Why A “Windfall”?

If you’ve been following the aftermath of the tax reduction legislation passed by Congress and signed into law by President Trump, you’ve seen stories about how some corporations have reacted to the new law by giving their employees bonuses or cutting their charges to consumers, and other, more critical stories noting that many of the companies are giving their employees one-off bonuses, rather than more permanent raises.

windfall-money-manBut while different articles about the tax cut legislation may make different points about how the tax cut legislation is affecting companies, workers, and the country at large, the coverage does seem to have one curious common theme and descriptive element:  the tax relief provided by the new law is typically said to have produced a “windfall” for companies and individuals alike.

It’s a very interesting choice of words — and one that conveys a deeper message, too.  The Merriam-Webster Dictionary defines “windfall” as “something (such as a tree or fruit) blown down by the wind” or as “an unexpected, unearned, or sudden gain or advantage.” The key underlying concept is that the “windfall” is a lucky gift and an unearned surprise — like an inheritance from your mother’s rich second cousin whom you’d never met.

“Windfall” is a telltale choice of words in this context because tax payments necessarily have been earned by whoever is making them; companies and individuals wouldn’t be paying taxes if they hadn’t sold the products or done the work or made the investments that generated the revenue in the first place.  By calling the proceeds of a tax cut in which individuals and companies pay less a “windfall” for them, you’re really suggesting that the taxpayers aren’t entitled to their own money, the government is — and taxpayers should consider themselves lucky that, for a time at least, they get to keep more of it.

Income earned as the fruit of labor or investment isn’t like fruit blown down from a stranger’s apple tree.  You can argue about whether the tax cut was good economic or social policy, but when taxpayers get to hold on to more of the money they’ve already earned it can’t reasonably be characterized a “windfall” for them.  The fact that so many news articles nevertheless present the issue in that way says a lot about how the news media, at least, views the respective entitlements of taxpayers, and government, to the money taxpayers earn.

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When Taxpayers Hit The Road

The Wall Street Journal has an interesting piece on Connecticut — the state which for some time has had the highest per capita income of any state in the union.  Now Connecticut is running into problems with its budget.  The problem?  It has jacked up taxes to the point that its biggest taxpayers, both corporations and individuals, have decided that it just makes sense to move.

leaving-connecticut-1170x514Aetna, a Connecticut institution since 1853 and one of the state’s largest employers, announced this week that it is moving.  General Electric has fled to Boston.  In May the state reduced its two-year revenue forecast by nearly $1.5 billion and has projected a 6 percent drop in income-tax revenue for 2017 and 2018.  Income-tax collections declined this year due to lower earnings at the top, as many high earners have moved to lower tax states.  Sales-tax revenue is forecast to fall by 9 percent, corporate-tax revenue is estimated to drop by 7 percent, and state pension contributions, which have doubled since 2010, will increase by a third over the next two years.  This confluence of bad news leaves Connecticut with a $5.1 billion deficit and three recent credit downgrades.

Is it a coincidence that all of that has happened after Connecticut raised its top individual income tax rate, payable by those who earn more than $500,000 a year, from 5% to 6.99%?  Is it a coincidence that, in the last five years, 27,400 residents have moved to no-income-tax Florida?  Their departures have depressed economic growth in Connecticut and, since high earners also tend to be high spenders, has also depressed home values and sales-tax revenues.

And here’s the kicker:  Connecticut is talking about issuing “revenue bonds,” backed by its shrinking income tax revenues, to try to reduce its borrowing costs and close its budget deficit.  In case you’re interested, that’s something Puerto Rico tried, too — and look where Puerto Rico ended up.

It’s a pretty simple lesson:  while people may not always be rational economic actors, if states keep raising taxes and taking large chunks of your income year after year, at some point taxpayers are going to go to a place where they get to hold on to more of what they earn.  Connecticut is now learning that lesson the hard way, and no-tax states, like Florida, are reaping the benefits.

Tax Torn

Well, it’s Tax Day — April 15, the due date for most federal and state income tax filings.  The butt of jokes by comedians for decades.  The annual source of angst for millions of American taxpayers.  A rallying cry for conservative anti-taxers ever since the Sixteenth Amendment was ratified in 1913 and allowed the federal income tax in the first place.

My feelings about Tax Day are decidedly ambivalent.  I recognize that taxes are the price we pay for living in a free society, and I pay them willingly.  A modern military with modern weaponry, a welfare state system that tries to help the poor and elderly, and a government that shoulders far-reaching tasks like disease control or preventing alien species from invading the Great Lakes can’t be funded by the system of duties and tariffs that supported a much more limited government during the colonial era.  I also think it’s ridiculous for people like Ted Cruz to talk about abolishing the Internal Revenue Service.  If you accept that taxes must be paid, as I do, there must be an entity that collects the tax.

