Monday, August 31, 2020

No. Just No. Not Even for Me, a Somewhat Tax Person 

Yes, I have taught tax. I have prepared tax returns. I have offered tax advice. I have written about tax. Of course, tax isn't all that I have done or that I do. It has occupied fewer than half the hours of my life. And the portion of my life it occupies has been decreasing since I stopped teaching tax courses and reduced my tax writing.

But even at the peak of my tax involvement, and even now, no, just no, I will now wear this, I will not buy this, I will not desire this. But I won't laugh at anyone who does.

Just take a look.

Taxes and Lies: Why? 

The false tax posts on social media are proliferating. One that caught my attention was the claim that “Biden’s tax rate on a family making 75,000 dollars would go from 12% to 25%. Let that sink in all you riding with Biden supporters!" Several similar intentionally incorrect posts are also circulating.

The truth, easily discernable by anyone willing to expend a bit of intellectual energy, is that Biden’s tax plan focuses on people earning more than $400,000 annually. The vast majority of Americans earn less than that amount.

So why do people start and spread these untruths? The answer is simple. Fear. Fear plays out in two ways.

First, there are those who fear losing and who therefore make statements that they think will reduce their chances of losing. It’s a pattern one sees in many young children, who, when confronted by a parent or other authority, deny whatever it is they have done because they fear the punishment. If and when the child learns that the punishment for lying is orders of magnitude greater than the punishment for whatever was done, the child might decide that the better course is to tell the truth and then argue a defense. “I didn’t take the cupcake” becomes “Yes, I did take the cupcake and here’s why it was necessary.” Perhaps that is how some youngsters decide to become lawyers.

Second, there are those who fear something or someone and who thus become easy victims of the liars and con artists. Most people, especially those who are struggling financially, not only object to tax increases but fear them, or, more specifically, fear the impact of higher taxes on their lives. What better way to get their attention and control their behavior, including voting decisions, than to play on that fear? “Don’t vote for this person because they are going to increase your taxes” might be a lie but it works if the people to whom it is addressed are too intellectually lazy to do some research that will reveal the mendacity of the statement.

Most fear arises from ignorance. Yes, there are some situations that are real and understandably trigger fear. But too often people fear something that would be worthy of fear if true but that is simply the fear monger using a lie in an effort to evoke a response, whether as a prank, as an effort to control a person or someone’s behavior, or as a political move. Education, research, and critical thinking can dispel most fear. But too many people let their emotion of fear push aside the intellectual aspect of their humanity. Fear should be reserved for those things truly deserving if fear.

In the long run, it’s much easier to tell the truth. Too many people, unfortunately, have not learned that lessson.

Friday, August 28, 2020

How, Not If, The Taxation of Social Security Benefits Should Be Changed 

The taxation of social security benefits is a topic that can spark intense discussion. I have written about this issue more than a few times in the past, including posts such as The Joys of IRC Section 86, Taxation of Social Security Benefits: Inexplicable Inconsistency and Hidden Tax Increases, Getting Specific with Tax-Related Deficit Reduction Ideas: Making Section 85 Fairer and Simpler, Does the Taxation of Social Security Benefits Constitute Double Taxation?, and Retirees, Social Security, and Filing Tax Returns?. It is a never-ending topic of discussion.

A few days ago, in a MarketWatch opinion piece, Alicia H. Munnell addressed a question posed by the headline, “Should we rethink how we tax Social Security benefits?” My answer is, as it has been since 1983, when the inclusion of some social security benefits were first included in gross income, a resounding “Yes.” Of course, the more important question is, “How?”

Munnell suggests that the model for taxing social security benefits should be how 401(k) plans are taxed. Yet she also concludes that no more than 50 percent of social security benefits should be taxed. She bases this conclusion on two facts. First, the portion contributed by the employer into the social security trust fund is not included in the employee’s gross income. Second, the portion contributed by the employee, which equals the portion contributed by the employer, is included in the employee’s gross income.

Munnell, however, misses a third, very important fact. She includes in her analysis on the difference between the taxation of traditional 401(k) plans and the taxation of Roth 401(k) plans. In the traditional plan, the employee is not taxed on employee contributions to the plan, and is taxed on the amounts withdrawn during retirement. In the Roth plan, the employee pays tax on what is contributed to the plan and does not pay tax on the amounts withdrawn during retirement. Here’s the catch. Even though the contributions to these plans earn income from whatever investments the plan makes, because the plans are tax-exempt, no taxes are paid while the plans are earning income on the accumulated contributions. In the traditional plan, that investment income is taxed when it is included in the amounts that are withdrawn. In the Roth plan, that investment income never gets taxed. To me, that is a flaw. Munnell also claims that if the tax rate does not change between the working years and the retirement years that the tax treatment of the traditional Is “equivalent.” However, not only does this claim ignore the non-taxation of the investment income in a Roth plan, it also ignores the time value of money, because deferring the tax payment until retirement is itself a benefit to the employee.

Determining the appropriate amount of Social Security benefits that should be taxed must begin with the definition of gross income. Simply put, gross income is the amount of a person’s income. Income is the person’s increase in economic wealth that has been clearly realized, and it is included in gross income unless it qualifies for a specific exclusion from gross income. Putting aside the niceties of what “clearly realized” means, a concept that students in a basic tax class struggle to comprehend and that requires deep, intensive reading and analysis of more than a few cases, and that in the context of social security is more a matter of timing than anything else, to the extent a social security recipient receives more than what the recipient contributed that was already taxed, the recipient has gross income.

