Tax Ignorance or Tax Deception?

Reader Morris sent me a tweet by Grover Norquist, who claimed “Slavery is when your owner takes 100% of your production. Democrat congresswoman Ocasio-Cortez wants 70% (according to CNN) What is the word for 70% expropriation?” I’m not on Twitter, primarily because squeezing complex concepts into a limited number of words is a recipe for errors, misunderstandings, and manipulation. I dug round, found the link to this particular tweet by Norquist, and read the comments. Many of the comments made the same point that I made when I replied to reader Morris after he sent me the tweet.

Norquist claims that Ocasio-Cortez “wants 70% . . . of your production.” That simply is not what she has proposed. She has proposed a marginal rate of 70 percent on income above $10,000,000. So unless a person has income exceeding $10,000,000, the proposed 70 percent rate is irrelevant. Norquist apparently is trying to play the fear card, trying to cause someone earning $50,000 a year to think that the federal government would take $35,000.

Here’s the basic point about marginal rates. They are not average rates. They are not effective rates. Here is an example. Using 2018 tax rates, an unmarried person with taxable income of $12,000,000 has a tax liability of $4,405,689, an average rate of 36.7 percent. Using 2018 tax rates, but amended with the 70 percent proposal, the same taxpayer would have a tax liability of $5,805,689, an average rate of 48.3 percent. That’s nowhere near a tax of $8,400,000, which is what Norquist wants people to believe. As one comment put it, “You'd think the president of Americans for tax reform would understand this. I'm betting he does, and is betting 30% of Americans do not.” That comment suggests that Norquist is not suffering from ignorance but is playing with deception. The only flaw is the understatement of how many Americans do not understand how marginal rates work, and thus do not understand the 70 percent proposal.

In 2013, YouGov ran a poll, and the published results are sad. When asked, “Suppose that your income put you at the very top of the 28% tax bracket and you earned one more dollar such that you were now in the 33% tax bracket,” 52 percent selected the correct answer, “My tax bill would go up a very small amount, but 48 percent selected the incorrect answer, “My tax bill would go up substantially.” What was even more revealing was the split between Democrats and Republicans. Of the Democrats who responded, 63 percent answered correctly and 37 percent did not. Of the Republicans who responded, only 38 percent answered correctly, while 62 percent did not. Is it any wonder that there is such an opportunity among Republicans for Norquist and others to share false, misleading, or insinuative information about the 70 percent proposal? As another comment explained, addressing Norquist, “You certainly understand it’s not 70% of anyone’s entire income. You know it’s income over $10 million. So you are trying to mislead people.” Or as another comment framed the situation, “They play to their base's ignorance and then the damage is done.” That same ignorance is what causes “A lot of middle class folks [to] not even realize that they pay a higher effective income tax rate than Billionaires do.”

Whether a 70 percent marginal tax rate on taxable income above $10,000,000 is the best solution is open to debate. Perhaps the rate should be lower, or higher. Perhaps the cut-off should be $5,000,000 with a lower rate, or $25,000,000 with a higher rate. Perhaps there should be several rates and several brackets. That debate, though, needs to take place AFTER most people understand the realities of how marginal rates function.

Norquist and others in the anti-tax crowd suggest, and often declare, that a 70 percent rate would destroy the economy, cause huge job losses, and devastate industry. As another comment put it, “The word for a 70% top tax rate in 2019 is no one is sure. But in the 1950s, a 90% top tax rate equaled one of the best periods in American history when it comes to the growth in wealth per US household. The US could not have built the suburbs without this tax revenue.” As indicated in this chart, the top marginal federal income tax rate equaled or exceeded 70 percent from 1917 through 1921, and from 1936 through 1980. For almost one-half of the history of the federal income tax, top marginal rates of 70 percent or more were the norm.

Issues surrounding federal income tax rates intersect with other issues. It is important to understand how playing with these other issues is used to twist and obfuscate the reasoning necessary to reform the federal income tax so that it does not enhance income and wealth inequality, which, by the way, are far more likely to destroy the economy, cause huge job losses, and devastate industry.

One issue is the charge that high income tax rates constitute “socialism.” Depending on how one defines that word, one can label the interstate highway system as socialism, or one can classify the years with those top marginal rates of 70 percent or more as controlled capitalism, very different from “socialism” as defined by those who think it means a political system that has taxation. Norquist’s attempt to equate high marginal income tax rates with Nazi Germany, because the word “socialist” is in the name “National Socialis German Workers’ Party” was met with the retort, “Grover, the National Socialists (Nazis) were actual socialists like the [Iranian] Republican Guard are actual Republicans. Stop with the BS, you should know better.”

Another issue is Norquist’s claim that high income taxes are, or come close to, slavery, based on his flawed notion that slavery is what happens when someone takes 100 percent of another person’s production. The flaw is that a slave has no choice and must generate production, whereas those who are not slaves and do not want to generate production that is taken by another have the option of not generating production.

One comment addressed the underlying problem: “I can’t understand how so many people don’t know what marginal tax rates are.” The answer is simple. Insufficient education.

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.

Certainly Norquist’s tweet does not go into the “effectively combating ignorance” column. It is yet another entry in the “development and perpetuation of ignorance” list. Sad.

Broken Tax Promises: When Tax Cut Crumbs Are Brushed Away

Proponents of the 2017 tax cuts for large corporations and the wealthy bragged that this tax giveaway would generate good-paying jobs and raise wages. They pointed to what turned out to be miniscule bonus payments by a tiny fraction of the employers who were rolling in cash after they cut their taxes to even lower levels. I wrote about this sleight-of-hand in posts such as Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, Oh, Those Bonus Payments! Much Ado About Almost Nothing, Much More Ado About Almost Nothing, You’re Doing What With Those Tax Cuts?, Arguing About Tax Crumbs, Don’t Want a Crumb? Here’s Dessert But Give Back Your Appetizer and Beverage, and How Tax Cuts for Large Corporations and Wealthy Individuals Impact Jobs. Rather than creating jobs, the 1,000 largest publicly traded companies reduced net employment by 140,000, as reported in this New York Times article. And, as Noah Smith pointed out in his Philadelphia Inquirer article, those bonus payments praised by the tax-cut folks constituted a trend that was “exaggerated,” a conclusion supported by an economic study he cited that demonstrated how those bonuses did not generate a significant increase in 2018 compensation.

Perhaps one reason that the bonuses did not do much in terms of worker compensation was the fact that there is a difference between announcement of a bonus, which gets the tax-cut acolytes all excited, and actual payment of the bonuses. What happened at Aramark demonstrates why talk is cheap and actions matter.

