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Wednesday, May 22, 2019

Call It a Tariff and the Unwise Won’t Realize They’re Being Taxed 

Almost a year ago, in Tariffs: Taxes By Another Name, I shared my agreement with what Tom Giovanetti, with whom I don’t always agree, had to say about tariffs in Who Pays Tariffs?. Here is what I wrote:
Tom Giovanetti offers an important analysis of how tariffs work and what the recently imposed tariffs will do to Americans and the American economy. Giovanetti points out that in the past, tariffs were a major source of federal tax revenue, that tariffs have been in place for decades, and that until recently, U.S. tariffs were significantly lower than those of the nations with which the U.S. trades. He points out that tariffs on goods imported from a particular country are not paid by citizens or residents of that country but by the Americans who purchase those goods, because the importer passes the tariff along as part of the price charged to consumers. On all of these points, he is correct.

Giovanetti argues that the tariffs imposed by the current Administration aren’t designed to raise revenue, but to increase the cost of imported products so that American consumers will shift their purchasing decisions from those items to their equivalents manufactured in the United States. He notes that this shift also has the effect of raising the prices charged by domestic manufacturers. Tariffs, he concludes, hurt American businesses and American consumers. On all of these points, he is correct. He doesn’t mention that in some limited instances the tariffs might be helpful to a particular American company or its workers to the extent the shift in purchasing decisions increases that company’s sales and profits, though those increases might be offset by the increased costs the company faces when it purchases components and supplies and that its workers face when making their consumer purchases. In sum, this omission isn’t a flaw in his explanation, but a detail that probably has no meaningful impact on the analysis.

Giovanetti describes the “national security” justification presented by the current Administration for its tariff decisions as “an embarrassing fiction.” Of course it is. And when he argues that “any discussion about tariffs should at least be informed by an accurate understanding of who actually pays,” he is spot on.

Giovanetti characterizes the tariff as a tax, specifically, a border tax. It is. In some ways, the word “tariff” is less offensive to some than the word “tax.” It is not unlike a sales tax or a value added tax. And it falls on the person purchasing the item subject to the tariff, just as a sales tax or value added tax falls on the consumer.

Tariffs are not the path to improving the American economy. There is a place for tariffs, but those instances are limited and often should be of short duration. Giovanetti is correct. The current flood of new and increased tariffs is helping no one who needs help.
Now comes some interesting insights into the economic impact of tariffs already imposed. According to this Slate article, the tariffs that have already been imposed by the current Administration amounts to a $62.5 imposition that ultimately is paid by those who purchase the goods subject to the tariff. Over the ten-year budget window, this amounts to one-third of the tax cuts dished out by the 2017 tax legislation. When factoring in secondary effects, such as price increases by other countries that export to the United States and by United States manufacturers, the existing tariffs will eat up two-thirds of the 2017 tax cuts. Though the article doesn’t get into the details, it seems to me that a more important comparison is the impact at each income level. Tariffs ultimately are paid by consumers. Low and middle income taxpayers spend a much higher portion of their income, often all of their income, whereas the wealthy spend only a small portion of their income on goods, and it is on some of those goods that the tariffs are imposed. So the bottom line is that for low and middle income taxpayers, the tariff-driven increased cost of what they purchase will exceed what small crumbs they received on account of the flawed 2017 tax legislation. On the other hand, for the wealthy, the tariff-driven increased cost of what they purchase will hardly make a dent in the huge handouts they received from that legislation. It ought to surprise no one that, once again, those who are revered by too many of the low and middle income individuals in this nation have implemented a reverse Robin Hood maneuver, taking from the poor and middle classes and giving to the wealthy. As they do this, the tariff king claims that China will pay the tariffs. His lack of understanding of basic economics is a disgrace.

Pending are another batch of tariffs that would double what already has been imposed. This would amount not only to an offset of the 2017 tax cuts but a tax increase equal to one-third of those cuts. Though I have objected to the 2017 tax legislation, I do not support paying for it with tariffs, because the effect is to require low and middle income taxpayers to pay tariff-driven price increases that are many times the tax breaks they received, while doing little, if anything, to reverse the giveaway to the wealthy and to large corporations.

Ultimately, the impact of these price increases will be to deflate the economy. Already Wall Street has been showing signs of price erosion. That’s because at least some investors realize that consumers will need to eliminate purchases of some items in order to pay the higher prices being posted for other items. Sometimes these sorts of economic disadvantages are prices that must be paid for something more worthwhile. But in this instance, the tariffs are having no effect on what China is doing. In the meantime, the anti-welfare, anti-handout Administration has been dishing out, and plans to dish out more, bailout money to farmers and others being devastated by the tariffs. When everyone else being similarly devastated lines up for some handouts, will the suddenly-socialist Administration be as generous? I doubt it.

I wonder how many Americans will figure out that when they see price jumps of 20 and 30 percent on some items that they will realize they are facing tax increases imposed by the self-styled chief advocate of cutting taxes. But, that’s how con artistry works. Read the books.

Monday, May 20, 2019

When It’s About Numerals, A Majority of Ignorance 

For a species that calls itself sapiens sapiens, humanity surely has its share of people who just don’t get it. Despite the warnings by those who see the risks that ignorance presents, and despite the attempts of millions of legitimate educators to stymie ignorance by teaching people how to think and research, ignorance is spreading like a virus rum amok. I have written many times about ignorance, usually focusing on tax ignorance but also expressing my concern about ignorance generally and how it is ripping apart the threads that hold civilized society together. A probably incomplete list of my commentaries about ignorance and its dangers includes Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, Tax Ignorance in the Comics, Tax Meets Constitutional Law Ignorance, Ignorance in the Face of Facts, Ignorance of Any Kind, Aside from Tax, Reaching New Lows With Tax Ignorance, Rampant Ignorance About Taxes, and Everything Else, Becoming An Even Bigger Threat, The Dangers of Ignorance, Present and Eternal, Defeating Ignorance, and Not Just in the Tax World, Tax Ignorance or Tax Deception?, The Institutionalization of Ignorance, and Disinterest in Tax: Should Difficulty in Understanding Justify Ignorance?.

A few days ago, I became aware of a poll that had been taken by CivicScience, a market research firm. Though the results of the poll are no longer on its web site, other outlets have shared it. According to this report, to select one of many similar and identical stories, more than 3,200 Americans were asked this question: “Should schools in America teach Arabic Numerals as part of their curriculum?” One would think all Americans but infants and the comatose would know that Arabic numerals have been taught in the nation’s schools for a long time. Yet 56 percent of those answering the question said, “No.” Only 29 percent said, “Yes.” And 16 percent had no opinion.

It doesn’t require rocket science to realize that at least almost all of those answering “no” were sharing a response generated by their limbic systems. Perhaps some people do not realize that the numerals 0 through 9 are Arabic numerals. What caused the limbic systems to overwhelm frontal lobes? As the report explains, “Maybe the word Arabic triggered it.”

The article ended with this question, “Roman numerals, anyone?” No, thank you. As I wrote 13 years ago in Giving Thanks, Again, “Thanks for Arabic numerals, because I can't imagine doing tax returns using Roman ones. And I'm thankful for the scholars who have explained that Arabic numerals are a transformation of Hindu, Indian, and perhaps even Chinese numerals.”

The connection between ignorance and bias is powerful. Bias triggers ignorance, because bias deters people from exploring and getting to know and understand “the other.” Ignorance triggers bias, because the lack of knowledge and understanding creates a fertile field for bias to take root and blossom.

