ataxingmatter

Swiss banking secrecy

I owe readers a post on the UBS settlement, which will be forthcoming in the next couple of days.

IN the meantime, Eric Woerth, the French minister of budget, made a startling announcement yesterday that the French government has acquired a list of 3000 names of French taxpayers who hold about $4.3 billion in Swiss banks.  This announcement came shortly after the signing of the new agreement between France and Switzerland on information exchange, which echoes the OECD language.

What's the source of the info, since the Swiss are still trying to hang onto their banking secrecy? The Swiss say they didn't furnish the list.  The French minister says they put it together based on tax audits and information from French banks about money transferred to tax havens.

Eventually, we'll have new international understandings about banking secrecy.  But Switzerland will hold out on real exchange as long as it can.  Meantime, good sleuthing through audits and bank disclosure rules will help, as the French are demonstrating.

HEALTH REFORM: who is trying to make sure real reform doesn't happen?

[hat tip to Stephen V.]

One of the wonderful things about the internet is the speed with which information can be available.  Another wonderful thing is the ability of a few people to cut to the chase and help large numbers of people understand relationships that otherwise would be hidden and esoteric.

But that benefit of the internet is lost when there is lots of money pushing an ideological agenda without much (if any) regard for truth.  IN health care reform, there has been a lot of propaganda and not much real analysis.  Sarah Palin has continued her odyssey from small state governor to stirrer of the passions with half-truths and outright untruths (her "death panels" analysis of the House health care reform bill is an outright falsehood).  Sen. Grassley has claimed the role of arbiter of health care reform legislation, but represents a tiny minority of the country and plays the propaganda game down to mimicing the rabble-rousing misinformation from Sara Palin, talking about deciding whether grandma will live or die. 

In the meantime, big money is circulating to ensure that the outcome of the "debate" favors--guess who, Big Money.  So take a gander at the health care reform lobby-tracking post at Huffington Post back in July and a chart from "our future.org" showing the way right-wing money and operatives are shaping the health care reform debate.  Or just enjoy the chart, below--with the caveat that the chart does include some assumptions about whose paying for what, as described in the Huffington Post entry.

Bank Bonuses: Time for an International Fix?

French President Sarkozy has seen how banks have responded to the financial crisis of their own making with extravagant bonuses for the very employees responsible for huge losses that led to central bank interventions and much taxpayer funding at stake.  To put it starkly, he doesn't like it.  So he has proposed a solution.

According to BNA's Daily Tax RealTime, he has announced plans for a proposal for bonuses modelled on the recent coordination among countries in dealing with tax havens and banking secrecy.   The proposal, to be fleshed out at the September meeting of the G-20 governments, calls for a coordinated effort by the G-20 governments to reign in bonus behavior.  Each country would agree to impose a tax on bonuses, to be levied at the same rate across the group.  In addition, each country would agree to an overall limit on bonuses, calculated as a percentage of the bank's revenues.  The tax would be dedicated to financing guarantees of deposits.

One can imagine the serious lobbying in the US against such a proposal.  Whenever there is talk of using the fact that the government has bailed out big banks to control some of the behavior that caused the bailout to be necessary or that represents an unseemly means of making a profit off customers (speculative use of derivatives, "high frequency trading" by big banks that essentially makes a profit by trading on client data in ways that individuals cannot duplicate, risk taking on the assumption that losses would be socialized, lack of sufficient regulation of capital reserves, etc.), the banks lobby and Congress caves.  Banker friends (or friends of bankers) tell me that "the bankers deserve the big bonuses, because they do difficult work." 

Of course, I tell my friends that what everybody deserves is decent wages for work done--no more, no less.  But most ordinary workers get shafted these days, while the bosses and the bankers, and managers ride home with the moolah.  Workers need to get more of the pie, one way or another.  Unions would help, but the laws don't make forming unions very doable.  A tax that acts as a restraint on bonuses while setting up a reserve fund to pony up the money when the banks' bets go awry would be one way to deal with the problem. 