At first, in late 2018, as reported in this article, Aramark, a beneficiary of those 2017 tax cuts, and reporting its highest profit margin ever, based on profits of $1.1 billion, announced not only a reduction in its contributions to employee retirement plans, but also a delay in payment of bonus payments that had always been paid in December. Instead, the bonus payments would be paid on February 15, 2019. Then, in early February of this year, as reported in this article, the company announced that there would be no bonus payments for managers in the four lowest of eight compensation levels. Instead, “select” employees would receive one-time awards.

This is a company that racked up $237.8 million in tax reductions thanks to the 2017 tax giveaway. Ought not at least some of that money be used to increase contributions to retirement plans? Instead, not only was the company contribution not increased, it was reduced. Ought not some of that tax break money be used to pay bonuses, and even increased bonuses? Instead, bonus payments have been eliminated for many employees. The CEO, incidentally, whose total compensation is $16,000,000, received a bonus of $2,600,000. As reported in this article, though the $16,000,000 was a reduction from $16,300,000, Institutional Shareholder Services, a shareholder advisory firm, tagged the compensation as “high relative to peers.”

Aramark has a clawback policy that permits it to recover incentive compensation paid on “misstated financial results.” It has expanded that policy to cover more than 165 executives. It seems to me that there also ought to be, for all companies, a tax break clawback provision that permits the federal government to recover tax breaks paid on misstated promises of increasing compensation for all employees. As I wrote in What’s Not Good Tax-Wise for Most Americans Is Just as Not Good for Small Businesses:

If, indeed, the goal of the Congress and the Administration is to assist all Americans, including small business owners, then it would have proceeded, and would proceed, in a manner consistent with the platitudes too many of its members tweet, bark, and spew. Instead of handing out tax breaks to large corporations and wealthy individuals while driving up the deficit that will wreck the economy, Congress and the Administration should have, and could have, made tax breaks available only after the tax break recipient performs what has been promised. This is what I suggested in How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, and When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises? Of course, my suggestions fall on deaf ears in the nation’s capital, because it is no secret that adopting this approach would expose what is really happening behind the curtain of deflections, misstatements, and fabricated claims. What is happening is not good for the vast majority of Americans, nor is it good for small business.

I wonder, if the tax cuts had been tied to actual job creation performances and not empty promises, whether more jobs would have been created or far fewer large corporations and wealthy individuals would have lined their pockets. I have yet to read any sensible argument why making tax breaks conditioned on actual performance rather than on false promises is a bad idea or something that cannot be implemented. The number of broken promises in society needs to be reduced, and hopefully eliminated, and anyone who objects to taking steps that reduce or eliminate broken tax promises perhaps should be given the opportunity to experience life on the other side of a broken promise.

Was the Philadelphia Soda Tax the Product of Revenge?

Last week, when the U.S. Attorney’s Office issued an indictment of eight individuals, as described in this report, among others, I didn’t dig into the details. But then another report appeared that caught my eye. I saw the phrase “soda tax.” What’s THAT about?

As readers of this blog know, the soda tax has been the subject of posts since 2008. I have written about its flaws in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, Imagine a Soda Tax Turned into a Health Tax, Another Weak Defense of the Soda Tax, and Unintended Consequences in the Soda Tax World. Thus my interest in this bit of news.

It turns out that two of the indicted individuals, electricians union business manager John Dougherty and City Councilman Bobby Henon, who were significant advocates for the Philadelphia soda tax, allegedly pushed for enactment of the tax in an effort to punish the Teamsters union. Dougherty allegedly was angry with the Teamsters union for a television ad it had run that put Dougherty “in a negative light.” The indictment claims that Dougherty told another union official, “Let me tell you what Bobby Henon’s going to do, and he’s already talked to [elected local public official]. They’re going to start to put a tax on soda again, and that will cost the Teamsters 100 jobs in Philly.” It also claims that when a member of the mayor’s administration started to explain why the soda tax would be good for the city, Dougherty replied, “You don’t have to explain to me. I don’t give a f—. Listen, my goal is to make sure you are alright, that’s all.” Allegedly, Dougherty and Henon stayed in touch during the time the soda tax proposal went through the legislative process. Some commentators consider the allegation as fuel for increased opposition to the soda tax from the beverage industry. It seems that the Teamsters union would also be aggravated by the disclosure, considering it has opposed the tax from the outset. Worse, the indictment alleges that Henon, a member of City Council, pushed for the tax as “part of a corrupt bargain he struck with Dougherty in exchange for a $73,131 salary from Local 98 and tickets to sporting events worth $11,807.”

The mayor of Philadelphia, Jim Kenney, explained, “It may have been a revenge plot by Local 98, but it wasn’t to do with me.” He claimed that his finance director suggested a soda tax shortly after he was sworn in as mayor. The soda tax had been proposed and rejected during the term of his mayoral predecessor. Kenney and Dougherty have known each other since childhood, went to school together, and have been active in Democratic politics in the city for a long time. Henon, in the meantime, denied any wrongdoing.

Several days later, two members of the Kenney administration issued a reply. Essentially, they repeat the mayor’s claim that the idea for the soda tax originated with the finance director and that Dougherty had nothing to do with it. They explain that the discussion started with a recognition of the city’s need for revenue to fund pre-K, rehabilitation of parks, recreation centers, and libraries, and other projects. They claim that they had no knowledge of Dougherty’s alleged effort to harm the Teamsters union until the indictment was released. They claim that “the tax was the result of creative thinking around improving education for our children and economic development in our neighborhoods.” After not finding money in the budget because they didn’t want to make more spending cuts in other programs, they considered new revenue sources. They claim that they “reviewed multiple options to raise new revenues,” but they do not identify those options, Instead they “decided to pursue the beverage tax because it provided the necessary revenues, it would not negatively impact other revenue sources needed to fund the School District of Philadelphia or other city services, and the reduced consumption of sweetened beverages has other health benefits that benefit Philadelphia.” A tax on donuts, candy, pies, cakes, fried foods, or other unhealthy food items would also raise revenue and have health benefits. Would such taxes harm the Teamsters union? I don’t know. Were such taxes among the “multiple options”? I don’t know. It seems to me that more information about the origin of the soda tax would be helpful and arguably necessary. Of course, these city officials point out the benefits generated by the revenue raised by the soda tax, but the same benefits arguably would be generated by a lower tax on a wider array of unhealthy foods and beverages.

It remains to be seen what actually transpired behind the scenes. My guess is that a multitude of factors were at play, and not all of them were as noble as the soda tax advocates would want us to believe.

Will Tax Increases Be Inevitable as the Federal Budget Deficit Increasingly Corrodes the Economy?

