Monday, February 24, 2014

Why Does Deep Inequality Matter? 

It is important to understand that objections to income and wealth inequality, such as those I’ve shared in Getting to the Root of the Problem, Absurdity Breeds More Absurdity, Income and Wealth Inequality: A Threat, Not a Distraction, Working Hard?, and Some Ultra Rich Reveal Their Hands: Intentional or Accidental? are not objections to inequality. There simply is no way that absolute income or wealth equality can be attained. It is administratively unworkable, and the cost of accomplishing it would be too great. The objection is to deep inequality, the situation in which the disproportionality is severe and unwarranted by any sort of measuring stick. Those who claim that the wide discrepancies are the product of the market place conveniently ignore the fact that the market is skewed, and skewed in favor of those with disproportionate wealth and income, so that they have the opportunity to increase the disproportionality.

Last week, Eric Liu explained, in a commentary that needs to be read by everyone who votes or should be voting, why the suggestion by Tom Perkins that each voter should be given a number of votes equal to the voter’s wealth in dollars doesn’t present as radical a change as it appears to be. Liu draws our attention to information that most people haven’t noticed, because if they had, the outcry would be even louder than it has been.

Liu begins by asking why Perkins is getting attention. What Perkins says, according to Liu, reveals that “he has no command of American social or political history, no appreciation for the multigenerational legacy of public investment that made his success possible, and no apparent empathy for anyone outside his rarefied circle.” But his comments get widespread coverage simply “[b]ecause he's spectacularly rich.”

Liu then turns to voting booth strength. Among voters with incomes of $150,000 or more, 78 percent vote. On the other hand, among voters with incomes of less than $15,000, only 41 percent vote. The rich vote at twice the rate as do the poor. One cause is that too many of the poor aren’t getting themselves – or cannot get themselves – up and out to the polling place. On the other hand, the poor who are aware of the campaign by the rich to disenfranchise them through the pretext of voter ID concerns are probably so discouraged that they have given up. The rich run the country, and when this is the outcome, they have some explaining to do.

Beyond voting, very few of the poor, and a shrinking sliver of the middle class, show up as political donors, lobbyists, or legislators. During the 2012 election cycle, one-tenth of one percent, or a mere 31,000 people, accounted for 28 percent of campaign contributions, and surely their corporations accounted for yet another chunk. When it comes to lobbyists, 894 of them tossed $34 million to political candidates as part of the process of buying legislation, dictating policy, and running the government.

The ultra rich already have disproportionate advantages in the political process, and it’s one that they hold without needing to implement the votes-tied-to-dollars-owned nonsense trotted out by Perkins. They benefit from a tax law flaw, one that I have criticized for decades. Their dividends, capital gains, and carried interests are taxed at rates far lower than those applicable to salaries and wages. The rich know how to convert their income into low-taxed and no-taxed items, whereas the poor and middle class have no genuine opportunity to turn their compensation into dividends and carried interests, or to circumvent employment taxes in the manner used by those with sufficient wealth to do so. What’s galling is that as the rich find ways to get legislatures to give them and their corporations tax breaks, they continue to whine and cry about how horribly burdened they are with taxes. It’s more than greed. It’s an addiction.

Liu’s conclusion is well worth sharing:
In short, the outrage is not what a Tom Perkins says out loud; the outrage is that we already have something like the system he fancifully, condescendingly proposes.

Policy wonks and heroic citizen activists have all proposed reforms. We don't lack possible remedies. What we've lacked is the will to force our government to enact them. And this is why the outrageous self-justifications of an imperious hyper-elite are, perversely, very helpful now.

The game is rigged. Having the likes of Tom Perkins rub our faces in it may be insult enough to awaken us. He suggests giving big money even more political power. Imagine a movement going the other way. Imagine a concerted citizen effort to double voter registration and turnout among poor and working Americans. Imagine cross-partisan collaborations between right and left to curb crony capitalism.

Let's not kid ourselves: It wouldn't be easy to unrig the game and revive the principle of equal citizenship. But let's not kid ourselves about this fact either: The rich already have more votes than the rest of us. The only question is whether we will continue to tolerate it.
Perhaps these eloquent words will encourage people to read his entire commentary He understands why deep inequality is a serious threat, and he explains it well. Go, and read.

Friday, February 21, 2014

Another Weakness of the Anti-Tax Silliness 

As snow and ice storms have been battering the Midwest, the Mid-Atlantic, the Southeast, and New England, states, counties, cities, towns, and townships have been spending far more on salt supplies, fuel, and overtime for plow drivers and other personnel than had been budgeted. For example, according to this report, Massachusetts has already exceeded its snow removal budget for the fiscal year. Similar reports are coming in for places such as Norwich, Connecticut, Bloomington, Illinois, and towns in the New York City area.

These jurisdictions have three choices. First, they can stop clearing roads and highways of ice and snow. Surely that is an outcome that would not find favor with anyone other than those who would privatize snow removal so that people could pay more for the same services in order to put more money into the pockets of those who already have more than enough money funneled their way. Second, they can shift money from other budget lines, such as stopping pothole repairs, closing parks and recreation centers, firing police, shutting down firehouses, or mothballing EMT services. Third, they can raise taxes. That’s the sensible thing to do, but it will bring howls of protest from the anti-tax crowd, who, I suppose, think that plow drivers should work for free.