Ignorance and bias is a deadly combination. They cast a long, deep, dark shadow over the light of knowledge, understanding, wisdom, and reason. If ignorance and bias were not so dangerous, one might be tempted to laugh at those “No” responses. Laughing at ignorance and laughing at bias does nothing, however, to curtail or eliminate those diseases that threaten all of us.

Friday, May 17, 2019

Making Sense of the New Jersey Rental Fees and Taxes 

New Jersey imposes its sales tax and an occupancy fee on short-term rentals. Well, on some short-term rentals. If the rental is arranged through a licensed real estate broker, are exempt. Owners who rent their properties through home-sharing markets, such as Airbnb and Vrbo, are not exempt. Nor are owners who rent directly to their tenants. The issue is particularly contentious for owners of properties along the New Jersey shore, where short-term rentals are ubiquitous. Now, according to this story, the New Jersey legislature is considering a bill that exempts owners who deal directly with a tenant.

Supposedly, the tax is “aimed at home-sharing marketplace Airbnb.” It seems to me that a tax imposed on a particular individual or company, whether by name or narrow definition, is wrong. In a sense, it can be characterized as confiscatory. Whether such a tax gets enacted against one company and not another would seem to depend on how much money each company spends fighting the tax or contributing to the campaign coffers of legislators.

Though I think user fees are an appropriate way to raise revenue, I also think they need to be applied to a specific concern. So the analysis would begin with this question: Why impose a tax on short-term rentals? The answer, I am guessing, is that short-term rentals can bring into the community people who have no sense of belonging, do not have as much civic pride in the area as do permanent residents, and are more likely to cause damage, require public safety services, and otherwise burden the community. That’s not to say all or even most short-term tenants lack civic pride, as many return summer after summer to the same property.

So if these taxes and fees on short-term rentals are being justified on account of extra costs incurred by the community because of short-term tenancies, then those taxes and fees should be imposed on all short-term rentals. To impose them on some, but to exempt others, is discriminatory. What is the justification for exempting certain types of short-term rentals? There is no connection between the channel through which the rental is arranged and the burdens that the tenants impose on the community that require funding in order to ameliorate.

Airbnb, which understandably opposes the exemptions, notes that rentals arranged through newspaper classifieds and magazine advertisements should not fall within an exemption because newspapers and magazines provide rental marketplaces. Airbnb suggests that piling exemption on exemption confuses would-be renters and makes the rental price change depending on the channel used to enter a lease. Airbnb has a point. When an exemption is created, it opens up the door to additional issues that involve defining who and what fit within the exemption, and who and what does not. Exemptions create complexity. Sometimes exemptions make sense and can be justified. In other instances they do not, and in those cases the complexity is a price not worth paying. Add to that the fact that when exemptions are reduced or eliminated, the overall rate of taxation can be decreased.

I have no idea what will happen with these New Jersey rental taxes and fees. My guess, though, is that it won’t turn out well.

Wednesday, May 15, 2019

Theories About Gasoline Taxes Fail When Practical Application is Examined 

There continues to be unhappiness in Michigan as its governor and legislature confront the challenge of fixing the state’s abysmal transportation infrastructure. Two months ago, in When Partisan Nonsense Muddles the Tax Debate, I addressed a meme that claimed Michigan’s governor was tripling the state’s gas tax, an act that would add $600 to $1,200 to each driver’s annual gasoline bill. In my commentary, I pointed out the obvious errors, such as the governor’s lack of power to increase the tax, the absurdity of the $600 to $1,200 annual tax increase claim, and the absurdity of claiming that 45 cents is not triple 29 cents. I shared the question I posed to those advocating what the meme claimed, by asking, “So what's your solution to the need to repair and maintain roads and highways? Tolls? (Also regressive) Privatization with even higher tolls (every such attempt in the USA failed, with governments having to take back responsibility for the roads, especially as those private companies are based in Europe)? Higher income taxes on wealthier people so that the ‘poor people’ don't pay additional gasoline taxes?”

Now comes some sort of answer, though it is not a reply to my particular commentary. In this opinion piece, Annie Patnaude claims that the answer to the funding challenge simply is, “Spend smarter, not more.” So how would that work?

Patnaude argues that increased gasoline taxes are taxes that “hard-working Michiganians can’t afford.” Perhaps Patnaude thinks Michiganians can more easily afford the costs of bad roads. Perhaps she thinks it is cheaper to pay for tire and wheel replacements, suspension repairs, alignments, and the hospital bills for those injured in accidents caused by poorly maintained highways. When she calls gasoline tax increases “unneeded,” perhaps she thinks vehicle damage, personal injury, and death are the true necessities. Somehow, though she laments the increases in gasoline taxes, she fails to take into account the impact of inflation. As she points out, the federal tax was three cents in 1956. Though she criticizes the raising of the tax at an “exponential rate,” she fails to note that three cents in 1956 is equivalent to 28 cents in 2019. Yet she complains about the current 18.40 cent per-gallon federal gasoline tax. In other words, the Highway Trust Fund has been underfunded for most of its existence if the 3 cent per-gallon tax in 1956 is the benchmark. If the federal gasoline tax is to be increased, it should be increased not only to bring the total to the inflation-adjusted 2019 amount of 28 cents, it needs to provide for a “catch up” for the decades of negligent Congressional underfunding. The time has come to pay the price for following the siren songs of the anti-tax crowd.

Patnaude argues that the current federal gasoline tax generates sufficient revenue to “improve our roads and bridges.” The goal, though, isn’t to “improve” roads and bridges. The goal is to make them safe. Filling some potholes improves a road. But filling some potholes doesn’t make that road safe if there remain unrepaired potholes, to say nothing of weakened bridge supports.

Patnaude points out that federal Highway Trust Fund revenues have been diverted to other projects. On this point she is correct, but the percentage devoted to things not connected with highway transportation is but a drop in the bucket. Even if those funds had not been used to fund, for example, transportation museum exhibits, the nation’s highways would not be better than they are, aside from a few miles here and there. Patnaude’s focus on the federal gasoline tax, though her opinion piece began with a focus on the Michigan gasoline tax, demonstrates her deliberate or unintentional disregard of the fact that the federal Highway Trust Fund is designed to deal with certain roads, such as Interstate highways, whereas state gasoline taxes are the primary source of revenue for state and local highways, of which Michigan has many, most in disrepair.

Patnaude then lists how she thinks highway revenue can be distributed in a manner that reflects “spend smart.” She gripes about the Davis-Bacon Act, environmental protection regulations, and “other permits and clearances.” She complains about the process taking many years, presumably causing costs to increase in the interim, though she doesn’t articulate that point. She requests that states have “greater freedom to construct and maintain their roads and bridges.” They have that now. What she really advocates is giving states the “freedom” to build and maintain highways without regard to environmental or labor regulations. She is particularly adamant about the Davis-Bacon Act. Why? That act requires the payment of “prevailing wages” to those who work on highway construction and repair. What’s so bad about prevailing wages? They are higher than the low-wage, barely-above-minimum-wage that the oligarchs want t pay workers. Cheap labor, free labor, the difference is a matter of degree and semantics. Otherwise, Patnaude doesn’t offer much in terms of specific proposals, budgets, and financial analyses to support her sound-bite quip that seems fine theoretically, but that lacks any support in terms of practical application.

