- The IRS tale--Times letter writers seem to get it (or at least, most of them anyway)
- How Apple avoids US taxes with shell games
- Useful information on 501(c)(4)s and 527s and the IRS's scrutiny dilemma
- The GOP and media frenzy over IRS scrutiny of tax exempts continues
- Remember When the IRS Targeted Liberals?
- IRS sharkfest continues: Media rampages; Obama scolds; Holder investigates
- More on the IRS's "targeting of conservative groups"
- Orrin Hatch on tax reform at the ABA--a predictable right-wing rant
- Moving in the right direction: US, UK, Aussies to share tax info
- Senate did the right thing--will the House?
As I've noted in several posts on A Taxing Matter (see links, below), the media and right-wing "hearing" frenzy continues over the purported IRS "scandal" from "targeting" conservative groups for extra scrutiny in determining whether to approve application for 501(c)(4) "social welfare" organization status (referred to herein as "C-4 status"). It's a silly affair. Obama and his minions appear to have apologized not because anything wrong was done but because the (GOP-appointed) Treasury Inspector General for Tax Administration (TIGTA) was issuing a report that suggested the use of a key word that might be in many conservative groups' name was "inappropriate" and that the failure of IRS leaders to correct that represented "mismanagement." I find it hard to see the reasonable use of a term that most of us associate with political campaigns "tea party" and "patriots" as inappropriate as a keyword for filtering out applications for C-4 status for further review of whether the group is planning to engage in politicking rather than social welfare activities. The mismanagement seems really to go back much further to a pro-taxpayer interpretation that put the IRS in an untenable position. The law passed by Congress states that C-4 organizations are supposed to be dedicated "exclusively" to "social welfare" activities. Regretably, years ago tax administrators recognized that many of these groups were actually doing lots of politicking. Rather than take the (politically) risky step of denying C-4 status to those groups, the regs officially interpreted the statute to require merely "primary" social welfare activity, thus opening themselves up for the impossible task of policing the border between doing some politicking and doing too much and opening the C-4 status up for the games-playing that some wealthy sponsors of organizations have engaged in--that is, hiding politicking behind C-4 status in order not to reveal that a purported 'grass roots' organization is in actuality a corporate-funded lobbying and campaigning organization. Readers at the New York Times who responded to Frank Norris's finance column, A Fine Line Between Social and Political, New York Times (May 17, 2013) show, on the whole, that they get it. See The Tale of the I.R.S. in Cincinnati, Letters to the Editor, the New York Times (May 21, 2013). * Russ Weiss (New Jersey) notes that "the fundamental problem here was actually the result of a too passive government. Clearly, political entities ludicrously masquerading as 'social welfare' groups have been allowed by supposed government watchdogs to subvert our political process for far too long." * Melvin Jacobowitz (a tax lawyer from Miami) explains that "[t]he I.R.S. properly targets a tax-exempt application for further review if there is a likelihood that its operations will be political rather than educational or for social welfare. This can be indicated by the group's name. The application is not denied solely because of the name. ... The I.R.S. would violate its obligations if it failed to target such applications for further inquiry. ...There was no need for an apology." * Neil Dworkin (Connecticut) adds that non-profit hospitals that apply for charitable status under 501(c)(3)--a provision allowing tax-exemption to the organization and tax-deductible contributrions by donors-- have to "demonstrate a level of community benefit that is at least commensurate to the value of [their] tax exemption. In light of their sometimes murky activities, the I.R.S. should require 501(c)(4) organizations to give some transparent measure of social welfare in order for them to continue to carry that designation." The one letter to the editor that misses the point is, not surprisingly, from Texas. I say "not surprisingly" because I graduated from high school in Texas when much of Texas was known for its racism and bigotry towards anyone that wasn't "white" or "Christian", with private schools often established to avoid anything but token integration and ensure that "God" and "education" were synonymous for many Texan children. It has since moderated its racism somewhat but at least the part I know best has become radically anarcho-libertarian, pro-gun, pro-business (the word "regulation" is almost a cuss-word in most of Texas), anti-taxes/anti-government and not very charitable towards its poor, its hungry, its homeless, its environment or any kind of intellectual (except in the oases around Austin and, to some extent, around other universities). So what did the Texan commentator have to add to the IRS sham-scandal discussion? * James Russell (Bellaire, Texas) suggests that it doesn't even matter whether there was intentional or unintentional mistreatment of Tea Party groups. What matters is that "the federal government is an elephant and we are all mice who can be squashed flat at any time." This is a perfect example of the failure of the right to look at all relevant facts. It ignores the fact that while groups with "tea party" in their names were selected for scrutiny, there is no evidence that any group was denied C-4 status inappropriately. It ignores the fact that failure to scutinize these groups for politicking would essentially be carte blanche for donors to avoid the sunlight required by our laws under the rules for 527s. And it disregards the fact that government is in fact a major provider of the wealth that has created most of Texas--from tax expenditures for the Oil and Gas Industry, to railroads to highways, Texas has depended on government for its economy throughout its membership in the Union.
