I'm Shocked - Shocked! - to Find There's Tax Avoidance Going On Here!

I must say I'm laughing my ass off.

Over the last week or so a controversy has been brewing involving Luxembourg and the tax games it has allowed multinational corporations to play by setting up paper subsidiaries in that country.
The background of this is that someone leaked Luxembourg tax rulings obtained by some 340 multinational companies to the International Consortium of Investigative Journalists, which has posted the rulings on its website.  The leak has created a storm of controversy, with officials from around the world vowing to take action to prevent tax avoidance through the use of Luxembourg as a tax haven.

Attention has focused on Jean-Claude Juncker, who is the current President of the European Commission and who, prior to assuming that post this year, had been either Prime Minister or Finance Minister of Luxembourg for over two decades.` Here is the latest from the Irish Times:

European Commission president, Luxembourg’s Jean-Claude Juncker, took political responsibility for his country’s tax practices on Wednesday, saying he would fight tax evasion with more automatic exchange of information between countries.

Juncker ( 59), who was the tiny Grand Duchy’s finance minister or prime minister for 24 years until the end of last year, has avoided the media since a network of investigative journalists reported last week that Luxembourg had granted sweetheart deals to some 340 multinationals allowing them to avoid billions of euros in tax.

The revelations put him under intense pressure to make clear his position on the tax deals and raised questions about whether they create a conflict of interest for him as commission chief.

“I am politically responsible for what happened in each and every corner and quarter (of Luxembourg),” he said, adding that while in line with Luxembourg and European laws, the tax practices may not have been ethical.

“It is true that sometimes when it comes to the application of different tax rules that are sometimes diametrically opposed that can lead to results that are not in line with ethical and moral standards that are generally applicable,” Mr Juncker said.

He explained that tax authorities in Luxembourg were independent of the government, but took political responsibility for the policies, which he said were a result of different tax regimes in EU countries.

“I am not the architect of what you could call the Luxembourgish problem,” Mr Juncker told reporters in a surprise appearance at a daily briefing of the European Commission.

“There is nothing in my past indicating that my ambition was to organise tax evasion in Europe,” he said.

The European Commission is investigating several tax schemes offered by Luxembourg to large multinational corporations to see if they broke EU laws on state aid.

“Everything that has been done has been in compliance with national legislation and international rules that apply in this matter,” Mr Juncker said.

“This state of affairs is due to the fact that we have to deal with the outcome of different standards. If there is no tax harmonisation throughout Europe ... then this can be the result.”

Please.

This kind of stuff has been going on for decades.  I know - I worked for years in the international tax group of one of the Big 4 firms (left there 10 years ago).  And it's not just Luxembourg.  The Netherlands is notorious for issuing these kinds of rulings.  So is Switzerland.  All of these countries engage in this sort of practice.  And the idea that they are doing it for reasons other than facilitating tax avoidance is just ludicrous.

As for the lack of tax harmonization in Europe, that is a feature, not a bug.

Everybody who is involved in tax administration, particularly when it involves multinationals, knows this kind of stuff is happening.  The idea that it is some big secret is hilarious.

Hahahahahahaha!  I'm having trouble getting myself up of the floor I'm laughing so hard.

As near as I can tell, this has nothing to do with countries being concerned about tax reduction schemes being carried out by multinationals.  It has everything to do with politics.  It's been clear from the outset that certain countries in the EU (namely the United Kingdom, but I'm sure there are others) were opposed to Juncker's elevation to EC president.  My guess is that this is a deliberate attempt to delegitimize him.

The real question is whether the fact that these kinds of arrangements are now becoming headlines will result in any real change in the way multinationals are taxed.

I seriously doubt it.

Qui Tam

Today's BNA Daily Tax Report has a story about a qui tam suit brought in NY against Vanguard.  The story is behind a firewall, but a related report at the Philadelphia Inquirer can be found here, and a post about it in the Tax Prof Blog is here.  A qui tam case is essentially a whistleblower case, where a person brings a lawsuit against someone for cheating the government.  Most states, and the federal government, have whistleblower laws that permit private parties to sue on behalf of the government if they discover wrongdoing.  The real party in interest is the government - it is entitled to the amounts recovered by the plaintiff - although the plaintiff is entitled to a percentage of the recovery.  While most such laws involve cheating in government government contracts (the first qui tam statute was passed by the federal government during the civil war to combat war profiteering), a few permit whistleblower claims that the party involved is cheating on their taxes.  The federal False Claims Act does not apply to tax obligations, but there is a separate statute that applies to tax cheating.  Here is a story about a tax whistleblower that received a nine-figure reward from the IRS.

