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Friday, March 27, 2020

Tax Hindsight and Damages for Broken Promises 

Readers of MauledAgain know that I have been a critic of the 2017 tax legislation, because it is terrible for most Americans, is mostly a giveaway to the oligarchs, is sloppily drafted, and has caused all sorts of unintended but adverse consequences for taxpayers least able to handle those consequences. I have criticized this tax “reform” mess since the legislation first started making its way through a Congress insensitive to the plight of most Americans. I have written about the flaws of that legislation in posts such as Taxmas?, Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, Getting Tax Cut Benefits to Those Who Need Economic Relief: A Drop in the Bucket But Never a Flood, Oh, Those Bonus Payments! Much Ado About Almost Nothing, You’re Doing What With Those Tax Cuts?, Much More Ado About Almost Nothing, More Proof Supply-Side Economic Theory is Bad Tax Policy, Arguing About Tax Crumbs, Another Reason the 2017 Tax Cut Legislation Isn’t Good for Most Americans, Yet Another Reason the 2017 Tax Cut Legislation Isn’t Good for Most Americans , Is Holding On To Tax Cut Failures Admirable Perseverance or Foolish Stubbornness?, What’s Not Good Tax-Wise for Most Americans Is Just as Not Good for Small Businesses, Don’t Want a Crumb? Here’s Dessert But Give Back Your Appetizer and Beverage, How Tax Cuts for Large Corporations and Wealthy Individuals Impact Jobs, Broken Tax Promises: When Tax Cut Crumbs Are Brushed Away, and The 2017 Tax Legislation: A Failure From Every Direction. Simply put, considering most of the tax cuts were giveaways to the wealthy and large corporations and were used for stock buybacks, bonuses for already-highly-compensated executives, and payments to lobbyists to push for more tax breaks, the legislation was a failure. The price paid for that failure is an overwhelming increase in the national debt. In the meantime, many of the corporations receiving tax breaks by promising to created jobs, instead eliminated jobs.

Now the nation, facing a serious pandemic, is struggling to deal with significant economic disruption. The solution, according to some, is to make payments to taxpayers with incomes of less than $75,000. But no sooner had that suggestion gained attention in the Administration and Congress than others jumped in to see what sorts of money they could get for corporations, some of whom did not use their earlier tax breaks wisely, such as setting aside contingency funds as most prudent individuals who budget their finances, and even some state and local governments, do. Still others want to limit the amount of payments made to individuals, or to limit how many individuals qualify for any sort of relief. Some of them claim that “we can’t afford to do this.” Well, perhaps we would find the financial challenges less obstructive if the Congress and Administration hadn’t squandered so many trillions of dollars on tax breaks to their friends.

Is there a solution? Yes. It surely won’t be adopted, is surely will meet with disapproval by oligarchs and their acolytes, but perhaps will find support among those who aren’t getting the help they need. The solution? Take back the tax breaks from those individuals and corporations that failed to live up to their job-creating promises. It might require chasing the money and obtaining the repayment from those to whom these tax giveaways were funneled. When promises are broken, the person breaching the contract must pay damages. That basic legal principle should be applied to this tax-giveaway fiasco.

Wednesday, March 25, 2020

A Good Time for a Tax Laugh? 

With all the unpleasant news, uncomfortable restrictions, and inconvenient precautions so widespread and unavoidable, I thought an email conversation I had with reader Morris might generate a chuckle. Perhaps it will inspire a groan. He was reacting to the last paragraph of my Friday commentary, More Tax Return Preparation Gone Bad. In that last paragraph, I wrote, “The lesson at the moment? Choose a tax return as carefully as choosing a surgeon or child care provider. In other words, do research, talk to friends and neighbors, look at online reviews, and interview the preparer.”

Reader Morris suggested:
And if you see this advertisement don't stop to get tax advice

https://www.facebook.com/NPRTA/photos/pb.351924042327297.-2207520000.1548024469./358270075026027/?type=3&theater
So, of course, I had to see what he was referencing. I did. I suggest you do now before continuing to read.

My response to reader Morris? “Oh my goodness!!! That is HILARIOUS!!!! Of course, the grammarians will have fun with the ambiguity. Does the ‘and’ separate two phrases or does ‘nude’ function as an adjective for both? !!!!!” In other words, are we dealing with “Nude Psychic Readings, and Tax Advice” or “Nude Psychic Readings and Nude Tax Advice”? Either interpretation is troubling, but the second much more so.

Of course I had to do research. First, I did a google search for “nude psychic readings and tax advice” in quotation marks. Less than two dozen results, and the only one I can even describe with any sense of accuracy is this podcast, which seems to involve jazz or music generally. Wondering about the more troubling second interpretation, I searched for “nude tax advice,” again in quotation marks. I actually found a blog post describing advice given to a couple by an accountant preparing their tax return. Go ahead, read it, it’s not what you think. Most of the other results generated by google weren’t useful and aren’t worth tracking down.

And then I stopped my research. I concluded that I wasn’t going to find who created the phrase, why it was created, or when it was created. I decided I didn’t really need to know. It’s not something that would ever fit into a tax curriculum. At least not in the world in which I move around.

