Tag Archives: Income Tax

This May Be the Most Disgusting, Disheartening Thing You Read Today

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(Or maybe the second most, since you might read about the fascists and semi-fascists on Fox News and elsewhere attacking Ukraine’s president and being celebrated for doing so on Russian TV.)

For most of us, the company or organization we work for reports our income directly to the government. We’re responsible for accurately reporting deductions and so on and that’s almost always the end of the story. If you’re a certain former president, you can arrange your personal business in such a complex way — making your one company look like 400 or 500 of them — that the I.R.S. will throw up its hands and let you get away with financial murder.

His 2016 and 2017 tax returns show the result.

He claims he lost $32 million more than he earned in 2016. The alternative minimum tax for high income taxpayers still would have resulted in a tax bill of roughly $2 million, but he just so happened to have the same $2 million in tax credits. His total income tax for 2016: $750.

For 2017, his claimed losses were $13 million more than his income. The alternative minimum tax would have been $7 million, but he again had the same amount of credits. The result again: his total income tax was $750.

The New York Times has an explanation:

Before [what’s his name] became president and after, his exceedingly complex and voluminous tax returns came under regular scrutiny by the Internal Revenue Service. The number of agents assigned to the audit team: one.

After he left office, the I.R.S. said it was beefing up the audit team, to three. The tax agency itself acknowledged that it was still overwhelmed by the complexity of [his] finances and the resistance mounted by the former president and his sophisticated army of accountants and lawyers, which included a former I.R.S. chief counsel and raised questions early last year about why even three revenue agents should be assigned to audit him.

“With over 400 flow-thru returns reported on [his] Form 1040, it is not possible to obtain the resources available to examine all potential issues,” I.R.S. agents said … in an internal memo … released by the House Ways and Means Committee this week….

The committee reports released this week highlight how depleted the I.R.S. has become in the last decade, as Republicans starved it of funding. They also show how the agency has become increasingly unable to crack down on wealthy taxpayers who push the legal limits to lower their tax bills and have the means to fend off audits if they get caught.

That has led to a $7 trillion “tax gap” of revenue over a decade that is owed but goes uncollected, in many cases from superrich taxpayers such as [him], who has boasted that he fights to pay as little tax as possible. [The I.R.S. is unable to] match the capacity of an industry dedicated to tax minimization and avoidance.

The agency’s … enforcement staff has fallen by over 30 percent since 2010, and audits of millionaires have declined by more than 70 percent. Its budget has declined by nearly 20 percent, when accounting for inflation, during the last decade.

Republicans have for years accused the I.R.S. of political bias and unfairly targeting conservatives. For that reason [no, the article should say “claiming that is the reason”], they have fought to cut the agency’s funding or, in some cases, called to abolish it altogether.

The spending package that Congress is voting on this week reduces the base funding levels for the I.R.S. by $275 million to $12.32 billion, which Republicans hailed as a victory. However, that does not account for the $80 billion in supplemental funding that the I.R.S. was granted through the Inflation Reduction Act this year to buttress its resources over the next decade and hire more than 80,000 agents and staff members. The Biden administration has broad discretion over how and when to deploy that money to modernize the agency and bolster its enforcement capacity.

The Treasury Department, which oversees the I.R.S., is planning to use some of those funds to hire more auditors who can tackle complicated tax returns.

Charles P. Rettig, who was appointed as I.R.S. commissioner by [the ex-president] and left the post last month, …  suggested in an email to The New York Times that the additional funding the agency is receiving will help it undertake such complex examinations.

“I.R.S. desperately needs additional specialized examiners and related support to conduct additional meaningful examinations of complex individual returns involving partnerships and tiered arrangements of partnerships and similar pass-through entities, foreign transactions, complex financial arrangements and similar,” Mr. Rettig said….

The Biden administration has emphasized its ambitions of modernizing the antiquated technology at the I.R.S. and improving its customer service. In an August memo laying out how the money would be deployed, Treasury Secretary Janet L. Yellen said the agency would be focused on cracking down on rich tax dodgers and big companies that have long evaded paying what they owe to the federal government.

