The Impact Of Tax Cheats

The Internal Revenue Service estimates that, each year, about 16.3 percent of the nation’s federal taxes go unpaid — and that’s after the IRS takes whatever action it takes to try to achieve compliance.  This “compliance gap” leaves a pretty big hole in the federal budget.  In 2018, if all of the federal taxes that were owed were actually paid, it would have meant another $643 billion in revenue for the federal goverment — which would have covered about 83 percent of our ridiculously large federal budget deficit.

celebrity_tax_cheats-624x300Why don’t people just suck it up and pay what they owe?  That’s not a self-answering question.  The Government Accountability Office says there are three main reasons for non-compliance:  third-party reporting issues, reduced IRS budgets and staffing, and the complexity of the Internal Revenue Code.  The first and third reasons involve mistakes — where third parties don’t correctly report what a taxpayer has earned, or has received in a taxable transaction, or where a taxpayer has legitimately tried to figure out what they owe, and simply been wrong — but the second category clearly relates to the ability of the IRS to ferret out, audit, and penalize those who are knowingly cheating.  In short, if you had perfect compliance, reduced IRS budgets and staffing wouldn’t make a difference.  And the lines between the three categories may be blurry, too.  If a taxpayer professes confusion about how to treat a particular source of income but adopts a stretched reading that dramatically minimizes their taxes, is that cheating, or a product of tax code complexity?

So, what can we do to improve the compliance numbers, recognizing that getting perfect, 100 percent compliance is an unattainable goal?  The answer to that question seems to turn on political inclinations and your view of human nature.  Some people, like the author of the article linked above, think that simplifying the tax code would result in a higher compliance rate — an argument that presupposes that people honestly try to figure out, and pay, what they actually owe.  The flip side argues that increasing the IRS budget for oversight and compliance is the best way to promote compliance.  In short, if more people fear they’re going to get caught, it will have a prophylactic impact on a wider group of taxpayers who will choose to simply pay their taxes rather than risk audits and penalties.

There’s undoubtedly merit in both arguments, although being somewhat cynical about human nature, I tend to agree more with the latter camp — but it’s also true that neither of these solutions has much promise in the short term.  Tax simplification has been the Great White Whale of politics for as long as I’ve been filling out 1040 forms, and it never quite happens.  And campaigning for office on a platform of increased IRS funding and more aggressive tax enforcement doesn’t seem like the ticket to political success.

So we’re likely to bump along as we have been, with many people accepting their federal tax burdens, a segment of the population consciously cheating on their tax obligations, and a continually growing deficit because we can’t actually do something about the “compliance gap.”  It makes you wonder:  at some point, is that “compliance gap” going to grow even larger?

Congestion Taxes

It sounds like an April Fool’s Day joke, but it isn’t:  New York lawmakers have approved a budget that will impose a tax on drivers who venture into Manhattan — one of the most congested driving areas in the world.  Drivers in New York City not only will be cursing the gridlock, now they’ll be paying extra for the privilege, too.

maxresdefaultThe budget deal will create a six-member commission that will set the fee to be paid by drivers who cross into Manhattan below 61st Street.  Because the idea is to use the tax to reduce congestion, pricing is expected to be variable, with higher rates during the peak periods and lower rates at night and on weekends.  Electronic readers will assess the tolls, which are expected to be between $11 and $12 for cars during daylight periods and about $25 for trucks.  The tax is forecast to generate about $1 billion in revenues, which New York lawmakers promise to use to address desperate repair needs in New York City’s subway and commuter rail systems.

Congestion taxes are used in other congested cities of the world, like London, but New York City will be the first U.S. city to adopt them.  And if the taxes work as planned in the Big Apple, it isn’t hard to foresee other congested areas of the country, like southern California, adopting them, too.  After all, local governments are always looking for new revenue sources, and this particular approach can be pitched as a method of using taxes to achieve a virtuous result — reduced road congestion and, if the tax revenues are earmarked, improved mass transit.

