taxpayers have been less upset if each year the property tax increases by roughly 1.7 percent? That amount of an annual increase is equivalent to postponing increases for 13 years and then raising taxes by 26 percent.

Different individuals have different preferences when it comes to dealing with price increases. Some might prefer small annual increases. Some might prefer waiting and taking the big hit. To make a good decision, a person would need to know at the outset what the increase 13 years later would be, and would need to know, or at least have some idea of, whether they could invest what would otherwise be the annual 1.7 percent increase and obtain a better than 26 percent return over the 13 years. Of course, it isn’t possible to have that information at the outset.

The worst aspect of this approach, of postponing increases until a large increase is necessary, is the inability or unwillingness of people to set aside funds to cover the possibility that this will happen. Of course, most taxpayers think that holding taxes constant will continue forever or that when taxes are increased, the increase will be small and manageable. Unfortunately, it doesn’t always work out that way.

Monday, December 17, 2018

Warped Perspectives on Tax Policy 

Facebook is beginning to challenge television court shows as a provider of material for this blog. A few days ago, someone posted a meme that showed up on my newsfeed. It was a picture of several elderly gentlemen sitting on a bench, with the following caption: “After the age of 65 you should be 100% tax exempt. You have already more than paid your dues. Like and share if you agree.” Of course, I did not like or share the post. But I did comment.

My reaction to this meme was simple. It was a rhetorical question. I asked, “So those 70 year old billionaires would be tax-exempt? Really?”

The first response was a comment that failed to address the question. It was a typical me-focused, toss-aside-a-wider-perspective analysis, the sort that leads to stereotyping groups because of one person or incident. The response stated, “I just turned 65 and I've paid my fair share.” Was this response intended to imply that all people who have “just turned 65” have paid their fair share, whatever that might be? Does it distinguish between people who have attained the age of 65 and are wealthy and those who have attained the age of 65 and are destitute? Or does it lump together all persons who have attained the age of 65 without distinguishing economic situations even though the issue is an economic issue?

The second response was another example of this narrow, view-the-world-through-my-lens-and-ignore-the-wider-perspective thinking that is destroying not only the nation but the planet. The response stated, “I totally agree with these old gentlemen . Work your aaa off for over 45 years, pay more than your fair share and the Govmt , still taxes your partial pension, they screw you coming and going . And now they want to screw You again , while congress has all the perks of men and women who goof off.” Without defining “fair share,” this commenter went beyond the claim of the first commenter and decided the payment had been “more than” a fair share.

What particularly caught my eye was the complaint that “the Govmt , still taxes your partial pension.” To the extent that the pension is paid out of funds that have not previously been taxed, it is income. The extent of taxation depends on the amount of the pension. If the pension is a small amount, the recipient’s standard deduction, and in years before 2018, personal exemption deduction, most likely offset the pension, creating a zero income tax. Even adding in social security payments might not trigger an income tax liability. Of course, if the pension were higher, or when social security benefits were added in, the total was high enough, there would be an income tax, but it would be a smaller percentage than if the pension and social security payments were added to large amounts of investment or trust income. In other words, the income tax accounts, to a greater or lesser extent, for the economic condition of the recipient of a pension and social security. I tried to make this point in my response, in which I stated, “Not everyone who has reached the age of 65 has paid their dues. Age is one thing. Income and wealth and taxes are another.”

The observation that “they screw you coming and going” suggested to me that the person was complaining about being taxed on wages and salary and then being taxed on a pension or other retirement income such as social security. So I pointed the readers of the facebook thread to an explanation I had provided last year, in Does the Taxation of Social Security Benefits Constitute Double Taxation?, in which I wrote, in reaction to a claim that the taxation of social security benefits “represent double taxation”:
I disagree with the scope of [that] observation. . . .

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

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

Under the current system, some social security benefit recipients do not include any social security benefits in gross income, even when they receive more than they paid into the system. There is no double taxation in that situation. Others include some portion of the social security benefits in gross income, and often they live long enough so that the portion of social security benefits not included in gross income over the years is at least the amount that the person paid into the system. Again, there is no double taxation. Double taxation exists when the recipient dies before receiving back what was paid into the system, and yet includes some of the benefits in gross income. The reason for this inconsistency is that current law measure social security gross income with a bizarre formula that reflects the recipient’s adjusted gross income, certain adjustments, and varying portions of the social security benefits. Thus, some social security recipients encounter double taxation, but most do not.
Taxation of private retirement income, such as pensions, is not quite as complicated nor bizarre, but the overall concept is that the recipient is taxed on amounts paid into the retirement fund without being taxed at the time. This would include nontaxable employer contributions and employee contributions taken out of compensation and excluded from gross income.

