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!