An Explosion of Events

October 4, 2020

by Steve Stofka

This has been a week of surprises. Sunday night, the NY Times released the details of President Trump’s tax documents which he has sought to keep hidden under the pretense that an IRS audit prevents him from doing so. We learned that Mr. Trump’s wealth is a ruse, like that of Bernie Madoff. We discovered the reason for the IRS audit: a $72 million refund that Mr. Trump was paid in 2009 under a dubious interpretation of rules in the Recovery Act following the 2008 financial crisis.

The report contains many instances of rule bending if not outright fraud. It serves as an example of why Republicans have repeatedly cut funding for the IRS. With fewer people, the IRS is unable to monitor the shenanigans of Mr. Trump and his accountants.

The last two decades have seen the largest accounting scandals, and most of them happened while Republicans controlled the majority if not all of the federal government. Enron, Tyco and Health South in the early 2000s were just the prelude to the 2008 financial crisis. The Enron scandal exposed the misdeeds of one of the largest accounting firms in the world, Arthur Anderson, who was forced to surrender their license in 2002. During these past twenty years, Republicans have consistently fought to undermine the mission of all government monitoring, to bend the rules in favor of large industry. Mr. Trump called us working stiffs suckers for paying taxes.

On Tuesday’s debate between both Presidential candidates, Mr. Trump’s interruptions broke debate protocol and the rules he had agreed to. That’s not a surprise. He is a notorious cheater at golf and has a motor mouth. He is an entertainer, not a statesman or a gentleman. The surprise was that Mr. Biden met the verbal assault without fluster. Afflicted with stuttering since he was a child, Mr. Biden has learned to speak with deliberation, a common strategy taught to stutterers. Kids around the country, watch Mr. Biden. This is how you stand up to bullies.

The announcement late Thursday night that Mr. Trump had tested positive for Covid surprised those of us who wondered how the disease had not caught up to the President, who has played the tough guy and pooh-poohed caution. Mr. Trump has several comorbidities, his physician said, without being specific. A lack of prudence might be one of them. Several hours later, Mr. Trump was taken to Walter Reed hospital out of “an abundance of caution.” With a month left before the election, Mr. Trump had a busy election schedule, which is up in the air for the next two weeks, at least. More on that at the end of this post.

The surprise in Friday’s monthly hiring report was the weak job recovery. The employment population ratio is 56.6%, significantly down from 61% in February, before Covid. In February, 1.5 people working supported each person not working, including children. Now it is 1.3 people supporting each person not working.

The growing debt of the Federal government has relieved some of the burden on workers, because, in times of crisis, the rest of the world wants to buy U.S. Treasuries. State and local governments are squeezed. Governments laid off 216,000 workers in September. Who will they turn to except the Federal government? Senate Republican Leader Mitch McConnell balks at aid to the states, particularly the “blue” states.

In the past weeks, airlines and other industries have been announcing permanent layoffs. Older people may be taking early retirement. The four industries that have not suffered during this crisis are utilities, consumer staples, technology and health care. The effect of tech on the stock market has been dramatic. The SP500, weighted by market cap, is up 7% since January. An evenly weighted SP500 index is down 17%. That reflects a general economic misery.  

The week was still not done. On Saturday, we learned that the President had known earlier that he had Covid. He met with prominent Republicans and did not tell them he had the disease. Former NJ governor and campaign advisor Chris Christie has now tested positive for the disease. Mr. Christie is younger but is obese, the chief co-morbidity leading to death. Kellyanne Conway, Mr. Trump’s White House advisor, has also tested positive. The White House is doing a trace of all people who came into contact with Mr. Trump. He hates his enemies, but he doesn’t spare his friends either.

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Photo by Jens Johnsson on Unsplash

Our Fair Share

January 19, 2020

by Steve Stofka

The holidays are over. This week our city picked up Christmas trees set by the curb. The sun set after 5 PM, the first time since the time change in the first week of November. The sun is returning to the Northern Hemisphere. Despite the variations in the amount of sunshine throughout the year, we all get the same amount of sunshine over the course of a year. Not so with our tax bills.