Now for a bigger laugh. Let’s see what the internet search engines and robots do with this post. Maybe the number of views will soar. We’ll see.

Update: Reader Morris just sent along this link to a storefront. I say no more!

Monday, March 23, 2020

Horrific Punishment for Allegedly Not Paying Taxes 

It is one of the most troubling stories involving taxes that I have read. A few days ago, reader Morris directed my attention to this news report about an incident in Milwaukee, Wisconsin. According to the story, Javaunte Jefferson set on fire Savannah Bailey, the mother of his children. He did this on Valentine’s Day. He allegedly did this “because she wouldn’t pay her taxes and was buying other stuff.”

Curious, I did some research, but most of the stories I discovered didn’t add much to what was reported in the story reader Morris shared. But according to several reports, including this one, Jefferson and Bailey had been arguing about financial issues, including the payment of taxes.

Surely more information is needed to sort this out. It does not appear that Jefferson was upset that Bailey was failing to file taxes for which Jefferson had liability. Was she in fact not paying her taxes? That’s a question to which I have no answer. Even if she wasn’t paying her taxes, why would that trigger the extreme reaction by Jefferson? Perhaps he was reacting to other issues in the argument. If there is a trial, perhaps some answers of this will emerge. Perhaps not. And if there is no trial, probably no one will ever know.

But the most important aspect of this story is the outrageousness of what was done, whether on account of unpaid taxes or any other issue. Violence of this sort, in these circumstances, does nothing, and did nothing, to resolve whatever problems were the subject of an argument. What happened is horrific. No one deserves that sort of reaction.

Friday, March 20, 2020

More Tax Return Preparation Gone Bad 

Almost fourteen years ago, in Should Tax Refund Anticipation Loans Be Blocked?, I mentioned that “Liberty Tax Services of Virginia Beach was told by First Bank of Delaware that it was ending a long-term contractual relationship because Liberty had decided to make riskier loans that the bank went so far as to describe in terms of ‘legally questionable.’” I shared my opinion that tax preparation firms should not be making loans based on refunds because of a conflict of interest. I also shared my opinion that the rates of interest being charged on those loans were outrageous and unconscionable.

That was bad news for one Liberty Tax franchise. Now comes another. According to this United States Department of Justice news release, the former operator of a Liberty Tax franchise in Florida was permanently barred from operating a tax return preparation business and preparing federal income tax returns for other. He also was ordered to pay back $175,000 he received from filing false tax returns on behalf of clients. The court that ordered these restrictions had previously issued similar orders against two other Liberty Tax franchise operators.

Efforts to protect people from unscrupulous tax return preparers have not been as successful as one would hope. I addressed this issue in Tax Return Preparer Regulation: What About Attorneys and CPAs?. I concluded that commentary with these words:
If the goal of preparer regulation simply is to stop preparers from stealing refund checks, then limiting examination and certification to preparers who are not attorneys and CPAs might be defensible. But if the goal is to produce more accurate returns, and thus improve revenue and compliance across the board, as it ought to be, I maintain that most lawyers and many CPAs aren’t as expertised as they need to be. In all fairness, Congress has created a tax law that rivals quantum physics in terms of difficulty, which surely makes attaining competence just that much more elusive, but that does not diminish the need for tax competence by all preparers. Demonstrating that competence ought to be accomplished by actual testing and not by erroneous presumption.
Several years later, in Do-It-Yourself Tax Preparation? Better?, I noted my surprise at a GAO study that revealed the error rate on tax returns prepared by tax return preparers exceeded the error rate on self-prepared returns, and suggested that more research was necessary to get more specific information to identify who is making the errors, why they are making the errors, and what can be done to reduce the error rate.

The lesson at the moment? Choose a tax return as carefully as choosing a surgeon or child care provider. In other words, do research, talk to friends and neighbors, look at online reviews, and interview the preparer

Wednesday, March 18, 2020

Fortune Cookies and Taxes: Part II 

Last Friday, in Fortune Cookies and Taxes, I shared the discovery by Reader Morris that advertisers have been buying space on the reverse side of fortune cookie papers. I suppose when billboards, radio, television, direct mail, telemarketing, web page pop-ups, and emails don’t do enough to persuade people to buy goods and services, what better place to put something in front of a person than a piece of paper that purports to predict someone’s future?

Shortly after my Friday commentary appeared, reader Morris found another tax-related fortune cookie assertion. The one he found is a photograph of a fortune cookie paper, showing that it states, “A fine is a tax for doing wrong. A tax is a fine for doing well.”

Of course, I don’t agree with what appears to be more of a cute sound bite than an accurate statement. Though a fine is imposed for violating a law, rule, or regulation, and thus is imposed for “doing wrong,” it is not a tax, and the fact that it is imposed on someone who has done something wrong does not convert it into a tax. The sort of thinking that classifies a fine in this manner is the sort of thinking that classifies as a tax any payment to which the person objects or doesn’t want to pay.

Of course, a tax is not a fine for doing well. A tax is not a fine. Yes, a progressive income tax is, in some sense, a reaction to someone “doing well,” but in a financial sense. There are many other ways to “do well” that don’t involve money. Perhaps the real property tax could be similarly classified. But no, taxes in general are not imposed because someone has done well financially. The impoverished person who makes a purchase of a necessity that is subject to a sales tax and the low-income worker who pays a gasoline tax while filling the tank of the vehicle used to get to and from work aren’t paying taxes because they are doing well financially.