A few days ago, in this commentary, Mark Zandi pointed out that the “U.S. government is set to spend $1,000,000,000,000 more than it earns,” and asked, “Who’ll pay for it?” It’s a good question, and it’s one I’ve addressed at least several times in the recent past. In A Peek Into Congressional Tax and Deficit Confusion, I pointed out the inconsistency between Paul Ryan’s expression of regret for “not paying off the national debt” and his participation in a tax giveaway to the wealthy and large corporations that has caused the nation debt to grow beyond anything anyone would have imagined ten years ago. In fact, Ryan claimed that the “tax overhaul” enacted “under his leadership” would be be viewed by history as very good. In Another Tax Cut Failure, and So a Tax Cut Incentive Didn’t Work As Promised, But I Am Not Surprised, I explained how one aspect of the promised economic benefits of the tax breaks enacted for corporations, namely, a reduction in tax on repatriated earnings, wasn’t producing anything near the promised benefits. In a series of commentaries, including How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?, No Tax Break Until Taxpayer Promises Are Fulfilled, and When Job Creation Promises Justifying Tax Breaks Are Broken, I have explained how the jobs promised by the advocates of the deficit-enlarging tax giveaway have not materialized, or have shown up as low-paying positions prohibiting workers from meeting their financial needs.

Mark Zandi points out several aspects of the deficit catastrophe hanging over our heads. He notes that the fiscal restraint and responsibility once practiced by members of both parties has disappeared. Annual budget deficits exceeding one TRILLION dollars are upon us and promise to continue if nothing is done. Aside from recession years, the deficit has not reached as high a percentage of the economy as it now does.

Zandi points out what I have been writing and saying for year, that the supply-side trickle-down approach to federal budgeting, does not work. He writes, “Lawmakers who argued that the cuts would pay for themselves by jump-starting sustainably stronger growth and thus much more tax revenue were completely off base. Revenues are plunging.” He also points out, as I have noted, that the tax breaks for corporations have not triggered any measurable increase in investment, making that claim look “more and more like a pipe dream.” None of this surprises those of us who understand how taxes and the economy work. Piled on top of this are large increases in defense spending and in non-defense expenditures. Seriously, if a Congress decides it needs to increase spending, especially for defense, then it ought not be lowering taxes. Imagine if that approach had been taken in the 1940s.

So what’s so bad about huge federal budget deficits? Zandi shares what should be apparent to those who look closely at how economies work. The federal government will need to borrow much more money. That will add more spending to the budget, because the interest expense will increase. It also will cause interest rates to increase, because of the law of supply and demand. With the federal government grabbing more of whatever money is available to borrow, everyone else who needs to borrow, which is everyone other than the oligarchs swimming in tax break money, will find loans more difficult to obtain and interest rates even higher. This shrinks the economy. It begins to spiral down, not up as promised. Alternatively, the federal government can print money, which would pile hyperinflation on top of the economic mess.

What Zandi doesn’t mention is that finding money to borrow, the federal government or someone in the 99 percent, requires looking to those who have money to lend. It is no surprise that the oligarchy drowning in tax break money will be ready to lend, for interest rates that will surely not be declining. Eventually there will be a nation 95 percent or more of whom will be in debt to a handful of trillionaires.

So what’s to be done? Zandi tells us, “To rein in the nation’s deficits and debt will require both higher taxes and spending restraint.” Who gets taxed? According to Zandi, “The increased tax burden can only fall on wealthy and high-income taxpayers, simply because that’s where the money is.” Of course, the wealthy, one of whom has already suggested he will run for president in 2020 because he can’t afford to have his taxes increase, will object mightily, will use their wealth to dictate to the Congress that taxes on them not be increased, or to dictate to at least enough of the Congress to obstruct any tax increases on the wealthy. They will insist that the deficit be reduced by the “spending restraint” portion. Zandi thinks that it “must fall on the healthcare system, because its outsized growth in caring for the elderly and poor is busting the government’s budget.” The oligarchs have their eye on more than Medicare and Medicaid. They also want to eliminate, in steps, Social Security. The net effect would be a population reduction similar to what a pandemic would bring. Already, life expectancy is declining in the United States, even though it spends more on healthcare per capita than other nations. The healthcare spending problem can only be resolved by fixing the underlying causes, namely, overpriced pharmaceuticals, fraud, inefficiencies, and oligopolies taking over health care practices. That, too, will be difficult to do, because the oligarchs have a vested interest in the profits that can be extracted from providing health care. When an oligarch suggests that air and water should be purchased, it is easy to see glimmers of the plan.

To those who argue that it would be against the interests of the oligarchs to let the middle class and poor diminish in number or disappear, I suggest taking a look at Will Bunch’s commentary on “how the world’s billionaires and their powerful friends are talking about an automated near-future in which millions of jobs from truck driver to bookkeeper to newspaper journalist are replaced by machines,” perhaps eliminating as many as 40 percent of jobs by 2034. Bunch sees it as “a development all but guaranteed to cause massive societal upheaval but the grand poobahs of technology are powerless to stop it...because, you know, shareholders.” He’s quite right. He adds, quoting the president of Infosys, “CEOs who once had been thinking of gently trimming their workforce because of automation are now thinking bigger, that, ‘Now they’re saying, ‘Why can’t we do it with 1 percent of the people we have?’’”

What needs to be done, to fix the deficit as well as to counterbalance the impact of the so-called “robot revolution,” or “robot apocalypse” in some quarters, is what I have been advocating, and what Will Bunch suggests in his commentary. He writes, “I do think the idea of higher income or wealth taxes on multi-millionaires and billionaires . . . should be seen as a potential form of garlic to ward off any the invasion of the robots.” He explains, “Higher taxes on the rich — with a top marginal income tax rate ranging from 70 to 91 percent — played a role in the economic boom of the 1950s and ’60s. The high tax rate inspired CEOs to invest in their workers, or in capital that created new jobs, rather than in themselves and their suppressed yearnings for multiple mansions and yachts. The government also had more tax revenue to spend on projects like infrastructure, which created even more decent middle-class jobs.” Certainly this nation can “bring back the 50s and 60s” without bringing back the social baggage that predominated in that era, by bringing back the sensible economic policies of that time.

Zandi expresses pessimism. He writes, “Unfortunately, it doesn’t look like Washington is capable of doing much of anything anytime soon, let alone tackling the daunting challenge of raising taxes and reining in spending.” Until oligarch money is removed from the equation, “Washington” isn’t going to do much of anything for the 99 percent. It won’t be permitted to do anything that removes the oligarchs from power. Will Bunch addresses those oligarchs with advice I doubt most of them will heed: “Maybe stop obsessing over artificial intelligence and use some emotional intelligence for a change. The short-term sugar rush of quarterly profit margins won’t be worth a warm bucket of spit in an economy with Great Depression levels of unemployment, where the only guaranteed job is building the barricades of a social revolution. That means thinking about stakeholders, including workers, and not just shareholders.” Indeed. As I have pointed out many times, capitalists need consumers, and consumers need money to be consumers, which means they need jobs. The best approach to growing a business is to invest in workers.