Patnaude concludes by asking, “Are you ready to pay almost $300 more in taxes for your gasoline this year?” Any person using logical analysis would answer, “Sure, if that means I no longer run a 50 percent risk of hundreds of dollars in tire and wheel replacements and automobile repairs, a 10 or 20 percent risk of thousands of dollars in medical bills, and a tiny risk of death.” Three hundred dollars is a great price for that assurance, isn’t it. Well, at least Patnaude is using a more reasonable $300 amount, rather than the ridiculous $600 to $1,200 amount tossed about by those with even more reactionary approaches to the issue.

All of this, of course, can be avoided by adopting a sensible “pay for what you use” approach. My idea, supported by a number of advocacy groups, is a road use fee based on miles driven and weight of vehicle (heavier vehicles do more damage), and though several states are experimenting with it, it meets much opposition. I have explained, defended, and advocated for the mileage-based road fees for many 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, and Plans for Mileage-Based Road Fees Continue to Grow.

So, once again I ask the same questions that I have asked time and again. Why are legislators so reluctant to acknowledge that they have been living in the twenty-first century for two decades and that it’s time to use twenty-first century solutions? Will legislatures act before it is too late?

Monday, May 13, 2019

Disinterest in Tax: Should Difficulty in Understanding Justify Ignorance? 

A few days ago, reader Morris directed my attention to letter written to the Lincoln Journal Star. The writer purports to claim he has no interest in Trump’s tax returns, yet he took the time and made the effort to welcome others to be interested in his disinterest.

Though the letter writer suggests a variety of reasons that tax, and Trump’s tax returns, defy understanding, he doesn’t explain why the fact that something is difficult to understand should be ignored. Most medical problems and diseases are difficult to understand, but thankfully medical researchers haven’t abandoned efforts to learn.

What caught my attention, though, was this claim: “I don't understand the tax code, and I don't think anyone else does, either.” Forget that many tax professionals understand the tax code, though admittedly it often requires intense intellectual effort and some degree of patience to work though some provisions. Instead, keep in mind what we were told by Trump back in August of 2015, on a radio show in Birmingham, Alabama. He claimed, “Who knows taxes better than me?” in a manner implying that the answer is “No one.” So is the letter writer suggesting that Trump was not telling the truth when he made this claim? Or is he suggesting that Trump understands his own tax returns but that no one else does, even though Trump did not prepare those returns?

From my commentary on that episode, ”Who Knows Taxes Better Than Me?”, I will share the benchmarks that can be used to identify people who do, in fact, understand the tax law, perhaps save for a provision or two. Not that having done all of these is what’s required, but having engaged in most of these demonstrates why the letter writer is wrong:
When people conclude that because they don’t understand something no one else does, ignorance wins. When people conclude that because they don’t understand something, any explanation or attempt to educate another person deserves no attention, ignorance wins. Ignorance thrives on disinterest. The advancement of civilization is grounded in curiosity. We cannot learn, and grow, unless we are interested. The ignorance that can thrive on disinterest can be fatal, to life, to liberty, and to the pursuit of happines..

Friday, May 10, 2019

When Legislatures Let Outsiders Write the Tax Laws 

Two of the many deficiencies in tax policy that I have criticized have met up, and the results aren’t pretty. It demonstrates that when the process for making tax law is flawed, the outcome is bad.

The first deficiency is one that I have criticized in a series of posts. I have always considered the New Jersey tax policy of dishing out tax breaks to companies that it entices to move to New Jersey, or to move to Camden from within New Jersey, to be unwise, indefensible, and yet another shifting of economic power and wealth from the poor and middle class to large corporations and wealthy individuals. I have written about these giveaways many times, including When the Poor Need Help, Give Tax Dollars to the Rich, Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, and Where Do the Poor and Middle Class Line Up for This Tax Break Parade?, The Tax Break Parade Continues and We’re Not Invited, and Another Flaw in the New Jersey Tax Break Giveaway. Though the claim that handing out tax reductions ultimately raises tax revenue is offered as justification for these deals, the reality is that these sorts of tax breaks are as effective as trickle-down tax cuts, that is, they’re not. Worse, when a small business applied, it was rejected, because in the words of the Economic Development Authority, it did not want to set a precedent that would encourage small companies to merge “for the sole purpose of securing tax incentives.”

The second deficiency is the distortion of the tax legislative process through the blending of special interest groups being too involved, the legislation being rushed, and often pushed through without public hearings. The result is a mess, a combination of unintended consequences and unjustifiable tax breaks. I have written about the flawed tax legislative process many times, most recently in in Bad Tax Law: The Price for Railroading, Special Interests, and Deficient Thinking, and More Bad Tax Law: The Price For Not Listening to The Citizenry

Now comes a New York Times report that the New Jersey legislation under which the tax breaks handed out to companies relocating to Camden was amended by an attorney whose clients included many of the companies getting the tax break. What happened?

While the bill was working its way through the New Jersey legislature, it was handed over to a real estate attorney. His law firm is described as having ties to Democratic legislators and other politicians. The attorney was not registered as a lobbyist for the legislation, and his law firm claims that what was done by the attorney does not constitute lobbying.

So why was the attorney permitted to play the role of a legislator? The attorney declined to comment, but his firm explained that it “was asked by policymakers, including those in the Legislature, to review this legislation and offer input and suggestions on ways it could be strengthened.” One wonders why they didn’t invite all attorneys, or even all tax attorneys and other tax professionals, to mark up the legislation. The public was not informed that a private individual had changed the language of the legislation.

The changes made by the attorney not only increased the amount of tax credits available to certain clients, but also included language that extended the tax breaks to additional clients not included in the original legislation.

What brought this to light is an investigation of the tax break program after people began to realize, as I had predicted, that the benefit to the state’s residents was but a fraction of the tax breaks dished out to the companies involved in the program. For example, the $260 million tax break given to Holtec International was predicted to generate $155,520 in benefits for the state, along with 235 new jobs, and yet the tax break was approved.

When generally applicable legislation, such as a tax bill, is crafted to benefit a particular person or company, legislatures rarely publicize the name of the beneficiary. Instead, dense language is used in what is becoming an increasingly unsuccessful attempt to hide what is happening, For example, the private attorney inserted language giving a tax credit to a “qualified business facility located in a priority area housing the United States headquarters and related facilities of an automobile manufacturer.” Who might that be? Well, it’s Subaru of America. No other company fits the definition.

Is it any wonder American voters are angry? Unfortunately, too many of them end up voting for the people who are part of the system that causes so many problems for so many voters. I wonder how many voters in New Jersey will read the full New York Times report. I wonder if the fact it’s longer than a tweet or sound bite, and requires putting together multiple analytical threads and events, will deter people from getting educated on the flaws in the nation’s political systems that need to be fixed before it is too late. Will they ask themselves, “Why wasn’t *I* permitted to mark up legislation to give myself or my friends and families a special tax break?” Perhaps they will realize that the answer is, “You don’t matter to the people wrecking the nation’s political system and endangering the nation itself.”

Wednesday, May 08, 2019

More Bad Tax Law: The Price For Not Listening to The Citizenry 

It was just a week ago, in Bad Tax Law: The Price for Railroading, Special Interests, and Deficient Thinking, that I expressed my surprise and delight when a former tax counsel for the House Ways and Means Committee admitted that the 2017 tax law change causing church employees to be taxed on parking provided by a church did not get the “months and months of planning and consideration” that was invested in areas of the tax law best described as being of the most importance to large corporations and the wealthy. My surprise reflected my long-standing dissatisfaction with how Congress deals with tax, and for that matter all other sorts of, law.