One thing is certain.  We need to move ahead with various new rules to address what went wrong in the September Massacre under Bush.  In addition to consider a workable way to restrain the outrageous bonuses for speculative behavior that Wall STreet seems to think it's entitled to, we should do the following:

•  re-regulate all banks and shadow banks by bringing hedge funds, equity funds and any other entity that acts as a major provider of funding under banking laws;
• regulate derivatives, including severely restricting or curtailing completely the use of customized derivatives that cannot be regulated easily in an over-the-counter exchange;
• split up the "too big to fail" financial institutions by separating investment and commercial banking and other financial activity; and
• amend the bankruptcy laws to permit mortgage loans to be modified in bankruptcy.

There's just no excuse for not doing these things, now.  We've seen the disaster that happens from the mayhem let loose by the Reagan deregulation.  We barely staved off a total economic disaster, and as it is, ordinary Americans will be paying for this fiasco for several years, with lower purchasing power and inferior quality of life. 

How to defeat real health care reform? Just Lie.....

You've probably seen the town hall meetings where people act like an angry mob and berate some Congressperson or other for supporting health care reform.  They've got it all wrong, of course.  They are under the delusion that our current private insurance system doesn't involve rationing, that Big Insurance pays for care rather than make huge profits out of denying care and that it doesn't benefit from any government subsidies, or that Big Pharma spends huge amounts of its income on developing helpful new drugs without government subsidies just so that America can enjoy superior health care to the rest of the world.  All wrong, since the system works now to siphon profits out to the top and not to develop innovative ways to take care of sick people and since we pay much more for inferior care compared to most of Europe and Canada.

See below a link to a very good posting on the issue of whether helpful R&D done by Big Pharm would curdle and die if we had a national single payer insurance plan that cut back on Big Pharm's ability to charge life-shattering prices for the drugs it develops. I particularly like the notice that most of the hype about Big Pharm's R&D is just that.  American Universities are the heart of basic research, and Big Pharm has made millions out of others' research--i.e., through government subsidies both on the research end (university research funded by NIH) and on the sales end (patents on products and mimicking products that let drug companies squeeze exorbitant profits over long terms). 

The Hunting of the Snark,Innovation, Aug. 14, 2009. (Hat Tip--Ken at Angry Bear)

Textron: is this a turning point in courts' approach to corporate attempts to reduce taxes with aggressive planning?

Yesterday, the First Circuit delivered its en banc opinion in the long-litigated question whether the Service can have access to the papers prepared to determine its tax reserves for financial accounting purposes (tax accrual workpapers).  See ataxingmatter, Textron's SILOs and its Tax Accrual Workpapers: First Circuit Sides with IRS (Aug. 13, 2009).

The opinion is critically important in several ways. 

First, it confirms that work-product doctrine only applies to materials that are prepared "for" litigation--i.e., "case preparation materials"--and not for documents produced routinely as part of the ordinary course of business.   Although the circuits have split on how to interpret the 26(b)(3) evidence rule codifying the work-product privilege (a relatively easy to satisfy "because of" standard in the First, Second and other circuits; a more defensible "primary purpose of" standard in the Fifth and other circuits), the en banc court's explanation of its "because of" standard with strong language from the seminal Supreme Court Hickman v. Taylor case is a good indication that courts using that standard will not permit the work-product doctrine to eviscerate the search for truth by providing blanket protection for anything that could even remotely be viewed as taking into account a future possibility of litigation.  As the court says, the doctrine is "aimed centrally at protecting the litigation process."  (emphasis in original).   The en banc court notes that the seminal Hickman v. Taylor case addressed case preparation that took place after a claim had arisen, and that the federal rules advisory committee note on the work product rule made clear that even documents "prepared by lawyers and reflecting legal thinking" aren't protected if done in the ordinary course of business for nonlitigation purposes.  After noting that "[e]very lawyer who tries cases knows the touch and feel of" case prep materials, the en banc court frankly states that "[a]ny experienced litigator would describe the tax accrual work papers as tax documents and not as case preparation materials." 

As I've noted on ataxingmatter at earlier points in the Textron litigation, tax standards require taxpayers to assess the possibility of success on the merits--judicial doctrines that could be raised must be taken into account when determining how to file in respect of a transaction.  It would completely defeat the IRS summons power if the mere possibility of the subject matter of the papers being litigated were sufficient to provide work product protection, since that possibility exists for every position about which there is any uncertainty.  As the court noted, this fact was not in dispute.

Textron's evidence was to the effect that litigation over specific items was always a possibility; the IRS did not deny that in certain cases litigation could result, although it said that this was often unlikely. 

