How Tax Policy Drives Quirky Compensation July 24, 2014Posted by federalist in Taxation.
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In some European countries tax rates are so high that there are vibrant parallel “black-market” economies.
But you don’t have to go to the Old World to see this. Distortions of healthcare markets by the tax code are something with which most Americans are familiar.
Even moderate income families in California can face marginal tax rates that approach 50%. When an employer tries to pay a worker one more dollar, the employee takes home slightly more than 50 cents. Most employee benefits, however, are tax free. That means that the benefit could be worth half its cost and still be a good deal for the employees.
Due Process Update: NFA Tax January 3, 2014Posted by federalist in RKBA, Taxation.
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NSSF provides an update on the time it takes the ATF to send applicants a stamp showing they paid the $200 fee required to possess a suppressor or short-barrel rifle. They cash the check immediately upon receiving the application, but they just reported that average wait times to approve them are still averaging 9 months!
This is worse than it was last year.
Problems with Progressive Taxes November 30, 2012Posted by federalist in Taxation.
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Never mind the principled arguments against progressive taxes. Somehow these practical arguments made it into the NYTimes(!):
[T]he United States already has one of the most progressive tax systems in the developed world….
Progressive taxes make it hard to raise money because they distort people’s behavior. They encourage taxpayers to reduce their tax liability rather than to increase their pretax income.
Is ATF Providing Due Process on NFA taxes? May 23, 2012Posted by federalist in RKBA, Taxation.
Here is a picture of the federal government depriving citizens of due process. Federal law requires payment of a $200 tax to make or buy certain types of weapons. The ATF is responsible for collecting the tax and returning a stamped form showing the tax has been paid and the applicant is allowed to make or receive the weapon. The ATF cashes the check on receipt of the application, but this chart shows that they are taking longer and longer to return the stamp — now upwards of six months.
Background: The 1934 National Firearms Act imposed a $200 tax on manufacture or transfer of a large class of firearms and accessories deemed at the time to be “gangster” weapons. In then dollars the tax was so high that it effectively eliminated the civilian market for machine-guns and silencers.
Through the quirks of subsequent court decisions, laws, and regulations, “short-barrel” rifles (SBRs) and shotguns (SBSs) are also subject to the NFA tax, but the delineation of these controlled items is truly bizarre. For example: Handguns are exempt, no matter what length barrel. But if you put a stock or shoulder support on a handgun with a barrel under 16″, it becomes a SBR. If you cut a rifle’s barrel under 16″ it’s an SBR, unless you remove the stock, in which case it’s a pistol. But if you add a foregrip to that, it becomes another type of NFA item called an AOW (“Any Other Weapon”) which requires a $5 tax.
In 1986 the Firearm Owners Protection Act froze the supply of machine-guns that could be transferred to individuals. The values of such transferable guns have run into 5 figures, so they are now mostly collectors items. People who want to legally play with machine-guns have to either be very wealthy or pay a Special Occupation Tax (typically at least $1000/year) to establish themselves as manufacturers, and subject themselves to license and regulation by the ATF.
Fortunately, the NFA tax rates stand at their original levels, and thanks to inflation it is no longer particularly difficult to pay the $200 to transfer or register a silencer or SBR in the majority of states where it is legal. In recent years hundreds of thousands of such tax stamps have been purchased as citizens have rediscovered the safety and convenience of silencers and SBRs.
A delay was always part of this process, but while many people were willing to wait a month or two for NFA paperwork to be processed, fewer are willing to go through the ordeal when the delay approaches a year. If government requires you to pay a tax to conduct commerce, its constitutional obligations to provide due process do not permit it to collect the tax and then withhold approval for an unreasonable period. Obama’s ATF has certainly crossed the line.
Lazy Law Update: IRS Edition December 3, 2010Posted by federalist in Judiciary, Taxation.
