Monday, May 30, 2022

What Is the Freedom for Which They Paid a Price Far Greater Than a Tax Bill? 

I sat down planning to write another Memorial Day essay. I had some ideas in my head, but before putting finger to keyboard – pen to paper having become more of an historical concept though I still do that from time to time – I looked at what I wrote last year (The Price of Freedom Is Much More Than Taxes). I realized that what was in my head now was pretty much what had been in my head last year when I sat down to write (or should I say, sat down to type, even though that, too, has become a reference to an old technology).

During the past 48 hours or so, I have seen on social media and news outlets the claim that those we honor today paid the ultimate price for freedom. That is true. What matters, though, is what is meant by that freedom. What does it mean to be free? And that takes me to what I wrote last year, which in turn incorporated some of what I had written in even earlier Memorial Day essays. Here is what I wrote:

On Memorial Day ten years ago, in Free, Freedom, Fees, and Taxes, I examined the extent to which Americans understand the meaning of the oft-heard and oft-written sentiment that those we are honoring today served to protect the freedom of the nation. I wrote:
Americans surely understand the word “free,” for it shows up frequently in the phrase “free market” and in the slogan “free to do what I want.” Yet when asked to pay for freedom, too many Americans balk, even when the cost facing them is far less than their time, their physical well-being, and their life. The notion that freedom is free is becoming ever more omnipresent in the culture.
I focused on a New Jersey Sea Grant Consortium contest in which beaches that did not charge a user fee emerged as the winner, even as other reports explained that even beach communities charging a fee were struggling to provide the services demanded by visitors, perhaps in part because the fees were nominal. The towns with free beaches were facing even steeper financial challenges. I suggested that these towns charge fees, even though officials worry about the risk of visitors not returning if fees are imposed but also threatening to stay away if services are diminished in quantity or quality. These same officials are aware that most visitors don’t care about the fiscal woes of the town they are visiting, and that their only interest is in having fun. The notion of “let’s have fun but let someone else pay for the things we get for free” is pernicious. I then shared these observations:
In order for a person to have something for free, someone else must pay. * * *

The question of who pays the bills to use a free beach would be irrelevant but for the fact that this nation exists, has beaches, and has a citizenry that is free to go to the beach. In some countries, people aren’t free even to travel outside their home village, let alone jump in a car, train, or plane to head for some resort. There are people who paid for that freedom with something far more than suitcases full of cash, namely, with their lives, and they deserve recognition and thanks on this Memorial Day. Paying taxes or beach fees pales in comparison to paying the price that has been paid by the veterans whom we cannot thank in person. The best we can do is to honor their memory. And the best way to do that is to respect freedom and to acknowledge that freedom is not free.

Though in that essay I centered my attention on the fiscal aspect of freedom, it is important to understand that the cost of freedom is not only the lives of those who have fought to defend it and the taxes and fees paid by those who enjoy it, but also other costs, costs too often ignored or at least noted without any reference to the impact on freedom.

Consider those who think that freedom means “free to do what I want.” This is the perception often heard from those making the transition from childhood to maturity, a transition that unfortunately does not happen for everyone. When someone making that proclamation is asked to describe what happens when encountering someone who makes the same proclamation but who wants to do something that interferes with the first person’s desires, the back-and-forth eventually results in what can best be described as a philosophy of “I am free to do what I want, and that means I am free to prevent others from doing what they want.” It is the essence of selfishness, self-centeredness, and immaturity. And it has been increasingly going viral.

Consider two examples. The person who claims that they are free to drive at whatever speed they select, regardless of speed limits, can end up imposing the cost of that “freedom” on the people they kill and injure when they learn, too late, that there are reasons a person should not, and cannot, drive at whatever speed they select at any time, in any place, and under any conditions. The person who claims that they are free to go maskless and unvaccinated can end up imposing the cost of that “freedom” on the people they sicken and even kill who are unable to be vaccinated or wear masks. It is no comfort that the person claiming the right to be free might also end up paying the price of injury, sickness, or death.