Now I happen to personally know someone who filed a qui tam action in NY state court regarding what I would consider fairly egregious tax evasion by a private investment fund.  As in the Danon case described in the Inquirer article, the NY AG decided not to pursue the case.  Unlike the Danon case, the person decided to withdraw the complaint before it was unsealed.  I'll talk about why in a moment.

But first, the following passage from the BNA article is instructive:

Brian Mahany of Mahany & Ertl in Milwaukee, who represents Danon, told Bloomberg BNA that New York is the only jurisdiction in the U.S. that allows qui tam claims for unpaid corporate income taxes. Such actions are always filed under seal, he said, to allow the attorney general time to investigate or develop the case.

The fact that the attorney general has chosen not to intervene does not say anything about the merits of the case, Mahany said. Danon still can pursue the case on his own, though he could not settle with Vanguard without the state's stepping back in.

Goodman [of Horwood Marcus, a Chicago law firm, described by Bloomberg as a critic of tax qui tam actions] agreed that the attorney general's decision not to intervene does not necessarily say anything about the merits of the case. It often happens in qui tam actions that the AG decides to step in later, as the case progresses, he said.

And the calculation of whether to intervene is often political, Goodman said.

“They might think it's a great case, or they might back off because it's a contributor, a company involved in politics. Or they don't want to dismiss it because they don't want to be seen as soft on companies that are being aggressive in their tax positions.”

Goodman noted another factor the attorney general might consider: Many people in New York are Vanguard shareholders and if the case resolved in Danon's favor, it would mean their investments would be worth much less.

That is not an outcome that would endear any elected official to the voters.

As explained in the article, a qui tam case is usually filed under seal, with the AG and the state tax department given the opportunity to investigate the claim and take over the case if they feel it has merit.  In the case I am aware of, the investment firm involved was well-connected politically, and immediately upon learning of the suit pulled out all of the stops lobbying AG Schneiderman not to intervene in the suit.  The AG complied, notwithstanding the fact that he had trumpeted the creation of his Taxpayer Protection Bureau to crack down on what he described as "large-scale tax cheats."  Like I have stated numerous time, when a politically connected company has a tax problem, the first person they call is their lobbyist.  I am not at all surprised to hear in this instance that the AG has declined to intervene in the case.  In fact, to my knowledge, there has been only one case which has been unsealed that the AG has pursued - a case for sales tax evasion against Sprint.  My acquaintance's claim was filed before the AG announced his decision to take on the case against Sprint.  Obviously, Sprint hired the wrong lobbyist.

Now I am somewhat surprised that the plaintiff in this case, unlike the plaintiff in the case I am personally aware of, decided to pursue the action notwithstanding the AG's refusal to sign on.  The reason can be found in the comments to the Tax Prof Blog post, where the first commenter asked the following question:

Is lawyer whistle blowing a violation of professional ethics rules?

Now, my acquaintance had a background as a lawyer, but was not employed by the investment fund in that capacity.  Instead, he was part of the finance department.  As such, he was arguably not practicing law when he came upon the information regarding the tax evasion that was going on within the firm.  Nevertheless, there is clearly a reluctance to divulge confidential information when placed in that kind of position, particularly given the reputational issues.  As one person responding to this question stated:

At first glance, there does not seem to be any exception to the ethical obligation to maintain a client's confidences that would permit this lawyer to make these disclosures. Not that anyone with any sense would ever again trust him as their counsel.

In fact, as another commenter noted, it is not an ethics violation if the lawyer is seeking to stop an ongoing or future crime.  Nevertheless, anyone in a position of confidence who breaches that confidence, regardless of the justification, is probably destroying any chance he has of obtaining a similar position in the future.  My acquaintance decided the risk to his career was greater than the possible reward of pursuing the action, and therefor withdrew it.

Whatever else happens as a result of this case, Danon's career working as a high level tax attorney is undoubtedly toast.

The Well Fargo Case, in a Nutshell

This morning a number of news outlets, including Bloomberg, Reuters, and even Politico, are reporting on a tax case involving Wells Fargo, where the IRS denied a tax refund of about $148 million.  Wells Fargo lost at the lower court level, and had appealed to the U.S. Supreme Court.  Yesterday, in a victory for the IRS, the Court denied the appeal.

It just so happens that I had recently written a brief piece about this case.  So I thought I'd take the opportunity to explain in layman's terms exactly what Wells Fargo (WF) did, and why it lost.  It is also a lesson on how well-intentioned provisions of the tax law - in this case, Section 351 - can be taken advantage of by sophisticated tax planning.

Section 351

Section 351 is designed to permit the incorporation of a business without recognizing a taxable gain.  Assume, for example, that someone who owns and operates a retail store wants to incorporate his business.  He does so by transferring the property of the business - the building, furniture and fixtures, equipment, supplies, inventory, etc. - to the corporation.  In exchange for the property, the business-owner will get back stock in the corporation.  Usually, the corporation will assume obligations relating to the business, such as the mortgage on the building or a credit line from a bank.