Tomorrow's Congressional hearing on the ability of major multinationals to shift profits offshore to avoid US tax (and everywhere-else tax) may finally get the attention of the American public onto a tax issue worth thinking about. As today's New York Times makes clear, Apple has used sophisticated tax planning to shift its assets offshore, often to employee-less shells that are run from Apple's US headquarters. See Nelson Schwartz, Apple avoided billions in US taxes, Congressional panel says, New York Times (May 20, 2013). Even as Apple became the nation’s most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and surprised experts, a Congressional investigation has found. Some of these subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif., according to Congressional investigators. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless – exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world. *** Atop Apple’s offshore network is a subsidiary named Apple Operations International, which is incorporated in Ireland but keeps its bank accounts and records in the United States, and holds board meetings in California. Because the United States bases residency on where companies are incorporated, while Ireland focuses on where they are managed and controlled, Apple Operations International was able to fall neatly between the cracks of the two countries’ jurisdiction. Even John McCain seems to recognize that Apple's offshoring gimmicks stretch the notion of what should be acceptable: “Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.” Id. Apple's gimmicks take advantage of a tax system that does not adequately address the nature of intellectual property as the core of a company's profit-making business nor the nature of the economic sham of claiming to sell such property to affiliates at "arm's length prices", when the purported affiliates are nothing but names on a tiny office door and the purported arm's length price would never be accepted from a genuine unrelated party. As Sen. Levin noted, Apple has succeeded in avoiding taxes "creat[ing] offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.” Id. Apple's CEO Cook is expected to claim that Apple doesn't use gimmicks. Id. Of course, like Clinton's equivocations, that all depends on your definition of a "gimmick." When you create a vast community of subsidiaries with shell companies that exist to allow you to claim your profits are earned by employee-less companies that just happen to reside where there is no tax, that is using a gimmick, even if it is one that is perfectly legal under an outdated code that has been incessantly weakened by corporate lobbyists for the last three decades, at least. Cook is also expected to argue that the solution is just to hand over to the big MNEs what they want--tax-free repatriation of profits they have shifted offshore. That's the same crazy idea that the Bush administration and Republicans in Congress promoted in 2004, one that essentially rewarded companies for engaging in gimmicks and encouraged even more companies to shift even more income offshore and hold it there even longer to avoid US taxes. Congress would be foolish to reward poor social responsibility behavior with an even better tax outcome than that already generated by the poor social responsibility behavior! The current transfer-pricing regime is not fitted for today's global commerce. What Congress should consider doing is (1) eliminate offshore deferral altogether, and (2) apply a substance-over-form analysis to all transfers of intellectual property to offshore affiliates that would in most cases treat them as not occurring for tax purposes. It could phase in the end of deferral by permitting companies to treat their current stash of offshore profits as being repatriated on a straight-line basis over five years, so they avoid a humongous one-time tax hit. The legislation should also restrict the use of loss carryovers against such repatriated cash in much the way that loss carryovers are restricted after major acquisitions. (And, by the way, that idea I had that I might make the iPhone my next smartphone? I've just thrown that in the waste basket. Rather not support a company that is so disloyal to the country that fostered the possibility of its existence and high profits.)
A fellow tax professor at Loyola University, Ellen Aprill, has put together a useful powerpoint on the way political activity comes into play in deciding whether an organization is eligible for 501(c)(4) status or should instead be treated as a 527 organization that is required to disclose donors. Download Aprill. Primer on political activity of 501(c)s and 527s. May 2013. Perhaps if most people understood the importance of this distinction (and the difficulties created by the lenient tax administration position that an organization can be "exclusively" focused on social welfare activities as long as it "primarily" is), some of the brouhaha over the IRS use of "tea party" and other terms to select applications for extra scrutiny would fade away.