It is easy to determine the extent to which a social security recipient has gross income. The question is timing. And that question is easily answered. Suppose a social security recipient contributes $50,000 to social security over a working lifetime. Basic tax law principles dictate that the recipient should not be taxed on the first $50,000 received in social security benefits. Thereafter, all of the payments should be taxed. It’s that simple. The key, of course, is knowing how much the person has contributed. The Social Security Administration has a record of that information. So why wasn’t that approach adopted? The official explanation was that the information was not available or, at best, not easily retrieved by the Social Security Administration. Whether or not that was true 37 years ago – I don’t think it was – it certainly isn’t the situation today. The real reason in 1983 was the need for revenue, to offset the adverse consequences of the 1981 tax cuts, and the approach I advocated would delay revenue from the taxation of social security benefits for several years as people simply recovered what they had paid in. Granted, it would have been a bit more complicated than that, to deal with the fact that some people already receiving social security benefits would have already received what they contributed and would be immediately subject to tax. But the simple approach I championed was rejected in favor of what was a more complicated gyration of computations made even worse a few years later.

There is another flaw in the current system. A person who dies before receiving benefits equal to what was contributed, and who has sufficient modified adjusted gross income to be taxed on social security benefits, can end up being taxed even though they lost money by contributing more than they got back. And offsetting that flaw is yet another, which is that someone who lives long enough to receive more than what was contributed ends up not being taxed on what unquestionably is a clearly realized increase in economic wealth.

So when Munnell suggests that fifty percent of social security benefits “might be viewed as the appropriate share of benefits to include in adjusted gross income,” she fails to address any of the flaws in how social security benefits are taxed. Under her approach, a person dying shortly after retirement would continue to be taxed on amounts that are not income, and a person living long enough would continue to receive income free of tax that should be taxed. I should note at this point that the concern about taxing social security recipients who have low income should be, and can be, addressed not through the “base amount” and “adjusted base amount” nonsense of current law but simply by providing a standard deduction high enough to protect low-income individuals from taxation no matter the source of the income.

Several of the comments to Munnell’s opinion piece remind me of how much ignorance about social security runs rampant. One person claimed, “Most of SS is just a return of your own money, therefor tax free makes the most sense.” That is absolutely untrue, except for the unfortunate folks who die shortly after beginning to receive social security benefits. Another person made a similar claim, stating, “Social security should be treated like a Roth IRA. not taxable at all you paid income tax on that money already.” No, you did not, again, unless you unfortunately die soon after retiring. Fortunately, other persons commenting on the article pointed out these misconceptions, suggesting that people can calculate what they, or a retiree they know, has received in social security benefits and compare that to what the person contributed. Many of the comments focused on other social security issues, not the taxation question, and then addressed other tax issues, both sensibly and with demonstrated ignorance, and though I could write several book chapters separating the comments reflecting good understanding of economics, finance, and tax from those reflecting something other than a good understanding, at the moment I will leave that for others.

As a practical matter, any attempt to make changes to the taxation of social security benefits will open the door to the continuing attempt to privatize social security and put its control into the hands of private equity funds, oligarchs, and wealthy financiers. Some of the comments to Munnell’s opinion piece reflected the unrealistic expectation that no one loses money making private investments. How quickly the world has forgotten Bernie Madoff, the folks at Enron, the wizards at Adelphia, to say nothing of the investment advisors with good intentions but inadequate skill sets. Americans have become so eager to purchase the Brooklyn Bridge. It is sad what happens when the money addicts meet those ignorant of economics, finances, and taxes. Very sad.

Wednesday, August 26, 2020

Running for Tax Collector (or Any Other Office)? Don’t Do These Things 

About two months ago, in A Reason Not to Run for Tax Collector (or Any Other Office)?, I commented on a story about an incumbent tax collector who stalked and impersonated a political opponent and impersonated a student in order to make false allegations about the opponent. He also created a fake Twitter account, pretending to be his opponent and making his opponent appear to be a segregationist and white supremacist. As a result of these activities, federal charges were brought against the tax collector.

About a month later, in Perhaps Yet Another Reason Not to Run for Tax Collector, I reacted to another story about the same tax collector. Additional federal charges were brought, accusing him of using information from surrendered drivers’ licenses to manufacture fake IDs with his picture on it. After this indictment was handed down, he resigned his office. In my commentary, I noted that I wondered why he wanted fake IDs. Perhaps an answer can be found in the next story.

Now comes yet more news about the same tax collector. In a superseding federal indictment, he has been charged with sex trafficking a minor. According to the indictment, he was able to get “personal information from motor vehicle records to engage in commercial sex acts and accessed personal information to engage in ‘sugar daddy’ relationships, including with someone who was between the ages of 14 and 18.” The tax collector’s attorney said that his client denies the charges.

In my first post on this continuing story, my focus was on the refusal of many otherwise qualified individuals to run for public office. The lies, ignorance, dirty tricks, altered images, fake videos, and false allegations permeating political campaigns are deterring those who would bring much-needed ideas and accomplishments to the public arena. I lamented the disappearance of “the days when politicians, candidates, and office holders engaged in rational, intelligent, honest, and sensible discussions and arguments about issues.” I rued how “mentality of win-at-any-price, devoid of critical thinking and cogent analysis, and reflecting any sense of quality values, has infected the political process.”