Though the quip on the fortune cookie slip nicely fits the requirements of a sound bite, namely, short and grossly oversimplified if not worse, it fails, as do most sound bites, to accomplish anything useful in the necessary progression of knowledge, wisdom, or understanding. Certainly there are numerous short quips that can be placed on fortune cookie slips, let alone billboards and other advertising media, that are sufficiently accurate to be either useful, amusing, or even frightening. I’m thinking of things such as “Wash your hands when you should,” “You are about to be $10.95 poorer ($8.95 if you had the buffet,” and “Eventually you will die, of what and when we don’t know.”

Fortune cookie slip writers, just stay away from tax advice. You can make fortune even without doing that.

Monday, March 16, 2020

Taxes and the Virus 

The current Administration seems to think that cutting payroll taxes is an effective approach to deal with at least some of the economic problems caused by the spread of the SARS-CoV-2 virus that causes the Covid-19 disease. There are news articles all over the internet and in newspapers and magazines reporting that the White House wants to stimulate the economy, or at least bail out some sectors of the economy adversely affected by the outbreak, by cutting payroll taxes.

Of course, anyone who understands economics, taxation, and tax policy knows that this approach is as ineffective as pretty much most of the other tax-cut-based economic solutions have been. I’m not alone in that view. For example, the headline to this Business Insider article sums it up, “Trump's idea of a payroll tax cut would be nearly useless for the Americans who need the help the most.” The article points out that it doesn’t help those without jobs or who are losing jobs during this economic freefall, and that it would benefit the wealthy more than the poor, with the amount put into the pockets of the former being more than 10 times what would go into the wallets of the latter. As another example, this Los Angeles Times commentary points out that not only does the payroll tax not help workers, it also would “destroy Social Security.”

Several days ago, Tom Giovanetti of the Institute for Policy Innovation published a commentary in which he disclosed that “we’re not enthusiastic about a payroll tax cut.” Neither am I, but I’m more than simply not enthusiastic. I oppose the idea.

The reason Giovanetti is unenthusiastic about using a payroll tax cut to deal with the problems is that he prefers economic stimulus. He prefers supply-side approaches rather than the demand-side approach that I advocate. I’m not alone. For example, the Center on Budget and Policy Priorities issued a report explaining why payroll tax cuts won’t get the job done because it’s too slow, badly targeted, and too narrow, suggesting instead direct cash payments to some households, with details forthcoming. Giovanetti and others oppose that approach because it requires borrowing money, but I suppose he and the others would not be surprised that I also oppose borrowing but would be disappointed that I also advocate repealing the badly-designed and harmful tax cuts enacted in 2017, coupled with a refund to the American people from those who obtained those cuts on the basis of promises they never kept and in many cases had no intention of keeping.

Giovanetti recognizes the mess that has been created. He points out, correctly, that options are limited. As he puts it, “Interest rates are already extremely low, the Federal Reserve has already tried quantitative easing, we’ve already cut corporate taxes and passed expensing of business investment. The toolbox for juicing the economy is just about empty.” He’s correct, but I wish he would examine the underlying cause of the mess.

His solution? Personal retirement accounts, which, he says, “could even be called Trump Retirement Accounts.” Is he kidding? Putting that name on anything is a sure way to fire up even more opposition. But, name aside, we already have personal retirement accounts. They’re called 401(k) plans, 403(b) plans, Keogh plans, IRAs, SEPs, SIMPLEs, and others that I’m leaving out because the list is long enough to make the point.

Why the enthusiasm for replacing Social Security with personal retirement accounts? It puts even more retirement dollars into Wall Street. Is that a good thing? No. Unlike Social Security, Wall Street guarantees nothing. Imagine what would happen if these were with us all along, with no Social Security, and someone was compelled to retire last week. And unlike Social Security, these sorts of accounts divert fees and commissions and other charges into the other people’s pockets.

He claims that these proposed accounts could “be made absolutely safe,” would “allow low- and middle-income workers their first real opportunity to build wealth,” and “would rescue future retirees from Social Security’s eventual meltdown.” These claims are the same ones made when privatization of Social Security was proposed more than a decade ago, and they still can be rebutted as they were back then. For example, this analysis examines twelve flaws in this idea. The analysis points out it removes current protection against disability and early death, would leave Social Security with outstanding obligations but devoid of additional inflows, would dampen economic growth rather than boost it as Giovanetti and others assert, failed in Chile, the UK, and other places, pose the risk of bad investment returns, put the retirement annuity at the mercy of how the market is doing at retirement especially when the worker has not choice in the timing of retirement, would increase Wall Street’s revenues, would require a new government bureaucracy, would put the cost of transforming the program on young people, would disadvantage women, minorities, and others who work fewer years outside the home, earl less, and live longer after retirement, and lack inflation protection.

