ataxingmatter

Republicans Plan a Giveaway: for the Wealthy

Republican Wally Herger of California appears to think that what is wrong with the economy is that the wealthy aren't keeping enough of their capital gains.   He and seven other Republicans (Dreier of CA, Johnson of Tx, Brady of Tx, Cantor of VA, Linder of GA, Campbell of KY and Conaway of Tx) have put legislation forward in the House to eliminate any federal income tax whatsoever on the main source of income of the very rich--capital gains and dividends.  H.R. 5908, available here Download hr_5908.txt .

Not surprisingly, Herger's press release in support of the bill is an attempt to hoodwink ordinary Americans into thinking that the bill is going to do them good (in spite of the fact that the bill is another piece of welfare for the wealthy).

• Herger talks about the importance of avoiding the purported "double taxation" on investments.  Of course, That is simply bunk.  Most corporate investments are NOT double taxed. Empirical studies show that more than 200 of the largest corporations in the country pay absolutely no U.S. federal income tax.  So as things stand today, corporate shareholders of those corporations are paying only 15% on their dividends and capital gains from selling shares on corporate earnings that haven't paid a penny of tax most of the time.  That's while their workers are being made to work longer hours, for less benefits and lower pay, and paying income tax on their salaries at the ordinary income rate, as well as the "payroll" taxes (social security, medicare) that the wealthy don't every pay on their capital gains and dividend income.
• Herger talks about this being intended as a benefit for everyone since "over half" of Americans own stocks and bonds.  Again, this is simply a deceptive way to try to gain support from ordinary Americans for a program that is intended to provide a windfall to the wealthy.  About half of Americans do own some small amount of stocks and bonds, but for anyone below the top quintile (those making, e.g., less than about 90,000 a year), that's a very small amount of stocks and bonds and they have very little capital gains or dividends during a year.  This windfall is intended to benefit the wealthy upper class that holds 70% of the financial assets and makes much of the income taxfree already (tax exempt municipal bond income, for example).

Herger and his co-sponsors want ordinary  Americans to believe they are thinking about them, but this bill is intended to provide a windfall for the wealthy and nothing more.  It would be extraordinarily costly, and that cost would have to be paid back out of the taxes on the salarires of the working middle class.

Okamoto and Breenan: Measuring the advantage we give hedge fund managers through the Partnership tax break

I've argued here that it is entirely inappropriate to permit hedge and private equity fund managers to be taxed on their compensation for services at the capital gains rate when ordinary wage earners pay the higher ordinary income rate.  It's particularly unfair, since these managers are merely using other people's money to get rich, and then using Uncle Sam's welfare for the elite to get even richer.  They are not really entrepreneurs, as they argue, but more likely either risky speculators or highly paid destruction crews.  It is these private equity funds, for example, that are able to buy businesses, rip them into pieces, and then resell at a gain.  Often workers are lost along the way, or the jobs are exported overseas.  In this "greed is good" climate engendered by the "free marketarian" fallacy coupled with the MBA in charge who knows very little about fostering a healthy work environment, nobody seems to care about that anymore.  All in all, a situation crying out for change, if only the Senate can be strong enough to take action that will impact a very few people who are very, very wealthy.

Karl Okamoto and Thomas Brennan have put together some empirical research on these hedge fund managers:  Measuring the Tax Subsidy in Private Equity and Hedge Fund Compensation.  Here's an excerpt from their abstract.

[O]ur model suggests that differences in tax account for a substantial portion of the disjuncture that exists at the moment. It also quantifies the significant excess returns to private fund managers that must be taken into account by arguments in support of their current tax treatment by analogy to entrepreneurs and corporate executives. This analysis is important for two reasons. It provides a perspective on the current issue that has so far been ignored by answering the question of how taxation may affect behavior in the market for allocating human capital. It also provides quantitative precision to the current debate which relies significantly on loosely drawn analogies between fund managers on the one hand and entrepreneurs and corporate executives on the other. This paper provides the mathematics that these comparisons imply.