Since I last wrote about this issue, the acting commissioner of the IRS Steve Miller has been forced to resign, and another IRS official has also been fired. Heads are rolling because the tax-exempt office used what seemed a likely efficient filter (the use of tea party or patriot in group names) to select applicants for C-4 status for review to see if they should be applying instead as 527s, groups that are allowed to be politically active. C-4 groups are supposed to operate "exclusively" for social welfare purposes, although the IRS has, through administrative interpretation in regulations, permitted such groups to qualify even when they do not satisfy the letter of the law, so long as they operate "primarily" for social welfare purposes. But Majority Leader Boehner isn't happy with a few heads rolling and a media feeding frenzy over the purported "scandal"--he wants people to go to jail. See Rayfield, Boehner on IRS: Who's going to jail over this scandal, Salon.com (May 15, 2013). And Rep. Camp at the Friday hearing, in which Republicans indulged in egregious insults to government employees, called the issue just the "latest example of a culture of coverups", "a problem of the IRS being too large, too powerful." Rubin & Tiron, Existing IRS Cheif Miller Denies Targeting as Republicans Pounce, Bloomberg.com (May 17, 2013). And the Treasury Inspector General on Tax Administration (TIGTA) report has been released, described by his testimony Friday at what promises to be the first of many hearings conducted by Congress on this matter. See Inspector General's Report on the IRS, New York Times (May 14, 2013) (full report available). Note that the reason the Inspector General considered the use of "tea party" or "patriot" problematic wasn't that it was not a potentially good indicator of whether a group was engaged in too much political activity, it was that the tag would capture every group that had "tea party" in its name, unlike the use of less targeted searches, which would capture some but not all groups. So he thought it was an inappropriate way to select groups for scrutiny, but he did not think the groups were politically or ideologically targeted by the IRS. He just thought there was a poor management problem. All those on the right who have been repeating the "big, bad government" meme are nonetheless having a ball. They have long targeted taxes, and the IRS as the administrative agency responsible for collecting them and going after tax cheaters, as the preeminent symbol of all they hate about the American experiment in self-government and their desire for a free hand for, and rule by, the corporatist and wealthy elite. Taxes permit government to act on behalf of all the people, rather than just catering to the needs of those who can buy access. And so taxes are a prime target for moneyed groups on the right. So they are playing this as a rogue government agency out to get ordinary people. See, for instance, the right-wing Institute for Policy Innovation's latest release (from TaxBytes.email@example.com, May 15, 2013), in which it uses the tax-exempt office's use of tags like 'tea party' to identify C-4 applications for scrutiny to support its claim that "our freedom is in peril" from government agencies, because "we can't trust the IRS". So the IPI complains about providing personal financial information to the IRS and the concern that "they" can't be trusted with the info is used as a basis for arguing for moving from an income tax (which is progressive) to a consumption tax (which is regressive--not taxing capital income of the wealthy). Then it goes on to claim that the inability to trust the IRS is just another reason to repeal the health care reform (which is mildly progressive) enacted under Obama. And a reason to object to the development of a "real-time tax system" that would allow the IRS to compute tax liabilities for taxpayers (which is progressive, since the wealthy hire whatever tax advisers they need, but many an earned income tax credit goes unclaimed because the working poor don't know they are eligible for it), since a system that allows the taxpayer to submit information and let the agency (using computers) calculate the tax due is "an affront to our system of voluntary tax compliance." The fact that an office used what seemed like an efficient label for separating out likely candidates for disqualification for C-4 status is used to argue that there are "powerful enemies within the Government Class" that are using "IRS harassment, purposely delaying flights, or releasing felons" to "fight back" against the purportedly righteous effort by the right to "limit the spending and power of the federal government." The facts suggest otherwise. As Stuart Levine commented on an earlier posting here, An organization seeking to qualify under 501(c)(4) does not need a determination letter. Why then were they seeking these letters? Well, the (likely well-founded) suspicion of the people in Cincinnati was that these organizations wanted a determination letter under 501(c)(4) to assure donors that they weren't 527 organizations and that their political donations would be anonymous. [He notes further that] the applications for all organizations seeking a determination letter are reviewed. That's 100% subject to review, not 1% or 2%. Second, one of the issues that has to be focused on in a 501(c)(4) review is whether the organization was engaged in an undue amount of political activity. The IRS has stated in its Q&A on the topic that "it started using 'tea party' as a shorthand in examining non-profit groups because employees had specific concerns about some groups with that name. IRS employees had seen cases of organizations with the name Tea Party in which political activity was an issue that needed to be reviewed for compliance with legal requirements." The IRS Q&A goes on to say that was an "inappropriate criterion"--it could have used "politically neutral" terms to get at the same groups that would be reasonably subject to greater scrutiny. Personally, I doubt that selection of groups with "tea party" would have been considered inappropriate in a world that didn't have a dysfunctional Congress with a partisan divide so wide you could drive a Mack truck through it. Further, the IRS targeted Democratic-leaning organizations for greater scrutiny in the same period that it targeted tea party groups. Emerge America, a liberal group that trains women for public office, had its status as a C-4 denied and was forced to file as a 