Case Studies in Gaming the Income Tax Laws

Tax Breaks 

The Top 40% Income Bracket Pays 106% of the Income Tax, The Lowest 40% Bracket Pays -9%% (Negative).

"Rich" People Gaming the Income Tax Laws:  Col. X and his Wife and Mega-Roth IRAs

"Poor" People Gaming the Income Tax Laws:  Juanita and Her Daughter Laura

Effective Tax Rates are Lower Than Most People Believe
Obama’s inequality argument just utterly collapsed

The Phony Lifetime Disabilities Gaming by Tens of Millions of People Who are Not Disabled

Proposed Solutions

This is recommended as a celebration cocktail for the 49.5% of U.S. taxpayers who pay no income taxes:
"Next Time You're At the Bar, Order an Income Tax Cocktail," by Adrienne Gonzalez (Jr. Deputy Accountant), Going Concern, March 20, 2012 ---
http://goingconcern.com/post/next-time-youre-bar-order-income-tax-cocktail

"Why Some Multinationals Pay Such Low Taxes," by Justin Fox, Harvard Business Review Blog, March 26, 2012 --- Click Here
http://blogs.hbr.org/fox/2012/03/why-some-multinationals-pay-su.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

U.S. National Debt Clock --- http://www.usdebtclock.org/
Also see http://www.brillig.com/debt_clock/

Academic Versus Political Reporting of Research:  Percentage Columns Versus Per Capita Columns ---
http://www.cs.trinity.edu/~rjensen/temp/TaxAirlineSeatCase.htm
by Bob Jensen, April 3, 201

Question
Should we keep increasing the government spending deficit and the national debt every year ad infinitum?

Answers
Although in these down economic times, the liberal's Keynesian hero and Nobel Prize economist, Paul Krugman, thinks recovery is stalled because the government is not massively increasing spending deficits. But he's not willing to commit himself to never reducing deficits or never paying down some of the national debt. Hence, he really does not answer the above question ---
http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html

So let's turn to a respected law professor who advocates increasing the government spending deficit and the national debt every year ad infinitum?

"Why We Should Never Pay Down the National Debt (even partly)," by Neil H. Buchanan George Washington University Law School), SSRN, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2101811

Abstract:
Calls either to balance the federal budget on an annual basis, or to pay down all or part of the national debt, are based on little more than uninformed intuitions that there is something inherently bad about borrowing money. We should not only ignore calls to balance the budget or to pay down the national debt, but we should engage in a responsible plan to increase the national debt each year. Only by issuing debt to lubricate the financial system, and to support the economy’s healthy growth, can we guarantee a prosperous future for current and future citizens of the United States.

Student Assignment

Since many of the most liberal economists are not quite willing to assert that "we should never pay down the national debt," what questionable and unmentioned assumptions have been made by Neil H. Buchanan that need to be addressed?

Are some of these assumptions unrealistic in any world other than a utopian world?

Bob Jensen's Answers ---
http://www.cs.trinity.edu/~rjensen/temp/NationalDeficit-Debt.htm

InfoGraphic on How the Tax Burden Has Changed ---
http://www.nytimes.com/interactive/2012/11/30/us/tax-burden.html


From The Wall Street Journal Accounting Weekly Review on March 30, 2012

Tax Breaks Exceed $1 Trillion: Report
by: John D. McKinnon
Mar 24, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video
 

TOPICS: Tax Laws, Tax Reform, Taxation

SUMMARY: The article reports on a "...new report by the non-partisan Congressional Research Service [which] underscores how far-reaching..." are many of the most costly tax provisions in the U.S. tax code. As highlighted in the related video, these items are likely to become a focused issue in this election year. "House Republicans proposed in their new budget this week to reduce or eliminate an unspecified array of tax breaks in order to offset the costs of lowering top tax rates for both corporations and individuals to 25% from the current 35%." President Obama proposed reducing the top corporate tax rate only, from 35% to 28%, with corresponding proposals to eliminate certain corporate tax breaks, such as deductibility of the cost of corporate jets and tax treatment of foreign earnings.

CLASSROOM APPLICATION: The article is useful to summarize the types of items considered to be "tax breaks," and the current, election-year proposals to simplify the U.S. tax code.

QUESTIONS: 
1. (Introductory) Who produced the report on which this article is based? How do you think the information was obtained?

2. (Introductory) Why is this report useful in considering ways to overhaul the U.S. tax code?

3. (Advanced) What kinds of items are characterized as "tax breaks" in the document on which this article reports?

4. (Advanced) Specifically describe the tax treatment of each of the items listed in the graphic entitled "Popular Provisions." Who benefits from each of these items?

5. (Advanced) Based on your answer to question 2, explain why "House Republicans dismissed the report's significance saying it only confirms that overhauling the tax code will be politically challenging."
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Tax Breaks Exceed $1 Trillion: Report," by: John D. McKinnon, The Wall Street Journal, March 24, 2012 ---
http://online.wsj.com/article/SB10001424052702303812904577299923495453562.html?mod=djem_jiewr_AC_domainid

A congressional report detailing the value of major tax breaks shows they amount to more than $1 trillion a year—roughly the size of the annual federal budget deficit—and benefit wide swaths of the population.

The figures could be useful to lawmakers of both parties and President Barack Obama, who are looking for ways to shrink future deficits and offset the anticipated cost of overhauling the much-criticized U.S. tax code, an effort likely to include tax-rate cuts. Both parties are looking to trim or eliminate tax breaks to achieve those goals.

Mr. Obama has suggested eliminating breaks for corporate jets and oil and gas companies to reduce deficits. He also has raised the possibility of reducing tax breaks for U.S. multinationals that ship jobs overseas, as a way to offset the cost of lowering the corporate tax rate to 28% from the current 35%. Research Report

 

House Republicans proposed in their new budget this week to reduce or eliminate an unspecified array of tax breaks in order to offset the costs of lowering top tax rates for both corporations and individuals to 25% from the current 35%.

The new report, by the nonpartisan Congressional Research Service, underscores how far-reaching many of the tax breaks are, which makes changing them a politically daunting task.

They include the exclusion from taxable income for employer-provided health insurance, the biggest break, at $164.2 billion a year in 2014; the exclusion for employer-provided pensions, the second-biggest, at $162.7 billion; and the exclusions for Medicare and Social Security benefits.

Other big breaks include the mortgage-interest deduction, third-largest; taxing capital-gains income at lower rates than other income; the earned-income credit for the working poor; and deductions for state and local taxes.

The report, citing political opposition, technical challenges and other reasons, said that "it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues" by eliminating tax breaks. That likely would leave little for reducing tax rates, perhaps only enough for one or two percentage points in the top individual rate, while maintaining the same level of revenue, the report said.

Continued in article

Jensen Comment
I'm suspicious that this greatly underestimates the so-called "tax breaks" by not mentioning exclusions from revenue. For example, hundreds of billions of interest  revenue from municipal bonds are excluded from taxable revenue (federal). Many types of life insurance payments are tax exempt. Clerics get some generous exemptions for housing allowances. And there are capital gains exemptions in Roth IRAs and scores of other exclusions.


Blue is Blue
From the TaxProf Blog on March 6, 2013

The Fiscal Times:  The Ten Worst States for U.S. Taxes:

  1. New York
  2. New Jersey
  3. California
  4. Vermont
  5. Rhode Island
  6. Minnesota
  7. North Carolina
  8. Wisconsin
  9. Iowa
  10. Maryland

The left of liberal governor of Vermont claims that his state's welfare generosity motivates Vermonters not to seek employment (at least the kind that does not pay cash under the table in the underground economy) ---
http://www.cs.trinity.edu/~rjensen/temp/Political/PoliticalQuotationsCommentaries.htm#VermontWelfare

Case Studies in Gaming the Income Tax Laws ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm


From CFO.com Morning Ledger on March 14, 2013

Regulators ramp up payroll audits.
Regulators are cracking down on small businesses and other employers who misclassify workers as independent contractors to avoid paying payroll taxes and other expenses, the Journal’s
Angus Loten and Emily Maltby write. Some employers are turning to contractors to avoid hitting the federal health-care law’s 50-employee threshold for health insurance. And the crackdown is partly aimed at boosting tax revenue. The U.S. Treasury estimates that forcing employers to properly classify their workers—while tightening so-called “safe harbor” rules that provide them with leeway in determining who is and isn’t an employee—would yield $8.71 billion in added tax revenue over the next decade.

Jensen Comment

Another incentive for outsourcing certain types of work is to outsource risk of fines and bad publicity resulting from employing undocumented workers. A company, including a highly respected university, can get very bad publicity when the news media discloses a practice of hiring undocumented workers. For that reason those organizations will hire such things as building cleaning services from local businesses that are very small and less concerned about bad publicity. A friend of mine in a very respected large company in San Antonio said in all his years working as a security guard for that company he never met a janitor (male or female) who spoke one word of English.


"CBO: The Distribution of Household Income and Federal Taxes, 2008 and 2009," Congressional Budget Office ---
http://www.cbo.gov/sites/default/files/cbofiles/attachments/43373-06-11-HouseholdIncomeandFedTaxes.pdf
Thank you Paul Caron for the heads up.

For most income groups, the 2009 average federal tax rate was the lowest observed in the 1979–2009 period. ... For the lowest income group, the average rate fell from 7.5% in 1979 to 1.0% in 2009. ... Households in the middle three income quintiles saw their average tax rate fall by 7.1 percentage points over 30 years, from 19.1% in 1979 to 12.0% in 2009. ... The average tax rate for households in the 81st to 99th percentiles of the income distribution also reached a low point in 2009, about 4 percentage points below its 1979 level. ... In contrast, in 2009 the average tax rate for households in the top 1% of the before-tax income distribution was above its low point, reached in the early 1980s. ... The tax rate ... rose somewhat from 2007 to 2009, as sharp declines in capital gains income caused a larger portion of the income of that group to be subject to the ordinary income tax rates. The decline in after-tax income between 2007 and 2009 was much larger at the top of the income distribution than further down the distribution.

Let's soak'em for 100% so we can live off the fat of the land
"CBO: The wealthly pay 70 percent of taxes," by Stephen Dinan, The Washington Times, July 10, 2012 ---
http://www.washingtontimes.com/news/2012/jul/10/cbo-rich-pay-outsized-share-taxes/

Wealthy Americans earn about 50 percent of all income but pay nearly 70 percent of the federal tax burden, according to the latest analysis Tuesday by the Congressional Budget Office — though the agency said the very richest have seen their share of taxes fall the last few years.

CBO looked at 2007 through 2009 and found the bottom 20 percent of American earners paid just three-tenths of a percent of the total tax burden, while the richest 20 percent paid 67.9 percent of taxes.

The top 1 percent, who President Obama has made a target during the presidential campaign, earns 13.4 percent of all pre-tax income, but paid 22.3 percent of taxes in 2009, CBO said. But that share was down 4.4 percentage points from 2007, CBO said in a finding likely to bolster Mr. Obama’s calls for them to pay more by letting the Bush-era tax cuts expire.

The big losers over the last few years were the rest of the well-off, especially those in the top fifth, who saw their tax burdens go up.

“Specifically, between 2007 and 2009, the share of taxes paid fell for the bottom three income quintiles, was close to flat for the fourth quintile, but rose for the highest quintile,” CBO said. “Within the top quintile, however, the shift was uneven; the share paid by the top percentile fell, and the share paid by the rest of the top quintile rose.”

The tax fight has risen to the top of this year’s presidential campaign, with Mr. Obama calling for the wealthy to pay more money both to lower the deficit and fund his new spending promises. He wants households making $250,000 or more a year to see their rates return to Clinton-era levels, though he has proposed a one-year extension of the rest of the Bush-era rates.

Republicans have countered that they want a one-year extension of all current rates in order to have breathing space to tackle a broader overhaul of the tax code.

CBO, the nonpartisan agency that serves as Congress’ official scorekeeper, said the current tax code is progressive chiefly because of the income-tax structure. On average, the lowest 40 percent of earners actually get money back through the income-tax code because of refundable tax credits.