Krugman on McCain and taxes: talking us into a continuation of the Bush irresponsibility

Candidate McCain is eagerly pushing his image as a straight talker.  But those of us who watch what candidates say have a different opinion on McCain's tax talk.  He has adopted the path of least resistance--claim that continuing the Bush cuts is reasonable, complain about the way tax cuts are scored, and then let the nation continue into a deficit-ridden, fund-short future where education, basic research and infrastructure take a back seat to making sure that the wealthiest in the country are sitting pretty while the ordinary workers suffer.

Here's an excerpt of what Paul Krugman had to say today, in Bush Made Permanent, NY Times, Apr. 28, 2008.

"... what Mr. McCain says about taxes shows the same combination of irresponsibility and double-talk that, back in 2000, foreshadowed the character of the Bush administration.  The McCain tax plan contains three main elements.

First, Mr. McCain proposes making almost all of the Bush tax cuts, which are currently scheduled to expire at the end of 2010, permanent. (He proposes reinstating the inheritance tax, albeit at a very low rate.)

Second, he wants to eliminate the alternative minimum tax, which was originally created to prevent the wealthy from exploiting tax loopholes, but has begun to hit the upper middle class.

Third, he wants to sharply reduce tax rates on corporate profits.

According to the nonpartisan Tax Policy Center, the overall effect of the McCain tax plan would be to reduce federal revenue by more than $5 trillion over 10 years. That’s a lot of revenue loss — enough to pose big problems for the government’s solvency.

The American people need to stand up and demand accountability of our political candidates.  They have been giving away the store to the wealthy.  The farm bill, for example, is primarily corporate welfare for agribusiness and has very little to do with helping small family farmers who are in danger of losing their farm.  In fact, big agrifarms are making hay--literally and figuratively--even without taking the federal funds into consideration.  Yet the federal government pays each of these agrifarms hundreds of thousands annually not to grow specific items.  And the Senate has added billions to that bill.  Will we never see politicians again who can do the right thing, instead of the right thing to get funding for their elections from the wealthy?  Not unless ordinary Americans let their Senators and Representatives hear what they really think--that corporate welfare for the wealthy has to stop, and that the farm bill and the Bush tax cuts are a good place to start putting a stop to it.

Wesley Snipes: convicted tax criminal in the news: jail time ahead

When Weslep Snipes was convicted on three counts of criminal failure to file tax returns but not convicted on tax fraud charges, many of the mainstream media put out headlines that were likely misleading to the tax protestor crowd, suggesting that he'd gotten off.  When I ran a blog entry about his conviction on the three counts, tax protestors emailed me saying Snipes was their hero, and that he hadn't been convicted of fraud so it proved their position (that the income tax is illegal or that it is to be paid only by non US people) was correct. 

So I'm pleased that the judge sentenced Snipes to the maximum--three years in jail and one year of probation,  See Rich Phillips, CNN, Snipes Gets the Maximum (updated 4/24/08).  Snipes made a payment of $5 million on his back taxes owed (plus penalties and interest)--nearly $17 million, which will be the subject of a civil case.

Snipes said he was sorry for his mistakes, but interestingly never specifically admitted having violated the tax laws.  See Wesley Snipes Gets 3-Years for Not Filing Tax Returns, NYTimes, Apr. 24, 2008. 

Snipes claimed at his trial that he was an innocent who had been duped by his co-defendants.  But he had joined his co-defendant's American Rights Litigators group back in 2000, a group which has a goal thwarting federal income tax collection.  See this FOX News.com story from the time of the trial: Carmen Gentile, Bad Financial Advice Behind Snipes Tax Woes, Lawyer Argues, FoxNews.com, Jan. 16, 2008.  The tax deniers' arguments are groundless, but they advertise and acquire followers who apparently can successfully convince themselves of any fantasy position in order to keep more money for themselves rather than pay their fair share of taxes to support important government activities.  As David Cay Johnston, Wesley Snipes to Go on Trial in Tax Case, Jan. 14, 2008, reported:

Tax deniers maintain that the law only appears to require payment of taxes. All their theories have been rejected by the courts, including the one invoked by Mr. Snipes, which is known as the 861 position, after a section of the federal tax code.

Adherents say a regulation applying the 861 provision does not list wages as taxable, though it does say that “compensation for services” is taxable. The courts have uniformly rejected all such theories, and eight people have been sentenced to prison after not paying taxes based on the 861 argument.

