IRS, Foreclosures, etc.

by Chris Sturr | May 23, 2013

Protest Potatoes

Protest Potatoes

(1) David Cay Johnston on IRS “Scandal”:  There was a very good Salon.com piece about this, The real IRS scandal: Targeting by class, quoting David Cay Johnston. Here are key nuggets:

It’s pretty simple, then, to figure out what took place. The IRS, faced with the enormous task of dealing with a surge of 501(c)(4) groups taking advantage of an often contradictory law, performed triage by taking the path of least resistance – going after the most obvious targets, who didn’t have the resources to artfully stay within the tax laws, or to fight back against invasive reviews. They shied away from the heavily lawyered-up big-money groups, and instead focused on battles they thought they could win.

This has precedent within other parts of the IRS. According to data from the Transactional Records Access Clearinghouse at Syracuse University, IRS audits of the largest and richest corporations have steadily declined since 2005, down 22 percent in the ensuing four years and even more from 2011-2013. In the same period, the agency accelerated its scrutiny of small and midsize corporations. Since 2000, the IRS has been more likely to audit the working poor, individuals and families making under $25,000 a year, than those making over $100,000 annually. The middle class received disproportionately more audits throughout the past decade as well. An IRS unit formed in 2009 called the Global High Wealth Industry Group, designed to give special attention to tax compliance of high-wealth individuals, performed exactly two audits in 2010 and 11 in 2011.

Salon asked David Cay Johnston, author of many of the above-linked reports, whether it was fair to assess the IRS fixing its attention on more vulnerable populations as a pattern. “We know broadly that when government takes enforcement actions, it tends to go after the little guy,” he replied. Johnston gave the example of so-called financial fraud prosecutions that target penny-ante operators instead of the largest Wall Street institutions. And just as the Justice Department tends to avoid suspects with more clever lawyers, the IRS could shy away from more fearsome individuals and groups as well.

The rest is worth reading.  And here is David Cay Johnston on Democracy Now!.

The other big tax news, of course, is the spectacle of Apple’s Tim Cook getting hauled before a Senate subcommittee about Apple’s tax evasion and lecturing them on how the corporate tax code should be changed. So corporations shape the tax code to the point where they can legally avoid paying taxes on billions, and when criticized for this they demand that they be able to further dictate the tax code.  Anyhow, I haven’t seen anything great on this–suggestions would be appreciated.  (I heard a kind of crappy interview with Carl Levin on Marketplace–Kai Risdall kept getting Levin to admit that he was responsible for Apple’s sins, because he’s been a senator for so many years.)

(2) Voices of Foreclosure Fraud:  I keep meaning to post a link to the incredible Naked Capitalism post from a week or so ago, Voices of the Harmed Borrowers on Rust Consulting.  It’s really moving.  Rust Consulting is the firm that is supposed to send out settlement checks from the botched Independent Foreclosure Review.  They are giving people the runaround bigtime, and people have found an outlet in Naked Capitalism for their stories.

For good news on this front, check this out:  500 people from a group called the Home Defenders League protested “too big to jail” at the Department of Justice, with 27 arrested.  Let’s have more of this, please.

(3) Tim DeChristopher Released:  Climate activist and former University of Utah econ major (and probably D&S textbook user) Tim DeChristopher was released after 21 months in federal prison.  (Info about him from the last time I posted about him, here.) Here’s an interview with him on the Real News Network. We hear he’s coming to our neck of the woods, as a student at Harvard Divinity School.  And there’s a new documentary out about him, Bidder 70.

(4) Monsanto Targets Scientific Journals:  Another great piece from sometime D&S author Jonathan Latham (he wrote our March/April 2012 cover story, Way Beyond Greenwashing) of Independent Science News, on how Monsanto is suppressing scientific research by placing sympathetic scientists on a journal’s editorial board. The piece (co-authored by Latham and Claire Robinson)  is called The Goodman Affair: Monsanto Targets the Heart of Science, and it is well worth reading.  The piece mentions an earlier hair-raising case of big pharma company Merck getting scientific publisher Elsevier to publish a fake journal, including reprints of articles from other Elsevier journals, just so it could include Merck-friendly (and non-refereed) articles. The fake journal was called the Australasian Journal of Bone and Joint Medicine. Who would have suspected?

It all reminds me of the Rogaine & Braveheart–er, I mean the Rogoff & Reinhart affair, where elites’ handpicked economists plant a data-challenged non-refereed article in a leading journal and thereby influence policy.  Except that economics never really had much claim to being a science.  Speaking of which…

(5) More Heterodox Grad Students Pile onto R&R:  Some grad students from the University of Missouri at Kansas City (another of the great heterodox economics departments, and adopter of D&S textbooks), Matthew Berg and Brian Hartley, have found further flaws in Rogoff and Reinhart’s paper, in a post the the New Economic Perspectives site entitled Debt-to-GDP Ratios and Growth: Country Heterogeneity and Reverse Causation, the Case of Japan (Ultra Wonky).  Read if you dare.  (Actually, though it’s harder-going than the Herndon-Ash-Pollin paper, I could get the main points, and apparently in some ways it’s more devastating, from what I gather from the comments section.)