It is becoming increasingly disappointing and dangerous that every time an economic crisis pops up, proposals are made that in the short-run and long-run shift wealth to the oligarchy. The sales pitches made for these proposals are disturbing. And every time they are bought by legislators they cause another crisis, which then provides the opportunity for yet another bad proposal to be made. Yes, I do think it is all part of a much bigger plan. But when plans backfire, as this one will, it’s not the planners who pay the price. That’s wrong, sad, and unacceptable.



Friday, March 13, 2020

Fortune Cookies and Taxes 

Reader Morris had an experience that surprised me. He went to his “regular Chinese restaurant,” had his meal, and opened his fortune cookies. The message? “Tax tip # 8 Travel could be considered a business expense. Even that island vacay. TaxAct Surprisingly legal. Start for Free: TaxAct.com”

Reader Morris noted, “Taxes are everywhere.” His experience suggests to me that “Tax advertising is everywhere.” From time to time I eat at Chinese restaurants. I always get fortune cookies. I’ve never seen one mentioning tax. But now I need to keep my eyes open.

I did a bit of research. Apparently the marketing world has discovered it can make use of the flip side of the paper on which the fortune is printed. According to several sites, such as Adweek and MediaPost, advertising agencies are buying that blank space on fortune cookie inserts. Who knew? I didn’t. Now I do. And so do you.

Apparently reader Morris also did some research, for shortly after he shared his dining experience he sent a link to the “Fortune Cookie: Bake. Learn. Give. Save” facebook page. Its “About” page explains the “Save” portion of the plan as follows: “Save- Pay your child for their time baking, packaging, and delivering the cookies for your small business, and put their earnings into a custodial Roth IRA.” A post on its main page elaborates: “Small business owners who are registered as an LLC can pay their dependent children up to $12,000/year without having to issue a w-2 or the kid having to file taxes.” Reader Morris asked, “Is this tax advice correct?” As a general proposition, yes. For many years, business owners have been hiring children to work in the business, paying wages included in the child’s gross income and deducted by the parent who owns the business, thus shifting the income to the child’s bracket, which at present is zero if it is less than the standard deduction (which is now $12,200, so the “advice” is technically out of date in that respect). Of course the children must actually be doing work and the wages must be reasonable in amount. Because the IRS looks closely at these arrangements, payment should not be in cash but by check or direct deposit into the child’s account.

But the tax advice offered on the Fortune Cookie facebook page is incorrect when it states that small business owners can pay their children up to $12,000 per year “without having to issue a w-2.” As the IRS explains in its General Instructions for Forms W-2 and W-3:
You must file Form(s) W-2 if you have one or more employees to whom you made payments (including noncash payments) for the employees’ services in your trade or business during 2020. Complete and file Form W-2 for each employee for whom any of the following applies (even if the employee is related to you).

• You withheld any income, social security, or Medicare tax from wages regardless of the amount of wages; or
• You would have had to withhold income tax if the employee had claimed no more than one withholding allowance (for 2019 or earlier Forms W-4) or had not claimed exemption from withholding on Form W-4; or
• You paid $600 or more in wages even if you did not withhold any income, social security, or Medicare tax.

Only in very limited situations will you not have to file Form W-2. This may occur if you were not required to withhold any income tax, social security tax, or Medicare tax and you paid the employee less than $600, such as for certain election workers and certain foreign agricultural workers.
And though the child might not be required to pay federal income taxes on wages of $12,200 or less, the child still needs to file a return so that the Form W-2 can be matched against a return.

Wednesday, March 11, 2020

A New and Questionable Type of Tax 

Last week, voters in San Francisco, by a 69.6 percent to 30.3 percent margin, approved a vacant storefront tax. Though the margin appears overwhelming, the tax barely passed because enactment required approval by two-thirds of those voting.

The tax, as described in this article, applies to property owners in any of the city’s commercial districts whose storefront remains vacant for more than 182 days in the year. For the first year, the tax equals $250 for each linear foot of street-facing wall. The linear foot rate increases to $500 for the second year, and $1,000 for the third and later years. Revenue from the tax, which begins next year, would be used to help small businesses the city.

The tax is a reaction to complaints about empty storefronts that have popped up throughout the city. Supporters of the tax argue that the vacancies are caused by property owners holding out for high rents, rents too high for the marketplace.

The owner of one storefront business remarked that landlords "have an economic incentive to keep a building vacant where they can write off the lost [revenue] that they've had from a previous tenant as an expense." There is no deduction for revenue that isn’t received. Instead, I think the business owner was attempting to point out that when revenue goes down, income taxes also go down, which is the same effect that a deduction has on tax liability.

Opponents of the tax argued, in effect, that there can be economic conditions, such as online shopping and recessions, that make it difficult, if not impossible, to find tenants for storefronts in the city. One real estate broker pointed out that as younger people move into neighborhoods they are more likely to shop online rather than going to a brick-and-mortar establishment. He also complained that city regulations, including permit rules and inspection requirements, make it more difficult to rent out storefronts. My guess is that these regulations are more of a problem when the nature of the use of the space changes, such as a hardware store being converted into a restaurant. A Chamber of Commerce official suggested that the solving the vacant storefront problem requires changes in zoning and planning rules.