Snipes' failure to file returns covered 1999-2004, during which time he earned $38 million and paid no taxes.  Id.

I still find it hard to believe that the jury bought such a defense for someone who has made millions and obviously is no idiot.  I suppose the celebrity cult is hard to avoid even in a jury deliberation room.  Although the jury in February only convicted Snipes on the three failure to file misdemeanor charges, they thankfully convicted his co-defendants Kahn and Rosile on the felony tax fraud counts.  Kahn will serve a 10-year sentence, and Rosile four years.  Wesley Snipes Gets 3-Years for Not Filing Tax Returns, NYTimes, Apr. 24, 2008.  There's a great bit of dialogue from Kahn's sentencing. 

Kahn's Statement to the judge upon sentencing:  "For the record, your honor, I don’t accept that.”

Judge's response: “You may not accept it, Mr. Kahn, but you will serve it.”   Id.

Any other resolution of this case would have made a mockery of justice.  A poor guy who swipes a piece of pizza from a kid in California can go to jail for life under California's ridiculously harsh criminal "three strikes and you're out" law, but wealthy elites who mock the nation's tax laws often get off with nothing but a slap on the wrist, if that.  If all they do is pay their back due taxes and interest, even with a penalty, they may come out ahead, under time value of money principles.   Snipes deserves jail.  It's good that he got what he deserves.

Treasury's Proposed Rules for Foreign Investment in the United States

On Monday, the Treasury Department issued proposed regulations amending the rules for review of foreign investment in the United States under the Foreign Investment and National Security Act of 2007 (FINSA).  The review of foreign purchases of US business to be conducted by the Committee on Foreign Investment in the United States (CFIUS) has been expanded, but not as much as some have called for.  A publc meeting on the rule will be held May 2.

The proposed rule includes the following provisions (generally stated).

• An acquisition that does not constitute control is still not subject to the Exon Florio notification provision of the Defense Production Act under FINSA.
• The definition of control is expanded to include the power to block key corporate decisions, which have also been expanded to include decisions that affect minority rights.  As a result, fairly common supermajority voting provisions on basic business decisions are included.
• The acquisition of convertible interests that will convert with the passage of time is also an event that calls into play the Exon Florio provision, if the conversion will result in control under the expanded definition.
• The safe harbor for passive investments of less than 10% is retained; but the proposed rules make clear that the safe harbor does not apply to investments where the investor intends to acquire control at a later time or where the investor also acquires governance rights, such as a seat on the board of directors.
• The definition of foreign persons covered has been expanded, so that offshore vehicles that are more than 50% owned by non US persons will be treated as foreign persons, even if they are controlled by US persons.
• There is no mandatory investigation of purchases by entities controlled by foreign governments, though the Treasury Department and responsible agency must approve the decision not to investigate.
• When notification is required, considerably more information must be provided and more time may be taken by the CFIUS.

Corporate Taxation: Good Idea or not?

I've made the argument (here, and in my scholarly writing, and in my classes) that thepredominant 'mainstream' economic view of taxation is problematic because it focuses only on the rather restricted economic idea of efficiency.  It disregards the most important exogenous issue for taxation, which is fairness. And it is problematic, because while economic efficiency looks good on paper--especially when written out in analyses that use statistics and calculus to make simple conclusions look like mathematical and scientific certainties--efficiency theories simply can't do what some suggest they should be able to do.  They can't resolve the fundamental questions about tax policy.  In part, it's because people don't make decisions the way most economic theories treat them as making decisions.  We are not "rational wealthy maximizers" who place economic advancement above all else and self-benefit above all other ideals.  And in part, it's because the theories themselves are too burdened with assumptions that are not sustainable in considering the real world. 

When we consider the question of whether corporations should be taxed, efficiency analysis seems to look at two small a piece of the picture.  Scholars write about the incidence of tax--is it on shareholders, consumers, creditors, workers?  Not clear.  But economic theorists tend to think only people should (or can) pay tax and therefore corporate tax is bad--better to tax the investors (as we do in partnerships or  S corporations or other pass-throughs) and eliminate the corporate tax.