Perhaps one silver lining in this dark and dreary winter is that some folks previously enchanted by the siren song of the anti-tax crowd will come to realize that taxes are a good thing. With that realization, perhaps they will see past the superficiality of the anti-tax sloganeering and recognize the anti-tax campaigns for the threats that they are.

Wednesday, February 19, 2014

Some Ultra Rich Reveal Their Hands: Intentional or Accidental? 

The growing awareness among Americans that the at least a significant number of the ultra rich hold them in disdain, delight in the diminution of the middle class, consider the poor to be “takers” addicted to entitlement, and have failed to come through with the promise of a better economy for all that justified reductions in their tax bills has put at least some of the wealthy into a panic. How else to explain the sudden full-court press defense of the ultra rich, wrapped in claims that they are being persecuted in a Holocaust-style manner, work harder than everyone else, are more important than everyone else, and deserve to be orders of magnitude more prosperous than 99 percent of the nation. During the past week and a half, these ridiculous claims were the subject of my commentaries in Getting to the Root of the Problem, Absurdity Breeds More Absurdity, Income and Wealth Inequality: A Threat, Not a Distraction, and Working Hard?.

Now comes an even more obnoxious reaction from the same ultra wealthy fellow who has explained he feels as though he is being persecuted in the same manner that Jews were exterminated in Nazi-dominated Europe. Tom Perkins, as reported in this report and many others, has proposed that voting should be limited to people who pay taxes, and that the number of votes available to a person should reflect the amount of money that the person has. Thus, according to Perkins, someone with $1 billion of assets would get 1 billion votes, whereas a person with $100 of assets would get 100 votes. Perkins explained that “it should be like a corporation. You pay a million dollars in taxes, you get a million votes.” Perkins did not explain why corporations should be a role model for anything.

If there’s anything worse than a defensive ultra wealthy person with an exaggerated sense of self-worth, it’s an ignorant, defensive ultra wealthy person with an exaggerated sense of self-worth. Aside from infants, toddlers, some children, and some people in comas, everyone pays taxes. People pay sales taxes, liquid fuel taxes, alcohol taxes, real property taxes, state, local, and federal income taxes, social security taxes, unemployment insurance taxes, tobacco taxes, excise taxes on tires, and so on. Few people pay all of these taxes, but just about everyone pays at least one, and generally two, three, or more, of these taxes. So Perkins’ proposal wouldn’t really make much of a difference in who votes.

Though adverse reaction to Perkins’ proposal has been almost universal, most people have focused on the outrageousness of his attitude and the equation of wealth with voting booth value. The best voters, of course, are those who are well-informed, thoughtful, wide-minded, and sensible, whereas only some of the ultra wealthy have those qualities. The administrative nightmare of figuring out how many votes a person receives is alone proof that Perkins lacks the ability to think things through before tossing out grenades in defense of his indefensible position. Is the voter’s wealth measure when registering? When voting? Is it the average wealth since the last election, measured monthly, quarterly, annually? Who audits the claims? Does photo-ID come into play when everyone claims to be a trillionaire?

What gets my attention isn’t simply the outrageousness of what Perkins suggested, but what he has revealed, perhaps inadvertently, about the mindset of ultra rich like himself. He could not have been any clearer had he simply come out and said, “We, the ultra rich, want to own and rule the world, leaving you as peasants, albeit in a so-called democracy where you can cast token votes that mean nothing. We have been unhappy since the demise of serfdom, slavery, and keeping peasants down on the farm.” Perkins has done the nation and the world a favor. He has let the ultra rich cat out of the bag. Not that it was a secret, but now there is proof, from the mouth of one of them, that the tax cuts for the wealthy, the destruction of the middle class, the demonization of the poor, the tagging of ordinary citizens as “takers,” the rejection of entitlement claims other than those asserted by the ultra rich, the disrespect for the hard work of the 99 percent, the manipulation of the markets, the buying of legislatures, and the duping of voters with spurious and hypocritical claims to be guardians of things voters hold dear all fit together in a mosaic matched wonderfully to the “we are better than the rest of you and deserve to be your overlords” mentality of Perkins and fellow travelers.

When it comes to why Perkins pulled back the curtain, there are two possibilities. One is that it was accidental, a thoughtless utterance by someone losing inhibitory control in reaction to the pressure and panic of a rising tide of political, moral, and electoral opposition. Considering the absurdity of Perkins’ previous comments and the apparent misconception that many people pay no taxes, it is not implausible to conclude that he blurted out something before he realized he was saying too much. The other is that it was intentional. If so, the question is why. What advantage is gained by revealing outright the heretofore badly-kept secret goal of economic world domination and its corollary electoral, political, military, and social domination? Is it a matter of making the point appear so ridiculous that no one will take it seriously? That sort of ploy is not new. Perhaps a reaction of “That’s so ridiculous they couldn’t possibly be planning that sort of outcome” is what they want. If so, it hasn’t quite worked out that way, because the outcry of outrage has been widespread.

Monday, February 17, 2014

Working Hard? 