She also promised that middle-class households would not face more onerous scrutiny and that their audit rates would not rise. “These investments will not result in households earning $400,000 per year or less or small businesses seeing an increase in the chances that they are audited relative to historical levels,” Ms. Yellen wrote. “Instead, they will allow the I.R.S. to work to end the two-tiered tax system, where most Americans pay what they owe, but those at the top of the distribution often do not.”

The revelations about [the I.R.S. not properly auditing the ex-president’s returns] laid bare the difficulty that the I.R.S. has had in auditing the rich. The former president proved to be particularly uncooperative, as his team failed to provide facts needed to resolve certain issues and threatened to protest or appeal the process….

The report suggested that as the I.R.S. tried to work its way through [his] maze of tax returns, revenue agents [took] for granted that the assertions made by [his] accounting firm were true. Michael J. Graetz, the deputy assistant secretary for tax policy at the Treasury Department from 1990 to 1991, said the acquiescence of the I.R.S. to big accounting firms was striking…..

An agency memo that was recounted in the report described an audit team manager laying out the daunting nature of [the ex-president’s] returns.

“This return has about 400 flow-through returns reported on Schedule E and, since some of these are tiered, report a total of about 500 flow-through returns,” the auditor said. Underscoring the need for more resources, the memo went on to say that to “do a thorough review of these returns, we would need a team much larger than the current team.”

However, as you would expect:

The funds for the I.R.S. are expected to become one of the first big fights in Congress next year when Republicans take control of the House, as Representative Kevin McCarthy, the California Republican who is seeking to become speaker, signaled in September.

“On that very first day that we’re sworn in, you’ll see that it all changes,” Mr. McCarthy said. “Because on our very first bill, we’re going to repeal 87,000 I.R.S. agents. Our job is to work for you, not go after you.” In November, Senator Ted Cruz, Republican of Texas, [declared:] “I think we ought to fight an epic, knock-down, drag-out fight over stopping the Democrats from funding 87,000 new I.R.S. agents…”

At Least We Know Death Is a Certainty

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Despite being on a news vacation, I heard that The New York Times got copies of some of Txxxx’s tax returns. I read the Times article, but will let a few other Times readers comment.

Ralph from Nebraska:

This stunning report takes some time to read and digest and we will all find numbers that amaze and annoy us. I was once a bankruptcy lawyer and I often had to explain this scenario to clients: If you borrow money and don’t repay the money the IRS sees the money that you didn’t repay as income on which you need to pay taxes. Here’s the number that jumped screaming off of my I Pad: $287,000,000. During the last ten years our President has stiffed his creditors to the tune of $287 million. 

STSI from Chicago:

There is something rotten in our tax system that allows someone like Dxxxx Txxxx to spend years litigating the IRS so that he can pay little or no taxes owed. Dxxxx Txxxx is the poster child for how the US tax code has been exploited and scammed by individuals who use taxpayer money to fund their legal battles with the IRS. Congress needs to address this issue and level the playing field so that every American pays his or her fair share of taxes due.

Ron S. from Los Angeles:

I run two small, moderately profitable businesses. I deduct legitimate business expenses, but I also make monthly estimated tax payments to the IRS, knowing full well if I claim losses year after year I will be audited. That Dxxxx Txxxx cheats the system is not only no surprise, it also shows how the U.S. tax system is set up one way for the rich and another way for everybody else.

B. Reed from Washington DC:

Txxxx is a crook who deserves to be prosecuted. But I wish this was an anomaly because it isn’t. . . . How people can see this stuff and not be radicalized and demand dramatic change is beyond me. . . . 

It’s beyond me too.

By the way, we have an election 36 days from now, in which Dxxxx Txxxx and lots of his Republican enablers are candidates for high office.

A Selection of Stuff You’d Rather Not Read About

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Four articles that made an impression this week, from least to most depressing, that didn’t even mention Jerusalem, Puerto Rico, healthcare or starving polar bears.

One hundred and eighty-seven people are facing felony charges for participating in a demonstration in Washington D.C. that turned violent. The demonstration was on the day Trump was inaugurated. A trial is now underway. The depressing aspect of this story is that none of the six defendants are accused of doing anything aside from being there:

What jurors haven’t heard, and prosecutors don’t intend to offer, is evidence that any of the six individuals currently on trial … actually engaged in any property damage or violence. Under the government’s theory of the case, in which anyone arrested in the group is part of a conspiracy and is responsible for any actions taken by others, the lack of individualized wrongdoing doesn’t matter.

