Thursday, September 30, 2021

Tax as a Deterrent 

Tom Giovanetti of the Institute for Policy Innovation has published an interesting commentary about a likely doubling of the federal excise tax on cigarettes. About half to three-fourths of smokers, according to a Colorado School of Public Healthy survey, have one or more socioeconomic disadvantages, the proposed increase in the cigarette excise tax would fall chiefly on the economically disadvantaged. This, Giovanetti points out, is inconsistent with Administration assurances that taxes on people earning less than $400,000 annually would not be increased. Giovanetti is correct.

The cigarette excise tax, like other “sin” taxes, is designed primarily to discourage unwanted behavior, in this instance, cigarette smoking. If the proceeds of the cigarette excise tax were used exclusively to educate people about the dangers of smoking and to offset some of the public health care costs of treating diseases caused or aggravated by smoking, it would also serve a secondary purpose. However, those are not the uses to which the cigarette excise tax revenue is put.

Giovanetti notes that most people who want to stop smoking have done so. He suggests that “If you’re still a smoker today, you’re likely unwilling or unable to access programs and treatments designed to help you stop smoking.” He may be correct. It’s possible that a doubling of the federal cigarette excise tax might cause some people to reduce or terminate their smoking, but if so, it’s likely to be a small percentage of smokers.

Giovanetti also notes that increasing taxes on smokers, many of whom have low incomes, is inconsistent with professed goals of reducing income and wealth inequality. Yet if raising the cigarette excise tax did cause most smokers to stop smoking, then it would help reduce income inequality because the money otherwise spent on cigarettes could be spent on other, presumably healthier, options, reduce illness among smokers and thus permitting them to engage in more income-producing activities rather than racking up sick days or being unemployed on account of illness. Though my suggestion that raising taxes on smoking might help some people escape the confines of economically disadvantaged lives, my suggestion is nothing more than a great theory that, of course, in practice doesn’t get very far.

The interesting thing about sin taxes is that if they work as deterrents, eventually the revenue they produce drops, and if totally effective revenue would drop to zero. If a tax increase caused cigarette smoking to go the way of cocaine-laced cough syrup, the tax would be a dead letter, though, of course, shareholders in and employees of tobacco companies would suffer economic pain, perhaps some plunging into the ranks of the economically disadvantaged. Yes, tax policy is complex.

One point that Giovanetti does not address is the deterrent effect of a cigarette excise tax on those on the brink of taking up smoking. As a practical matter, most “new” smokers are young, often in their teens. Might the doubling of the excise tax cause some of them to decide it isn’t worth it? I don’t know. Nor do I know where Giovanetti would come out on that issue. Another point he does not make is why cigarettes are being targeted, whereas other forms of nicotine absorption aren’t being addressed. Perhaps they are, and the proposal isn’t yet fully crafted. Considering, for example, that vaping is becoming increasingly popular, and poses all sorts of health risks, would not heavy taxes on vaping be valuable in terms of helping people avoid the health issues that contribute to being in economically disadvantaged positions?

Libertarians, of course, would leave all of these things to the “freedoms” of the individual, namely, “it’s their choice to smoke or vape and get sick,” yet they do not focus on the costs imposed on the rest of society by individual behaviors that affect not only the individual but others. Put another way, if some people want to live in ways that confine them to the ranks of the economically disadvantaged, should the tax law be used as a deterrent to that sort of behavior? That question has been percolating for as long as there have been tax laws, and the debate over the answer has been pursued for just as long. The answer is education, which has succeeded to some extent with respect to smoking, and which is necessary to keep deterrence from being an oppression rather than a welcomed affirmation. Without education, tax as a deterrent is limited.

Monday, September 27, 2021

Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf 

From time to time I write about tax return preparers who get in trouble. I’ve done so in posts such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for the IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, and Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention.

The things that tax return preparers do to get in trouble are as varied as there are tax return preparers who get in trouble, though often the same “technique” for helping clients evade taxes or for defrauding clients get repeat use as not-so-well-intentioned preparers notice what other noncompliant preparers are doing.

So what caught my eye with a recent attempt by the Department of Justice to shut down a preparer is a pattern of behavior that is new at least to me. According to the complaint filed by the Department of Justice, the preparer in Beaumont, Texas, would charge customers a fee, as little as $200 or as much as $500, for preparing a “tentative income tax return” that showed a small refund. The preparer then modified the tentative return by inserting inflated and fabricated deductions, credits, and losses, which increased the tax refund on the return. The preparer filed those modified returns with the IRS, requesting that the refunds be deposited with a third party company. That company would pay to the customer the refund shown on the tentative return, and the preparer pocketed an additional fee. Apparently a portion of the inflated refund went to the third party company for its services. All along, the customers knew nothing about this scheme because the preparer gave them either an incomplete copy of the return or a copy of the return different from what was filed with the IRS. The preparer in question prepared more than 3,100 tax returns for tax years 2018, 2019, and 2020. That’s a lot of taxpayers, many of whom could be liable for repayment of fraudulent refunds claimed in their names, along with penalties and interest.