Overall, the federal tax rates in 2008 and 2009 — at 18 percent and 17.4 percent — were the lowest in the last three decades, suggesting at least part of the reason the federal government has run record deficits in recent years.

In terms of actual earnings, the top 1 percent suffered the most in the recession, with their average earnings dropping from $1.9 million to $1.2 million. The lowest 20 percent saw their incomes drop from $23,900 to $23,500 during that time.

 


A Slide Show from the Tax Foundation (Click the arrows on the right side of the screen)
"Putting a Face on America's Tax Returns: A Chartbook September 24, 2012," by Scott A. Hodge William McBride, Tax Foundation, September 24, 2012
http://taxfoundation.org/slideshow/putting-face-americas-tax-returns
Thank you Caleb Newquist for the heads up.

You can get the above content in PDF format at
http://taxfoundation.org/sites/taxfoundation.org/files/docs/putting_a_face_on_americas_tax_returns_a_chartbook.pdf

Jensen Comment
This slide show focuses heavily on inequality.

Congressional Budget Office (CBO)
The Top 40% Income Bracket Pays 106% of the Income Tax, The Lowest 40% Bracket Pays -9%% (Negative).
CNBC. December 11, 2013 --- http://www.cnbc.com/id/101264757

Jensen Comment
This is a bit misleading in terms of bracket definitions. The income taxes paid or received in the above brackets are highly skewed such that the highest income taxpayers are paying a larger share in the top bracket and the lower income tax receivers in the low bracket are receiving a larger share of the negative cash flows. In other words the outcomes can be made more or less dramatic by definitions obrackets.


"Rich" People Gaming the Income Tax Laws:  Col. X and his Wife

Perhaps I am less sympathetic than most of you because I suspect that tens of millions of people are gaming the system to avoid income taxes even though they are not really so poor when the Great Scorer adds up their annual incomes. There are really two types of tax gamers. One type is a so-called "taxpayer" who files an income tax return but games the tax code to pay little or no income tax. The other gamer is supposedly so poor that it's not necessary to file a tax return and be classified as a "taxpayer."

I will tell you about two families I know in San Antonio. First note that San Antonio is heavily populated with retired military families who have extensive social networks and take advantage of the various Army and Air Force bases in the area. Among other things, these bases provide free medical services, free prescription drugs, low cost base exchange (BX) department stores that don't charge any sales tax, base golf courses, base social clubs, and even free base cemeteries for husbands and wives.

The American Dream:  A Free Ride
Nearly Half of All Americans Don’t Pay Income Taxes
http://blog.heritage.org/2012/02/19/chart-of-the-week-nearly-half-of-all-americans-dont-pay-income-taxes/


Why don't they grant an Oscar to the state with the biggest tax breaks for Hollywood film makers?
http://professional.wsj.com/article/SB10001424127887324880504578298080119811240.html?mod=WSJ_Opinion_LEADTop&mg=reno64-wsj#articleTabs%3Darticle

. . .

Actually, nowadays an Eva Longoria who flipped burgers would probably qualify for the Earned Income Tax Credit and get a check from the government rather than pay taxes. It's the movie set where she works these days that may well be getting the tax break.

With campaign season over, you're not likely to hear stars bringing up taxes at this weekend's Academy Awards show. But the tax man ought to come out and take a bow anyway. Of the nine "Best Picture" nominees in 2012, for example, five were filmed on location in states where the production company received financial incentives. ...

Such state incentives are widespread, and often substantial, but they don't do much to attract jobs. About $1.5 billion in tax credits and exemptions, grants, waived fees and other financial inducements went to the film industry in 2010, according to data analyzed by the Center on Budget and Policy Priorities [State Film Subsidies: Not Much Bang For Too Many Bucks]. Politicians like to offer this largess because they get photo-ops with celebrities, but the economic payoff is minuscule. George Mason University's Adam Thierer has called this "a growing cronyism fiasco" and noted that the number of states involved skyrocketed to 45 in 2009 from five in 2002.

 


Col. X and his wife were our exceptional friends (more like family) when we lived in San Antonio. Erika and I went to dinner-card parties at least once each week with this couple and eight other couples that were retired from the military. On frequent occasions these parties expanded to 20-30 couples at parties on San Antonio's military bases and in area country clubs. Throughout most of our 24 years in San Antonio, the major military bases were Lackland AFB, Ft. Sam Houston Army Medical Command (Brooke Army Medical Center), Randolph AFB, Brooks AFB , and the huge Kelly AFB (much of Kelly is now owned and operated by the City of San Antonio).

Col X is a former Air Force physician. He's now retired.

I know some about the personal finances of Col. X and his wife because I helped them file their tax return each year while I was their close circle of friends. They receive about $90,000 in tax exempt bond interest annually. In addition they have about $75,000 in other retirement income that includes some really complicated depreciation pass-through amounts from low income housing investments. I never understood these investments. But that did not matter since Col. X's brokerage firm provided me with explicit instructions about how to feed all this information into Turbo Tax.

The bottom line is that during our years in San Antonio Col. X and his wife received well over $150,000 per year in retirement and paid almost no income tax. They lived in a $600,000 house with a four-car garage that housed two big Lincoln automobiles. They never seemed to begrudge losing thousands of dollars in monthly trips with friends to the Golden Nugget Hotel and Casino in downtown Las Vegas. But they adopted a strategy to only pay a pittance in income tax even though they lived on a full military pension with totally free medical services from the Brooke Army Medical Hospital on Fort Sam Houston, free prescription drugs, BX shopping, and other base privileges paid for by the military. When they die they will be buried, one on top of the other, by an honor guard at the Fort Sam Houston Military Cemetery.

I might add that during World War 2, Col. X was a B17 navigator who went on dangerous missions in North Africa, Italy, and eventually Germany. He recalls bombing the hell our of a ball bearing factory in Regensburg a few years before Erika, as a five-year old child, was smuggled across the Czech. border into Regensburg shortly after the war.

After World War 2 the Air Force paid the tuition for Col. X to attend the Johns Hopkins University Medical School. He also retained his active duty pay as a Captain in the Air Force while attending medical school. Afterwards he was assigned to both the Brooke Army Medical Center at Ft. Sam and the Wilford Hall Medical Center at Kelly AFB. Subsequent to retiring from the Air Force he went into private practice in San Antonio.


Question
Among the 46% (some say 49.5%) of taxpayers not paying any taxes, is it mostly the outliers (extremely rich and extremely poor) who pay no income taxes?

Answer
Well, only in part. Most (89%) of those so-called "taxpayers" making less than $20,000 pay no taxes. A few like college students who are still claimed as dependents on the tax returns of their parents may pay a slight amount of income tax on part-time earnings.

Most of those making more than $100,000 pay some income taxes. Bloomberg reports that 98% of those that pay no income taxes have less than $100,000 in earnings. Most are availing themselves of recent tax breaks such as energy credits, tax breaks from employer contributions to medical insurance, increased tax breaks for dependents, and deferred tax breaks such as breaks professors get for employer contributions to TIAA-CREF.

Watch the April 3, 2012 Bloomberg Video ---
http://www.bloomberg.com/video/89503501/

Also see
"Comparing the top and the bottom income earners: Distribution of income and taxes in the United States," by Govind S. Iyera, Peggy Jimeneza, and Philip M.J. Reckers, Journal of Accounting and Public Policy, March–April 2012, Pages 226–234 ---
http://www.sciencedirect.com/science/article/pii/S027842541200004X
Thank you Steve Sutton for the heads up.

Why, according to the OECD, is the US system so progressive? Not because the rich face unusually high average tax rates, but because middle-income US households face unusually low tax rates--an important point which de Rugy mentions and Chait ignores.
Note that the Excel file includes payroll taxes as well as income taxes ---
(Here are the IRS data, excel file.)
"U.S. Taxes Really Are Unusually Progressive," by Clive Crook, The Atlantic, February 10, 2012 ---
http://www.theatlantic.com/business/archive/2012/02/us-taxes-really-are-unusually-progressive/252917/

If you ask me, Jonathan Chait, a writer I respect, has made an ass of himself in a fight he picked with Veronique de Rugy over taxes and progressivity. She offended him by saying that America's income taxes are more progressive than those of other rich countries. Chait assailed her "completely idiotic" reasoning, called her an "inequality denier", "a ubiquitous right-wing misinformation recirculator" and asked if it was really any wonder he cast insults now and then at such "lesser lights of the intellectual world". (Paul Krugman said he sympathises. With Chait, obviously. The only danger here is in being too forgiving, Krugman advises. Chait may think the de Rugys of this world are only lazy and incompetent, but we know them to be liars as well.)

Just one problem. On the topic in question, De Rugy is right and Chait is wrong.

Income taxes in America are more progressive than in other rich countries--according to an authoritiative official study which, to my knowledge, has not been contradicted. The OECD's report "Growing Unequal", on poverty and inequality in industrial countries, includes a table that provides two measures of income tax progressivity in 2005. This is evidently the source of de Rugy's numbers. Here they are in an excel file. According to one measure, America's income taxes were the most progressive of the 24 countries in the sample, except for Ireland. According to the other, they were the most progressive full stop. (A more recent OECD report, "Divided We Stand", uses different data, a smaller sample of countries and a different measure of progressivity: the results are similar.)

Before you ask, this ranking takes account of employee-side payroll tax as well as the federal income tax.

Chait first objected to de Rugy's claim about progressivity because he thought she was inferring it from the fact that the US collects the biggest share of income taxes--45 percent of the total, col B1 in the table--from the top income decile. That would be a false inference, as Chait says, because it could be true of a country with a very unequal income distribution even if its taxes were not especially progressive. But look at the table. There was no need for de Rugy to draw any such inference, let alone try to mislead readers. All she needed to do--and all, I'm sure, she did--was glance over to the last column, which actually gives the measure of progressivity, showing the US to have the highest score.

The measure of progressivity is hard to explain, so I can see why de Rugy quoted the tax share instead. But she could have chosen a much more dramatic number if she was seeking merely to bamboozle her readers. Exclude payroll tax, and the top 1 percent of taxpayers, not the top 10 percent, have lately accounted for nearly 40 percent of income tax receipts, the top 5 percent for nearly 60 percent, and the top decile for roughly 70 percent. (Here are the IRS data, excel file.)

For the reason I just gave, this does not prove that the US tax system is more progressive than anybody else's--but it surely has some relevance to the question, "Are the rich paying their fair share of income tax?" If this isn't fair, what would be?

When Chait, with all the authority of a leading light of the intellectual world, says "Rich Americans pay a bigger share of the tax burden because they earn a bigger share of the income, not because the U.S. tax code is more progressive," he is making the same kind of sloppy bias-driven error he falsely accuses de Rugy of making. (I'll refrain from wondering whether he made the mistake deliberately.) According to the OECD, rich Americans bear a bigger share of the tax burden because they earn a bigger share of the income and because the US income tax system is more progressive.

There's a lot more to say on this subject.

Is measuring progressivity straightforward? No. It's difficult, because the underlying data are very complicated and hard to compare across countries. Another problem: expressing progressivity across the whole income range as a single number, so that one can say A is more or less progressive than B, can be misleading. Unfortunately, we all want to be able to say, A is more or less progressive than B.

Why, according to the OECD, is the US system so progressive? Not because the rich face unusually high average tax rates, but because middle-income US households face unusually low tax rates--an important point which de Rugy mentions and Chait ignores.

How does the picture change if you take indirect taxation into account? That would make the US system look even more progressive, because the US doesn't rely on a flat consumption tax like most other governments.

Continued in article

Most developed nations, other than the U.S., provide relief on double taxation
"Corporate Dividend and Capital Gains Taxation: A Comparison of the United States to Other Developed Nations," by Ernst & Young (Drs. Robert Carroll and Gerald Prante), February 2012 ---
http://images.politico.com/global/2012/02/120208_asidividend.html

 


Individual Retirement Account (IRA) --- http://en.wikipedia.org/wiki/Individual_retirement_account

There are several types of IRA:

There are two other subtypes of IRA, named Rollover IRA and Conduit IRA, that are viewed by some as obsolete under current tax law (their functions have been subsumed by the Traditional IRA); but this tax law is set to expire unless extended. However, some individuals still maintain these arrangements in order to keep track of the source of these assets. One key reason is that some qualified plans will accept rollovers from IRAs only if they are conduit/rollover IRAs.