I've argued that the question of taxation of corporations can't be considered without thinking about the issues I've raised on this blog--how do we tax fairly? and how do we create a tax policy that helps to sustain democratic egalitarianism? We want a policy that values democratic institutions, respect for individuals, and the idea that a democratic society should provide opportunities for all.  Corporations are not people, but the corporate entity, through the people who manage it and own it, nonetheless wields enormous global power and seeks self-preservation (at all costs?), much like live animals do.  Corporations are not people, but if they are permitted to grow without restrictions and to make decisions about how their products will be made, shipped, and provided without restrictions, they will tend to make "wealth maximization" decisions that benefit their owners and managers to the detriment of their workers, customers, and even in many cases of  grotesque environmental pollution, the future of the planet.  We might even argue that the decision years ago to treat corporations as "persons" under the Constitution, and to give them "rights" under the law separate from their managers and workers and owners, created a necessity to tax them.  Taxation of corporations ensures (or should, if the IRS audits them appropriately) that the endeavors the corporations engage in contribute to the federal fisc; and it also restrains, somewhat, the ability of corporations to grow out of proportion to what is reasonable for a sustainable democracy (somewhat like the estate tax restrains, somewhat, the ability of wealth to accumulate).

There's a posting at the Angry Bear on this topic that readers of this blog may find interesting: The Cactus Tax Proposal, Part 3: Corporate Tax Rates.  I encourage you to read the series.  This is an important topic, and I'm curious what readers think.  Have corporations acquired so much power that we can't tax them successfully any longer?  They certainly use the "tax competition" gambit as strongly as possible, getting countries to impose a corporate tax (and then use it to build roads, utilites for the corporation) so that they can reduce their US tax liability with Mellon's foreign tax credit while actually still enjoying the benefit of the consumption of all of the amount purportedly paid in taxes to the foreign government.

  I start out dubious of the ability to capture the appropriate level of tax if we let large multi-national corporations pay no tax and only attempt to tax what is passed through to shareholders.  I end up thinking about the many reasons that it seems appropriate to tax corporations--even though they are "merely" entities that are run by people, and even though they are "ultimately" owned by people-- and concluding that it is essential to do so.  What about you? 

Here are some interesting links on the subject:

• Joel Friedman, CBPP, The Decline of Corporate Income Tax Revenues, Oct. 24, 2003:  corporate tax 2003 (noting that corporate taxes raised about 5% of GDP in 1950 and even until 1968 were the second greatest source of funds for the federal fisc, but since that time corporations have effectively lobbied for corporate welfare provisions in the code, resulting in (at the time of the report) corporate taxes raising less than 10% of federal revenuesThe D, much less than the payroll tax, and in 2003 amounting to only 1.2% of GDP;
• Bob McIntyre, CTJ, Corporate Tax Avoidance in the States Even Worse than Federal. Feb. 2, 2005 (in a study of 252 companies, finding that 71% had managed to pay no state income taxes at all, and most had slashed their state income tax payments with various tax avoidance planning; this include huge companies like ToysRUs, Merrill Lynch, and AT&T that paid not one penny of state tax over the three-year period of the study);
• Dharmapala & Desai, Earnings Management and Corporate Tax Shelters, Feb. 2006 (considers the implications of the link between corporate tax avoidance and earnings management);
• FinFacts Team, Corporate Tax Competition has negative effect on income tax revenue, Apr. 22, 2008 (an interesting European study that finds that while corporate tax revenues may go up when corporate tax rates are cut under the pressure from countries competing for corporate patronage, the overall income tax revenues go down--that's because entities are switching to corproate form when it is ultimately more advantageous than noncorporate form through the tax competition gains)

Is Big Business Getting Bigger By Cheating?

Over the past half year, I have commented on the congressional investigation into Blackwater's gambit for enriching its owner--treating hired security personnel in Iraq and elsewhere as though they were independent contractors.  See Blackwater Security Guards (Mar.12, 2008) (discussing Waxman letter to IRS, Small Business Administration and Labor Department pressing for inquiry into Blackwater classification of employees); Blackwater Security Guards (Oct. 20, 2007) ( discussing Waxman letter to Blackwater's Prince seeking information about classification of employees).  That gambit saves the company millions, enriches the company's owners (in Blackwater's case, on no-bid government crony contracts), and leaves the little guy--the company's employees--out in the cold because the company doesn't even pay Social Security on the wages. 