I’ve driven through New York City exactly once, in a rental car on a Saturday morning when the roads weren’t bad.  I can’t imagine what how nerve-wracking it would be to drive there on a daily basis — and now to pay special taxes for that added stress.

And here’s what’s interesting, too:  if congestion taxes are, in fact, designed to reduce congestion, that reflects an acknowledgement that taxes influence behavior.  That is, such taxes presuppose that some drivers will forgo taking their cars into the congested zone in order to avoid the tax — otherwise, the tax would have no effect on congestion.  But if taxes do in fact affect behavior, and people take action to avoid taxes, what does that mean for New York and New York City generally, which have some of the highest income taxes and other taxes in the U.S.?

Voting With Its Wallet

Seattle is home to some of the largest corporations in the world, with one — Amazon — growing like crazy and fueling a boom in downtown construction.  But when Seattle politicians decided to impose a tax on large employers in the city to deal with a homelessness crisis, Amazon very publicly decided to pause work on a new downtown office building until after Seattle City Council votes on the tax.

03062018_amazongrowing_132746-780x513The proposed tax would have a real impact on businesses.  It would be a “head tax” of $500 per employee on approximately 500 businesses that gross at least $20 million annually in Seattle.  For Amazon, which currently has about 45,000 workers in Seattle, the tax would cost more than $20 million in 2018 and 2020, with that tab increasing when the form of the proposed tax would shift to a .7 percent payroll tax in 2021.  Even for a company that is highly profitable — Amazon recently reported quarterly income of $1.6 billion — $20 million a year isn’t chump change.

Amazon typically doesn’t mess with local politics in Seattle, so its pause in construction planning until after the City Council vote has had a real impact.   One City Council supporter of the tax accused Amazon of attempting “blackmail,” but other voices in city hall and in the real estate development community shuddered at the thought that the company might stop its investment in Seattle.  The concern is only heightened by Amazon’s announced search for a new city in which to build a second headquarters — a process that is already underway, in which Columbus and other cities have made the first cut.  Some people are concerned that Amazon might just direct its growth exclusively to the new home of “HQ2,” leaving Seattle in the dust.

Why should large employers, alone, pay a tax to address Seattle’s growing homelessness problem?  Supporters of the tax say that the large tech companies have contributed to the problem by bringing in highly paid workers who have caused a spike in home prices and rents — the median price for a house in Seattle is a whopping $820,000 — and that has contributed to the homelessness problem.  The sponsors of the tax also note that Seattle doesn’t have an income tax or tax capital gains, and claim that the city has few options to raise funds to address homelessness.  It’s curious, though, that the tax would be limited to only  large employers, as opposed to all employers, or that it doesn’t target various forms of real property transfers.  After all, a lot of people have presumably made a lot of money selling property that dramatically increased in value due to Amazon’s growth — why shouldn’t they contribute some of that profit to address the homelessness problem?

The reaction of the City Council member who characterized Amazon’s decision to pause construction as extortionate reminds me of the hubris that caused cities like Detroit to assume (wrongly) that large employers wouldn’t move away — or the story of the goose that laid the golden eggs.  As Amazon’s experience in its “HQ2” search proves, other cities would welcome a large employer that offers thousands of workers high-paying jobs.  The reality is that Seattle needs Amazon more than Amazon needs Seattle.  Does it really want to risk killing the goose?

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.