On Wednesday, in Absurdity Breeds More Absurdity, I noted one defender of Sam Zell’s silly claim that the top one percent works harder by resorting to another absurdity, that of measuring how hard a person works by referring to how many hours a person works. Now along comes Robert Frank, who in a Wall Street Journal blog, uses hours worked as the measuring stick for how hard a person works.

As I suggested in Absurdity Breeds More Absurdity, caloric expenditure surely is a better measure of how hard a person works. It may not be the best measure, but for the moment it’s as good as there is. Taking a look at Calories Burned During Work, Occupations and Hobbies, it becomes clear that work such as mowing lawns, shoveling snow, cleaning houses, farming, coal mining, fire fighting, digging ditches, and nursing requires far more effort than making telephone calls, sitting in meetings, and socializing at lobbying events. Lest anyone offer that people in jobs not involving intense physical labor aren’t working as hard as the ultra rich, one burns more calories playing a musical instrument, bar tending, helping customers as a store clerk than wheeling and dealing with money and power brokering.

And even if someone could demonstrate that people holding hundreds of millions and billions of dollars in wealth, or pulling down tens of millions or hundreds of millions of dollars in income, somehow are “working harder” than everyone else, it is inconceivable that they can demonstrate that these folks are working hundreds and thousands of times harder than everyone else. Falling back on the “that’s what the market provides” argument overlooks the collaboration permeating the supposedly “free” market of high level income and wealth.

Friday, February 14, 2014

Income and Wealth Inequality: A Threat, Not a Distraction 

In recent posts, I have been exploring the defensive positions taken by those who consider excessive income and wealth inequality not only as a contrived problem but also as a condition beneficial to everyone. For example, in Getting to the Root of the Problem, I rejected the claim that income and wealth inequality is a simple outcome caused by poor people not working hard enough.

The defenders of the trend that will bring us one person owning the world have stepped up their marketing campaign to convince the majority of voters, almost none of whom are ultra rich, that their best chances lie with the ultra rich and their agenda. Now that the world has reached the point where 85 people own as much as do the poorest half of the world’s population, as dissected in this report, it is only a matter of time before 50 people own as much as do the poorest three-quarters of the world’s population, and perhaps just decades before 25 people own as much as does everyone else. The current situation and the direction in which things are going are not accidents, and the vigorous defense being mounted by the perpetrators is glaring proof of what is being planned.

It is disturbing to read claims that income and wealth inequality is a good thing, that it does not matter, and that it is a distraction. One wonders how well orchestrated this defense of inequality has become. Consider several recent attempts to push the blame for the nation’s economic problems away from the causes.

Economist David R. Henderson argues that most people do not care about income inequality, and that this makes sense because income inequality doesn’t matter, a point he justifies by claiming that so long as everyone’s income increases, the gap makes no difference. As for his first point, there’s no doubt that many people are deeply concerned about it, especially when they are given the opportunity to learn why life has become increasingly challenging from an economic perspective. As for his second point, for most people, income in real terms has either declined or increased at a rate that does not keep up with the increases in the costs of food, energy, health, and similar necessities. Worse, when economists argue, as Henderson does, that the poor are better off because more of them now own refrigerators, cars, and cell phones, he overlooks the fact that this has happened because of the government transfer programs so detested by those who delight in the growing income and wealth gap. What would the economic situation be if they had their way by eliminating all social welfare programs, including Medicare, Medicaid, and Romneycare-turned-Obamacare, repealing the income tax, revoking most regulations, and giving their ultra rich sponsors unrestrained opportunity to do what they want? The things that they want to eliminate are the very things that have spared the nation from an even worse outcome, and that’s why there is so much effort from their direction to remove those last lines of defense against tyrannical oligarchy and the reduction of democracy to a mockery.

Economist David Brooks also claims that income and wealth inequality is not the issue. He argues that the plight of the poor is caused by “bad schools, no jobs for young men, broken families, neighborhoods without mediating institutions.” In many respects, he’s correct. Fixing those problems would help reduce the inequality. What he doesn’t address, for obvious reasons, is that those problems for the most part are caused by the tax destruction campaign waged by the ultra rich under the pretext of helping the very people that tax destruction harms, and by the bottom-line mentality that exalts next week’s profits over the long-term economic health of the nation. Jobs are not available for young men in part because those jobs have been shifted overseas and in part because the nation’s school systems are a mess thanks to insufficient funding and attacks on the far-from-rich teaching profession. As I’ve asked in previous posts, does it make sense to destroy tomorrow’s consumers if the lack of consumers means the long-run failure of the businesses generating profits and wealth for the ultra rich?