527--disclosing its donors and paying some taxes. Julie Bykowicz & Jonathan D. Salant, IRS Sent Same Letter to Democrats that Fed Tea Party Row, Sources Say, 94 DTR GG-2 (May 15, 2013). Progress Texas, a liberal group, faced the same line of questioning, according to the Bloomberg report. The two law firms that represent 33 Republican-leaning organizations claiming they were targeted by the IRS acknowledged that none of their clients was rejected for tax-exempt status. Id. The problem isn't targeting of potentially political groups--it's that the IRS has administratively applied the law (requiring "exclusive" operation as a social welfare organization) to permit organizations to conduct a great deal of political campaign intervention activity--so long as it isn't the "primary" activity of the organization. This allows both Democratic and Republican groups to "game a system [that is] intended to encourage citizens to engage in charitable endeavors and support projects or programs that braodly benefit communities." Julie Bykowicz, IRS Probe Sheds Light on Nonprofit Election-Year Activity Boost, Bloomberg.com (May 17, 2013). As notes Melanie Sloan, executive director of Citizens for Responsibility and Ethics: "The real problem is that phony 501(c)(4) groups are exploiting the tax laws to protect donors who don't want to be held accountable for vicious, deceitful political ads." Julie Bykowicz & Jonathan D. Salant, IRS Sent Same Letter to Democrats that Fed Tea Party Row, Sources Say, 94 DTR GG-2 (May 15, 2013). Baucus (registered as a Democrat but comporting himself on tax issues like a Republican) and Camp (a dyed in the wool GOPer) both claim that this controversy should provide "momentum" for their ideas about "tax reform"--ideas which involve "broadening the base" and "lowering the rates" (an idea whose time came more than a quarter-century ago and shouldn't be revisited now when we need to raise revenues to support education and infrastructure development). See Rubin & Cook, IRS Scandal Bolsters Case for Tax rEvision, Camp and Baucus Say, Bloomberg.com (May 16, 2013). That's silly--what this episode shows more than anything seems to be that we have underfunded the IRS, so that there is insufficient training of employees and insufficiently skilled management leading all of the various offices. We need to raise more tax revenues to fund necessary government functions adequately, as well as deal with the many problems we have deferred for decades as we have moved to the right, such as climate change, infrastructure decay, and educational funding. Ron Wyden has a better idea for combatting the "problem" demonstrated by the potential for bias in groups picked for scrutiny in the tax-exempt application process: MAKE ALL GROUPS THAT SPEND ANY MONEY DRIECTLY ON POLITICS DISCLOSE THEIR DONORS. That eliminates the kind of difficult line-drawing that requires discretionary decisionmaking by low-level functionaries and instead provides a workable bright-line rule that politicking requires disclosure. Outside groups spent $1 billion in the 2012 elections, id., a result of the Supreme Court's worrisome Citizens United decision granting corporations a First Amendment right to intervene in political campaigns as "persons" under the law, even though corporations can't actually vote. (One wonders whether they don't get even better selection of political handymen through their liberal use of money.) Let them all reveal just who put up that money, to support which positions. That way, voters can decide, with full information.
Salon's Alex Seitz-Wald has a story that provides additional context on the difficulty the IRS has in determining appropriate filters for political activity. See "When the IRS targeted liberals: Under George W. Bush, it went after the NAACP, Greenpeace, and even a liberal church," Salon.com (May 14, 2013). While few are defending the Internal Revenue Service for targeting some 300 conservative groups, there are two critical pieces of context missing from the conventional wisdom on the “scandal.” First, at least from what we know so far, the groups were not targeted in a political vendetta — but rather were executing a makeshift enforcement test (an ugly one, mind you) for IRS employees tasked with separating political groups not allowed to claim tax-exempt status, from bona fide social welfare organizations. Employees are given almost zero official guidance on how to do that, so they went after Tea Party groups because those seemed like they might be political. Keep in mind, the commissioner of the IRS at the time was a Bush appointee. The second is that while this is the first time this kind of thing has become a national scandal, it’s not the first time such activity has occurred. The article goes on to list the IRS varied record on successful filtering and investigation of political activities, including: * The investigation of All Saints Episcopal, a large (liberal) church in Pasadena, because of an anti-war sermon the Sunday before the 2004 election, about Bush's preemptive war doctrine--a case that was not closed until 2007, when the IRS concluded that the church had violated rules but did not revoke its tax-exempt status; * The failure to investigate two large (conservative) churches in Ohio that were apparently engaged in direct political campaigning for the Republican gubernatorial candidate, who even benefited from flights on church planes, inspite of the complaint from a group of religious leaders about the violations; * The quick closing of an audit, without any action, of The Living Word Christian Center, a (conservative) church in Minnesota, after its pastor endorsed Michele Bachmann from the pulpit in 2006; * The 2004 audit targeting the (liberal) NAACP for criticising Bush for being the first sitting president to fail to address the organization at its annual meeting; * The ability of a right-wing group called "Public Interest Watch", funded almost entirely by Exxon Mobile in one year, to get the IRS to instigate an examination of Greenpeace, an organization critical of Exxon Mobile for its failure to address climate change, in 2006. Perhaps more interesting--The Senate held a hearing on nonprofits' political activity under the REPUBLICAN chair of the Finance Committee, who wanted the IRS to come down harder on enforcement of the rules and noted the need to provide legislative clarity about drawing the line between politics and social welfare, the same issue that the right-wing press is accusing the IRS of failing on today.