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I have previously described the problem of selective enforcement of a byzantine legal code. Today the Libertarian Party alerts us to the federal government’s intention to imprison Wesley Snipes for three years for conviction on misdemeanor charges of ‘willful failure to file an income tax return.’
Why is a failure to file a tax return a criminal non-act? Should people ever be sent to prison for not doing something? If the IRS wants to come after Snipes and take his money, they have power to do that. Who does it help to send the man to prison?
The federal tax code also allows for “selective enforcement,” to put it mildly. Why is it that Wesley Snipes gets a prison sentence, but known tax cheat Tim Geithner gets promoted to Secretary of the Treasury? Maybe Tim should be Wesley’s cellmate. Throw tax cheat politician Charlie Rangel in the slammer too for good measure.
Capital Gains and the Inflation Tax January 15, 2010Posted by federalist in Economic Policy, Finance, Taxation.
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A great many opponents of the Federal Reserve Bank argue that fiat currencies, like the dollar issued by the Fed, have no inherent value and that we are at the mercy of a government-sanctioned currency monopoly to preserve our assets. I have explained that this is not accurate because nobody really has to hold dollars, and even if you are required by government or custom to use dollars for transactions there are small conversion costs from many other currencies and stores of value, so you can choose to minimize your exposure to value deflation resulting from the inflation of any particular currency.
However, even if you eliminate your exposure to dollars you are still harmed by dollar inflation because the government has imposed a “capital gains tax,” which the IRS has implemented essentially as a dollar inflation tax. The peril of fiat currencies is that debtors (like the states or state-sponsored entities that issue them) have an incentive to inflate their way out of debt. National debt becoming too onerous? Just print some more money to pay it off and enjoy the added benefit that this will inflate the currency (deflating the currency’s value) which reduces the real size of the remaining debt. Of course, if nobody uses your currency this will only go so far. But if you assess a tax on the basis of the value of your currency, as the U.S. government does, then it still gets you: As the dollar devalues all other assets appreciate in dollar terms. Call that appreciation a “capital gain” and tax it.
Doesn’t seem fair, does it?
Inflation Conspiracies January 6, 2010Posted by federalist in Economic Policy, Finance, Taxation.
Tags: inflation tax
If you are a debtor, and your debts are denominated in dollars, then dollar inflation directly benefits you by reducing the real cost of your debt. So imagine the moral hazard when one of the biggest dollar debtors — our government — happens to have the ability to inflate the dollar! (Not to mention that, due to our tax code, dollar inflation is itself a tax that increases government revenue.)
Suppose all the Good Guys (Joe Consumer and Homeowner) are loaded with debt, and suppose that this debt is payable to the Bad Guys (Rich People and Foreigners). What can you do about it? Oh, and also suppose that the debt is mostly in nominal terms. Answer: You inflate.
What will happen when politicians realize that they can surreptitiously redistribute wealth from capital owners to both the government and the indebted? Since this is consistent with our government’s tendencies over the last century you may wonder why it’s not already happening.
For one thing, there is supposed to be a mechanism to prevent this: The dollar’s supply is regulated by the Federal Reserve, which was supposed to be both (A) independent of the federal government, and (B) interested only in maintaining dollar stability. However, some time ago they gave up on the latter point, with muddled pronouncements about balancing dollar stability with other economic objectives like employment. And the last year or so has seen the evaporation of any semblance of Fed independence from the government.
So the institutional barriers that originally secured the dollar’s value are effectively gone. The only other thing that holds back politically-motivated inflation is the fact that inflation only has the desired effect if it’s unexpected. If the government came right out and said, “We’re going to 6% annual inflation in order to reduce our debts, increase our revenues, and help all the debtors who vote for us,” it wouldn’t work for long: Owners of existing dollar-denominated debt would be hurt, but when the government went to expand or rollover its debt it would find lenders demanding annual rates at least 6% higher than they do now. Likewise with individual borrowers.
In fact, if the dollar was abused too much people would probably stop lending in dollar terms at all: If you wanted a loan, repayment might be demanded in Euros, or barrels of oil, or ounces of bullion. (Several of my recent investment posts deal with practical means of hedging against dollar inflation.)