Economist Robert Samuelson characterizes income and wealth inequality as the consequence, rather than the cause, of the nation’s economic problems. But in his attempt to prove this point, he claims that “the rich got rich by running profitable small businesses, . . . creating big enterprises, . . . being at the top of lucrative occupations, . . . managing major companies or inheriting fortunes. He writes this in a way to suggest that inherited wealth is a miniscule factor, whereas inherited wealth is what brings many of the ultra rich into their position as ultra rich. Samuelson’s list of examples, such as owners of car dealerships, lawyers, doctors, actors, athletes, and the like is misleading because very few car dealership owners, lawyers, doctors, actors, and athletes are close to being within the ranks of the ultra rich. Samuelson also makes the same point Henderson does, by trying to prove that everyone’s inflation-adjusted incomes increased wonderfully from 1980 until 2010, though he concedes that the rate of growth among the top one percent was far more than what was experienced by everyone else. The flaw in Samuelson’s statistics is that he reaches back to 1980, thus taking into account the impact of decisions and events before the Revolution of the Rich in 2001. Gains accrued by the 99 percent from 1980 through 2000 aren’t much help to people trying to make ends meet in 2014 because their situations deteriorated during the decade of the double zeroes. And we know what happened during that era, and why it was a bad thing to do.

That income inequality is a bad thing is clear, even though its defenders choose to ignore the signs or excuse them away. In England, research indicates that 25-year difference in life expectancy exists between London’s wealthy and its deprived. Two medical researchers have demonstrated that income inequality contributes to the growing health problems of the nation. Other researchers have determined that assortative mating, the phenomenon of people marrying within their income bracket, contributes not only to the rich getting richer and the poor getting poorer, thus widening income and wealth gaps, but also to the reduction of marriages between people near the edges of their income brackets. These gaps also contribute to the decline in the number of marriages which, in turn, as even admitted by the defenders of inequality, contributes to even more income and wealth inequality. The inability to support a family on one salary, the growing insecurity of job tenure, and workplace stress fueled by a profits-is-all-that-matters mentality feeding the money addiction of the ultra rich are major factors in the divorces that the defenders of inequality identify as a cause of inequality. In other words, income and wealth inequality feeds upon itself as it spirals into oligarchy.

The claim that income and wealth inequality is not a cause of poverty overlooks the connection between wealth accumulation in the hands of a few and the lack of education, jobs, health care, and well-being among the poor. The Revolution of the Rich was justified by claims that putting more money in the hands of the rich would solve problems because the rich are the job creators. Yet, if they created jobs, they didn’t create very many in this nation, and the surely didn’t create enough. Americans fell for the siren song, and the economy is now crashing on the rocks. True, the captain and crew will get off the sinking ship because they have the resources but the passengers are left with broken promises and cutbacks in lifeboats and life preservers. And, not surprisingly, the captain and the crew are now trying to blame the passengers for the navigation errors, the false promises, and the lack of lifeboats and life preservers.

Wednesday, February 12, 2014

Absurdity Breeds More Absurdity 

In my last post, Getting to the Root of the Problem, I criticized Sam Zell for, among other things, his absurd claim that the ultra rich work harder than everyone else. Much to my surprise, someone has actually tried to defend this claim, on equally absurd grounds. On Erin Burnett Out Front, one Reihan Salam tried to justify Zell’s claim by pointing out that the ultra rich work upwards of 3,000 hours each year while those not in the top one percent barely crack the 2,000 hour barrier.

The silliness of this retort of desperation is inescapable. Here are just a few facts for Zell, Salam, and the rest of the elitists to consider.

First, all sorts of people hold jobs or practice professions in which they put in more than 2,000 hours each year, and a more than a few top 3,000 hours. For example, it doesn’t take much of a bad winter for utility crews to rack up 16-hour days. And they can’t take an offsetting vacation when the next storm shows up a week later to cause more damage.

Second, because of the ways in which the ultra rich have managed to push down the middle class and demonize the poor, many people are compelled to work more than one job, which causes the number of hours that they invest in labor to surpass by far the 2,000-hour limit Salam thinks applies to the rank-and-file.

Third, and this is the most important point, the number of hours spent at work does not correlate to the difficulty of that work nor does it measure how hard a person works. What are the ultra rich doing during those 3,000 hours? To use a better measure, how many calories are they burning? How much of their time is devoted to conversation, lunch and dinner meetings, cocktail parties, fund raisers, and similar events? If they think that’s hard work, someone needs to hand them some hard hats, shovels, and picks, and guide them into a coal mine.

Having argued with people who clearly are wrong but who cannot let go of their errors, I recognize the defensive tactics that have been adopted by those still intent on ruling the world through means other than democracy. I understand why it is so difficult – hard work, perhaps – to let go, because letting go unravels the entire arrangement. Yet being exposed for absurd and silly arguments would not happen if those absurd and silly arguments had not been advanced. The fact that these sorts of outrageous claims are popping up with increasing frequency suggests that Americans’ growing awareness of what has been going on is more than an idle threat to the power and money addiction that is doing no less damage to this nation than any other sort of addiction.

Monday, February 10, 2014

Getting to the Root of the Problem 

According to numerous reports, including this one, billionaire Sam Zell has rushed to the defense of Tom Perkins, the venture capitalist who compared complaints about staggering income and wealth inequality as equivalent to the persecution of Jews in Nazi Germany. Although Perkins was compelled to apologize for his comment, Zell tried to paper it over by explaining that although the word persecution was not “the right way to describe treatment of the top 1 percent of earners,” the criticism of the ultra rich is fueled by envy, and the income and wealth inequality is the fault of government regulations. Zell then compounded his defensive posture by claiming that the reason people are critical of the income and wealth inequality is that “it’s politically convenient to do so.” He suggested that people should emulate the ultra rich, and followed that up with a claim that “The 1 percent work harder, the 1 percent are much bigger factors in all forms of our society.”