Too often, those who claim that this unregulated “freedom” is sacrosanct point to the arrival of Puritans in what is now Massachusetts. They are idolized as seekers of freedom, trying to escape religious and political persecution. Yet when they arrived in the Massachusetts Bay Colony, they immediately started acting in the same manner as had their tormenters, in turn suppressing those whose religious beliefs or political positions conflicted with those set down by the Puritans. The contrast with Pennsylvania, also settled by victims of religious persecution, but where those of diverse origins and religions were welcomed, is startling. I didn’t learn this in school because it isn’t taught in this manner, nor is this lesson noted. I learned this when I did the research to write the biography of Thomas Maule of Salem, reading not only his works and those of others, both in his day and thereafter, but also studying the social and cultural environment in which his fellow citizens, of a different religious persuasion, acquitted him of the seditious libel charges brought by Puritan authorities who resented being tagged as hypocrites. And they truly were. Seem familiar?

The question at the moment is what sort of “freedom” will this nation embrace? To ignore this question is to dishonor those who fought and died for freedom, because answering the question incorrectly makes the price they paid a price paid in vain. Will the model be the “freedom” to escape torment and persecution only to torment and persecute others? Or will the model be the “freedom” to welcome those with different perspectives while refusing to adopt the methods of those from whom freedom was sought?

Indeed, freedom is not free. It comes with a cost. The cost is more than monetary. The cost can be the reduction of speed, the stopping at a red light or stop sign, the obedience to the yield sign, the wearing of a mask, the ceasing of the 1 a.m. fireworks, the toning down of the party noise at 2 a.m., the picking up of the pet’s poop, the use of a trash or recycling container rather than the gutter when disposing of trash, the extinguishing of the cigarette when in a closed space or close to others, the use of words rather than weapons when in a disagreement, telling the truth, and learning to think critically.

Freedom is not free. It disappears when the cost, whether in lives, taxes, or proper behavior, no longer is paid. Memorial Day means little if the freedom for which the fallen fought is disregarded, abused, or limited to fewer than everyone. The cost of freedom is much more than taxes.

As I re-read last year’s commentary, I developed a deeper appreciation for those who chose to enact laws and regulations that require stopping at red lights and stop signs, limiting noise in the wee hours of the morning, using trash and recycle containers rather than the neighbor’s law to dispose of unwanted material, prohibiting smoking in certain areas. Surely there was opposition to those sorts of rules, most likely from the handful of people who wanted to be “free to do whatever they wanted wherever they wanted.” Their howls of protest gave way to the common sense of the populace. It took rational, critical thinking to figure out how to balance freedom to breathe clean air with the freedom to smoke, the freedom to drive without stopping with the freedom to drive without being killed, the freedom to party with the freedom to sleep. It took courage to act despite the objections of the selfish few. Now, however, the selfish few have grown in number, emboldened and empowered by funding from shadowy people and places, common sense is far less common, and critical thinking continues to take a pounding from the emotional manifestations of greed, insecurity, and trauma. And now, the price for the "freedom" to behave in greedy, selfish, and immature ways is being paid by people who ought not be paying a price for that sort of "freedom." Worse, the decision to make people pay that price is being made by self-centered individuals rather than by those who hold have been charged with the resposibility of enacting and enforcing rules that balance and protect everyone's freedom, including the freedom to be free from the actions of greedy, selfish, and immature individuals who have no respect for anyone else's freedom. So what is the freedom for which those we honor today paid the ultimate price?

Wednesday, May 25, 2022

Another Misuse of the Word “Tax” 

The headline to this story caught my eye. It read, “Some PS Plus Players Are Seemingly Getting Hit With A Giant Upgrade Tax. Perhaps there was some sort of unexpected tax increase, or the reclassification of something from exempt to taxable, or the enactment of a new tax.

So I read the article. It describes the roll-out of a PlayStation upgrade, for which players are required to pay a fee. The fee equals the fee for the upgraded service minus the amount paid by a player for existing service. Many players obtained their existing service at a discount, so the upgrade fee is the difference between the new fee, which is not discounted, and what the player paid, rather than the difference between the new fee and the pre-discount fee for the existing service. The article quotes a social media post in which someone explained, “For example, If you purchased 1 year plus for 25% off, which is $45,[t[o update to extra plan, you need to pay 100 - 45 = 55$, not 100-60=40$” To clarify this explanation, a player who paid $45 rather than $60 for existing service because of a discount must now pay $55 to get the upgrade. For some reason, there are players who think the upgrade should only cost them $40 to get them from $60 to $100. Though I can see merit in that position, because paying $55 amounts to a de facto revocation of the original discount, I will leave that discussion to others.