What was formerly known as an Educational IRA is now called a Coverdell Education Savings Account.

Starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many of the restrictions of what type of funds could be rolled into an IRA and what type of plans IRA funds could be rolled into were significantly relaxed. Additional acts have further relaxed similar restrictions. Essentially, most retirement plans can be rolled into an IRA after meeting certain criteria, and most retirement plans can accept funds from an IRA. An example of an exception is a non-governmental 457 plan which cannot be rolled into anything but another non-governmental 457 plan.

The tax treatment of the above types of IRAs except for Roth IRAs are substantially similar, particularly for rules regarding distributions. SEP IRAs and SIMPLE IRAs also have additional rules similar to those for qualified plans governing how contributions can and must be made and what employees are qualified to participate.

 

"Should You Contribute to a Non-Deductible IRA?" by Laura Adams, Money Girl, February 12, 2013 ---
http://moneygirl.quickanddirtytips.com/what-is-a-non-deductible-ira.aspx

Bob Jensen's personal finance helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

 


Roth IRA --- http://en.wikipedia.org/wiki/Roth_IRA

Jensen Warning
Deborah Jacobs may have overstated the case for a Roth IRA. Ordinary folks should not choose a Roth IRA without expert tax advice

Mega-Roths
Remarkably, despite warnings of future large revenue losses, Congress has put no cap on the amount that can accumulate in a Roth IRA. Still, the Yelp shares in Levchin’s Roth do raise a legal issue. Tax rules bar you from investing your IRA or Roth IRA in a business you control—such a “prohibited transaction” can render the IRA immediately taxable and ­possibly subject to penalties.
Deborah L. Jacobs (see below)

"How Facebook Billionaires Dodge Mega-Millions In Taxes," by Deborah L. Jacobs, Forbes, March 20, 2012 ---
http://www.forbes.com/sites/deborahljacobs/2012/03/20/how-facebook-billionaires-dodge-mega-millions-in-taxes/

In 2010 Max R. Levchin, chairman of social review site Yelp, sold 3.1 million shares of Yelp held in his Roth individual retirement account. Most of the $10.1 million he received was profit. But Levchin, a 36-year-old serial entrepreneur who started PayPal with ­billionaire Peter Thiel in 1998, won’t ever have to pay a penny of income tax on those gains. That’s because all earnings in a Roth IRA are tax free so long as its owner waits until age 59 1/2 to take money out.

Moreover, Securities & Exchange Commission filings show Levchin still has 3.9 million shares of Yelp, now trading near $22, in his Roth. So it appears his tax-free “retirement” kitty is worth at least $95 million—and maybe a lot more. We don’t know, for example, if Levchin’s Roth owned stock in social app company Slide, which he started in 2004 and sold to Google for $182 million in 2010. If Levchin doesn’t spend his mega-Roth in retirement, he can leave it to his kids or grandkids, who can, under current law, stretch out income-tax-free growth and withdrawals for decades.

Levchin isn’t the only tech titan who’s got a shrewd tax advisor. Buried in recent SEC filings for Facebook, Zynga and LinkedIn are other examples of legal moves the ultrarich use to shield big dollars from the ­taxman. These techniques are available to the merely well-off, too, but they produce the most dramatic savings when executed early in a hot company’s—or hot entrepreneur’s—life.

How early? Facebook billionaire cofounders Mark Zuckerberg and Dustin Moskovitz are both 27, unmarried and have no children we know of. Yet back in 2008 they both set up grantor retained annuity trusts (GRATs) that we estimate will allow them to transfer a total of at least $185 million of wealth to future offspring or others, gift tax free. That compares to a supposed gift-tax exemption of just $1 million in 2008 and $5.12 million today.

Both the Obama Administration and congressional Democrats have proposed new limits on GRATs. Meanwhile, you may want to copy the social tech wizards, if you have high-growth investments to shelter.

Mega-Roths

Remarkably, despite warnings of future large revenue losses, Congress has put no cap on the amount that can accumulate in a Roth IRA. Still, the Yelp shares in Levchin’s Roth do raise a legal issue. Tax rules bar you from investing your IRA or Roth IRA in a business you control—such a “prohibited transaction” can render the IRA immediately taxable and ­possibly subject to penalties.

It’s clear that if you own a small business, your IRA or Roth IRA can’t invest in it. But what if you are chairman or CEO of a private firm with many investors and buy its shares for your Roth? SEC filings show that in 2001, while CEO of ­PayPal, tech investor Thiel bought 1.7 million shares of that company for 30 cents a share through his Roth. In 2002 eBay bought out PayPal for $19 a share—an apparent $31.5 million tax-free profit for Thiel. It also appears from a letter we discovered in a federal court case that some of Thiel’s early investment in Facebook was also through his Roth IRA. He now sits on Facebook’s board.

Is this kosher? FORBES has been told reward-seeking informants are filing claims with the IRS Whistleblower Office, flagging such transactions as improper. But IRA expert Noel Ice says it’s a gray area, with little IRS or court guidance. Buying closely held stock for an IRA is probably okay, he says, so long as the IRA’s owner doesn’t have—when all his investments are combined—voting control of that company. Levchin, Thiel and the IRS wouldn’t comment.

The lesson for ordinary folks? Put investments with the highest growth potential in your Roth. Note: If you do want to put nonpublicly traded stock in an IRA or a Roth IRA, you’ll generally need to use a special custodian who handles “self-directed” IRAs. (The big brokers, banks and mutual fund companies that hold most IRAs generally limit investments to publicly traded stock, bonds, mutual funds and bank CDs.) Levchin and Thiel have used San Francisco-based Pensco Trust Co. to hold their Roth IRAs.

The Facebook GRATs

Thanks to a 2000 Tax Court decision ­involving a member of the billionaire Walton clan, which founded Wal-Mart, it’s now possible to transfer large amounts of wealth to heirs gift tax free using a grantor retained annuity trust. The person who wants to transfer wealth (the grantor) puts shares into the ­irrevocable trust and retains the right to ­receive an annual payment back from the trust for a period of time—say, 2 to 15 years. If the grantor survives that period, any property left in the trust when the annual payments end passes to family members.

The key is this: In calculating how much value will be left at the end—and thus how big a gift the grantor is making—the IRS doesn’t look at the performance of the actual stock in the trust. Instead, it assumes the trust assets are earning a paltry government-determined interest rate. With a zeroed-out, or “Walton” GRAT, the grantor receives an annuity that leaves nothing for heirs—if assets grow only at the IRS’ lowly interest rate. If they grow faster, the excess goes to heirs gift tax free. (If assets don’t grow, the grantor is no worse off, because the annuity can be paid by returning some shares each year to the grantor.)

Continued in article

Hi Ramesh,

If income and wealth equality is such a stimulant  to economic growth and prosperity why haven't nations other than Cuba and North Korea seriously experimented with making everybody equal in income and wealth?


Why, for example, haven't Japan, South Korea, Norway, Finland, India, and now China seen the egalitarian light?


Seems like an economic prosperity solution that Marx, Engels, and Mao brilliantly advocated in previous centuries.


More importantly, Ramesh, can you offer us a clue as to why the following countries, in an effort to stimulate economic growth, decreased rather than increased the taxes paid by their most wealthy citizens? Why on earth would Finland, Norway, Denmark, India, Iran, and the others do such a thing that is counter to the expert that you linked us to in this thread?


Isn't this an effort to increase the economy with less equality?
Liberals/progressives just will not provide me with an answer to this question.


I imagine you will also not answer this question about the economic stupidity versus brilliance of so many nations when they decrease taxes to their most wealthy citizens?


 

Marginal Tax Rate Declines in the Rest of the World ---
http://www.econlib.org/library/Enc/MarginalTaxRates.html

 


Table 1 Maximum Marginal Tax Rates on Individual Income
*. Hong Kong’s maximum tax (the “standard rate”) has normally been 15 percent, effectively capping the marginal rate at high income levels (in exchange for no personal exemptions).
**. The highest U.S. tax rate of 39.6 percent after 1993 was reduced to 38.6 percent in 2002 and to 35 percent in 2003.

  1979 1990 2002
Argentina 45 30 35
Australia 62 48 47
Austria 62 50 50
Belgium 76 55 52
Bolivia 48 10 13
Botswana 75 50 25
Brazil 55 25 28
Canada (Ontario) 58 47 46
Chile 60 50 43
Colombia 56 30 35
Denmark 73 68 59
Egypt 80 65 40
Finland 71 43 37
France 60 52 50
Germany 56 53 49
Greece 60 50 40
Guatemala 40 34 31
Hong Kong 25* 25 16
Hungary 60 50 40
India 60 50 30
Indonesia 50 35 35
Iran 90 75 35
Ireland 65 56 42
Israel 66 48 50
Italy 72 50 52
Jamaica 58 33 25
Japan 75 50 50
South Korea 89 50 36
Malaysia 60 45 28
Mauritius 50 35 25
Mexico 55 35 40
Netherlands 72 60 52
New Zealand 60 33 39
Norway 75 54 48
Pakistan 55 45 35
Philippines 70 35 32
Portugal 84 40 40
Puerto Rico 79 43 33
Russia NA 60 13
Singapore 55 33 26
Spain 66 56 48
Sweden 87 65 56
Thailand 60 55 37
Trinidad and Tobago 70 35 35
Turkey 75 50 45
United Kingdom 83 40 40
United States 70 33 39**

Source: PricewaterhouseCoopers; International Bureau of Fiscal Documentation.

 

Respectfully,
Bob Jensen

Note that PwC does Romney's tax returns and most likely is his main source regarding global tax planning.
"In Superrich, Clues to What Might Be in Romney’s Returns," by James B. Steward, The New York Times, August 10. 2012 ---
http://www.nytimes.com/2012/08/11/business/in-the-superrich-clues-to-romneys-tax-returns-common-sense.html?_r=3&ref=business

On the face of it, Senator Harry Reid’s explosive but flimsily sourced claim that Mitt Romney paid no income tax seems preposterous. Mr. Romney has denied it, and without his returns no one can say for sure. But for someone who makes millions of dollars a year, would it even be possible?

Evidently it is.

It so happens that this summer the Internal Revenue Service released data from the 400 individual income tax returns reporting the highest adjusted gross income. This elite ultrarich group earned on average $202 million in 2009, the latest year available. And buried in the data is the startling disclosure that six of the 400 paid no federal income tax.

The I.R.S. has never before disclosed that last fact.

Not even Mr. Romney, with reported 2010 income of $21.7 million, qualifies for membership in this select group of 400. But the data provides a window into the financial lives and tax rates of the superrich. Since the I.R.S. doesn’t release data for the tiny percentage of Americans at Mr. Romney’s income level, the 400 are the closest proxy.

And that data demonstrates that many of the ultrarich can and do reduce their tax liability to very low levels, even zero. Besides the six who paid no federal income tax, the I.R.S. reported that 27 paid from zero to 10 percent of their adjusted gross incomes and another 89 paid between 10 and 15 percent, which is close to the 13.9 percent rate that Mr. Romney disclosed that he paid in 2010. (At the other end of the spectrum, 82 paid 30 to 35 percent. None paid more than 35 percent.) So more than a quarter of the people earning an average of over $200 million in 2009 paid less than 15 percent of their adjusted gross income in taxes.

How do they do it?

The data show that the ultrarich typically pay low tax rates every year, but 2009 was a special case. In 2008, people with large stock portfolios and other less liquid assets were disproportionately hit with large losses on paper. One of the oddities of the tax code is that capital gains taxes are discretionary, since they must be paid only when gains are realized. And they can be offset by losses. The silver lining in a bad year like 2008 for wealthy people is that they can “harvest” losses by selling assets, then use those losses to offset any gains. They can also carry forward the losses to offset gains in future years.