Maybe the jury will have the sense to acquit everyone and convince the government to stop these prosecutions.

Elsewhere in Washington, Republicans from the House and Senate are trying to reconcile the terrible tax bills they’ve recently passed. Could any of them read this article from The New York Times and say they were proud of their efforts so far?

… for the first time since the United States adopted an income tax, a higher rate would be applied to employee wages and salaries than to income earned by proprietors, partnerships and closely held corporations….

“We’ve never had a tax system where wage earners were substantially penalized” relative to other types of income earners, said … a former Treasury Department official….

Indeed, economists and tax experts across the political spectrum warn that the proposed system would invite tax avoidance. The more the tax code distinguishes among types of earnings, personal characteristics or economic activities, the greater the incentive to label income artificially, restructure or switch categories in a hunt for lower rates….

“The more you look at any of the major rules, the more ambiguities, glitches, clearly unintended consequences and tax planning opportunities you see,” said Michael L. Schler, a lawyer in the tax department of Cravath, Swaine & Moore. He has written a 50-page summary of the more glaring problems …

From Georgia Southern University, a professor named Jared Yates Sexton, who grew up in the South, writes about the fascism that runs in his family.

Eventually I left for college and found my own people who didn’t express such fascist and ignorant beliefs. I visited for the occasional holiday, kept in decent enough touch, but I felt confident knowing that people like my family would never be in charge of the country they understood so poorly….

They hoard weapons, supplies, and daydream about the day the government will fall and they’ll be free to remake the country as they see fit.

I cannot say they are fascists, but I can definitely say they hold fascist ideas. This is why they hardly blink when Donald Trump quickly erodes the normal order of the government, why they’re not concerned when he undermines the Freedom of the Press or cozies up to authoritarian leaders. They love it when he tells policemen to be rough on suspects. They want someone who plays nuclear chicken with a despot while the lives of hundreds of million innocent people lie in the balance.

Finally, speaking of nuclear chicken, Jeffrey Lewis, a “scholar at the Middlebury Institute of International Studies”, shares some really scary thoughts in The Washington Post. He imagines how a confrontation between North and South Korea might escalate, helped along by a morning tweet from the president, into nuclear war.

And so, facing what he believed was a massive American military invasion, Kim gave the order. The thread of history winds along on twists of fate, like Archduke Ferdinand’s driver missing a turn…

The U.S. Missile Defense Agency would later say this was a sign that the system had worked well, downing about a third of the missiles — although experts would argue that the low intercept rate resulted from problems that the Los Angeles Times had reported in 2017…. It seemed more likely, the experts said, that five of the missiles had simply broken up as they reentered the earth’s atmosphere.

The remaining seven nuclear warheads landed in the United States. These missiles were no more accurate than the others — but with 200-kiloton warheads, 10 times the power of the bomb that destroyed Hiroshima, close was enough to count in most cases.

I told you so.

If They Wanted Real Tax Reform

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The big story in Washington this week is the Senate Republicans scrambling to pass a major tax bill that nobody but their donors and other members of the plutocracy likes. Assuming something like it eventually becomes law, it will give a temporary tax cut to most members of the middle class and raise taxes for others, while giving a permanent tax cut to rich people and corporations. It will also add more than a trillion dollars to the deficit while requiring billions of dollars to be cut from programs like Medicare. (There is a nice summary of the giant con here.)

Republicans and even some journalists are calling it “tax reform”, even though it will make our system of taxation worse than it already is.

Wondering what real reform would look like, I read a book called A Fine Mess: A Global Quest for a Simpler, Fairer and More Efficient Tax System. It’s by a journalist named T. R. Reid. After a lot of research and conversations with tax experts around the world, he reached the same conclusion most experts have. The simplest, fairest and most efficient system of taxation is based on the “Broad Base, Low Rate” (BBLR) model.