What puzzles me is why the headline writer refers to the $55 amount or the $40 amount or the increased $15 amount as a “tax.” Nowhere in the article does the word “tax” appear. So it is unclear if someone called one of those amounts a “tax” or if someone simply put the word “tax” in the headline. Perhaps there is some sort of sales or transaction tax on the payment required to acquire the upgrade but that is not mentioned in the article. A tax is an amount imposed by a governmental authority, even though the word gets misused as it is, for example, in Major League Baseball’s collective bargaining agreement, which imposes a “competitive balance tax” on teams paying more in salary than a specified amount. Why the word “tax” rather than a more appropriate term such as “fee” or “charge” was used is a question for which I do not have the answer. It probably has something to with the fact that the word “tax” generates more fear and resentment than do the words “fee” or “charge.”

I have previously written about the use and misuse of the terms “tax” and “fee,” in commentaries such as Please, It’s Not a Tax, So Is It a Tax or a Fee?, Tax versus Fee: Barely a Difference?, Tax versus Fee: The Difference Can Matter, When is a “Tax” Not a Tax?, When Use of the Word “Tax” Gets Even More Confusing, Sometimes It Doesn’t Matter If It Is a Fee or a Tax, It’s Not Necessarily a “Tax” Just Because It’s an Economic Charge You Don’t Like, Court of Appeals for the First Circuit: Tolls Are Fees, Not Taxes, The “Tax or Fee” Discussion Gets a New Twist, Is It a Tax? Is It a Fee? Does It Make Sense?, Can the Proper Use of the Terms “Tax” and “Fee” Be Compelled?, and It’s Not a Tax, It’s Not a Fee, It’s a . . . Yeah, OK.. And it cuts both ways. Often, the word “tax” is used for things that are not taxes. But words such as “fee” and “surcharge” have been used to describe what actually is a tax, by people who are trying to raise taxes while giving the appearance of complying with a claimed opposition to tax increases.

There are instances in which precision matters. Whether it’s a matter of words, measurements, or movement, using the wrong word, measurement, or movement, no matter how closely it appears to resemble the correct version can cause all sorts of damage. The damage can range from the adverse consequences of misinformation to injury and death. Though some might dismiss adherence to precision as “nit picking” or some similar term, when precision matters, it matters. It is possible to debate whether in a particular instance precision matters, but clearly using the word “tax” to describe what is essentially a price charged by a seller for upgrading a service can mislead people into thinking they are being hit with a tax. That isn’t what’s happening.

Friday, May 13, 2022

A Very Bad Reason That Taxes Had to Be Increased 

There are all sorts of reasons that taxes are increased. A taxing authority encounters increased costs for the services it provides. A taxing authority, at the direction of its citizens or a court, increases or expands the services that it provides. A natural disaster causes losses to taxing authority property that aren’t reimbursed by insurance. These and similar reasons are situations in which the taxpayers get something, directly or indirectly, for the taxes that are paid.

That’s not what happened when the small town of Corsica, in Jefferson County, Pennsylvania, was compelled to double its property tax rate. According to this story, the town did so because the town secretary embezzled so much money over a eight-year period that the town was unable to maintain a children’s playground or fix its deteriorating roads. The town went so far as t borrow money from its mayor so that its government did not shut down. The scale of the embezzlement is evident from two facts. The town secretary stole $306,000. There are 319 people living in the town. After being caught and indicted, the embezzler repaid about $41.000 of the embezzled funds.

The secretary’s modus operandi wasn’t all that unusual. She issued checks from the town’s bank account and from the state’s Local Government investment Trust to herself, her husband, and her father. To do this, she forged the name of the vice-president of the town’s council. She also made electronic transfer payments from town accounts. She used that money to pay bills. She used the town’s account at a store to purchase a camera, an iPad, and other things for herself. To hide this activity, she prepared and submitted false bank records to the town council and to state auditors.