Now a corporation is a separate person under the tax law.  Ordinarily, if I transfer property to another person and receive property back, I have to recognize gain equal to the difference between the value received and my cost for the property.  It's as though I sold my property for cash, and used the cash to acquire the property I received in the exchange.  In special circumstances, however, the tax law says I don't have to recognize the gain.  One of those is provided in Section 351, which says that if I transfer property to a corporation in exchange for its stock and after the transfer I control the corporation, I don't gain or loss on the exchange.  This Section allows people to incorporate their business without recognizing gain.

Now, when you incorporate a business like this, the corporation that acquires the business generally "steps into the shoes" of the person that transferred the business.  In other words, the corporation will compute income from the business in virtually exactly the same manner as the individual did before he incorporated.  For example, when the corporation sells inventory received in the exchange, its profit on the sale depends upon the cost of the inventory. The tax law says the corporation's cost is the same as it was for the transferor, so that the profit on the sale is the same as the individual owner of the business would have made if the business had not been incorporated.  If one of the assets transferred to the corporation is a lease (suppose the store was a leased building rather than an owned one), the corporation will generally be able to deduct rent on the lease in the same manner as the individual did prior to the transfer.

Oh, and one more thing.  What happens if the individual later sells his stock in the corporation?  When you sell stock, you have to report a gain or loss equal to the difference between your cost (basis) for the stock and the amount you receive on the sale - if you receive more than your basis you have a capital gain, and if you receive less than your basis you have a capital loss.  The tax law says that the individual's basis for the stock is the same as the basis of the assets transferred to the corporation.  If the corporation assumes obligations associated with the business, the basis is reduced by the amount of the obligations.  For example, if I transfer a building that cost me $100,000 with a mortgage of $80,000 (my equity is $20,000) to the corporation for its stock, my basis in the stock is $20,000 - my cost for the property minus the mortgage taken over by the corporation.

Now, Section 351 does not just apply to a transfer of a business.  It applies to a transfer of any property to a corporation in exchange for stock, even if the property is not part of a business.  As long as the person transferring the property controls the corporation immediately after the exchange, gain or loss is not recognized on the exchange of property for stock.

The Wells Fargo Case

Wells Fargo had engaged in several mergers with other banks, and after the mergers it consolidated a lot of the operations.  As a result, it ended up with a lot of real property that it didn't need for its business anymore.  Most of the property was not owned by WF, however.  It was leased from other owners.  WF had legal obligations to pay the rent on the leases but the properties were idle and, at most, they were able to sublease them for short periods of time at rentals that were not sufficient to cover the lease obligations.  In other words, the properties were losers.

If you have a lease on property that you no longer need, you can (assuming the landlord permits) transfer that lease to another person.  If the rent due under the lease is less than the rental value of the property, a transferee will ordinarily pay the transferor an amount which represents the future value of the difference.  For example, if the lease has 10 years left to go, the rent is  $1,000 per month but the rental value is $1,200, a transferee is getting the benefit of 120 months at $200 per month, and will pay the transferor an amount equal to the present value of that benefit.  In that case, the tax law says the transferee can deduct the amount paid over the term of the lease.

On the other hand, if the rental value of the property is less than the rent under the lease, then the transferor may pay the transferee to get rid of the lease.  In other words, if the numbers above were reversed, the transferor is getting a benefit of $200 per month by getting rid of the lease, and will pay the transferee for that benefit.  In that case, the transferor is making the payment, and gets to deduct the full amount when the lease transfer occurs.

However, Wells Fargo decided to get greedy, and use Section 351 as a way to get a double deduction.  Here's how it worked.  WF had 21 leases on properties at various locations in the United States on which it paid rents that were greater than the rental value of the property.  In fact , the rents were substantially greater - they calculated the amount it would have to pay to terminate the leases at $426 million.  They transferred these leases plus $430 million worth of government securities to a subsidiary corporation named Charter in exchange for stock.  As you can see from these numbers, the net value of the transfer was $ 4 million.

Now leases are funny animals under the tax law, because they represent a future obligation to pay for a future benefit.  This is different from, say, a loan, which is an obligation to pay in the future for a benefit provided in the past (like the mortgage on the building I discussed above).  So WF stated that the lease obligations weren't the kind of obligations that should reduce the basis (cost) of the stock.  It claimed that the basis for the stock was $430 million.

So, according to WF, the stock they received in the exchange had a "cost" of $430 million, even though it was worth only $4 million.  Naturally, they sold the stock for $4 million, and claimed a $426 million loss.

Now, some people may say, what's the big deal?  I said above that WF calculated it would cost them $426 million to terminate the leases and that if they paid that amount to somebody to take over the leases they would get a deduction for it.  So what's the big deal if they get the same loss by selling stock?