The BBLR idea is that countries should tax as much as possible while keeping rates as low as possible. So, in the case of income tax, it’s best to tax all kinds of income at the same low rate. That means getting rid of deductions, exemptions and credits, many of which benefit people with the highest incomes, while categorizing things like health insurance benefits from your employer as personal income. That’s the “broad base” part. Once you’ve broadened the base and made more income subject to taxation, you can then lower everyone’s rates (that, obviously, is the “low rate” part).

The BBLR approach has a number of benefits. Filing and auditing tax returns is far simpler. Since rates are low and everyone’s income is treated the same, fewer people are tempted to avoid or evade taxes. Also, decisions about things like buying a house or building a factory tend to be made on the merits, not on the basis of tax considerations.

Reid also thinks the U.S. should institute a Value Added Tax (VAT). It’s a kind of sales tax, but one that is applied at every step of the manufacturing or distribution process, i.e. whenever money changes hands. We are the only rich country in the world that doesn’t have a VAT. Since it’s a tax on consumption, not income or savings, a VAT apparently has beneficial effects on a nation’s economy. It’s also difficult to evade. That’s why everyone else has one.

Another change Reid recommends is to reduce taxes on corporations. The U.S. has a high corporate tax rate, which results in corporations devoting a lot of effort to reducing or even eliminating their taxes. He thinks it would be better if all of the income people receive from corporations, especially dividends and capital gains, were subject to the same tax rate as other income (today, supposedly in order to foster investment, that income is taxed at a lower rate, which again mainly helps the wealthy). In fact, in a very interesting article in The Washington Post earlier this month, Reid advocated eliminating the corporate tax altogether, since it doesn’t do what it’s supposed to do.

What surprised me most about A Fine Mess, however, was that some of the ideas Reid endorses are included in the Republican tax bill. (Seriously, it doesn’t happen very often that there is overlap between “Republican policy” and “good idea”.) For instance, the Republicans have talked about getting rid of the deductions for medical expenses, state and local taxes and interest on mortgages. They would try to offset the disappearance of those deductions by increasing the standard deduction and lowering everyone’s rates. The result would be that more income would be taxed, but at a lower rate (that’s BBLR). Another result, not so beneficial, would be that millions of average taxpayers, for example, those who have major medical expenses or live in states with high taxes or who have big mortgages, would get a tax increase, even if their tax rates were lowered.

Unfortunately, the Republicans want to combine their few good ideas with many bad ones. For example, they want to get rid of the estate tax, which only affects the truly wealthy, and give more favorable treatment to certain kinds of business income (it’s been said that the Republican tax plan could have been written by Trump’s accountant). They also want to reduce taxes on the rich so much that they’ll have to cut social programs like Medicare, while adding more than a trillion dollars to the deficit.

Reid points out that Congress tends to produce a major tax bill every 32 years. The last one was in 1986. Congress worked on it for two years. The bill had bipartisan support and actually deserved being called “tax reform”. This year, the Republicans are trying to pass their bill in a matter of weeks, without hearings and without input from the Democrats. That indicates how screwed up our government is and how far away we are from getting actual reform.

This, That and the Other Thing

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There are few places as forlorn as a resort town on a chilly, cloudy, damp, out of season weekday afternoon. Thus, Virginia Beach, Virginia, last week:

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But let’s move on.

Paul Waldman writes about “The GOP’s Baffling Decision to Raise Taxes on Millions of Americans” at The Week.

If there’s one thing we thought we could count on in this crazy world, it’s that Republicans will never, ever, ever support a tax increase. It wasn’t always this way — Ronald Reagan, who to hear some people tell it practically walked the Earth without sin, actually raised taxes multiple times — but today there may be no more foundational belief to the GOP than the principle that taxes must come down, everywhere and always.

Nevertheless, “the GOP is right now rallying around a bill that will raise taxes on tens of millions of Americans.” It certainly is strange. One part of the explanation, however, is that Republicans aren’t very good at this governing thing. Another part is that they’re so eager to cut taxes for rich people and corporations, they’re willing to antagonize millions of voters and lie about what they’re doing.

As a partial antidote to the above, consider reading all about “The Relentless Honesty of Ludwig Wittgenstein”. Ian Ground presents an excellent overview of Wittgenstein’s philosophy, both early and late, at The Times Literary Supplement.