Friday, February 27, 2004

A Billion Here, A Billion There -- Pretty Soon We're Talking Real Money

Some argue that you can't tax golden eggs because the geese will just run away. If California reinstates its top 11% tax rate on incomes over $400,000, then what's to stop the rich from moving out of Beverly Hills and Belvedere and Napa and settling down in Dry Duck Gulch, Nevada? After all, Nevada's state income tax rate is zero -- there's no Nevada tax on personal incomes.

Consider, tho: IRS Statistics of Income for year 2001 show 30,843 Californians filed tax returns that year reporting income over $1,000,000. California had 16% of the 193,000 income millionaires in the US that year, tho just 12% of the US population. Nevada, with 0.75% of US population had 1,919 income millionaires -- 1% of the total. So even tho California now has a 9.3% state income tax rate (and no breaks for capital gains) and Nevada has a 0% rate, they seem to be equally attractive for high income folk. Maybe state income taxes (which are deductible, so reduce Federal taxes somewhat) aren't that big a factor in deciding where to live. Maybe CA is more expensive than NV, but also nicer. Maybe CA spends tax money in ways that the rich find attractive. (Sure, they don't want to pay for it. Who does?)

The same 16:1 CA to NV ratio seems to apply to the truly rich. According to the current issue of Forbes, California is home to 66 billionaires, while Nevada has only four.

But what if people *say* they live in Nevada but really spend lots of time in California? Turns out that the tax authorities are wise to such scams. Here's the technical definition of "California resident". Ask yourself -- if you were a billionaire, would you want to spend your remaining time on earth in a courtroom fighting tax fraud charges? What's the point of having money if you have to spend all your time fighting to hang on to it?

California Driving

Governor Arnold's personal charisma seems to have made folks forget the mess he made of the car tax. Remember? The first thing Arnold did as governor was to cut the automobile Vehicle License Fee, a cut that has generated $824,000 of campaign contribution gratitude from California's car dealers.

Technically, what Arnold did was to block the scheduled ending of a temporary tax cut. The VLF is a kind of wealth tax, one that takes the place of a local property tax on autos. The Department of Motor Vehicles collects it as part of annual auto registration, but the money raised is transferred to local governments -- cities and counties. Since the 1940's the normal VLF rate has been 2% of a car's DMV bluebook value. However, during the state revenue boom in the late 90's, the legislature decided to temporarily lower the VLF, down to 0.65% of DMV bluebook. In order to protect local revenue, the state "backfills" the amount of the cut, paying the difference to the cities and counties. There are about 30 million motor vehicles in California with a total value of $280,000,000,000, so the VLF is big money -- the 2% rate would produce about $5 billion a year for local governments, and the "backfill" costs the state about $3.5 billion annually. (Note that the backfill is categorized as state spending for budget purposes.)

The temporary cut in the VLF was to have expired in 2003 due to the state's current revenue squeeze. However, just after his inauguration, Gov. Humvee ordered that it stay in place -- apparently giving no thought as to how to keep funding the $3.5 billion annual backfill. The cuts in the university and health care budgets were then improvised to cover the local government's need for backfill money to keep paying the cops and firefighters. In retrospect, it reads like a script for Terminator Part V -- the final victory of machines over humans.

On March 2 Californians are to vote on the Gov's $15 billion bailout bond, about $400 in new debt for every person in the state. To pay it off, we'll be hocking a 1/4% slice of the sales tax for the next 20 years or so. Like the Ancien Regime in Bourbon France, or the provincial Mandarins of Late Imperial China, we'll have to assure the moneylenders of our willingness to squeeze, rack and grind down the laboring masses in order to fund the prompt payment of every penny of principal and interest. Interesting, that the shortfall this bond will cover is roughly equal to the total revenue that the state has lost from cutting the VLF.

Here are links to more VLF info from California's legislative analyst:

How VLF works and who bears the burden. 3% of the revenue comes from 25% of the cars -- those bought for under $5,000. 30% of the revenue comes from the 8% of the cars that are valued at more than $25,000. If you want to pay less tax, buy a cheaper car.