For example, in Apologizing for the Tax Law Efforts of the Congress, I had this to say about its efforts:
I confess that my reaction when students groan in reaction to the bewilderment and frustration sweeping over them as the course works its way through just a small bit of the tax law surely is not an expression of remorse on behalf of the Congress. No, I yield to the temptation to criticize the consequences of the inattention, the ignorance, the vote-grabbing, the currying of favor with special interests, the sloppiness, and the last-minute rushing on the part of Congress that causes the nation to have such an abysmal tax law.
The legislative process is flawed. Why? In Birthdays in the Tax Law (and Obituaries?), focusing on the definition of “attaining” an age, I explained why a simple concept had become muddled:
So that means the phrases “attains the age” ends up with two different interpretations. Does it make sense to give a phrase two different meanings when the statute using the phrases does not do so? Of course, this is once again a matter of Congress not thinking through the implications of what it enacts. That’s probably because few members of Congress actually read, let alone think deeply about and think through the consequences of, the legislation on which they vote.
I reached the same conclusion in Tax and Perfection, in which I discussed a flaw in the statutory language dealing with interest deduction limitations: “Had the Congress and its various staffs invested a little more time by having brains attached to other eyeballs think through the ramifications and issues implicated in the bonus taxation legislation, far fewer resources would have been wasted in the ensuing flap over the matter.”

Recently, news has been spreading about another glitch in the 2017 legislation. For example, this article explains in more detail how an attempt to change the tax rate schedule applicable to trusts has caused tax increases on the order of $5,000 for surviving spouses and children receiving benefits on account of the death of the other spouse and parent who died while on active military service. Though people are calling it the military widow’s tax but I am certain there are widowers who also are experiencing this outcome. It is estimated that thousands of people have been hit with this tax increase.

The change in the tax law was designed to prevent wealthy individuals from putting assets into trusts benefitting their children in order to gain the advantage of lower tax rates. Though that sounds like a provision unfavorable to the wealthy, the change was accompanied by a doubling of the amount of assets exempt from the estate tax, which more than offsets the income tax change. In the case of non-wealthy families getting by on military survivor benefits, no offsetting provision was enacted.

According to the report, “congressional aides and others involved” in the drafting of the legislation, “nobody at the time realized the impact the change would have on military families.” Why not? Isn’t it the job of congressional aides to analyze proposed legislation? Has it not been, at least until the recent autocratic approach to government permeating D.C. in 2017, a matter of course to hold public hearings so that educated and intelligent people out “beyond the Beltway” can share their insights on proposed legislation. I am confident at least one person, and probably more, would have said, “Hey, look what this would do to families receiving military survivor benefits.” But in the rush to railroad the legislation through the Congress, the people dead set on having it their way and no other didn’t bother to pay attention to the people they supposedly represent, and instead let those “others involved,” who lack the sort of broad overarching understanding of tax law that once was a staple of Congressional tax legislative process, toss about their ideas without regard to those insufficiently privileged to sit in the smoke-free back room.

Congress is now “scrambling” to fix the mess. Would it not be easier to make certain the legislation is well done before enacting it? There’s no reason not to get input from multiple sets of eyes and brains from segments of society that are diverse geographically, politically, socially, economically, financially, and experientially. That, however, is something oligarchs and their acolytes don’t like to do.

Monday, May 06, 2019

Using Taxes to Bail Out Wrongdoers 

The story is sad and infuriating, has happened too often, and continues to happen. Because of wrongdoing by an accuser, a police officer, a prosecutor, a judge, an expert witness, or multiples or combinations of them, an innocent person is convicted and imprisoned. Years later, exculpatory evidence is found, and the innocent person is released. And then the innocent person sues the jurisdiction where the wrongful conviction occurred. This happened, for example, to a group known as the Beatrice Six. Six individuals were falsely convicted of raping and murdering a woman in Beatrice, Nebraska, in 1985. Twenty-four years later, in 2009, the truth came out and they were released.

The six were convicted in part because of forensics presented by Joyce Gilchrist, who later was determined to have assisted in other false convictions. The six also were forced into giving false confessions. The forensic scientist who did the original analysis was not called to testify, even though she had determined there was no forensic match between the defendants and the crime scene. After being released the six falsely convicted individuals sued Gage County, where the crime and convictions had occurred, but by the time the case went to trial in 2014, the lead plaintiff had died. Two years later, a jury awarded the plaintiffs or their successors in interest $28 million. The county appealed, but lost. On March 4, 2019, the United States Supreme Court denied the final appeal. Attorney fees and interest have raised the cost to $31 million.

So Gage County needs to come up with $28 million. It raised property taxes to the maximum permitted under state law. Because that was not enough, the county sought state legislative approval to impose a sales tax. As reported a few days ago in this story, the Nebraska legislature approved the request, the governor vetoed the legislation, and the legislature overrode the veto. The governor vetoed the legislation because he wanted the tax to be approved by voters. Usually, voters must approve sales tax increases. It was predicted that voters would not approve the sales tax because many of them did not live in the county in 1985, and some still believe that the six are guilty despite the exonerating DNA evidence. Compounding the problem is the county’s failure to have adequate insurance at the time of the false conviction to cover these sorts of claims.

Interestingly, some legislators who are members of the anti-tax movement voted for the tax increase. One of them has provided an explanation that ought to be printed in bold lettering and placed in the front of every legislature in the country: “This is a time when campaign promises become meaningless and situations must be solved.” I’m thinking, for example, of the funding required to fix infrastructure, to protect Americans from catastrophic health costs, and to build up adequate cyber-security against attacks by enemies.

The justification for approving the sales tax is to prevent the cost from falling entirely on property owners who pay property taxes. What is unclear to me is how much of the sales tax will be paid by people who are not property owners in the county. Aside from renters who make purchases, the only other source would be visitors and tourists, who probably aren’t numerous. Using a sales tax will shift some of the burden from farmers with large land holdings, but reduced income, to town residents, whose property taxes typically are lower than those imposed on farmers.

I don’t know if anyone other than the county was sued. Perhaps Joyce Gilchrist, the police, the prosecutors, and the others who were involved in the false conviction were sued. Perhaps they are long gone from this planet. Perhaps they are bankrupt. The problem that I see is the shifting onto taxpayers the price that must be paid when officials, some elected, some not, and third parties recruited by those officials, act wrongly. It is said that holding officials responsible for the costs of their bad decisions would discourage people from running for office. Yet it’s not a question of holding people responsible for the outcomes of decisions made in good faith. When there are intentional failures to comply with the rules, to follow the proper procedures, or to everything that must be done, asking innocent taxpayers to bear the burden of those failures is difficult to justify. Perhaps taxpayers who voted for those officials knowing that those officials are prone to acting wrongfully should be taxed, but there is no way to identify those taxpayers, some wrongdoing officials aren’t elected, and proving that taxpayers knew that officials were prone to act wrongfully and would do so once elected is near impossible.

The answer, I think, is for taxpayers to prevent these sorts of taxes by paying attention to what is happening in government and politics. Too many people “aren’t interested” in “those things.” Too many people fail to take everything into account when evaluating government officials and candidates, often getting caught up in one issue to the detriment of all else. Worse, taxpayer oversight of government officials is lacking, as often the only recourse is the ballot box which turns up every other year or even longer. Oversight of government officials by other government officials, though fine in theory, has failed when it comes to practical application. We are seeing that now, on a scale much larger than Gage County, Nebraska. When the time comes to pay the price for the misdirected tax cuts, for the environmental damage, for the death and destruction due to infrastructure failure, and for other deliberate and wrongful decisions, perhaps American taxpayers will understand, “you were warned, you did not listen, you are now paying the price.” So sad.