See this WorldWideWeb-Tax posting on the difference between employee and independent contractor.  The key factor in making the determination is how much the company controls the employee.  And what about the consequences of the determination?  It can make a big difference in how much the company pays in taxes and in what benefits the employee receives.  The following is a quick overview from PayrollTaxes.com.

What difference does it make to classify a worker as an independent contractor instead of as an employee? Here are some of the requirements of an employer/employee relationship:

• Employee Withholding. Employers are responsible for the withholding and timely remittance of federal income taxes, state and local income taxes, and FICA taxes from wages paid to their employees.
• Employer Payroll Taxes. Employers owe, and must remit, their own share of payroll taxes, such as FICA and federal and state unemployment insurance, on employee wages.
• Labor Laws. Worker's compensation, working condition, and minimum wage laws all impose on employers certain financial and other requirements for the benefit of employees.
• Employee Benefits. Employees generally enjoy employer funded benefit programs such as vacations, holidays with pay, health insurance, and pension and profit sharing plans; contractors generally do not receive these benefits.
• Reporting. Wages paid to employees (along with the amounts of the various taxes withheld) are reported on Form W-2; amounts paid to contractors are reported on Form 1099. Additionally, Forms 940 and 941 (and perhaps others) must be filed for wages paid to employees.

So the worker definitely loses out when the employer misclassifies the worker.  But that isn't the only loss.  In effect, when an employer misclassifies an employee, we all lose--the worker, the employer's competitors (who are trying to make a profit while treating their workers with respect, as they should), and the public fisc.  See this entry on the unbossed.com blog.

The IRS ruled in the case of one Blackwater employee that the employee was just that, and not an independent contractor.  Hopefully, it is auditing Blackwater diligently and will assess acequqate penalties for its failure to treat its employees as such. 

Blackwater isn't the only big company with saving millions by pretending that its employees aren't.  FedEx is another one, as revealed this week in a story in the New York Times looking at the miserable result for one woman truck driver for Fed Ex.  See Steven Greenhouse, Working Life (High and Low), New York Times, April 20, 2008.  You can also check out FedEx's online recruitment information for single and team ground haulers at this link.  (You'll probably note that it doesn't leave much up to "negotiation" with its "independent contractors"--there are set rates, performance bonuses, times for work for singles versus teams, and various "discount programs" for buying gas at FedEx,etc.--sounds a little like the company store and coal mine job that Tennessee Ernie Ford used to sing about.)  According to the story, Jean Capobianco drives a truck for Fed Ex.  She was required to buy a particular truck, on terms set by Fed Ex.  She is required to wear a FedEx uniform.  She reports to work at the time FedEx instructs her to.  She loads and delivers the packages that FedEx instructs her to deliver.  She appears to be, in all practical details, an employee.  Yet she bears most of the risk of her job, and FedEx gets most of the benefit.  Instead of making the $60,000 that FedEx advertises for its drivers, she makes slightly over $32,000 after all those costs foisted on her by FedEx are taken into account.  And the benefit for FedEx.  It avoided about $400 million (a year), giving it a huge advantage over UPS, its competitor that treats its employees as, surprise, employees.

In 30 lawsuits, FedEx Ground drivers have argued that they are employees, not independent contractors, and that the company should therefore pay for their trucks, insurance, repairs, gas and tires. In one lawsuit, a California judge ruled that FedEx Ground was engaged in an elaborate ruse in which FedEx “has close to absolute control” over the drivers. Last December, FedEx acknowledged another setback: the I.R.S. ordered it to pay $319 million in taxes and penalties for 2002 for misclassifying employees as independent contractors. FedEx could face similar I.R.S. penalties for subsequent years. FedEx said it would appeal.  Id.

How common is this?  In New York State, an article by Donahue, Lamare and Kotler suggests that there is a significant underground of companies--especially construction companies--that misclassify their workers--averaging around 10% or more.  See The Cost of Worker MisClassification in New York State.  Other studies suggest that as many as 30-40% of workers may be misclassified.  See this posting on the IRS Mind blog (reporting a 1984 IRS study showing about 15% and a review of about eleven thousand 1988-1994 audits, suggesting more than 40%).  The IRS finally issue, in December 2007, Form 8919, a form that facilitates a worker's claim that its employer failed to pay over payroll taxes appropriately. 