Well remember I said that the corporation "steps into the shoes" of the transferor?  In this case, Charter will be able to continue deducting rent on the leases.  And it does not take much in the way of tax planning for the buyer of Charter stock to be able to use those deductions to reduce its own taxable income.  Stated differently, the buyer paid WF $4 million in order to receive $426 million of tax deductions.

There's the double deduction - WF deducts the loss on the stock, and Charter deducts the loss on the leases.

Epilogue

Just a couple of additional notes about this.

First, the idea for getting this kind of double deduction was very popular in the 1990s.  WF paid a fee to a tax advisor of $3 million for assistance in putting this transaction together.

When Congress caught wind of it, they amended the tax law to stop it.  The amendment essentially provided that lease obligations like those transferred by WF to Charter would reduce the cost basis of the stock received in the exchange.  Under current law, then, WF would not be able to claim that its cost for the stock was $430 million - its cost would be $4 million.  But that was not the law in the year that WF sold the stock and tried to deduct the loss.

So how did the IRS win the case, if technically the law was on the side of WF?  Well, there's a long line of cases dating back to the early thirties that says that if a transaction has no economic substance and its only purpose is to generate a tax benefit, the transaction can be ignored as a sham and the benefit can be denied.

This concept, known as the "economic substance doctrine," drives a lot of people crazy.  They think that if they're bright enough to find technical loopholes, they ought to be able to take advantage of them.  Today I looked at the docket for the Supreme Court case and saw that there were about a dozen amicus curiae briefs filed, all on behalf of the bank.  Among those filing briefs were the American Bankers Association, the Chamber of Commerce and the Cato Institute.  Reading the brief of the Chamber is particularly fun.  They are apoplectic that the lower court found for the IRS.  They must be pulling their hair out that the Supreme Court - as business-friendly as it is - declined to take the case.

Kickstarting Tax Reform

So Senators Wyden and Hatch have decided that they want to kickstart the tax reform process by holding hearings this summer.  Thus far, they have identified three areas they want to explore:

1. Education Tax Incentives
2. Taxpayer Privacy
3. "Modernizing" corporate taxation.

I shudder to think what this last item is.

More thoughts as we get closer to the hearings.

They're Falling Like Flies

Camp is not seeking re-election.

With Baucus to China and Camp now retiring, the two forces behind the drive for tax reform are now gone.

The issued their proposals and said "good luck boys - it's up to you to get it done."

Fat chance.

The Red-Face Test

Does it even exist anymore?

The advance sheets today let me to this case, involving a scheme to generate tax losses to offset gains recognized on an unrelated transaction. In this case, the company implementing the scheme was wholly-owned by a tax advisor that had sold the scheme to other clients:

Petitioner admits that courts have consistently found similar tax avoidance schemes lacking in economic substance. However, petitioner attempts to distinguish its transaction. First it attempts to differentiate the economics of its transaction....

Petitioner also attempts to distinguish its transaction on the basis that it did not initiate the scheme on the advice of a tax shelter promoter. Courts have often found that a taxpayer's involvement with a tax shelter promoter indicated that tax avoidance primarily motivated a disputed transaction. [cases] Petitioner argues that the absence of a promoter in this case demonstrates that its transaction represented legitimate tax planning. We disagree. Mr. Haber is a tax shelter promoter. He did not need to consult a third-party promoter, because he knew the scheme well enough to execute it himself.

The guy who argued this case before the Tax Court is a senior partner at a major international law firm.  He's been practicing longer than I have.  It's shocking to me that he actually made such a stupid argument.

Unbelievable.

David Cay Johnston on IRS Dysfunction

Via DDay comes this article by David Cay Johnston in Tax Analysts regarding a revolt happening at two IRS offices in New York, where a veteran lawyer has sent a letter to the Senate Finance Committee complaining about mismanagement there:

Jane Kim, a 10-year veteran chief counsel attorney for the Small Business/Self-Employed Division, wrote that "a sustained pattern of abuse" by chief counsel's supervising lawyers in Manhattan and Long Island, has led to "gross waste of government resources, gross mismanagement, violation of labor laws, and active abuse and retaliation against employees."

The complaint depicts a workplace culture in which favored employees are given light workloads, while their colleagues who pick up the slack face discipline and retaliation if they chafe at unfair treatment. Meanwhile management turns a blind eye to the problems -- when it isn't actively making them worse.

As a result of that negligence, tax cheats often get away without paying, taxpayers needing help go unaided, and good employees suffer more stress in an agency already struggling to deal with budget cuts and public scorn.

The whole thing presents a rather sordid picture.  Having been in Ms. Kim's position, I can certainly feel for what she's going through.