And this is where the conspiracy comes in. Bookstaber explains:
To do inflation right, you have to be a little sneaky. Especially if you don’t want your creditors feeling totally screwed and have them walk away the next time you need to borrow. Don’t announce it as a policy. Have it just happen. In fact, have it happen in spite of all of your best efforts to reign it in. So you need a controlled burn that looks like it is spontaneous. Who knows, maybe this idea actually is making the rounds.
Given the political inclinations of the current establishment it’s not hard to imagine.
State Interposition, Nullification, and Secession September 3, 2009Posted by federalist in Federalism, Government Spending, Taxation.
Interposition, nullification, and secession. These are the means by which a state can check the power of a federation.
That is how American federalism was supposed to work. The three branches of the central government would check each other, but it would be up to the sovereign States to keep the central government itself in check. The Constitution was to be enforced through political action of the States not by the legalism of nine unelected Supreme Court justices.
“Interposition” brought to mind the recent gestures by several state governors to reject federal “stimulus” funds. Those gestures were viewed as symbolic, empty, and perhaps silly because rejecting the federal money would not have had any real effect on federal power or spending. They would have had real consequence had the governors truly interposed against what they claimed was unconstitutional federal spending: I.e., the concomitant gesture to rejecting the federal funds should have been the recovery and return to their states’ taxpayers all federal taxes that were supposedly being spent unconstitutionally.
Tags: affiliate tax, Amazon tax, internet tax, mail order tax exemption, sales and use tax
State governments dependent on sales tax revenue have begun desperate and counterproductive efforts to extend their taxing authority to out-of-state businesses. Per the United States Constitution, states cannot levy taxes on subjects outside of their jurisdiction. The Supreme Court has clarified (Quill Corp v. North Dakota) that a company must have a physical business presence in a state for it to be subject to the state’s taxing authority.
45 of the United States charge some type of sales tax, and many counties and cities levy additional sales taxes. As far as I know sales taxes are always levied upon the consumer. I.e., even though the seller is required to collect the tax, it is the consumer who is being taxed. Therefore sales made to a buyer outside of a jurisdiction are exempt from sales tax. Mail-order companies have always taken advantage of this fact: When selling to a buyer in another state they do not have to collect sales tax, and this savings not only offsets shipping costs but can also make their prices more competitive against local sellers within the buyer’s state who must collect the sales tax. Consequently “brick and mortar” businesses that typically serve local customers have fought alongside states to eliminate this “mail order tax exemption.”
States have attempted to reduce the out-of-state sales tax exemption by imposing a “use tax” in parallel with their sales tax. Essentially the use tax obligates residents to pay their state’s sales tax on any goods they bring into the state that were not taxed when purchased. However use taxes are rarely observed, and even more sparingly enforced (typically only against extremely valuable and conspicuous goods, or against individuals who are already under state scrutiny for other reasons).
Since it is far easier to coerce a large business into complying with sales tax collection than it is to enforce a use tax against individuals, states have been aggressively pursuing new theories to extend their jurisdiction over mail-order companies. The latest attempts depend on the argument that marketing affiliates constitute a physical business presence. New York and Rhode Island have already established laws to this effect. Laws are also pending in Hawaii, North Carolina, and a few other states. These laws are almost certainly unconstitutional, but it is unclear at this point whether the victims of the laws are willing to fight the states to the Supreme Court. In fact, to avoid a fight Amazon, Overstock, and other large mail-order businesses have instead chosen to simply terminate their affiliate marketing programs in these states.
The Affiliate Nexus
Affiliates marketers are independent contractors that earn fees by referring business to a company. Typically they are paid a commission when a customer they refer makes a purchase from a company. The internet has made it possible for affiliate marketing to be done on a much broader scale than ever before, but the marketing practice predates e-commerce. For example, realtors and lawyers have long collected referral commissions when they send a client to another firm. States have not and still do not suggest that those referral arrangements establish a business nexus for tax purposes. If law firm A in New York refers business to firm B in Rhode Island, New York does not claim on that basis that firm B has a physical presence in New York.