While the information about the applications of tea party and other groups for tax-exempt 501(c)(4) "social welfare" status has been causing a feeding frenzy in the press, the Obama Administration continues to pander to the right by agreeing Monday that the use of terms designating primarily tea party and other groups with politically important terms in their names for scrutiny was intolerable. This is the kind of statement that makes it difficult for the IRS to retain employees, in an underfunded agency with a highly visible mission to collect taxes, including from people who don't want to pay them. I'm not convinced that it was anything other than a political deaf ear to how the right would respond when it was disclosed. After all, there were thousands of new conservative groups seeking approval at the height of tea-party mania, and many of those groups were likely to be conducting considerable political activity that might make them inelgible for (c)(4) status. It is much more likely that targeting such groups was simply a political no-no because of the hue and cry that right-wingers in Congress and out would raise (as they have), rather than that it was an improper exercise of the IRS's limited resources to select groups for review. Now Eric Holder has announced that he has ordered the Justice Department and FBI to investigate whether IRS officials broke any criminal laws in singling out groups for special scrutiny. Shear & Shane, Justice Department Opens Criminal Inquiry Into I.R.S. Audits, New York Times (May 14, 2013). We don't investigate federal government officials for targeting US citizens for assassination by drone or for imprisoning US citizens in military brigs, but we start an investigation of mid-level IRS officials trying to find reasonable ways to filter the many political groups who apply for (c)(4) status to find those that are inelgible? Sounds like skewed priorities to me. Especially when the IRS's inspector general is already investigating the gency and is expected to release its report in a few days, describing in detail the way the agency screened political groups for extra scrutiny. And of course, a Republican in Congress has already introduced a bill to make it illegal for the IRS to 'target' political groups. Are there other options to prevent the recurrence of these issues? One idea is to publish all donors: If a (c)(4) is funded almost exclusively by a party machine, the public should know about it. Another idea is to eliminate tax-exempt status for any group that does any political campaigning or lobbying. Another is to require all tax-exempt groups to provide a full monthy report of activities on their website, listing every event and every contact of any member or agent of the group with any sitting official or any political candidate. The price of tax-exemption would be transparency regarding the organization's activities.
[edited 2:51 to include additional links to news coverage and Lerner statement] In my earlier posting on Orrin Hatch's disappointing 'keynote' speech at the concluding ABA Tax Section luncheon, I mentioned his concluding attack on the IRS for "targeting conservative groups." TaxProf has provided considerable converage of the media sharkfest over the disclosure on Friday that the IRS's division responsible for overseeing the applications for tax-exempt status had used terms like "patriot" and "tea party" and "9/12" to select applications for scrutiny as to the potential for having passed the cap on political activity permitted for a social welfare organization. See, e.g., WaPo and WSJ agree: IRS targeting of conservatives is appalling, which includes a plethora of links to various Hill and national papers covering the disclosure. The fact that the IRS searched for suitable key terms to find groups that would have the greatest potential for conducting too much political activity to qualify as a social welfare organization is not at all surprising. As Lois Lerner stated on Friday, this was done as a "shortcut" to pick applications for review, not from "political bias." It is also odd to say that including the term "patriot" would only identify conservative groups--it is quite possible that there are liberal groups using that term, since progressives do think of themselves as patriots who care deeply about our nation. Similarly, there might well be a liberal group with an "anti-tea-party" name, intended to provide a political counterpoint to right-wing tea party groups--that group would be, and appropriately should be, selected for deeper scrutiny to be sure it satisfied the requirements for a social welfare group with such a key-word search. A problem would exist, however, if there were no progressive groups --also likely to be over-involved in politicial activity--identified for deeper scrutiny: that hasn't been established, as far as I can tell from the media reports. Sunday's TaxProf post provides Professor Schmalbeck's summary of the discussion at the tax-exempt organization committee's briefing by Lois Lerner at the ABA Tax Section's annual meeting. Here's the link: Schmalbeck on the IRS 'Targeting' of Conservative Groups. Other links in the media today include: Josh Hicks, Lingering questions about the IRS targeting of conservative groups, Washington Post (May 13, 2013). Kathleen Hunter & Richard Rubin, Obama says IRS targeting of Tea Party groups 'outrageous', Bloomberg BusinessWeek (May 13, 2013). CNN Washington Bureau, Obama: Alleged IRS political targeting 'outrageous', CNN Politics (May 13, 2013).