But I wasn't at the IRS when I was in Ms. Kim's position.  I was in private industry.  The fact is, there are a lot of people who succeed in their careers by kissing up and shitting down.  That's just the way of the world.  It happens in government as well as outside of government.  I am sure that there are a lot of people out there in both government and private companies that have experienced this kind of crap.  And yes, it has as big effect on productivity and destroys the morale of people on the receiving end.

The good thing from the perspective of Ms. Kim is that she has an outlet - writing to her legislators.  People in the private sphere more often have no recourse at all but to quit.  My experience has been that most people in high management positions get there by kissing up and shitting down.  Complaints are viewed as breaking that rule, are frowned upon, and usually fall on deaf ears.

I wish Ms/ Kim the best as her complaint is acted upon.  But honestly, I don't hold much hope.  Senior managers aren't the only ones who succeed by kissing up and shitting down.  Politicians do too.

Bill Black on Corporate Lawyers - Tax Lawyers are Just as Bad

Via Yves, Bill Black has written a couple of postscriticizing a New York Times article about the indictments of  senior partners at Dewey & LeBouef, the law firm that went bankrupt in 2012.  His main criticism is the lede of the article itself: “4 Accused in Law Firm Fraud Ignored a Maxim: Don’t Email.” As Black explains:

The article’s hook is the ironic failure of top lawyers to follow their own advice that they purportedly “always tell their clients” on how to commit fraud with impunity by ensuring that there is no paper (or electronic) trail of “incriminating” evidence of their crime.

. . . .

What the Deal Book describes as corporate lawyers’ “cardinal rule” is clearly unethical and often a crime.  A corporate lawyer who counsels a “client” on how to commit a crime without being prosecuted by using fraud mechanisms that prevent the FBI from finding the “incriminating” evidence establishing the crime has made himself a co-conspirator who is aiding and abetting the fraud.

Ah, Bill, would that it were the case that lawyers recognize this fact. Unfortunately, this kind of thinking is all too common in the corporate world generally and the corporate bar specifically. And this is something that has been slowly eroding over a long period of time.

Sun Capital

The Supreme Court has denied certiorari in the Sun Capital case.

In Sun Capital, the First Circuit ruled that the hedge fund was engaged in a trade or business.  Sun Capital owned the majority of the stock of a company that was party to a multi-employer pension plan and went bankrupt.  Under the Employee Retirement Income Security Act (ERISA), members of a controlled group of trades or businesses are liable for the employer contributions of other members of the controlled group. By holding that Sun Capital was engaged in a trade or business, the court found it liable for the contributes owed to the plan by its bankrupt company.

The Sun Capital case has implications far beyond the ERISA issue. Finding that a hedge fund is engaged in a trade or business can severely impact its investors.  For example, a tax-exempt entity is exempt from tax on investment income (interest, dividends and capital gains) but not on income earned by engaging in an "unrelated trade or business."  The taxation of a foreign person differs depending on whether the income earned by the investor is trade or business income rather than investment income.  Hedge funds are partnerships, which are not separate taxable entities.  If the income of the partnership is trade or business income, then the partners have to report that income as trade or business income and pay tax accordingly.

If the government decided to push this theory beyond the ERISA area, literally tens of billions of tax could be at stake.

Thus far, the Treasury Department has been coy about whether they are inclined to push the issue.  Up to now, all we've heard is that they are studying the case.

We'll see....

The State and Local Tax Deduction

Sahil Kapur notes that one of the big fighting points in the Camp bill is the elimination of the deduction for state and local taxes, which benefits people who live in states that have higher taxes than others, also known as "blue states" with Democratic leaning governments.  Yes, this is true.  Here is a map showing a distribution of the benefit of the deduction:

What Democrats should do, of course, is contrast this map with this one:

So the states that benefit from the deduction tend to be those that also pay more in federal taxes than they receive in federal spending.  Those with low state taxes, on the other hand, tend to need more help from the federal government.

Funny how that works, right?  

This is just another way of increasing the subsidies from rich states to poor states, in the name of "equity." 

The Camp Tax Reform Plan

I'll have a lot to say in the coming days and weeks about the Camp Tax Reform plan.  My focus will be on the provisions in the bill the media are not talking about, particularly corporate taxes and changes to the international tax rules.

But I do want to focus now on one thing I noticed in the revenue estimates for the bill, which we should pay attention to when we hear the rhetoric on what the effects of various aspects of the bill will be.

I was kind of shocked when I saw that the Joint Committee on Taxation estimated that one aspect of the bill - the repeal of the alternative minimum tax - would reduce projected federal tax liabilities by over $1.3 trillion for the period 2014 through 2023 (see page 4 of this table).  The projected reduction in revenues from cutting the regular tax rates is only $544 billion.  So the AMT number seems just tremendously high to me.