There’s ample evidence that happened in 2009 among the richest taxpayers. Their average income, $202 million, dropped from $270 million in 2008 and was the lowest since 2004. Like Mr. Romney in 2010, for the richest taxpayers most income comes from capital gains and other investment income. Their net capital gains (the data doesn’t include gross gains and losses) dropped by nearly 40 percent, from an average of $154 million in 2008 to $93 million in 2009, which accounts for nearly all of their drop in total income. Even with these lower gains, these 400 taxpayers, a minuscule fraction of the population at large, still managed to account for 16 percent of all capital gains. That is the highest percentage since the data was first released for 1992, when that percentage was less than 6 percent.

Tax experts I consulted said these results almost certainly reflected aggressive use of tax-loss carry-forwards from 2008, since the stock market bottomed in March 2009 and rallied strongly during the rest of the year.

The superrich also accounted for a disproportionate amount of dividend income, which averaged over $26 million for the top 400, or over 6 percent of total dividend income, also a record. Capital gains and dividends are both taxed at a maximum rate of 15 percent, as opposed to the maximum rate on earned income of 35 percent, which helps explain why so many of the superrich pay a relatively low rate. Still, that preferential rate doesn’t get them anywhere near zero, or even 10 percent.

Edward Kleinbard, professor of law at the Gould School of Law at the University of Southern California, explained it this way, “You start with income dominated by tax-preferred income — capital gains and qualified dividends. That gets you to 15 percent. Then you use charitable contributions of appreciated securities to reduce ordinary income. But the charitable contribution deduction is capped at 50 percent of adjusted gross income. Now you’re way down, but you’re not at zero.”

Continued in article

Jensen Comment
Note that in many instances what we call a "tax savings" is not a net savings. For example, when a taxpayer has millions of dollars invested in tax-exempt bonds of towns, cities, counties, states, and schools (the so-called muni-bonds), those government entities are getting a lower cost of capital (adjusted for financial risk) than if the federal government took away those tax-exempt options in tax reforms. For example, the cost of capital for municipalities would soar much higher if their bonds were suddenly to become taxable on federal tax returns and, thereby, had to compete with lower risk corporate bonds.

One could argue that it would be better for the government to eliminate tax exemptions for municipal bonds and then subsidize all of the towns, cities, counties, states, and school districts, but the trillions in subsidies required would clobber Federal deficits now over a trillion dollars. And shrewd high-income taxpayers would simply find other ways avoid taxation.

Even if Congress should enact a flat tax, I'm not in favor of eliminating tax exemption for bonds of towns, cities, counties, states, and school districts. That elimination would be too much of a shock to all the Main Streets of America.

Having said this, I think there are many things that need to be accomplished in major tax reforms for all levels of AGI.


The American Dream ---
http://www.cs.trinity.edu/~rjensen/SunsetHillHouse/SunsetHillHouseHotel.htm 




 

"Poor" People Gaming the Income Tax Laws:  Juanita and Her Daughter Laura

Nationally, the poverty rate increased from 14.3 percent in the 2009 to 15.3 percent in the 2010
http://www.census.gov/prod/2011pubs/acsbr10-01.pdf
How Poverty is Calculated
http://www.census.gov/hhes/www/poverty/methods/definitions.html
 

 

Now we come to the second San Antonio family that games the income tax system. Col. X and his wife pay about $400 per week for two part-time maids --- a mother and daughter team. Juanita is not a U.S. citizen although she's lived in San Antonio for over 40 years. Her daughter Laura is a U.S. citizen and single parent with five children, welfare, food stamps, and free Medicaid family medical care.

Juanita and Laura also work for several of our other friends. As best I can tell, they're earning over $50,000 in cash per year that's never been reported to the government. When combined with welfare, food stamps, and Medicaid services and drugs, their income is probably equivalent to a family earning over $100,000 in reported income. And yet Juanita and Laura are considered too "poor" to even file income tax returns.

We're told that about half the taxpayers-gamers in the United States pay no income taxes when they file their returns. In addition tens of millions of other gamers are too "poor" to even file income tax returns.

Yet many of them are cash gaming the system with tax free unreported cash. This includes the following:

Note there are various instances when poor people who do not have to file an income tax return are advised to do so by the IRS ---
http://www.irs.gov/newsroom/article/0,,id=105097,00.html


"Senate report finds (massive) disability benefits fraud," by Erik Wasson, The Hill, October 7, 2013 ---
http://thehill.com/blogs/on-the-money/budget/326985-senate-report-finds-disability-benefits-fraud 

A Senate committee on Monday wrapped up a two-year investigation into the nearly insolvent Social Security Disability Insurance program and alleged weak systemic oversight allowed massive fraud to perpetrated by a Kentucky lawyer.

The investigation, spearheaded by Sen. Tom Coburn (R-Okla.), found evidence that lawyer Eric Conn collaborated with Administrative Law Judge David B. Daugherty, to wrongly award potentially billions in benefits.

The revelations of fraud and inability of bureaucrats to address weak oversight comes as the disability fund is set to run out of money to pay full benefits by 2016. It also comes as the federal government is partially shutdown and because of that officials from the Social Security Administration were not available to testify before the Senate on Monday about the fraud allegations. 

 

 
“A two-year investigation of his actions representing claimants applying for Social Security Disability Insurance (“SSDI”) and Supplemental Security Income (“SSI”) benefits uncovered a raft of improper practices by the Conn law firm to obtain disability benefits, inappropriate collusion between Mr. Conn and a Social Security Administrative Law Judge, and inept agency oversight which enabled the misconduct to continue for years,” the report concludes.

 

Coburn said that the fraud was hurting the truly disabled and the report lists a series of steps the government can take to prevent fraud. 

“Every bogus claim made on behalf of someone who is not truly disabled robs taxpayers and denies or delays benefits for someone who is truly disabled.   This is an enormous and urgent problem that should demand our immediate attention,” Coburn said in a release.

The report found that Daugherty, who was sanctioned and allowed to retire, had awarded an unusually large $2.5 billion in benefits and had received unexplained cash payments. The judge had provided the Conn law firm with assistance through lists in obtaining medical opinions for Conn clients. 

The investigation found questionable benefit awards by Daugherty based on evidence by doctors who had suspect medical credentials, and determined that Conn had destroyed a massive amount of evidence once he came under congressional investigation. 

The Democratic chairman of the panel said the investigation was troubling.

“While we don't have any evidence that this is more than an isolated case, one example of inappropriate actions of this nature is one too many,” Sen. Tom Carper (D-Del.) said. “ I am encouraged that the Social Security Administration has already acknowledged many of the issues raised by the investigation, and I understand that it has begun to implement stronger reviews and other solutions.”


Read more: http://thehill.com/blogs/on-the-money/budget/326985-senate-report-finds-disability-benefits-fraud#ixzz2h8YcyLEN
Follow us: @thehill on Twitter |
TheHill on Facebook
 

Bob Jensen's threads on entitlements disasters ---
http://www.trinity.edu/rjensen/Entitlements.htm

 


U.S. Census Report:  Only a small percentage of impoverished adults actually say it's because they can't find employment.
"Why The Poor Don't Work, According To The Poor," by Jordan Weissmann, The Atlantic, September 23, 2013 ---
http://www.theatlantic.com/business/archive/2013/09/why-the-poor-dont-work-according-to-the-poor/279900/


 

Conservative Republicans have officially made it their mission to end food stamps as we know them. Such was evident last week, when the House GOP voted to cut the Supplemental Nutrition Assistance Program, as food stamps are now known, by $39 billion over a decade and begin bulking up its work requirements, along the lines of welfare reform in the 1990s.
 


 

Whether you believe this a good or humane idea probably boils down to your take on a single question: why don't the poor, who make up the overwhelming majority of food stamp recipients (nearly 50 million of them), go to work? In 2012, more than 26 million 18-to-64-year-old adults lived under the poverty line; about 15 million of them didn't have a job during the year. Is the economy to blame? Or are personal choices at fault?
 


 

If you're a liberal, your answer is probably pretty cut and dry, and these days likely involves the word "recession." But conservatives tend to take a different view. They argue that whereas unemployment among middle class families rises and falls with the health of the job market, poverty is shaped and fueled mostly by cultural forces, that the poor could work if they wanted, and that the safety net lulls them into indolence. One of their key data points on this front comes from the Census. Each year, the bureau asks jobless Americans why it is they've been out of work. And traditionally, a only a small percentage of impoverished adults actually say it's because they can't find employment, a point that New York University professor Lawrence Mead, one of the intellectual architects of welfare reform, made to Congress in recent testimony.
 


 

In 2007, for instance, 6.4 percent of adults who lived under the poverty line and didn't work in the past year said it was because they couldn't find a job. As of 2012, it had more than doubled, leaving it at a still-small 13.5 percent. By comparison, more than a quarter said they stayed home for family reasons and more than 30 percent cited a disability. 

Continued in article


 

Jensen Comment
What the article overlooks is that millions of people who are described as "not working" really are working in the underground economy where cash wages are tax free to maids, farm workers, construction workers, care providers, pool cleaners, roofers, etc.

It's also hard to determine underground compensation relative to the minimum wage because so many such workers contract by the job rather than by the hour for housekeeping, lawn services, etc. For example, my  lawn worker in New Hampshire (one person only) that charges me $100 per job has expenses for equipment, fuel, travel, etc. but usually does the job in less than 2.5  hours. I do that part myself with my tractor and hand mower. In the winter he has a very profitable ski and sportswear shop.

He only does the front part of my lawn but is not interested in the back lawn where the ground is not a smooth
 
Up here the "cash only" housekeepers generally get paid by the job that nets out to over $35 per hour. One woman wanted over $50 per hour.
 

Estimates according to USA Today run as high as $2 trillion in the underground economy ---
http://www.usatoday.com/story/money/business/2013/05/12/2-trillion-dollar-underground-economy-recovery-savior/2144279/
 


USA Today also attributes much of the economic recovery to the $2-trillion underground economy.
 
Unemployment is not what it seems.

 


Pretending to be a shoeless and homeless bum is good business
"Bum given boots by kind-hearted cop is back to begging barefoot Panhandler has '30 pairs of shoes'," by M.L. Nestel, Kevin Fasick, and Bob Fredericks, The New York Post, March 26, 2016 ---
http://www.nypost.com/p/news/local/manhattan/kind_cop_bum_goes_from_gift_to_grift_93SD0wxjPPCxm7lzZ8vlwM

Jensen Comment
Reminds me of the time I followed a fashionably-dressed beautiful woman with two small children through a payment line at a supermarket in San Antonio. She paid for her groceries with food stamps and then a man helped her load the stash into a shiny new Cadillac Escadade (starting around at over $60,000). I overheard her children him "Daddy." My guess is that she had more than 50 pairs of shoes stored at his magnificent house.

Why do any parents want to get married? The food stamp game can be played better without getting married.


The New Yorker:
From maids to roofers to drug dealers the underground economy resulted in an estimated $2 Trillion (with a T) of underreported taxable income in 2012
Unemployment and Welfare Fraud
"The Underground Recovery," by James Surowiecki," The New Yorker, April 29, 2013 ---
http://www.newyorker.com/talk/financial/2013/04/29/130429ta_talk_surowiecki

When we all finished filing our tax returns last week, there was a little something missing: two trillion dollars. That’s how much money Americans may have made in the past year that didn’t get reported to the I.R.S., according to a recent study by the economist Edgar Feige, who’s been investigating the so-called underground, or gray, economy for thirty-five years. It’s a huge number: if the government managed to collect taxes on all that income, the deficit would be trivial. This unreported income is being earned, for the most part, not by drug dealers or Mob bosses but by tens of millions of people with run-of-the-mill jobs—nannies, barbers, Web-site designers, and construction workers—who are getting paid off the books. Ordinary Americans have gone underground, and, as the recovery continues to limp along, they seem to be doing it more and more.