The court then made a clear statement of the relationship between the subject matter of a document and work product protection.

It is not enough to trigger work product protection that the subject matter of a document relates to a subject that might conceivably be litigated.  Rather, as the Supreme Court explained, 'the literal language of [Rule 26(b)(3))] protects materials prepared for any litigation or trial as long as they were prepared by or for a party to the subsequent litigation. (citing FTC v. Grolier, 462 U.S. 19, 25 (1983), with added emphasis).

Not surprisingly, the dissent heartily disagrees with all of this, though it is not able to frame an argument that responds to the subject matter issue at all.  The district court arrived at its understanding of the purpose of the work papers based almost entirely on the fact that the workpapers had to consider litigation possibilities to determine tax reserves (ie, on the subject matter).  It misunderstand the key point made by the en banc court about the subject matter issue.  The dissent merely continues to argue that determining reserves for financial accounting purposes is anticipation of litigation.  It too misses the point (perhaps intentionally).  The dissent thinks the district court's possible error --that the prospect of litigation drove the financial audit analysis--doesn't matter much.  The dissent's approach would ultimately permit corporations to hide any materials that had anything to do with their consideration of an uncertain tax position, for whatever purpose. 

Second, the court provides a useful discussion of tax accrual workpapers and the reasons that they cannot be given work-product protection, citing to  language from the seminal  Supreme Court Arthur Young case rejecting a privilege for independent auditor materials.  Tax accrual workpapers, the court notes, are used to determine tax reserves and that determination is necessary for required SEC filings.  And the court noted that no one provided any evidence that the work papers could serve "any useful purpose" in conducting litigation if it did arise.

Texton described generically the contents of the work papers in question: these included (1) summary spreadsheets showing for each disputable item the amount in controversy, estimated probability of a succcessful challenge by the IRS, and resulting reserve amounts; and (2) back-up e-mail and notes....

Neither side disputed that the immediate purpose of the work papers was to establish and support the tax reserve figures for the audited financial statements.  ...

 ***

That the purpose of the work papers was to make book entries, prepare financial statements and obtain a clean audit cannot be disputed.  ...

Textron's own witness acknwoledged that it would 'have to include in its ... tax accrual work papers any new transactions that the company entered into that year that there might be some tax exposure on' regardless of whether it anticipated likely litigation.

Third, the court affirms what many commentators, including yours truly, have said--that the revelation of tax accrual workpapers simply does not present the concern that the work product doctrine is intended to address--the fear that making materials available would discourage sound preparation for a law suit. That can't be present when there are independent  obligations to prepare such papers.  (I would go further, and say that is true about all materials relating to the preparation of a tax return.  Tax return preparation is not confidential legal work but ordinary "course of business" work, since taxpayers are required to file a return and nonlawyers routinely advise on tax structuring of transactions.)

Fourth, the  facts revealed in this case suggest that the government's concerns about widespread corporate abuse of the tax laws are well-founded.  In its brief summary of the workpapers in question, the court notes that "[i]n some instances the spreadsheet entries estimated the probability of IRS success at 100 percent."  That, my friends, is an example of aggressive tax reporting--obviously hoping 1) that it won't be discovered on audit and 2) if it is discovered, that the company can prevent a real review and 3) that none of the papers that show the company knew the position was intolerably weak will be revealed in the course of the controversy.  No wonder Textron didn't want the IRS to get its workpapers!  Remember that taxpayers must file returns and that the Code provides standards to guide them in their decisionmaking about possible positions that they can take on those returns.  A taxpayer is also supposed to take into account judicial doctrines that apply, such as substance over form and other core tax concepts developed in the federal common law.  A taxpayer is not allowed to report a position--even when it provides adequate disclosure--for which is does not have a "reasonable basis."  How likely is it that a corporation has a reasonable basis for taking a position if its internal tax department has concluded that it has zero chance of winning on the merits if the case were to be litigated with the government?  Sure, these are conclusions in the context of accounting determinations, but still they do make one wonder.  Isn't it likely that the basis for these positions was a remarkably slim reed, if anything?

