Monday, March 31, 2014
The concern about welfare takes on a new twist, according to this report. Though the accusations are, at the moment, just that, there’s good reason to believe that they are true and nothing at this point to conclude they are false. A prosecutor in Minnesota filed charges against a married couple who collected food stamps and welfare provided by the state of Minnesota. According to the complaint, the husband was the CEO of a satellite television and broadband services company and the wife operated a championship dog breeding business. They managed to deposit several million dollars into bank accounts. They resided in luxury homes and drove expensive vehicles. They purchased and lived on a $1.2-million yacht in Florida at about the same time they applied for, and collected, food stamps and welfare, omitting their million-dollar bank accounts from the application, and claiming that they were living in Minnesota. Until officials discovered what had been happening and cut off the payments, the couple managed to pull in more than $165,000 in benefits designed to assist the poor.
Perhaps the movement favoring income inequality has reached new heights, or more accurately, depths. It’s not enough to make it difficult for poor people to put food on the table and care for their children, it’s time to pretend to be poor in order to grab some of what little food is being provided. Is there any better indication that so much of income inequality is the consequence of addiction and greed? I wonder if the prosecutors plan to investigate how the millions that the couple accumulated before pretending to be poor were generated. Perhaps from successful business operations. Perhaps not.
Friday, March 28, 2014
Some argue that so long as only one tax rate is applied, a graduated income tax does not exist. Others point out that under the plan, which would provide an exemption or deduction, when taxpayers divide tax liability by their total income, they would find themselves being taxed at different rates. Some in fact would pay no tax.
What makes this complicated is that under current law, the Pennsylvania personal income tax provides “tax forgiveness” for lower-income individuals in the form of a tax credit. This credit also has the effect of creating, in effect, a graduated income tax. Does it make a difference if the effect of a graduated income tax is accomplished through a credit rather than an exemption? If the answer is yes, then how difficult would it be to switch from the proposed exemption to a larger credit available to more individuals? That is, in fact, what another of the candidates for the nomination has proposed.
It will be an interesting campaign season in Pennsylvania. And depending on who is elected in the fall, it should be an interesting tax legislation season as 2015 opens. Stay tuned.
Wednesday, March 26, 2014
Last week, I received an email directing me to the results of a GoBankingRates poll reaching the same conclusion. The poll results are, of course, distressing, because they indicate that Americans have not become any wiser, educated, or informed about the uses to which federal income taxes are put. What was also at best confusing, and at worst troubling, was the inclusion of Medicare among the expenditures funded by the federal income tax. Medicare, as this explanation informs us, is funded by the Medicare portion of the federal payroll tax and by premiums charged to Medicare participants. Interestingly, social security payments were excluded from the list, but yet even though Medicare is also administered through a trust fund, it was not similarly excluded.
One of many disadvantages of a tax system as complicated as the one that lobbyists have created is that it’s too easy to be confused, to reach erroneous conclusions, and to spread intentionally misleading or incorrect information. The GoBankingRates error surely is not intentional, but it suggests how even those more familiar with the tax laws can be caught by tax law complexity. Productive debate and progress with respect to tax policy cannot be accomplished until citizens know how the tax law works and how tax revenues are used. And at the moment, that does not appear to be happening for enough people.
Monday, March 24, 2014
Now comes an observation that the provision generating the mess that the proposal is designed to fix also prevents the proposed remedy. According to this story, Article 3, section 27 of the Pennsylvania Constitution provides that “No law shall extend the term of any public officers, or increase or diminish his salary or emoluments, after his election or appointment." So when the compensation of the board members was reduced, the incumbents were protected. That created the compensation differential that some think accounts for the board’s sluggish response to the roughly 24,000 property tax appeals that have been filed with it. But solving the problem by raising the compensation of those earning less also appears to be prohibited.
There are two solutions. One is to clean house and appoint an entirely new board. Politics surely gets in the way of that solution. The other is to abolish the board, which is what the city tried to do, but the courts blocked that move. Finding a solution is going to require putting the well-being of the city and its residents over the interests of politics and politicians. The chances of that happening are low enough that I can again predict with confidence that the story will continue.