What can taxpayers who use preparers do to protect themselves? First, as I wrote in Are They Turning Up the Heat on Tax Return Preparers?, “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.’” Second, as I wrote In When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, I elaborated:

What’s a taxpayer to do? Talk with relatives, friends, and business associates. Ask them to describe their experiences with the tax return preparer that they use. Seek out a tax return preparer who has been preparing the other person’s returns for many years free of problems. Beware of the advice to use a tax return preparer who has been used only once, or even not at all. Look at reviews on various web sites. Google the name of the tax return preparer. If the preparer is a company, ask for the names of its owners and managers, and google those names. If the return that is prepared is “too good to be true,” don’t agree to its being filed, but ask for a copy and take it to another preparer for a second opinion. If it’s good to go, return to the original preparer and approve the filing. If it’s not good to go, file a complaint about the preparer with the IRS, and seek a fee refund from the original preparer.
Third, insist on seeing the return before it is filed, looking not at some “tentative” print-out but at what’s on the preparer’s computer screen, and possibly take a photo of each page of the return that is on the screen. Fourth, insist on standing behind the preparer when the preparer is filing the return, looking at what is on the computer screen to make certain nothing has been changed, and insist on tracking the preparer’s steps as the return is filed. Fifth, insist on a printed copy of the return at that moment. Sixth, think about going to a second preparer to obtain a transcript of what was filed on your behalf, to see if there is a discrepancy between what was actually filed and what the prepare claimed was filed. Seventh, think about filing the return by yourself, using one of several software applications available to taxpayers.

Thursday, September 23, 2021

When Tax Evasion is Publicized 

When I saw the headline to this article in this morning’s Philadelphia Inquirer, I read the story because of my interest in technology and intellectual property. So I was somewhat surprised to see tax pop up. The headline gave no clue about the tax part of the story, as it simply stated, “Local YouTuber charged by FBI in one of the largest cable TV piracy cases ever.”

According to the article, an indictment has been issued against a man accused of digital piracy, allegedly accessing movies and shows from cable and streaming services and then re-selling access to individuals who did not have subscriptions to those services. There are some interesting legal questions to be answered because the alleged thefts took place before enactment of a law prohibiting what was done. I will leave that discussion to those who are expert in intellectual property law. Though I am familiar with the basics, I am not proficient in the nuances of the many applicable provisions.

Among the counts in the indictment are counts of tax evasion. According to the indictment, the accused and his partners netted more than $34 million between 2016 and 2019. He posted all sorts of images displaying what he purchased with his earnings, including high-end vehicles, jewelry, and even a photo of “his son holding stacks of cash.” He allegedly did not file any personal or corporate tax returns during the period in question. Before he embarked on his digital streaming venture he allegedly was making about $550 a year in advertising on his YouTube page. On that YouTube page he admitted to his tax violations, claimed they were “committed in ignorance,” and predicted imprisonment. But he also has claimed, “I made a ton of money … I’m only guilty of making money. I ain’t guilty of nothing else.” But did he not already admit to not filing tax returns and not paying taxes?

At this point, hopefully his attorney, if he has one, advises him to pay the back taxes, because until he does so, interest and penalties will continue to grow. Considering his open, public admission to not filing returns or paying taxes, his chances of avoiding a decision that he owes taxes, interest, and penalties are slim to none, mostly none.

Some tax evaders work in the shadows, and some of them never get caught, mostly because there aren’t enough investigators to discover all the tax fraud. But others, for reasons that the psychologists can explain, find it necessary to publicize their tax evasion accomplishments. That not only makes it easy for investigators to find them, it also makes it easier for the prosecutors to obtain convictions.

Tuesday, September 21, 2021

Those Anti-Tax Folks Don’t Get It But Yet Don’t or Can’t Give It Up 

An interesting headline and article in today’s Philadelphia Inquirer reminded me that the anti-tax folks are hopelessly glued to their irrational position as fans are attached to their favorite teams. Their inability to adapt to changing circumstances is emblematic of the larger problem that exists because too many people cannot re-think and re-evaluate positions to which they are emotionally attached.

According to the article, Lou Barletta, a candidate for the Republican nomination for governor of Pennsylvania, has signed Grover Norquist’s absurd no-tax-increase pledge. Barletta claimed “he was proud to sign” the pledge. His campaign pointed out that “the last thing Pennsylvanians need is the government taking more of their hard-earned money.” Strange, because most proposed tax increases are aimed at those who are born into money, and those who don’t lift a finger to earn money. The current taxation systems, both federal and state, put much more of a burden on wage earners, that is, those who work hard, than it does on those who accumulate wealth and income without needing to be employed. Perhaps Norquist and his anti-tax colleagues can come up with definitions of “hard earned money” and “not hard earned money,” and then revise the pledge to spare tax increases on truly hard-earned money.

One wonders how history would have turned out had Franklin Roosevelt and the Congress of the late 1930s and the 1940s taken the Norquist pledge. The pledge has no accommodating language to deal with extraordinary matters. It is a simplistic salute to historical ignorance.

The article notes that Tom Corbett, the last Republican governor of Pennsylvania, signed the pledge. Later, he signed legislation raising fuel taxes, signed a law permitting counties to enact impact fees on gas wells, and signed legislation increasing a variety of fees. When asked to reconcile his actions with the pledge, he claimed that “he believed he had fulfilled the spirit of the pledge.” No, he did not. Perhaps he fulfilled the spirt of what the pledge would have been had it been drafted carefully. He was asked if he regretted signing the pledge, and replied that when he signed the pledge “he couldn’t have foreseen the demands on the state for new revenue.” I laugh at that. Anyone who pays attention to life, history, politics, economics, tax policy, and reality knows that all sorts of situations can arise that require increases in public revenue. Imagine if Barletta had been governor when the pandemic hit.