Perhaps I am a perennial optimist, but I can't help hoping that the courts may just be getting it. Tax evasion is a major problem, and the privilegs that exist should not be read broadly so as to give taxpayers a free hand to cheat the government at will.  While Hand noted that tax planning was fine, he also wrote an opinion that held against the taxpayer because its planning just created a sham to avoid taxes.  Here's what the en banc First Circuit has to say about tax enforcement.

Textron apparently thinks it is 'unfair' for the government to have access to its spreadsheets, but tax collection is not a game.  Underpaying taxes threatens the essential public interest in revenue collection.  If a blueprint to Textron's possible improper deductions can be found in Textron's files, it is properly available to the government, unless privileged.  Virtually all discovery against a party aims at securing information that may assist an opponent in uncovering the truth.... (emphasis in original)

The practical problems confronting the IRS in discovering underreporting of corporate taxes, which is likely endemic, are serious.  Textron's return is massive--constituting more than 4,000 pages--and the IRS request the work papers only after finding a specific type of transaction that had been shown to be abused by taxpayers. ...

CEO pay continues to be out of bounds (especially private equity pay)

Private equity and oil company CEO pay is ridiculously high, at a time when ordinary Americans can't get a job at all, or are forced to work for peanuts compared to the CEO's surf n turf.  Schwarzman, CEO of the Blackstone private equity group, made $702 million last year. That's almost $2 million a day!  Meantim, almost 10% of Americans have no job at all.  This man takes home an obscene pay package of three-quarters of a billion dollars in one year.  Second on the list is Oracle's CEO Larry Ellison, who got $557 million.  See Campbell, Schwarzman's $702 million tops list of best-paid executives, Bloomberg.com (Aug 13, 2009).

Something is plainly out of whack when this kind of disparity occurs. It's shameful that we have dismantled the protective system of unions that once gave workers across the economy power to unite and claim for themselves some of the bounty of their hard work.  Now, the CEOs get it all, and then reneg on even the meager promises they made to workers by taking away health care and other benefits or moving jobs offshore.  It's time for Congress to act.  It could start by passing legislation taxing the "two and twenty" carry of equity funds and hedge funds as compensation. 

Textron's SILOs and its tax accrual workpapers: First Circuit Sides with the Service

[edited to add link to case]

In a 3-2 en banc ruling in United States v. Textron, the First Circuit today reversed the earlier three-judge panel decision on the accessibility of Textron's tax accrual work papers to the government.  It held that the IRS should have access to tax accrual workpapers prepared in 2001, at the time that the aerospace conglomerate had undertaken various SILO (sale-in, lease-out) tax shelters, involving telephone networks and an overseas railway system, to lower its tax liability.  The IRS, the court noted, "serves the legitimate, and important, function of detecting and disallowing abusive tax shelters."  See, e.g., Saunders & Levitz, Court Lets IRS Access Textron Leasing Papers, Wall St. Journal (Aug. 14, 2009) (subscription required); Donmoyer, Textron Ordered by Appeals Court to Give IRS Tax Shelter Papers, Bloomberg.com (Aug. 14, 2009).

Textron had claimed (among other claims) that the papers were protected work product--i.e., prepared in anticipation of litigation.  The First Circuit adheres to a lax work product standard, first set forth by the Second Circuit in the Adlman case, that merely requires that the material be prepared "because of" litigation.  Since tax standards require an assessment of the likelihood of success on the merits, success on this claim would likely result in most any materials prepared in connection with accounting issues about tax accruals being protected.  At trial, Textron had produced testimony that its workpapers were used to determine "whether Textron was adequately reserved with respect to any potential disputes or litigations that would happen in the future.  On appeal, the First Circuit panel treated resolution of disputes even in preliminary administrative proceedings before the IRS--which are often cooperative and at best only quasi-adversarial-- as satisfying the definition of "litigation" for work product purposes and the need to estimate success to determine accrual reserves as "anticipation of litigation," rejecting the government's position that business and regulatory objectives for preparation of material per se defeats a work product claim.

The en banc court, however, recognized that the doctrine "does not protect from disclosure documents that are prepared in the ordinary course of business" rather than for litigation.  That is the right answer, and in accord with Supreme Court precedent.  Further, the court acknowledged that the IRS "serves the legitimate, and important, function of detecting and disallowing abusive tax shelters" (see Bloomberg.com)--something very important, in these days of right-wing tax-protest mobs who  apparently don't understand the centrality of taxes, and an adequately informed IRS, to their well-being.

