Politicians advance plan to allow politicians to give more tax money to private businesses. From TheGazette.com:
Iowa communities would be able to designate special 25-acre development zones and use a share of sales tax and hotel-motel tax revenues to assist private projects of at least $10 million under legislation that’s getting bipartisan support.
House File 641 would establish reinvestment districts designed to spur development of “big ideas,” said Sen. Matt McCoy, D-Des Moines, who led a Senate Ways and Means subcommittee that revamped the bill representatives approved 87-9 last month.
This is, of course, an awful idea. Politicians are notoriously bad at allocating investment capital, and they tend to make sure it goes to their cronies and contributors. But when the state’s Governor, a member of the purported small government party, does an end-zone dance over a giant federal subsidy to a private utility controlled by a billionaire, the battlefield is left to the crony capitalists. The House version of HF 641 passed 87-9.
New York State’s comptroller says giving $2.8 billion in tax breaks over five years added more than a million jobs, which would be great news except that the state lost jobs.
I’m confident Iowa’s job-creating tax breaks work just as well.
For capital gains, the current law is already out-of-step with international standards. After the fiscal cliff, combined state and federal capital gains rates increased from 19.1 percent to 28 percent. This is more than 10 percentage points higher than the international average. One suggestion, of course, is to tax capital gains at the rate at the 1986 rate of 28 percent. This would push America’s average combined federal and state capital gains rate to more than 35 percent, more than double the international average.
A chance traffic stop on I-75 in Lee County uncovers a massive tax fraud scheme. Deputies say the woman accused used her job to steal personal information – even stealing from people who were dead.
Thursday, 23-year-old Tequila Gordon was sitting in the Lee County Jail. Her bond was set at $72,000.
Prosecutors say she worked at liberty tax services in 2009 and stole personal information from dozens of people.
I would think having a first name of “Tequila” would make getting a good job challenging. It won’t be any easier now.
The politicians are tripping all over themselves to claim credit for Facebook’s new server farm in Altoona. From The Des Moines Register:
The Iowa Economic Development Authority board today approved $18 million in tax credits for Facebook’s $300 million data center in Altoona.
“Welcome, Facebook,” said board member Pete Brownell. The data center project has been referred to as Siculus Inc. in state documents.
Debi Durham, the state’s economic development director, said she expected that Facebook’s investment would grow to a billion dollars within five or six years.
“It’s good to be friends with Facebook,” she said. Gov. Terry Branstad said Facebook is “about as high-profile a company as it gets.”
The “high profile” bit tells you why politicians love “targeted” tax credits. It gives them an excuse to call a press conference and cut a ribbon, claiming credit for the project like a rooster taking credit for the sunrise. It’s more fun than facing the fact that real economic growth doesn’t come from photo ops. It doesn’t come from paying $580,000 to a wealthy company for each “job” it brings.
Ultimately economic growth comes from making Iowa an attractive place for low-glamor businesses to set up and expand without having to hire lobbyists and tax consultants to tap the corporate welfare keg. It comes from incremental hiring and location decisions that involve no politicians. It calls for discarding high-profile corporate welfare in favor of a simple low-rate system that’s friendly even for obscure businesses — like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.
To put things into perspective: our firm, Roth & Company, has “created” more jobs, at higher pay rates, than Facebook’s 31 promised jobs. Where’s our $18 million?
Radio Iowa runs with this headline ”$8.7 million from “Development Fund” creates 600+ jobs.” This headline arises out a “study” paid for by the economic development bureaucracy (meaning: taxpayers) to demonstrate the tremendous job-creating skills of people who give your money to other people. How did this study demonstrate this job creation?
By assuming it.
From the “study”:
A survey of past recipients of Demonstration Fund investments was conducted by the Iowa Innovation Corporation to determine, among other things, how large these companies are now as compared to their pre-investment levels. This growth in size – in annual revenues and in head count – can be attributed in part to the involvement of and investment by the Demonstration Fund.
Furthermore, the resulting economic impact is greater than the direct increase in expenditures and head count, since those increases lead to a series of spillover effects, whereby the impact of new company spending and employee earnings ripples through local economies and supports additional economic activity and job creation. Job impact estimates are determined by using standard input-output methodologies and multipliers, as provided by the US Department of Commerce.
- that the businesses and jobs wouldn’t happen without the wonderful effects of your money being directed by politicians to those businesses.
- that the money wouldn’t have also generated jobs if it had been spent elsewhere.
That’s the same kind of thinking behind the 2009 stimulus spending spree. The results were less than assumed. The dark line is what government projected that spending would do to unemployment, using “standard multipliers.” The lighter blue line was the grim fate awaiting us absent a government binge. The red dots are the actual post-binge unemployment rates.