Estimated taxes were due this week. The self-employed, retired people and others who earn income with no taxes withheld must pay estimated taxes every quarter. This past year the IRS audited less than ½% of returns, a lifetime low. That sounds great because none of us wants to endure an audit. The very word strikes fear in the hearts of many taxpayers, but most of us have a small chance of being audited regardless. We don’t pay enough in taxes for the IRS to do much more than a paper audit, a request for supporting documentation.

The IRS is not a popular agency and became less popular when the agency discriminated against Tea Party and progressive groups during the 2010 election (Farhi, 2017). House Republicans repeatedly cut the agency’s budget, but that retribution has had serious budget consequences. The National Bureau of Economic Research estimated that the government could raise an additional $1 trillion in tax revenue – that’s about 20% of total revenue – with stricter enforcement of existing law (Heeb, 2019). In 2019, the Federal deficit, or budget shortfall, was $1.1 trillion (BPC, 2020). Stricter enforcement would have effectively erased that deficit.

The race for the Democratic Party’s nomination for President promises to center around several themes. The first is the horse race against President Trump, whose incumbency gives him a distinct advantage when running for re-election. The press often seems more concerned with the contest than the underlying issues of a campaign. Taxation is a recurring discussion in each election. More or less? What is a fair share? More, more, more social programs, taxation and regulation, or less, less, less social programs and taxation and more defense spending and power for large corporations?

What is fair? As children we have a keen sense of fairness – our “monkey brain.” We are social creatures who feel scorned at what we perceive as unequal treatment. Equal and fair are not the same thing. A fair share is not the same as an equal share. If I can afford to buy $50,000 worth of goods in a year, why should I have to pay more sales tax than someone who only buys $30,000? We make equal use of a city’s public services. Why should we be treated unequally? Well, we have become accustomed to paying an equal percentage of what we buy in the stores as a sales tax.

Why don’t we follow that same approach for income taxes? States like Colorado do charge the same rate of state income tax regardless of income. Is that fair? Some cities like Denver charge a head tax, a flat fee income tax for anyone who works within the district. Should we follow the same approach throughout the nation? Warren Buffett and I would pay the same amount in income taxes. Is that fair?

Should prices for public utilities be adjusted based on income? If my neighbor makes twice what I do, should they pay twice for the same amount of water? Currently, we are charged the same rate. The income and property taxes of those over 65 are often given a discount. In some districts, a person who reaches 65 finds that they can lower their property tax by 50%. Is that fair?

Elizabeth Warren, a candidate for the Democratic Party’s presidential nomination, proposed that all student debt be eliminated. Should students who went to more expensive private schools be rewarded more than students who borrowed less because they went to a state college? Should students who borrowed less because they worked part time while going to school be penalized? Is that fair?

In Matthew 20:1–16, Jesus tells a parable of the workers in the vineyard. Workers who came to work in the morning agreed to an amount of money for a day’s work. Workers who came to work later in the day were also promised the same amount of money for working the rest of the day. Jesus was making a point that each person will be rewarded equally in the kingdom of heaven no matter when in their lifetime they come to God’s love. No matter what your religious orientation, is that fair?

Each election we get to vote on what’s fair. Some people don’t vote because they say that their opinion doesn’t matter. It certainly doesn’t if they don’t vote so they have proved their case. If I vote and my neighbor doesn’t, my vote effectively counts double. In a few weeks, the Democratic primaries will start. The first two are in Iowa and New Hampshire, states with small populations and an even smaller number of people who participate in the caucus system. The votes of a few thousand people can make or break a candidate’s campaign. In a democratic nation of 320 million people, is that fair?