Is he serious? Clearly what’s at the root of the problem is the belief that those who do well, no matter how that comes about, work harder and are more important. That explains the war on the poor and the attempt to destroy the middle class. People aren’t complaining about income and wealth inequality because they want to be billionaires. They’re complaining because they want to be able to feed their children, take care of the children’s education and medical needs, and put a roof over their heads. People aren’t complaining about income and wealth inequality because it’s politically convenient to do so. They’re complaining because they understand that it is morally and ethically reprehensible to create and support systems that funnel increasing amounts of wealth into the hands of a oligarchy that ultimately is destined to become a global tyranny that promises even more dire economic distress for all but the economic elite.

The absurdity of Zell’s comments is evident from his silly claim that the one percent work harder. I wonder if Zell has ever shoveled out his own driveway, or raked leaves, or did laundry, or dug ditches, or changed engine oil, or put chains on police car tires. I wonder if he has ever tried climbing icy utility poles to restore power in bitter cold weather. I wonder if he has worked in a coal mine, or stood on his feet for hours in an operating room or a fast-food restaurant. I wonder if he has tried to handle a room full of kindergartners, or walked behind a refuse truck collecting trash and recycling. I wonder if he has delivered newspapers in the dark, the rain, the snow, and the ice, lugging dozens of pounds of material to subscribers. I checked his wikiedia biography and if he’s done any of those things it hasn’t been included. What’s evident is that he gambled with other people’s money, got lucky, and now considers himself a hard worker. It must be muscle-weakening and strength-sapping to wheel and deal in the world of finance. For every Sam Zell who gets lucky playing the finance gambling game, there are hundreds who tried and failed. According to Zell, those who fail simply didn’t work hard enough.

Zell seems to think that the one percent work hard, even though a significant number of the one percent are living on fortunes handed down to them. Perhaps their grandparents or great-grandparents worked hard. So what? And in some instances even the ancestral wealth accumulators didn’t work all that hard. Until someone has experienced digging ditches, fixing utility lines, mining coal, collecting trash, or similar endeavors, that person needs to be quiet about what it means to work hard. In the world we inhabit, buying a winning lottery ticket does not constitute working hard.

The disdain that Zell has for those whose hard work isn’t rewarded by the so-called free market to the extent he has accumulated wealth reflects a very deep and disturbing mindset. People who do well through luck, accident of birth, or circumstances beyond their control too often translate that experience into a claim that they work harder and are succeeding through merit. Too often they subscribe to the flip side of that translation, deeming people who are down on their luck to be nothing more than lazy takers who don’t work hard enough. As another commentator suggests, in line with comments I’ve made since the outbreak of the war on the poor and middle class, “More and more, these people sound like the French royalty and aristocracy right before the revolution. Perhaps they will create the same outcome for themselves.” I wonder if Sam Zell can afford to purchase some history books. I wonder if he can work hard reading them and figuring out the absurdity of how he views people.

Friday, February 07, 2014

Goodbye Children, Goodbye Dependency Exemption Deduction. Goodbye Child Tax Credit 

A recent case, Richardson v. Comr., T.C. Summ. Op. 2014-9, reaches an unsurprising result but nonetheless is disturbing. What’s disturbing is not the opinion, but the underlying facts.

In 2006, the State of California removed the taxpayers’ four children from their home, and the children did not live with them during 2008 or 2009, and presumably during 2006 or 2007. When the taxpayers filed their 2008 joint federal income tax return, they claimed four dependency exemption deductions for the children, and also claimed a child tax credit. They did the same thing on their 2009 joint federal income tax return.

The IRS issued a notice of deficiency, denying the deductions and the credits. The taxpayers filed a petition with the Tax Court, which agreed with the IRS that the taxpayers were not entitled to the deductions and credits because the children did not reside with them during 2008 or 2009, and because the taxpayers failed to show that they provided any support for the children.

It is disturbing that taxpayers would claim dependency exemption deductions and child tax credits with respect to children who did not reside with them. It is even more disturbing that something happened to prompt the State of California to remove the four children from the taxpayers’ home.

Wednesday, February 05, 2014

Sometimes It’s the Procedure that Causes Tax Complexity  

Most of the time, when someone complains about tax being complicated, the reason is on account of what lawyers call the substantive law. In other words, the rules for computing tax liability are complex. Not only are computations sometimes reminiscent of those long-ago algebra classes, but determining how transactions are classified requires digging through general rules that are curtailed by exceptions, exceptions to exceptions, exceptions to exceptions to exceptions, special rules, and transitional rules. Fortunately, computer software can assist with much of the computational frenzy, assuming the programmers understand what needs to be done.

On the other hand, sometimes the complexity of tax arises from what can be confusing procedures. One might expect that the more complex the substantive tax law, the more complex the tax procedure. But that’s not the case. Some of the most vexing procedural snags can arise with respect to taxes that are computed rather easily.

For example, real property taxes are computed by multiplying the assessed value of the property by the tax rate. Sometimes a special rule permits reducing the assessed value. Sometimes a person qualifies for a reduced rate. Not infrequently, a property owner qualifies for a flat dollar reduction of the tax computed after multiplying the assessed value of the property by the tax rate. In almost every instance, the taxing authority almost always computes the tax and sends a bill to the property owner.