The study does not have the two words that could have given it credibility: “opportunity cost.” They assume that the money left in the hands of taxpayers would have done nothing. But it would have been spent elsewhere, undirected by politicians; it would have bought things, creating profits and jobs. But as they would have gone unclaimed by economic development officials, no press conference could have been called, so they don’t count.
Obama consistently ignores the statutory timeline for releasing his budget, and this year is the latest he has ever put forward a fiscal proposal. On all things administrative, the president is frequently dilatory. But those waiting with bated breath for Obama’s proposals will be disappointed — the budget will be more of the same and has little chance of actually being passed or even taken up by Congress.
Flickr image courtesy Sean MacEntee under Creative Commons license
April Fools day is a challenge for tax bloggers. No matter how outlandish an idea you have for a joke story, chances are that the legislation has already been proposed. Today’s challenge: Real tax headlines are mixed with fake ones from today’s Tax Policy Blog. Can you pick the real fakes without peeking?
In fact, the research activities credit is noteworthy for its excessive cost — more than $45 million each of the past three years — and the lack of any demonstration of a public benefit. This giveaway is so loosely managed that companies are not even required to disclose how many jobs are related to the taxpayer cost, let alone demonstrate that the jobs would go away without the subsidy.
Incentives are inequitable. They’re unnecessary — and hence a waste of money. They distort markets. They breed cronyism. If the players involved weren’t establishment politicians, household name corporations, and prestigious law and accounting firms, we’d describe them as grifters.
Why wouldn’t we describe ”establishment politicians, household name corporations, and prestigious law and accounting firms” as grifters? Redundancy?
Here’s a new one. A Pakistani company, the Fatima Group, would like to open a fertilizer plant in Indiana. The company, which for all I know makes the Cadillac of fertilizer, is seeking both federal and state incentives to build its factory. The twist is that the Fatima Group’s fertilizer has been used in 80 percent of roadside bombs in Afghanistan. That’s awkward.
Right now Iowa seems to lead the world in fertilizing fertilizer companies with tax money. No doubt explosive growth is just down the road.
If spending time and effort connecting with tax collectors helpfully “draws our attention to our duties as citizens,” then tax withholding short-circuits that attention. So why not eliminate withholding and oblige each income earner to pay every cent of his or her tax bill by writing personal checks to the IRS? Not only would elimination of withholding make us even more attentive to our “duties as citizens,” we would also – as any behavioral economist would point out – gain a truer and more fully felt sense of the price we pay for Uncle Sam’s splendors.
Reading Don Beaudreax Cafe Hayek blog for one week will make you smarter than all of Iowa’s legislators combined.
Zumba instructor finds way to draw men to her studio. From RegisterCitizen.com:
The dance instructor who used her Zumba fitness studio as a front for prostitution faces jail time after pleading guilty in a case that captivated a quiet seaside town known for its beaches and picturesque homes.
The plea agreement, which calls for a 10-month sentence, spares Alexis Wright from the prospect of a high-profile trial featuring sex videos, exhibitionism and pornography. She’s scheduled to be sentenced on May 31.
Wright quietly answered “guilty” 20 times on Friday when the judge read the counts, which include engaging in prostitution, promotion of prostitution, conspiracy, tax evasion and theft by deception.
Remember, just because they pay in cash doesn’t make it tax-free.
Iowa cracking down on RV tax scofflows? Southwestiowanews.com reports:
Iowa lawmakers are putting the brakes on those who avoid paying registration fees when buying expensive vehicles.
Under a bill recently approved by the Senate, tax evaders using so-called out-of-state shell corporations to avoid paying registration fees on RVs or other luxury vehicles will face criminal charges and penalties.
Going to jail to save a few bucks on your vehicle registration seems like a bad bet.
The (Decatur) Herald & Review reports that, according to Illinois officials, Iowa is offering Cronus Chemical LLC an estimated $35 million in taxpayer subsidies to build a plant in Mitchell County near the Minnesota border.
Illinois lawmakers are considering tax breaks in a proposal by state Rep. Adam Brown, a Republican from Champaign. The plant would be built near Tuscola in the east central part of the state.
Hey, Iowa Economic Development people: Illinois is broke. Busted. Played out. They’re not bidding. We don’t need to be bribing fertilizer plants to come here. Instead give us a tax system that’s not so awful that we have to pay people to like us.
It baffles me that the National Association of Enrolled Agents is so in love with the RTRP program.
In their weekly newsletter to EAs last week, NAEA bizarrely referred to the unlicensed preparers who brought suit against the IRS over the RTRP program as people who want “the right to remain incompetent.”