But now I think it’s worse. There indeed are people who run for office with the worst of intentions, and perhaps some who run with the best of intentions but who are sidetracked when they are caught in the equivalent of what someone in Washington, D.C., described to me when I was a federal employee as “Potomac fever.” Unfortunately, it didn’t take long for politicians, their advisors, and others to decide that if valid charges can bring down an opposing candidate or someone already in office, fake charges, even if eventually disproven, can derail a candidate’s campaign or wreck an official’s career. It’s so bad that in some instances even proof of bad behavior is overlooked by those who are trying to divert attention by making accusations against others, who may or may not be guilty of those charges. It’s because of the mud-slinging, lies, and other dirty tricks that many good, decent people stay out of politics. It’s because of the actual corruption that many people paint politicians with the “all politicians are corrupt” broad brush, just as many people paint almost everyone and everything with the broad brush of stereotyped caricatures. None of this is good for the country.

It remains to be seen if the former Florida tax collector is convicted or acquitted. Perhaps he will take a plea. No matter how this plays out, it won’t be good. If he is convicted or takes a plea, it will, in the minds of many people, reinforce their belief that “all politicians are corrupt.” If he is acquitted, he nonetheless has suffered and yet another instance of false accusations polluting the system will have accomplished what its perpetrators sought, as it would not be easy for him to repair the damage.

For anyone considering a run for tax collector or any other office, it might be wise to accumulate evidence of the truth of one’s life so that when accusations are made, a response can be delivered quickly, effectively, and with positive impact. And because many people do not decide to run for office until later in their lives, when it might be too late to gather evidence to refute the flood of falsehoods that are drowning this nation and that are unleashed whenever someone announces a candidacy, it might be wise for everyone to accumulate evidence of the truth of one’s life. After all, the tossing about of falsehoods isn’t confined, unfortunately, to the world of taxes or politics. And to make certain that the truth of one’s life is something others will admire, it is best to consider each decision from the perspective of “how will this play out if I ever run for office or, for that matter, seek a job?”

Monday, August 24, 2020

Chocolate from Heaven? 

A break from writing about taxes. It’s chocolate time. Imagine living in or near Olten, Switzerland. Suddenly, chocolate powder begins to fall from the sky. Is it chocolate from heaven? According to several reports, including this one from The Guardian, the cocoa powder came from the Lindt & Spruengli factor in the town. A small defect in the factory’s ventilation system caused cocoa nibs to escape into the atmosphere. Nibs are the fragments of crushed cocoa beans, and are the ingredient used to make chocolate. Add in some strong winds and, poof, everything is covered in chocolate dust. Years ago, when in the Southwest, I stopped for dinner. I left the windows in the car open a quarter of an inch to let heat escape. I had learned that lesson as a child when the back window of my father’s car popped out because of heat buildup, and that was in the Philadelphia area. When I emerged from dinner, a dust storm had blown through, and yes, it was a mess. A local resident warned me, “Don’t use water. Brush it off.” My snow brush was in the car so I was good to go after some exercise. So how does one clean chocolate powder? With water? Nah. With milk? Maybe. Perhaps there is a way to brush it into containers. But is it clean? Would you use the chocolate power that landed on the roof of your car or the roof of your house? Perhaps it depends on the depth of one’s chocolate addiction. Factory officials offered to pay for cleaning but as of the time the report was published, no one had taken them up on the offer. The company announced that the powder was harmless to people, animals, and the environment. Well, I suppose that’s true unless someone managed to scoop up and eat bowl after bowl of the chocolate! Now, back to taxes. So let’s assume the factory does not pay for the cleaning and succeeds in defending lawsuits demanding that it do the cleaning. Suppose insurance doesn’t cover the cost, or does cover the cost but with a high deductible. Suppose this happened in the United States, and that’s simply because I don’t know the ins and outs of Switzerland income tax law. Perhaps a casualty loss deduction would be in order, assuming the taxable year was before 2018 or after 2025. But if someone is going to suffer a casualty loss, this is the one I would choose. Compared to hailstorms, tornadoes, hurricanes, and derechos, a rain of chocolate powder is almost a blessing.

Friday, August 21, 2020

An Unwise Tariff Decision 

As reported by many sources, including this story, the Administration’s tariff on aluminum imported from Canada has gone into effect. The impact on American purchasers of products made with aluminum is easy to predict. The prices they pay will increase. Why? Because the American manufacturers paying the tariff will pass the cost through to their customers. Tariffs are, for all intents and purposes, taxes. They are taxes on the value of material, items, goods, or products imported into, or exported from, a country. So, in effect, this tariff is a hidden tax increase on Americans, and because of its nature, qualifies as a regressive tax.

The tariff was imposed because the President “claimed that the American aluminum business has been ‘decimated’ by Canada.” He accused Canadian aluminum producers of “flooding the U.S. with exports.” There is a reason aluminum imports have increased. Demand has increased. Why? According to this editorial, “aluminum demand has gone up as pandemic quarantines have driven bar patrons home and away from draft or bottled beer. In addition, the growing popularity of hard seltzers has increased demand for aluminum cans.” It is not unrealistic to expect consumers of beverages sold in aluminum cans, including not only beer but also soda, ice tea, and other drinks, discovering the cost of their purchases going up. How many will understand why?