A Blunt Instrument

As of January 1, 2018, Seattle has placed a tax — it’s officially called a “sweetened beverage recovery fee” — on sugary sodas and “sports drinks” like Gatorade.  Costco, the big box membership club retailer, has responded by placing signs showing consumers the specific impact of the tax on the Costco price for the product — and it’s a whopper.

video__sugar_tax_sticker_shock_0_10405324_ver1-0_640_360The Costco signs show that the Seattle tax adds $10.34 to a Gatorade 35-bottle variety pack — the kind you might buy if you were responsible for buying refreshments for your kid’s sports team to consume after a practice.  The price of the product was $15.99, but with the new tax the price is now $26.33.  The tax added $7.56 to a 36-can case of Dr. Pepper, bringing the price from $9.99 to $17.55.  Costco also helpfully added signage to explain the tax-related increase to its customers and remind them that they can avoid paying the additional cost simply by going to a nearby Costco located out of the city limits.  Some customers have told local TV stations they plan on doing just that.  There’s also been lots of social media chatter about the Costco signs and the impact of the tax on prices.

What’s the point of the tax?  Seattle evidently is concerned about obesity, which some studies have linked, at least in part, to the consumption of sugary soft drinks.  Seattle hopes that by imposing a substantial tax on soft drinks and “sports drinks,” it will incentivize people to make healthier choices.  But get this:  the tax exempts sweetened products from certified manufacturers with annual worldwide gross revenue of $2 million or less, and products from certified manufacturers with gross revenue of more than $2 million but less than $5 million pay a much smaller tax.  That exemption is a purely political decision that doesn’t make sense as a public health issue, because the size of the producer obviously doesn’t change whatever the impact of the product might be.  Seattle’s approach also focuses only on sweetened drinks, and doesn’t address products like ice cream, candy bars, “snack foods,” or frozen pizza that might also be said to contribute to “unhealthy lifestyles.”  And, of course, it doesn’t begin to address other issues that contribute directly to obesity, such as lack of exercise.

Other cities, like Chicago, have tried soft drink taxes and dumped them in the face of business opposition.  Costco is providing a salutary service by alerting its customers to the specific cost impact of the tax so they can factor it into their decision-making.  The Seattle experiment, as illuminated by the Costco signs, reminds us, yet again, that taxes are a pretty blunt instrument when it comes to trying to change behavior and achieve broader policies — and that taxes are always going to be affected by political considerations, too.

Hang On To Your Wallets

Here’s some news that should cause all taxpaying Americans to feel a cold, hard lump in the pit of their stomachs:  Congress has decided to focus on “tax reform.”

ap17306662049220Congress’ decision to pivot to tax reform has produced all kinds of news stories, most of which have headlines that can only stoke the angst.  What does the proposed tax reform bill means for the value of your home?  What kind of hidden tax brackets might be found deep in the dense language of the proposed bill?  How will small business owners be affected?  What company’s stock price took a dive because the bill proposes repealing a crucial tax break?  All of these stories, and more, can be found simply by running a google search on “republican tax bill.”

The stories are indirectly reflective of the key problem with the federal tax code, because the many different areas of potential concern they address shows just how wide and deep is the reach and impact of our federal tax structure.  Virtually every company, industry, form of property, job, trade, college, technology, and concept is affected by some form of federal tax or federal tax break.  At the founding of the republic, Alexander Hamilton may have devised a simple approach to raising revenue to fund the federal government, but those days are long gone.  Now, the tax code is a complicated morass far beyond the ken of the average citizen, with special rates and breaks and benefits and exclusions and surcharges that only experts and lobbyists understand.

So, given that reality, why should the average citizen be concerned that Congress has decided it’s time to mess around with the tax code?  Because our political class, Republicans and Democrats alike, have shown they are primarily interested in raising lots of money so they can be reelected . . . which means the risk that some special provision written specifically to help a large donor will be inserted in the dead of night simply can’t be ignored.  And with the Dealmaker-In-Chief in the White House, who’s going to really dive into the details of whatever gets passed, trying to make sure that the average citizen doesn’t get gored while the special interests get their perks and sweetheart deals?

Maybe it all will work out, and the tax code will be made more fair and equitable and easy to understand, and we’ll be able to file our tax returns on postcards like the photo op pictures are indicating.  Maybe — but I’ll believe it when I see it.  Until then, I’m hanging on to my wallet.