The fun begins when assessed values are increased and the property owner wants to appeal. If the property owner files the appeal before the bills are sent, in some jurisdictions taxing authorities can adjust the bill so that the old assessed value is used pending the outcome of the appeal. But in some instances the news that the assessment is being appealed doesn’t reach the folks who send out the property tax bills, and the bill that is sent reflects the newly assessed value. A property owner who is appealing the assessment is, in some jurisdictions, permitted to pay an amount reflecting the old assessment. But the property owner who is unaware of how the procedure works is apt to write a check for the amount shown on the bill and then go about trying to get the new assessed value reduced, expecting a refund if the appeal is wholly or partly successful.

According to this Philadelphia Inquirer story, things aren’t working out well in Philadelphia. It seems that most property owners who are appealing their new assessments are unaware that they can pay a real property tax computed by using the old assessment. Apparently the bills for at least 24,000 properties whose assessments are under appeal were sent out with tax amounts reflecting the new assessment. The cause, an official explained, was that the people sending out the bills did not get a list of properties for which appeals had been filed until it was too late to revise the bills. Another official used the word “confusion” to describe the situation. Indeed.

It’s worse. It seems that the owners of roughly 4,600 properties filed appeals even though the assessments on their properties were the same or even less than what they had been. In other words, taxpayers are filing appeals to complain that their taxes have been reduced.

The bottom line is that when a tax bill arrives, whether it is for real property taxes or any other sort of tax, the taxpayer needs to review the bill. In other words, the taxpayer needs to do what an auditor would do when examining financial statements. Look at each number. What is its origin? For a real property tax, look at the assessment notice and compare it to the assessment on the bill. Check the arithmetic. The bill probably is generated by computer software, but computer software is far from infallible. If unsure, get help.

Monday, February 03, 2014

The Growing Realization That Taxes Are Not Evil 

About two months ago, in in If They Use It, Should They Pay?, and its follow-ups, The See-Saw World of Legislating Infrastructure Funding and Noticing a Tax, I described the long and twisted path taken by a simple proposal to raise tax revenues in Pennsylvania to fund transportation infrastructure repairs and maintenance. I pointed out that in the long run, the tax increase would be less than the vehicle repair costs incurred if the infrastructure repairs and maintenance were not pursued.

Now comes news, as reported in this story, that the governor of Delaware has proposed a 10-cent-per-gallon increase in that state’s gasoline tax. The revenue would be used to provide an additional $500 million to fund repairs and maintenance on the state’s transportation infrastructure. The average driver would pay an additional $57 per year, certainly far less than the cost of hitting just one unrepaired pothole. In addition to improving transportation safety, the work would create jobs.

It takes only one transportation catastrophe, such as the one last week in the nation’s southeast, to demonstrate the need for government and the need to fund government. The efforts to portray taxes as evil, though initially resonant with too many people, are being exposed as simplistic, misleading, and dangerous.

Friday, January 31, 2014

The People’s Court Meets Tax Record Keeping 

The People’s Court, with Judge Milian, has been the subject of two previous MauledAgain posts, The (Tax) Fraud Epidemic, and TV Judge Gets Tax Observation Correct. I have highlighted the importance of retaining records has been highlighted in more than a few posts over the years, including The Importance of Tax Record Keeping, The Aggravation of Tax Paperwork, and Failing to Keep Those Records Can Increase Taxes. Aside from the need to keep records, I discussed the question of how long records ought to be retained in Why the “Toss Tax Records After Three (or Seven) Years” Advice is Bad.

Several days ago, another episode of The People’s Court put the record keeping issue in front of however many viewers were paying close attention. The case involved a car owner who was unhappy with a body shop’s work in fixing a window in the car. As the case progressed, one of the questions that surfaced was the delay experienced by the plaintiff, who brought the car to the body shop many months before the window was replaced. The plaintiff alleged that the body shop repeatedly claimed that the reason for the delay was the supplier’s failure to supply the window in a reasonable period of time. The defendant disagreed, and tried to put the responsibility for the delay on the plaintiff. The defendant explained that the window arrived at the body shop within two days of when the plaintiff brought the car to the shop. Judge Milian asked the defendant for evidence that the window ordered for the plaintiff’s car had arrived within two days as defendant claimed. The defendant replied that he did not have any records because he doesn’t keep records for transactions that occur as long ago as two years. Judge Milian expressed surprise, pointing out that, as a business, he is required to retain records supporting income and deductions for at least three years. The defendant explained that because he did not make any money he didn’t need to retain records, and then claimed that he did not make any money on the particular job in question and so didn’t need to keep records of that job.

Two points need to be made for the benefit of all taxpayers, including business owners. First, records must be maintained for all the transactions during the year that affect tax liability computation, regardless of the income or loss computed with respect to a specific job, task, client, or customer. Second, even if a taxpayer loses money for a taxable year, records need to be kept in order to prove that the deductions exceed the gross income. Put another way, losing money is not a justification for not keeping records or for tossing out records too soon. In this particular case, the defendant’s business practices reflected other record-keeping deficiencies, such as a receipt for the customer that simply described the make and model of the car, with no notations referring to why the car was in the shop or any other details of the job.