Oddly, according to the Aluminum Association, imports of Canadian aluminum have dropped. So much for the President’s “flooding” nonsense.

In addition to this hidden regressive tax increase, the tariff also poses threats to American jobs. Why? Canada has announced it will retaliate. According to this report, Canada is working on a list of American products, some of which are described in the report, on which it will impose tariffs. This will reduce demand and put workers in factories making those products at risk of losing their jobs. Why? Because jobs reflect demand, not supply.

So while this tariff war instigated by the “deal maker” ravages both the United States and Canada, long-time allies with a history of cooperation, does anyone benefit? According to this story, the Canadian ambassador to the United States explained that “two of the biggest beneficiaries from the Trump administration’s reimposition of 10 per cent tariff on some imports from Canada will be a Swiss trading firm and a Russian producer.” I wonder how many people complaining about the increases in the cost of beer, soda, and other beverages will take the time to understand what actually is happening.

Wednesday, August 19, 2020

Payroll Taxes, Trust Funds, Regressive Taxes, Progressive Taxes, And Flat Taxes 

Over at Mother Jones, Kevin Drum advocates changes in the way Social Security is funded. In his commentary, he argues that the payroll tax should be abolished, that because Social Security payments are mandatory they do not require Congressional appropriations and would be made no matter the situation with the federal budget, and that “for the next couple of decades Social Security will be partially funded by income taxes anyway.” He claims that the “trust fund, after all, is nothing but a bunch of government bonds in a filing cabinet somewhere in Virginia.” He argues, “If payroll taxes are insufficient to cover Social Security payments, the bonds are cashed in. And where does the money to redeem the bonds come from? The general fund, of course, which consists primarily of money from income taxes.” He argues that progressives should support his proposal because the payroll tax is regressive.

Drum is correct that payroll taxes are progressive. People earning more than the $137,700 Social Security cap pay a lower percentage of their wages than do people earning $137,700 or less. The fix to that problem is simple. Repeal the cap. It does not require eliminating the trust fund. Repealing the cap makes the payroll tax a flat tax. I agree with Drum that the regressive nature of the payroll tax is undesirable, and to the extent he would support repeal of the cap, we are in agreement.

But when it comes to the trust fund, I disagree with his proposal. Why does the trust fund exist? It exists to ensure that payroll tax receipts do not go into the general fund where they can be spent without accountability to the Social Security payment mandate. Drum makes much of the fact that the trust fund “is nothing but a bunch of government bonds.” Technically, the excess in the trust fund, that is, the excess of receipts over expenses (chiefly Social Security payments), have been invested. They were invested in what has been perceived to be the safest investment, Treasury bonds. Thus, when those investments are cashed in during periods when Social Security payments exceed payroll tax receipts, the trust fund is using its investments. It matters not how the debtor digs up cash to redeem the investment. The Treasury can redeem the Bonds by using any sort of receipts, not simply income taxes, or by issuing replacement bonds purchased by the public. It need not tap income tax revenues.

There is another catch to the repeal of the payroll tax. Drum notes that Social Security payments are made automatically under the current system, but he neglects to mention that the amount of an individual’s payment depends on several factors which reflect the payroll tax. To qualify, the individual must have earned wages subject to the payroll tax for at least 40 quarters. The computation of the payment requires determination of how much the individual earned in qualified wages subject to the payroll tax over the person’s earning history. If the payroll tax is eliminated, another method of computing Social Security payments would be necessary, and that opens up the political battle that Drum claims would not exist if the payroll tax is eliminated.

Worse, Drum makes no effort to deal with the transition issues that his proposal raises. Are Social Security payments currently being made left alone? What happens to the person who retires and seeks Social Security days, months, or a year or two after Drum’s proposal is implemented? Does the person lose credit for the quarters they worked and the eligible wages they earned? Is the balance in the trust fund dumped into the general fund?

And, of course, payroll taxes also fund Medicare. Drum makes no mention of Medicare They also fund other programs. Drum also makes not mention of those.

If Drum wants to go after federal trust funds because he thinks the general fund is sufficient, does he propose to eliminate not only the Social Security trust funds (technically there are two, the old-age and survivors insurance fund and the disability insurance fund), but also the two Medicare trust funds, the Civil Service Retirement and Disability Fund, the Military Retirement Fund, the Employees Life Insurance Fund, the National Railroad Retirement Investment Trust, the Employees and Retired Employees Health Benefits Funds, the Foreign Service Retirement and Disability Fund, the Rail Industry Pension Fund, the Foreign National Employees Separation Pay Fund, the Judicial Survivors' Annuities Fund, the Judicial Officers' Retirement Fund, the District of Columbia Judicial Retirement and Survivors Annuity Fund, the Armed Forces Retirement Home Fund, the United Mine Workers of America Combined Benefit Fund, the Foreign Service National Separation Liability Trust Fund, the United States Court of Federal Claims Judges' Retirement Fund, the Court of Appeals for Veterans Claims Retirement Fund, the Tax Court Judges Survivors Annuity Fund, the Unemployment Trust Fund, the Railroad Social Security Equivalent Benefit Account Fund, and the Black Lung Disability Trust Fund? All of these either are funded with payroll taxes or amounts based on wages, or serve similar purposes as does Social Security. Does he propose eliminating and dumping into the general fund the Transportation Trust Fund, the Foreign Military Sales Trust Fund, the Airport and Airway Trust Fund, the Oil Spill Liability Trust Fund, and the other 89 or more trust funds held by the federal government?