Friday, March 21, 2014
The confusion is indicative of how much Americans don’t know and understand about taxes. This issue isn’t a matter of complex rules and computations. It’s simply a matter of knowing that taxes are imposed not only by the federal government, but also by state and local governments. This outcome of insufficient education also manifests itself when people complain about “the government,” as though there is one monolithic government. My response to these sorts of complaints is a simple, “Which government?” It often brings a silent stare. Is it any wonder that the misinformation merchants thrive in this country?
Wednesday, March 19, 2014
The survey asked respondents to answer a series of questions, such as whether they “regularly do favors for others without being asked,” “will only do something nice for others for personal gain,” and “feel bad when they see someone less fortunate.” The outcomes, sorted into three categories of low socio-economic status, middle status, and high socio-economic status, pretty much came out the same way for all three groups, but for the question about giving to charities on a regular basis.
Whatever anyone wants to make of the survey results, it is important to understand that on these sorts of surveys, people lie. As explained in this advice to survey designers, people are dishonest on surveys if they fear their answer is contrary to what is socially acceptable, if they want to appear sophisticated, tolerant, or up-to-date, if they want to be mischievous, or if they dislike the survey or surveyor. Some things measured by surveys, such as the one in question, are often better resolved by observation. For example, a survey asking people if they have ever run a red light almost certainly generates results inconsistent with information gathered by observers stationed at intersections.
How people really feel reveals itself in actions. There’s a reason that the old saying, “Actions speak more loudly than words,” has hung around for so long. Unlike some survey responses, it’s true.
Monday, March 17, 2014
Now comes news that City Council has voted to boost pay for all members of the Board so that all of them receive a $70,000 salary. The hope, or perhaps expectation, is that the raises will encourage the board members to work longer hours. Interestingly, the Board continues to exist even though the city tried to abolish it, because another court decision requires that the board be maintained as the venue for appeals of property tax valuations.
The change would increase one member’s pay from $50,000 to $70,000, which he would collect in addition to his $88,800 annual state pension. Another member, currently being paid $150 per hour, would earn $70,000, along with his $95,000 annual state pension. But for another member, who receives a $64,000 annual city pension, a switch from $150 per hour to a $70,000 salary would mean surrender of the pension. So, in a bizarre twist, the attempt to create a financial incentive for this member backfires, as he would earn more if he remained a $150 hourly employee.
It’s unclear whether a member can refuse the switch to a salary and remain as an hourly employee. It’s also unclear whether a “raise” leaving a member in worse financial shape would cause that member to resign from the board. Sometimes things aren’t as they appear to be, and often things aren’t simple. In this case the simple concept of a raise creates the appearance of something that it isn’t.
The measure needs the mayor’s approval. There are rumblings that it is being criticized in his office. So this story will continue.
Friday, March 14, 2014
According to this story, the governor of New Jersey proposes a new tax on e-cigarettes. Though e-cigarettes are not illegal in New Jersey, using them in public has been prohibited. It is unclear whether the proposed tax is designed to discourage the use of e-cigarettes or to provide funding for the long-term societal cost of their use. It’s unclear, as explained in this story, whether e-cigarettes help people stop smoking tobacco or encourage people who wouldn’t otherwise smoke tobacco to transition from non-smoking through e-cigarettes into tobacco use. Another study, according to this story, concluded that e-cigarettes causes an increase in the number of tobacco smokers.
It has been suggested that New Jersey’s proposed tax would push e-cigarette stores out of business because the tax would at least triple the cost of the liquid used in e-cigarettes, and encourage some users of e-cigarettes to turn to tobacco products. Others think that taxing e-cigarettes at rates less than those applicable to tobacco products would signal that the legislature thinks e-cigarettes are safer than tobacco.
Public hearings are scheduled to consider the proposal. They should be interesting.