The anti-tax pledge does far more to protect the wealthy than it does to protect anyone else. It’s more than a political stunt. It is part of the Constitution of the oligarchy.

Friday, September 17, 2021

Hyperbolic Tax Ignorance or Hyperbolic Tax Propaganda? 

Seven years ago, in Tax Myths: Part IX: The Tax Rate Confusion, I pointed out that too many people, including some law students enrolled in the basic income tax course, do not understand the difference between marginal tax rates and average tax rates. Too often, people think that the marginal rate applicable to their taxable income bracket applies to all of their taxable income (or worse, all of their gross income) when, in fact, that marginal rate applies only to the portion of taxable income within that bracket. In contrast, average tax rate, which is tax liability divided by taxable income, is never as high as the highest marginal rate to which the taxpayer is subject. I provided this example:
For example, if taxable income of up to $50,000 is taxed at 20 percent, and taxable income above $50,000 is taxed at 30 percent, a person with taxable income of $60,000 would be subject to a tax liability of $13,000 ($50,000 x .20, plus $10,000 x .30). It is easy for someone in that situation to claim that they are taxed at 30 percent, but in fact, their tax liability of $13,000 is 21.7 percent of $60,000. Failure to understand the difference generates exaggeration, which in turn triggers more resentment than is warranted.
I then pointed out:
Americans’ confusion with average and marginal tax rates provides fertile ground for the growth of misleading claims and absurd hyperbole. The myth that people are taxed at the highest nominal marginal rate on all of their income is a myth that needs to die.
Of course, the myth hasn’t died. It has been nurtured by the anti-tax crowd. In Tax Ignorance or Tax Deception?, I commented on Grover Norquist’s claim that a 70 percent top marginal rate means that a person’s income tax liability would equal 70 percent of their income. I explained that a marginal rate of 70 percent on income above $10,000,000, the proposal that inspired Norquist to make his erroneous claim, has no relevance to someone with taxable income equal to or below $10,000,000, and would not cause someone with income above $10,000,000 to have a tax liability equal to 70 percent of taxable income. Of course, Norquist is, and has been, trying to rile up people with incomes far less than $10,000,000 in order to get them to support his anti-tax, anti-government campaign by convincing them that they would be hit with a 70 percent tax. He tries, as I pointed out, to “play the fear card, trying to cause someone earning $50,000 a year to think that the federal government would take $35,000.” I concluded that because Norquist surely knows the difference between marginal rates and average rates, that he is “not suffering from ignorance but is playing with deception.”

The game of deception and fear is spreading like a raging wildfire. This morning I received an email from an advertising firm offering me the opportunity to speak with a person described as a tax expert about his claim that if the pending tax federal tax legislation is enacted it would raise income tax rates paid by people in “blue” states to well over 50 percent. The accompanying graphic claims that “if the Democrats’ tax plan becomes law, income tax rates” would be 61.2 percent in New York City, 59.7 percent in California, 57.4 percent in Hawaii, and 57.2 percent in New Jersey.” This, of course, is nonsense. No one in any of those locations would pay income taxes equal to their income multiplied by the stated percentage. Those percentages would apply to the income of taxpayers in the highest marginal brackets and then, only to their income exceeding the bracket floor. In other words, billionaires and multi-millionaires would pay high rates on a portion of their gargantuan incomes. But that’s not the message being sent. The message being sent is, “Hey, you oppressed middle class person struggling to get by, the ‘government’ is going to take 60 percent of your income.” That is not only false, but unless it arises out of ignorance, it is a bold-faced lie. It is, in short, propaganda.

I don’t know whether the claims made in the email I received arose from ignorance or deliberate hyperbolic deception. I tried to determine if the person described as a tax expert had any sort of tax education. What little I found suggests he does not have a J.D. or LL.M(Taxation) degree. His biography shows five years at a college, but whether that means he has a M.T. degree cannot be determined. He is the founder of a family office that bears his surname and advertises himself as an expert in reducing people’s taxes through the use of opportunities that are available to, and used by, the wealthy. So perhaps he doesn’t understand the difference between marginal and average tax rates. Or perhaps he does, is adept at reducing the taxable income of the wealthy, perhaps to the point that they aren’t even in the highest bracket, and is making the alarming “you will be paying about 60 percent of your income in taxes” claim in order to stir up votes for the political party dedicated to helping starving wealthy people reduce their tax burden. If he is deliberately obfuscating the facts to make this point, he is doing a good job of following in the footsteps and talking points of Norquist and the anti-tax crowd.