And sure enough, I did a little looking and found this report from the Tax Policy Center compiled last August showing that, after the amendments to the AMT made in 2012, the projected AMT over the same period would be $385 billion.  That's a huge difference!  So what accounts for this?

My guess is that this has something to do with how the JCT models the revenue effects of various proposals that interact with one another.  In this presentation on how they model revenue effects (page 19), the JCT states:

• Many tax bills make multiple changes to the tax code that interact with each other, such as

• Simultaneously changing tax rates and adding or eliminating deductions, or

• Adding a category of activity that is eligible for an expiring tax credit while extending the credit.

• A revenue table with separate estimates for each provision in such a bill accounts for interactions either by 

• Adding a separate line for interaction effects or

• Incorporating the interaction effect between the two provisions into the estimate of one of the provisions.

• Incorporating the interaction effects into the estimate of one of the provisions is referred to as "stacking" the interacted provision after the non-interacted provision 

• For example, for a bill that reduces tax rates and changes deductions, the estimate of the tax rate change may be "stacked first" (without the interaction effect) while the deduction estimates ("stacked after the rate change" would incorporate the interaction effect by being estimated after the rate change.

OK, I understand that.

But still, I can't possibly fathom how they get to such a huge effect for the AMT.  I mean, standing alone, the effect of repealing the AMT could be no higher than the $385 million current projection.  And think about the other changes they are proposing.  First, they are eliminating deductions.  Eliminating deductions reduces the difference between the AMT base and the regular taxable income base.  Stated differently, one effect of eliminating deductions is to reduce the AMT.  Thus, if you model the effect of eliminating deductions first, the effect of eliminating the AMT goes down.

The other major change is, of course, to the regular tax rates. Granted, reducing the regular tax rate will have the effect of increasing the AMT if no other changes are taken into account.  But the effect of reducing regular rates is shown at to be $544 billion over the ten year period.  Are you really telling me that the effect of changing the regular tax rates - absent any other changes - would be to reduce regular taxes by $544 billion, but increase the AMT by $950 billion?  That makes no sense at all.

So what is really going on here?  I think they're fudging the numbers.  I think that the Republicans don't want to show that the cuts in regular rates will reduce revenues by $1.5 trillion, so they are dumping a huge amount of the revenue effect into the obscure AMT line hoping nobody would notice.

Maybe I'm wrong, but somebody has to convince me otherwise.

The Camp Plan

Bits and pieces of the Camp plan are leaking out, a day ahead of its release.  What we know so far:

1. Two rate brackets of 10% and 25%, and
2. A surtax of 10% on "certain types of earned income" over $450,000.

"Certain types of earned income" means salaries. It doesn't include farmers or manufacturers or, presumably, businesses.  And it doesn't include income from investments.

This is a cut in the top rate of about one-third, give or take.  There is no indication yet what credits and deductions (tax expenditures) will be cut in order to make up for the lost revenue.  But there is some indication that the poorest taxpayers will be hit by cutting back on refundable credits.

That last part is really funny.  On Sunday I was watching a panel discussion with Forbes' Avik Roy, also of the Manhattan Institute, who was arguing that we shouldn't raise the minimum wage.  Instead we should strengthen the Earned Income Tax Credit.

Evidently, the Republicans in the House don't agree with him.

No mention is made of any changes in the treatment of capital gains.  And no mention is made of any change in corporate taxes.  I guess we'll just have to wait and see.

According to the Post, "the vast majority of taxpayers would see little change in the ultimate size of their tax bills..."

Translation:  the very rich will get a large tax cut.  The rest of us will get nothin'.

What They Really Mean by "Reform"

This post yesterday by Digby is illustrative.  A post by Charlie Savage discussing the new Justice Department guidelines regarding protecting journalists concludes:

The rules cover grand jury subpoenas used in criminal investigations. They exempt wiretap and search warrants obtained under the Foreign Intelligence Surveillance Act and “national security letters,” a kind of administrative subpoena used to obtain records about communications in terrorism and counterespionage investigations.

And then she cites Marcy Wheeler saying this:

Which makes these “new guidelines” worth approximately shit in any leak — that is,counterintelligence — investigation. 

Exasperated, Digby responds:

This is the stuff that drives you crazy.  They know they've gone too far and have to respond.  But they simply create some razzled dazzle "reform" that addresses a different issue and pretend that they've done something.  

And I think: you think this is bad, wait until you see how they want to "reform" the tax code!

Baucus Confirmed

This can only be good:

Baucus’s impending departure will set off a round of musical chairs among Senate committee chairmen. Sen. Ron Wyden (D-Ore.) is expected to assume control of the finance panel, a move that likely will lead to Sen. Mary L. Landrieu (D-La.) taking the top spot on the Senate Energy Committee.