What both Zandi and Bunch write is consistent with what I wrote in A Peek Into Congressional Tax and Deficit Confusion: “If it is difficult for a member of Congress to understand basic arithmetic and the practical reality of economics, imagine the challenge facing most Americans. This is what encourages advocates of failed tax policy to continue preaching this nonsense [of tax cuts for the wealthy and large corporations trickling down to the masses]. They have the means to do so because they are financed by the handful of wealthy individuals and large corporations that benefit from a situation that is detrimental to almost all Americans. Though some people look at their present situation and consider it comfortable, very few examine the long-term consequences of this harmful tax-cut gimmick and the impact of those consequences on their lives ten, twenty, or thirty years from now.”

I share the pessimism. As I also wrote in A Peek Into Congressional Tax and Deficit Confusion: “Perhaps it is the inability to understand tax and economic policy that encourages too many voters to line up with those who offer false promises that make for great tweets and sound bites but that in the long run, and in many instances in the short run, are disadvantageous to the vast majority of Americans. By the time enough people figure this out, it will probably be too late. So for those who don’t yet get it, cutting taxes for the wealthy and large corporations not only fails to reduce or pay off national debt, it also fails to improve the economic position of everyone else.”

When a mistake has been made, fix it. Fixing a mistake often requires undoing, or reversing, what was done. A person who drives past the store they wanted to visit needs to turn around. A person who types the wrong letter in spelling a word needs to hit the backspace key. A Congress that foolishly cut taxes needs to uncut those taxes, and not just in the future. The tax breaks that were dished out but that were not used for what was promised are not unlike a merchant giving too much change to a customer. Undo the tax cuts. It’s that simple. Otherwise, an exploding deficit will meet some robots, and it won’t end well for pretty much everyone.

Is a User-Fee-Based System Incompatible With Progressive Income Taxation?

Reacting to my commentary, Who Should Pay to Clean Up Water, suggesting that the cost of cleaning up polluted water should be borne by those who pollute the water, a reader asked me to reconcile that position and my support for the mileage-based road fee with my support for the use of a progressive income tax to pay for social safety nets. The challenge of fitting different types of user-based fees with progressive income taxes has existed since the income tax was enacted. It has inspired many commentators to share their perspectives. Here is mine.

When examining the use of federal income tax revenue generated by a progressive income tax, it makes sense to consider the various programs that consume federal revenue. There are many, but I focus on several of the biggest or most vexing.

The federal government spends money on national defense to protect lives and property. Those with more property have more to lose, and thus should pay more. Though a flat rate tax might appear to accomplish this, income is not the same as wealth, as many people with wealth manage to make their income, or at least their taxable income, appear disproportionately less than wealth. I’d prefer a tax on wealth, but I think that would violate the direct tax prohibition (as it would pretty much be a federal property tax). The closest one can get to that ideal system is a tax on real income, This is one major reason, by the way, why I support removal of most exclusions and deductions. For the curious, another major reason is my preference for the reduction of complexity in tax systems.

Governments at all levels spend money on assisting those with financial and health problems. I consider this, too, to be an aspect of national defense. Those financial problems contribute not only to the health problems but also to other problems such as education deficiencies and crime. History is filled with examples of military forces at a disadvantage because their recruits were unhealthy, inadequately educated, or otherwise suffering from the effects of financial problems. Even the United States, in both World Wars, had to spend money to bring its military recruits “up to speed” in remedial education and health efforts before getting them through basic training. The need for education is even more important in the twenty-first century. When the next war breaks out, there will be even less time to engage in remediation required to offset the deficiencies that safety nets address, especially because those safety nets are inadequate and inefficient. For me, the bigger issue is not whether we should be investing in the nation’s human capital the way we have been investing in financial capital, but how the nation should be spending the money devoted to developing, strengthening, and protecting its human capital. For example, too much money spent on health care assistance flows into the coffers of pharmaceutical companies that prevail on captive legislators for tax breaks and raise prices to make even more profit to satisfy the insatiable desire of the wealthy for even more profit. From a long run perspective, the focus needs to address not just immediate health care issues but also the education required to teach people how to live in ways that reduce health problems. Similarly, there needs to be investment in teaching people how to improve their financial lives, and life generally, by staying in school and avoiding particular harmful behaviors. Payment for these efforts cannot come from those who lack financial resources, but must come from those who would benefit the most from having a larger “supply” of national defenders and who would lose the most if the national defender pool continued to become inferior in terms of health and education.

Governments at all levels spend money on programs such as environmental cleanup. Cleaning the environment benefits everyone, but again, it is those who have the most who have the most to lose.

From a macroeconomic perspective, a nation with a significant portion of its population sick and uneducated, especially as that portion has been rapidly growing, becomes increasingly a nation with a smaller consumer base, which is detrimental to the interests of the wealthy. Throughout corporate America, large corporations are swallowing up small, local enterprises, trying to “buy” customers, rather than enticing them with high quality goods and services. Private equity funds and hedge funds are acquiring everything they can grab. The number of people holding large amounts of wealth and thus controlling the nation and its legislatures is shrinking, while their wealth grows, causing substantial increases in the number of people with little or nothing, or just getting by as members of a shrinking middle class. The trend is such that eventually fewer and fewer people will own more and more. Taken to its logical extreme, what happens when one person, directly or through owning all corporations and private equity funds, owns everything? To whom will this person sell? Granted, this scenario is improbable, because the tipping point will be reached before the contestants for world financial domination reduce themselves to the last two standing. It demonstrates, though, not only why supply-side economics and trickle-down theories not only are failures and masks for the satisfaction of greed but also the need for progressive taxation. A progressive income tax is the braking system necessary to prevent the consequences of the inevitable runaway oligarchic and monopolistic consequences of unfettered capitalism.

When the Tax Stuff Piles Up

One of the unfortunate consequences of the federal government having been shut down for as long as it was is the backlog that piles up. Life brings all sorts of backlogs. We encounter backlogs caused by equipment failure, backlogs caused by traffic accidents or road repairs, and backlogs caused by people running late due to other backlogs. It is not unusual to encounter backlogs when returning from vacation, particularly with mail and packages piling up, though in recent years the volume has been reduced because of the shift from paper to digital communication.

