Tag: Income tax

Supreme Court Gives Taxpayers a Muddled Win

This blogpost was co-authored by Cato legal associate Carl DeNigris.

Before the argument on the Arizona immigration case yesterday, the Supreme Court scored a blow for American taxpayers by rejecting the IRS’s attempt to overturn the Court’s prior interpretation of a disputed provision of the Internal Revenue Code, 26 U.S.C. §6501(e)(1)(A).  By avoiding the issue of whether agencies can use their regulatory powers retroactively, however, the Court didn’t go far enough.

In United States v. Home Concrete, the Court ruled that its decision in Colony v. Commissioner of Internal Revenue (1956) – that a taxpayer’s overstatement of tax basis in property is not an omission of income that would otherwise trigger an extended statute of limitations period for assessment – was still controlling.  The IRS had tried to change its interpretation of the relevant regulation but the Court concluded that, despite the government’s contention that the new interpretation was due judicial deference, “there is no longer any different construction that is consistent with Colony and available for adoption by the agency.”  That is, the IRS can’t unilaterally overturn Supreme Court precedent by changing how it interprets statutory language or applies a particular regulation.

But the Court didn’t address the government’s most insidious action here: the IRS sought deference for a regulation that it promulgated in the midst of litigation and which would have been retroactively applied to the taxpayers who were parties to the Home Concrete lawsuit.

In our amicus brief, Cato argued that sanctioning this sort of ad hoc, retroactive rulemaking undermines the rule of law by altering basic assumptions “regarding fairness and reliability of the laws and their application by the courts.”  Yet, with the exception of Justice Kennedy’s one sentence dismissal in dissent, the Court showed no interest in the retroactivity issue.  Moreover, it referred to the government’s blatant attempt at retroactive rulemaking as a mere “gap-filling regulation” with “no gap to fill.”  So while taxpayers won a narrow victory today, the Court’s silence gives little assurance that it remains a bulwark against arbitrary government power.

Perhaps even more importantly, it’s now unclear how courts are to apply an important precedent called Brand X, a 2005 case standing for the proposition that administrative agencies (like the IRS) can adopt regulations contrary to a judicial decision only when the relevant statute’s silence or ambiguity represents a congressional delegation of authority to fill that “gap” to the agency.  In other words, here the IRS acted contrary to clear statutory language as interpreted by Colony Cove, but what about future cases?  We’re no tax or even administrative law specialists, but it does seem that the Court has made a big mess out of Brand X:  When can an agency overturn decisions of the Court?  When can it not?  We’ll have to wait for the next ridiculous agency action to make its way to the Supreme Court to find out.

For more on the case, see here; for more technical administrative/tax law analysis, see here.  One other curious thing about this decision is that it ended up 5-4 but the majority opinion was written by Justice Breyer (who styles himself as the Court’s administrative law expert) and joined by the “conservative” justices – though Justice Scalia concurs only in part – with Justice Kennedy writing the dissent, joined by the remaining three “liberal” justices.

$1 Trillion in Phony Spending Cuts?

In the Washington Post Friday, Ezra Klein partly confirmed what I fear the Republican strategy is for the debt-limit bill—get to the $2 trillion in cuts promised through accounting gimmicks. As I have also noted, Klein says that there is about $1 trillion in budget “savings” ($1.4 trillion with interest) to be found simply in the inflated Congressional Budget Office baseline for Iraq and Afghanistan. Klein says, “I’m told that a big chunk of these savings were included in the debt-ceiling deal” that Rep. Eric Cantor (R-VA) and Sen. Jon Kyl (D-AZ) are negotiating with the Democrats.

Republican leaders have promised that spending cuts in the debt-limit deal must be at least as large as the debt-limit increase, which means $2 trillion if the debt-limit is extended to reach the end of 2012. In a Daily Caller op-ed, I noted that you can find $1 trillion in “savings” from this phony war accounting and another $1 trillion by simply pretending that non-security discretionary will stay flat over the next decade.

There is more evidence that few, if any, real spending cuts are being discussed. One clue is that the media keeps quoting Joe Biden essentially saying that it was easy to reach agreement on the first $1 trillion in cuts.

The other suspicious thing is that the media keeps floating trial balloons for specific tax hikes, but I’ve seen very few trial balloons for specific spending cuts. Friday, the Washington Post story on the debt discussions mentions all kinds of ideas for raising taxes on high earners. A few days ago, news stories revealed that negotiators were talking about changing tax bracket indexing to create annual stealth increases in income taxes. The only item I’ve seen being discussed on the spending side is trimming farm subsidies.

If Republican and Democratic lawmakers were really discussing major spending cuts, then the media would be full of stories mentioning particular changes to entitlement laws to reduce benefits and stories about abolishing programs widely regarded as wasteful, such as community development grants.

I hope I’m wrong, but this is starting to look a lot like the phony $100 billion spending cut deal from earlier this year.