Rejecting a request for probation, the judge sentenced her to 21 months of prison and also ordered her to repay the other $265,000 that she had embezzled. Though the secretary, her lawyer, family members, and friends cited health problems in asking for probation, the judge concluded that the secretary’s actions were motivated by greed and that a prison sentence was consistent with the sentences handed down to other embezzlers. Perhaps the judge was also influenced by the fact that after being indicted and released on bond, the secretary was arrested on multiple counts of retail theft for five separate incidents at another retail store.

It is difficult to imagine the impact on the taxpayers of this small town when they are told that their property taxes will double in order to make up the losses incurred by the town on account of one person’s inappropriate behavior. Perhaps if she makes full restitution, an outcome that is far from certain, the town will be able to reduce its tax rate and provide credits to its taxpayers. That, of course, could get complicated as some of the residents hit with the tax increase die, move away, or sell their properties, and new property owners arrive. I wonder if some sort of conditional adjustment will be made at settlement when properties are transferred.

Update: This isn't the first time this has happened! Thanks to reader Morris who dug up this gem from a long time ago, though the impact wasn't quite as bad as a doubling of taxes, it was bad enough.

Saturday, May 07, 2022

Tax Law, Inflation, and the Red-Blue Divide 

When the email from the Institute for Policy Innovation arrived, the headline caused me to think that I had missed a Supreme Court tax opinion. The headline to the commentary stated, “Supreme Court Correctly Rules on . . . SALT Deduction.” Upon closer examination, the headline was referring to an event that I had already noticed, that is, the Supreme Court’s denial of certiorari in a case challenging the $10,000 limitation on the deduction for state and local taxes. A denial of certiorari is not a ruling. It is not an affirmance of the decision from which the petition for certiorari is taken. It simply means that the Court does not want to decide the issue, perhaps at the moment, perhaps forever.

Despite the headline, I read the commentary. It turned out that the headline was the least of my concerns.

In the commentary, Tom Giovanetti praised the Supreme Court’s decision not to hear the challenge. He pointed out that the four states bringing the challenge – Connecticut, Maryland, New Jersey, and New York – are “four solid ‘blue,’ high-tax states.” He explained that before the limitation was enacted, “the federal tax code essentially subsidized high-tax blue states.” He asked, “Why care about your state’s high taxes if you can just deduct them all from your federal taxes?” The answer to his question is easy. If a person in facing a marginal 35 percent federal income tax rate is hit with a $1,000 increase in state taxes, it’s not as though the person’s federal income tax liability is reduced by $1,000. If it were, then it would be true that the person would not care about the increase. Rather, the $1,000 increase means that the person would be $650 out of pocket. Most people would care about that.

Worse, though, is the jab at high-tax “blue” states getting federal subsidization of state and local taxes and the implicit praise for the $10,000 limitation. Yet that is only a small piece of federal subsidization of states. A careful analysis of the relationship between federal and state taxes and subsidies tells a different story. As recently disclosed by various reports, including Wallet Hub, Money Geek, and Forbes, the overall picture is different. It’s a pattern that reaches back many years, as indicated, for example, in 2004 by the Tax Foundation as summarized in this TaxProf blog post. The most recent analyses disclose that eight of the ten states most dependent on federal government funding are red states. Of the nine states that sent more to the federal government in taxes than they received from the federal governent, seven were blue states, which also had higher per-capita GDPs than many of the red states near the top of the federal subsidy list. The eight states receiving the highest child tax credit per capita are red states. Attempts to dismiss these findings, such as this Hill commentary by an ALEC member muddies the analysis by pointing out that the top ten federally dependent states are not all red, that two red states are actually blue states, and that it makes sense for red states to be subsidized by blue states because blue states have higher per-capita GDPs and red states are most in need. The latter observation is, to me, an indictment of how the classic red-state low-tax, low-service (and less pervasive education) approach shortchanges its citizens.

Giovannetti does make an important point. He notes that the $10,000 limitation should be indexed for inflation. He is correct. He then proposes that both the limitation and “capital gains taxes” be indexed for inflation. I’m not sure whether he means that the tax liability on capital gains should be indexed or if capital gains should be indexed, but perhaps he means that taxpayers’ adjusted bases in capital assets should be indexed. If that is what he means, I agree. However, if capital asset adjusted basis is indexed then the justification for low rates on capital gains (and the limitation on the deduction of capital losses) disappears. The latter were enacted as admittedly rough solutions to the capital asset inflation problem. Pick one. Keeping both is excessive.