Drum’s claim that “[t]here are several upsides to funding Social Security through the general fund and literally no downsides” is not supported by the evidence. There are downsides. There are too many downsides. Drum is confident that the trust fund is not necessary because “when Social Security was first started, [the trust fund . . . was a useful way of guaranteeing that Social Security couldn’t be touched in the future,” and that although it “may have been necessary 90 years ago, . . . it’s not anymore [because it’s] not the funding source that stops Congress from cutting Social Security payments, it’s the broad support for the program itself, [as it is] just too damn popular to screw around with.” Tell that to the private equity investors, their politician puppets, the GOP, and the others who want to eliminate Social Security and toss it aside as they have eliminated pensions over the past forty years, in the name of “privatization” and “capitalism” run amok. Tearing down a serious wall of defense against the money-addicted oligarchs is not, as Drum claims, “something that any progressive should support.” No one, progressive, moderate, conservative, or sensible, should support destruction of yet another pillar of American democracy. What should be supported is elimination of the payroll tax cap. It’s that simple.

Monday, August 17, 2020

A President Out of Control on Taxes 

According to many reports, including, for example, this one, the President claims he is “considering a capital gains tax cut in an effort to create more jobs.” It is unclear whether he is referring to the previously-circulated idea of indexing basis, an idea I excoriated in The Menace of Impetuous or Manipulative Tax Policy Announcements, or to his intent to issue a unilateral reduction or elimination of capital gains rates.

This time, as reported by several sources, including Accounting Today and Ventural Broadcasting, two top White House officials have admitted that the President cannot cut capital gains tax rates unilaterally by executive order. They admitted that changes in tax rates are within the purview of the Congress. Though they seem to have remembered what they learned in their Civics course, or perhaps made the effort to find out how law-making is done in this country, it seems the President doesn’t have a clue. Presumably they have shared their knowledge with the President, but how that conversation went isn’t something disclosed to the public.

Some Americans, understandably frustrated with how politics works and convinced that a businessman would do a better job of “running” the country, voted in favor of putting a businessman in the White House. Of course, the alleged businessman was a dabbler in real estate using inherited money, and a failure at running businesses. Between stiffing workers and suppliers and going bankrupt multiple times, he demonstrated everything that a successful businessman is not. As the meme puts it, they wanted him to “run the country the way he ran his businesses,” and he certainly has.

In business, the CEO of a non-public enterprise is king, czar, emperor, and lord. The CEO answers to no one. Smart CEOs get an education by going to class, surround themselves with advisors who understand what the CEO does not, listens to and takes advice from those with superior experience, intelligence, and knowledge, and with their help navigates the treacherous world of reality. The Presidency is not a CEO position. It is the top office in one of three branches of government. Its powers are constrained. Changes in tax rates, and changes in the Internal Revenue Code, must originate in the House of Representatives and be approved by the full Congress. Though a CEO can unilaterally and even arbitrarily increase or decrease the prices at which the company sells goods and services, a President cannot unilaterally or arbitrarily change tax rates or eliminate taxes.

Of course, it is possible that the President has no intention of unilaterally cutting capital gains rates. So why propose doing so? Because some of the people who would benefit from such a move, and even people who would not but who some sort of philosophical antipathy towards taxes, and perhaps people who think he is on a path leading to his unilateral repeal of taxes that they pay, find in such an announcement “proof” that he is the “hero” they have come to think he is. The announcement gathers votes. As I wrote more than seven years ago, in The Disadvantages of Tax Incentives, “The well-being of the national economy demands stability, continuity, predictability, and reliability in the tax system. By putting personal electoral goals ahead of the nation’s well-being, Congress is selling the nation short and ultimately risks selling it out.” Rather than taking my advice, Congress continued on a path that in some ways encourages the same sort of behavior by the Executive Branch. Again, I warn, “By putting personal electoral goals ahead of the nation’s well-being, the Administration is selling the nation short and ultimately risks selling it out.”

Friday, August 14, 2020

Tax Policy by Dictatorship 

So the President unilaterally orders the suspension of payroll tax collection, leaving the Treasury to figure out the messy details of how to deal with the possibility that the taxes would need to be withheld and paid in the future. The President’s has no authority to eliminate those taxes, and even his authority to defer the taxes for the entire country is debatable. Worse, he has limited the deferral to taxes due on wages below a specified limit, a power not evident in the statute on which he claims to rely. And, of course, as I have explained in posts such as Taxes and the Virus, Do Lower Taxes, Less Regulation Create Jobs? Do Payroll Tax Cuts, Employment Credits, More Section 179 Expensing, Unemployment Benefits Create Jobs?, Another Foolish Tax Idea That Won’t Go Away, and They Just Won’t Stop With This Foolish Tax Idea, cutting the payroll tax does little or nothing in the short-term while imposing significant long-term costs on the economy. Deferral of payroll taxes is worse, because it simply fools people into thinking they have an increased take-home pay while failing to explain that in the near future they will face even higher withholding than they did before the deferral. Worse, the President promises, if re-elected, to eliminate payroll taxes, which would destroy both Medicare and the Social Security system. This from a guy who claimed he would never cut either program. And, of course, payroll tax cuts are meaningless for people who are unemployed.