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Notes:

Bipartisan Policy Center (BPC). (2020, January 9). Deficit Tracker. [Web page]. Retrieved from https://bipartisanpolicy.org/report/deficit-tracker/

Farhi, P. (2017, October 5). Four years later, the IRS tea party scandal looks very different. It may not even be a scandal. Washington Post. [Web page]. https://www.washingtonpost.com/lifestyle/style/four-years-later-the-irs-tea-party-scandal-looks-very-different-it-may-not-even-be-a-scandal/2017/10/05/4e90c7ec-a9f7-11e7-850e-2bdd1236be5d_story.html

Heeb, G. (2019, November 19). The US could raise $1 trillion more in taxes through stricter IRS enforcement, according to a new study. Markets Insider. [Web page]. Retrieved from https://markets.businessinsider.com/news/stocks/us-could-raise-1-trillion-more-tighter-irs-enforcement-study-2019-11-1028700145

Photo by Maria Molinero on Unsplash

Pay Up

February 10, 2019

by Steve Stofka

When I was growing up in New York City, each kid’s name was shortened to one syllable, two at the most. New York is a busy town; people didn’t have time to pronounce long names. Guillermo became Will or Bill.  An exotic name like Anastasia was shortened to a rather pedestrian Ann. Melodic names like Florinda became Flo. In a sign of the changing times, N.Y. Representative Alexandria Ocasio-Cortez has became known as AOC. That’s a generous three syllables!

She has proposed a 70% Federal income tax on Adjusted Gross Income over $10 million. That’s a straight 70% haircut on only the income above that threshold. Deductions, credits and favorable tax treatment for capital gains could apply to income below $10 million but everything above that is a bada-bing-bada-boom 70%.

How much revenue would that generate? I used IRS sample data from 2016, the latest available (Note #1) and calculated an extra $218 billion collected on 15,000 returns for tax year 2016 (Note #2). This would have been an additional 14% over the $1550 billion collected in individual income taxes that year (Note #3). It would make up for the corporate taxes that are not being collected because of the 2017 Tax Act.

If AOC’s proposal were passed by the House, it would not make it out of the Senate Finance Committee, which is controlled by Republicans. If it did become law, it would incentivize the accountants and lawyers of the super-rich to craft clever solutions to avoid the tax. Most of them can buy citizenship in another country. They can put income in tax havens (Note #4). They can make hefty political campaign contributions to buy loyalty in Congress.

The rich complain about taxes. Yes, they do pay much of the income taxes collected. It should be all of the income taxes. The 16th Amendment was “sold” to the American people as a tax that would apply only to the rich, the top 1% of incomes. When the amendment was passed in 1913, half of the population worked in farming and thought that the tax would never impact their lives. It didn’t until a few months after the U.S. entered World War 2.

Under FDR, the tax base increased ten-fold and now affected 42% of the population. FDR called it the “greatest tax bill” (Note #5). The American people didn’t think so. Many were not paying their income taxes. As the fate of nations lay bloody on the altar of history, FDR regarded tax delinquency as a personal disloyalty. He turned to economist John Kenneth Galbraith who suggested that employers should be forced to become the tax collector for the government. In 1943, Congress passed legislation requiring that employers withdraw taxes from their employees’ paychecks. Employing more than 7% of the workforce, the Federal government was the largest employer (Note #6). Before employees could feed their families or pay their rent, the government had its taxes.

It’s time for Democrats and Progressives to undo what they did under FDR. World War 2 ended 75 years ago. Let’s return to the original intent of the 16th Amendment and impose most of the income tax burden on the rich.

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Notes:
1. 2016 IRS tax data by adjusted gross income
2. A screenshot below of the IRS spreadsheet with my calculations of revenue collected.
3. A breakdown of 2016 federal revenue
4. The Rolling Stones, Bono, and Mark Knopfler of Dire Straits took advantage of tax havens to avoid paying hefty U.K. taxes on royalties
5. Highlights of IRS history
6. Federal Employees CES9091000001 series / PAYEMS (All employees) series in the FRED database

IncTaxbyAGI2016.xls