This is an important decision and one that was correctly decided.  It is time the court's recognized the boundaries to work-product protection.  Tax accrual workpapers do not merit protection.  Textron should hand over the workpapers and determine to engage in less aggressive tax planning in the future. 

Aside:  The company was faced with another lawsuit today, as investors complain that it faked back orders to make its business look better.  Sounds like the company could use a primer in basic integrity--after all, buying telephone networks is not exactly germane to the business of the world's largest corporate jet manufacturer, is it?

Some background on the Textron challenge to the IRS workpapers summons:

The district court case, United States v. Textron INc., 507 F. Supp. 2d 138 (D.R.I. 2007) held that the tax accrual workpapers were protected.  For contemporary commentary summarizing the case, see, e.g., McDermoot, Will &  Emery, Textron Protects Tax Accrual Workpapers from IRS Summons (Sept. 4, 2007); Pawlow, Ryan & Spencer, Hands Off My Tax Accrual Workpapers: Textron, Fin 48, and Related Issues, Fall 2007 The Tax Executive Magazine 421.  For my own analysis (and a link to the district court's decision), see ataxingmatter, Textron, Inc: Tax Accrual Workpapers, Attorney-Client Privilege, and Work Product Protection (Aug. 30, 2007)

The First Circuit heard the case on appeal with two circuit judges and one district court judge.  The panel affirmed the trial court's decision on general applicability of work product doctrine to tax accrual workpapers, but remanded for consideration of waiver.  See, e.g., Greenhouse, Spencer, and Selby, Textron Decision Deems Tax Accrual Workpapers Protected Work-Product, Mondaq Business Briefing (Feb. 16, 2009).  Circuit Judge  Boudin dissented, arguing that "tax accrual work papers are not protected because they are prepared for reasons independent of the need to prepare for or conduct litigation." 

The First Circuit vacated the opinion and ordered rehearing en banc on March 25, 2009 (No. 07-2631). See, e.g., Sullivan & Cromwell, First Circuit to Reconsider Work Product Privilege for Tax accrual Workpapers (Mar. 27, 2009).

Health Care Reform: is private or public best at keeping costs low?

Whenever I've discussed health care reform here, there are a number of commenters (both on the blog and via email) who assert as god-given truths the right-wing party line opposing a national single payer option.  I have three big problems with the typical comment:

• Much of the time the naysayers rely on anecdote and refuse to acknowledge what valid statistical studies show.  They heard about a woman in Canada who had a hard time getting the surgery she thought she needed, so she came to the U.S. or they've read newspaper stories about waiting time to get in to see a doctor in rural Canada.  They don't seem to understand that anecdotal evidence can be collected for almost any point of view--no human system is perfect, and every institution will fail sometimes, somewhere. 
• Much of the time the naysayers just seem completely uninterested in learning where the truth really lies.  They often repeat (ad nauseum) the slogans that are being wafted around the right-wing TV and radio circuits--that national single-payer health is rampant socialism, that it will lead to government-mandated euthanasia and government-selected doctors and government-enforced rationing, that Big INsurers and Big Pharm are just like any other business, making a living through entrepreneurialism, and that we shouldn't condemn them for how they do it and we certainly shouldn't use government power to create a more level playing field.  Well, from my perspective, that's all bunk.  Take the euthanasia claim.  It's apparently derived (I have to say apparently--it is really a scare-the-old-folks fiction invented to try to prevent real reform in the form of a public option) from the House bill provision for permitting medicare to cover the costs of a once-every-five-years consultation between a patient and the patient's chosen doctor about what kind of end-of-life wishes the patient has, and from the fact that Rahm Emanuel's brother Ezekial Emanuel is a bioethics expert who has written about end-of-life issues.  The House bill provision  doesn't have anything, not anything, to do with euthanasia. A doctor who is on record as opposing making even physician-assisted suicide legal is not a doctor who is in favor of euthanasia.  A doctor who writes about bioethics in the end-of-life area that most doctors must deal with as a significant part of their practice is a doctor who is interested in thinking about how medical doctors can best serve us when we are dying.  It is, in other words, about serving patients by making it possible for them to make the decisions they want to make, that right now they have to pay for out of their own pockets, which may be quite empty, so they may not now be able to enjoy these kinds of services that the rich take for granted day in and day out.
• Most of the time, if the naysayers do quote anybody who has done a study on the issue, it will be something produced by a right-wing think tank to be used in the anti-reform propaganda campaign.  One of those is an analysis by Robert Book of Heritage Foundation, which purports to prove that government run health care is bad because it will inevitably be more costly than private health care, through a purported analysis of Medicare administrative costs.    Luckily, Angry Bear Tom Bozzo has done an analysis of this study that shows, not surprisingly, that it is simply wrong and that Medicare's administrative costs are, in fact, much lower than private insurance.  Please read his post: Are Medicare Administrative Costs High?, Angry Bear, August 6, 2009, in which he carefully shows how these right-wing think tanks distort information in their "broadside[s] against government run health care."   One teaser question--how much of the federal government's budget for "administration of justice" would you think should reasonably be added to the listed Medicare administration costs? Needless to say, Book allocates a whopping proportion.  Angry Bear has the real facts.