Now, according to many reports, including, for example, this one, the President claims he is “considering a capital gains tax cut in an effort to create more jobs.” It is unclear whether he is referring to the previously-circulated idea of indexing basis, an idea I excoriated in The Menace of Impetuous or Manipulative Tax Policy Announcements, or to his intent to issue a unilateral reduction or elimination of capital gains rates. Of course, cutting capital gains does not create jobs any more than the other tax breaks dished out to wealthy individuals and large corporations do. Jobs are created when someone needs workers, but if there is nothing for workers to do or there is an empty supply of people with necessary skills, jobs are not created.

Once a President decides that taxes can be deferred or eliminated at the President’s whim, or that basis can be adjusted by fiat, or that tax rates can be changed by dictate, the door is open for a complete return to feudalism. What’s to stop a President from declaring that individuals with annual incomes exceeding $1,000,000 or net worth exceeding $10,000,000 are exempt from all taxes? What’s to stop a President from declaring a disaster in states whose electoral college votes were cast for the President and absolving their residents from taxation while increasing tax rates on residents in the other states? In theory, the Congress can, but the Congress is weak because the Senate majority is beholden to oligarchs. In theory, if an individual found a way to sue to stop this sort of behavior, the Supreme Court ultimately could, but it, too, has become politicized and cannot be trusted to issue decisions in the best interest of the people.

More than seven years ago, in The Disadvantages of Tax Incentives, I wrote, “The well-being of the national economy demands stability, continuity, predictability, and reliability in the tax system. By putting personal electoral goals ahead of the nation’s well-being, Congress is selling the nation short and ultimately risks selling it out.” Rather than taking my advice, Congress continued on a path that in some ways encourages the same sort of behavior by the Executive Branch. Again, I warn, “By putting personal electoral goals ahead of the nation’s well-being, the Administration is selling the nation short and ultimately risks selling it out.”

There are those, who looking at their own wallets and lives, are thrilled with these dictatorial changes to the tax law. Of course, they probably are looking at the short-term consequences and, as usual, ignoring the long-term ramifications. And surely they are not considering what happens, with this sort of precedent in place, when a future President decides to increase taxes on the wealthy, eliminate special capital gains rates, and subject capital gains to taxation at death. What goes around comes around. What’s good for the goose is good for the gander. Karma. Those cheering dictatorial orders, despotic decrees, and autocratic approaches to government are being extremely short-sighted. A slide into tyranny doesn’t always turn out the best for the instigators. History teaches that lesson, one that surely escapes a person who thinks the Second World War ended in 1917. If this is the best that we can do as a nation, the future indeed is bleak.

Wednesday, August 12, 2020

Are They Turning Up the Heat on Tax Return Preparers? 

Two weeks ago, in Another Tax Return Preparation Enterprise Gone Bad, I suggested, “Perhaps they are turning up the heat on tax return preparers gone bad. They being investigators and attorneys at the Department of Justice, though they usually work in cooperation with agents and auditors from the Internal Revenue Service.” That post described a grand jury indictment of tax return preparers in North Carolina based on their filing of false returns for clients. Four months ago, in More Tax Return Preparation Gone Bad, I described the sentence handed down to a tax return preparer convicted of filing false returns for clients. And now another tax return preparer in trouble. According to this United States Department of Justice news release, a tax return preparer in Newport News, Virginia, has pleaded guilty to aiding and assisting the preparation of a false tax return. According to the indictment, which I somehow missed when it was released, the preparer filed false returns on behalf of her clients over a five-year period, claiming credits and deductions for which the clients did not qualify. Worse, she did not sign the returns as the paid preparer, making the returns appear to have been prepared by the clients. On top of that, when asked by the clients for copies of the returns she filed on their behalf, she did not provide the copies to the clients.

I have written about noncompliant tax return preparers in what seems to be the distant past. For example, back in 2009, in Tax Fraud Is Not Sacred, I described the indictment of a tax return preparer who offered free tax return preparation services to members of a church, who included false deductions and credits on the returns, and who pocketed part of the refunds. Perhaps indictments of tax return preparers are increasing because of increased investigations, or perhaps they have been holding steady and I’m simply becoming more aware of them.

I will simply repeat what I have written several times in the past: “The lesson at the moment? Choose a tax return preparer 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.” Once again, this most recent indictment does nothing but corroborate the wisdom of my advice.

Monday, August 10, 2020

Language in Tax Referendum Matters 

In California, citizens can propose legislative changes by putting a referendum, or proposition, on the ballot. The details of how that process works are one thing, but another is the language of the proposition and the voter information guide that is published to explain the proposition. This fall, California voters will have a chance to support or reject Proposition 15. This proposal would repeal portions of the famous Proposition 13 that limited the extent to which property taxes could be increased. Proposition 15 would permit local governments to assess business property based on actual market value rather than the artificially limited amounts set by Proposition 13.

The voter information guide includes language drafted by supporters and opponents of the proposal. The fun begins with the language provided by opponents of the proposal. According to this story, the dispute over the language was litigated and a court issued a ruling that illustrates the extent to which the anti-tax movement will go to oppose taxes.

The proposed changes do not apply to homeowners, just businesses. Opponents of Proposition 15 wrote that the initiative would let local governments raise property taxes on residences because there are small businesses operated out of homes. But the language of Proposition 15 specifically exempts home-based businesses from assessment at actual market value. The judge described the language offered by the opponents as “misleading if not outright false.”