How the backfill works. Total backfill costs so far: $15.6 billion. And because VLF is an itemized deduction for federal income tax, for every $100 reduction in VLF Californians will have to pay about $15 more to the IRS. It adds up -- about $2.4 billion lost so far, and counting.

And what's my position on the bailout bond? Under rational government it would be the lesser evil, but under Gov. Charismanegger, who sensed no inconsistency in attacking "reckless spending" while increasing backfill spending by $3,500,000,000.00, success on the bailout bond will just encourage more folly. So... I suppose I'll just hold my nose and vote against it.

Tuesday, February 17, 2004

“To tax and to please, no more than to love and to be wise, is not given to men.”Edmund Burke, 1774

A slow week on the tax blogging front. Finished reading Perfectly Legal: The Covert Campaign To Rig Our Tax System To Benefit The Superrich And Cheat Everyone Else by New York Times reporter David Cay Johnston. It's generally well-written with good examples -- Johnston can dig, and he can tell good stories.

Professor Sheldon Polllack gives Perfectly Legal a mixed review in Tax Notes (February 9, 2004 at page 795). While agreeing that Johnston presents a "somber portrait of a sinking tax system", Pollock argues that the premise of Perfectly Legal -- that the superrich have secretly rigged the tax system to benefit themselves and cheat everyone else -- -- is “infuriatingly simplistic” hype. Pollock’s view, which he explains in more depth in his book Refinancing America: the Republican Antitax Agenda (2003), is that the distress of the income tax system is due to a malfunctioning “electoral system that encourages politicians of all stripes to curry favor with voters by granting them special tax breaks.” Republicans who are ideologically biased in favor of tax cuts find common ground with Democrats who festoon the tax code with tax expenditures -- special credits and subsidies that are the equivalent of spending but are easier to enact and once enacted are rarely reviewed.

From this neutral corner it looks like Johnston wins on points. Both would agree that the swings, shifts and “reforms”of the last 23 years have undercut whatever logical integrity the tax code may have had, and weakened the moral rationale for voluntary compliance. But Johnston emphasizes what Pollack downplays: the connection between tax system malfunction, increasing concentration of wealth and income, and the ongoing efforts to shift the tax base away from capital and onto labor. The civil servants and legal technicians who drafted the 1954 tax code would be aghast to learn that dividend recipients are now taxed at a maximum of 15%, when an equal amount of income from work bears an effective tax rate of 38% or more after Social Security payroll taxes are factored in.

Perfectly Legal is well worth reading as an expose of the hypocrisy of legislators who make tax policy. It’s not deliberate corruption that makes taxes complex – there are no lobbyists for cross-references. There is a more fundamental duplicity at work. It is the need to hide the tax, to avoid been seen doing what one must do to raise the revenue that pays for civil society. Our incumbent tax legislators are masters of the seemingly impossible art of taxing and being loved at the same time.

Postscript: That same February 9th issue of Tax Notes has an article by Martin Sullivan showing that US corporations are sheltering an increasing share of their profits in offshore tax havens. His analysis of Commerce Department data indicates that almost half of all foreign profits of US-based multinationals are in tax havens. The top 4 haven countries (Netherlands, Ireland, Bermuda and Luxembourg) garnered 30% of all profits, tho only 18% of the assets, 9% of sales, 5.3% of plant and equipment and 3.4% of the work force were in these countries. Is this an example of Pollack's trend or Johnston's? How much point is there in having national tax systems try to keep money from flowing to low-tax zones in a world of global finance? And who benefits -- the "rich", the wannabee managers, or the anonymous pension trusts, index funds and charitable institutions that now constitute world finance capital? To paraphrase Vespasian, "Money has no Country".