Whether the person mentioned in this morning’s email Is operating from a position of ignorance, or engaging in deliberate deception to play on the tax rate ignorance of most Americans, it is ignorance that fertilizes the propaganda storms that are buffeting the nation. As I wrote in Tax Ignorance or Tax Deception?:

In Reaching New Lows With Tax Ignorance I wrote “Ignorance has become an epidemic.” I think it poses a threat to the survival of democracy, and perhaps even the survival of the species, considering what ignorance has already destroyed. I have written about the horrible consequences of ignorance in numerous posts, so many that the following list is probably incomplete. I have focused not only on tax ignorance but ignorance generally in posts such as 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, and Defeating Ignorance, and Not Just in the Tax World. The answer is education. Yet, attempts to educate Americans face high hurdles. As I wrote in Defeating Ignorance, and Not Just in the Tax World:
The challenge in using education to combat ignorance is two-fold. First, those who profit from ignorance use their resources to curtail access to education, particularly quality education. Their efforts include underpaying teachers, underfunding schools and educational resources, and consigning lower income individuals to low quality schools. Second, those who profit from ignorance use their resources to distort curricula, to fill textbooks with misinformation, to leave important material out of educational materials, and to indoctrinate students, particularly those who grow up in cultural bubbles. The effort to keep Americans ignorant or misinformed, which is pretty much the same thing as ignorance, is intense, well-funded, and dangerous. The fear of letting people think for themselves, a skill that I was fortunate to learn and that I have tried to instill in my students, motivates the purveyors of ignorance to take steps that are inconsistent with the survival of a healthy democracy. Put another way, tyrants, dictators, and oligarchs delight in the spread of ignorance. * * * For all of the damage being done, the deeper entrenchment of ignorance in the citizens of an endangered democracy might be the most serious, longest-lasting, and most difficult to reverse.
The email I received this morning conveyed the sort of ignorance-based or ignorance-exploiting message that needs to be exposed for the danger it poses. It did me no harm, because I have been blessed with the opportunity to learn, to study, and to learn how to think critically. I wonder, and worry, about those who receive the same email or read similar messages from this person and without thinking, react emotionally, and thus make bad decisions. To survive, the nation, and the species, needs more education and more critical thinking, and less ignorance and less propaganda.

Wednesday, September 15, 2021

Remembering the Unremembered 

As at least some readers of this blog know, I invest a sizeable chunk of my time doing genealogical research. For the past few years I have been compiling genealogies of each of my maternal grandparents. Going through more than a century of birth, marriage, and death records from at least seven towns and cities, I noticed that something I had previously encountered time and again came across in a different light. Throughout the decades of genealogical research, I have noticed, discovered, and entered into databases the birth and death of infants who were born dead, or survived for a few hours, days, or months.

A few days ago a thought entered my head. Yes, when a child is born dead or dies in infancy, the parents know and remember. Older siblings probably know and if so, remember. Younger siblings might be told about their older departed sibling. But how many of those who know in turn share this with the next generations? Some do, and some don’t. Unlike those who grow to adulthood and leave descendants, and whose stories are passed down for at least a few generations, the memories of those who die as infants disappear with the demise of those who were witnesses. That is, until genealogists record the names, birth dates, and death dates of these children. Sadly, though, what we usually have are names and dates, and nothing more. Every now and then there is a photograph that has survived, and perhaps identifying information accompanies the photograph.

In my father’s family, I knew, from updates made by my father’s Aunt May to the 1868 Maule Family genealogy pamphlet that my father had two siblings who died as infants. One of them was named James. But my father, being one of the younger children, did not know about these two siblings, and had not yet seen the pamphlet. So, no, I was not named after my uncle, because my mother did not know that my father had a sibling named James. She and Dad learned of that when my father’s oldest sister discovered the pamphlet packed away somewhere and made copies for the family. What my mother did know is that my father had a sibling who died as an infant due to a particular medical condition. She learned that when I was diagnosed, at three weeks of age, with the same problem and shared that news with several of my father’s older siblings. Yes, it is genetic, and yes, it was fixed. By the time I was born, doctors had figured out how to do the surgery to unblock the pyloric valve. It is for that reason that my generation, at least, which includes several other cousins who had the same issue, remembers my father’s brother James. But I wonder, will the next generation know the story? Some have been told. Will they pass the story along? Perhaps, because we have been told to watch for certain symptoms and to pass that information along. But I wonder, will the name of my father’s brother be remembered?

In my mother’s family, once I dug into the birth records of the town where her father had been born, I discovered the exact dates of birth of the uncle she knew, and the four aunts of whom she knew but had never met. She knew of those aunts because she met several of the children of one of them, and heard stories from her father about the other three, one of whom died at age 6 and one of whom died as a teenager. But the story about their deaths, that they died at the same time because of an accidental medication switch, turned out to be impossible, because they died six years apart. On top of that, to my surprise and my mother’s surprise, I discovered that Mom had two other uncles, each of whom died at the age of two days. My grandfather never mentioned them to my mother, or to me, and my guess is that as the next-to-youngest in the family, he didn’t even know they existed. On her mother’s side, I again discovered not only the exact dates of birth of the uncle and aunt she knew, and the two uncles of whom she knew, but also the existence of four uncles and an aunt, all of whom died as infants or toddlers. No one spoke of them.

Having examined tens of thousands of registry entries in those seven towns, covering the nineteenth century and the early twentieth century, I know that it is true infant mortality was very high. I wonder about one family, who lost all of their children at young ages, ranging from birth through several years of age. Those parents had no grandchildren. So who remembers those children? Even if the siblings of those parents, or their cousins, were aware of those children, as they almost surely were, were the memories of their brief lives passed on to succeeding generations? I doubt it. Now, their names and the dates of their births and deaths are not only in the registers, but also in the database. Yet they are names. We know nothing about them. We don’t even know how or why they died, as those registry entries rarely provide causes of death.