In that context, the fact that the IRS has cut back on its audits of big corporations is again problematic. (See TRAC data on the significant drop in corporate audits by the IRS.)   And the fact that Congress seems bent on providing more and more corporate welfare through the tax code is even more ludicrous.  (See the proposal for a 4-year carryback of operating losses for construction companies and others, letting companies that over-speculated in housing get paid for their risky behavior by the taxpayers.)  Perhaps instead Congress should enact a legal presumption that new hires are employees, unless an employer can demonstrate that the new hires are clearly independent contractors.

Get with it, IRS.  Audit these businesses and require them to treat their employees as employees.  It's time to do what's right, instead of creating a climate where anything goes for big business.

Class Warfare? Or Fair Shares?

I've gotten several emails in the last few days from people who think my position on the estate tax and on the best way to handle the approaching sunset date of the Bush tax cuts is "class warfare."  The emailers don't like my suggestion that those at the top of the income distribution should pay more in tax, not less. 

This "class warfare" label is used as an attack to divert the attention from the way money, prestige and power is accruing to those at the very top of our society while the vast majority are losing purchasing power. The label is intended to squelch discussion, without engaging in consideration of the underlying fairness issues. 

Yes, I'd leave the estate tax in place without the huge increase in the exemption amount that most in Congress appear to be contemplating.  And for good reason.  The death of the person who accumulated a large estate is a reasonable time to tax that estate.  Much of the accumulation won't have been taxed during the lifetime.  Most of the accumulation is in the form of financial assets.  If inherited, they are received with a step up in basis.  If held til death, they are passed on with another step up in basis.  Yet during the holder's lifetime, many advantages accrue merely because of the accumulated wealth, even when it is unused.  Status, prestige, power--all flow from accumulated wealth.  And the person with that wealth benefits enormously from the society that allowed it to accumulate--a stable environment for further investments, a vigorous market, a healthy federal reserve bank safeguarding fiscal policies, institutions from local to state to federal that provide advantageous investments (e.g., municipal bonds that pay interest that can be excluded from income for federal income tax purposes).   The danger from enormous accumulation of wealth is that the decision making processes in democratic institutions will be captured by those influential wealthy and the concerns, needs and views of the vast majority of ordinary citizens will be ignored. 

So a position in favor of an estate tax isn't class warfare.  Rather, a position that is in favor of repeal of the estate tax is a form of class warfare against all those ordinary taxpayers who don't have the accumulated wealth, the benefits, the status, the prestige and the power and whose taxes will go up if the estate tax isn't collected from these enormous estates.

Yes, I'd also let most of the Bush tax cuts expire.  Many are merely welfare entitlements for big business--such as allowing a credit, in the name of a stimulus, for research and development that would be done anyway and that should be expensed, not credited against the tax liability; or allowing deferral of taxation on active financing income in foreign subsidiaries.   The individual  rate cuts for capital gains and dividends resulted in too low a rate of taxation on those types of income flows that are predominantly enjoyed, again, by those at the top of the income distribution.  That preference has come when economic growth has benefited those at the top while those at the bottom have suffered stagnating wages and real increases in prices for essentials.  So I'd reinstate higher rates on capital gains and dividends.  And I'd leave in place the other rate cuts for the lower brackets, but add a higher bracket surcharge.  Ideally, that surcharge would be graduated, so those in the top 20% would pay the surcharge, those in the top 10% would pay more, those in the top 5% more, and those in the top 1% even more.

That's not class warfare.  That is setting the tax burden in a way that appropriately allocates it to those who have the ability to pay.