Friday, May 03, 2019

Tax Breaks for Broken Promises: Not A Good Exchange 

Two years ago, in Is Tax and Spend Acceptable When It’s “Tax the Poor and Spend on the Wealthy”?, I criticized the use of public funds and tax revenues to finance an arena in which two professional Detroit teams will play. Now comes news in a Detroit Free Press story that just about every promise that was made to justify the grabbing of public funds and tax revenues by a wealthy family has gone unfulfilled. More than $300 million in tax revenues intended to fund the city’s schools were diverted to the construction of a playground for teams awash in their own revenues.

To justify grabbing public funds, the billionaires who own the project promised that they would create jobs for Detroit residents, build housing for low-income Detroit residents, and clean up blight that the billionaires themselves had created. According to the report, though the arena has been built, the number of housing units built by the billionaires totaled “zero as in none.” The number of Detroit residents hired to work on the construction came nowhere near the promised 50 percent of the workforce. The removal of the blight in the area between the arena and downtown Detroit did not happen, though the blight is attributable at least in part to the billionaires buying the properties in that area and letting them deteriorate in order to drive down prices in the area. There also are allegations that corners were cut in order to increase profits on the arena deal.

Some community leaders, activists, and politicians point out that the vast majority of those coming to the arena live in areas outside Detroit and thus do not bear the burden of their tax dollars paying for the arena. One politician noted, "They promised it would be something that trickled down to the neighborhood. It hasn’t trickled down. We said yes to a billion-dollar corporation for nothing in return." That’s how the game has been played for the past four decades, a con on the American people that too many Americans fail to recognize because they fail to let themselves be educated on the realities of these arrangements.

Politicians who supported the deal claim that it was successful because the arena was built and is drawing attendees. Nothing was said of the broken promises. When asked if giving half of the revenue from the arena to the billionaires, one politicians said he was “fine with that.” When asked if he understood the that funding private projects owned by the wealthy with public revenues doesn’t work out as promised, that same politician said that people need “to have a level of faith in a project,” though he claimed to be a “data-driven person.” What data is he examining? That same politician is now president of the entity set up to siphon public revenue into the hands of apparently starving billionaires.

The billionaires who profited from this heist tried to defend what happened. After claiming that they have “six decades of dedication, commitment and positive impact throughout the broader Detroit community," and noting that they “are exceptionally proud of [their] accomplishments,” they claimed to have created “thousands of jobs,” to have restored “various historic buildings,” and to have developed “a downtown sports and entertainment district which has surged since the opening” of the arena. Nothing was said of the broken promises. People who break promises don’t like to talk about those promises nor do they like people asking them about those promises. Instead, as these billionaires did, when called out on the broken promises, they accuse the questioners of being “self-interested, sensationalized and inaccurate.”

When will America wake up? Considering the extent to which 40 percent of Americans seem fine with revering those who break promises, the answer might not be “Soon enough.”

Wednesday, May 01, 2019

Bad Tax Law: The Price for Railroading, Special Interests, and Deficient Thinking 

Readers of MauledAgain know that I am not a fan of how Congress does business. Though my focus on Congressional behavior usually highlights tax law, the deficiencies in how Congress operates touches every area within its purview.

For example, in Apologizing for the Tax Law Efforts of the Congress, I had this to say about its efforts:
I confess that my reaction when students groan in reaction to the bewilderment and frustration sweeping over them as the course works its way through just a small bit of the tax law surely is not an expression of remorse on behalf of the Congress. No, I yield to the temptation to criticize the consequences of the inattention, the ignorance, the vote-grabbing, the currying of favor with special interests, the sloppiness, and the last-minute rushing on the part of Congress that causes the nation to have such an abysmal tax law.
The legislative process is flawed. Why? In Birthdays in the Tax Law (and Obituaries?), focusing on the definition of “attaining” an age, I explained why a simple concept had become muddled:
So that means the phrases “attains the age” ends up with two different interpretations. Does it make sense to give a phrase two different meanings when the statute using the phrases does not do so? Of course, this is once again a matter of Congress not thinking through the implications of what it enacts. That’s probably because few members of Congress actually read, let alone think deeply about and think through the consequences of, the legislation on which they vote.
I reached the same conclusion in Tax and Perfection, in which I discussed a flaw in the statutory language dealing with interest deduction limitations: “Had the Congress and its various staffs invested a little more time by having brains attached to other eyeballs think through the ramifications and issues implicated in the bonus taxation legislation, far fewer resources would have been wasted in the ensuing flap over the matter.”

Of course, members of Congress don’t stand up and confess that the legislative process they follow is a mess, or that the product of their flawed procedures are of high quality. Nor would anyone expect members of Congress to do so, because the nature of politics seems to require, or at least encourage, every politician or candidate to present himself or herself as a paragon of perfection.

So wasn’t it surprising, refreshing, and uplifting when, as reported in this Bloomberg story, a former tax counsel for the House Ways and Means Committee admitted that the 2017 tax law change causing church employees to be taxed on parking provided by a church did not get the “months and months of planning and consideration” that was invested in areas of the tax law best described as being of the most importance to large corporations and the wealthy. This is not a case of a staffer attached to opponents of the 2017 tax legislation lamenting a loss. The former Ways and Means tax counsel who made the admission is a Republican working with advocates of the legislation. Now that the Republicans no longer control that committee, he has moved across the Capitol and serves as an investigative counsel with the Senate Finance Committee. I do hope that he can share with his new colleagues the lesson he seems to have learned. And I do hope those colleagues will listen, learn, and act accordingly.

As I wrote in When Congress Can't Do Things On Time:
Members of Congress need to learn that they were elected to serve, not to devote substantial amounts of energy to preparing for, and seeking, another term. If they want another term, then they can earn it by doing their job in a timely and competent way, for which a reward can be re-election. Voters, though, need to stop re-electing members of Congress because of yet more promises likely to go unfulfilled or because of favors granted. Perhaps a practice used in many other organizations would make sense, namely, after serving a term (or perhaps two in the House), a member must stand down for one or two terms before being again eligible to return. That sort of rule might encourage members of Congress to focus on their legislative work.
Of course, getting the Congress to enact legislation or initiate the amendment of the Constitution to put such a provision in place is close to impossible. The spirit of Cincinnatus, much admired by George Washington and others of the Founding Period, has long departed from these shores.

Monday, April 29, 2019

Funding Infrastructure Repairs and Maintenance Other Than Through Taxes  

The debate over the best way to fix the nation’s crumbling architecture is heating up. Though some engineers and some public policy and tax policy commentators have been warning people for years and offering suggestions, only now is the general public beginning to pay more attention. People are noticing that the public-private partnership model used in some instances with little fanfare isn’t generating the benefits advertised.