It is unfortunate that much of the political and social unrest, including angry reactions to taxation, reflects a lack of a wider perspective that can be acquired both through formal education and through traveling outside the bubble, whether it’s a gated community, a closed social or religious community, or a neighborhood characterized by a singularity of perspective. Too many people think that when the encounter something, it becomes a truism. Thus, we observe people attaining a particular age and turning it into a category with attributes reflecting a singular or limited experience. So we see “I am over 65, I have paid taxes, I am being taxed on my pension, and I don’t have as much money as I would like” being translated into “Everyone who is over 65 should be exempt from paying taxes because [presumably] everyone over 65 is in the same position I am in because everyone over 65 is in the same economic position.” The flaw in the reasoning, if that is what it can be called, is obvious the moment thought is given to the proposition. The inability to view things from a wide enough perspective, reflecting a broad exploration of life, causes people to see things from a warped perspective, one that does not reflect all of reality. Here, I saw it with respect to taxation, but it exists not only with respect to economic issues but also with respect to political, religious, cultural, and social issues. It’s a narrowness of experience that become a narrow-mindedness of cognitive dissonance. It is a dangerous thing except for those who profit from the narrow-mindedness of the masses.

Friday, December 14, 2018

Judge Judy Identifies Breach of a Tax Return Contract 

I’ve never counted, but my guess is that tax related cases show up in television court shows more often than most issues other than gift versus loan, dog attacks, and vehicle accidents. These sows have provided me with numerous opportunities to explore the tax woes of plaintiffs and defendants. My commentaries include 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, and Another Tax Return Preparer Meets Judge Judy.

So it’s no surprise that a few days ago I encountered a rerun of a Judge Judy episode (Season 22, Episode 231) from earlier this year that involved a tax issue. That I did not see the episode when it originally airs simply demonstrates that I’m not always watching the television in hopes of finding material for MauledAgain!

The facts of the case were simple. A man and a woman lived together, did not marry, had a child, and separated. When they separated they entered into a separation agreement. They agreed that the child would spend half of her time with each parent, that each parent would support the child when the child was with the parent, and that no child support would be paid by either parent to the other. In the contract, the parents agreed that the mother would claim the child as a dependent for tax purposes in odd numbered years, and that the father would claim the child as a dependent in even numbered years.

The story became complicated when the mother went to jail for three months during an odd numbered year. During that time the child lived with the father’s parents because the father at that time was not employed. When the father filed his federal income tax return for that odd numbered year, he claimed the child as a dependent. He then paid the mother $1,000 to account for the fact that he claimed the child in a year that “belonged” to the mother.

The mother sued the father, seeking “the other $2,000” and the father counterclaimed for return of the $1,000 he had paid the mother. The father argued that the mother’s inability to support the child during the time she was in jail during the odd numbered year nullified the contract.

Judge Judy held that the contract was in force, and that the father had breached the contract. She held that he owed the mother $2,000 and that he was not entitled to receive back the $1,000 that he had paid.

Two questions popped into my head while watching the episode. I wondered, how did the parties compute the $3,000 of tax savings attributable to claiming the child as a dependent? My guess is that it was a combination of the reduction in tax due to the dependency exemption and the reduction in tax due to credits based on having a child as a dependent. Whether the amount reflected the decrease in the father’s tax liability, or what the mother would have saved had she claimed the child is unclear. I also wondered, did the mother claim the child as a dependent and then receive a disallowance from the IRS or did she know what the father had done and avoided complications by not claiming the child? The answer to that question was not provided during the show.

It is unclear if the parties had professional advice when they decided to enter into, and sign, the separation agreement. My guess is that the father did not have professional advice when he decided to claim a dependency exemption that he had agreed the mother was entitled to claim. It is very unlikely that the agreement contained a provision addressing what would happen to the dependency exemption if either parent was unable to take custody of the child for one-half of the year. Perhaps it should have had such a provision.