Wednesday, March 12, 2014
In the latest installment in this saga, it seems that it will take years for the Board of Revision of Taxes to work through the approximately 24,000 appeals that have been filed. More than $48 million in tax revenue has not been collected while the appeals are resolved. According to this report, one of the reasons that the process is taking so long, aside from the huge volume of appeals, is the decision of some board members to hold out for a pay increase. It is expected that by the end of this month, about 10 percent of the appeals will be resolved. At that rate it will take years to work through the appeals, and certainly more will be added to the backlog when another real property tax year rolls around.
Currently, though two members of the board are paid $70,000 a year for their work, others are paid as little as $150 per day, which works out to roughly $38,000 a year. City Council claims that it has made money available to the board to hire staff, but apparently that money was used to comply with a court order requiring back pay for several board members. The board spends two days a week listening to arguments on behalf of taxpayers, and three days a week dealing with appeals for which taxpayers have not requested the opportunity to make presentations. On those days, the board meets for about an hour, sometimes less. It seems that for $150 a day, board members aren’t inclined to put in 40-hour weeks. So now attempts are underway to increase the pay of all the board members to $70,000. The situation is muddied by the fact that the city had tried to reduce the pay for all the board members from $70,000 to $50,000 for the chair, $45,000 for the secretary, and $150 per meeting for the other members. But the courts held that pay could not be cut for members already holding office, which generated back pay for them, and left only the new members being paid $150 a day. Legislation is working its way through City Council that would restore the $70,000 salary for all board members, in an attempt to “make the BRT members feel encouraged to finish the hearings by the end of the year.” The Mayor and his spokesperson are questioning why this plan wasn’t brought forward months ago.
Getting through these appeals requires all the board members to put in full-time weeks. It makes no sense to pay two of them $70,000 a year and the others $150 a day. This is what happens when someone thinks that saving a few hundred thousand dollars by cutting government spending is a good idea, when in fact the cost of the delay triggered by the outcome delays collection of almost $50 million in tax revenue. It’s not unlike the foolishness of cutting the IRS budget and then wondering why there is a federal budget deficit, knowing that the annual $300 billion shortfall over several decades accounts for quite a chunk of the national debt. Short-term thinking, one of the banes of modern culture, is bad for long-term progress. Surely there will be more chapters in the Philadelphia property tax story.
Monday, March 10, 2014
In the global survey conducted by deVere Group, one of the world's largest independent financial advisory organisations, 61 per cent of those polled ranked personal finance as the most difficult subject to discuss with family, friends and colleagues.My first reaction was not one of surprise, but one of curiosity. Did these results differ from how people not considered high-net-worth individuals would reply. Digging around, I discovered that Wells Fargo had done a similar survey of individuals aged 25 to 75, without regard to financial status. According to the news release, the results were a different:
It came ahead of politics (14 per cent), sex (11 per cent), religion (8 per cent), and health issues (6 per cent) in the study of 1,125 clients who have investable assets of more than £1m. The respondents came from, the U.K, the U.S., the United Arab Emirates, Hong Kong and South Africa.
A new survey from Wells Fargo (NYSE: WFC) revealed that Americans find discussing personal finances as difficult as talking about other thorny discussion topics like religion and politics. Nearly half of Americans say the most challenging topic to discuss with others is personal finances (44%), whereas death (38%), politics (35%), religion (32%), taxes (21%), and personal health (20%) rank as less difficult.It seems that a somewhat higher percentage of the high-net-worth individuals found finance discussions difficult. What is interesting is that despite that difference, for most people, conversations about money present the toughest challenge. That’s not a surprising result. So however the differences might be with respect to the other topics – the survey results are presented in a way that prevents comparison – it seems that rich, poor, or in between, talking about money continues to be a social taboo.
Friday, March 07, 2014
The unfortunate thing about the tax protest movement is that most of the people in it are vulnerable folks who fall for the siren song of the ringleaders, just as those who support special tax breaks, even without benefitting from them, have fallen for the siren songs of those who procure special tax breaks for themselves and their clients. Just as most of those arguing for the wonderfulness of economic inequality take their words from a few propagandists, so, too, most people in the tax protest movement blindly follow the words and instructions of the movement’s ringleaders.