Taxpayer TARP Aid, Bank of America-Merrill Lynch Deal, and Bonuses

As everybody that pays attention knows, one of the last acts of the Bush Administration was to push through Bank of America's  September 2008 acquisition of Merrill Lynch,  and then, on Jan. 14, give Bank of America $20 billion of TARP funds to help it absorb Merrill (on top of $25 billion it had already received) and guarantee about $98 billion more of losses on Merrill's toxic mortgage assets. See this basic description of Bank of America in the New York Times, Aug. 4, 2009.  Only later, we all learned that Bank of America had agreed that Merrill would pay its high-falutin', risk-taking, public loss causin' traders and brokers almost $6 billion in bonuses, to be paid before the takeover by a bank that had potential LOSSES in the tens or hundreds of billions!  You, me and everybody except those bankers who think they "deserve" millions for their cushy desk jobs thought this was the last straw--any bonuses in this context--for a losing company whose takeover was being actively arranged by the federal government that was already bailing out the financial system (including the bank that was taking over) and mainly for the unit that caused those losses with risky deals that looked good only as long as everything was moving up--can only be described as utter arrogance combined with utter disregard for the public good.  The Wall Street culture has never deserved the accolades it receives--making profits on fast computers that do high frequency trades by peeking at what ordinary folks are planning to buy and driving the price up, pressing tax lawyers to give a "debt for tax" opinion for their securitizations, bullying anyone who gets in their way, and generally making most of their money from activities that do not create products or even well being but mostly move money around.  But the continuation of that greedy Wall Street culture and the "right" to billions in bonuses in the face of a systemic breakdown caused by that very culture, with sheer disregard for regular folks whose lives depend on getting a loan to pay for medical care or the bank coming through with a promised mortgage at a promised rate--that's greed carried to extremes.

While the greedy culture can make money for shareholders as well as bankers (even while often fleecing the public at large), these Merrill bonus deals didn't, since shareholders of Bank of America might have made different decisions if they'd known that a losing bank was essentially spending a good portion of its lifeline from TARP to pay off greedy employees in the riskiest unit of the losing company!  The SEC sued.  On August 3, BoA and the SEC announced a settlement--BoA would pay what appears to be a measly $33 million for its sins.  And yesterday Judge Rakoff in Manhattan refused to approve the settlement without a hearing, set for next Monday.  See Judge Halts Settlement with Bank, Reuters (Aug. 6, 2009).

As the judge notes, the deal doesn't give a reason for why the parties settled on $33 million or wehether that is a fair amount, and if there is a settlement, the truth would never come out.

Good for Judge Rakoff.  We need more of this type of sunshine.

Tax Foundation's assessment of economic data--Guest Post

The Tax Foundation has been pouring out its analyses and blog themes lately--they all have catchy titles.  Back during the presidential campaign, the Tax Foundation "Bemoans Egregious Errors in Presidential Tax Policy Debate" or "Fact-Checks Final Presidential Debate for Joe the Plumber". 