Readers of this blog know that I am no fan of privatization, because privatization does not work, and these private enterprises have a goal, maximization of the bottom line at all costs, that is inconsistent with the goal of maintaining and improving the public welfare. Why privatization does not work is something I discussed in Are Private Tolls More Efficient Than Public Tolls?, When Privatization Fails: Yet Another Example, How Privatization Works: It Fails the Taxpayers and Benefits the Private Sector, Privatization is Not the Answer to Toll Bridge Problems, When Potholes Meet Privatization, and Will Private Ownership of Public Necessities Work? As I noted in So Guess Who Pays for the Senate’s Tax Cuts for Corporations and Wealthy Americans?, the anti-tax/privatization movement is part of a “plan to eliminate or privatize Medicare, Social Security, national defense, and everything else so that eventually the oligarchy owns everything.”

As for the highway, bridge, and tunnel funding challenge, there is a twenty-first century solution. I have explained, defended, and advocated for the mileage-based road fees for many 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?, and Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign. When a reader asked how my support for the mileage-based road fee fit with my preference for a progressive income tax, I answered that question in Is a User-Fee-Based System Incompatible With Progressive Income Taxation?.

Recently, a reader directed me to a proposal for a different way to fund infrastructure repair and maintenance. The suggestion is to fund an “infrastructure bank” by requiring “every American public company” to issue “1 percent of its equity in the form of new stock” to an infrastructure bank, and to put this requirement in place for a three-year period. The proposal would rise roughly $1 trillion. The justification rests on a reaction to the newly opened Mario Cuomo Bridge and the benefits it brings to “high-growth regional companies” because it “supports the efficient movement of supplies and finished products, makes for a happier commute for our employees and can make a difference in recruiting key talent.” The money put into the bank would be dished out as grants or loans “to support worthy infrastructure projects.”

The proposal is worth discussing, because careful analysis raises a variety of questions. I doubt that I have identified all of the questions.

First, as the proposal suggests, funding infrastructure needs through increases in personal or corporate income taxes or through wealth taxes is unlikely to happen. Yet the proposal recognizes that “some companies and their shareholders will surely grumble.” I daresay the question is whether the “some” would actually be “many” or “nearly all.” The proposal admits that it “would put the burden onto wealthy Americans and foreigners.” Is it realistic to think that most of them would not grumble?

Second, the proposal notes that the required equity contributions “would hardly be a burden.” Is that actually the case? Do we know that every public company can afford to make the contributions without hurting its business? The proposal notes that the one-percent-of-equity-contribution requirement is less than the “typical daily fluctuation in many companies’ stock prices,” but is this true for all companies? Aren’t variations in stock prices more of an issue for shareholders? The proposal notes that last year, companies paid $800 billion to buy back their own stock. But is this something that will happen every year, or is it a one-time event reflecting the surge of tax break dollars flowing into corporate treasuries? Is it possible that this realization is yet another example of why it would have been better to invest in infrastructure rather than plowing money into tax breaks, considering that “[t]he White House Council of Economic Advisers estimates that gross domestic product would increase up to $13 billion a year for every $100 billion in infrastructure investment”?

Third, considering that the “infrastructure investment gap over the next two decades” is roughly $5 trillion, the proposal makes too small of a dent in the funding requirement. Meeting a $5 trillion need through the equity contribution proposal would require not three years, but 15 years, of contributions. Whatever grumbling a three-year requirement would generate, a 15-year requirement would be orders of magnitude more vociferous.

Fourth, if money from the infrastructure bank were paid out as loans, who would be responsible for repayment? Would state and local governments be the borrowers? If so, would they not need to increase or impose tolls on transportation infrastructure or raise taxes with respect to all infrastructure in order to repay? Or is the plan to make loans to private sector enterprises, thus bringing privatization of public resources back into the picture through a different pathway? If money is distributed as loans, what happens when the loans are repaid? If recycled into more infrastructure projects, what happens when, as the proposal puts it, “its infrastructure mission is accomplished” and it “might even liquidate itself.” Does the money go back to the corporations? What if they are no longer in existence?

Fifth, who decides if an infrastructure project is “worthy” and how is that determination made? To what extent will politics be a factor? The proposal wants the infrastructure bank to be “apolitical.” Is that realistic? If not, to what extent will campaign contributions by construction companies and related enterprises looking for infrastructure repair work be a factor? Will rural or urban projects get a disproportionate amount of the grants or loans? Though the proposal claims that “Although detailed mechanisms for issuing the stock and managing the portfolio would need to be defined, this plan should be more straightforward than an income tax,” isn’t it quite possible that it would be just as complicated as income taxes?

Sixth, why limit the proposal to American companies? Do not foreign corporations doing business in this country benefit from the nation’s infrastructure? Though the proposal notes that “84 percent of all stock held by Americans belongs to the wealthiest 10 percent of households, and foreign investors account for 35 percent of investment in American stocks,” does that suggest domestic shareholders of foreign corporations doing business in this country would also share in the burden? Conversely, if there are companies and shareholders who do not benefit from infrastructure repairs and maintenance, why put the burden on them?

Seventh, why just corporations? Isn’t there a significant amount of equity in limited liability companies, partnerships, hedge funds, and private equity funds? Why should they be excluded from the funding party?

The more I thought about the idea, the more I began to consider what the proposal would be, in substance, if it took the form of mandatory contributions, loans repaid, probably with interest as the proposal notes, additional loans made and repaid, and the infrastructure bank liquidated by returning the contributions, with or without interest, to the corporations (and other entities). Is this not the equivalent of floating bonds to fund infrastructure repair and maintenance, but buttressed by what amounts to compelled purchase of those bonds by corporations (and other entities)? Why compel the purchase? What would happen if infrastructure bonds were floated, with the security not being tax revenues, but pledges from corporations (and other entities) in the event that the bonds were not repaid through fees imposed for the use of the new or repaired infrastructure? If different alternatives are going to be put on the table, perhaps the pledged bond idea also should be added to the list.

Friday, April 26, 2019

Getting Out of Paying Taxes in Retirement: Not So Easy 

The headline of the article, 3 Ways to Legally Get Out of Paying Taxes in Retirement caught my eye, as I’m confident it caught the eye of others. Wouldn’t it be wonderful, at least from the taxpayer’s perspective, to live a tax-free retirement?

Actually, the article focuses on federal income taxes, so it doesn’t even claim to give a roadmap for getting out of paying, for example, sales taxes or local real property taxes, while retired. Its recommendations probably do little to affect state and local income taxes.

So are there ways to avoid paying federal income taxes in retirement? Of course there are. One way is to keep one’s income below the standard deduction amount. Another is one of the three techniques suggested by the article, that is, restrict one’s income to municipal bond interest. Of course, doing that is rather difficult. It means having enough wealth so that the interest generated by the bonds is sufficient to live the lifestyle one desires. It means not taking a job that pays more than the standard deduction, and it means not claiming Social Security benefits unless the municipal bond interest is sufficiently low so that combined with half of the Social Security income it does not exceed the $25,000 taxation benchmark for Social Security benefits.

The article suggests saving in a Roth IRA or Roth 401(k). That advice certainly comes too late for those who are retired or within a decade of retirement. Of course, there is a steep price to pay for choosing a Roth plan rather than a typical plan. There is no exclusion for the contributions to the Roth plan. That means the taxpayer is paying the tax now, rather than later, thus not taking advantage of the fact that the present value of the tax paid in retirement is less than the tax being paid in the year of contribution. It also means that the taxpayer probably is paying tax at a higher rate when working than when retired.