Supporters included, in their portion of the guide, language stating that Proposition 15 would not impact homeowners and renters. Opponents asked that this language be removed. The judge refused that request because the language was accurate.

The communications director for the organization behind Proposition 15 stated, “The court's ruling today is concrete evidence that there are consequences for running a campaign based solely on debunked scare tactics.” Unfortunately, sometimes the consequences are that the misleading statements, half-truths, and lies circulate unimpeded and generate outcomes that would not have been the result had truth prevailed.

In this instance, the misstatements also provided a distraction. Rather than focusing on the wisdom of denying property tax relief to profit-generating, cash-rich businesses, which might be a good or bad idea, opponents try to drum up support by getting voters to think terrible things are going to happen to them personally. This technique can be effective but it doesn’t make it admirable nor appropriate.

Friday, August 07, 2020

They Just Won’t Stop With This Foolish Tax Idea 

In a series of posts, including Taxes and the Virus, Do Lower Taxes, Less Regulation Create Jobs? Do Payroll Tax Cuts, Employment Credits, More Section 179 Expensing, Unemployment Benefits Create Jobs?, and Another Foolish Tax Idea That Won’t Go Away, I criticized a proposal by the current Administration to cut payroll taxes as a solution 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, as well as the payroll tax cut enacted during the previous Administration. I pointed out that anyone who understands economics, taxation, and tax policy knows that this approach is ineffective, and that I am not alone in my criticism. I noted that although I opposed the payroll tax cut enacted during the previous Administration, I viewed it as an experiment. But because that experiment failed, those who do understand economics, taxation, and tax policy, even some who supported the experiment, admit that, as I wrote, “The payroll tax cut did little, if anything, to fix the problems, because the economy is no better at this point than it was when that cut was enacted, and it might even be, by some measures, worse. As a short-term band-aid, it was worth the attempt. As long-term surgery, it fails. It costs too much. It undermines funding for the Social Security program.”

Yet despite the evidence, the current Administration won’t give up. Even though the proposal has met bipartisan objections in the Congress, the desire for a splashy though ineffective token offering for political purposes continues to demonstrate the inability of the current Administration to come to grips with economic reality. So, several days ago, in a Wall Street Journal commentary, White House economic adviser Stephen Moore argued that the President can and should order a stop to the paying and collecting of the payroll tax. He was joined in the commentary by Phil Kerpen, founder of the Committee to Unleash Prosperity, of which Moore is a founder. Moore and Kerpen think that the President should declare a “national economic emergency” and then order the IRS to postpone tax filing deadlines for the payroll tax. It is worth noting not only that the Committee to Unleash Prosperity supports the sounds-good-won’t-work flat tax and a variety of anti-tax, anti-government, and anti-regulatory proposals, but also that another of its founders is Arthur Laffer, whose track record of failure with the deceptive trickle-down supply-side approach to tax policy is well known and responsible for much of the nation’s current economic mess. Perhaps what influenced Moore and Kerpen is the fact that the President has already explained that he is contemplating taking steps to circumvent Congress. Or perhaps they are egging him on to do idiotic things. Yes, that’s what the nation needs, a President who treats one of the three branches of government as meaningless because it won’t march in lockstep with his absurd drumbeats. Yes, that was a sarcastic comment. It reflects the reality that suspending the payroll tax requires Congressional approval especially when, as was the case with the payroll tax cut enacted during the previous Administration, funds were allocated to the trust funds to offset the impact of the cut.

According to many reports, including this one, reaction has ranged from dubious to outrage. According to the report, “Tax policy experts doubt that President Donald Trump has the authority to unilaterally suspend payroll tax collections.” The experts included not only the Urban-Brookings Tax Policy Center, a nonpartisan think tank supported by the center-left Brookings Institute and the Urban Institute, but also from the conservative American Enterprise Institute.

A look at the details of Moore’s and Kerpen’s proposal reveals how ridiculous their proposal is. They want to cut the payroll tax to zero for workers making $75,000 or less. There is no effective mechanism to implement this sort of proposal without legislative authorization. And, of course, a payroll tax cut does nothing for people who are unemployed. Imagine the joy of seeing one’s payroll tax withholding drop from zero to zero. It also does nothing for people who aren’t working because they are unemployed.

Attempts by Moore and Kerpen to rely on Internal Revenue Code section 7508(a) are misplaced. When the IRS relied on that section to postpone federal income tax filing deadlines, it was because the IRS was not in a position to process the returns. In contrast, payroll tax withholding and payment can proceed whether or not the IRS is operating at full capacity or even operating at all.

Here’s the clincher. Moore and Kerpen wriite, “The Democratic plan includes a six-month extension of the $600-a-week unemployment bonus and $3 trillion in new spending. It would sink the economy and imperil Mr. Trump’s re-election.” Wow. Where were Moore and Kerpen when trillions were dished out to the wealthy oligarchs and big corporations? Why was that giveaway not opposed by them as something that would sink the economy? And it did, because it meant that when the pandemic hit, the workers supposedly helped by handing money to oligarchs lost their jobs because unlike the oligarchs, they weren’t given the sort of tax breaks that would permit them to squirrel away a sufficient rainy day fund. But it’s worse. Why should the re-election of any president be a justification for any sort of tax or economic policy? Granted, any politician seeking re-election will examine any proposal in terms of its effect on re-election chances, but to try to sell that to Americans reveals the true intent of Moore and Kerpen, which is to get their hero re-elected. Throwing a nickel-and-dime bone to the working class as a ploy to get votes is an insult to the recipients because it tells them they aren’t worth as much as are the oligarchs who use their tax break money to make large campaign donations in exchange for government positions. And, of course, those nickels and dimes come at a price, which is a reduced or eliminated Social Security and Medicare coverage for those very same workers. It’s nothing more than another con game.