Yet states are now straining to argue that affiliate marketers in their state that refer business to mail order companies elsewhere somehow establish a physical presence of those companies in their state. But these affiliates are not employees of the companies to which they refer customers. Affiliates do not participate in business transactions between the customer and the company. And affiliates often advertise on behalf of many different companies. If an independent affiliate establishes a business presence for its clients in the affiliate’s state of residence, then the same argument must extend to all contractors of a business. Suddenly all of its outsourced business services — legal, PR, payroll, etc. — could give it a “physical presence” in another state. If my small business hires H&R Block to prepare my annual tax return, am I suddenly liable for collecting sales taxes from customers in every state just because Block has offices in every state? Of course not.
The unfortunate collateral damage in these unconstitutional state sales tax campaigns includes numerous small affiliates, many of whom had productive businesses until their state legislatures threatened their clients. Evidently it is cheaper for the likes of Amazon to cut off referrals from affiliates working in a particular state than to subject themselves to the obligation to collect sales taxes from all customers in that state. The states will not get any new sales tax revenue by going after mail order companies in this fashion. But they can instantly destroy the businesses of their own residents who were making a living from affiliate marketing.
Congress Imitates Homer Simpson — II May 24, 2009Posted by federalist in Energy, Healthcare, Taxation.
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Some federal legislators have decided that all of that government-subsidized sugar we’ve been adding to soft drinks all these years might not be so good for us. Since government has assumed responsibility for the health of American citizens our representatives are ready to take action. Naturally, they’ve decided to reduce those crop subsidies.
Oh wait, no, they’ve actually decided that the way to fix this problem is to impose an excise tax on sweetened drinks. I.e., they’ll continue to pay farmers to grow more corn and sugar than the market wants, but they’ll discourage Americans from drinking it with a “soda tax.”
Because of course the best way to correct the unintended consequences of government is with more government.
Reminds me of Homer Simpson’s solution to overdosing on stimulants:
Clerk: Hey, you can’t take that many pep pills at once.
Homer: No problem, I’ll balance it out with a bottle of sleeping pills.
Government Can’t Order Results May 19, 2009Posted by federalist in Government Regulation, Taxation, Transportation.
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Well gosh, if the government can just order automobiles to be more efficient, why stop there? Wouldn’t 50mpg be even better? Indeed, it is not clear how the government intends to effect this order. If it’s anything like past enforcement of CAFE mandates then:
- Domestic companies will try to comply by building fleets of efficient cars nobody wants and selling them at a loss.
- Foreign companies will generally try to make a profit, either by seeking subsidies or by paying government fines for noncompliance and passing them on to their customers.
- All companies will game the regulations — e.g., redefining “automobile” to exclude SUVs, or substituting diesel engines for gasoline (thereby achieving the nominal goal, but probably not in the way proponents wanted.)
Two years ago I noted that any bad regulation is just a disguised tax, and it is usually helpful to rephrase regulation in terms of taxation. In this case, there is a simple tax that would achieve the government’s stated goal:
“If gasoline is cheap, there’s going to be a huge disconnect” between the vehicles available and what consumers will want, argues AutoNation Inc. Chief Executive Mike Jackson. He has long advocated a higher federal gasoline tax to ensure that gas prices stay above $4 a gallon, the level that drove demand for small cars last summer.
I.e., if the government really thinks it’s important to increase the distance an average car travels on a gallon of gasoline, it can avoid all gamesmanship and politics in achieving that goal simply by raising the existing gasoline tax.
But apparently The People don’t think it’s worth paying more at the pump to get more efficient cars on the road. So instead the government pursues its agenda through supply-side regulation, disguising the costs to such a degree that nobody can hope to quantify them. Of course, in the process all sorts of special interests crowd into smoke-filled rooms with bureaucrats and politicians to trade favors. If the objective is met, it is at a much higher economic cost than the transparent and straightforward tax would have accumulated.