This is what happened to Steven T. Waltner. Following the advice given by Peter Hendrickson in “Cracking the Code: The Fascinating Truth About Taxation in America,” Waltner and his wife submitted returns showing zero wages, two deductions, and a zero tax liability. Listing their occupation as “private-sector workers,” they attached Forms 4852, Substitute for Form W-2, reporting zero wages, including boiler-plate statements that they did not receive wages. Waltner also attached a “correcting” Form 1099-B, on which he replaced the gross proceeds amount with a zero, and at the bottom of which he included more boiler-plate language.
Of course, the IRS issued notices of deficiency to the Waltners. The ensuing litigation generated enormous activity, ranging from multi-hundred-page discovery requests, dozens of orders by the Tax Court, and eventually the Waltners paid the taxes that were due. But the case didn’t end at that point. The IRS had asserted section 6673 sanctions against the Waltners, and the Waltners in turn asserted similar sanctions against the IRS. In Waltner v. Comr., T.C. Memo 2014-35, the Tax Court upheld a $2,500 penalty against Waltner, even though it was authorized to impose a penalty of as much as $25,000.
Rather than simply pointing out that the Waltners had filed frivolous returns and imposing the penalty, the Court took the time, and many pages, to rip apart Hendrickson’s book. The Court’s effort is intended to prevent others from wandering down the deceptive path on which Hendrickson has been leading people looking for a quick way to live life without contributing to what society provides them. Anyone who thinks Hendrickson is sharing any sort of valuable tax information needs to read the case to learn why he simply is regurgitating the same, long-disproven, nonsensical arguments that analytical examination readily identifies as silly and dangerous. The best part of the opinion, for me, having read numerous rebuttals of the tax protest creed, is the description of Hendrickson’s tax protest activities. The court notes that nowhere in his book does Hendrickson provide his credentials, confining himself to a claim that he is a “researcher, analyst and scholar.” The court continues, “Add to that felon and serial tax evader.” Hendrickson not only has been indicted for tax-related crimes, but also placing and using explosives in the mail, and he ultimately pled guilty to some of the charges. Subsequently, he was again indicted on 20 counts of federal tax crimes, and eventually convicted. At his trial, Hendrickson defended himself by making the same arguments he made in his book, and those arguments were soundly rejected by the court.
Even though Hendrickson’s ideas, broadcast in his book, have been rejected, some people seem intent to treat it as worthy of being followed. It doesn’t seem to matter to them that Hendrickson went to prison for following his own advice. Do they think they’re headed anywhere else if they persist in going along the same path? It doesn’t seem to matter to them that Hendrickson proclaims Irwin Schiff, another convicted ringleader of the tax protest movement, to be his mentor. They’re so angry about paying taxes that they would follow these Pied Pipers right over the cliff as they play their pipes.
Yes, the tax system is a mess. But the path to its reform is to clean up the Congress that is responsible for the mess. To do that, control of the Congress needs to be taken away from the moneyed interests that have corrupted it to their purposes. Going down the tax protest path does nothing but to strengthen the power of the moneyed elite over the Congress. If those in the tax protest movement took their energy, their anger, and their frustration, and directed those feelings into reforming the Congress, they’d be pleasantly surprised by the outcome.
Wednesday, March 05, 2014
An enterprising reader, far more steeped in popular culture than I am, sent me an email and pointed me in the direction of this number from Boardwalk Empire: Don’t Put a Tax on the Beautiful Girls. Just imagine an exemption for beautiful girls. It’s not difficult imagining the lobbying that would take place in favor of such an exemption. Nor is it difficult to imagine that every female would claim to qualify. But what about the handsome men? What would they do? One can only imagine. The entire concept is not only hilarious but ridiculous.
If anything, all of this simply proves that individuals are intent on seeking an edge over everyone else. Whether it’s going straight out of the left-turn lane, sneaking into a movie theater without paying, or getting a tax break based on some supposedly unique or limited feature or characteristic. Too often, the feature or characteristic has nothing to do with sensible measure of a tax base, but is hyped as having some rational connection with how revenue is raised. The point of the suggestion made by Harry Gross is that the best tax is one that requires declarations against one’s own interest. That, however, is not easy to construct.