Wednesday, August 05, 2020

For Me, It Was Situational Tax Irony 

When I read the headline in this story, “Rhode Island mistakenly issued tax refund checks signed by Walt Disney and Mickey Mouse,” I immediately thought, “Wow, someone hacked the Rhode Island Department of Revenue and instead of stealing money or information, or perhaps in addition to doing so, pulled off a sophomoric prank.” I also thought, “There are people who think taxes and tax systems are ‘Mickey Mouse,’ so I wonder what they are thinking when they received these checks.” Then I thought, “Perhaps the recipients aren’t looking closely and think they are getting a free or discounted trip to a Disney resort.”

Then I read the article. Was I ever wrong. What happened was totally different from what I expected, and thus I was caught in an instance of situational irony. It turns out that there was a software error, and that the “invalid signature lines were accidentally sourced from the Division of Taxation's test print files.” There was no hacker. The checks, involving corporate tax refunds, sales taxes, and a few other taxes, were thereafter voided, meaning they cannot be deposited. Replacement checks are being mailed.

There are some lessons from this story. First, mistakes happen. Second, it could have been worse. Third, the more important the task, the more double-checking (sorry, couldn’t resist) and even triple-checking needs to be done. Fourth, headlines can be incomplete and even misleading. Fifth, don’t rely solely on a headline, the tweet, or the sound bite in making a decision, reaching a conclusion, or reposting the tidbit, but do research, including reading the article. Sixth, if you receive a check signed by Mickey Mouse or by a dead person (yes, Walt Disney left long ago), be suspicious and don’t run to the bank.

So that’s why I didn’t stop and write something when I read the headline. Had I done so, I would have written nonsense. Instead, I read the article and ended up writing something different from what I had first thought. First impressions are said to be lasting, and though some think they usually are correct, as David Handler put it, “I don't know if you've ever noticed this, but first impressions are often entirely wrong.” Indeed.

Monday, August 03, 2020

A Proposed Tax Law Change That Doesn’t Solve The Problem 

Though I’ve not yet found the text of the Senate’s proposed Health, Economic Assistance, Liability Protection and Schools Act, summaries from some Senators, as reported in various sources, including this overview, indicate that the bill would eliminate the 50 percent limitation on the deduction for business meals from the date of enactment until the end of the year. Why is this provision included in legislation intended to ease the economic damage caused by the pandemic?

According to this report, the removal of the meals deduction limitation “was pushed by President Donald Trump.” Why? According to another report, the President has been pushing for this change since he had a conversation with “well-known chef Wolfgang Puck,” after which he tweeted, ““This will bring restaurants, and everything related, back - and stronger than ever." Senator Tim Scott of South Carolina inserted the provision in the current Senate bill, claiming that it "will lead to more customers, more opportunities for hardworking waitstaff and kitchen staff, and much needed revenue for small businesses across the country."

What nonsense. Though restaurants are facing a decline in revenue, in many instances forcing permanent closure, the reason isn’t on account of people staying out of restaurants because of the meals deduction limitation. People aren’t going to restaurants because inside dining is unsafe, outside dining is limited by space and weather issues, and patronizing restaurants is beyond the budgetary reach of the tens of millions of Americans dealing with their own revenue shortfalls.

One senior member of the House Ways and Means Committee describes the proposal as be "the latest example of a tax provision tailor-made to benefit the Trump family finding its way into major tax legislation.” This explanation highlights the differences between the economy that exists for the economic elites and the economy in which 99 percent of Americans live. Repeal of the meals deduction limitation will not bring more people into the restaurants that ordinary Americans usually patronize.

The foolishness of the proposal is highlighted by the fact that even some Republicans oppose it. it is being criticized by tax policy experts “across the ideological spectrum.” For example, Kyle Pomerleau of the American Enterprise Institute, hardly a progressive on tax issues, had this to say in his blog about a month ago:

More permissive treatment of business meals and entertainment would make it easier for business owners and their clients to disguise personal consumption as business expenses. And without the hard rules under current law, there would be a greater strain on tax administrators to determine whether a party is a “promotional expense” or just a party.

Expanding the deductibility of meals and entertainment is also poorly targeted in the context of COVID-19. Proposals to expand the deductibility of business meals and entertainment would reduce the after-tax cost of these activities and may encourage some additional activity at the margin but would have a limited impact on the economy and these industries. Simply put, many Americans continue to be uncomfortable with dining out in the presence of the virus.

Ultimately, the most effective way to help the restaurant and entertainment industries is to get the virus under control.

And that is the problem. Instead of tinkering with symptoms, the Congress needs to fill the void in national leadership by focusing on legislation that directly addresses the pandemic, in terms of prevention, mitigation, and cure. It’s not enough to focus on vaccine development while people fail to wear masks where necessary, and while people attend crowded parties without adequate physical distancing. Members of the Congress who continue to think playing with the tax law in order to benefit their wealthy patrons are doing the nation more than a disservice. They are diverting attention away from what needs to be done.

Newer Posts Older Posts

This page is powered by Blogger. Isn't yours?