It seems to me that there are multiple factors contributing to the vacant storefront problem. To the extent that landlords holding out for excessively high rents are a cause, any tax addressing that problem needs to be more nuanced than a simple number-of-vacant-days and storefront-linear-feet computation. Surely a formula that compares the asking rent to comparable rents in the neighborhood can be added to the calculation. Another factor would be the number of offers from potential tenants, the amount of rent prospective lessees offer, and the counter-offers from the landlords. External economic factors, such as city GDP for the quarters in play, job numbers, and street and other construction impacting the storefront in question could be taken into account.

Only time will tell if this tax solves anything or even makes a dent in the inventory of vacant storefronts in San Francisco. I’m confident officials and businesses in other towns and cities will be watching.

Monday, March 09, 2020

The Primary Goal of the Philadelphia Soda Tax: Not a Reduction in Soda Consumption 

The soda tax is one of those topics that probably will never go away. I have been writing 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, Imagine a Soda Tax Turned into a Health Tax, Another Weak Defense of the Soda Tax, Unintended Consequences in the Soda Tax World, and The Soda Tax “War” and a Pathway to Tax Peace.

Now comes news from the Philadelphia Inquirer that a recent study by Drexel University researchers indicates that the amount of soda and other sugary drinks consumed by Philadelphia residents declined so little since enactment of the soda tax that the change is statistically insignificant. The decline was essentially the same as in places without a soda tax. Interestingly, a study in Washington state determined that soda sales in Seattle, which has a soda tax, dropped by 30 percent while sales in Portland, Oregon, which does not have a soda tax, dropped by 10 percent. However, not all sources of sugary beverage purchases were taken into account, and though retail establishments outside each city were included in the survey, only those within two miles were considered. The sweetened beverage tax in Cook County, Illinois, which didn’t last very long, reduced sales by 21 percent, according to the study reported in this story, but purchases outside the county limits did not seem to have been taken into account. One conclusion from these results is that consumption of sugary beverages is dropping generally, for a variety of reasons other than taxes, and that soda taxes are contributing, at best, a marginal increase in that decline.

Yet what struck me from the Philadelphia Inquirer story is something said by Lauren Cox, a spokesperson for the administration of Mayor Jim Kenney, the principal supporter of Philadelphia’s soda tax. As I described in Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, Kenney voted against the soda tax when it was proposed by his predecessor, but once he took office he flipped positions. Why? I suggested, “The answer appears to be quite simple. The new mayor has discovered that his spending proposals, such as universal pre-kindergarten, community schools, park and recreation center upgrades, and similar projects, require revenue. Rather than raising any existing taxes, he has turned to a tax on certain sugary drinks.” I added, “If the concern is health, as soda tax advocates claim, and if a significant cause of health problems is sugar, as soda tax advocates claim, and as research tends to demonstrate, then why not a sugar tax? Why not a tax not only on sweetened drinks, but also on cakes, cookies, pies, donuts, sugared coffee, ice cream, and candy?” According to the Philadelphia Inquirer story, Cox “said that reducing consumption was not the city’s primary goal in implementing the tax.” So what was the primary goal? Let me guess. Revenue.

Friday, March 06, 2020

If This Were An Exam Answer, It Would Earn a Low Grade 

This time, reader Morris directed my attention to a MoneyWise article titled “What Is Taxable Income?” Though questions on the basic federal income tax exam aren’t presented that starkly, the definition and computation taxable income is one of roughly a dozen basic capabilities that a student needs to demonstrate in order to earn a grade higher than what can be called the “goodbye grades,” as in, get too many of them and the student fails to qualify to continue as a student.

Ester Trattner begins by offering several sensible observations. First, “To pay the right amount of taxes — no more, no less — and receive the refund you deserve, you need to understand what counts as taxable income.” She adds, “Most people have multiple income sources.” And she points out, “[Y]ou need to pull together your paperwork on what you earned during the previous year.”

Then, however, she announces, “The IRS puts taxable income into two main categories: earned income and unearned income.” This is wrong on two counts. First, it is gross income, not taxable income, that is divided between earned and unearned. Second. It is the Congress, not the IRS, that decided to categorize gross income in this manner.

Trattner then correctly explains, “To determine your taxable income, you first you need to calculate your adjusted gross income or AGI.” However, she then defines adjusted gross income as “all the taxable income you’ve earned minus any adjustments you’re eligible for. These might include tax credits for dependent children, and any deductions. You may take the standard deduction, or itemize deductions and take write-offs for medical expenses or gifts to charity, among others.” To classify this as confusing is to be kind. It’s wrong. First, if computation of taxable income requires that a taxpayer first compute adjusted gross income, which is in fact the case, then adjusted gross income cannot be “all the taxable income . . . minus adjustments.” It is GROSS income minus adjustments. Second, those adjustments consist of specified deductions, not credits. Credits don’t enter the picture not only after taxable income is computed but after tax liability is computed. Third, the decision to claim the standard deduction or to itemize deductions is reached after adjusted gross income is computed, and has nothing to do with the computations of adjusted gross income.