Not only are there the individuals whose names we know, though we know nothing much else, there are all of those whose names we don’t know, and who, because they were not in the public spotlight, faded into anonymity. It is easy to remember a parent, uncle, aunt, grandparent, cousin, or some other family member we knew. It is difficult to remember those whose memory has become nothing more than a name on a piece of paper or carved into a gravestone. It is even more difficult, if not impossible, to remember those whose names were never recorded. It is difficult to remember the unremembered. But it is something that needs to be done.

Monday, September 13, 2021

Here’s An Idea: Limit the Life Insurance Proceeds Exclusion 

An idea popped into my head, and nothing I was doing at the time accounts for why it did. My thought was simply, why are the proceeds of life insurance excluded from gross income no matter the amount? The purpose of the life insurance proceeds exclusion, which has been in the federal income tax law, and most state income tax laws, since near the beginning of income tax time, is to spare survivors from paying tax on the insurance proceeds needed to replace the income stream that the decedent would have earned. During the past few decades, clever planners have found ways to exclude life insurance proceeds from state and inheritance taxes, mostly through the use of irrevocable life insurance trusts coupled with what are called Crummey powers. In essence, these plans have created arrangements that are far more similar to investments than they are to sources of support for struggling survivors. Over the years, of course, life insurance policy amounts have increased to reflect increases in the cost of living, but there is a big difference between a four or five million dollar policy whose proceeds can support the decedent’s dependents for a lifetime if properly managed, and the policies that pay out tens of millions, and in some instances hundreds of millions in tax-free returns.

Curious, I tried to determine if anyone had ever introduced legislation putting a cap on the exclusion. The cap would reflect an amount consistent with the purpose of letting the decedent’s dependents meet the cost of basic housing, food, medical care, and similar expenses. I did not find anything, but that could be a consequence of how search engines work and how I phrased the many different search expressions that I used. The closest proposal I could find is Calvin Johnson’s shelf project proposal to tax the investment earnings portion of life insurance policies to the policy owner.

Nor could I find sufficient data on how many life insurance policies generate more that, say, five million dollars in payouts. I did find information about the eye-catching huge payouts and policy amounts, some exceeding $100 million and the largest, so it seems, coming in at about $200 million. That means I cannot compute the amount of life insurance proceeds that are collected in excess of, say, five million dollars. And that means the tax savings generated by the income tax exclusion cannot be computed. Similarly, I don’t have an amount for how much in life insurance escapes the estate and inheritance taxes. But surely it is not a trivial amount. Of course, a proportionate amount of the premiums paid for the policy should be subtracted from what would be included in gross income.

The use of high value life insurance policies, whether in trusts or otherwise, adds to the compounding effect that continues to widen the income and wealth gaps. Most people either cannot afford to buy life insurance or can only afford to purchase a policy that meets the basic needs of their dependents. People fortunate enough to obtain life insurance paid by their employers are almost always afforded a rather small amount, rarely beyond five figures, unless perhaps they are high-ranking officers of the company. The current tax treatment of mega-sized life insurance policies is inconsistent with what needs to happen in a balanced economy.

Thursday, September 09, 2021

More Proof That Relying on Government to Prepare Tax Returns Poses Risks 

The headline caught my eye. It was attached to this story. The headline explained, “Two identical cars, but two very different Massachusetts excise tax bills.” What happened?

Michael Culver’s wife bought a BMW SUV. Michael liked it so much that he replaced his car with one identical to hers, with the exception of a $350 technology package on her car that isn’t on his car. Even the color is the same. So when they received their Massachusetts excise tax bills for the cars, they were surprised that the tax on Michael’s car was $659 and the tax on his wife’s car was $816. Could a $350 option account for a $157 difference in the tax? Of course not.

The excise tax is computed by the state Registry of Motor Vehicles, and is based on the manufacturer’s suggested retail price. The MSRP of both of the cars in question was the same: $43,950. Because the tax is collected by the local tax collector, Michael called the local tax collector. That office replied that it was following the values it had received for the cars, so it suggested Michael contact BMW. Because the vehicles are leased, the tax bill is sent to the lessor, in this case BMW, which simply passes the amount along to the lessee driver. The driver doesn’t see the actual bill. BMW told Michael to call the dealer, but the dealer was unable to explain the discrepancy.

So Michael turned to WCVB NewsCenter 5 for help. Their investigators discovered that the error was made by the Registry of Motor Vehicles, which entered the wrong value for Michael’s wife’s car. The value should have been $43,950, the same as entered for Michael’s car, but for some reason the Registry employee entered a value of $54,404 for the wife’s car. The Registry of Motor vehicles corrected the entry for the value. That change, however, still left Michael and his wife needing to deal with the excise tax overpayments for the past few years, which total more than $400. Eventually BMW credited the Culvers’ account and now must get the state to issue a refund.

Michael asked, "Across the state, how many people are getting the wrong values for their cars reported and paying more excise taxes than they should?" He added, “"There's no way that someone like me can follow this or knows what to do to follow it or even knows that they should. You just get an excise tax bill and you pay it. . . . I've never looked into this in my past leases and this mistake might have happened in the past. I think that a lot of people could be impacted by this." The best guess is that this is not the only inaccurate value entry made by the Registry of Motor Vehicles. And the best guess is that very few people are aware of the need to review the government-prepared bill.