Measuring an unreported economy is obviously tricky. But look closely and you can see the traces of a booming informal economy everywhere. As Feige said to me, “The best footprint left in the sand by this economy that doesn’t want to be observed is the use of cash.” His studies show that, while economists talk about the advent of a cashless society, Americans still hold an enormous amount of cold, hard cash—as much as seven hundred and fifty billion dollars. The percentage of Americans who don’t use banks is surprisingly high, and on the rise. Off-the-books activity also helps explain a mystery about the current economy: even though the percentage of Americans officially working has dropped dramatically, and even though household income is still well below what it was in 2007, personal consumption is higher than it was before the recession, and retail sales have been growing briskly (despite a dip in March). Bernard Baumohl, an economist at the Economic Outlook Group, estimates that, based on historical patterns, current retail sales are actually what you’d expect if the unemployment rate were around five or six per cent, rather than the 7.6 per cent we’re stuck with. The difference, he argues, probably reflects workers migrating into the shadow economy. “It’s typical that during recessions people work on the side while collecting unemployment,” Baumohl told me. “But the severity of the recession and the profound weakness of this recovery may mean that a lot more people have entered the underground economy, and have had to stay there longer.”

The increasing importance of the gray economy isn’t only a reaction to the downturn: studies suggest that the sector has been growing steadily over the years. In 1992, the I.R.S. estimated that the government was losing $80 billion a year in income-tax revenue. Its estimate for 2006 was $385 billion—almost five times as much (and still an underestimate, according to Feige’s numbers). The U.S. is certainly a long way from, say, Greece, where tax evasion is a national sport and the shadow economy accounts for twenty-seven per cent of G.D.P. But the forces pushing people to work off the books are powerful. Feige points to the growing distrust of government as one important factor. The desire to avoid licensing regulations, which force people to jump through elaborate hoops just to get a job, is another. Most important, perhaps, are changes in the way we work. As Baumohl put it, “For businesses, the calculus of hiring has fundamentally changed.” Companies have got used to bringing people on as needed and then dropping them when the job is over, and they save on benefits and payroll taxes by treating even full-time employees as independent contractors. Casual employment often becomes under-the-table work; the arrangement has become a way of life in the construction industry. In a recent California survey of three hundred thousand contractors, two-thirds said they had no direct employees, meaning that they did not need to pay workers’-compensation insurance or payroll taxes. In other words, for lots of people off-the-books work is the only job available.

Sudhir Venkatesh, a sociologist at Columbia and the author of a study of the underground economy, thinks that many workers, particularly younger ones, have become comfortable with casual work arrangements. “We have seen the rise of a new generation of people who are much more used to doing things in a freelance way,” he said. “That makes them more amenable to unregulated work. And they seem less concerned about security, which they equate with rigidity.” The growing importance of services in the economy is also crucial. Tutors, nannies, yoga teachers, housecleaners, and the like are often paid in cash, which is hard for the I.R.S. to track. In a 2006 study, the economist Catherine Haskins found that between eighty and ninety-seven per cent of nannies were paid under the table.

Continued in article


Labor Hoarding --- http://en.wikipedia.org/wiki/Underemployment

"Housing has been booming! Construction jobs haven’t. Here’s why," by Neil Irwin, The Washington Post, March 19, 2013 ---
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/19/housing-has-been-booming-construction-jobs-havent-heres-why/

. . .

Key to understanding the sluggish growth in construction jobs is a concept called “labor hoarding.” That’s what happens during a recession when companies don’t fire as many workers as the decline in business would seem to have justified. Firms don’t want to lose all their quality workers and then be unable to keep up with demand when business finally turns around, so they keep people on staff even when there is not enough work to keep them fully busy.

This seems to have happened on a large scale in construction in the last few years. Kris Dawsey and Hui Shan at Goldman’s economics research group calculated that the economic value added per construction worker fell from $80,000 in 2006 to under $60,000 at the end of 2012. That is labor hoarding in a nutshell.

But because construction companies never fired as many workers as the collapse in their business would have justified, that means that over the last year, they haven’t needed to hire additional workers to keep up with the uptick in business.

Continued in article

Jensen Comment
I think an even bigger reason that a housing boom is disappointing for reducing unemployment is the way housing contractors outsource much of the construction work to skilled tradesmen who are self-employed and not included in the employment-unemployment data generated by the government ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

For example, such things as basement construction, plumbing, electrical wiring, bricklaying, siding, roofing, landscaping, swimming pool installation, etc. are outsourced mainly for reasons of not having to pay benefits to employees and unemployment insurance. The self-employed subcontractors often hire unskilled and unreported helpers in the underground market where no benefits like health care, Social Security, Unemployment Compensation, and Medicare payments must be paid.

In San Antonio, for example, hundreds and hundreds of workers, many undocumented, crowd selected street corners in south San Antonio waiting for subcontractors to pick them up for day work. Their self-employed bosses have the trade skills, but they need helpers who do not have to be so skilled. The one fringe benefit is that unskilled workers often learn tricks of the trade, like bricklaying, and eventually become their own self-employed subcontractors.

I replaced my roof twice in San Antonio with the same roofing company over a period of 24 years. My roofing contractor did not have a single employee on the books and did not go up on the roof himself after the day he estimated the price of each job. I never met any of his workers who could speak much, if any, English. However, some of them who worked for my contractor were regulars over the years who became quite skilled at roofing.  I was happy with their work even if I always hated having a flat roof next to enormous live oak trees, I grew very tired of having to rake and blow leaves from my roof in San Antonio. In what remains of my life I will never again own a house with a flat roof or swimming pool.


Here is a politically incorrect tax loophole costing billions ---
http://www.wthr.com/video?clipId=7054149&topVideoCatNo=103348&autoStart=true


"For Spain's Jobless, Time Equals Money," by Matt Moffett, The Wall Street Journal, August 27, 2012 ---
http://professional.wsj.com/article/SB10000872396390443404004577577352038273664.html?mg=reno-wsj

Even though she's one of millions of young, unemployed Spaniards, 22-year-old Silvia Martín takes comfort in knowing that her bank is still standing behind her. It's not a lending institution, but rather a time bank whose nearly 400 members barter their services by the hour.

Ms. Martín, who doesn't own a car and can't afford taxis, has relied on other time-bank members to give her lifts around town for her odd jobs and errands, as well as to help with house repairs. In return, she has cared for members' elderly relatives, organized children's parties and even hauled boxes for a member moving to a new house.

The time bank not only saves her cash, she says, but also lifts her spirits by making her feel "part of a community that's taking some positive action during hard times."

As Europe's leaders struggle with a five-year-old economic crunch that has saddled Spain with the industrialized world's highest jobless rate, young Spaniards are increasingly embracing such bottom-up self-help initiatives to cope. The diverse measures—some commonly associated with rural or disaster-zone economies—supplement a public safety net that is fraying under government austerity programs.

Besides time banks, they include barter markets springing up in barrios, local currencies designed to spur the flagging retail economy, and charity networks that repurpose discarded goods. An environmental group recently launched Huertos Compartidos, or Shared Gardens, that links up owners of vacant land with those willing to plant vegetables in them and share the harvest.

The growth of time banks revives a concept pioneered by 19th-century anarchists and socialists in the U.S. and Europe, who wanted to test their philosophy that prices of goods and services should more closely reflect the labor involved in producing them.

The number of such banks in Spain—some run by neighborhood associations, others by local governments—has nearly doubled to 291 over the past two years, according to a survey by Julio Gisbert, a banker who runs a website called Vivir Sin Empleo, or Living Without Work, that tracks mutual-aid initiatives. Some economists worry that the rise of such informal systems of economic exchange is pushing more of Spain's economy underground—out of the view of regulators and tax collectors, and effectively sending the country back in time developmentally.

"It's a step backward not only for a euro country, but also for a developed country," says José García Montalvo, an economics professor at the University of Pompeu Fabra in Barcelona.

Banks and social currencies, he says, can backfire on the broader economy since the income received from such arrangements often goes undeclared, therefore depriving the government of tax revenue. Social currencies and time banks also preclude taking on debt, adds Mr. García Montalvo, which in moderate levels can help people start businesses and access beneficial goods and services that they can't afford upfront.

Others, though, say the measures represent a significant stabilizing force in society. For "people who can't find work, these kinds of possibilities of exchanges and mutual help can help make bearable a situation that otherwise would be unsustainable," says José Luis Álvarez Arce, director of the economics department at the University of Navarra.

Continued in article


Effective Tax Rates Are Lower Than Most People Believe

"Measuring Effective Tax Rates," by Rachel Johnson Joseph Rosenberg Roberton Williams, Urban-Brookings Tax Policy Center,  February 7, 2012 ---
http://www.taxpolicycenter.org/UploadedPDF/412497-ETR.pdf


February 24, 2012 reply from John Brozovsky

. . .

On a second note that has been carried in this thread. Two years ago I would have qualified as one of the people that paid no federal income tax. Plenty of other federal, state and local taxes due to a healthy accounting faculty salary but not federal income tax. I adjusted my behavior in a manner consistent with what the government ‘wanted’ to promote. I put in a geothermal system in my house which carried a 30% tax credit effectively wiping out my tax liability. While I do not think the government should be promoting social agenda with the tax code, I will certainly adjust to make use of it when it does.

 

Question
Can you lower income taxes for people who don't pay any income taxes?
Note that about half the taxpayers in the United States do not pay any income taxes.

Answer
Of course. You can increase their refunds that their already receiving before you "lower" their taxes.

"Can you cut taxes for people who don't pay taxes?" Des Moines Register, February 07, 2012 ---
http://www.rothcpa.com/archives/007655.php

Jensen Comment
It was conservative economist and Nobel Prize winner Milton Friedman who advocated simplifying the welfare system by introducing a negative income tax. We seem to have a negative income tax in place without giving Professor Friedman enough credit .


 

Question
Are there defects in statistics used the progressive and political media to rant about the economic decline of the middle class?
And has the liberal media intentionally avoided this research published almost a year ago?

Clue
According to a study led by Cornell University researchers, it's not so much a crime of commission as it is one of omission!.
Part of the problem lies in ignoring the many tax breaks available to middle class households.

"A 'Second Opinion' on the Economic Health of the American Middle Class," by Richard V. Burkhauser, Jeff Larrimore, Kosali I. Simon, National Bureau of Economic Research, April 24, 2012 ---
http://www.nber.org/papers/w17164.pdf

Researchers considering levels and trends in the resources available to the middle class traditionally measure the pre-tax cash income of either tax units or households. In this paper, we demonstrate that this choice carries significant implications for assessing income trends. Focusing on tax units rather than households greatly reduces measured growth in middle class income. Furthermore, excluding the effect of taxes and the value of in-kind benefits further reduces observed improvements in the resources of the middle class. Finally, we show how these distinctions change the observed distribution of benefits from the tax exclusion of employer provided health insurance.

SSRN charges $5 to view this paper unless you are already a paid subscriber.

The conservative media has jumped on this in a way that does not make me entirely happy on the other side of the political coin
"Obama’s inequality argument just utterly collapsed," by James Pethokoukis, Enterprise Blog, April 11, 2012 ---
http://blog.american.com/2012/04/obamas-inequality-argument-just-utterly-collapsed/

President Barack Obama has a theory of the case, yes he does. For the past 30 years, the living standards of middle-class Americans have gone nowhere even as the overall U.S. economy has grown markedly. The Obama explanation: Wealthier Americans grabbed all the money. Time to raise their taxes for the sake of “fairness.”

– Here’s Obama in January 2009: “Middle class Americans have been working harder, yet not enjoying their fair share of the fruits of a growing economy.”

– Here’s Obama in Osawatomie, Kansas, last December: “Over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk.”

– And here’s Obama this week: “What drags our entire economy down is when the benefits of economic growth and productivity go only to the few, which is what’s been happening for over a decade now, and gap between those at the very, very top and everybody else keeps growing wider and wider and wider and wider.”

Underlying Obama’s entire thesis is the work of two economists, Thomas Piketty and Emmanuel Saez. According to them, median American incomes rose just 3.2% from 1979 through 2007.  (All figures are inflation adjusted.)

So what happened to the rest of the dough? The top 10%, 1% and 0.1% grabbed all the money. Or pretty much most of it. Time to crank up taxes on the rich and spend more on the middle class. It’s not overstating things to say that the findings of Piketty and Saez form the very heart of Obamanomics, giving a powerful economic rationale for Obama policies such as ending the upper-end Bush tax cuts to Obamacare to the Buffett Rule.