Tax Competition: Swiss Update May 6, 2009Posted by federalist in Taxation.
I’m a huge fan of tax competition. Bloomberg reports that the combination of increasing British income taxes (a 50% marginal rate was promised last month) and EU efforts to increase the regulatory burden on alternative investment funds are driving fund managers from London to Switzerland. There:
Personal taxes for wealthy foreigners can frequently be negotiated with the local authorities in Switzerland, depending on the canton … and may be based on projected expenditures, not income….
Federalism Update April 27, 2009Posted by federalist in Federalism, Taxation.
The first assertions of state sovereignty occurred early in the history of the United States: Jefferson authored the Kentucky Resolutions and Madison wrote the Virginia Resolution. One generation later was the notable South Carolina “nullification crisis.” In February I noted the resurgence of state sovereignty movements. Christian Science Monitor had a good update last month. This week Randy Barnett proposes a Constitutional “Federalism Amendment” to reign in the federal government, though I much prefer his simpler fix, which is to repeal the 16th amendment:
What sort of language would restore a healthy balance between federal and state power while protecting the liberties of the people?
One simple proposal would be to repeal the 16th Amendment enacted in 1913 that authorized a federal income tax. This single change would strike at the heart of unlimited federal power and end the costly and intrusive tax code. Congress could then replace the income tax with a “uniform” national sales or “excise” tax (as stated in Article I, section 8) that would be paid by everyone residing in the country as they consumed, and would automatically render savings and capital appreciation free of tax.
I Can No Longer Do My Own Taxes April 15, 2009Posted by federalist in Taxation.
I have a Yale degree in Computer Science and Math, magna cum laude, and I worked for the government for several years. I have always tried to do my own taxes because:
- I enjoy tax optimization, and I need to fully understand the tax system in order to minimize taxes.
- I believe I am as capable as an average accountant at reading and understanding the tax regulations.
- I want to know when the government has made strict tax compliance impossible even for someone with an above-average technical education.
Granted, the tax code has not experienced any quantum leaps in convolution in the last few years. It certainly does increase in complexity each year, but what pushed me over the edge were new complications in my own financial circumstances that took me deeper into the uncharted and poorly illuminated niches of existing tax regulations.
I spent days poring over my taxes this year. As is my custom I began with TurboTax to flesh out the bulk of my returns, and then began digging into specific forms and publications to understand and verify what was going on. I was alarmed early on to discover that TurboTax had failed to optimally incorporate information pertaining to a home office deduction — and then to discover that it had made the same error last year! I saved a few thousand dollars right there. But after many more hours of trying to place gains and losses associated with alternative investments I concluded that it is simply impossible to confirm the correct way to assess those taxes. So this year I will begin to pay an accountant to review my returns. And I present myself as evidence that the United States government imposes tax laws upon its citizens with which reasonably competent men cannot with certainty comply.
Incidentally, I don’t believe that accountants have any special powers of discernment when it comes to tax law compliance. I have often reviewed the professionally-prepared tax returns of family and friends in order to offer them better financial advice. And I have frequently noticed that in gray areas of uncertainty professional accountants typically take liberties and shortcuts for the benefit of their clients that do not strictly square with the letter of the law. I have concluded that the law as written is so impenetrable (see “Lazy Law“) that extra-legal customs have evolved, generally respected by both accountants and the IRS, to prevent the business of filing and processing taxes from grinding to a halt. An outsider like me is not privy to these customs and so the government forces me to choose to either:
- Pay an accountant to lead me through the unwritten law.
- Do my taxes conservatively and probably pay the government more than I rightly owe.
- Do my taxes liberally and risk violating the unwritten laws and consequently being forced to pay additional fines for my daring.