The folks at WCVB advise, “It's a good idea the first year you lease a car to ask for a copy of the actual excise tax bill from either your lease company or your town so you can make sure the car's valuation is correct.” That is good advice, but how many people will do that? How many people check the value amount and arithmetic on real property tax bills? The best guess is not many. So how many people would check the entries and arithmetic on a government-prepared income tax return? The best guess is some, and many of those will end up paying a tax professional to do that checking, which means people will still be paying fees in connection with getting their income taxes filed. This is one of the many objections I have raised over the years for the theoretically interesting but pragmatically unfeasible “Ready Return” concept. For those interested, my commentaries on the flaws of Ready Return include Hi, I'm from the Government and I'm Here to Help You ..... Do Your Tax Return, ReadyReturn Not a Ready Answer, Ready It Was Not: The Demise of California’s Government-Prepared Tax Return Experiment, As Halloween Looms, Making Sure Dead Tax Ideas Stay Dead, Oh, No! This Tax Idea Isn’t Ready for Its Coffin, Getting Ready for More Tax Errors of the Ominous Kind, Federal Ready Return: Theoretically Attractive, Pragmatically Unworkable, First Ready Return, Next Ready Vote?, 14-part series, Simplifying theTax Return Process, Surely This Does Not Boost Confidence In The ReadyReturn Proposal, Imagine ReadyReturn Afflicted with This Sort of IRS Error, Debating the ReadyReturn Proposal, In Writing, and Yet Another Reason the IRS is Not Ready for ReadyReturn. I also published a 14-part series on the concept’s shortcomings, with an index, and engaged in a published debate, Perspectives on Two Proposals for Tax Filing Simplification, with Prof. Joseph Bankman, one of the most vigorous proponents for government-prepared tax returns.

If something as simple as an excise tax return based on a number multiplied by a percentage can so easily be botched even in the hands of the state, how confident should anyone be that the IRS or a state revenue department will be any less inaccurate when dealing with income taxes that involve many numbers, many computations, and complex rules requiring many input decisions. Even so-called “pre-populated returns,” which for many would be, in effect, “prepared returns, pose the same input-entry risk. And that’s just one of the many risks presented by government-prepared and government-pre-populated income tax returns.

Tuesday, September 07, 2021

More Proof Demand-Side Economics is Superior to Supply-Side Economics 

I read a Philadelphia Inquirer article this morning in which the author notes that rebuilding houses and other structures in the wake of Hurricane Ida will “cost a lot more than usual – and take much longer, too.” That thought had occurred to me last week while Ida was wreaking havoc on its long path of destruction, because I already was keenly aware of material and labor shortages. Those shortages arise from a combination of increased demand and decreased supply. The supply decreases are mostly in the form of delivery delays, because of disruptions in manufacture, processing, and transportation. For example, shutting down one of the world’s largest ports in China because a worker tested positive for Covid leaves supplies sitting on docks and in ships rather than getting to their destination.

Much of the cost increase and delivery delay can be attributable to increased demand. As an advocate of demand-side economics, this does not surprise me. As I have pointed out repeatedly, funneling tax breaks to businesses in the hope that it would create jobs is a waste, because businesses do not create jobs simply because they have more profit or reduced tax liabilities. Businesses create jobs when they have work for people to do. And work for people to do is necessary when there are customers who want to purchase the goods and services offered by the businesses. That is what is happening now. Pandemic relief funds channeled to consumers is helping to fuel demand, which was skyrocketing even before Ida and other natural disasters created even more need for goods and services. As the article put it, “Businesses were caught off-guard by a surge in customer demand.” That’s what creates jobs.

Granted, increased demand leads to inflationary pressures, and the economy already has witnessed increased prices for all sorts of things. For some items, the increase is startling, far more than the 3 or 10 or 20 percent that is so distressing. The lesson, of course, is that economies should be grown the way water should be heated for certain types of delicate cooking, through a slow and controlled simmer rather than a full-blast race to a raging boil. That is possible in “normal” times, but the pandemic’s effect in 2020 was the equivalent of putting the pot of water into a deep freezer, which made the recovery the equivalent to a raging boil as the economy tried to recover as quickly as possible.

There also is a shortage of workers. This is what happens when businesses face increasing demand. They need employees and compete for employees, which drives up wages but also contributes to inflationary pressure. The trick is to get a balance into the system so that runaway inflation and runaway wage increases don’t derail economic growth. It has now become a workers’ market. The article explains, quoting an economist, “Workers — they have the power — They can go where they can make the most money.” Is this a surprise? Not at all. Though many people are aware of the Black Death, what often isn’t taught outside of history departments is that the sharp decline in the number of workers encouraged peasants to leave the land to which they were attached by the strictures of feudalism and to go elsewhere in search of cash wages. That pandemic totally reshaped the economies of Europe and pretty much brought feudalism to an end. The current pandemic is doing the same thing to the existing economy. And as some have characterized Darwin’s theories, perhaps in oversimplified exaggeration, one must evolve or die. There is no retreating to the way it once was. Perhaps this time, money-addicted oligarchic capitalism will suffer the same fate as feudalism, especially as money-addicted oligarchic capitalism, in many respects, shares the features of feudalism.