Orrin Hatch was the keynote speaker for the ABA Tax Section luncheon today in DC. Having never heard the man in person, I was surprised at the bumbling nature of his speech. He came across as an old man reciting a set of platitudes from the GOP talking-points rulebook. Asserting that the tax code is "complicated, inefficient, unjust, unfair," he claimed that all are agreed on a need for tax reform, because the tax code is "the major obstacle standing between us and sustained prosperity." Now, folks. You all know that's bunk, right? The major obstacles standing between us and sustained prosperity are (1) the billions we squandered on two unnecessary preemptive wars and other costs of excessive militarization of our society, along with (2) the billions spent supporting the 'too big to fail' financial giants that have plundered the middle class while continuing to benefit from cheap (subsidized) funding. Of course, there are a number of areas of the tax code that also stand in the way of prosperity--the preference for capital over labor, the extensive provisions incentivizing consolidation of business empires, the provisions favoring private equity enterprises that eat up and spit out workers for their own profits. Those were clearly not the target of Sen. Hatch in his favored tax "reform." So what did he say about tax reform? Let's see. 1) The goal is "to produce bipartisan tax reform that can pass the House and Senate." For my part, I'd just as well stick with the current Code. ANYTHING that the GOP is willing to go along with will be beneficial to Big Business and harmful to ordinary Americans. About the only thing that is bipartisan these days is something that Wall Street likes, so it gets the support of Baucus and other Dems-in-name-only. 2) The Obama Administration has accepted the idea of "revenue neutral corporate tax reform" but Hatch wants broad reform of individual, corporate and pass-through. Interestingly, the Teaching Tax Committee had a program, staged as a debate, on corporate tax reform. The audience voted overwhelmingly in favor of retaining the corporate tax and against doing reform as "lowering the rate with revenue neutrality". Corporate tax reform as envisioned by most on the right is just another piece of the "tax cuts create growth" mythology that has been repeated ad nauseum in spite of the evidence of the last decade of tax cuts with minimal growth. Hatch of course says we should do corporate tax reform (lowering the rates) while ALSO lowering the rates on dividends and capital gains yet again. And he wants to lower individual rates generally at the same time that we lower corporate rates--claiming, of course, that such lowering of rates is a "fairness" issue for those pass-through businesses that have only an owner-level tax in order to encourage small business growth, entrepreneurs and job creation. Funny how no matter what the rate is or how low the effective rate is--Apple's is less than 10%, GE's is even lower--the DC gang will still claim that if we only get the rates lower there will be more jobs. And he says not doing individual tax reform at the same time would be "unfair," because we'd be "extending a helping hand to corporations and leaving individuals benind, whether families or small businesses" This is the right's typical claim that they care about ordinary Americans. But behind that claim is the perennial desire to 1) aid the owners of capital, with no concern for labor whatsoever and 2) cut taxes generally so that the very government that people like Sen. Hatch serve can be cast as the devil and shrunk to ensure that it provides the minimum services imaginable, in 'starve the beast' fashion. Hatch then launched into some scattered comments about the "principles" that should guide tax reform. They were the predictable ones from the right 1) Hatch claims the main goal of tax reform is to promote growth through lowering rates 2) Hatch claims that international competitiveness is terribly important. He wants US multinationals to be able to repatriate their overseas profits easily (meaning--no tax). He says competitiveness requires that the U.S. adopt a "reasonable territorial system". That, he claims will increase exports and encourage investment at home. This is, of course, garbage. Companies go abroad to exploit cheap labor in impoverished countries like Bangladesh where workers have no rights and company owners take all the profits. Having no US taxes would just be the icing on the cake. Until we end the primitive transfer pricing game that companies are allowed to play, companies like Apple and Google will continue to pretend to sell to their offshore affiliates assets that are their core business and never ever would be sold to a third party, purely to avoid US tax on intellectual property generated in the US. The reform we need is to eliminate deferral entirely. (And we certainly don't need to keep extending the ridiculous "active financing exception" that serves as yet another subsidy for financial institutions.) Here Hatch engaged in a gratuitous insult to every union member in the country. He asserted that the only thing holding the country back from the territorial system he wants is the unions' lobbying of President Obama. He went on to claim that workers "have to join unions and pay unions dues"--this of course is the anti-union screed of the right that misstates the way agency shops work. In my case, faculty can be paying members of the union or they can pay a "fair share" fee for the services the union provides them (grievances, representation, negotiation) or they can contribute to a university scholarship fund and pay nothing to a union and still get those services. Hatch's tone (and facial expression) here was one of sheer hate--I literally had to bite my tongue to avoid standing up to challenge him for his misrepresentations about unions. Of course, in his hatred of unions, Hatch reveals the contempt in which the right generally holds ordinary workers in the US. They want companies to be competitive--meaning that they want companies to make huge profits from exploiting labor and they don't give a damn about workers' being able to have jobs and decent living. 