The Case for Government Investment March 28, 2009Posted by federalist in Economic Policy, Government Spending, Markets, Taxation, Transportation.
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As a libertarian I like to believe that anything worth doing will be done by for-profit entities. But we know that in practice there are many public goods and services worth providing that will not be provided in anarchy — typically because they suffer from at least one of three characteristics:
- They require more up-front or concentrated capital than private entities can reasonably provide.
- Potential returns are too risky or distant, rendering the risk/reward calculus untenable for a profit-seeker.
- Returns are too difficult to capture for a non-government entity (practically by definition of a public good).
If public infrastructure investment can reliably increase economic activity, then not only can government capture returns on the investment through constant-rate taxes on a growing economy, but it would even be reasonable to fund the investment with government debt. This is, in broadest terms, the premise for a large amount of the Obama administration’s proposed deficit spending. Robert Reich today presents a reasonable argument based on this premise: He suggests that the United States grows and competes internationally based on its productivity, and that public goods like a ready base of strong human capital and infrastructure are critical to growing productivity.
Only those Americans whose parents can afford to give them a high-quality private education and health care, and who can situate themselves in locations with excellent infrastructures of telecommunication, transportation, public health and safety, have been able to link up with global capital on more positive terms. But not even they are entirely secure economically, because they face growing shortages of talented people they can rely on within easy reach, and can’t entirely avoid the disadvantages of a deteriorating public infrastructure, such as ever more congested roads and airports.
Obamanomics recognizes that the only resource uniquely rooted in a national economy is its people — their skills, insights, capacities to collaborate, and the transportation and communication systems that link them together. Public investment is the key to attracting long-term private investment so that a nation’s people can prosper.
Tax Competition March 1, 2009Posted by federalist in Diplomacy, Economic Policy, Taxation.
A few years ago I highlighted the importance of tax competition in restraining government and encouraging government efficiency. The US and EU are waging a new war against “tax havens.” Daniel Mitchell, who recently published Global Tax Revolution has also put a few videos advocating the preservation of tax competition on the Cato blog.
Will States Restrain the Federal Government? February 15, 2009Posted by federalist in Federalism, Taxation.
The United States Constitution reserves all powers, not explicitly delegated to the federal government, to the states and the people. Since each state is a sovereign entity, why do they tolerate such an enormous federal government?
A state government has real incentives to resist the encroachment of the federal government: Every dollar that the feds take in taxes is a dollar that the state can no longer use for its political purposes. The feds can take that money and redistribute it for the benefit of other states. Or the feds can use it as a “carrot,” only remitting the tax revenue to states when they comply with the wishes of the feds. Either way, federal taxation takes power away from the states. But the Constitution clearly gives states the authority to retain this power, except insofar as the federal government is spending it on a very limited set of enumerated activities.
If there was any doubt before, the recent “bailout” plans show the federal government plainly exceeding its enumerated powers. Mark Sanford, Governor of South Carolina, is asserting that point, and suggesting that his state should not take any of this money.
The Pennsylvania state legislature is also considering a resolution that would “put the federal government on notice,” and serve as a preamble to repealing all extra-constitutional federal laws and taxes.
So long as the federal government is taxing and spending outside of its enumerated powers, the states would be justified in nullifying the taxation and prosecution of their citizens. It would be quite easy for a state like South Carolina or Pennsylvania to simply announce that it is indemnifying its citizens against the claims of the IRS. If the federal government threatened to send agents into a state to forcibly collect unjust taxes or imprison citizens who did not pay them, the state could not only call out its sheriffs and militia to defend its citizens, but it could also appeal to other states or countries for assistance in maintaining its sovereignty. If the federal government tried to impound assets held outside of that state, the state could seize the assets of the federal government or its beneficiaries for recompense.
In practice, because the states are in fact sovereign entities, and because the federal government is in fact constitutionally restrained, it is likely that the mere assertion of a state’s rights would be sufficient to put the federal government back in line. Governor Sanford: It only takes one state to start!