But it’s just not true, according to a new study in National Tax Journal from researchers at Cornell University. (Here’s an earlier, working-paper version.) The academics, led by economist Richard Burkhauser, don’t say the findings of Piketty and Saez are wrong — just incredibly, massively incomplete. According to the Cornell study, median household income – properly measured – rose 36.7%, not 3.2% like Piketty and Saez argue. That’s a big miss.

And all income levels got richer. Yes, the very rich did exceptionally well, mostly due to technology and globalization. Incomes rose 63% for the top 5%, 56% for the top 10% and 52.6% for the top 20%.  But everyone else made out pretty well, too. Incomes rose 40.4% for households between the 60th and 80th percentiles, 36.9% for the next quintile, 25.0% for the next, and 26.4% for the bottom 20%. There’s the “shared prosperity” Obama says he wants, right in front of his eyes. (Indeed, the study finds, income inequality has actually been shrinking since 1989, with the Gini index falling to 0.362 from 0.372.)

As the Cornell study concludes:

Income inequality increased in the United States not because the rich got richer, the poor got poorer and the middle class stagnated, but because the rich got richer at a faster rate than the middle and poorer quintiles and this mostly occurred in the 1980s. .. the apparent failure of the median American to benefit from economic growth can largely be explained by the use of an income measure for this purpose which does not fully capture what is actually happening to the resources available to middle class individuals.

See, Piketty and Saez made lots of odd choices about what to measure and how to measure it. They chose to measure something called “tax units” rather than households, a move which ignores the statistical impact —  including economies of scale — of couples who cohabitate, kids who move back in with their parents after college, and senior parents who live with their adult children.

They chose to ignore the value of all government transfers — including welfare, Social Security, and other government provided cash assistance — received by the household.

They chose to ignore the role of taxes and tax credits.

They chose to ignore the value of healthcare benefits. In short, Piketty and Saez ignored a lot of stuff. Again, Burkhauser and his team;

 The apparent failure of the median American to benefit from economic growth can largely be explained by the use of an income measure for this purpose which does not fully capture what is actually happening to the resources available to middle class individuals …  When using the most restrictive income definition – pre-tax, pre-transfer tax unit cash (market) income—the resources available to the middle class have stagnated over the past three business cycles. In contrast, once broadening the income definition to post-tax, post-transfer size-adjusted household cash income, middle class Americans are found to have made substantial gains.

So the tax and regulatory polices of the past three decades did not lead to stagnation for the middle class at the hands of the rapacious rich. Claims to the contrary — such as those made by Obama, the Occupy movement, and many liberal economists — never really passed the sniff test of anyone who lived through the past few decades. And now we know why: The inequality and stagnation alarmists were wrong. And so, therefore, is the economic rationale of the president’s class-warfare economic policies. Not that economics ever had much to do with them anyway.

 

Jensen's Unpopular Views on Tax Increases
I don't think these revelations should be a basis for not imposing higher taxes on high income earners and higher capital gains taxes (if those gains are first adjusted for inflation).

I do think that this revelation should inspire more research on higher taxes for the middle class and upper class.
In an election year?
Yeah Right!

 


"The Year Solar Goes Bankrupt," by John Ransom, Townhall, March 2012 ---
http://finance.townhall.com/columnists/johnransom/2012/03/12/the_year_solar_goes_bankrupt

Get ready for a new round of green bankruptcies, as Europe trims back subsidies for solar companies and taxpayers lose their appetite for subsidizing green power.

“The mini-bubble resulting from the rush to cash in on solar subsidies in European and U.S. markets is ending, as feed-in tariffs drop in Europe while loan guarantee and tax credit programs tighten up in the U.S.,” says a new report from Bank of America Merrill Lynch according to CNBC.com.

Germany is dialing back subsidies for solar this month by 29 percent with subsequent decreases each month, according to Bloomberg.com.

Rasmussen has recently released a survey of voters that show a diminishing number of voters support subsidizing the production of the Chevy Volt.

Only 29 percent of likely voters agree with Obama’s latest proposal to include a $10,000 subsidy in the federal budget to support the purchase of every electric vehicle.

Continued in article

Jensen Comment
Many buyers of electric cars like the Chevy Volt often overlook is that if gasoline hit $10 a gallon the price of electricity used to charge a Chevy Volt will also soar, and states will commence to find ways to tax Volt owners for road repair (because of lost road taxes as gas pumps). There's no free lunch as far as electric cars are concerned.

The Chevy Volt is also a huge disappointment in many respects. It's so heavy that it gets lousy gas mileage when the batteries run down. And those batteries run down after after 25-50 miles depending upon such things as hills and temperature. It's battery range is even less than 25 miles during the winter where I live in these mountains. And it has a notoriously bad heater forcing passengers to wear their long johns in wintertime.

It's taken for granted that the Chevy Volt is not a cost-effective net energy saver at the present time. But what about the more popular Toyota Prius? ABC News just did a module on the payback of the added price to get the Prius hybrid option. On average, ABC reported it takes 17 years of driving to pay back the hybrid's additional price.

And those energy credits and deductions on houses and cars account for much of the reason that 49.5% of the U.S. taxpayers pay zero income taxes or demand net refunds.


Trying to Tax Away Inequality is Naive and Dysfunctional
"Lead Essay:: What to Do about Inequality," by  David B. Grusky, Boston Review, March/April 2012 ---
http://www.bostonreview.net/BR37.2/ndf_david_b_grusky_inequality.php

Jensen Comment
This does not mean that increasing taxes at all levels (including the rich) is not a bad idea to a point that brings more fairness into the tax code and raises some revenue for deficit reduction. Taxpayers at all levels of wealth and income are probably getting too much of a break with a tax code that is absurdly complex and literally being written by too many lobbyists.

As John F. Kennedy put it in 1963 when he endorsed a cut in this tax: "The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital" as well as "the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy." Today's Democrats in Washington are no Jack Kennedys. As President Obama told Charlie Gibson of ABC News in 2008, whether or not a higher capital-gains tax raises more revenue is irrelevant to him. He wants a higher rate as a matter of "fairness.".
"Obama's Revenue Soup: A History Lesson on Capital Gains Taxes:" The Wall Street Journal, April 9, 2012 ---
http://online.wsj.com/article/SB10001424052970203918304577241513296604128.html?mod=djemEditorialPage_h
Jensen Comment
I might buy into the "fairness" argument if President Obama would also agree to index the cost basis of long-term capital gains for inflation before applying the higher rate. It's highly unfair, for example, to treat the cost of farm land purchased in 1945 that is sold in 2012 as if the 1945 dollars had the same purchasing power as 2012 dollars. For example, in 1945 you could buy a cup of coffee for a dime and an new Chevy for $1,200. Fairness demands that capital gains taxes be applied to costs and revenues having the same purchasing power.

Why must there be punishment without any purpose other than punishment?
"Henninger: Demolishing Paul Ryan:  The Left launches on warning against any challenge to its ideological fortress," by Daniel Henninger, The Wall Street Journal, April 11, 2012 ---
http://online.wsj.com/article/SB10001424052702304356604577337922580242292.html?mod=djemEditorialPage_t

With the presidential battle begun, the Obama campaign has revived the Cold War nuclear strategy of launch on warning. At any suggestion that a conservative idea might be threatening its ideological fortress, the American left now launches ICBMs of rhetorical destruction.

So it was after the Supreme Court's hearings on the Obama Affordable Care Act, which put in jeopardy the federal command to buy health insurance. After the president green-flagged the assault, the Supreme Court's "legitimacy" was in play. The Roberts Court, wrote one blogger, is "on trial."

On current course, House GOP Budget Chairman Paul Ryan himself may exhaust their entire thermonuclear arsenal before November. Once again, the Campaigner in Chief threw the switch himself, calling the Ryan House budget "social Darwinism," "a Trojan horse" and "antithetical to our entire history." Rev. Samuel Rodriquez of the Hispanic Evangelical Association said the poor would be "budget-war collateral damage."

On Tuesday, Mr. Ryan pushed back. In an interview with the Christian Broadcasting Network, he said that in fact the Catholic Church's "social magisterium" had informed his House budget. One goal of that teaching, he said, is to prevent the poor from staying poor. Nor, he added, should individuals become lifelong dependents of their government.

Just as the left thought the regulating reach of the Commerce Clause was beyond serious challenge, it long ago decided that none dare question the moral case for public spending. That social Darwinism speech Barack Obama is giving now in defense of federal programs isn't merely a public-policy statement. It's a Democratic encyclical. Paul Ryan's ideas are worse than wrong. They are heresy.

Within the hour of the Ryan CBN interview, the blogospheric left went ballistic. "Ryan is shilling for the Catholic Church," said Democrats for Progress, folding in another recently identified group of ObamaCare heretics. And: "Mr. Ryan has drunk the libertarian Kool-Aid." A pro-spending religious coalition, the Faithful Budget Campaign, emailed, "The differences in what the organized religious community is calling a Faithful Budget and what Rep. Ryan refers to could not be more stark."

What Mr. Ryan actually said is worth quoting, because it should revive the debate over the proper relationship between individual citizens, including the poor, and the national government:

"A person's faith is central to how they conduct themselves in public and in private. So to me, using my Catholic faith, we call it the social magisterium, which is how do you apply the doctrine of your teaching into your everyday life as a lay person?

"To me, the principle of subsidiarity . . . meaning government closest to the people governs best . . . where we, through our civic organizations, through our churches, through our charities, through all of our different groups where we interact with people as a community, that's how we advance the common good. By not having big government crowd out civic society, but by having enough space in our communities so that we can interact with each other, and take care of people who are down and out in our communities.

"Those principles are very, very important, and the preferential option for the poor, which is one of the primary tenants of Catholic social teaching, means don't keep people poor, don't make people dependent on government so that they stay stuck at their station in life. Help people get out of poverty out onto a life of independence."

Subsidiarity—an awful but important word—attempts to discover where the limits lie in the demands a state can make on its people. Identifying that limit was at the center of the Supreme Court's mandate arguments.

The first major use of subsidiarity as a basis for public policy was in Pope Leo XIII's famous 1891 encyclical "Rerum Novarum" (though the word itself doesn't appear). Leo was seeking a way to protect the dignity of human beings caught during those years in the tension between unfettered capitalism and unfettered government. "The State," he wrote, "must not absorb the individual or the family." Arguments over where the balance sits have raged since.

The American left thinks this debate is settled. So, for example, any hint of Supreme Court dissent from settled doctrine justifies questions about its "legitimacy."

Continued in article

Jensen Comment
Personally I hope that President Obama wins the Presidency for another four years without getting a liberal majority back in Congress. I've truly enjoyed the relative calm that he holds over the vicious liberal press. Over the past four years the New York Times has not, to my knowledge, leaked any classified military and diplomatic documents. The progressive press has not hounded us daily to close Gitmo. Keith Olbermann can't keep a job, and Chris Matthews just makes it more and more obvious that MSNBC is a one-sided headquarters for the Democratic Party.

More importantly, President Obama might accomplish more than in the correct direction than a press-tied Mitt Romney can accomplish. It's analogous to how the Democratic Party legislature in Rhode Island can accomplish more in reducing entitlement obligations than any Republican Party legislature in any other state. However, President Obama is scary if we give him a spendthrift Congress for the next four years that will pay for pork by cranking out another $2 trillion of printed greenbacks to pay bills in lieu of taxing the middle class --- which is what really needs to be done because 98% of the taxpayers paying no income taxes earn less than $100,000 per year. There just aren't enough rich people to make up the difference. So welcome to Zimbabwe Economics in North America.

Here's a tax unfairness that President Obama will never call "unfair":
April 11, 2012 message from Barbara Scofield

I am a Tax Aide in the AARP Foundation tax preparation program at a senior center in Odessa. My final client was an atypical senior because he had social security income plus retirement pay plus interest plus dividends. In addition, he had sold two stockholding positions during the year with capital gains in both positions, one for about $11,000. His dividends were also substantial, about $6,000.

After entering all of the information, he had about $35,000 in adjusted gross income and after exemptions for filing jointly with taxpayer and spouse over 65 and standard deduction, his taxable income was about $14,000.