Saturday, September 04, 2021

Precision and Accuracy Matter When Arguing About Taxes 

Reader Morris directed my attention to a Bloomberg L.P. article by Jared Dillian published as a Washington Post story. The headline caught my eye. It declares, “Americans Who Say They Pay Taxes Are Probably Lying.” Really? The odds are that people who pay taxes are lying that they pay taxes? Perhaps the odds are high that people overstate the amount of taxes that they are paying, though I doubt it, but that’s different from claiming that the odds are high that taxpayers lie when they say they are doing what makes them taxpayers. But then I figured, well, often the headline is not written by the author, and it’s a tax story, so perhaps the headline writer didn’t quite get the gist of what was being written. So, I continued to read.

The article begins with a reference to the Urban-Brookings Tax Policy Center report saying that 61% of U.S. households had paid no federal income tax in 2020. Dillian, noting that the percentage was pandemic-driven and would likely return to the usual mid-40-percent range, decided “now is probably a good time to have a discussion about what the right percentage of people paying taxes should be.”

Dillian, in a preliminary hedge, conceded that “while about half of Americans don’t pay income taxes, almost everyone who is employed pays payroll taxes,” though he refers only to the payroll taxes that fund social security and not those that fund Medicare. He sets payroll taxes aside as a form of funding a person’s future retirement and medical benefits. He distinguishes them from income taxes which “are intended to fund government spending, which has been increasing every year.: He points out that, “The burden of funding the government falls on a smaller number of taxpayers.”

At this point, I reacted as I do when people complain about “the government,” as though “government” is one indivisible entity. Sometimes I wait, and sometimes I am rude by interrupting, to ask, “which government?” And I do so here. I presume he is talking about the federal government, because if he were talking about state and local governments, the proposition that the burden of funding those governments falls on a smaller number of taxpayers is flat out wrong. Those governments collect sales taxes, property taxes, and several other types of taxes that vary from state to state, and when those taxes are considered as a group, pretty much everyone other than infants and most children pays taxes.

Dillian then offers his opinion on “the right number of people who should be exempt from paying income taxes,” and again I presume he is referring to federal, and not state and local, income taxes. Without getting into the details of his ideas, he makes the point that “except for the truly indigent,” which in his opinion are households with annual income less than $28,000, “we can all chip in.” He claims, “The idea of someone paying no income taxes is offensive to us all, no matter what their wealth and income.” Really? He just finished exempting those he considers truly indigent so would it be offensive if the truly indigent did not pay income taxes? And is he speaking for everyone when he claims that “us all” are offended by the existence of people who do not pay (presumably federal) income taxes? Or is “us all” a reference to those who want to reduce the federal (and state and local) income taxes paid by the wealthy by shifting the burden to those who are far from wealthy even though they are either less able to pay or incapable of paying because they are trying to survive on starvation wages?

Yet if Dillian were to consider who pays taxes of any kind, he would realize that his goal of making certain that everyone has “skin in the game” is accomplished every year. True, there may be a tiny fraction, perhaps one percent or less, of Americans who pay no taxes at all. But once one considers not only income taxes, but also sales taxes, real property taxes, personal property taxes, tobacco taxes, alcohol taxes, and all the others, it is difficult to identify someone who is living in this country and not paying taxes.

So then I thought, perhaps Dillian neglected to use the adjective “federal” in places where it would clarify his position and render irrelevant some of my criticism. But then I returned to the headline. Suppose it read, “Americans Who Say They Pay Federal Taxes Are Probably Lying.” But that doesn’t work. There are federal fuel taxes, alcohol taxes, tobacco taxes, firearms taxes, environmental taxes, telephone taxes, air transportation taxes, sport fishing equipment taxes, fishing rod and fishing pole taxes, electric outboard motor taxes, fishing tackle box taxes, bow, quiver, broadhead, and point taxes, arrow shafts taxes, coal taxes, tire taxes, gas guzzler automobile taxes, vaccine taxes, heavy truck, trailer, and tractor retail taxes, ship passenger taxes, and indoor tanning services taxes. There probably are others I didn’t manage to find, and surely a similar and perhaps longer list at the state and local level (such as entertainment ticket taxes). So surely some, and perhaps a sizeable portion, of the people Dillian claims do not pay taxes or, to give him the benefit of the adjective, do not pay federal taxes are, in fact, paying taxes and paying federal taxes.

So what it comes down to is another instance of objection to a federal income tax that impacts the wealthy and the almost wealthy much more than it impacts the not so wealthy while it exempts the poor. That is exactly what the federal income tax was designed to do. Yes, we can quibble about rates and bracket margins, but the goal is to offset the regressive nature of the non-income taxes with an income tax that adjusts for the fact that without a federal income tax, the wealthy would be paying a tiny fraction of income in taxes while the poor and middle class would be paying larger percentages of income in taxes. Why was this done? As the economy shifted in the late nineteenth century to one in which a handful of barons controlled the means of production, the existing regressive-only tax system contributed significantly to the era of the corrupt Gilded Age. The progressive income tax mitigated the harmful effects of most wealth being held by a few, and that worked for decades until misguided and perhaps not-so-well-intentioned lobbyists found ways to sell to the American middle class the package that essentially restored the groundwork for a second corrupt Gilded Age. And now that backlash is growing, the defenders of regressive taxation, which contributes to the compounding of wealth and income inequality, are dredging up whatever arguments they can make to sell the false notion that the wealthy are bearing the brunt of the nation’s tax burden by focusing on the federal income tax while ignoring all the other taxes that are paid disproportionately (to income) by those who are not wealthy.