During one of the breaks, the show’s host asked two spectators what they thought about keeping records. One of them replied that business owners need to retain records, if for no reason other than tax purposes. The other spectator simply said, “What she said.” It is refreshing that these two spectators understood the significance of record retention. Later, the show’s host advised viewers to keep records for six years. As readers of MauledAgain know, I think that six years is too short. As I stated in To E-File or Not to E-File: That is The Question:
Though some people don't hold onto their tax returns for more than say, 3 or 7 years, relying on the statute of limitations, I recommend holding onto all returns, if for no reason other than to maintain records of basis and to guard against the strange day when the IRS claims a return from some years ago was not filed, which would open the statute of limitations, and which can be rebutted quite easily by providing a copy of the return.
And if the tax reasons for keeping records isn’t sufficiently convincing, the prospect of coming up short in litigation when asked to produce evidence supporting one’s allegations should settle the matter.

Wednesday, January 29, 2014

Julian Block Revisits the Intersection of Tax and Relationships, and More 

Julian Block has a problem. He’s not the only one afflicted with it. It hovers over me, and many others. The problem? When we write things, in the back of our minds is the ever-present awareness that the next hour, the next day, the next week, the next month, can bring one or more changes that makes our words wrong. Tax law affects so many activities, and changes so often, that keeping up with it poses a challenge to taxpayers, tax professionals, and those who write about it. When someone is as prolific a writer as Julian is, a condition with which I can relate, keeping an assortment of tax books up to date is a never-ending task. Not unexpectedly, Julian rises to the occasion.

And so it comes to pass that eight months after reviewing the 2013 edition of Julian Block’s “Tax Tips for Marriage and Divorce” in Julian Block Looks at Marriage, Divorce, Affairs, Engagements, and Cohabitation in the Shadow of Tax, I have been given the opportunity to look at his 2014 edition. Once again, Julian gives his readers good reason to replace the book currently on their shelves, and provides those unfamiliar with his books a reason to make room for his latest effort. Though it is a tax book, it’s a fun read. Julian has dug up all sorts of tax cases involving marriage, divorce, and an assortment of other transactions that offer stories just as easily at home in the scripts of soap operas and reality shows. There are cheaters and thieves, engagement breakers, mistresses and prostitutes, liars and shoplifters, sick children and cash hoards, and a variety of other tales of joy and sorrow.

As usual, Julian has produced a book that is practical, easy to read, and interesting. He gets many of his points across by using the question-and-answer technique, with the questions being easily envisioned as inquiries handed up by someone next door or in the next cubicle at the office. Julian deals with just about every tax issue that pops up when people create and end all sorts of relationships. He explains the marriage penalty and marriage bonus, filing status, alimony, property settlements, child support, death of a spouse, bad debt deductions for loans to spouses that aren’t repaid, legal fees, the impact of divorce and separation on dependency exemptions and the child tax credit, the tax consequences of residence sales by married couples, and the impact of social security benefits. Julian explains how tax returns can open the door to discovering assets hidden by a spouse before or during the deterioration of a marriage.

The book concludes with a chapter on withholding computations, a chapter on amending returns, and a chapter on using IRS publications. He addresses these concerns not only in the context of relationships but also as issues facing taxpayers generally no matter their relationship status.

As I noted with respect to the previous edition, the title of the book is misleading. It’s difficult to make the title of a tax book, or for that matter, a tax course, technically correct and yet succinct. Julian does not limit himself to marriages and divorces. For example, he examines the tax challenges faced by cohabiting individuals. He considers whether an unmarried woman can deduct the cost of contraception, and whether the cost of gender reassignment surgery is a deductible medical expense. But as I tried to construct a revised title for Julian’s book, I found myself wallowing in painfully long captions, so I gave up! But don’t give up the chance to acquire this book.

Monday, January 27, 2014

Shutdown Consequence: Tax Filing Season Delay 

Recently I’ve been asked, by people expecting federal income tax refunds, why it is taking so long for the tax filing season to get started. The answer is easy. As reported in this and similar stories, the delay is a direct consequence of the government shutdown last fall. Originally scheduled for January 21, the tax filing season opening day has been pushed back to January 31. Considering that the shutdown spanned 14 days, it is worth noting that the IRS managed to trim four days from the delay.

Why does it matter? There are, of course, those folks who will be waiting for at least an additional 10 days to receive their refunds. Because the April 15 date cannot be changed by the IRS, it also means tax return preparation work will be squeezed into a shorter period of time. In some instances, taxpayers will decide, perhaps at the urging of their preparers, to file extensions and submit tax returns later in the year. For some taxpayers, that’s not necessarily an advantage.

This is not the first year in which a tax filing season has been delayed. There have been times when the delay was caused by last-minute tax law changes enacted by Congress late in the preceding calendar year. It takes time for the IRS to prepare forms, update instructions, rewrite its publications, revise computer programs, and train employees, to mention just a few of the many tasks triggered by tax law changes.