Some of you already know the bottom line of this tax return, but it greatly surprised me.

He owed no taxes at all because his dividends and capital gains have a 0% tax rate for 2011 and exceeded his taxable income.

While he appreciated not paying taxes, I don't think this senior felt it was "fair." It was inscrutable.

Barbara W. Scofield, PhD, CPA
 Chair of Graduate Business Studies
Professor of Accounting
The University of Texas of the Permian Basin
4901 E. University Dr. Odessa, TX 79762

 

The American Dream ---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm

To help explain what is really going on with mortgage refinancings and foreclosures I wrote a teaching case:
A Teaching Case:  Professor Tall vs. Professor Short vs. Freddie Mac
http://www.trinity.edu/rjensen/TallVerusShort.htm 

 


 

The Phony Lifetime Disabilities Gaming by Tens of Millions of People Who are Not Disabled

"Millions of jobless file for disability when unemployment benefits run out," New York Post via Fox News, February 19, 2012 ---
http://www.foxnews.com/politics/2012/02/19/report-millions-jobless-file-for-disability-when-unemployment-benefits-run-out/

Being unemployed for too long reportedly is driving people mad and costing taxpayers billions of dollars in mental illness and other disability claims. 

The New York Post reported Sunday that as unemployment checks run out, many jobless are trying to gain government benefits by declaring themselves unhealthy. 

More than 10.5 million people -- about 5.3 percent of the population aged 25 and 64 -- received disability checks in January from the federal government, the Post wrote, a 18 percent jump from before the recession.

Among those claiming disability, 43 percent are asking for benefits because of mental illness, the Post wrote. A growing number of those people are older, former white-collar workers. 

Disability claims come from the Social Security Trust Fund, which is set to go broke in 2018. Congress last week agreed to dip into the revenue stream to give a 2-percentage point tax break to working Americans.

The Post noted that the more people file for disability claims, the better for the unemployment picture since those people are removed from the jobless rolls.

Audit Failure: The GAO Reported No Problems Amidst All This Massive Fraud|
Note that most of these particular workers retire long before age 65 and are fraudulently collecting full Social Security and Medicare benefits intended for truly disabled persons
"The Public-Union Albatross What it means when 90% of an agency's workers (fraudulently)  retire with disability benefits (before age 65)," by Philip K. Howard, The Wall Street Journal, November 9, 2011 ---
http://online.wsj.com/article/SB10001424052970204190704577024321510926692.html?mod=djemEditorialPage_t

The indictment of seven Long Island Rail Road workers for disability fraud last week cast a spotlight on a troubled government agency. Until recently, over 90% of LIRR workers retired with a disability—even those who worked desk jobs—adding about $36,000 to their annual pensions. The cost to New York taxpayers over the past decade was $300 million.

As one investigator put it, fraud of this kind "became a culture of sorts among the LIRR workers, who took to gathering in doctor's waiting rooms bragging to each [other] about their disabilities while simultaneously talking about their golf game." How could almost every employee think fraud was the right thing to do?

The LIRR disability epidemic is hardly unique—82% of senior California state troopers are "disabled" in their last year before retirement. Pension abuses are so common—for example, "spiking" pensions with excess overtime in the last year of employment—that they're taken for granted.

Governors in Wisconsin and Ohio this year have led well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing] the collective bargaining rights of public employees." What are these so-called "rights"? The dispute has focused on rich benefit packages that are drowning public budgets. Far more important is the lack of productivity.

"I've never seen anyone terminated for incompetence," observed a long-time human relations official in New York City. In Cincinnati, police personnel records must be expunged every few years—making periodic misconduct essentially unaccountable. Over the past decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a cost of $3.5 million.

Collective-bargaining rights have made government virtually unmanageable. Promotions, reassignments and layoffs are dictated by rigid rules, without any opportunity for managerial judgment. In 2010, shortly after receiving an award as best first-year teacher in Wisconsin, Megan Sampson had to be let go under "last in, first out" provisions of the union contract.

Even what task someone should do on a given day is subject to detailed rules. Last year, when a virus disabled two computers in a shared federal office in Washington, D.C., the IT technician fixed one but said he was unable to fix the other because it wasn't listed on his form.

Making things work better is an affront to union prerogatives. The refuse-collection union in Toledo sued when the city proposed consolidating garbage collection with the surrounding county. (Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts eliminated funding to mow the grass along the roads, the union sued to stop the county executive from giving the job to inmates.

No decision is too small for union micromanagement. Under the New York City union contract, when new equipment is installed the city must reopen collective bargaining "for the sole purpose of negotiating with the union on the practical impact, if any, such equipment has on the affected employees." Trying to get ideas from public employees can be illegal. A deputy mayor of New York City was "warned not to talk with employees in order to get suggestions" because it might violate the "direct dealing law."

How inefficient is this system? Ten percent? Thirty percent? Pause on the math here. Over 20 million people work for federal, state and local government, or one in seven workers in America. Their salaries and benefits total roughly $1.5 trillion of taxpayer funds each year (about 10% of GDP). They spend another $2 trillion. If government could be run more efficiently by 30%, that would result in annual savings worth $1 trillion.

What's amazing is that anything gets done in government. This is a tribute to countless public employees who render public service, against all odds, by their personal pride and willpower, despite having to wrestle daily choices through a slimy bureaucracy.

One huge hurdle stands in the way of making government manageable: public unions. The head of the American Federation of State, County and Municipal Employees recently bragged that the union had contributed $90 million in the 2010 off-year election alone. Where did the unions get all that money? The power is imbedded in an artificial legal construct—a "collective-bargaining right" that deducts union dues from all public employees, whether or not they want to belong to the union.

Some states, such as Indiana, have succeeded in eliminating this requirement. I would go further: America should ban political contributions by public unions, by constitutional amendment if necessary. Government is supposed to serve the public, not public employees.

America must bulldoze the current system and start over. Only then can we balance budgets and restore competence, dignity and purpose to public service.


Solutions that Don't Work

Trying to Tax Away Inequality is Naive and Dysfunctional
"Lead Essay:: What to Do about Inequality," by  David B. Grusky, Boston Review, March/April 2012 ---
http://www.bostonreview.net/BR37.2/ndf_david_b_grusky_inequality.php

Jensen Comment
This does not mean that increasing taxes at all levels (including the rich) is not a bad idea to a point that brings more fairness into the tax code and raises some revenue for deficit reduction. Taxpayers at all levels of wealth and income are probably getting too much of a break with a tax code that is absurdly complex and literally being written by too many lobbyists.


From Paul Caron's Tax Prof Blog on January 25, 2013

NY Times Debate: What Should Tax Reform Do?

New York Times, Room for Debate:  What Should Tax Reform Do?:

Raising taxes on wealthy Americans, as was agreed upon by Congress earlier this month, won’t be enough to deal with the nation’s budget deficit. Some would argue that we also need to raise taxes on everyone. At the very least, a broader conversation about this country’s tax policy is necessary, and that means asking a simple question: What should tax reform do?

Case Studies in Gaming the Income Tax Laws ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm


"Federal Budgets and Class Warfare:  I support letting the Bush tax cuts expire. But the Obama plan isn't a serious strategy," by Michael R. Bloomberg, The Wall Street Journal, March 28, 2012 ---
http://online.wsj.com/article/SB10001424052702303816504577309434216236936.html#mod=djemEditorialPage_t

A cardinal rule of American campaigns is that candidates must appeal to the party base during primary elections and then move to the center to win moderates and independents in November. This year, on the issues of taxes and spending, that shift can't come soon enough—and not just for the Republican nominee.

Over the past year, as the candidates jockeying for the Republican nomination raced to the right, the Obama campaign has sought to re-energize its base by tacking left. The president not only embraced the frustration expressed by Occupy Wall Street protesters—which was real—but he adopted their economic populism.

Central to fixing the country's problems, he has argued, is making the wealthiest Americans pay their "fair share," even though the top 5% already pay 59% of all federal income taxes, while 42% (actually 49.5%) of filers have no federal income tax bill at all (or got a check from the government via the earned-income tax credit). Warren Buffett's secretary became the public symbol of this strategy, even appearing at the president's State of the Union address. (Mr. Buffett, of course, did exactly what lower capital gains taxes are designed to encourage: He invested!)

I don't believe in class warfare, and not because I don't want to pay more in taxes. I think the Bush tax cuts should expire for all Americans—you, me, everyone—as part of a long-term plan to rein in the deficit. We are all in this together. Pitting one group against another not only divides us in counterproductive ways but offers one group the false promise of something for nothing.

That's exactly what got our country into this mess in the first place. Mortgages were approved with no money down for borrowers with no income and no assets. Meanwhile, the federal government was running up huge deficits during a period of economic growth and telling the American people not to worry about the bill. Even today, four years later, none of the major candidates for president has developed a plan for paying the bill. Instead, all are still offering something for nothing.

The president asserts that 98% of Americans do not need to pay more in taxes, that we just need those earning more than $1 million to pay a minimum of 30% in federal income taxes. But according to Congress's Joint Committee on Taxation, this plan would generate only $1.1 billion in revenue for the coming fiscal year. To put that in perspective, the federal government this year is spending $1.2 trillion more than it is taking in.

Whether you support it or not, the president's tax plan is a political strategy, not an economic one. It will have virtually no bearing on the federal deficit or our ability to finance current spending levels.

The Republican presidential candidates have unveiled tax plans that are just as divorced from reality. They say they'll make the Bush tax cuts permanent while also eliminating the deficit. If you believe that, I've got a bridge to sell you. Republicans who emphasize economic freedom would have a lot more credibility if they'd stop promising a free lunch. Any candidate who says we can cut taxes and balance the budget is either delusional or dissembling.

Both parties' candidates are also promising major reductions in spending. But there's one small catch: They don't have the courage to tell the public which programs they'll cut, and how they'll reduce entitlement spending, to balance the budget.

This is a problem not just for voters but for businesses. Nearly every CEO and business leader I speak with says virtually the same thing: They are hesitant to make major investment decisions until they know how Washington intends to grapple with its huge deficits. That uncertainty is a major drag on job creation because the price of uncertainty for business is paralysis. Companies with healthy balance sheets that could be creating jobs are sitting on the sidelines, waiting to see if the federal government will begin increasing market stability by reducing long-term deficits.

If the federal government passed a real deficit-reduction plan, business leaders would respond as they did in the 1990s, when President Clinton and Congress adopted a long-term deficit-reduction plan that gave businesses more certainty about the market. A serious deficit-reduction plan that both increases revenues and reduces expenditures would be the most effective economic stimulus plan Washington could adopt.

As the two parties sketch out their general-election campaign platforms, both should commit to a reasonable and responsible goal—closing the deficit in 10 years. Even given Washington's current dysfunction, this can be achieved through a simple two-step process: The president can declare that he will allow the Bush tax cuts to expire for all income levels, and Congress can take an up-or-down vote on the Simpson-Bowles deficit-reduction plan, as a bipartisan group of House centrists will propose this week. That plan calls for $4 trillion in savings by capping discretionary spending, slowing the growth of entitlement costs including Social Security, and raising revenue through tax reform.

I believe there is enough support in both parties and both houses to pass Simpson-Bowles. And the American people deserve to know, before the November election, where their representatives—and the candidates for president—stand on it.

The era of something for nothing must end if we are to get our country back on track. The nominee who is more willing to tell that truth to the American people will win the election.

Mr. Bloomberg is mayor of New York City.


Tax Reform:  France Versus the United States Versus Greece

France
"Tax Expenditure Theory and the Reform of French Loopholes," by Eric Pichet, SSRN, April 18, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041897
Thank you Paul Caron for the heads up.