The article also suggests holding investments for at least a year and a day to qualify for lower long-term capital gains rates. But unless somehow the long-term capital gains rate is zero, this strategy does not let the taxpayer get out of paying taxes. That zero rate only applies to unmarried taxpayers (and married taxpayers filing separately) whose income is less than roughly $40,000, to heads of households whose income is less than roughly $53,000, and to married taxpayers whose joint income is less than roughly $79,000. But it is likely that taxpayers with sufficient wealth to generate capital gains will have other types of income that exceed the standard deduction and generate tax liability.

The headline of the article would make much more sense if it were “Three Ways to Legally Reduce Federal Income Taxes in Retirement.” Even that is a bit misleading because the Roth plan suggestion comes at a cost of paying more taxes while working. The article itself, near the end, confesses that it isn’t quite what it’s headline claims. It recommends that people “think about the ways you might reduce your tax burden as a senior” rather than “think about the ways you might eliminate your tax burden as a senior.”

In all fairness, not all writers get to pen the headlines for their articles. I learned that many years ago from a Philadelphia Inquirer reporter who wrote an article about my basic federal income tax class. When I saw the headline and commented, he explained that headline writers did just that, applying their ability to sum up an article in a few words, often trying to work in some word play. So perhaps the headline was not written by the article’s author. By the way, I write my own “headlines.” Surely that is obvious!

Wednesday, April 24, 2019

Is It Finally Time to Fix the Tax Law Flaws That Encourage Asset Stripping? 

Last October, in What to Do When Drowning in Money and Hauling in Tax Cuts, I explained why pumping tax breaks into the hands of people already basking in the benefits of low capital gains rates, almost non-existent federal estate taxes, and the unjustifiably favorable treatment of carried interests is foolish and dangerous:
What do hedge funds and private equity do? One path of investment is to acquire public companies and turn them private, or to invest in public companies that are in trouble and hope they turn it around. But increasingly, private equity and hedge funds are grabbing distressed businesses simply to extract the last bits of value and to abandon what’s left. As explained in this article, too often, when given the opportunity to turn a distressed business in the direction of modernization, hedge fund and private equity managers prefer to take out money than to invest enough to turn the business around. This is what has happened with Sears, in which a controlling interest was purchased by hedge fund ESL Investments. It failed. Toys ‘R’ Us was acquired by KRR, Bain Capital, and Vornado Realty Trust. It failed. It happened to Gymboree, another Bain Capital investment. It failed. It happened to Payless ShoeSource, owned by Blum Capital and Golden Gate Capital. It failed. It happened to Radio Shack, in which Standard General had a substantial interest. It failed. Twice. It happened to Fairway, owned by Blackstone. It failed. The same outcome fell upon The Limited, Wet Seal, Claire’s, Aeropostale, Nine West, Brookstone, David’s Bridal, and Sports Authority.

From the perspective of the hedge funds and private equity, these aren’t tragedies. These have been good investments. From the perspective of employees, customers, and the malls in which these businesses rented space, these transactions have been disaster. Granted, retail stores have faced competition from their on-line counterparts, but would not saving one of these retailers included plans to go online? That didn’t happen. It didn’t happen because the new owners preferred not to put in even more money but to take out what was left. Worse, according to investment officer Jack Ablin, “many private equity investors lack the expertise to make the shift from traditional retail to online commerce.” Yet, surely they had the money to hire people who had the expertise. They didn’t, because, according to that investment officer, those investors “were also reluctant to commit more capital for the long-term to transform these struggling retailers.”
At the end of my commentary, I shared these thoughts:
I wonder how things would have turned out if tax cuts had not been handed out to these folks during the past two decades. I wonder if they would have had the resources to do what they have done, are doing, and intend to continue doing. Retail stores probably still would have failed – they have, for many decades – but the resources that remained would not have been channeled into the hands of those already drowning in wealth. Perhaps not as many stores would have closed. Perhaps not as many people would have lost jobs. Perhaps some businesses would have hired people willing and able to take them online.

There are many lessons to learn from these events. Sometimes learning a lesson is helpful for the future. Sometimes learning a lesson comes too late, and the future is altered forever, often in a bad way. Perhaps we have run out of time.
Now comes news, in a Philadelphia Inquirer report, that Sears is suing its former chairman, Eddie Lampert, and board members, alleging that they engaged in a scheme to transfer Sears assets to themselves and their hedge funds. In other words, they are being accused of what I described, namely, setting out to “extract the last bits of value and to abandon what’s left.” The amounts in question total in the billions of dollars. The cost, according to the complaint, includes creditors getting paid pennies on the dollars, job losses, and store closures. The hedge fund disagrees, calling the complaint “baseless” and “fanciful.”

The allegations, if proven true, are astounding. Allegedly, Lampert directed employees to create misleading documents showing Sears on the brink of reaping “huge profits” when in fact it was losing billions of dollars a year. What is not disputed is that Lampert and the board paid $40 million to settle another lawsuit claiming that they sold Sears’ best real estate to another of Lampert’s businesses. Describing the transaction as “highly conflicted,” the Sears shareholders who sued predicted that it would ““plunge the company into insolvency.” Indeed.

Members of the board include the founder of an investment management firm, the president of a hedge fund, and the managing partner of another investment firm. Also on the board was Lampert’s college roommate, who is now Secretary of the Treasury. The reaction of Mark Cohen, director of retail studies at Columbia Business School and the former chief executive of Sears Canada, provides an insight into the sort of attitude being brought into government. He explained that “Lampert ran the company like it was a private company owned by him. But it wasn't private. It was very much a public company." Jordan Thomas, a partner at Labaton Sucharow and former Justice Department trial lawyer, put it this way: “For all of the directors, there will be an assessment of independence and whether they exercised appropriate fiduciary duty in making their decisions.” There’s the key phrase: fiduciary duty. Acting responsibly as a fiduciary is what too easily disappears when money accumulation for one’s self becomes the paramount goal.

The ability to engage in the sort of disruptive behavior by hedge funds and private equity firms that has afflicted the economy for the past decade and a half is significantly enhanced by the influx of money into that world caused by unwise tax breaks. Considering the damage done in the latter part of the last decade by these sorts of entities, the last thing that the Congress needs to be doing is to enact more and more tax breaks for their activities. The world is awash in capital, and owners of capital do not need more capital, other than to satisfy money addiction. It is time not only to repeal the unwise tax breaks but also to enact provisions to take back, and give to the 99 percent who don’t play these risky games, the tax breaks that ought not to have been granted. Considering how many members of Congress vote for these tax breaks because of “contributions” from the individuals who get the tax breaks, the return of the tax breaks are justified on the grounds that they were obtained not through the exercise of fiduciary duty by members of Congress but through the treatment of the federal government as a “private company” owned by members of Congress and other government officials.

Back in March, in Will Private Ownership of Public Necessities Work?, I issued a warning that at least some dismiss as over the top:
As companies merge, as hedge funds and private equity funds purchase companies, strip them of assets, and toss them aside, as local businesses are overwhelmed by national and global chains that give little regard to local concerns, as consumer choices are reduced because the number of providers from which to select decreases every year, and as private industry that cannot be held responsible at the voting booth becomes the replacement for government, the foundations of democracy will erode and the republic eventually will collapse.
I stand by that prediction. Unfortunately, I fear that too many Americans will heed the warning signs about as eagerly as do the ones who, as described in this article, are “oblivious or disdainful” when they receive as tornado warning, at least until they’re being blown out of Kansas.

Monday, April 22, 2019

Keeping Track of Charitable Contributions for Tax Purposes 

So a bit of a brouhaha has popped up with respect to Beto O’Rourke’s charitable contributions. Rather than focusing on the question of whether a person’s charitable inclinations should include time spent running for office, I want to focus on the issue of unclaimed potential charitable contribution deductions.