We need to do this, because we need to ensure that the society can continue to provide public goods that are needed to underlay a sound, stable economic, social, and cultural system. (And as long as the war in Iraq continues, we are spending huge sums on the military that can't be diverted to these other important needs.  If Stiglitz and Bilmes are correct in their assessment, that is $3 trillion to $6 trillion that is not able to be spent on infrastructure and other needs.)  We need to spend considerably more money than we have been spending on roads and bridges, and we should spend much more on public transportation--intercity and intracity light rail lines in particular.  We should also be spending much more on education.  Every young person in this country should be able to attend college and receive a good education that prepares that person for a productive position in the modern economy.  Lately, that American dream is becoming less of a reality for many.  And we should be spending more to fund both basic research and research in health, agining and other areas of particular importance to our population.

economic conditions: Merrill Lynch

The stock market has appeared to stabilize somewhat compared to the significant swings around the time of the Bear STearns takeover.   It is not clear whether the United States is in recession, on the brink of recession, or just escaping recession.  Should we be complacent?  Probably not. Job losses and stagnant wages at a time of increasing food and gas prices surely are worrisome, on top of the credit crunch that has afflicted the financial system.

Here's what Merrilly Lynch CEO John Thain had to say about the expectations for further slowing of the economy, in Louise Story, At Merrill--Write Downs and More Lay Offs, NY Times (Apr. 18, 2008).

So far the slowdown has been finance-driven,” Mr. Thain said. “What we haven’t seen yet is the impact on the consumer of falling house prices, rising energy prices, higher food prices and higher unemployment.”

The recession, he said, is going to move from being a finance-driven problem to a consumer-driven one, and Merrill may continue to struggle as a result.

House Passes "Taxpayer Assistance and Simplification Act"

The House on Tuesday (4/15/08) passed H.R. 5719, the "Taxpayer Assistance and Simplifcation Act of 2008".   Text of the bill as passed is available at this link (along with other information).  The vote was 238 to 179:  99% of Democrats supported the bill, and 93% of Republicans opposed it.  The following indicates several of the key provisions, in some cases with my commentary.

• elimination of the outsourcing of federal income tax debt collection

This is an important  provision that should pass.  The IRS spent $71 million setting up and maintaining this program, which garnered only $20 million in revenues for the federal fisc in 2007, for a net NEGATIVE of more than $50 million.  Two private companies made $12 million in 2007 by doing the work that the IRS should be doing, with 65 IRS employees devoted to overseeing the work of those two companies. (Of course, because the Congressional Budget Offices doesn't count the use of discretionary IRS resources in determining Pay-Go offsets requires, it scores the elimination of a program that is costing the federal government $50 million a year as though it were cutting off revenues to the federal government. That crazy scoring policy should be changed so that the full costs are taken into account of such programs.)   It would be much more cost efficient for the IRS to use its employees to collect these "easy" tax debts rather than outsourcing the work to private companies.   Tax debt collection is a quintessentially government function: privatizing it is a bad idea.

• modification of the tax return preparers' level of confidence requirement for penalty purposes to a "substantial authority" position for undisclosed positions and a "reasonable basis" position for disclosed positions

This is a step backwards.  The change to a more likely than not confidence level requirement was the right one.  The problem was that Congress did not raise taxpayers' confidence level requirements to the more likely than not standard at the same time.  Regretably, the House has yielded to the influence of tax practitioner (law firms and accounting firms) and tax preparer company lobbying on this issue.  Congress should read some of the emails over the listserves that I have seen since the change to a more-likely-than-not standard.  It is clear that the change in the standard made tax return preparers much more cautious about advising super-aggressive tax positions.  That is what the standard should do.  The conference committee should remove this provision and instead raise the taxpayer standard as well to more likely than not.  See my article on this issue : Tax Advice Before the Return: The Case for Raising Standards and Eliminating Evidentiary Privileges.

• Require health savings account users to document their use of funds to ensure that the withdrawals are in accord with the provisions.

This is a no-brainer.  Given the increasing compliance problems in the income tax area, requiring documentation for use of health savings account withdrawals to pay health expenses is a no-brainer.  Congress should do it.  One Republican in the House complained mightily that having to prove one wasn't abusing the system could make people not use the health savings accounts.  That's a misguided concern.  When one pays medical bills, one has receipts.  We have to document those expenses to insurance agenices, so why not to the federal government? 

• Elimination of the  loophole permitting American firms to avoid paying Social Security and Medicare taxes for U.S. employees working overseas for their foreign subsidiaries on government contracts.

This is a worthy proposal that should be enacted.  Halliburton is a prime example of a US company that used a foreign shell company to avoid paying Social Security and Medicare taxes on compensation paid to US employees.