Abstract:
This study has a dual ambition. One is to develop, for the first time ever, a complete Theory of tax expenditures and, therefore, a proposal for reforming the French tax loophole system. Having noted the proliferation of such loopholes in France and elsewhere over the past 20 years or so, we provide a succinct analysis of their political origins and highlight the absolute necessity of stopping a deviation that risks undermining the very foundations of efficient and fair taxation, the only possible basis for a social consensus and citizens’ ongoing willingness to pay tax. The first section, from a theoretical point of view, offers our Theory of tax expenditures as well as a new and more complete definition of this construct, thereby tracing an idealized border between tax determination modalities, the elements that are inherent to any benchmark tax system and actual tax expenditures. The second section, from a pragmatical point of view, recalls three possible methodologies for assessing tax expenditures, evaluating the many different analysts that work in France (all deeply rooted in an initial spending paradigm) before offering our own methodology, one based on the double criteria of effectiveness and fairness. On this basis, we analyze France’s 17 main tax expenditures today in 2012 and invite the next Parliament to keep any legitimate tax expenditures (after modifying them, if need be) while eliminating many costly, ineffective and inadapted loopholes, along with any that generate windfall effects (what we might call illegitimate tax expenditures). Lastly, we suggest a new global architecture for tax expenditures, one relying on clear and coherent foundations.

United States
"Tax Reform Holds Promise, But if Not Done Carefully, Could Increase the Deficit and Inequality and Harm the Economy Policymakers Must Not Let Tax Reform Become 'Trap' That Produces Harmful Policies," by Chuck Marr and Chye-Ching Huang, Center for Budget and Policy Priorities, June 8, 2012 ---
http://www.cbpp.org/cms/index.cfm?fa=view&id=3792

Policymakers are increasingly discussing the need for tax reform, with a number of them calling for large cuts in tax rates — to levels well below the Bush tax rates — as a core element of reform. They contend that sweeping but unspecified cuts in tax expenditures (credits, deductions, and other tax preferences) will offset the cost of deep cuts in tax rates and, depending on the proposal, possibly generate some revenue to reduce deficits. Many who favor this approach go a step further and call for policymakers to commit to specific cuts in tax rates before they agree on any specific tax expenditures to reduce.

Such approaches pose big risks. They could produce tax “reform” that increases both deficits and inequality because while cutting “tax expenditures” sounds appealing in the abstract, cutting specific tax expenditures enough to offset the costs of substantial new rate cuts and contribute meaningfully to deficit reduction would likely prove difficult, if not impossible, to achieve. Indeed, the difficulty of cutting popular tax expenditures — from the mortgage interest deduction to 401(k) tax preferences to the deduction for charitable contributions to the exclusion for employer-sponsored health insurance — is why those who urge policymakers to commit upfront to specific, large rate cuts rarely specify any tax expenditures to cut. In fact, they often highlight tax expenditures that they would refuse to touch, such as the preferential tax rate for capital gains.

Continued in article

Greece
Tax Reform in Greece is Probably a Hopeless Cause ---
http://taxjustice.blogspot.com/2010/03/tax-evaders-freedom-fighters.html

Reply from Apostolos A. Ballas

The comments on tax reform in Greece are a bit dated. Since some of the reforms are discussed in France and the USA, let me give you my view on the issue:

a)      A number of tax expenditures / loopholes have been eliminated or substantially reduced. For example, only 10% of the interest element in mortgage payments is treated as income reduction. Similarly, medical expenses and payments for (private) pension plans.

b)      The system now relies on income indicators. That is, if you can afford a house in Kolonaki, Athens (equivalent to 5th Av, New York) then most probably you are rich and you have to prove that you are not earning a substantial income. I consider this very rough justice, but justice at last. Indeed, I am very happy that a number of such individuals are enjoying the “hospitality” of the Greek prison system.

c)      Last year, a new law on property taxes was enacted. To give you an indication on the rates, I had to pay 1,5% on the market value of my flat. This proved to be highly controversial and will likely be scrapped. Personally, I found the law dumb because (in its initial form) it was asking people on unemployment benefits to pay X euros while there was no variation of the rates depending on the number / accumulated value of properties owned.

d)      Tax evasion is both an ethical / legal issue and an economic one. We should not confuse the two, however. If the rich and famous do not pay their taxes, then no one will. Nevertheless, the situation in Greece is that tax evasion is a widely accepted practice because it is to the advantage of all individuals to evade taxes. Let me give you an example. Medical expenses were a tax deductible item. Thus, my incentive was to ask the doctor to give me a receipt. He / she would record the revenue and be taxed (marginal rate 40%) and I would be getting a (marginal rate) 20% tax deduction. Now, I am not getting the deduction. If the doctor offers a 20% discount for not issuing a receipt, what are the incentives? Another issue is that a large proportion of the untaxed income comes from people close to the taxable income threshold who simple do not file a tax return. If they are not in the system, how can they be caught? Last, but not least, does anyone know of a good study of the level of tax evasion AFTER TAKING INTO ACCOUNT 2ND ORDER EFFECTS. I mean by this: some of the tax not paid goes into consumption which is taxed (VAT). Thus, state revenue losses are actually less that they initially seem.

e)      Finally, a point about the situation in Greece which most do not understand. The current situation is that we live in an environment where there is wealth, but no liquidity. Thus, even the best intentioned citizens if they cannot pay taxes, they will not pay taxes. Your family, not your taxes, is your priority in the Greek environment.

And one accounting issue for you Bob: how can a country mislead about its financial statistics before it issues its financial statistics? Another comment: A country’s debt (most of it at least – mainly excluding NATO financial transactions) is a matter of public record. It is approved by parliament (at least in Greece), you can read about it in Bloomberg screens. In Greece we have made many mistakes but let us all behave us adults. No one fooled anyone who did not want to be fooled. And since I am Greek a comment about the European siuation: Creon in Antigone was absolutely right in his own terms, but Gods still punished him very, very harshly.

Best regards,

Apostolos

Jensen Comment
I was sad to see the role Goldman Sachs and other U.S. banks played in the filing of phony economic performance reports ---
 

. . .

To keep within the monetary union guidelines, the government of Greece had also for many years misreported the country's official economic statistics. At the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001, for arranging transactions that hid the actual level of borrowing.[20] The purpose of these deals made by several successive Greek governments, was to enable them to continue spending, while hiding the actual deficit from the EU. As reported in the table below, the revised statistics revealed that Greece at all years from 2000-2010 had exceeded the Euros stability criteria, with the yearly deficits exceeding the recommended maximum limit at 3.0% of GDP, and also the debt level clearly exceeding the recommended limit at 60% of GDP.

Continued in article


June 13, 2012 reply from Scott Bonaker

Paul Caron, on his TaxProf Blog has a list of the Top 5 Tax Paper Downloads that includes two new papers in the #4 and #5 spot.

 

http://taxprof.typepad.com/taxprof_blog/2012/06/top-5-1.html

#4 Carter: New Life for the Death Tax

Elizabeth Ruth Carter (LSU), New Life for the Death Tax:

This article examines the ascendancy of wealth redistribution as the policy underpinning the federal estate tax through the lens of sociology and argues that, by attempting to ensure equal access to the American dream by penalizing only those who have fulfilled its promise, the federal estate tax places fundamental American values in irreconcilable conflict. The reason that the current system does not work, I argue, is rooted more in history and sociology than it is in economics. The solution is not necessarily the repeal of the federal estate tax. Nor is the solution replacing the estate tax with an inheritance tax, an accessions tax or taxing inheritances as income, as proposed by other commentators. The estate tax plays — or should play — an important role in ensuring vertical and horizontal equity in our federal tax system. Perhaps more importantly, it also has the potential to provide a safety net of revenue during times of exigency — such as that currently faced by our nation. In order to achieve these goals, however, we must first correctly recognize the fundamental problem with the current system. When the history of the tax is examined from a sociological and historical vantage point, the real problem is clear.

#5 Kant and the Ethics of Taxation

Gary Banham (Managing Editor, Kant Studies Online), Kant and the Ethics of Taxation:

In this article I address the normative basis Kant provides for taxation. There exists a significant literature already that applies “Kantian” principles to the understanding of taxation but it does so in a limited way that shows little grasp of the structure of Kant’s ethics. Here I set the justification of taxation Kant provides in the setting it requires prior to treating his account of different types of justified taxation. The relationship between Kant’s ethics, his political theory, and his view of taxation thus becomes clearer. Subsequently I treat at some length the degree and nature of Kant’s view of redistributive taxation before concluding with a discussion of some implications for views of redistribution in contemporary political philosophy.

 

 


"Clock Ticks on U.S.'s Fiscal Time Bomb," by David Wessel, The Wall Street Journal, March 28, 2012 ---
http://online.wsj.com/article/SB10001424052702304177104577309203491177784.html?KEYWORDS=defuse+the+fiscal+time+bomb

Pundits and pollsters speculate hourly on the outcome of the next Republican presidential primary. Business executives and investors increasingly focus on whether Congress and the president will defuse the fiscal time bomb they have built—or whether they will be so paralyzed that the bomb will go off at year-end.

Without congressional action before Dec. 31, here's what happens:

A payroll-tax holiday ends, which means a tax increase for workers of as much as 2% of wages.

Income-tax rates revert to pre-George W. Bush levels, rising not only for the rich but for nearly all taxpayers.

Across-the-board cuts in domestic and, particularly, defense spending are triggered.

The federal debt bumps up against the legal ceiling, at some point yet to be determined, reviving confidence-rattling headlines about a potential U.S. default.

That's just a partial list. Federal Reserve Chairman Ben Bernanke calls this "a massive fiscal cliff." Abrupt tax increases and spending cuts, which together would equal roughly 3.5% of the nation's gross domestic product, would devastate an economy not fully recovered from a deep recession.

No one in Washington wants that. The rule of thumb is that if no one in Congress or the White House wants something, politicians will find a way to prevent it. But these days, well, you never know. There are three possible outcomes:

Scenario One: The grand compromise.

One reason this is politically tough is that there is no pain-free deficit cure. With a lid on annually appropriated spending, most Republicans' answer to long-term deficits is to cut future benefits from what they would otherwise be. The Democrats' answer is to cut benefits and raise taxes. Resolving that disagreement is key.

If Mitt Romney or another Republican wins the White House, congressional Republicans won't flinch on taxes in a lame-duck session. And if Barack Obama is re-elected and Republicans lose some seats in the House? Would an emboldened Mr. Obama and chastened Republicans cut a deal? Possible, but unlikely.

Just in case, though, the deficit-reduction lobby and sympathetic members of Congress are drafting plans. To make a point, a small bipartisan bunch is putting one tax-hike-and-spending-cut plan to a vote in the House this week.

Odds: 25%.

 
Scenario Two: A standoff.

If neither side wins big in November, Congress may be unable to pass legislation that defuses the time bomb—unless a measure hitches a ride to must-pass legislation to, say, lift the federal debt ceiling or avert a government shutdown.

If lawmakers can't agree, then taxes will go up and spending will be cut across the board. Then Congress and the president (the re-elected one or a new one) would negotiate from a new starting point, softening the blow retroactively. This has been done before, but it's unsettling and messy, and adds to already more-than-ample uncertainty.

Odds: 25%.

 

Scenario Three: Kick the can down the road.

Faced with unappealing alternatives, Congress is always tempted to look for a way out. The obvious one: Suspend the tax increases and across-the-board spending cuts for a time, declaring they would endanger the economy and national security. Promise—really, truly—to fix the deficit later. No one will advocate for this in advance, but at year-end, particularly if the economy isn't doing well, a six- or nine-month delay will be appealing.

To save face, this probably would be paired with another legislated commitment to deal with the deficit later. That may be expedient, but it won't help rebuild public trust. After all, Congress set these Dec. 31 deadlines last August to try to force its own hand.

Odds: 50%.

 

All these odds will change before year-end.

It matters who wins in November, and how decisively. A sweep by either party lifts the odds that its approach will prevail and reduces the odds of gridlock.

Continued in article


 

Bob Jensen's threads on the entitlements disaster are at
http://www.trinity.edu/rjensen/Entitlements.htm

Tax Foundation Facts & Figures (Free) ---
http://taxfoundation.org/files/ff2012.pdf

To help explain what is really going on with mortgage refinancings and foreclosures I wrote a teaching case:
A Teaching Case:  Professor Tall vs. Professor Short vs. Freddie Mac
http://www.trinity.edu/rjensen/TallVerusShort.htm 

Bob Jensen's blogs and threads ---
http://www.trinity.edu/rjensen/threads.htm