Sean, Rush, Greta, Glenn, Bill: When you get Republican leaders on your shows, get them to promise that they won’t use phony baseline accounting like war costs to reach the $2 trillion in cuts. The budget and the nation desperately need real cuts and real government downsizing.

The President’s Fiscal Commission: It’s a Start

Today POLITICO Arena asks

Will implementing President Obama’s Fiscal Commission recommendations require that everyone take a hit?

My response (with tax insights from Jagadeesh Gokhale):

President Obama’s Fiscal Commission Report offers a useful start in reducing our budget deficits and national debt, but it hardly goes far enough. As several of my Cato colleagues have just noted here, here, here, and here, the report recognizes, to its credit, that our corporate income tax structure puts U.S. corporations at a considerable competitive disadvantage against their foreign competitors. And the report keeps military spending cuts on the table, even if there is much more to be cut. Yet by proposing a reduction in government spending from 24.3 percent of GDP today to 21.8 percent over the next 15 years – total federal spending as recently as 2000 was just 18.4 percent of GDP – it plays the old Washington game of calling a slower increase than previously projected a “cut.”

As for taxes, this report should be read in the context of a powerful argument in last Friday’s Wall Street Journal to the effect that over the past six decades, tax revenues as a percentage of GDP have averaged just under 19 percent, regardless of the top marginal personal income tax rate or whether taxes were cut or raised. What this suggests is that low tax rates spur income growth to leave the government’s revenues undiminished over the long-term. High tax rates do the opposite. It doesn’t take a large leap of faith to believe that this effect would be stronger for those who earn more and pay more in taxes. Indeed, among high earners are the nation’s business leaders – innovators who create new products and jobs – who would respond positively to the growth opportunity provided by a stable, low-tax-rate environment.  So those who believe that we help ourselves by more heavily taxing the rich need to ask themselves whether it might not be better to cut rates and keep them stable instead. Wouldn’t that promote a robust economy and lift all boats – with the government continuing to generate 19 percent in revenues?

None of this has anything to do, of course, with whether our current out-of-control federal government is constitutionally authorized to do all it is doing. But it’s a start toward returning the government to within its constitutional limits. Had those limits been respected – as the Framers understood, unlike New Deal progressives – we wouldn’t be in this mess.

The Consumer Spending Fallacy behind Keynesian Economics

I’m understandably fond of my video exposing the flaws of Keynesian stimulus theory, but I think my former intern has an excellent contribution to the debate with this new 5-minute mini-documentary.

The main insight of the mini-documentary is that Gross Domestic Product (GDP) only measures how national output is allocated between consumption, investment, and government. That’s useful information in many ways, but if we want more output, we should focus on Gross Domestic Income (GDI), which measures how national income is earned.

Focusing on GDI hopefully would lead lawmakers to consider ways of boosting employee compensation, corporate profits, small business income, and other components of national income. Focusing on GDP, by contrast, is misguided since any effort to boost consumption generally leads to less investment. This is why Keynesian policies only redistribute national income, but don’t boost overall output.

You may recognize Hiwa. She narrated a very popular video earlier this year on the nightmare of income-tax complexity.

There Ain’t No Such Thing as a Tax Expenditure

The co-chairs of President Obama’s Fiscal Commission propose to eliminate several tax loopholes while reducing marginal rates.  Hear, hear.  But they describe those loopholes as “backdoor spending in the tax code.”  It is incorrect and dangerous to equate tax loopholes with government spending.

The tax code’s countless credits, deductions, and exclusions let people keep a portion of their earnings, provided they use the money how the government wants them to use it.  Tax loopholes therefore have a lot in common with government spending: they give power to politicians, inhibit freedom, reduce economic output, unjustly enrich special-interest groups, et cetera.

But to call them “tax expenditures” or “tax subsidies” or ”backdoor spending in the tax code” is to claim that when the government fails to take a dollar from you, it is spending that dollar.  It implies that your dollar actually belongs to the government, which is graciously letting you keep it.  And it implies that eliminating a tax loophole is not a tax increase, because that dollar already belonged to the government anyway.  The government has simply decided to spend its money somewhere else.

When you hear a politician use the terms tax expenditure, tax subsidy, or backdoor spending in the tax code, beware.  He’s about to raise your taxes.

Ballot Initiatives Provide Underappreciated Election-Night Victories

Last week, I highlighted nine ballot initiatives that were worth watching because of their policy implications and/or their role is showing whether voters wanted more or less freedom. The results, by and large, are very encouraging. Let’s take a look at the results of those nine votes, as well as a few additional key initiatives.

1. The big spenders wanted to impose an income tax in the state of Washington, and they even had support from too-rich-to-care Bill Gates. The good news is that this initiative got slaughtered by a nearly two-to-one margin.  I was worried about this initiative since crazy  Oregon voters approved higher tax rates earlier this year. In a further bit of good news, Washington voters also approved a supermajority requirement for tax increases by a similar margin.

