|
| Taxing value |
|
navigational aids: News ticker:
|
14 December 06.
The question for the day: when should you count transfers among third parties as part of your taxable income? Here are two examples.
•
•
To the intuition of most of the folks I've spoken with, the gift donation
should not count as income, and the sidelong rent payment should be.
So that's an easy consensus, but the next question is why one
third-party transfer should count and the other shouldn't. Both are
a transfer from one third party to another that benefits you, and at
that level, are equivalent. The fact that one is a gift is irrelevant:
if Grandma slipped a $1,000 check into your birthday card, you would
have to claim it like any other income. Amnesty is a charity,
but that just means that after you claim the $1,000 gift as income,
you can deduct it as charitable giving. I mean no offense to the many
people who have tried, but I have not yet seen a reasonable explanation
as to why we should treat one of these cases as income but not the other.
Defining income is hard. A great deal of title 26 of the US
Code
is about questions like these. When your employer pays your health
insurance for you, is it income? What if they reimburse you for it after
you pay for it? Since you sometimes declare your income tax
over a year after you earned it, other problems can arise: ¿If you live
in Maryland but work in DC, to whom do you pay state income taxes?
Hint: only one of these areas has Congressional
representation.
The first, IRS representative #2504624, decided that a mortgage
counts as rental expenses. At this point I'm torn. Even I know this is
false, but is it rude to call her on her made-up interpretation of tax law?
Her: As you can see from this publication, tenants paying rental expenses
count as income.
Me: It also says here that you can deduct the full value of rental expenses,
so would that mean that a person could deduct their full mortgage?
Her: No. You can never deduct your full mortgage.
Me: But you declared that it's a rental expense, and those are
deductible.
Her: Mortgages can't be deducted. They don't count as rental expenses.
Me: So if it's not a rental expense, then it's not income when a tenant pays.
Her: Yes, it is income. When a tenant pays rental expenses, then it's income.
This went on for a while, as I politely pressed her for a consistent
definition of rental expenses, or of income. She eventually hung up on me.
Which is why I'm bucking my normal habit of using only initials and am
printing her full name here. That's right, IRS Representative #2504624,
every time anybody searches for your name, the first hit will be this
post about how you rudely treated a taxpayer after giving him blatantly
false, made-up advice.
The second try gave similar results, albeit much more politely:
Him: This counts as income under the doctrine of constructive receipt.
Let me transfer you to somebody else who will explain that to you so I
don't have to talk to you anymore.
While on hold, I looked up this doctrine. Constructive receipt is about
the timing of income. If you get a paycheck on 20 December, but don't
deposit it until 2 January, it still counts as income as of 20 December,
because there was nothing keeping you from receiving it then. But this
doesn't apply to either of the above cases, because there's a whole lot
keeping you from receiving money from either Amnesty or CitiMortgage.
The conversation with the third person went about the same, but he had the
grace, wit, and courtesy to admit that he had neither the text of 26 CFR
nor the wherewithal to interpret it, and wrote out an email inquiry
that was to be replied to within 48 hours. [You can't directly email
the IRS's service desk--you have to phone in and ask the operator to
type out an email for you.] Naturally, I never got a response.
I checked 26 CFR myself and learned an interesting factoid:
it doesn't actually define income, beyond the basic `income is money you
receive' definition that does not to justice to any of the above.
There are the no-brainer cases--if somebody hands you cash, then it's
income--but what if you loaned them fifty bucks that they paid back
the next month? Is that $50 income for them in month one and $50
income for you in
month two? Nothing is consumed and relatively little value is added, but
it's ambiguous whether there's income. The law also
considers things like large gifts to be income. Remember when
Oprah Winfrey gave her audience members cars, and they then
each got a $7,000 tax obligation with the
gift?
The idea here is that any item that you receive is equivalent to its
fair market value. But this opens the door for massive ambiguity: that
backrub has a fair market value, after all.
The tax code is a mess because the problem of defining income is
fundamentally unsolvable, because it starts with a fundamentally
unsolvable question--¿Where does value come from?--and then adds on
top another fundamentally unsolvable classification--¿What portion of
value should be taxed?