Wednesday, December 12, 2018

Another Tax Cut Failure 

The December 2017 tax cut legislation has wrought all sorts of damage to the American economy. Some taxpayers not in the top one percent rejoiced when they received tiny raises or paltry bonus payments, but many of them, unlike the still-too-poor one percent, will be forking those dollars back to the Treasury come tax filing season in early 2019. Job numbers appear better, but it’s a short-term phenomenon and most of the new jobs are minimum wage opportunities. The federal budget deficit is growing as though it were on steroids.

Now comes more bad news. One of the claims made by the proponents of the always-failing supply-side, trickle-down economic theory was that the reduction in corporate tax rates would bring back into the United States money stashed overseas by corporations. Supposedly, the return of this money would create jobs, though the fallacy in that claim is that corporations do not simply create jobs because they have money, they create jobs if they need workers, and if the 99 percent cannot afford to purchase the goods and services offered by the corporation then the corporation doesn’t create jobs. At one point, the administration that pushed the 2017 tax legislation, despite having promised to push legislation that allocated all of the tax cuts to the 99 percent, claimed that the reduced corporate tax rates would cause $4 trillion in cash to come back into the country from overseas. Now comes news that, once again, reality trumps theory and boasting. According to this Bloomberg report, the repatriation of these earnings started off slowly and slowed even more. During the first quarter of 2018, the first after the enactment of the 2017 tax cut legislation, corporations brought $295 billion of earnings back into the United States. During the second quarter, the amount dropped to $170 billion, and the estimate for the third quarter is between $50 billion and $100 billion. That’s a total of $515 billion to $565 billion. That’s just about halfway to ONE trillion dollars, and it’s nowhere near FOUR trillion dollars. Not even close. And one doesn’t need to be a mathematician to figure out that each new quarter will bring diminishing amounts, so that after ten years it’s unlikely that much more than one trillion might be repatriated.

Many companies are keeping their cash overseas, and some have publicly announced that they are doing so. One reason is that many other countries impose “onerous” taxes when the money is taken out of their jurisdiction. I wonder if the architects of the “lower tax rates and the money will cascade into the United States” theory paid attention to the realities of a global economic marketplace. They were too busy, I think, selling the false claim that corporate tax rates in the United States were the highest in the world to pay attention to the reality of other countries’ exit taxes.

Monday, December 10, 2018

To Itemize or Not To Itemize 

To me, the decision whether to itemize or not to itemize is an easy one to make. Yet for years the question has generated a variety of commentaries, articles, analyses, suggestions, and other explorations. The latest one that I’ve seen is It may be time to stop itemizing your taxes. The author provides “four things tax pros say could indicate that it's time to stop itemizing and take the standard deduction.” These are “1. YOU DIDN'T PAY A LOT OF MORTGAGE INTEREST. . . 2. YOU USED THE DEDUCTION FOR STATE AND LOCAL TAXES. . . 3. YOU DIDN'T DONATE A LOT TO CHARITY. . . 4. YOU DIDN'T HAVE HUGE MEDICAL EXPENSES.” Notice that the term “a lot” is used twice and “huge” shows up in one of the “things.”

For me, the answer is simple. Do the math. Add up the itemized deductions and compare the total to the standard deduction. Tax preparation software does that automatically. Yes, I know that the process of keeping track of itemized deductions requires some time and effort, but software used to track financial transactions also does most of the heavy work for that task. The significant itemized deductions are easy to identify: local real property taxes, usually paid once a year, charitable contributions, for which donees provide statements and the checkbook software tallies, mortgage interest, identified by a statement from the lender, and so on. When doing the math, “a lot” and “huge” are not numbers that enter the equation.

In the article, the author, after pointing out that “many taxpayers . . . ponder. . .” the question, suggests that “a major plot twist may make the issue even more vexing for some this tax season.” What is the “major plot twist”? The 2017 tax legislation increased the amount of the standard deduction. That will change the decision for some taxpayers but it doesn’t change the process. Do the math. It simply means that a different number is used to compare to the total itemized deduction number.

There are plenty of other “plot twists” in the 2017 tax legislation about which taxpayers need to worry. Most are disadvantageous to those who are not wealthy. It seems to me that the existence of “additional tax due” is going to be far more vexing for taxpayers than the simple task of comparing two numbers.

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