3) Hatch, like all those who elevate simplicity over distributional justice and compliance needs, talked about the complexity of the tax code, claiming that $168 billion is spent annually in complying with the tax code, while there are 51% who "don't pay tax". Not sure where Hatch got the $168 billion figure (federal? state and federal? tax shelter planning included?). Much sophisticated tax planning is tax avoidance planning--businesses make the calculation that they're willing to pay accountants and lawyers a good bit to avoid a bigger tax hit. They could avoid much of that expenditure by just doing transactions in commonly accepted ways and not doing transctions that are primarily tax motiviated at all.l As for the 51% 'shades of Romney's 47%" comment. it didn't even fit in. Came across as another gratuitous insult to those in the lower income distributions who barely make a sustainable living and who pay considerable sales and payroll taxes even though perhaps not income tax. We did, after all, DESIGN our tax system to try to protect lower income taxpayers from paying income tax. That's the reason, for example, that we have a standard deduction and presonal exemptions. 4) At this point, Hatch's speech became somewhat incoherent as he wanted to hit Obama for a "sea change" from the purported wonder years of the Bush tax cuts to the new era of tax increases. So he praised the unfortunate Bush tax cuts of 2001-2003 and contrasted that with the "awful" fact that the estate tax came back after the 10-year gimmick expiration reached its sunset. (He called it, of course, by the right-wing term "death taxes") He noted the "problem" of having to extend the various extender provisions--"tax reform should be more permanent" because, he claimed, the uncertainty "hinders long-term growth." Actually, almost every single one of those corporate extenders should be let go. The R&D credit, the active financing exception, etc. 5) Another of the perennial GOP tax goals popped up as Hatch claimed we need a "tax environment more favorable to saving and capital investment that will lead to a better standard of living for future generations." Hey, Congress had the sense to write the capital gains preference out of the Code in the thoughtful reform of 1986. But then the lobbyists for the wealthy got it right back in and they've whittled the rate down to a paltry 20%. We haven't seen any of that promised "better standard of living". IN fact, more of the profits have gone to the capitalists and workers' wages continue to deteriorate. The rest of the tax reform "discussion" in the speech was one platitude after another. Tax reform will "help the entire economy", help companies "compete better", "help all Americans." It's an "economic necessity" that is worth struggling to achieve even in this "toxic political environment" because we are, after all, the "greatest nation in the world." Wait a minute, folks. The party that is responsible for the "toxic political environment" is the GOP, the obstructionist party of no that has determined that it doesn't care what it does to the country as long as it can stay in power. And that claim about "greatest nation" status is highly suspect: we are horribly unequal in resources. We have a high illiteracy rate. We have high deaths in childbirth. We have high teen pregnancies. We have an obscenely high incarceration rate. We have a lower life expectancy than countries with a greater quality of living. We have fewer citizens that are college-educated than other developed countries. We have more children living in poverty. We are fast becoming an oligarchy in which the wealthy buy the laws they want and exploit the rest of us. Guns run rampant in our society and are used for heinous crimes but even when a vast majority supports simply measures like universal registration and limited magazines our Congress heeds only the gun lobby. That "greatest nation" status is highly dubious. Hatch ended his speech with another political item --you'd think he thought that the ABA tax section must be mostly rich lawyers that are good Republicans from the tone of much of this speech. It has come to the media's attention that the IRS office that review tax-exempt organization applications has focused on those that have "tea party' in their title. But that's the note that Hatch ended on--claiming that this was "harassment and intimidation" and that Congress would folloow up to find out "who was behind it, when it began, and what was done (or not done) to correct it" since "in a country with the First Amendment, no organization should be singled out" so "this is not over by any stretch of the imagination." Now, what readers should know is that scrutinizing applications for social welfare organization stauts is in fact an important role of the IRS. There is an office in Cinncinati that scrutinizes the apps. Among other things, it looks for those organizations that shouldn't apply as social welfare organizations because their primary activity (greater than 50%) is political so they should be a "527" organization. The IRS office has very limited resources and personnel (another of the 'starve the beast' methods of the right), so it seeks to find efficient ways to focus on organizations that should potentially be denied social welfare status and moved to 527 status. Somebody in that office found that 'tea party' was a reasonable search item--probably somebody who didn't have very good political attenna to be aware of how the Fox News types like O'Reilly would present it as "targeting conservatives'. What was really targeted was any organization, conservative or liberal, that inappropriately applied for social welfare organization status. The right is making a mountain of a molehill here. And once again creating a media frenzy out of the public's ignorance of the way the IRS has to work to avoid abuse of tax exempt status.