One of the articles I haven’t yet written, and perhaps never will, is one that rests on a list of dollar amounts in the Internal Revenue Code that are indexed for inflation and those that are not. Both lists are long, both keep growing, and I’ve not yet found or made the time to once again read the entire Internal Revenue Code to identify each provision in the two lists. Perhaps someone has done this sort of comprehensive survey with respect to the Internal Revenue Code as it exists for 2022; J.K. Lasser has a long list of some of the limitations not adjusted for inflation. Of course, some limitations not indexed for inflation immediately jump to mind even without looking at the list, such as the $250,000 and $500,000 limitations on the exclusion for gains from the sale of a personal residence, the base amounts and adjusted base amounts used in computing the portion of social security benefits included in gross income, the $25 deduction for business gifts, and the $5,250 exclusion for employer-provided education assistance. If the $10,000 limitation on the deduction for state and local taxes and the adjusted bases of capital assets are to be indexed, then so, too, should all of the other fixed dollar amounts in the Internal Revenue Code. That would advance the notion of tax fairness by helping not only the well-to-do who pay higher state and local income taxes and enjoy the ownership and sale of capital assets, but also the social security recipients with lower income and home sellers facing very high amounts of gain because of a housing market bubble but who otherwise have modest amounts of income.

When Giovannetti proposed increasing those two limitations, he asked, “Any takers?” If he included all fixed dollar amounts and not just those two, and agreed to dispose of the low capital gains rate and capital loss limitation band-aids, then I’m on board. For that idea, there isn’t any red or blue.

Tuesday, May 03, 2022

How Not to Enact Infrastructure Taxes 

About a week ago, reader Morris directed me to story about a proposed tax. Thanks to being busy with other things, it’s just now that I can elaborate on my reply to reader Morris. My response to him was brief, and included this sentence: “It is a stupid idea.” Now I have time for the longer response.

The proposal, made by a member of Pittsburgh’s city council, would impose a one percent tax on college and technical school tuitions and medical bills in the city. Would the proceeds be used to help pay tuition for students from economically deprived backgrounds? No. Would the proceeds be used to help defray medical costs incurred by low-income individuals? No. The proceeds would be used to fund infrastructure. The tax would apply to the amount of medical bills before reduction by insurance payments.

Now, funding infrastructure is not a stupid idea. It’s necessary, and as readers of this blog know, I support increased in infrastructure funding because if infrastructure fails, people die, people are injured, the economy suffers, and the nations spirals even faster into disaster.

The question is who should pay for infrastructure? The answer is simple. It should be funded by those who use it and those who benefit from it. Of course, everyone benefits from infrastructure, so the challenge is figuring out how to apportion the cost of infrastructure among the population. Singling out two groups of people, many of whom are not in a position to handle a one percent increase in their living costs, is the stupid part of the idea. The outrageous part of the idea is imposing a one percent tax on someone’s $100,000 cancer treatment invoice even though insurance covers the entire $100,000.

One critic of the bill, Pittsburgh’s city controller, suggests that the proposal should be ditched and replaced with some sort of tax or user fee on non-profit medical facilities and higher-education institutions. If infrastructure in the city is funded with a tax from which those institutions are exempt, the controller’s idea has validity. But what about other non-profit institutions in the city? Why not include them? Why focus on institutions providing two of the most essential services required by people, that is, education and health? Why exempt non-profit institutions that are providing other essential services such as environmental protection? And why exempt non-profit institutions providing services that aren’t as essential as health?

Another critic suggested that the proposal was unworthy of support but at least served as a conversation starter. In all fairness, perhaps that was the goal of the council member who introduced the bill, though there are better ways to start conversations. At least now that council member has a way to ease out of the predicament in which he finds himself.

On top of the policy and fairness question, there is the not-so-slight legal obstacle. The tax is in the form of a sales tax, and a second-class city in Pennsylvania, which is how Pittsburgh is characterized by the legislature, has not been given authority to enact a sales tax.

Back to the drawing board they must go. It will be interesting to see what the next proposal turns out to be.

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