GOP Legislation: The Art of Newspeak

I just came across a blurb that the Ways and Means Committee is marking up a bill called the Save American Workers Act of 2014.  The purpose of the bill is to amend the ACA to change the definition of "full-time worker" from a person working an average of 30 hours per week to one working an average of 40 hours per week.  The effect is to vastly reduce the number of employers subject to the employer mandate.

Here is a link to the Joint Committee on Taxation description of the bill.

How this is supposed to "save American workers" is not explained.

KPMG Violates Independence Rules

The SEC issued an order against KPMG last week for violating the auditor independence rules.

This topic has not been in the headlines.  "Auditor independence" is one of those arcane issues that most people ignore.  But it is fundamental to the smoothe operations of the securities markets, and the compromised independence of the auditors is a basic problem in the marketplace today.

An auditor is someone who job it is to inspect the books of account of a company and report on whether they are being properly maintained and whether the financial reports of the company are accurate.  There are, essentially, two kinds of auditors.  An internal auditor is someone who is hired by the management of the company and provides reports to management.  An external or independent auditor purportedly acts on behalf of the investors of the company and issues reports intended for those investors.  Since the enactment of the securities laws in the 1930s, all public companies are required to have an independent auditor undertake an audit to the companies and certify as to the accuracy of the financial statements of the company.  When the company issues its annual report that says its earnings were $5.00 per share in 2013, the independent auditor's job is to say "yep, that's accurate!"

Today's Exercise in Cognitive Dissonance

Today's updates brought two items to my inbox.

First, the OECD has published a draft model template for country-by-country reporting by multinational corporations. The goal is to require companies for the first time to provide tax authorities with details of how they allocate their income, taxes and business activities on a country-by-country basis.

The draft requires companies to list its “constituent entities” (i.e., subsidiaries and affiliates), effective place of management, and important business activities for each country in which it does business. It also requires a company to report on a country-by-country basis, its revenue, earnings before income tax, income tax paid on a cash basis to the country of organization and to all other countries, total withholding tax paid, stated capital and accumulated earnings, number of employees, total employee expense, and tangible assets other than cash and cash equivalents.

This is a pretty big deal if you ask me.  I'll have more after I've been through the draft template.

But....

The second item in my inbox had this headline:  "Don't expect tax reform this year."

*Sigh*

Wrong Thinking on Taxes

David Atkins, who writes on Digby's blog (among others), links to this article in the Times on Saturday, which apparently has gone viral.  And I admit it is a good read and reflects my own perception (from years of experience) of the Wall Street mentality.

But I want to focus on David's concluding sentence, which I find troubling:

Wall Streeters often whine that people hate them without good reason. But of course that's not true. People hate them for very good reason. There are the inevitable degenerate moral cretins who watch a film like The Wolf of Wall Street (or Michael Douglas' Wall Street for that matter) and want to be that guy. But those with a moral compass read accounts like this, or ones by Michael Lewis, or films about Wall Street, and understand that while the boring business of loans, liquidity and investment has value, the destructive, wealth-addicted, deeply immoral and Objectivist culture of modern Wall Street cannot be salvaged.

It must be cleansed with the purifying fire of punitive taxation and regulation.

Can we stop talking about taxation being "punitive"?  Please?

Look, taxation fundamentally is the means by which our society, through its government, generates the resources to undertake activities that everyone benefits from.  Contrary to the views of conservatives, we don't impose taxes to punish, and we should stop characterizing taxation as a form of punishment.

Look, I agree that taxation, like other actions taken by the government, can be a means to encourage helpful actions and discourage harmful actions.  That's why we tax tobacco and alcohol products.  But this is regulation, not punishment.

Look, I think there are legitimate, regulatory reasons for imposing a marginal income tax rate of 90% on the highest incomes.  Concentration of wealth is a problem in a free market economy.  The whole concept of anti-trust laws is a recognition that concentration of wealth and economic power is anti-competitive, and anti-free market, and in the long run harmful for the economy and for society (to say nothing of the way that it distorts our democracy, and makes the government less responsive to the desires of the vast majority of our citizens).  That doesn't make a 90% tax rate "punitive."

As a liberal, I think we need to stop talking in these terms.  Labelling taxation as punitive is buying into the language of the right-wing anti-taxers.

Taxation is a way to fund the government and to regulate behavior.  It is not punishment.

IRS Budget (UPDATED)

As Forbes reports, the IRS has gotten hammered in the latest appropriations bill:

The Internal Revenue Service is one of the biggest losers in the 2014 budget deal agreed to last night by House and Senate negotiators. Under the agreement, the service would get just $11.3 billion, which is $526 million below its 2013 budget and $1.7 billion less than President Obama requested.