One of the (many) ways by which rich, sophisticated taxpayers who are also ultra-greedy have managed to avoid paying their fair share of taxes is to move money offshore through trusts and "companies" set up in various no-tax/lo-tax, hi-sun jurisdictions like the Cayman Islands, British Virgin Islands, Cook Islands, Singapore, etc. I suppose for many years this scheme served multiple objectives--it stashed the cash beyond the reach of the US government, it provided a nice place to visit the cash, and it had the cachet of belonging to the exclusive jet set behind it. That's becoming less so as the US continues to pursue tax cheats with unreported offshore accounts. The dam started bursting with the revelation of the way Swiss bankers groveled at their American clients' feet, from smuggling diamonds into the country in toothpaste tubes to secreting gold in deep, hidden vaults to setting up sham companies in the Phillipines or other countries. Over the last half decade, more people have participated in voluntary disclosure and more have been identified for more serious penalty programs (including criminal prosecution). Each voluntary disclosure included full information about those who facilitated the offshoring--bankers' names, other involved lawyers, accountants, and bankers, other entities. That groundswell of information facilitated identification of even more tax cheats, and those identifications yielded a new trove of relational data--those who had assisted them. That finally seemed to begin to put some teeth into enforcement efforts and some gnashing of teeth into the lives of the otherwise obliviously happy tax evaders. But various commentators (including my colleague at Wayne Law, Professor Michael McIntyre) have been concerned that the offshore gambit can't be cleaned up until countries begin more automatic sharing of the tax information they have without requiring the requesting country to have already identified the accountholder well enough to ask for information specifically about that person. If they can ask specifically, of course, it means they have already been found, which makes for a catch-22 that has made pursuing secret bank account holders an overly arduous task. That makes the IRS's announcement today of a new coordinated effort among the U.S., U.K, and Australia heartening news. They have agreed to share information about trusts and companies holding assets in tax havens like the British Virgin Islands, the Cayman Islands, and Singapore. See IRS news release IR-2013-48 (May 9, 2013). With the cache of information each country has gleaned from the recent efforts, coordination will allow them all to benefit from each one's effort. That should accelerate the effort to catch the tax cheats.
Most are aware that online businesses have an unfair tax advantage. Under the 1992 Quill Supreme Court decision, states cannot currently require online retailers without physical presence in the state to collect applicable sales taxes. Although customers are supposed to save receipts and then pay over the appropriate amount of sales tax at the end of the year, nobody does. And they get away with not paying since it would be an onerous burden on states to assess those taxes without information from the onlines sellers. The result is that the tax-included price for merchandise purchased online is cheaper than for the same merchandise purchased in stores. So our tax system is essentially subsidizing the replacement of mom and pop small businesses with online giants. The mom and pop business often serves the online business in another way--for free: customers may go try on the merchandise at the local store, but then order online to get the cheaper (sales-tax-free) price. Local businesses have lobbied for legislation that would permit states to require online retailers of reasonable size ($1 million in revenues annually) to collect sales taxes. Given the ability of today's software to handle these kinds of complex tasks, there is really no justification for subsidizing online businesses over local businesses by not requiring them to collect the taxes. The Senate finally passed the legislation on Monday. The vote--69-27--demonstrates that when politicians understand that people want a fair tax bill, they can sometimes even in this stridently partisan age manage to get it passed. The House, however, may be another matter. Tea Party extremists are more likely to rally to the Norquist anti-tax pledge even though this is quite clearly NOT a tax bill. The taxes have long been due. It is the mechanism of collecting the taxes that the bill would change, since collection by the seller works much better than self-reporting and payment by the customer. Right-wing groups oppose the legislation as a matter of "basic principle because they are not only ideologically opposed to ANY revenue going to governments but also don't like the idea of setting up reasonable measures to help government collect revenues actually due. Matt Kibbe of Freedom Works doesn't like "creating a new infrastructure to expand the general power of government." Will the GOP leadership whip these guys into line. Probably not. Boehner has expressed his reluctance to support the legislation. Funny, this is really a "state's rights" issue that the GOP would, in ordinary times, likely support. It just ensures that states can collect sales taxes already due. And the GOP has tried to use sales taxes as an argument for eliminating the income tax--remember that one of the purported "pros" of a national sales tax that is claimed is that it could "piggyback" off the state sales tax mechanism, letting the states collect the federal sales tax. So the truth is now revealed. The GOP would be quite happy if the states were incapacitated to collect their own sales tax and thus unable to collect the 'national' sales tax either. The idea of starving government programs lies very shallowly beneath the surface of the opposition to this legislation.