During this week, we have been informed that when IRS employees returned to work when the shutdown ended, they found 5,000,000 pieces of unopened mail. Apparently the shutdown not only caused the usual mail to accumulate, but the closure of in-person IRS help centers left taxpayers with little choice but to use mail. So instead of getting the usual 200,000 pieces of mail each day, the IRS received 700,000.

The Tax Court has experienced a similar avalanche. According to this report, the Tax Court, stopping mail delivery during the shutdown, has received a “mountain” of mail. It is unclear whether the inability to file electronically generated more paper mail than usual.

The mail backlog is just one facet of the impact of the shutdown on the federal tax system. The list of questions and problems is long. Bloggers at the Procedurally Taxing blog, published by four current and former full-time and adjunct colleagues, including a former student, has offered a series of commentaries examining these questions:

A Close Look at the IRS Shutdown (27 Dec 2018)

Tax Court Operations During Federal Government Shutdown (29 Dec 2018)

Don’t Forget Guralnik and Parkinson during Tax Court’s Indefinite Closure (31 Dec 2018)

Dealing with the Shutdown When You Have an Impending Calendar Call: Take Me Back to 2013 (15 Jan 2019)

IRS Updates Contingency Plan (16 Jan 2019)

After The Shutdown: Dealing with Time Limitations, Part I (22 Jan 2019)

After The Shutdown: Dealing with Time Limitations, Part II (23 Jan 2019)

The Taxpayer Advocate Service’s Role During an IRS Shutdown (25 Jan 2019)

Finding Guidance on the Effects of the Shutdown (27 Jan 2019)

After The Shutdown: Dealing with Time Limitations, Part III (28 Jan 2019)

After The Shutdown: Dealing with Time Limitations, Part IV (31 Jan 2019)

All of these commentaries, and surely any that follow, are worth examining, and will continue to be helpful as the process of digging out from the backlog continues. They will continue to be valuable if another shutdown occurs. And if that happens, I expect more guidance and commentary from the quartet that is far more adept at tax procedure than I am.

Edited 1 Feb 2019 to add Finding Guidance on the Effects of the Shutdown, Part IV, released after this post was originally published.

Pay Tax Now? Pay Tax Later?

Those familiar with how federal income tax disputes can be resolved know that in most instances taxpayers have a choice. They can pay the amount that the IRS claims is due, and then file a claim for a refund. They can decide not to pay and file a petition with the Tax Court. If they prevail in their refund claim, they get interest on the refund. If they lose in the Tax Court, they pay interest on the deficiency.

A recent Philadelphia Inquirer article explains that Philadelphia will permit property owners disputing their 2019 real estate tax assessments to delay paying the disputed tax increase until their appeals are concluded. There currently is a big backlog of pending appeals, most of them generated by the city’s recent re-assessment of properties.

The legislation passed despite the mayor’s refusal to agree. The mayor’s signature is not required if the legislation has passed City Council by a sufficient margin. The mayor’s objection reflects his concern that the delay in collecting the disputed increased taxes will harm the city and the school district because it will reduce their current year revenue.

What is unclear to me is whether property owners who do not prevail in their assessment appeals will be required to pay interest on the unpaid tax for the period between when it otherwise would be due and when it eventually is paid. My attempt to find the specific legislation was unsuccessful, as no 2019 legislation is showing up yet on City Council’s web site. My attempt to find the Philadelphia general rules with respect to postponed real property tax payments also failed. The article simply states, “After appeals are settled, which can take a year — or longer if appeals continue into the court system — property owners would need to pay the difference if the outcome of their appeals were still higher than their 2018 assessment.” No mention is made of interest. It is possible that there is a general requirement of interest payment but the specific legislation in question waives it. Without the text of the legislation it is impossible to know the answer.

It seems to me that taxpayers who are appealing assessments ought to have the same sort of choice facing taxpayers who face IRS claims of additional income tax due. If they choose to delay paying the increased real property tax, and lose the appeal, they ought to pay interest. They also should have the option of paying the disputed real property tax increase, and if they win the appeal, they should be paid interest. Perhaps it works that way and I simply cannot find the provisions that specify those choices and interest payments. If someone knows the answer, please let me know.

Unintended Consequences in the Soda Tax World

The soda tax has been getting my attention for eleven years, and though there was a respite, it now is once again getting plenty of attention in national commentaries. I have written about the soda tax since 2008, in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, Imagine a Soda Tax Turned into a Health Tax, and Another Weak Defense of the Soda Tax.

As readers of this blog know, although its advocates continue to praise its existence, the soda tax fails to get my support because it is both too narrow and too broad. It applies to items that ought not be subjected to this sort of “health improvement” tax, and yet fails to apply to most of the food and beverage items that contribute to health problems. Very little of its revenues are directed into health improvement efforts.

An email from a reader has alerted me to another flaw in Philadelphia’s soda tax. The reader pointed me to this commentary, in which Kyle Smith notes, “Now that beer is, in some cases, cheaper than soda in Philadelphia, alcohol sales are up sharply.” Somehow, I had not been aware of this development. A bit of research confirmed it, as it was reported in this article from about a year ago, though the increase was not limited to beer but also affected wine and some types of liquor but not other types of liquor. The article also suggested that the changes in alcohol consumption could not necessarily attributed to the soda tax. About a week ago, in this article, Heather Moon concludes that because beer is cheaper than soda, there is a “correlated increase in alcohol sales in [Philadelphia] as a result.”

It is not surprising that people who encounter price increases when purchasing one beverage would turn to another beverage that is less expensive. Those who are seeking soda because they want something cold to drink on a summer day might consider beer to be a suitable substitute. The same can be said for those who are seeking soda because it is something they enjoy if beer is another beverage that they enjoy.

Though there are arguments about the health consequences of drinking beer or other alcohol, there is no doubt that drinking alcohol to excess is at least as unhealthy as drinking soda to excess. In some respects, though overconsumption of soda harms the drinker, overconsumption of alcohol harms not only the drinker but potentially harms others. What this means is simple, namely, that the soda tax does not correlate well with health improvement, even though that is its purpose according to its advocates. Attempts to regulate health through taxation would require very detailed fine-tuning, because very few items are dangerous to health in all events, whereas most items are dangerous to health if too little or too much is consumed. What is too little or too much depends on each individual. Designing a tax to control dietary input requires a scheme so complicated it might make the federal income tax look simple.

The key is education. There are too many people who do not understand the risks of consuming too little or too much of most foods and beverages. Perhaps the advocates of “health improving” soda taxes will next offer a tax on failure to eat vegetables?

When Tax Return Preparation Just Isn’t Enough

Yes, I watch television court shows. Anyone who scans MauledAgain can’t help but notice the long list of television court show cases that have become the subjects of my commentaries, including Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, and Judge Judy Identifies Breach of a Tax Return Contract.