(6) More Retro Reports:  I mentioned that my friend Harry Hanbury is now with a great new project/organization called Retro Report, which looks back at how the news media screwed up media frenzies way back when.  They have two more short videos out, both of which are great:  The Legacy of Tailhook, and Crack Babies: A Tale from the Drug Wars.

That’s it for now.

–Chris Sturr

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Grover Norquist is Right to Oppose Internet Sales Taxes

by Polly Cleveland | May 19, 2013

When I visited my brother in London a few years back, I toted a suitcase packed with tennis balls. I paid New York City’s 8 ½ % sales tax to help my brother’s tennis-mad family avoid the UK’s 20% value-added tax, or VAT, Europe’s big brother to our sales tax.

In the last 40 years, mostly at Republican initiative, many US states and localities have dramatically increased sales taxes at the expense of property taxes. Only four states, Delaware, New Hampshire, Oregon and Montana, have no sales taxes; southern states generally charge the most. (Arizona tops out with a combined state and local rates up to 13.7%). Europe’s VAT, introduced by France in 1954, is a national tax. European Union “tax harmonization” rules require member countries to charge a minimum of 15%; most EU members charge over 20%. (Hungary wins with 27%.)

So far the US has resisted a national VAT, despite support from both right (businessman Steve Forbes) and left (economist Robert Frank). That may change with the expansion of sales taxes on internet sales.

The US Senate just passed the Marketplace Fairness Act, enabling state governments to make internet companies like Amazon collect sales taxes from their customers—just as local businesses have long done. Is this truly a victory for tax fairness? While Grover Norquist, the Heritage Foundation, and other extreme anti-tax ideologues continue to oppose the measure, many Republicans are waffling. Many good liberals positively jump with enthusiasm. New York Times business columnist Floyd Norris writes (5/13/13):

“It is nothing short of amazing to me that this proposal is controversial…What this would do is make tax compliance easier and provide badly needed revenue — from their own citizens — for struggling states and cities. It would also mean that local merchants — the ones who pay property taxes — would find it a little easier to be competitive with Internet merchants.”

Alas, Floyd Norris misses the big picture: Sales taxes are simply terrible taxes. As Europe’s gasping economy sinks into another recession, I think there’s good case that the VAT aggravates the damage of misguided austerity policies.

As most of us know, sales taxes are “regressive.” That is, when sales taxes are “passed on,” they fall harder on poorer customers than on richer ones. That’s why many states exempt food and medicine, as does New York, (except for restaurant food). But sales taxes are also “passed back” onto retailers and service providers. In fact, sales taxes are shared between customers and retailers in inverse proportion to their ability to shop or sell elsewhere.

It’s the “passed back” portion of sales taxes that do the most damage, because—unlike profit taxes—they take a bite from gross revenues before expenses. Moreover, a uniform tax rate does not mean uniform impact. (As Anatole France wrote, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”) Sales (and VAT) taxes fall hardest on small, labor-intensive retailers, with high volume and low profit margins.

Consider two New York City businesses: One is a furniture store; the other is a Sabrett’s hot dog cart. Assume for simplicity the “passed back” portion of the 8 ½ % sales tax is 5%. The furniture store invests $9000 a year in an inventory of sofas, which it sells for $10,000, earning a $1000 before-tax profit. 5% sales tax is $500, half of profit, and 5.5% of the $9000 investment. The hot dog cart invests $200 a day in buns, dogs and labor. It earns $210 a day, or $76,650 a year in sales and $3,650 in profit. A 5% sales tax collects $3,833, wiping out profit and amounting to 1916% of the $200 investment! Moreover since most of the cost of the cart is labor, the tax adds 5% to the 18% or so in payroll taxes! In short, sales taxes kill small businesses—precisely the kind which provide the most jobs per dollar invested. And by killing competition, sales taxes may drive prices up by more than the tax rate.

Sales taxes are also insidious—it’s always so tempting to politicians to raise them another quarter cent, and hope no one notices. Up to now, the threat of tax competition from neighboring states and localities has kept those politicians in check. That is, as long as customers can easily shop elsewhere, most of the tax will be “passed back” onto merchants—whose complaints will make politicians think twice about increases. The European VAT has crept so high precisely because shoppers can’t avoid it by crossing borders. (Tennis ball smuggling isn’t cost-effective).

In recent years, the rise of effectively untaxed internet sales has helped check increases of state and local sales taxes. If the Marketplace Fairness Act passes the House, it will release that check on sales taxes, and lubricate our way towards European-style VAT taxes! “Fairness” shouldn’t mean raising sales taxes on internet merchants, but reducing them on local businesses. For once, though for the wrong reason, Grover Norquist is right.

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