Sunday, February 08, 2004

Loopholes Aren't Loopholes When They Benefit Rich Folks

The current Bush administration budget is a study in dishonesty. Today’s example is taken from Chapter 18, "Tax Expenditures", which discusses the huge, hidden subsidies produced by income tax rules that allow a “special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of liability.” In other words, the Loophole List.

This list, which is required under the Budget Act, highlights the holes in the revenue system. It makes it possible to see, for example, that treating employer-paid medical insurance as a tax-free fringe benefit reduces revenues by over $100 billion per year – a hidden demand-side subsidy for health care that equals 1/8th of all individual income tax receipts. (p. 294)

How, then to show the effect of last year's tax law changes that cut the top rate on capital gains from 20% down to 15%, and lowered the top rate on dividend income from 35% down to 15%? It’s a potentially embarrassing calculation, because taxpayers with income over $1 million receive one-fifth of all dividends and over half of all long-term capital gains.

So what do the Bush budgeteers do? They move the goal posts. They change the rules in mid-game. They gerrymander the definition of “tax expenditure” so tax cuts for the rich don't count. In Budget-speak:

Although not in line with previous reference tax law or normal tax law baselines, our tables exclude from the list of tax expenditures JGTRRA’s reductions in the tax rate on dividends. Reference law used for the FY 2005 Budget includes capital gains as tax expenditure, but only to the extent capital gains have not previously been taxed under the corporate income tax. Similarly, the lower tax rate on dividends is not included as a tax expenditure under reference law because dividends have generally already been taxed under the corporate income tax. This exception was made as part of Treasury’s ongoing reevaluation of the tax expenditure concept and to consider gradually changes in the baseline tax system to conform more closely with a comprehensive income tax that excludes double tax on corporate income. The same treatment is extended to the tax rate differential applied to capital gains on corporate shares, including JGTRRA’s increase in this differential.” (p. 300)

Ongoing re-evaluation?

"’When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean—neither more nor less.’"

Monday, February 02, 2004

Disappearing Taxes: The $339 Billion Hole in the US Budget

It's right there, hidden in plain view. It's on Table 19-1, Chapter 19, page 329 of the detailed backup book for the new US Budget - the book with the less-than-seductive title of "Analytical Perspectives". Total US Government tax receipts in fiscal 2003 were $339 billion less than was estimated when that year's budget was being put together back in February 2002. That's 339,000,000,000.00 dollars. It's a 15% shortfall in US government revenue.

What happened? That's the curious part. "Newly enacted legislation" - i.e. the 2002 and 2003 tax cuts reduced receipts by $76 billion, of which $40 billion represented a 20% reduction in corporate income taxes. "Lower than anticipated wages and salaries" -- the difference between rosy forcasts and actual economic performance -- reduced tax collections by $62 billion. But most of the shortfall -- $201 billion dollars -- was due to "technical factors".

Technical factors?

What on earth are "technical factors"? On p. 330 the gnomelike technicians at the Office of Management and Budget explain: "This net reduction was primarily attributable to lower-than-anticipated collections of individual and corporation income taxes of $131 billion and $44 billion, respectively", which is about as meaningful as saying that unemployment is caused by people being out of work. By way of contrast, spending was "only" $78 billion above the Bush Administration forecast.

Something odd is going on. It can't be incompetence. No one can be this incompetent. Could the crop-circle paranoids be right in suspecting that the US government is now being run by and for a gang of tax cheats? Gov. Groepenegger looks like Mother Theresa by comparison.

Sunday, February 01, 2004

For He Is an Englishman

While Sunday blogsurfing thru the old china hands, acerbic expats and fellow Gweilos, Professor Tax observes a new star swing into view: ShangHai Eye. Read his description of coming home to England, and ask yourself -- "can this fellow write, or what?" It's fortunate, or even "fantastic" that no one in California is this literate, so as to spare us the temptation of Envy.

"What poet would not grieve to see,
His brethren write as well as he?
But rather than they should excel,
He'd wish his rivals all in hell."
Jonathan Swift (1739)

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