I admit, I watch these court shows not just for the occasional tax issue or for an example I can use when teaching the wills and trusts course. Sometimes there are interesting cases that involve other areas of the law. Often, however, the cases are routine, involving issues identical or similar to those popping up in earlier cases. So when a case popped up on Hot Bench that appeared to involve another one of the “loan or gift” questions, my attention wasn’t entirely focused on the television (which is why I did not pick up on the season and episode). I had listened enough to realize that the plaintiff, a 74-year-old man, was suing the defendant, a 31-year-old woman, for the return of money he claimed to have loaned to her. She, not surprisingly, was insisting that the transfers of money were gifts. But then, a few minutes later, I heard the word “tax” and my eyes and ears put full attention on the television.

What I had heard was the plaintiff telling the judges that the reason he expected repayment from a woman who claimed to have needed money was his understanding that she earned most of her money during the first few months of the year because she was a tax return preparer. According to the plaintiff, the defendant told him that she needed money to pay her rent. So he wrote her a check, and wrote “rent/loan” in the notation space on the check. The judges pointed out that he could have added that notation after the check was returned by the bank, but he denied writing it other than when he wrote the check. Sometime later, he wrote another check to the defendant when she claimed she needed money to pay car insurance.

The defendant admitted that she was an accountant and tax return preparer. She argued that the transfers of money were gifts, because the plaintiff was appreciative of being given the opportunity to spend time with her. She stated that if someone wanted to be in her company, the person would need to pay. She articulated her position in a way that caused at least one of the judges to comment that what the defendant was describing might come close to breaking the law. Indeed, that explanation appeared to open the door to a third possibility, specifically, compensation for services. The plaintiff, however, denied that the relationship was anything but platonic. The defendant explained that whenever she needed money, she went to the plaintiff, and he happily gave her gifts of cash. She also claimed that the plaintiff “made moves” on her and that it made her uncomfortable. One judge asked, “Did it not make you uncomfortable accepting money from the plaintiff?”

The plaintiff vigorously denied making moves on the defendant. He said, in effect, “Look at me. Do I look like someone who has to pay a woman so I can create a relationship?” He also produced a text message in which the defendant promised to pay him back for the moneys he had loaned her.

The judges asked the defendant why she, a professional woman, would claim that if a man wanted to hang out with her, he had to pay. She did not give any sort of explanation. Next, when she was asked how much money the plaintiff had transferred to her, she said she did not know, which one judge found inconsistent with the defendant’s training and experience as an accountant who keeps track of dollar amounts. When asked for an estimate of the money received from the plaintiff, the defendant stated that she was unable to provide one.

The judges deliberated for an extremely short time, perhaps not even a minute. They concluded that the defendant had “connived” the money out of the plaintiff. They held in favor of the plaintiff.

In the usual post-hearing interview conducted in the lobby, the defendant simply said, “If you want to hang out, it’s going to cost you.”

So is this what happens when tax return preparation fees don’t generate sufficient income for a person’s desired lifestyle? In most instances, I think not. In most instances, tax return preparers have a second, or even third, job. And tax return preparers who also are accountants presumably are working year-round, doing quarterly financial statements, payroll, and other tasks. But ever now and then, it works out differently.

When Job Creation Promises Justifying Tax Breaks Are Broken

Although most tax breaks, especially those for “creating” jobs, are handed out before the recipient does what the recipient promises to do in exchange for the tax breaks, I have advocated holding back tax breaks until the recipient actually does what the tax break requires. I have explained this position in posts such as How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?, and No Tax Break Until Taxpayer Promises Are Fulfilled.

Now comes yet another example of why tax breaks for creating jobs should not be based on promises of future employee retention and hiring, but on actual compliance with job creation. According to this report, AT&T continues to reduce its job force, this time closing a call center in Syracuse, N.Y. that employs 150 people. Those who are willing to move to Florida can do so to keep their jobs, though since the enactment of the Tax Cuts and Jobs Act of 2017, AT&T has eliminated 10,700 jobs, closing several call centers. The tax legislation reduced the company’s federal income tax bill by $20 billion. Yet its CEO had claimed that it would created 7,000 “good jobs for the middle class” for every $1 billion in tax reduction. Yet, instead of creating 140,000 jobs, AT&T has reduced its work force. Under my approach, a company that cut 10,700 jobs would not receive a tax reduction.

I can understand why the oligarchs do not like my proposed approach to job creation. What I don’t understand is why so many Americans who are not oligarchs and who are struggling to make ends meet paycheck to paycheck vote for those who make their financial lives miserable. Is it that difficult to look at the facts and act accordingly even if the facts don’t mesh with what one expects or hopes would be?

The Goodbye Tax

According to this article, Japan has been added to the list of countries that charge a tax when tourists leave the country, joining Australia, China, Costa Rica, Lebanon, Mexico, and Sweden. Clearly this good-bye tax, not to be confused with the “goodbye taxes” dream of the anti-tax advocates, has revenue as its sole purpose. Surely these nations are not trying to discourage tourists from going home.

Most places that charge a fee for visiting charge admission. People who visit museums, or attend movies and concerts, pay a fee to enter. Imagine if a person could walk into a movie for free but face a fee when trying to leave. That approach would not work. But an admission fee discourages entry to the extent that a person cannot pay or does not think the fee is worth paying. So why do these countries impose a departure fee instead of an arrival fee? Probably because an arrival fee would have a bigger adverse affect on tourist numbers.

Many years ago, to speed up traffic on the bridges between Pennsylvania and New Jersey, the Delaware River Port Authority decided to make passage free in one direction and to impose the toll only in the other direction. This approach to speeding up traffic now is common in many places. My father would joke, “You can get into New Jersey for free but you need to pay to get out. Are they trying to keep us there?” I don’t think Japan is trying to keep tourists from leaving, and knowing that tourists want to leave, they are an easy target for revenue.

I am confident that all of us can think of occasions where we would happily PAY someone to leave. Let’s leave that for another day.

Who Should Pay to Clean Up Water?

According to this report, Gavin Newsom, governor of California, has “proposed a tax on drinking water * * * to help disadvantaged communities clean up contaminated water systems. Newsom’s plan for a “safe and affordable drinking water fund,” included in the new governor’s first budget proposal, attempts to revive an idea that died in the Legislature last year.”

The idea of taxing drinking water both surprised and puzzled me. It surprised me, because taxing drinking water might be close to taxing the air that a person breathes. It puzzled me, because it is logistically difficult, if not impossible, to determine how much of the water that a person purchases, from a water utility supplying a building or in the form of bottled water, is used for drinking rather than washing, bathing, or watering lawns and plants.