A Giant Insurance Company With An Army

With Tax Day now behind us, it’s worth looking, again, at where our tax dollars come from and also how our tax dollars are spent.  The Brown Bear helpfully sent me an article reporting on the Taxpayer Receipt prepared by a nonpartisan group called the Committee for a Responsible Federal Budget.  While the original article is behind the Wall Street Journal website paywall, a Fox Business reprint of the article’s text is available on-line.

ss-recipientThe Taxpayer Receipt shows how every $100 in federal taxes was spent in 2016 — and, to give a sense of the trend lines, how that same $100 was spent in 2011, too.  The result supports the conclusion memorably expressed by the line I’ve used as the headline for this piece:  the United States has become a “giant insurance company with an army.”

Why?  Because half of all federal spending goes to Social Security, Medicare, Medicaid, and health programs, and that number is growing, with Social Security spending up 17% since 2011, Medicare up 15.1%, and Medicaid up 25.4%.  Social Security gets by far the biggest piece of the federal spending pie, receiving $23.61 of every $100 in tax dollars.  Medicare places second, with $15.26.

And what about that army?  National defense comes in third, with $15.24 of every $100 in taxes paid.  That amount dropped 22.3% from 2011 to 2016, incidentally.

On the spending side, the lesson from these numbers is clear:  we’ve become an enormous social welfare state, with benefits continuing to expand.  As the percentage increases from 2011 to 2016 indicate, the growing spending on such programs is crowding out our ability to fund other programs, like transportation infrastructure, federal parks, space exploration, and every other federal initiative you can name.  And the increased spending isn’t helping the nagging problem of Social Security solvency, either.  The program is underfunded by at least 20 percent, and under current projections the Social Security Trust Fund (not exactly an accurate moniker) will run out of money in 17 years.

Oh, and here’s another interesting data point — fully $6.25 of every $100 in tax revenue goes to pay interest on the national debt.  That number is growing, too.

On the tax generation side, the individual income tax provided 47% of the $100, with payroll taxes producing 34%, corporate income taxes 9%, and customs duties and excise taxes another 9%.

Now, get back to work!

Trump’s 2005 Taxes

There was a dust-up yesterday about Donald Trump’s taxes.  MSNBC’s Rachel Maddow obtained two pages of Trump’s 2005 personal tax returns, which apparently had been leaked — by someone.  The two pages show that, in 2005, Trump reported income of $150 million, paid $38 million in taxes, primarily through the alternative minimum tax, and benefited from a continuing write-off of losses that apparently date back to 1995.

48550944-cachedThe White House bemoaned the leak of the two pages of the tax returns, noting that an unauthorized leak of tax returns is a violation of federal law.  At the same time, the White House noted that the two pages show that Trump paid a big chunk of money in federal taxes — while also pointing out that he has no obligation to pay one penny more in taxes than the law requires, a position that virtually every taxpayer heartily agrees with — and added that Trump also paid “tens of millions of dollars in other taxes, such as sales and excise taxes and employment taxes, and this illegally published return proves just that.”

In addition, some Trump supporters used the two pages of the return to refute some of the things said by Trump opponents during the presidential campaign — namely, that Trump wasn’t releasing his taxes because he was a poor businessman, his business empire really wasn’t that successful, and his returns would show that he paid no taxes at all.  As a result, some people are speculating that Trump himself engineered the leak and is using the 2005 return to play the media like a Stradivarius — by releasing limited documents that appear to refute opposition talking points, while at the same time objecting to leaks in violation of federal law.