Read in conjunction with the Taxpayer Advocate report discussed here, this is, not surprisingly, a disaster. And there is no question that this is payback by Republicans.  After all, the appropriations bill contains the following provisions:

SEC. 107. None of the funds made available under this Act may be used by the Internal Revenue Service to target citizens of the United States for exercising any right guaranteed under the First Amendment to the Constitution of the United States.

SEC. 108. None of the funds made available in this Act may be used by the Internal Revenue Service to target groups for regulatory scrutiny based on their ideological beliefs.

And just for good measure, they added this one as well:

SEC. 105. None of funds made available to the Internal Revenue Service by this Act may be used to make a video unless the Service-Wide Video Editorial Board determines in advance that making the video is appropriate, taking into account the cost, topic, tone, and purpose of the video.

Note that the Service-Wide Video Editorial Board is an internal IRS organization created to review videos created for training and other purposes,, in response to the Inspector General's report on the 2010 training conference in Anaheim that raised so many hackles last year.  So basically, this provision mandates that the IRS do what it said it was already going to do.

There is, of course, no evidence that the IRS committed the acts described in Sec 107 and 108 either.  As the Forbes article deftly puts it:

If you like irony, you might keep in mind that the 501(c)(4) mess was caused in part by a lack of resources. The short-staffed agency was so overwhelmed by requests for tax-exempt status that poorly trained workers tried to shrink the backlog with what turned out to be clumsy shortcuts (word searches for “tea party,” “progressive,” and the like). Thanks to Congress and its budget, this will now get worse.

Yep.

UPDATE:  It's a done deal.  Gotta love this from US News: "Lawmakers hope passage of appropriations bill ushers in new era of cooperation in Congress." Yeah, right.

The Taxpayer Advocate Report

The IRS Taxpayer Advocate issued her Annual Report to Congress this week.  From the Executive Summary, here is a list of the five biggest issues noted in the report:

The Most Significant Issues Facing Taxpayers and the IRS Today

1. TAXPAYER RIGHTS: The IRS Should Adopt a Taxpayer Bill of Rights as a Framework for Effective Tax Administration

2. IRS BUDGET: The IRS Desperately Needs More Funding to Serve Taxpayers and Increase Voluntary Compliance

3. EMPLOYEE TRAINING: The Drastic Reduction in IRS Employee Training Impacts the Ability of the IRS to Assist Taxpayers and Fulfill its Mission

4. TAXPAYER RIGHTS: Insufficient Education and Training About Taxpayer Rights Impairs IRS Employees' Ability to Assist Taxpayers and Protect Their Rights

5. REGULATION OF RETURN PREPARERS: Taxpayers and Tax Administration Remain Vulnerable to Incompetent and Unscrupulous Return Preparers While the IRS Is Enjoined from Continuing its Efforts to Effectively Regulate Return Preparers.

Now, I am a big sanguine on the first issue.  The advocate doesn't say that taxpayers don't have sufficient rights.  What she says is neither taxpayers nor IRS employees knows what those rights are.  OK, I can understand this.  After all, IRS Publication Number 1, entitled "Your Rights as a Taxpayer", could have a much more prominent link on the main page of the IRS website, I guess, and could have a lot more information in it (or links to other appropriate information).

But note, this is question of education:  educating the public about what rights they have, and educating IRS personnel about the rights of taxpayers.

Of course, we know what happens when the IRS spends money for educating its workers.  You get stories like this:

IRS faces new scrutiny for excessive spending on conferences

The Internal Revenue Service spent an estimated $49 million on at least 220 conferences for employees over a three-year span beginning in fiscal 2010, according to a forthcoming report that will prompt fresh scrutiny of the already embattled agency.

The most recent report I have seen says the IRS has about 90,000 employees.  Spending $49 million on training conferences works out to about $500 per employee, spread out over a three-year period.  This is a pittance, and yet it is considered to be out of line by our politicians and our mainstream media.

Hell, I could argue that the whole "IRS targeting" scandal is as sign of a dysfunctional IRS, crippled by a lack of personnel needed to address important issues as they arise.  We have employees cutting corners creating "BOLO" lists and inquiries by the local agents in Cincinnati that made to the National Office that took months to respond to. From the report at the link:

In fiscal year 1992, the agency had 117,945 employees, according to data from TRAC-IRS at the University of Syracuse. By 2012, this had fallen 23 percent to 90,280. At the same time, the number of returns increased 27 percent, from 113.1 million to 143.4 million. How can we expect the IRS to square this circle?

But we have a bunch of people who make a good living hating on the IRS, and doing everything to do to keep it from doing its job.

We need a government.  To have a government we need taxes, and we need an agency to collect them. As our economy grows, we need that agency to grow as well.  It's not rocket science.

The second recommendation by the Taxpayer Advocate should be the first.  We need a working, functional tax collection agency.