So I’ll toss out another idea. Perhaps people should be taxed on income equal to the amount they claim as income when they apply for a loan or try to impress a date, and perhaps property taxes ought to be paid on the value of the homes, boats, cars, airplanes, and other items that people claim to own when they are trying to get an edge in some arena other than taxation.
Yes, sometimes tax policy can generate hilarity. And ridiculousness.
Monday, March 03, 2014
The joy of the moment is tempered, of course, by the existence of income taxes, both federal and state. Must the couple pay tax? Yes. The value of the coins is included in the couple’s gross income. It is ordinary income. The law is settled. See, for example, Treasury Regulation section 1.61-14(a), Cesarini v. U.S., 296 F. Supp. 3 (N. D. Ohio 1969), aff’d, 428 F.2d 812 (6th Cir. 1970); Rev. Rul. 53-61, 1953-1 C.B. 17.
If the couple treat the coins as an investment does that turn the income into capital gain? No. Holding the coins as an investment generates capital gain or loss when the coins are sold by the couple. Capital gain or loss treatment requires a sale or exchange. Acquisition of something by finding it and reducing it to possession is not a sale or exchange. Assume that the coins in fact are worth $10 million. The couple reports $10 million of ordinary gross income, and obtains a basis of $10 million in the coins. If the couple hold the coins as an investment and sell them for, say, $11 million, there will be capital gain of $1 million. Whether the capital gain is long-term or short-term depends on when they sell the coins.
But if the couple treat the coins as inventory, any gain on subsequent sale of the coins would be ordinary income. According to the story, the couple plan to sell the coins individually or in small bundles using on-line sites. That approach raises the possibility that they will be treated as dealers.
It has been suggested that because the couple found the coins on land that they owned, that they purchased the coins when they purchased the land, that part of what they paid for the land should be treated as having been paid for the coins, that they thus invested in the coins, so that selling the coins generates capital gain. This argument simply prevents the couple from having gross income when they purchased the land equal to the difference between what they paid for it and its value as computed with $10 million of gold coins buried in it. In other words, the acquisition transaction by which they were enriched did not take place when they purchased the land, but when they extracted the excess value by discovering the coins. If instead of discovering coins they had discovered natural gas, oil, or minerals naturally in place and extracted those items, they would have gross income, not when they purchased the land but when they sold the natural gas or oil. At best, the argument supports a delay in the timing of the income but does not convert it into capital gain any more than a landowner who discovers and sells oil from the land has capital gain.
If the couple reports capital gain, the IRS surely will adjust their return. If they choose to contest that decision, they will end up in court, and the world will know who they are. To date, they have carefully protected their identity and the location of the land, understandably, and have chosen to remain anonymous. It is unlikely that they would surrender that anonymity for the sake of saving some tax dollars net of the cost of contesting the IRS assessment.
Thanks to the reader who raised the question about the tax treatment of this event.
Friday, February 28, 2014
The thought that these statistics reflect mere geographical movement is negated by another bit of information from the study. During a comparable forty-year period, 1971 through 2011, the percentage of the nation’s population that belonged to the middle class fell from 61 percent. This news is exacerbated by a realization that the economic condition of the middle class also has fallen, because middle class income has stagnated.
The decline of the middle class is not because those in it lack education. The study revealed that in 1970, only 56 percent of the city’s middle class had at least a high school education, and only 18 percent had any college education. By 2010, 92 percent of the middle class had finished high school, and 50 percent had at least some college education.
According to the study, the biggest drop in the city’s middle class, from 55 percent to 48 percent of the population, took place during the 1980s. The biggest increase in lower-class membership, from 36 percent to 45 percent, took place during the same decade. That decade, hailed by many as a time of American prosperity, surely didn’t do wonders for Philadelphia’s middle class.
Wednesday, February 26, 2014
Sometimes, especially during tax season, it helps to find humor in the tax world. It can require digging deep or reaching far, but it’s worth it. Thank you, Harry Gross, for making me laugh and inspiring me to think about taxes in a fun way.