NAEA also kissed the government’s butt by praising the “serious and vigorous” IRS attorneys who are appealing the court ruling that struck down the RTRP program. The flowery kissing-up continued as NAEA went on to opine that the government “delivered its A-game” in the appeal.
I have never seen anything good for enrolled agents in the IRS preparer regulations. Enrolled Agents have been around a long time, and they have to meet much higher standards than the RTRPs would. Yet the EA designation is not well understood by the public, and having the IRS officially sanction a lesser credential will probably make it even harder for EAs to get their story out.
The preponderance of evidence points to corporate taxes being the most harmful to economic growth, followed by personal income taxes, consumption taxes, and property taxes. Notice a pattern? The corporate tax is the largest tax on capital income in most countries, while the personal income tax is the largest tax on labor although it also taxes capital.
Jeremy Scott, Paul Ryan Borrows a Page From Obama’s Playbook(Tax.com): “ Much like Obama, Ryan keeps releasing the same budget every year, knowing full well that it has no chance of becoming law.”
I will fight for the right to tax you to subsidize other people. Governor Branstad is touchy about criticism of the massive tax breaks for the Southeast Iowa Orascom fertilizer plant. Radio Iowa reports:
“I’m here to make it clear that the chief executive of this state is on your side and we will fight for these jobs and I want to make it clear that when we make a promise to Lee County — or to any county in Iowa for that matter — it’s a promise we’re going to keep, no matter what they might say in Des Moines in any committee meeting,”
Never mind the high possibility that the plant would have been built without our tax money. Never mind the moral problem of taxing existing businesses and taxpayers to lure and subsidize outsiders. Never mind that political allocations of investment capital are always and everywhere unwise. Forget the lost opportunities for taxpayers to spend the money on their own projects. Jobs!
The Governor also hinted at darker forces opposing the tax credits, reports KCCI.com:
And he said he believed the Koch brothers were behind some opposition to the plant because it would hurt their fertilizer business.
So Iowa Democrats opposing the subsidies are tools of the libertarian Koch brothers. Who knew?
David Brunori, Things to Read, Sites to Visit. (Tax.com). He shares some online resources, but tragically fails to mention the Tax Update.
Peter Reilly, No Fans Of Sister Wives At The IRS ? As far as I’m concerned, the possibility of consolidated individual returns should be all the argument needed against polygamy.
“Iowa has a solid base of state - level economic development incentives tools upon which to build. However, to become more competitive, Iowa may wish to increase the funding level and flexibility of some of the State’s key incentive programs” states Darin Buelow, a Principal with Deloitte Consulting LLP.
It’s hard to imagine the study coming to a different conclusion considering what they were looking for:
At the request of the Iowa Chamber Alliance (ICA), Deloitte Consulting (Deloitte) benchmarked incentives programs in Iowa and in five alternate states, focusing on a high-level analysis of state-level incentive programs, their value, and overall effectiveness in attracting investors.
In other words, they were to look at whether Iowa has more and better giveaways than its neighbors.
I looked for the study in vain for any analysis of the value of Iowa’s tax credits to the economy vs. alternative uses for the funds — like lowering the tax rates of the rest of us who pay for them. There is no mention of “opportunity cost.” In looking at the “value” of the programs, it makes unsupported conclusions like this one about the “High Quality Jobs Program:”
Considered effective and competitive in providing benefits to mitigate corporate income tax, refunding sales tax for construction and providing a supplemental refundable research credit.
Considered effective by whom? On what basis? It doesn’t say.
The study says Iowa should enrich its data center corporate welfare — where the rest of us subsidize the infrastructure of Microsoft and Apple. They also recomment Iowa “consider allowing sale, refund or transfer” of tax credits.
Transferability of tax credits complicates the projection of revenues and the tracking of credits, creates uncertainty about when credits will be claimed because the purchasing entity may utilize a different fiscal year than the entity awarded the credit, and siphons resources from awarded entities through brokerage fees… Once tax credits are transferred, it creates limited recourse for the State to recover funds claimed in instances where the business awarded the original credit does not fulfill the contracted obligations or if the credit was awarded in error. Additionally, transferability has also resulted in abuses in some tax credit programs.
It would be better Iowa to not “compete” in taxing its current taxpayers to lure and subsidize their competitors. Instead Iowa should enact a tax system good enough that we don’t have to pay people to be our friends. The Quick and Dirty Iowa Tax Reform Plan would be better for Iowa businesses than any number of pocket-picking tax credits.
Former Kirkland & Ellis LP senior partner Theodore Freedman pleaded guilty to fraud in connection with the filing of false tax forms.
