We Americans have fought with our internal revenue code since 1913. But slicing and dicing income, deductions, and a dizzying array of business and personal credits is hardly the only way that Uncle Sam could raise the money he needs to pay for guns and butter. State and local governments also use sales taxes, payroll taxes, property taxes, excise taxes, and "gross receipts" taxes to fill their hungry coffers, too.
And then there are the more exotic taxes, the kind that sometimes live only in philosophers' heads. The nineteenth-century economist Henry George argued that a land-value tax would raise wages, improve land use, and eliminate taxes on economic activity. More recently, economists and politicians have proposed carbon taxes, consumption taxes, and European-style value-added tax alternatives.
Here's one you probably never considered. Earlier this month, a Duke University philosophy PhD candidate named Erick Sam took a microscope to the concept of an "endowment tax." This is a vaguely Marxist tax on "a person's potential earnings, which can provisionally be thought of as the maximum income a person could earn or could have earned over a given time period." (Yikes!)
Sam opens his paper by asking how we determine a person's "ability" in the first place. He acknowledges that we don't "inhabit a reality where endowment is readily apparent," then goes on to consider standardized test scores, genetic capabilities, and educational achievement as proxies for ability. He even mentions one proposal to impose a "privilege tax" based on the income your parents earned during your childhood!
Now the fun starts. Sam walks us through the utilitarian considerations of an endowment tax, and how it counters the "substitution effect" that income taxes impose on the desire to work. "Distributive considerations are only instrumentally relevant to this calculus, since different distributions will tend to be correlated with distinct aggregate utilities." (Well, duh???) He goes on to address the Kaplowvian argument for endowment taxation as the ideal Haigs-Simon income tax, where "income" equals consumption plus all accretions to wealth over a given period of time. (Huh?)
Next, he drags us kicking and screaming through a dense swamp of non-utilitarian considerations. These include Shaviro's deontological argument for endowment taxation rooted in the theory of luck egalitarianism, Stark's libertarian challenge to Rawlsian arguments favoring the priority of liberty, Markovits' algorithm for balancing endowment taxation with talent slavery, and Dworkin's auction and insurance scheme for eliminating inequality. (It's ok, we're just as lost as you are.)
After 69 pages, Sam thankfully suggests leaving the whole idea in one of the counter factual worlds where it might actually work. Here on Earth, though, endowment tax fans face three unpleasant choices: 1) make peace with how it does violence towards liberty, 2) acknowledge that it's both inefficient and unattractive on its own terms, or 3) accept its problems of "talent slavery, counter factual talent slavery, and servitude to objective standards of rationality." It's enough to make our current tax code sound pretty dreamy!
So . . . we've established that our current tax code may not be the worst way to raise government revenue. But that doesn't mean you have to like how much you pay! So call us when you're ready for some real-world savings, and we promise to explain them in actual English!
Tuesday, February 27, 2018
Wednesday, February 14, 2018
Romantic Tax Collectors Love Valentine's Day, Too
It's February, and love is in the air. Restaurants are advertising intimate specials for two. Florists are rolling out the red carpet. And in the greeting card racks across the country, Hallmark's most accomplished poets are debuting their new verse.
We're talking about Valentine's Day, of course. 62% of Americans say they'll celebrate the occasion. (Of course, that means the rest of us will just try to keep our heads down and pretend it's just another blah February day.) But with all those Cupid's arrows flying around, shouldn't the tax man get a little love, too?
The National Retail Federation estimates that Americans will spend $19.6 billion this Valentine's Day. That includes $4.7 billion on jewelry (for the truly lucky ones), $3.7 on going out, $2 billion on flowers (including, naturally, 250 million roses), $1.7 billion on chocolate and candy, $894 million on greeting cards, and $751 million on pets. That's all before we get to the lingerie, champagne, and candles. (Guys, we know you don't care for scented candles. Just think of them as proof that your Valentine trusts you with fire.)
Naturally, all that spending means taxes. The average sales tax rate here in the U.S. is 8.454%, which suggests that state and local governments will collect over $1.5 billion. Of course calculating that tax isn't always as easy as multiplying your purchase amount by the local rate. Some states define candy as "groceries" or "unprepared foods" and tax them at lower rates or exempt them completely. (True love may be pure and simple. Taxes, not so much.)
