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Category: Tax

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Audit Them All (extended remix)

Last week, I posted my proposal to Audit Them All and I received many helpful comments from readers. Today, I have an extended version of the proposal in Legal Times (free but you have to register). Thank you Co Op readers for the valuable feedback you provided!

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Audit them all

Tom Daschle, former Senator and nominee for Secretary of Health and Human Services, didn’t fully pay his taxes. Apparently, Daschle didn’t tell his accountant about a free car service (worth a whopping $250,000) and consulting income (another $88,000) over a three year period. Tax laws are complex and so perhaps Daschle didn’t realize at the time that these things constituted taxable income. Regardless, the perception Daschle leaves is that powerful people don’t pay everything they owe.

In the world of tax compliance, perceptions matter a good deal.

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Tim Geithner and Tom Daschle Are No-Goodniks

I have enjoyed my visit at Concurring Opinions, but alas, my time is up and this will probably be my last (and maybe least) post.

I am one of those who is irked by the Timothy Geithner and now the Tom Daschle tax controversies. Geithner avoided paying tens of thousands of dollars in self-employment taxes. Then he paid back the part that he was forced to. Then, when his nomination as Treasury Secretary loomed, he paid the rest of it. And he wasn’t straightforward about his reasoning for the timing of all of this. Wags took the opportunity to argue that we need to reform the tax code, to make it simple enough that even the Treasury Secretary can follow it. Geithner was confirmed, apparently because none of the candidates who paid their taxes correctly were good enough for the job.

Now, Tom Daschle is facing similar issues. Nominated for Secretary of Health and Human Services, he amended his last three years’ worth of tax returns. Upon further reflection, he realized that he had failed to report hundreds of thousands of dollars in income, and that he shouldn’t have claimed some of the deductions that he took. He wrote a check for $140,000 and is now hoping for the best. It apparently wasn’t very challenging to get it right the second time around; why couldn’t he have had his “people” be equally careful in the first place? The most obvious reason is that nobody was watching then.

I agree with the idea that you can gauge how ethical someone is by how they behave when they think nobody is watching. Given the difference between how Geithner and Daschle behaved before and after people were watching, I think that they both fail the test.

I’m in a self-righteous mood about this right now, because I am doing my taxes this week and I found some old mistakes.

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Why the Persistence of Tax Havens?

isleofMan.jpgThe last remnants of British imperialism are still wreaking havoc today. The Canadian Governor-General’s bizarre proroguing of the Parliament there threatens to make a figurehead a kingmaker. More dangerously, tax havens like the Isle of Man, Guernsey, and Jersey cost governments worldwide billions of dollars of revenue annually:

Because of the secrecy surrounding the treasure islands, no one knows how much money they divert from developing countries. Christian Aid’s estimate – of $160 billion a year – is the lowest figure, though 60% greater than the international aid the poor world receives. The Pope suggests $255bn; the US research group Global Financial Integrity proposes $900bn. In all cases we’re talking about the means by which hundreds of thousands of lives could have been preserved in the world’s poorest countries. But Britain’s network of tax havens permits multinational companies, dodgy businessmen and corrupt leaders to snatch money from [tax authorities].

As governments face ever-greater fiscal responsibilities in the midst of crisis, many of those best able to shoulder the burden are AWOL. Even though “organised crime . . . depends on tax havens,” they persist. Why?

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The Shock Doctrine Meets Tax Law

Naomi Klein could have predicted it. As panic over the financial crisis set in, the US Treasury department put into action a “two-decade effort by conservative economists and Republican administration officials” to eviscerate a limit on tax shelters.

In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention. But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion. . . .

Until the financial meltdown, its opponents thought it would be nearly impossible to revamp [Section 382 of the tax code -- a provision that limited a kind of tax shelter arising in corporate mergers] because this would look like a corporate giveaway, according to lobbyists. . . . [According to other experts,] “It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops,” said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. “I’ve been in tax law for 20 years, and I’ve never seen anything like this.”

Sen. Charles E. Grassley (R-Iowa), ranking member on the Finance Committee, was particularly outraged and had his staff push for an explanation from the Bush administration, according to congressional aides. . . [But] “[w]e’re all nervous about saying that this was illegal because of our fears about the marketplace,” said one congressional aide, who like others spoke on condition of anonymity because of the sensitivity of the matter. “To the extent we want to try to publicly stop this, we’re going to be gumming up some important deals.”

Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts [has stated;] “We’re left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?”

Which makes one wonder–where will the main engineers of this giveaway be working after they leave Treasury? How richly will they be rewarded for their policy innovation? Or was this more a form of “return on investment,” rather than the kind of service that generally garners tips? As Gretchen Morgenson has written, more transparency, please.