As reported in various stories, including this Philadelphia Inquirer report, O’Rourke is being criticized because the charitable contribution deduction on his released tax returns amount to 0.7 percent of adjusted gross income. O’Rourke explained that "We've made donations to so many organizations in small amounts, in the hundreds of dollars, in larger amounts, in the thousands of dollars. This is beyond what's itemized and reflected in our taxes. . . . [we] "just didn't report it because it wasn't important for us to take the deduction. Never thought it would be an issue because I didn't expect to release my taxes 'cause I never thought that I'd be running for president." O’Rourke disclosed, "We're trying to go back to some of these organizations to see if they can share with us, over the last 10 years, how much we have donated."

Taking this apart, there are two types of potentially deductible charitable contributions to consider. The first type is the small cash donation, often a dollar or two or five or ten or twenty, dropped into a collection plate, or a charity’s giving bowl, or otherwise made on the spur of the moment. There is no record, there is no letter of acknowledgement, and the deduction disappears for that reason. It’s why I encourage people to make donations other than in cash, or when making a donation in cash, to use envelopes, if provided, to supply the charity with donor information so that the charity can issue a tax-satisfying confirmation letter. As to these unsubstantiated cash donations, it is highly unlikely that O’Rourke will be getting any sort of confirmation from the charities. The second type is the substantiated deduction that a taxpayer simply fails to deduct on the return. In these instances, the taxpayer should have the confirmation letters, unless they were lost, which is why the taxpayer would need to request the charity to issue another one. It’s unclear if this is the situation in O’Rourke’s case.

So why forgo the deduction? There are many reasons. I have written about this issue, a controversial one, by the way, in No Thanks, Uncle Sam, You Can Keep Your Tax Break, 31 Seton Hall Leg. J 81 (2006), There are times when a deduction would be wasted because it does not generate a tax benefit and yet claiming it would generate some other disadvantageous consequence. The including this Philadelphia Inquirer report explains that “O'Rourke implied that the family didn't need the tax reductions, though, and his personal finances suggest that's the case.” It hen reveals that, “According to the nonpartisan Center for Responsive Politics, O'Rourke, who left Congress in January, had a net worth of nearly $9 million in 2015.” Of course, high net worth does not necessarily mean that a tax deduction has value, if the taxpayer’s income in a particular year is low or if there are sufficient other tax breaks to reduce tax liability to zero. It’s unclear why O’Rourke’s “personal finances suggest” that his “family didn’t need the tax reductions.” According to this Washington Post story, in 2017 he and his wife reported “more than $370,000” and “paid about $81,000 in taxes.” It seems to me that deducting the charitable contributions made in 2017 would have reduced tax liability and thus would not mesh with the idea that he “didn’t need the tax reductions.”

So is it a matter of unrecorded and unsubstantiated cash contributions? Is it a matter of charities failing to send the required confirmation letters? Is it a matter of having lost those letters before preparing the return? Is there some other reason to have decided not to deduct all of the charitable contributions that were made?

Friday, April 19, 2019

The Institutionalization of Ignorance 

Detest is a strong word, but it works for me when I explain that I detest ignorance. There is nothing beneficial about ignorance, there are ways to eliminate ignorance and its consequences, and there is every legal, social, moral, and sensible justification to stand up against ignorance. Ignorance is the ally of evil.

I have written many times about ignorance, usually focusing on tax ignorance but also expressing my concern about ignorance generally and how it is ripping apart the threads that hold civilized society together. A probably incomplete list of my commentaries about ignorance and its dangers includes Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, Tax Ignorance in the Comics, Tax Meets Constitutional Law Ignorance, Ignorance in the Face of Facts, Ignorance of Any Kind, Aside from Tax, Reaching New Lows With Tax Ignorance, Rampant Ignorance About Taxes, and Everything Else, Becoming An Even Bigger Threat, The Dangers of Ignorance, Present and Eternal, Defeating Ignorance, and Not Just in the Tax World, and Tax Ignorance or Tax Deception?.

As reported a few days ago by numerous sources, including this report, White House press secretary Sarah Sanders had this to say about the prospect of Congress reviewing the President’s tax returns:
I don't think Congress, particularly not this group of congressmen and women, are smart enough to look through the thousands of pages that I would assume that President Trump's taxes will be. My guess is most of them don't do their own taxes, and I certainly don't trust them to look through the decades of success that the President has and determine anything,
My reaction was not one of surprise, because this isn’t the first time that nonsense has emerged from the mouth of Sarah Sanders. I almost laughed. How could someone in a position of serious responsibility be so ignorant? Is it that difficult to learn the facts, to brush up on a topic before opening one’s mouth? Apparently, judging from what I read and hear, too many people indeed find it difficult to engage their brain before opening their mouth.

Here are some pieces of information that Sarah Sanders apparently does not know, but should have known. Of course, it is possible that she knows these things but chose to engage in deception, hiding the truth from the millions of listeners who give cult-like attention to what she represents.

1. As noted in his biography, Representative Brad Sherman “is a Tax Law Specialist and a CPA.”

2. As noted in his biography, Representative Tom Rice is a tax attorney and a CPA, has practiced tax law, and is certified as a specialist in tax law, estate planning, and probate law.

3. As noted in his biography, Representative Tom Suozzi is both a lawyer and a CPA.

4. As noted in his biography, Representative Brian Fitzpatrick is both a lawyer and a CPA.

5. As noted in his biography, Representative Collin Peterson is a CPA.

6. As noted in his biography, Senator Mike Enzi has an accounting degree and has worked with tax issues both in the private sector and in government.

7. As noted in his biography, Senator Ron Johnson has an accounting degree, has worked as an accountant, and has been enrolled in an MBA program.

8. As noted in his biography, Representative K. Michael Conaway is a CPA.

9. As noted in his biography, Representative Bill Flores is a CPA.

10. Members of Congress have at their disposal the staff of the Joint Committee on Taxation, who are tax experts and charged with helping members of Congress understand tax issues, including the review of tax returns.

There is no question that at least some members of Congress can work through a tax return and understand what has and has not been reported correctly. For example, Representative Brad Sherman has “audited large businesses and governmental entities, provided tax law counsel on multi-million dollar transactions, advised entrepreneurs and small businesses on tax and investment issues, and helped represent the Government of the Philippines under President Aquino in a successful effort to seize assets of deposed President Marcos. Sherman was also an instructor at Harvard Law School’s International Tax Program.” Surely he would not be stumped by Trump’s tax returns.

What is troubling isn’t just the absurdity of what Sanders said, but the millions of Americans who are so bereft of knowledge and so unwilling to do independent research that they believe the nonsense that is tossed about by those who apparently dread the thought of the President’s tax returns from being seen by the Congress. As I have written more than once, ignorance, coupled with reluctance to seek education and to undertake research, has become an epidemic that poses a threat to the survival of democracy, and perhaps even the survival of the species, considering what ignorance has already destroyed. It has infected the highest level of government in the United States. Though the widespread existence of ignorance disturbs some people, it unfortunately doesn’t disturb enough people. The institutionalization of ignorance nurtures ignorance of ignorance and ignorance of the dangers of ignorance. Would that an anti-ignorance campaign could sweep this nation with the energy and intensity of campaigns such as the anti-tax movement and the anti-vaccination movement.

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