The real action comes once you and your Valentine get married. For years, the so-called "marriage penalty" has taxed married couples at a higher rate than single filers earning the same combined income. The Tax Cuts and Jobs Act eliminates that penalty for couples earning up to $400,000. But above that amount, it bites hard. Singles don't hit the 37% top tax bracket until $500,000 of taxable income, while joint filers hit it at just $600,000. For a couple earning $500,000 each, that's a difference of $8,000 in total tax — enough to buy a lot of roses!
Of course, there are tax advantages to tying the knot, too. You can make unlimited cash gifts to your spouse. Your estate tax unified credit doubles, to $11.2 million. (Maybe that's why rich old geezers marry younger women . . . yeah, they do it for the tax planning!) You can make twice as much tax-free profit selling your home than if you're single. What's not to love about that?
And if your marriage doesn't go as planned? You can still console yourself with tax-advantaged alimony payments — at least, for agreements finalized before the end of 2018. (You know why divorce is so expensive? Because it's worth it!) You might also get a tax deduction if you donate all the stuff your ex gave you to charity! No sense cluttering up your house with painful memories, right?
Here's something we know you'll love, no matter what your relationship status: keeping more for your sweetheart this holiday. The key to making it work, of course, is planning. So call us when you're ready to pay less tax every day!
We're talking about Valentine's Day, of course. 62% of Americans say they'll celebrate the occasion. (Of course, that means the rest of us will just try to keep our heads down and pretend it's just another blah February day.) But with all those Cupid's arrows flying around, shouldn't the tax man get a little love, too?
The National Retail Federation estimates that Americans will spend $19.6 billion this Valentine's Day. That includes $4.7 billion on jewelry (for the truly lucky ones), $3.7 on going out, $2 billion on flowers (including, naturally, 250 million roses), $1.7 billion on chocolate and candy, $894 million on greeting cards, and $751 million on pets. That's all before we get to the lingerie, champagne, and candles. (Guys, we know you don't care for scented candles. Just think of them as proof that your Valentine trusts you with fire.)
Naturally, all that spending means taxes. The average sales tax rate here in the U.S. is 8.454%, which suggests that state and local governments will collect over $1.5 billion. Of course calculating that tax isn't always as easy as multiplying your purchase amount by the local rate. Some states define candy as "groceries" or "unprepared foods" and tax them at lower rates or exempt them completely. (True love may be pure and simple. Taxes, not so much.)
The real action comes once you and your Valentine get married. For years, the so-called "marriage penalty" has taxed married couples at a higher rate than single filers earning the same combined income. The Tax Cuts and Jobs Act eliminates that penalty for couples earning up to $400,000. But above that amount, it bites hard. Singles don't hit the 37% top tax bracket until $500,000 of taxable income, while joint filers hit it at just $600,000. For a couple earning $500,000 each, that's a difference of $8,000 in total tax — enough to buy a lot of roses!
Of course, there are tax advantages to tying the knot, too. You can make unlimited cash gifts to your spouse. Your estate tax unified credit doubles, to $11.2 million. (Maybe that's why rich old geezers marry younger women . . . yeah, they do it for the tax planning!) You can make twice as much tax-free profit selling your home than if you're single. What's not to love about that?
And if your marriage doesn't go as planned? You can still console yourself with tax-advantaged alimony payments — at least, for agreements finalized before the end of 2018. (You know why divorce is so expensive? Because it's worth it!) You might also get a tax deduction if you donate all the stuff your ex gave you to charity! No sense cluttering up your house with painful memories, right?
Here's something we know you'll love, no matter what your relationship status: keeping more for your sweetheart this holiday. The key to making it work, of course, is planning. So call us when you're ready to pay less tax every day!
Tuesday, February 6, 2018
Country Crooners Sing the Blues
Country music embraces a long tradition of songs about sadness and ruin, heartbreak and pain. It just makes sense, then, that country sometimes runs afoul of the tax system. Most famously, Willie Nelson found himself on the wrong side of a $16.7 million tax bill. And outlaw country icon David Allen Coe, who penned Take This Job and Shove It, drew three years probation and $980,000 in restitution for failing to report his income, which he insisted on taking in cash to hide from the IRS.
Joy Ford probably never expected she would become a part of that particular tradition. She got her start as a carnival dancer performing at state fairs. Her co-star Loretta Lynn inspired her to start singing, and she had several minor hits in the 1980s. She went on to operate the Bell Cove Club outside Nashville, where she showcased up-and-coming acts. But her eye for talent turned out to be far better than her eye for business.