At the same time, it’s hard for me to feel warm and fuzzy about our tax system or the IRS.  Last night Kish and I watched the latest Last Week Tonight with John Oliver, and it tried to make viewers feel sorry for the IRS, because IRS jobs are boring, the Internal Revenue Code is constantly being changed by Congress, and IRS funding has been cut.  Good luck with that effort!  The IRS may be necessary, but don’t expect me to give it a hug, okay?  And when I sign my forms and send in my payments, don’t think I’m a nut if I wonder about the presence of unfairness in our tax code and abuse and favoritism in the highly political process by which tax exemptions are determined and tax rates are imposed.

Every year, as I look at the forms and the complicated instructions, I wonder if there isn’t a simpler, fairer way to do it.  Say what you will about the sales tax, but it’s a straightforward percentage that anybody can calculate, and it targets consumption rather than work.  If you want to soak the idle rich, wouldn’t a tax when they buy ridiculously appointed $200,000 SUVs be a good idea?  And user fees that are triggered when a specific federal service is used — say, for use of ports and customs, for airline security, or for drug or vehicle testing to ensure compliance with safety standards — also seems fair.  Couple that with an income tax and withholding system that involves fewer exemptions, exclusions, deductions, tax rate levels, and schedules, and maybe you’ve got a workable system that won’t cause so many Americans to take the IRS’s name in vain come every April 15.

Taxes, Forms, Worksheets, And Instructions

It’s April 15 — Tax Day.  For many Americans, it’s an angst-filled day, as they rush to complete their taxes and get their forms filed before the midnight deadline.  Even for those of us who are already filed, it’s not a day to celebrate.

Every year, the process of completing tax forms seems to become more complicated and more overwhelming.  Taxpayers juggle federal, state, and local forms, labor through increasingly lengthy instructions, and strive mightily to interpret myriad weird descriptions of deductions, credits and “adjustments to income” to determine whether they have any application to our lives.  This year, the on-line IRS instruction booklet for the 2012 Form 1040 comes in a PDF that is a mind-boggling 214 pages long.  And if you don’t think you need to read every instruction because common sense answers most of the questions, consider this:  according to the instruction at page R-1 of the Form 1040 booklet, for purposes of the credit for the elderly, the IRS considers you to be 65 the day before your 65th birthday!  Somewhere, there is an sober bureaucrat who will give you an earnest explanation of why that approach makes perfect sense.

Although we make the most fun of the federal forms and instructions, for many of us the state and local forms and instructions are just as bad.  This year I had the good fortune to review the New York forms and instructions.  The basic New York personal income tax form, the IT-201, is four pages long and includes 19 separate line items for federal income and adjustments, 5 line items for “New York additions,” 9 line items for “New York subtractions,” 4 line items for deductions, 9 line items for “tax computation, credits, and other taxes,” 13 line items for “New York City and Yonkers taxes, credits, and tax surcharges,” and 14 line items for “payments and refundable credits.”  The on-line instructions for the form comes in a PDF that is a hefty 72 pages long.

Of course, those are just the forms for personal income tax.  I can’t even begin to imagine the complexity and pain involved in filing tax returns for a small business.

With the multiplicity of forms and the confusing instructions, it’s not surprising that many people turn to tax preparation services for help.  According to estimates, about 60 percent of taxpayers seek professional help, and some 800,000 people are employed in helping us prepare our tax returns.  If you add in the various people employed by the IRS and state and local tax agencies to receive, process, and audit our forms, more than 1 million Americans likely earn their living through some tax-related job.  That’s why some people say that “flat tax” proposals that would eliminate all of the deductions, adjustments, additions, surcharges, and other confusing entries are job killers.

I’m sorry if simplifying the tax form completion process would cost some people their jobs, but it simply makes no sense to have Americans fight through these ludicrous forms and instructions every year.  Congress, state legislatures, and local governments should roll up their sleeves, get rid of the special interest exclusions, deductions, and adjustments, and get us to a tax system that is simple and straightforward.  If you want people to pay their taxes — and we should want people to pay their taxes — make the process easy to understand and therefore easy to comply with.

Hey Harry, Mitt Paid Taxes!

Today Mitt Romney released his 2011 tax returns.  They show that the Republican nominee earned more than $13.5 million — mostly from investments — and paid $1.9 million in taxes.  He has his wife also gave generously to charities.

In addition, Romney also released a summary of his taxes going back to 1990.  The summary reported that, during the period from 1990 to 2009, the Romneys paid taxes every year, with an average annual effective federal tax rate of 20.2 percent.  Romney has now provided information about 23 years of tax returns, including releasing the tax returns themselves for 2010 and 2011.

Let’s not forget that the abominable Harry Reid claimed back in August that an anonymous source had told him that Mitt Romney had not paid taxes for 10 years.  It was appalling that the Senate Majority Leader would rely on an unnamed source to launch such serious and slanderous accusations, which have now been shown to be false.  Do you think there is any chance that Harry Reid will apologize to Mitt Romney for making such reckless and unfounded accusations?  That’s what any decent person would do.  Unfortunately, any person of character would never have made the unsupported accusations in the first place, so I wouldn’t bet on old Harry doing the decent thing.  Instead, he’ll just endure another blow to whatever shreds of credibility he might still possess.