It’s a messy story, and we’ll have to see whether we learn anything further about the source of the leak.  For now, I hold to two basic points:  (1) if Trump didn’t approve the leak and somebody in the federal government (specifically, the IRS) leaked the two pages of the 2005 return to advance their own personal political agenda, that is both illegal and a grossly inappropriate intrusion into Trump’s personal information and should be opposed by anyone, regardless of their political views, who has entrusted the government with their confidential information, via tax returns or otherwise; and (2) the returns show why presidential candidates should release their returns and why, if they object to such a release, voters should insist that they do so.  The 2005 returns indicate that Trump paid millions of dollars pursuant to the alternative minimum tax — a tax that Trump has talked about abolishing.  The public deserves to know whether political positions are motivated by a politician’s own self interest.

Testing The Impact Of Free Money

Starting this week, the government in Finland is going to do something interesting.  For two years, it will be giving free money — about $590 a month — to 2,000 unemployed Finns.

free-moneyIt’s an effort to test the theory of “basic income,” and also an attempt to try to streamline Finland’s social welfare system, where benefits vary depending on a person’s status and change whenever the status changes.  The concept of basic income posits that paying people just for being alive will make sure that no one falls through the cracks.  And the Finnish government also is hoping that the experiment will provide some evidence of just what unemployed people will do if they are given money with no strings attached.  Proponents of basic income hope that the money spurs unemployed people to start their own businesses and be more entrepreneurial.  The skeptics expect that the lucky 2,000 Finns will spend a lot of time on their couches, watching TV and eating junk food.

I’m not sure how the free money will affect the 2,000 recipients; predicting the reactions of individuals is never easy.  I don’t think $590 a month is all that much money — for example, it’s about a third of what salespeople in Finland earn, according to this chart — but if Finland has a robust social safety net, as many northern European countries do, it might be enough to allow somebody to eke out a couch-bound, video game-oriented life with a roommate or two and some generous parents.  It doesn’t seem like it would be enough money to allow people to start a business, learn a new trade, or do some of the other positive, poverty-ending things that some advocates are forecasting.  My guess is that if the unemployed folks had the drive, moxie, and gumption to start a new business, for example, they probably wouldn’t be unemployed in the first place.

No, I think the more predictable response will come from the people who aren’t getting that $590 a month for the next two years.  Somebody is paying the taxes that fund the “free money” pot, and I’m guessing they won’t exactly be happy to be paying somebody else to simply exist.  And if even a portion of the 2,000 start their own businesses, some of the taxpayers no doubt will wonder why they didn’t get the free money that would allow them to pursue their dreams.  When government is picking the lucky few, there is bound to be some resentment.  Pretty soon you end up with a lot of people wanting that free money from the government, the government bowing to popular demand, and perhaps not enough people who are working and paying the taxes that provide the free money in the first place.

All of which begs the question:  how could the “basic income” model be sustainable in the real world?  Thanks to Finland, maybe we’re about to find out.

On The Squirrel Superhighway


The bird feeder in our backyard broke, sending birdseed falling to the ground — and in the process turning our back fence into the German Village Squirrel Superhighway.  As I write this, no fewer than four squirrels are racing over the fence lines, romping through the backyard, twitching their tails, eating as much birdseed as they can stuff into their gluttonous buck-toothed mouths, and then skittering back up the trees that serve as the squirrel superhighway on and off ramps.

Squirrels are basically rats with tails, but they are industrious little buggers and fun to watch.  Hard-working and personally greedy, they are the prototypical capitalists of the animal kingdom.  When an opportunity presents itself, they are highly motivated to get their share and will do what they can to maximize their personal gain.

Now that I think of it, I’m surprised somebody hasn’t tried to tax them.