So, as I usually do when I read or hear something that doesn’t quite make sense, I did a bit of research. According to this report, the proposed drinking water fund would need an initial $25 million. Though details on the source of the funding are unclear, last year’s proposal would have imposed a 95 cent monthly tax on residential utility customers, and fees on dairy producers and feedlot operators. That monthly tax and those fees are not a “tax on drinking water.” The headlines that so claim are flat out wrong.

Though several groups have expressed opposition to the enactment of a new tax, for various reasons, my concern is that a tax intended to clear up water ought to be imposed as a fee on those who have dirtied the water. Taxing residential homeowners and renters, almost none of whom are responsible for the dirty water in question, would require them to pay for the misdeeds of others. If imposing a dirty water fee on businesses and activities that pollute water requires those entities to increase the prices they charge customers, then the true cost of their products and services would be borne by those who use those products and services. A tax that shifts the burden of pollution from the polluters to those who are not polluters is unwise. It also happens to be one of the reasons that some of the opponents of the proposal have taken the position they have taken.

No Tax Break Until Taxpayer Promises Are Fulfilled

Although most tax breaks, especially those for “creating” jobs, are handed out before the recipient does what the recipient promises to do in exchange for the tax breaks, I have advocated holding back tax breaks until the recipient actually does what the tax break requires. I have explained this position in posts such as How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, and When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?

Now comes news that the New Jersey program providing tax breaks to corporations that promise to create jobs in the future lacks oversight, and that New Jersey has “failed to hold companies accountable for the jobs and investments they promised.” The news follows an audit by the state’s comptroller, whose office was unable to verify the 3,000 jobs that the tax break recipients claimed to have created or kept. Among the recipients of these tax breaks were companies that promised to stay in, or move to, Camden while creating jobs. The agency charged with implementing the program did not establish a method to determine if the tax breaks generated the economic benefits that were promised. Nor did it set up a method to verify the claimed job creation.

I have been a critic of the Camden promised-jobs tax giveaway, writing about the flaws in posts such as The Tax Break Parade Continues and We’re Not Invited, and previously in When the Poor Need Help, Give Tax Dollars to the Rich, Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, Where Do the Poor and Middle Class Line Up for This Tax Break Parade?, and Another Flaw in the New Jersey Tax Break Giveaway. Although New Jersey’s governor has proposed replacing the expiring tax break giveaway program with one that limits the tax breaks and monitors them more closely, it seems to me that the better approach is to simply let the program expire. But if these sorts of promised-job tax breaks are to continue, the process should be reversed, and companies that want to claim the tax break should be required first to produce iron-clad evidence that jobs have been created.

I am not alone in criticizing the New Jersey program in question. According to the news report, criticism has arisen from across the political spectrum. It was not unnoticed that the tax breaks were handed out “to companies with strong political connections.” Criticism was probably strengthened by the fact that more than $8 billion in tax breaks were handed out, almost all to companies awash in cash and profits. And surely it was strengthened by the news that some companies were overpaid even if they met their promised investment and job creation promises.

Savvy individuals and companies put money into escrow or other third-party accounts when the payment of the money depends on the performance of services or the delivery of property. There is no reason that a similar approach cannot be used when it comes to tax breaks, with a thorough review by a third party of companies’ claims that they have already performed what they promised to perform. Broken promises should not be part of a tax system.

Another Weak Defense of the Soda Tax

Though it had been a while since I last wrote about the Philadelphia soda tax, no sooner had I published my latest commentary in Imagine a Soda Tax Turned into a Health Tax, addressing the closing of a grocery store, than there appeared a Philadelphia Inquirer commentary arguing that the closure was not on account of the soda tax. As readers of this blog know, although its advocates continue to praise its existence, the soda tax fails to get my support because it is both too narrow and too broad. It applies to items that ought not be subjected to this sort of “health improvement” tax, and yet fails to apply to most of the food and beverage items that contribute to health problems. Very little of its revenues are directed into health improvement efforts. Though I haven’t paid much attention to the tax during the past year or so until last week, I had written about the soda tax since 2008, in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, and Imagine a Soda Tax Turned into a Health Tax.

In that recent Philadelphia Inquirer commentary, Ptah Gabrie argues that the closure of the Shoprite was due to other factors. After pointing out that the owner of the grocery store purchased a mansion four years ago and owns other stores that turn a profit, Gabrie cites a study claiming that some Philadelphians were shifting from sugary beverages to bottled water. Aside from the fact that the financial condition of the store’s owner has nothing to do with the fact that the store’s revenues are insufficient to cover the cost of purchasing the items it sells and paying for utilities, insurance, workers’ salaries, and other costs, the decrease in soda consumption has not necessarily translated into reductions in residents’ weight or an increase in residents’ health. Perhaps the sweetness lacking in bottled water is being offset by consumption of more cake, pies, cookies, and doughnuts.

Gabrie claims that the store closed because it lacks a liquor license. Yet even if having a liquor license would have permitted the store to remain open, does not the sale of alcoholic beverages contribute to health problems?

Gabrie also claims that home delivery cut into the revenue of the store in question, and points out that the store did not offer home delivery. Is there any evidence that the number of shoppers at the store decreased because they were using home delivery from other sources, rather than on account of shopping across the city boundary?

Gabrie suggests that a new ShopRite roughly two miles away might be the reason that revenue declined at the closed store. Yet again there is a question of whether shoppers chose to go to that store rather than to a store across the city boundary. It is interesting to speculate, but empirical evidence would be much stronger.

Gabrie asks why, if the soda tax is causing shoppers at stores near the city boundary to shift their shopping to stores outside the city, has the Aldi store not closed. There are several possibilities. One is that the store also is not doing well but its owner is hanging on, hoping for a turnaround. Another is that many of the clientele of that store are not habitual soda drinkers and thus do not see the point in taking their shopping out of the city.

Gabrie writes, “New taxes will always be opposed by the corporations that stand to lose profits and by people who mindlessly oppose any progressive means of changing the way we live.” My opposition is not based on lost profits but on the disconnect between the soda tax and the articulated goal of making people healthier. As I’ve pointed out in previous posts, the soda tax reaches items that are healthy, and fails to reach most items that are not healthy. Gabrie adds, “Taxation is the only way to push people on the fence to the healthy side. Just look at the tobacco industry.” That’s too much of an overstatement. There are, for example, workplace incentives in the form of bonus payments and gym reimbursements that are positive reinforcements of healthy behavior.