I hope Romney’s release of his tax returns takes that silly issue off the table, and lets the candidates and the American public focus on the big issues in the race — like who is better equipped to get our economy going, and how we can get people back to work and bring this unending recession to a long-overdue end.

Who Is This Guy? (The Revenue Side)

The next part of President Obama’s approach to the budget deficit, outlined in his April 13 speech, addressed what he called “tax expenditures” and “spending in the tax code.”   At the outset, he said he regretted agreeing to extend “tax cuts for the wealthiest Americans” only a few months ago, but explained that he did so “because it was the only way I could prevent a tax hike on middle-class Americans.”  He added that “we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society” and declared:  “I refuse to renew them again.”

The President next said the tax code is “loaded up with spending on things like itemized deductions.”  He agrees with “the goals of many of these deductions, from homeownership to charitable giving,” but “we can’t ignore the fact that they provide millionaires an average tax break of $75,000 but do nothing for the typical middle-class family that doesn’t itemize.”  He then called for “limiting itemized deductions for the wealthiest 2 percent of Americans.”

Finally, he said “we should go further,” and Congress should “reform our individual tax code so that it is fair and simple — so that the amount of taxes you pay isn’t determined by what kind of accountant you can afford.”  The White House fact sheet that UJ linked to recently phrases the issue more bluntly — it says: ” the President is calling for individual tax reform that closes loopholes and produces a system which is simpler, fairer and not rigged in favor of those who can afford lawyers and accountants to game it.” (The emphasis is in the fact sheet itself.)

These remarks are, commendably, more specific than the President’s remarks on spending and health care.  He wants to raise the current tax rates on high income earners (by not “extending” those rates) and he wants to “limit” deductions for the wealthiest 2 percent of Americans.  It is interesting that the President now regrets a decision he made only a few months ago, but it is even more interesting that he seems to equate “income” with “wealth.”  The federal income tax only addresses “wealth” if the wealth produces taxable income.  The notion that individuals who are taxed at the highest tax brackets are all “millionaires and billionaires,” as the President suggested, is preposterous.  Instead, many of those people are simply productive workers in two-income families — small business owners, professionals, and so forth — who are reaching the peaks of their earnings potential while at the same time they are putting their kids through college and trying to save for retirement.  The notion that such people are “the wealthiest Americans” who have somehow gamed the system is ludicrous.

I’m all for making the tax code simpler and fairer — but does anyone really think President Obama is well positioned to do so?  His health care legislation is already producing volumes of regulations that are of breathtaking complexity.  And this is not a President who has shied away from advocating tax breaks and incentives for causes that he agrees with — like green energy.  A better course, I think, would be to get away from deductions altogether.  I’d like to see an end to special tax treatment of donations to charitable and religious organizations and the non-profit political groups, right and left, whose vile advertising makes TV watching during the election season so revolting.  Our tax policy should not encourage such groups.

And consider the intemperate language of the White House fact sheet quoted above.  It actually suggests that our federal tax system is “rigged in favor of those who can afford lawyers and accountants to game it.”  Does the President honestly believe that the federal tax system that he has presided over for two years is “rigged” and “gamed” by “lawyers and accountants”?  If so, why hasn’t he done something about it before now?

Who Is This Guy?  (The Health Care Side)

Who Is This Guy?  (The Defense Side)

Who Is This Guy?  (The Spending Side)

Illinois Ups The Ante

Last week Illinois passed legislation to significantly increase its income taxes in order to help solve its dismal budget deficit problems.   Personal income tax rates in Illinois will go from 3 percent to 5 percent — a 66 percent (!) increase — for the next four years.  Corporate taxes also will increase.  Legislators passed the bill only hours before a new legislature was sworn in, and coupled the tax increases with a promise that, during the four-year period, spending increases would be limited to 2 percent a year.  Given that Illinois has a $25 billion annual budget, the “strict limits on spending increases” means the Illinois legislature will have to scrimp by on only $500 million in new spending every year.

The actions of the Illinois legislature and Governor are precisely why “tea party” candidates were successful in the 2010 election and will be probably continue to be successful so long as government spending is out of control.  It will always be easier for politicians to defer hard choices on spending, so as to avoid upsetting any constituency, and then seek tax increases imposed by lame-duck lawmakers who are leaving office and, perhaps, seeking jobs with the same constituencies who are trying to avoid spending reductions.  I’m sure, however, that Illinois residents will appreciate the brave actions of their elected representatives and will be happy about paying even more taxes in a down economy where families have already engaged in significant belt-tightening.

I’m hoping that Governor Kasich and the Ohio General Assembly don’t follow the lead of the Illinois legislature.  The path to a balanced budget lies in spending cuts, not tax increases imposed on struggling citizens and businesses that are expected to produce jobs.  And if the Ohio government can resist the urge to raise taxes, it may find that Illinois residents and businesses may look favorably on Ohio as a more tax-friendly place where they can relocate and leave corrupt, spending-addicted Illinois politics behind.