Powerball Dreams, Tax Realities

Many of us went out to buy a Powerball ticket over the last few days.  Why not?  Even a tiny, ridiculously remote chance to win a $1.5 billion jackpot is still . . . a chance to win a $1.5 billion jackpot!  How often does the average Jane or Joe have a chance at such enormous sums of money?  It’s an irresistible temptation.

according-to-math-heres-when-you-should-buy-a-powerball-ticketPart of what you are buying when you purchase a Powerball ticket under these circumstances is a chance to dream.  What would you do with hundreds of millions of dollars?  Would you quit your job, move to your dream location, buy a professional sports team, make each of your relatives a millionaire, stay in the President’s suite at the Ritz and take a champagne bubble bath, buy a Ferrari . . . or something else?  If you literally had more money than you knew what to do with, even the wildest dreams are possible.  I’m guessing that 99.9% of the people who are in the Powerball drawing — even people, like Kish and me, who never play it — have thought something like this at an idle moment:  “I know it’s unlikely that we might win, but what if we did?”  And then the enjoyable dreams begin.

The passing dreams of millions will come crashing to the ground tonight, when the drawing occurs and, presumably, somebody else will win.  It won’t hurt too much, because no one really expected to win, of course, and in any case the opportunity to dream a little about a life-changing cash payout isn’t a bad thing even if the fickle finger of fate passes us by.

Oh, and then there’s the issue of taxes — which are going to take a pretty big bite out of any jackpot.  The cash payout amount will be $930 million ($930 million!) and unless you live in a state where there are no state or local income taxes, or lottery winnings are exempt from such taxes, you’re going to pay federal, state, and local income taxes on that staggering sum.  In New York City, a single winner of the payout would walk away with $579.4 million, and then would pay another $100 million or so in initial federal taxes.

So that $1.5 billion in the headlines would be reduced to $475 million or so.  I guess we could live on that if we had to.

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.

529’d

State of the Union policy proposals come, often in rapid-fire fashion, and go.  President Obama’s proposal to tax “529” college savings accounts, announced only last week and withdrawn this week, may have set a record for the quickest skedaddle.

IMG_0746The “529” plans, named for the section of the Internal Revenue Code that addresses their tax treatment, allow people to squirrel away money to pay for a family member’s college tuition.  The money gets invested, taxes on any gains are deferred, and the money that accumulates in the account can later be used to pay for a beneficiary’s college, tax-free.  That’s why savingforcollege.com says that 529 plans offer “unsurpassed income tax breaks.”

The 529 plans are such a good deal that more than 7 million of them have been created.  President and Mrs. Obama have them for their daughters, for example, and put $240,000 into those plans back in 2007.  And while the Obama Administration argues that the tax benefits for those plans predominantly favor “the rich,” it all depends on how you define “middle class” in modern America.  As the New York Times points out, 10 percent of 529 plans have been established by people with incomes below $50,000, and 70 percent of the total number of 529 accounts are owned by households with annual income below $150,000.  Is a two wage-earner family that makes $140,000 really wealthy?  My guess is that most families in that category don’t look at things that way.

The President’s 529 tax plan was a trial balloon that quickly was shown to be a lead balloon, opposed not only by the people who set up the 529 accounts, and the entities that hold and manage those accounts, but by Democrats and Republicans alike.  House Minority Leader Nancy Pelosi reportedly personally lobbied President Obama to ditch the 529 tax plan on a recent plane flight.  And the optics of the proposal aren’t that great, either.  For generations, a cornerstone of American policy has been to help citizens get their kids to college — and now we’re going to tax those industrious folks who plan ahead and save for college for their kids and grandchildren, rather than letting them be saddled with crushing student loan debt as they go forward into their adult lives?  Of all of the tax breaks available in the endless Internal Revenue Code, this is the one we’re attacking?

You can argue, I suppose, about whether the 529 tax plan was good policy, but there’s no doubt that it was bad politics.  I’m guessing that “529’d” might become part of the dictionary of political slang, to be used in the future whenever an ill-conceived proposal gets raised, quickly torpedoed, and then flushed forever down the memory hole.

When The King Goes To Canada

Burger King has announced that it is buying Tim Horton’s, a Canadian doughnut and coffee chain, and moving its headquarters to Canada as part of the move.  From the frenzied reaction to the decision, you’d think the head guys at Burger King had set fire to the American flag and then used the remains to mop the floor by the deep frying machine.