It gets worse. Trattner tells her readers, “Once all of your taxable income has been added up, and deductions and credits are subtracted, the result is your adjusted gross income.” The simple fact is that once taxable income has been computed, deductions have already been taken into account. Deductions are not subtracted from taxable income because they are subtracted as part of computing taxable income. And, of course, credits are not subtracted from taxable income or in computing taxable income. They are subtracted from tax liability to determine if the taxpayer needs to pay additional tax, or is getting a refund.

If that’s not enough, she then states that tax is “[b]ased on your adjusted gross income and your filing status.” Though it is true that filing status affects the computation of tax liability, the tax rates are applied to taxable income, not adjusted gross income.

She then correctly explains, “Essentially, the higher your taxable income, the higher the amount of tax you pay.” If the article were a tax examination answer, this explanation and the several other correct statements are what would cause the grade to be something more than an F, though it would not earn a grade at least as high as the C grade that represents the GPA required to continue one’s studies. Reader Morris, who in his email pointed out several of the errors, undoubtedly would fare much, much better.

Curious, I tried to determine what sort of tax background Trattner has. I discovered that she is a freelance writer, and according to LinkedIn, is the lead writer for MoneyWise and has been employed there since May 2017 after having been a self-employed writer and editor since October 2014. She also appears to have written money-related articles for other web sites. According to LinkedIn, she earned a Bachelor of Arts in English Language and Literature/Letters from York University in Toronto, Canada. So it is unlikely that while at York she took any sort of course in United States taxation. It is difficult to write about topics with which one is not sufficiently educated, experienced, or even familiar. That is why the list of topics on which I do not write is very long.

Wednesday, March 04, 2020

Some Observations on Recent Articles Addressing the Mileage-Based Road Fee 

In the past several weeks, the mileage-based road fee has been popping up in a variety of stories, shared with me by reader Morris. I’ve been explaining, defending, and supporting that fee for almost 16 years, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, and Another Example of a Problem That the Mileage-Based Road Fee Can Solve.

The first article, from the Philippines, describes a legislative proposal to exempt motorcycles from the country’s road user tax, which carries the official name of motor vehicle user’s charge. The fee is not a mileage-based fee, but it does reflect weight and cargo load differences. The justification offered for the proposed motorcycle exemption is that owners of four-wheel vehicles “have more money to pay” the fee. That is such a silly rationale. There are wealthy motorcycle owners and there are four-wheel vehicle owners who are just getting by financially. A mileage-based road fee as I have proposed would not exempt motorcycles but would subject them t a much lower per-mile fee because the fee also would reflecting weight, and motorcycles are much lighter than almost all the other vehicles on the road. Yet motorcycles do contribute to road damage, because every pound hitting the pavement stresses that pavement, and thus it makes no sense to exempt motorcycles.

The second article describes a proposal by Senator John Barrasso, a Republican from Wyoming, to enact a “truck-only Vehicle Miles Traveled tax.” The author of the article, Chris Spear, criticizes the tax for several reasons. First, Spear claims that the technology to implement it is not yet ready but that, of course, is not the case, as demonstrated by the many pilot projects that have been undertaken. Second, Spear objects to a double taxation, and this is a point well taken because the mileage-based road fee should replace and not supplement existing fuel taxes. Third, Spear objects to singling out trucks, and this is another point well taken, because trucks are not the only vehicles using highways, bridges, and tunnels. On the other hand, when Spear notes that trucks are 4 percent of vehicles on the roads but pay half of the taxes going into the Highway Trust Fund, Spear is being clever by too much, because what causes the need for highway funding, namely, wear and tear, should not be measured by the number of vehicles but by the weight of vehicles and the number of miles they are driven.

The third article describes legislation introduced in the Washington State legislature to protect drivers from what are perceived as privacy risks posed by a mileage-based road fee. Those concerned about privacy note that the device measuring the number of miles driven, as well as the type of road or whether a bridge or tunnel has been traversed, can reveal where the driver has been. The legislator sponsoring the bill wants to prohibit any tracking of where a driver drives, which, of course, conflicts with how a mileage-based road fee works. He argued, “You can never track anybody based off the way they drive. In this case, no GPS transponders, no type of technology could load on your cell phone, nothing you could install in your car.” There is technology that permits the measurement of miles, the location of where those miles are, but that does not relay that information past the device that is computing the road fee. It seems to me that this legislator is listening to misinformation from opponents of the mileage-based road fee rather than sitting down and reading the reports issued by those who have studied the fee and managed the pilot projects, or at least my MauledAgain blog posts on the topic. When asked if the legislation was “just a roundabout way of killing the pay by the mile plan,” the legislator responded, “Well, that’s the best part.” He then explained that the fee could be calculated using odometer readings, but that does not permit identifying which vehicles use the more-expensive-to-build-and-maintain bridges and tunnels or the more-difficult-to-maintain-because-more-heavily-used highways.

The fourth article, from StreetsBlogUSA, includes the mileage-based road fee among its ten suggestions for subtracting cars from the road. Though I’m not persuaded that the number of cars on the road will shrink by shifting from a fuels tax to a mileage-based road fee, it was encouraging to see that the StreetsBlogUSA writer described the fee as an improvement over the fuels tax. It’s also worth noting that the device used to compute the mileage-based road fee could also be used to implement several of the other StreetsBlogUSA suggestions, such as congestion pricing, parking surge pricing, and distance-based insurance.