Gabrie then claims, “It is a fact that soda and sugary beverages cause diabetes.” It was when I read this statement that I decided I really did need to respond. The fact is, as explained by a variety of sources, including the University of Rochester Medical Center, eating too much sugar does not cause diabetes. According to the American Diabetes Association, “Type 1 diabetes is caused by genetics and unknown factors that trigger the onset of the disease. Type 2 diabetes is not caused by sugar, but by genetics and lifestyle factors.” The Mayo Clinic adds that gestational diabetes is caused by the placenta producing hormones that make cells more resistant to insulin. According to these and other sources, it’s not the sugar that causes diabetes but the weight that the sugar can add to a person’s body mass, so it’s not just sugar and certainly not just soda that adds the weight. That brings us back to the inconsistency between a tax on selected healthy and unhealthy beverages but the lack of a tax on unhealthy food items that can be just as much a risk for adding diabetes-inducing body weight. How many of the advocates of the soda tax would support a bacon tax, a fried food tax, or a saturated fat tax?

If It’s Real Property, It Should Be Subject to the Real Property Tax

As reported in this article, the Pennsylvania Commonwealth Court has held that the land on which billboards are placed is subject to the real property tax even though the billboards themselves are not because of an exemption in the tax law for signs. The taxpayers have argued that the exemption for signs, which includes billboards, should also apply to that land.

Though generally it is easy to distinguish real property from personal property, there are items that appear to be one but that are the other. Billboards are one example. Unlike a portable trailer carrying a sign, which can be easily moved from place to place, a billboard structure is affixed to the land and not easily moved. Thus, but for the exemption in the statute, the billboard would be treated as part of the land, and thus, as real property. This is why a building is considered real property. Applying the same reasoning, the legislature also enacted exemptions for wind turbines and silos. Yet the legislature has not enacted exemptions for cell-phone towers despite enacting one for amusement park rides, so there is a bit of subjectivity in the drawing of the line between real and personal property.

Those who claim that the exemption for the billboard should extend to the land on which it sits claim that the Commonwealth Court decision will make things “taxable because there’s a rent being derived by the landlord or the property owner.” But that is not the basis for treating the land as real property despite the existence of personal property, the billboards, on the land. In fact, the position of the land owners is the position that, if extended, would open the door to the elimination of the real property tax on all but raw land. Should the land on which a person parks vehicles be exempt from the real property tax because vehicles are not subject to the real property tax? Should the land on which a person places patio furniture be exempt because furniture is not real property?

Another argument offered by the land owners and their representatives is the claim that the legislature intended to exempt the land from the real property tax. But the statute refers to “sign or sign structure” and not to “signs and the land on which they are situate.” If the legislature intended to exempt the land, which I doubt, the legislature needs to amend the statute to express in clear terms what it presumably intended. In effect, the legislature said, “In the absence of the exemption, the value of the billboard would be included in the value of the land for purposes of computing the real property tax because the billboard is affixed in the same way a building is affixed to the land, but because we have a soft spot in our hearts for the owners of the billboards, who often do not own but rent the land, we will treat the billboard differently from the way a building is treated.” That leaves the land as land, and subject to the tax.

So why would someone look at a statute that refers to a “sign or sign structure” and conclude that it applies to land? Perhaps for the same reason that someone tries to find a way of getting out from chores assigned by a parent. Perhaps for the same reason that some people, when there is an emergency or a call for volunteers, slink down in the chairs or turn away rather than pitching in.

Imagine a Soda Tax Turned into a Health Tax

It has been a while since I last wrote about the Philadelphia soda tax. As readers of this blog know, although its advocates continue to praise its existence, the soda tax fails to get my support because it is both too narrow and too broad. It applies to items that ought not be subjected to this sort of “health improvement” tax, and yet fails to apply to most of the food and beverage items that contribute to health problems. Very little of its revenues are directed into health improvement efforts. Though I haven’t paid much attention to the tax during the past year or so, I have written about the soda tax since 2008, in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, and Putting Funding Burdens on Those Who Pay the Soda Tax.

In the meantime, as summarized in this article, academic and business researchers have studied the impact of the tax. Advocates of the tax and opponents of the tax have found reasons to support and object to each of the studies, almost always reflecting an alignment between their views and the outcome of the study. Generally, it appears that stores have passed some or all of the tax on to customers, sales of beverages containing soda have dropped, and some customers have shifted their shopping to locations outside the city where the tax does not apply, causing sales at stores outside the city limits to increase.

Now comes news that the owner of a Shoprite grocery store in West Philadelphia will close. The owner has explained that because of the soda tax, revenue at the store has dropped from $30.5 million in 2016, before the tax went into effect, to $23.4 million in 2018. The store is just blocks from the city limits, and it would be no surprise to learn that when people go to a store outside the city to avoid the soda tax they also purchase everything else on their grocery shopping list. The Shoprite’s owner concluded that the store has become unprofitable, losing more than $1 million each year since the tax went into effect. This Shoprite is not the owner’s only city grocery store, as he owns six other stores in the city. Those stores also have suffered revenue decreases but not to the extent of the store within blocks of the city limits.

The impact of the closure is unhealthy. The owner had opened this store and the others in what are called “food deserts,” places in cities where access to fresh groceries is limited or non-existent. Customers who shopped at this store despite the soda tax because they lack transportation to stores six, ten, or fifteen blocks away now face serious challenges in finding places to shop for food, even though the owner of the store has suggested he will offer ride shares. Employees of the closed store will be transferred to the owner’s other stores, but as employees of those stores leave, they will not be replaced, adding to the 200 positions already left unfilled because of slumping sales at those other stores. These are rather high prices to pay for a program that is generating less revenue than projected, and that has seen its projected revenue revised downward several times.

A spokesperson for the mayor, the chief cheerleader for the tax, responded by claiming that there was no “evidence that the tax has had any impact on sales.” The evidence I see is rather clear, so it would be helpful to know what sort of evidence the mayor seeks. The spokesperson pointed to several of those studies summarized above, but those did not focus on any particular store or area of the city, but rather looked at overall trends. The mayor continues to insist that because the tax is imposed on beverage distributors, they could absorb it rather than pass it on to customers, but the practical reality of the tax is that it gets passed on to customers.

Imagine if the tax was imposed on all items containing substances harmful to health, and not just beverages that contain sugar. Imagine if the tax did not apply, as it does, to items that are not harmful to health. The impact of the tax would be much less significant, because it would be spread over a much larger array of unhealthy food items, such as doughnuts, pastries, cakes, bacon, cheese curls, candy, and other items that contribute as much, if not more, to the poor health of America as does soda. Imagine if the revenue generated from the tax was used to improve health habits, dietary decisions, and medical care. Imagine if there was a connection between the impact of the tax and the purposes to which its revenues were dedicated. Imagine.