Ohio’s Democratic Senator, Sherrod Brown, seems to be the one who has gone the deepest off the deep end; he’s urging a boycott of Burger King in favor of American burger outlets like Wendy’s and White Castle.  In an email he sent out yesterday, Brown calls what Burger King is doing “abandoning your country” and says it is part of a “growing trend in which companies get rich in the United States, then move to a foreign tax haven with the stroke of a pen.”  Bernie Sanders, the Independent Senator from Vermont, says the move shows “contempt” for the “average American.”  Dick Durbin, the Democratic Senator from Illinois, also has ripped Burger King for being un-American.

It’s not entirely clear that Burger King’s motive in pursuing the Tim Horton’s deal is to avoid taxes.  The company says they are making the move not to dodge taxes, but because they want to buy Tim Horton’s and think the move will be more palatable to Canadian regulators if the combined company’s headquarters is in Canada.  It seems undeniable, however, that the move to Canada will change how the new company pays taxes — companies that are headquartered in the U.S., under U.S. tax laws, pay the steep 35 percent corporate income tax on all income earned anywhere in the world (even in countries that have no corporate income tax), whereas companies headquartered in Canada (and many other countries) pay the different corporate tax rates in the countries in which the income is earned.

The overreaction to the Burger King move seems like pretty obvious, and silly, political posturing.  So Canada, our friendly neighbor to the north with whom we share a peaceful common border that is thousands of miles long, is now a despicable “tax haven” like, say, the Cayman Islands?  So corporations that see a better deal and pursue it are now unpatriotic if that deal reduces the taxes they pay in the U.S.?

As a reminder to our Senators, corporations don’t exist to funnel as much money as possible to the U.S. government.  Instead, corporations are principally answerable to their stockholders and, in most instances, have the primary goal of making money, not shelling it out unnecessarily.  Burger King isn’t breaking any laws by buying Tim Horton’s and moving its headquarters, and if doing so will help it save on unnecessary tax payments and realize better shareholder value, what’s wrong with that?  If American tax policy is out of step with that of Canada and other countries, maybe America needs to revisit its policy rather than blaming companies for making entirely rational economic decisions.

One other point on this:  there’s a Burger King near my house.  I’m not sure how many people it employs, all told — 50, perhaps? — but how do you think those people would be affected if Sherrod Brown’s call for a boycott were successful?  If Burger King moves to Canada its restaurants will continue to employ thousands of Americans, and it will continue to pay taxes on the money it earns here.  That seems fair to me.

Doubling The Airline “Security Fee”

Last week the “security fee” the federal government charges to airline passengers more than doubled, from $2.50 per passenger to $5.60 per passenger.  The increased fee was part of a budget agreement that Congress and the Obama Administration worked out last year.

IMG_2260I don’t have a problem with the concept of “user fees,” and I view the “security fee” as falling within that category.  I think user fees are a fair way of paying for services that some Americans use, but not others.  Every American needs our military, for example, but not everyone needs the blue-shirted Transportation Security Administration folks who remind us to take off our belts, look at our drivers licenses, and wave us through scanners.  Why should people who don’t regularly fly on airplanes pay for services that are used only by regular air travelers like me?  And with all of the nickel-and-diming that goes on with air travel these days, from baggage fees to food fees to other obscure charges, who’s going to notice an extra $3.10?

The problem I have is that the money raised won’t be used entirely for the TSA, or apparently for services that are directly related to air travel security.  I recognize that the federal government is one huge bucket, and it’s hard to precisely account for specific payments, but if you really want to implement a “user fee,” the proceeds should go solely for the service being used.  Otherwise, you’re just using the fee as a thinly disguised tax to raise general revenue, and you’re targeting just one group for the tax hit.  That’s not equitable, and it’s destructive of the fairness principle that make user fees a sensible approach in the first place.