Opponents of the mileage-based road fee are accomplishing little other than to lengthen the amount of time that a serious problem goes unsolved. Eventually, when the fee is implemented, it will need to be higher than it otherwise would have been in order to make up for the delay in collecting revenue and repairing highway infrastructure. It is pointless and wasteful, to say nothing of unwise, to oppose the inevitable.

Monday, March 02, 2020

Seizing a Tax Refund to Pay a Fine Owed by the Taxpayer Does Not Change the Fine Into a Tax 

Reader Morris directed my attention to an article and asked a question. First, the article.

According to the article, in 2018 the Mississippi legislature enacted legislation permitting local jurisdictions to seize some or all of a taxpayer’s state income tax refund to offset fines that the taxpayer has failed to pay. This arrangement is not unlike the provisions permitting federal and state governments to seize some or all of a taxpayer’s federal income tax refund to offset the taxpayer’s past-due child support, certain debts owed to federal agencies, unpaid state income taxes, and certain unemployment compensation debts.

The city of Vicksburg, Mississippi, facing fiscal constraints, calculated that uncollected fines amount to roughly $4,200,000. Considering that its annual budget is $30 million, having uncollected fines equal to 14 percent of the budget is troubling. So Vicksburg officials has decided to implement a state income tax refund offset program as authorized by state law. For some reason, rather than going after all of the unpaid fines, the city is starting with the top 50 scofflaws, a total of approximately $90,000. Interestingly, some residents have expressed disapproval, noting that, “People have other things they have to handle with their tax money.” I know they should’ve handled their fines too but they have bigger things too.” The mayor reacted by pointing out, “I’ll take whatever we can rather than raise anybody’s taxes.” Of course, if taxpayers don’t want to pay fines, they can avoid doing the things that trigger the fines. Stop at red lights, slow down, comply with zoning regulations, do the right thing. It’s cheaper.

Next, the question from reader Morris. He asked, “Does collecting unpaid a fine by going after income tax refunds change a fine into a tax?” The answer is “No.” Why not? Once computed, the tax refund represents money owned by the taxpayer. At that point, certain creditors, such as a government or a parent to whom child support is owed, can seize the taxpayer’s refund. The offset programs are designed to simplify the collection process and move it along more quickly than the usual debt collection process. Put another way, if child support is collected by taking money from a parent’s bank account, or if a fine is collected in the same manner, the amount collected from the parent or scofflaw isn’t a tax. So the fact that it is taken from a tax refund while it is on its way to the taxpayer doesn’t turn child support, a fine, or some other government debt into a tax.

Friday, February 28, 2020

Characterizing a “Meals Tax” 

Reader Morris directed my attention to this article about a proposed increase in the Charlottesville meals tax. He asked, “Is a meals tax a regressive tax , a progressive tax, or a luxury tax?”

Before answering the question, a bit of background, is helpful. This background suggests why reader Morris asked the question.

Charlottesville needs revenue to fund affordable housing programs, so the city decided to increase the 5 percent meals tax to 6 percent and to increase the lodging tax to 8 percent. Restaurant owners dislike the meals tax. The city’s mayor reacted by writing, “The restaurant and hotel industry are selfishly making arguments about their failed revenue projection. A few small business owners who have not turned their hobbies into successful enterprises are blaming our potential tax increase as the foundation for their demise. A few restaurant owners want you to believe that they’re catering to low- to middle-income families and that the extra 10, 20, or 50 cents will prevent you from eating out.” Is that in fact the case? One restaurant owner noted that the increase would not hurt him, but that “It’ll hurt the poor people. It’s local people who eat here.” Another owner noted that increasing the tax will “punish your people,” mostly local residents. Apparently, according to restaurant owners, there is a “misperception [the meals tax] is paid by visitors and rich people.”

When the city raised the tax in 2015, those who objected were told by one city official that the tax is “not a regressive tax because eating out is . . . discretionary and a ‘luxury.’” As another restaurant owner put it, quite correctly, “No one who studies economics says that a sales tax isn’t regressive.” The meals tax is simply a variant of the sales tax, that is, a sales tax imposed on a very specific and narrow set of goods and services. So, to answer part of reader Morris’ question, the meals tax in Charlottesville is a regressive, not a progressive, tax.

Is the meals tax a luxury tax? The answer depends on the definition of luxury. As one restaurant owner put it, the meals tax “isn’t a yacht tax.” Is eating out a luxury? Does it depend on the “luxuriousness” of the restaurant? Does it depend on how much is being spent on the dining experience? I think that, if asked, most people would not consider a tax on eating at a low-cost restaurant to be a “luxury.”

A question not asked by reader Morris nor addressed in the article is whether the appropriate funding source for affordable housing should be a tax on meals and lodging. An advocate for increasing affordable housing program budgets stated that she “doesn’t think an extra 10 cents is going to stop someone who’s homeless from buying a cheeseburger,” especially because, as she claimed, “they’re also eating at soup kitchens and having breakfast at the Haven.” She added, “The lack of affordable housing options—that’s more important than whether my McDonald’s is going to cost $1.10 or $1.25. I don’t foresee this as onerous. It’s onerous when you don’t have a key to a place to live.” Suggesting that it’s appropriate to impose a tax because it’s not onerous pushes the analysis in the wrong direction.