2. Nevada voters had a chance to vote on eminent domain abuse. This is an initiative that I mischaracterized in my original post. The language made it sound like it was designed to protect private property, but it actually was proposed by the political elite to weaken a property rights initiative that the voters previously had imposed. Fortunately, Nevada voters did not share my naiveté and the effort to weaken eminent domain protections was decisively rejected.  This is important, of course, because of the Supreme Court’s reprehensible Kelo decision.

3. California voters were predictably disappointing. They rejected the initiative to legalize marijuana, thus missing an opportunity to adopt a more sensible approach to victimless crimes. The crazy voters from the Golden State also kept in place a suicidal global warming scheme that is driving jobs out of the state. The only silver lining in California’s dark cloud is that voters did approve a supermajority requirement for certain revenue increases.

4. Nearly 90 percent of voters in Kansas approved an initiative to remove any ambiguity about whether individuals have the right to keep and bear arms. Let that be a warning to those imperialist Canadians, just in case they’re plotting an invasion.

5. Arizona voters had a chance to give their opinion on Obamacare. Not surprisingly, they were not big fans, with more than 55 percent of them supporting an initiative in favor of individual choice in health care. A similar initiative was approved by an even greater margin in Oklahoma. Shifting back to Arizona, voters also strongly rejected racial and sexual discrimination by government, but they narrowly failed to approve medical marijuana.

6. Shifting to the local level, San Francisco, one of the craziest cities in America rejected a proposal to require bureaucrats to make meaningful contributions to support their bloated pension and health benefits. On the other hand, voters did approve a proposal to ban people from sleeping on sidewalks. Who knew that was a big issue?

7. Sticking with the ever-amusing Golden State, voters unfortunately eliminated the requirement for a two-thirds vote in the legislature to approve a budget, thus making it even easier for politicians to increase the burden of government spending. The state almost certainly is already on a path to bankruptcy, and this result will probably hasten its fiscal demise. Hopefully, the new GOP majority in the House of Representatives will say no when soon-to-be Governor Brown comes asking for a bailout.

8. The entire political establishment in Massachusetts was united in its opposition to an initiative to to roll back the sales tax from 6.25 percent to 3 percent, and they were sucessful. But 43 percent of voters approved, so maybe there’s some tiny sliver of hope for the Bay State.

9. Louisiana voters approved an initiative to require a two-thirds vote to approve any expansion of taxpayer-financed benefits for government employees. With 65 percent of voters saying yes to this proposal, this is a good sign that the bureaucrat gravy train may finally be slowing down.

At the risk of giving a grade, I think voters generally did a good job when asked to directly make decisions. I give them a solid B.

Nine Key Ballot Initiatives to Watch

While everyone is focused on the battle to see which party will control the House and/or Senate, there are several issues that voters will directly decide that deserve close attention. Here are nine initiatives that I’ll be watching next Tuesday.

1. Imposing an income tax in the state of Washington - This is the one I’ll be following very closely. I have a hard time thinking that voters would be dumb enough to impose an income tax, but the Pacific Northwest is a bit crazy on these issues. Oregon voters, for instance, approved higher tax rates earlier this year.

2. Stopping eminent domain abuse in Nevada - This initiative is very simple. It stops the state from seizing private property if the intent is to transfer it to a private party (thus shutting the door that was opened by the Supreme Court’s reprehensible Kelo decision).

3. Marijuana legalization in California - Proponents of a more sensible approach to victimless crimes will closely watch this initiative to see whether Golden State voters will say yes to pot legalization, subject to local regulation. (David Boaz and Juan Carlos Hidalgo already have commented on the implications of this vote)

4. Strengthen rights of gun owners in Kansas - If approved, this initiative would remove any ambiguity about whether individuals have the right to keep and bear arms.

5. Protecting health care freedom in Arizona - For all intents and purposes, this is a referendum on Obamacare. I’m hoping that it will pass overwhelmingly, thus giving a boost to the repeal campaign. There’s apparently a similar initiative in Oklahoma, but it hasn’t gotten as much attention.

6. Reducing benefits for bureaucrats in San Francisco - If one of the craziest, left-wing cities in America decides to require bureaucrats to make meaningful contributions to support their bloated pension and health benefits, that’s a sign that the gravy train may be in jeopardy for bureaucrats all across the nation.

7. Making it easier to increase government spending in California - The big spenders want to get rid of the two-thirds requirement in the state legislature to approve a budget. This would pave the way for even bigger government in a state that already is close to bankruptcy.

8. Reducing the sales tax in Massachusetts - The entire political establishment is fighting this proposal to roll back the sales tax from 6.25 percent to 3 percent, and pro-spending lobbies are pouring big money into a campaign against the initiative, so you know it must be a good idea.

9. Controlling benefits for bureaucrats in Louisiana - The initiative would require a two-thirds vote to approve any expansion of taxpayer-financed benefits for government employees.