Of course, the Tax Foundation is known for inventing the concept of "tax freedom day"--which is a statistic that is truly just a number and meaningless, but useful, it seems, in making people think they are working to hard to support "government" rather than themselves.  It's meaningless, since of course support of government is support of ourselves--our roads, our institutions of justice, our institutions of mercy.  It is meaningless, since it averages Bill Gates and Joe the Plumber taxes and income to get a rate and then multiples that rate by the number of days in the year to come up with how many days of work it takes to pay off the taxes.  It claims the calculation answers the question--"what price is the nation paying for government" by dividing total tax collections by total income.  See, for example, the blog blurb at this post, with the subtitle : "America will work 8 days less to pay taxes in 2009 than in 2008 (full "report" is available there as well).  The number of days doesn't apply to any individual taxpayer of course, but you have to understand something about statistics to realize that.  The language of the report doesn't help:  in 2009's report, the second sentence says that "Americans will work about three and a half months, from January 1 to April 13, before they have earned enough money to pay this year's tax obligations at the federal, state and local levels."  It goes on to compare that statistic to other dates and then notes that "Americans will pay more in taxes than they will spend on food, clothing and housing combined." Note that this is misleading for other reasons as well, when you realize that some of that tax liability is paid on money that isn't "earned" by "working" and that some of it is "earned" by corporate entities, not individuals, but many readers are likely not to understand that.  When it says "Americans will have to work an additional six days to pay their share of corporate income taxes", most will think it means that they will each work 6 days to pay corporate taxes that we directly bear (though of course it doesn't mean that).  Each year the papers pick it up and talk about how many days America has to work to pay off the government before "tax freedom day" arrives, and the masses assume that means that they had to work that long themselves just to pay money over to the government. 

 One of the Foundation's recent blogpostings caught the eye of my colleague Ted Seto, Professor of Law at Loyola Law School in Los Angeles.  The post shouts that The Tax Burden of the Top 1% Now Exceeds That of the Bottom 95%.

Here's what Prof. Seto had to say about it (reprinted, of course, with his permission).

The Tax Foundation’s latest release asserts that “Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the "rich" are not paying their fair share of taxes.”

Examination of the underlying data reveals that in 2007 the “bottom 95%” paid 39.37% of all income taxes paid, while the “top 1%” paid 40.42% -- in other words, more.

Does this factoid support the Tax Foundation’s conclusion? Obviously, different folks have different views about what makes distribution of the tax burden “fair.” Putting this problem aside, however, the Tax Foundation’s use of this particular factoid to support its bottom-line conclusion is deceptive for many reasons.

First, the data the Tax Foundation is relying on omits the single largest tax on income paid by the bottom 95%: the payroll tax. According to the 2007 Budget, a total of $869.6 billion in Social Security and other payroll taxes were paid in FY 2007 -- primarily by the bottom 95%. Added to the $439.2 billion that the bottom 95% paid in income taxes, the bottom 95% paid roughly three times as much tax on its income as the top 1%.

Second, the Tax Foundation fails to disclose the reason the percentage of income taxes paid by the top 1% went up: the top 1% received a much larger portion of all economic income in 2007 than it did twenty years earlier. According to the same IRS release, the top 1%’s share of AGI rose from 11.30% in 1987 to 22.83% in 2007, a 102% increase. In other words, the top 1% paid more income taxes in 2007 because they received more income.

But the top 1%’s share of income taxes paid did not go up correspondingly. In fact, it went up only 57%. This implies that their average tax rate declined by 45% -- substantially more than the bottom 95%’s average tax rate declined over the same period. (emphasis added)

There is a further problem with the Tax Foundation’s assertion, a technical but important problem. The underlying data categorizes taxpayers by AGI, not by economic income. Middle- and lower-income taxpayers have far fewer opportunities to exclude income from AGI than upper-income taxpayers. Bill Gates probably had very little, if any, AGI during 2007; if so, he would have been included in the bottom 95%, not the top 1%. For purposes of the Tax Foundation’s conclusion, therefore, he would not have been part of the “rich” who are paying “their fair share of taxes.”

More simply, the top 1% by AGI does not include "the rich" who are able to use features of the Internal Revenue Code to avoid taxes. Taxpayers with high AGI are simply those who haven’t been able to do so. The fact that the latter are paying more and the former less doesn’t mean the system is fair.

Does the Tax Foundation know all this? Of course they do. They know exactly what they’re leaving out. But they publish their “conclusions” anyway, misstating what they’re doing in the process. This is agitprop, not analysis.