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Citizens and Taxpayers

Under the provocative title “How Many Americans Should Have Skin in the Income Tax?” the TaxProf blog recently described a study by the Tax Foundation regarding the number of people who pay no federal income tax. While about one-third of income tax filers reported no federal income tax liability in 2006 (up from 20% in 1981), this number is estimated to rise to 43% under John McCain’s proposed tax policies and 44% under Barack Obama’s. TaxProf concluded: “The Tax Foundation rightly notes: ‘It is time for a serious public discussion of whether it is desirable to have so many Americans disconnected from the cost of government and what the consequences are of using the tax system as a vehicle for social policy.’” It is, indeed, a good idea to have a serious discussion about why this question seriously misses the point.

This view of low-income taxpayers is reminiscent of the Wall Street Journal editorial page’s infamous “lucky duckies” argument from several years ago. The basic idea is that

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Reds

One of the certainties of being a tax policy scholar who is not opposed to all taxes is that I am called names on a regular basis. The most common epithets are the standby favorites of the Cold War era: commie, pinko, commie-pinko, socialist, red, Marxist, Marxist/socialist . . . you get the idea. It pretty much does not matter what one says — again, unless one says that all taxes are theft — but the most surefire way to become subject to this kind of name-calling is to advocate any kind of income redistribution. Thus, while giving a talk last year, someone asked me if my argument might suggest that we should increase the estate tax. When I said yes, another academic (!) in the room said, “Oh, I see, so you believe in ‘from those who have the ability to those who have the need,’ right?”

I bring this up now because of the recent

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Probably?

975800_cookies.jpg

I’ve been wanting to write an article entitled “Oatmeal Raisin: The Cookie Nobody Loves.” Unfortunately, although this title captures, I am convinced, a deep truth, I could not find a way to link it to tax law. So instead of describing why, if you leave out lots of plates of different kinds of cookies and come back a little while later there are always more oatmeal raisin cookies left than any other kind, but if you come back an hour later, all the cookies, including the oatmeal raisin cookies, are gone (nobody loves ‘em, but they do like ‘em), this post will describe the piece I wrote instead: Probably? Understanding Tax Law’s Uncertainty.

As I described in an earlier post, flipping a coin is risky, because while we do not know whether it will come up heads, we do know the probability that it will come up heads (50%). The presidential election is uncertain, because we do not know whether John McCain will be elected president, and we do not know the probability that he will be elected president. A.J. Sutter pointed out in a comment to that post that the distinction between risk and uncertainty (that is, between known probabilities and unknown probabilities) ties into the debate about the correct interpretation of probability statements. As it happens, that debate is precisely Probably?‘s topic.

We might say that the probability that an event will occur is the number of times that event will occur over the long run out of the number of times that it could occur. So when we say that a coin has a 50% chance of coming up heads, we mean that if we flip the coin a lot of times–a million, say–about half of those flips will come up heads. And the more times we flip, the closer the percentage of heads will get to 50%. This is a frequentist interpretation of a probability statement.

But this interpretation doesn’t work if the event we’re talking about is not risky, but is, rather, uncertain. As others have noted, tax law is uncertain–that is, that we do not, and cannot, know the probability that a court will uphold a particular tax position. Tax advisors make these sorts of probability statements all the time, because a taxpayer faces lower penalties if he can get a tax advisor to give an opinion that there is a certain level of probability that the taxpayer’s position will eventually be upheld by a court. But if we don’t and can’t know this probability, what does it mean to say that there is a, say, 90% chance that a particular tax position will be upheld?

It means, I think, that the speaker believes that there is a 90% chance the tax position will be upheld. Or, put another way, the speaker would pay 90 cents to play a game in which he would get a dollar if the position were upheld and get nothing if it were struck down. This is what’s known as a “subjectivist” interpretation of a probability statement.

So, who cares? Well, everyone should care, of course!

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How Much is that Simulacrum in the Window?

When America’s wealthiest families start beating the drum for estate tax repeal, remember this heartwarming story of canine cathexis from Leona Helmsley:

[Helmsley's] instructions, specified in a two-page “mission statement,” are that the entire trust, valued at $5 billion to $8 billion and amounting to virtually all her estate, be used for the care and welfare of dogs, according to two people who have seen the document and who described it on condition of anonymity.

This news reminds me of part of John Chung’s fascinating article Money as Simulacrum, which comments on the unreal differentials of power created by contemporary inequality:

In 2007, the average amount of compensation for the top 25 highest paid hedge fund managers was $892 million. The compensation for the highest paid manager was $3.7 billion. . . . Earlier this decade, the price of some paintings broke the $100 million mark. Single family homes also have broken the $100 million mark this decade. To the ordinary person, such amounts are beyond comprehension. Such numbers are the product of a different world, a different reality that bears no resemblance to the reality of most people.

Perhaps the numbers seem unreal, even unimaginable in an increasingly innumerate society. But the power they manifest is all too real, all too able to shift scarce resources from increasingly hungry persons in the developing world to spoiled pets in ours.