The lack of affordable housing imposes costs on society. It creates homelessness, which brings a variety of problems. It contributes to insufficient maintenance on houses, leading to neighborhood deterioration, increases in crime, and declines in health and well-being. Creating affordable housing also imposes costs on society. Funding is required to build and maintain affordable housing. So if there are going to be costs, which is better, to spend money dealing with the consequences of insufficient affordable housing or to spend money fixing the problem? And who should pay? The answer is simple, those who benefit from fixing the problem. Although some would argue that the beneficiaries are those who move from the streets into affordable housing, those who understand the complexities of life would also recognize that all of the city’s residents benefit from the impact of increased affordable housing, such as decreased homelessness, decreased crime, improvements in health and well-being, and overall societal improvement. Thus, if I were dealing with the issue in that city, I would advocate paying for the affordable housing programs through a tax that is spread across all of the city’s residents.

Wednesday, February 26, 2020

Another Example of a Problem That the Mileage-Based Road Fee Can Solve 

Reader Morris sent me a link to a letter to the editor written by Tamara Porter and sent to the La Crosse Tribune. Porter objects to the $75 vehicle license surcharge imposed by Wisconsin on hybrid vehicles. She asks, “Are we being punished for buying a hybrid vehicle that is more environmentally sound or are gas-guzzling vehicle owners being rewarded?”

The answer is no and no. Because the owner of a hybrid vehicle purchases less fuel than would be purchased if the same vehicle were not a hybrid, the surcharge is designed to make up the lost fuel tax revenue. The fuel tax, and the substitute surcharge, are not designed to deal with pollution but to defray the cost of maintenance and repair of the roads used by the vehicles. Owners of gas-guzzling vehicles are not being rewarded. In fact, they probably are paying more than the combined fuel tax and surcharge paid by Porter because those vehicles use disproportionately more fuel.

Porter explains that the state’s former governor “put in place a surcharge on electric vehicles” though my guess is that the legislature enacted the surcharge and the governor signed the legislation. The current governor “proposed a gas tax” though my guess is that he proposed an increase in that tax. The proposed gas tax increase was not adopted during budget negotiations.

Porter argues that the “proposed gas tax made more sense. Those who use more gas, thereby adding more pollution, should pay more when they fill up their energy-inefficient vehicles versus those who fill up their energy-efficient vehicles.” Porter’s argument misses the point. The tax and surcharge are designed to pay for repair and maintenance of roads, something that is proportional to the weight of vehicles and the miles that the vehicle is driven. Another flaw in Porter’s argument is that the pollution caused by a vehicle needs to be measured not only by the amount of fuel it consumes, or, more appropriately, the amount of tailpipe emissions it generates, but also by the amount of pollution caused by the manufacture and the disposal of the vehicle. When those factors are taken into account, hybrid and electric vehicles are not necessarily as “clean” as their proponents argue.

The argument that Porter does not articulate, and that would have added much strength to her letter, is whether the surcharge is calculated in an appropriate amount. It is difficult to assign a fixed amount to a fuel tax substitute, because the number of miles that the hybrid vehicle is driven can vary, and thus the lost fuel tax revenue will vary. The substitute surcharge accordingly should vary. The solution, of course, as readers of MauledAgain know, is the mileage-based road fee. I have explained, defended, and supported that fee for more than 15 years, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, and A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee.

Porter wrote, “It’s time for all of us to vote against the lack of common sense in our elected officials and hold them accountable.” Indeed. Common sense mandates the mileage-based road fee. Elected and unelected officials who insist on preserving the outdated fuel tax and on blocking revenue-raising progress in the form of the mileage-based road fee ought to be denied the opportunity to continue with their stubborn attachment to the past.

Monday, February 24, 2020

How Difficult Is It to Release Tax Returns? 

I did not watch the debate last Wednesday evening. But according to a variety of sources, including this report from The Hill, this article from the New York Post, and this story from CNBC, when several Democratic presidential candidates asked candidate Michael Bloomberg why he had not released his tax returns, he replied, “It just takes us a long time. Unfortunately, or fortunately, I make a lot of money and we do business all around the world, and we are preparing it. The number of pages will probably be thousands of pages. I can’t go to TurboTax.”

Presumably, Bloomberg’s tax returns for years before 2019 have already been prepared and filed. Releasing them is a simple task. If they are in paper form, which I doubt, it doesn’t take long to make a photocopy, even if the return consists of thousands of pages. If, as I think is the case, they are in digital form, releasing them does not take very long at all. If they’re not already in a common format, such as pdf, convert them. It’s easy and doesn’t take much time.

Access to TurboTax has nothing to do with the release of the returns. If the returns had been prepared using TurboTax they would already be in a pdf format. If they were not prepared using TurboTax, a person doesn’t need to “go to TurboTax” to release tax returns.

The answer was a side-step. I wonder why. And I wonder how many people who listened to, or read, Bloomberg’s response understand that it makes no sense. Unfortunately, we are living in an era in which too many candidate responses and declarations, across the board, increasingly make little or no sense.

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