Ford met with a producer to talk about a TV show, and met with a consultant who suggested converting the club into a seafood restaurant. But the show went nowhere and the consultant's advice went in one ear and out the other. She claimed losses of $210,298 for the years 2012-2014, and deducted them against income from trusts and a brokerage account. Business losses are deductible against outside income, of course, if you can show you're really trying to make money. But the IRS decided her business was just an expensive hobby, disallowed the losses, and case ended up in court.
Judge Foley took just two pages to find that Ford wasn't really trying to make a profit. "She had no expertise in club ownership, maintained inadequate records, disregarded expert business advice, nonchalantly accepted Bell Cove's perpetual losses, and made no attempt to reduce expenses, increase revenue, or improve Bell Cove's overall performance." Not much to sing about, there!
Not all country musicians who take on the IRS wind up on the sad side. Remember Conway Twitty? (Who could forget a name like that? It sure beat Harold Lloyd Jenkins, the one he was born with!) In 1968, he rounded up 75 friends and associates to invest in a side venture called Twitty Burgers. Apparently, his fans found his vocal licks tastier than his burgers, and by 1971, all but one of the restaurants were shuttered. Twitty worried that the failure would hurt his reputation, so he repaid his investors out of his music income. Naturally, he deducted those repayments, totaling $96,492.
The critics at the IRS disallowed Twitty's repayments because they were related to the burger business, not the music business. So Twitty took the IRS to court, and the Tax Court ruled in his favor. Judge Irwin found that repaying the investors was an "ordinary and necessary" expense for "furthering his business as a country music artist and protecting his business reputation for integrity." (We're not sure how Twitty would have translated those happy results into a country song!)
Are you looking for happier music where your taxes are concerned? You'll need to do a little planning, and probably a little homework. But we can help you with that effort, and we promise you'll whistle a happy tune if you do. So call us when you're ready to save, and remember, we're here for your bandmates, too!
Joy Ford probably never expected she would become a part of that particular tradition. She got her start as a carnival dancer performing at state fairs. Her co-star Loretta Lynn inspired her to start singing, and she had several minor hits in the 1980s. She went on to operate the Bell Cove Club outside Nashville, where she showcased up-and-coming acts. But her eye for talent turned out to be far better than her eye for business.
Ford met with a producer to talk about a TV show, and met with a consultant who suggested converting the club into a seafood restaurant. But the show went nowhere and the consultant's advice went in one ear and out the other. She claimed losses of $210,298 for the years 2012-2014, and deducted them against income from trusts and a brokerage account. Business losses are deductible against outside income, of course, if you can show you're really trying to make money. But the IRS decided her business was just an expensive hobby, disallowed the losses, and case ended up in court.
Judge Foley took just two pages to find that Ford wasn't really trying to make a profit. "She had no expertise in club ownership, maintained inadequate records, disregarded expert business advice, nonchalantly accepted Bell Cove's perpetual losses, and made no attempt to reduce expenses, increase revenue, or improve Bell Cove's overall performance." Not much to sing about, there!
Not all country musicians who take on the IRS wind up on the sad side. Remember Conway Twitty? (Who could forget a name like that? It sure beat Harold Lloyd Jenkins, the one he was born with!) In 1968, he rounded up 75 friends and associates to invest in a side venture called Twitty Burgers. Apparently, his fans found his vocal licks tastier than his burgers, and by 1971, all but one of the restaurants were shuttered. Twitty worried that the failure would hurt his reputation, so he repaid his investors out of his music income. Naturally, he deducted those repayments, totaling $96,492.
The critics at the IRS disallowed Twitty's repayments because they were related to the burger business, not the music business. So Twitty took the IRS to court, and the Tax Court ruled in his favor. Judge Irwin found that repaying the investors was an "ordinary and necessary" expense for "furthering his business as a country music artist and protecting his business reputation for integrity." (We're not sure how Twitty would have translated those happy results into a country song!)
Are you looking for happier music where your taxes are concerned? You'll need to do a little planning, and probably a little homework. But we can help you with that effort, and we promise you'll whistle a happy tune if you do. So call us when you're ready to save, and remember, we're here for your bandmates, too!
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