The IRS only makes things more difficult by refusing to acknowledge
that the income tax is a tax on value. But it remains in denial, both
in order to sound smart and for political reasons (The VAT is unpopular
because Europeans do it, and the IRS doesn't want to admit that the
income tax is a botched VAT). If we could use the word value,
then the Amnesty-CitiMortgage conundrum is easy: the gift contribution adds a
small amount of value to your life, while a $1,000 mortgage payment adds
$1,000 in value. As the IRS's service representatives demonstrated, when
you can't use the V word, you're stuck making up ad hoc
stories about rental expenses and constructive receipt that don't quite
work.
Another, much more effective alternative: the consumption tax. It has
some æsthetic appeal: we aren't bothered by the rich for making
lots of money, we're bothered by how they buy big yachts and overpriced
shoes. We want to encourage savings, which is why there are so many
exceptions in the income tax for savings like 401(k) plans (i.e.,
retirment plans conforming with 26 CFR 1.401(k).). By the simplified
equation Income - Savings = Consumption, the current tax code makes you
calculate income--already hard, as above--and then excruciatingly
subtract every element that could somehow count as savings. The
consumption tax just has you total up consumption, by billing you at
point of sale like any other sales tax.
The consumption tax also reconciles the Amnesty-CitiMortgage problem.
First, we would decide whether either of the above counts as
consumption or not right off the bat. Instead of the situation we have
now, where we tax your income and then if you contribute to Amnesty
then you get to deduct that portion of income (under a number of caveats),
you would instead pay tax when you give money to CitiMortgage (depending
on how you wanna count buying a house), and then not pay tax when giving
to Amnesty.
Second, all those issues about who who is the final recipient just
evaporate: tax is paid by the person making the outlay. Oprah pays taxes
on the car when she bought them. There's the social problem of whether
the tenants should pay the landlord's taxes, but that isn't complicated
by the accounting issues.
Sure, there are still questions of how one defines consumption--like
whether your house is consumption or an investment. But once we have an
arbitrary decision on that question, the accounting is much easier.
We like progressive taxes, where poor folk pay a lower percentage than
rich folk. There's intuition behind this, that economists can readily
formalize: a dollar to a poor person that buys a loaf of bread is worth
much more--has much higher value--than a dollar to a rich kid who uses
it to buy a portion of jewellery or other useless items. In formal terms,
there is a diminishing marginal value to income, which is evidenced by
risk-averse behavior, especially as shown by those who are well past
the survival level. A progressive tax on cash terms approximates
a flat tax on value terms. McCaffery
proposes fixing this via a refund on the taxes paid on the first
$20,000 in spending. If the tax rate is 5%, everybody just gets handed
$1,000. Those who consumed less than $20,000 are now making a
small profit on the tax system, and thus pay a negative rate; those who
spent $20,000 last year are paying 0% taxes, and the yacht buyers are
paying 4.999%.
So, the consumption tax really is a simplification of the tax scheme,
because it takes taxes at the door, replacing the problem of defining
income minus savings with the simpler problem of defining cash
purchases for consumption. It encourages savings and discourages yacht
purchasing. The only problem is that there are several industries built
from the ground up around avoiding income taxes. Lindblom explains
in his Market as Prison essay Jstor link
that the market is the perfect
system for preventing change, because no matter the change, somebody will
resist it because they are optimized to make money the way things are now.
So when you have a massive system like the income tax, no matter how
fundamentally screwed up it is, there will always be a chorus of
defenders.
So we're stuck with the tax law we have, that attempts to codify the
answer to two impossible-to-answer questions. We'll get tax laws that
simplify the situation a bit, and tax laws that complicate it a bit, but
as long as the law requires a definition of value and a definition of
what value is to be taxed or untaxed, the law will remain a mess.
@article{lindblom:prison,
@book{mccaffery:tax,
Relevant previous entries:
[link] [A comment]
Replies: A comment
on Monday, December 18th, Andy said
I am a big fan of the idea of the consumption tax, too, for basically the same reasons that you outlined, although you should ask Bill Gale about this -- he is pretty skeptical. I think one problem of his is that the tax would have to be larger than 5% -- like maybe 30%. |