Life for taxpayers would be much easier if the Congress would act responsibly when dealing with the tax law. Not only would taxpayers find it easier to plan and easier to file tax returns, the reduction of time pressure on the IRS would free the agency to provide more assistance to taxpayers. Waiting until the last minute to enact tax law changes gives politics priority over fiduciary duty. That’s wrong. Shutting down the government also give politics priority over fiduciary duty. That’s wrong.

Americans deserve better. When are they going to insist on it? Better yet, when are they going to vote for it?

Friday, January 24, 2014

How Not to Compute a Casualty Loss Deduction 

A recent Tax Court case, Elder-Douglas v. Comr., T.C. Summ. Op. 2014-7, illustrates how not to compute a casualty loss deduction. The taxpayer’s vehicle was involved in an accident, and the insurance company determined that it was unsalvageable. The insurance company paid the taxpayer $47,950 for the vehicle, after subtracting a $50 deductible. The taxpayer claimed a $12,020 casualty loss deduction on account of the loss of the vehicle. The taxpayer computed the deduction by subtracting the $48,000 from $60,020, the original value of the vehicle. However, the first step in computing the amount of a casualty loss deduction is to subtract the insurance recovery from the difference between the value of the property immediately before the casualty and the value of the property immediately after the casualty, unless the taxpayer chooses to use cost of repairs as a substitute measure, though that was not relevant in this case. Because the taxpayer did not provide evidence of those values, and because the Tax Court was unwilling to assume that the vehicle’s value immediately before the accident was the same as its value when it was new, it upheld the determination of the IRS that the taxpayer was not entitled to a casualty loss deduction.

It is possible, though perhaps not likely, that the taxpayer’s vehicle was worth more than $48,000 immediately before the accident. If the taxpayer had acquired and presented proof of such a value, the taxpayer might have been entitled to a casualty loss deduction, depending on how the other limitations, especially the ten-percent-of-adjusted-gross-income reduction, played out. Obtaining that information is not difficult, but is something that most people don’t think of doing at the time. However, it is not impossible to acquire that information after the fact. As I tell my students, facts matter, disputes over facts are at the core of far more cases than are disputes over the law, and getting facts is something lawyers need to spend a good bit of time doing. So, too, should taxpayers, especially with respect to facts that only they can produce.

Wednesday, January 22, 2014

When Tax and User Fee Increases are Cheaper 

In previous posts, I have pointed out that the cost of failing to raise taxes or user fees can exceed the increase thereby avoided. In Liquid Fuels Tax Increases on the Table, I wrote, “Leaving gasoline taxes at their current levels guarantees more bridge collapses, and pothole-caused front-end alignment repair costs that will take more out of motorists’ pockets than the proposed tax increases.” I made the same point in You Get What You Vote For, when I predicted that “front-end alignment spending will skyrocket past the small amounts that would have been paid if the [highway repair tax funding] proposal had been enacted.” In Zap the Tax Zappers, I explained why tax evaders need to face the consequences with these words, “Lest this be thought too rough, think of the person who dies when their vehicle hits a pothole and goes out of control, a pothole not repaired because of revenue shortfalls and spending cuts triggered by the actions of a group of people who refuse to pitch in and fulfill the obligations of citizenship.” In Potholes: Poster Children for Why Tax Increases Save Money, I shared news from the United Kingdom that the cost of damage caused by potholes exceeds the tax or user fee necessary to fix the pothole, and news from Los Angeles that potholes cause $750 of damage annually for each vehicle.

Now comes news about the scope of pothole damage in the United States, much of it caused by potholes either left unrepaired or fixed only after long delays on account of revenue shortfalls. In this Philadelphia Inquirer article, Ben Finley reports that each year, according to Independent Insurances Agents and Brokers of America, drivers file roughly 500,000 insurance claims for pothole damage and spend almost $5 billion on repairs. As best as I can tell, those numbers do not include hours lost driving the vehicle to and from the repair shop, the inconvenience of cancelling or rescheduling other events, and the overall negative impact on the economy. Nor is it clear if those numbers include medical expenses and other collateral damage arising from the consequences of hitting a pothole. The cost would be even higher if states barring lawsuits against highway departments for failure to repair potholes eliminated those legal barriers.

There are times when it makes sense to increase taxes or user fees in order to prevent even higher costs. Given the choice between paying an additional $150 in highway user fees or $750 in pothole repair costs, rational people would choose the former. Yet most people are willing to gamble, thinking that they are immune from pothole collisions or that they are in some way sufficiently special to have the ability to avoid potholes. The anti-tax crowd plays on this limbic system reaction to reality, parlaying people’s emotional weakness into political gains for those who benefit from tax reductions. Certainly the person who avoids a $150 tax or user fee increase only to incur a $750 repair bill had not received a benefit, but understanding that outcome before the fact appears to be a significant challenge for a huge number of voters.

As I concluded in Potholes: Poster Children for Why Tax Increases Save Money, “[T]he ultimate conclusion is that the anti-tax folks are working at cross-purposes with themselves. That comes as no surprise to me. Hopefully it comes as a wake-up call surprise to those seduced by the pied piper claims that people save money when they pay fewer taxes. The choice is easy to understand. Pay a little bit now or pay much more later.” I wrote that seven months ago. Later has arrived, and people are paying, paying much more.

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