In fairness, Dillian makes a good point that has nothing to do with taxes, at least not directly. He notes that there is no military draft or compulsory service. He notes that voting is not mandatory. These are problems because they create an environment encouraging people to withdraw from discourse in the public arena. But those aren’t tax issues. Yet Dillian suggests that to get U.S. citizens to contributed by “participating in civic society” more of them should pay federal income tax. But increasing taxes on the poor and middle class, while reducing federal income taxes on the wealthy, isn’t going to reinstate the draft or create a compulsory service program. It isn’t going to do much to increase public discourse, nor directly increase voting participation. Perhaps it might encourage those haven’t been voting but somehow come to understand the impact of the “crumbs for some, feasts for the wealthy” string of tax cut ploys to “get out and vote,” though I suspect it will be other issues that will motivate increased voter turnout.

Dillian writes, “I happen to think it is unfair that 61% of Americans have no income tax liability.” Well, I happen to think that without the adjective “federal,” his statement is inaccurate, because a sizeable portion of the 61 percent pay state and local income taxes. And if he inserted the adjective “federal,” then I would simply disagree and state that what is unfair is the ability of a handful of people to live luxuriously on the backs of underpaid workers and people subjected to a long list of regressive taxes.

Dillian concludes by asserting, “The next time you hear someone tell you with great indignation that they’re a taxpayer, remember that there’s a 61% chance that they are lying.” That is nonsense. The odds of someone other than an infant of child lying when they state that they pay taxes is less than one percent, probably less than one-tenth of one percent. And even if, again, the adjective “federal” is inserted into Dillian’s claim, the odds would not be correct because there are federal taxes other than income taxes. And even if the adjectival phrase “federal income” was inserted, the 61 percent figure would be correct only if everyone made the statement, but there are honest people out there who would state, for example, “In 2020 I did not pay federal income taxes” or “In 2020 my federal income tax liability was zero and I received a refund of the federal income taxes that I paid.”

The insistence that all people should be paying federal income taxes is bad enough. When adding in the conflicting position of exempting the indigent yet using the adjective “all” makes it worse. What caps it off is the failure to put the issue in proper perspective by insinuating that 61 percent of taxpayers do not pay taxes, which paints a picture very different from reality and has emotional effects on at least some unwitting people that are counterproductive to understanding reality. It is difficult to buy into a commentary so replete with these sorts of exaggerations and contextually inaccurate and misleading assertions.

Thursday, September 02, 2021

To Tax Snitch or Not Tax Snitch? 

For years, the IRS has had in place a tax whistleblower program, under which it makes payments to persons who provide information that the IRS uses to collect taxes otherwise being evaded. The program is established under Internal Revenue Code section 7623(b). There are various procedural rules for filing a claim for the reward, a list of individuals ineligible to participate (mostly tax and other officials), and rules for computing the amount of the award. To qualify for an award, the information provided to the IRS must relate to a tax noncompliance matter in which the tax, penalties, interest, additions to tax, and additional proceeds in dispute exceed $2,000,000; and relate to a taxpayer, and for individual taxpayers only, one whose gross income exceeds $200,000 for at least one of the tax years in question. In addition, if the information does not qualify for an award under section 7823(b), the IRS has discretion to make an award under section 7623(a), which provides the IRS with wide-open discretion. The program is successful, with the IRS collecting more the $5.9 billion between 2007 and 2020, and paying more than $1 billion in awards.

But some people don’t like the idea of being ratted out. According to this story, the finance minister of Baden-Wuerttemberg state in Germany proposed a plan to let people make anonymous tips about tax evaders. In response, he was subjected to hate mail, including racist tweets, as well as accusations of proposing totalitarian measures. Critics likened the idea to Nazi and Stasi practices. According to the story, “In Germany, tax evasion is considered a widely practiced ‘national sport.’” Apparently those engaging in tax evasion don’t like the plan because it threatens to put an end to their game.

Once upon a time, people protected each other by reporting crimes that they observed. Now, a cultural rejection of doing so has silenced witnesses, whose recession into the background because of fears that they will be tagged and targeted as snitches has made it increasingly difficult to solve crimes and identify perpetrators. Of course, failure to take steps to assist in identifying criminals makes it easier for the criminal to repeat the offense, time and again.

Understandably, people ought not be rewarded for intruding into other people’s personal lives to look for possible crimes. That difference is a serious distinction that puts the proposal in a different category than the sort of privacy intrusions characterizing Nazi and Stasi practices. When a crime is being committed in a public venue, reporting the crime or testifying about the crime is not an invasion of privacy. No one should be rewarded for hacking into someone’s computer to look for their tax software inputs and outputs, but when an employer asks an employee to collect receipts without entering the amount into the point-of-sale interface or into the appropriate accounting software field, the employee who chooses to report that employer is not invading the employer’s privacy. When someone brags at a party about having circumvented the tax laws by laundering money, transmitting that information to the tax authorities is not an invasion of privacy.

No employer for whom I have worked has ever asked me to assist in tax evasion. I have never heard anyone brag at a party about their tax evasion success. I have witnessed crimes, and accidents, and have reported and provided the relevant information. None of those crimes, though, involved tax evasion. At least not yet. And hopefully never. But it leaves readers with this question: what would you do if you were asked to help someone evade taxes?

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