Freedman changed his plea yesterday from not guilty to guilty of four counts of tax fraud. U.S. District Judge Deborah Batts in Manhattan accepted the plea and set sentencing for Sept. 17. Freedman’s lawyers reached a plea agreement with U.S. attorneys.
Indicted in July 2011, Freedman misrepresented his income as a partner at the law firm by about $2 million, the U.S. said. He also claimed more than $500,000 in expenses for a sole proprietorship that didn’t exist, the government said.
It’s hard to imagine how he thought this would work. K-1s get matched against tax returns, at least occasionally. The IRS matching system is cumbersome and inefficient, but it works well enough that you can’t habitually ignore K-1s with six-figure income. Furthermore, claiming big bogus Schedule C losses like that is practically an engraved invitation for the IRS to visit your return.
Programming note: This site was pretty much shut down part of yesterday afternoon. Our valiant hosting service says it was a comment spam attack on the pre-2012 archived posts. Sorry about that.
A tailor who counted star athletes including Rickey Henderson and Wilt Chamberlain among his clients has pleaded guilty to skirting about $2 million in sales and income taxes.
Mohanbhai Ramchandani pleaded guilty on Tuesday, state Attorney General Eric Schneiderman said. His company, Mohan’s Custom Tailors Inc., also has had local stars Patrick Ewing and Darryl Strawberry among its clients and made an appearance on Bravo’s “The Real Housewives of New York City.”
The charges say that he failed to pay $1.7 million in sales taxes starting in 2001, and he failed to pay $256,000 of income taxes from 2007 through 2009. I didn’t know tailoring could be so lucrative. But this is unusual:
Authorities said a whistle-blower first raised concerns over Ramchandani’s tax practices. They said one indication of fraud was the use of numbers on his tax forms that added up to multiples of 10, an outgrowth of his belief in numerology.
Once in a while you prepare a return that happens to foot to a round number somewhere. It looks funny, but it will happen occasionally just by chance. But when they are all round, apparently the tax people might notice.
As strange as Mr. Ramchandani’s approach to numbers is, Iowa gives him a run for his money. Iowa’s lead tax credit pusher, Debi Durham, has issued a press release touting the economic wonders of enormous tax credits granted Orascom, an Egyptian company, to build a fertilizer plant in Southeast Iowa. The release bases its conclusions on “ the Regional Economic Modeling Inc. (REMI) analysis for the Iowa Fertilizer Co. project.” From the release:
“The REMI analysis of the Iowa Fertilizer Co. project speaks for itself,” said Debi Durham, director of the Iowa Economic Development Authority (IEDA). “On the front end, Iowa Fertilizer Co. will inject $1.4 billion of capital investment into our state and create at least 165 permanent jobs and thousands of construction-related jobs. Now we know that the benefits of that project will serve Iowans for years to come.”
It speaks for itself and it says nothing. It says nothing about whether the project would have gone ahead without the credits, but Iowa’s claims that Illinois was hot after the plant with its own incentives lack credibility.
The analysis really betrays itself by omitting two key words: “opportunity cost.” It claims every projected benefit from the project without asking whether any benefits would be available if the money were used for something else. It certainly doesn’t say what Iowa loses by having a complex tax system with high rates to pay big subsidies to the well-connected.
I’ve said it before: using taxpayer money to lure businesses is like a guy taking his wife’s purse to the bar to buy drinks for the girls. It’s not impressive. They might let the guy buy the drinks, but they realize he’ll treat them like he is treating his wife if he gets the chance. And anybody he goes home with isn’t likely to be much of a prize.
Egypt taking a different approach to Orascom. The Orascom executives do better in Iowa than back home, reports SiouxCityJournal.com:
An Egyptian billionaire behind one of the largest and most controversial projects in the state is being investigated for tax evasion and has been barred from leaving his country.
According to an article published Tuesday in Construction Week Online, Orascom Construction CEO Nassef Sawiris and his father, Onsi Sawiris, are barred from travel until a resolution is reached regarding the sale of an Orascom subsidiary and the taxes from that sale.
As hard as it is to deal with Iowa and federal tax authorities, they are probably downright reasonable compared to Egyptian revenuers. I suspect that the “resolution” being sought is much like that sought by a kidnapper.
The TaxProf links to this from the New York Times Dealbook: Why Carried Interest Is a Capital Gain. It is as good an explanation as I’ve seen of why capital gain on private equity isn’t a crime against humanity:
Typically private equity investors are paid a 2% management fee, on which they pay ordinary income tax rates, and a 20% carried interest of the partnership’s profits that is only paid after limited partners receive a preferred return of 8%.
Carried interest, therefore, is the profits share on the sale of a capital asset and not “ordinary income” as some would have it treated. In other words, it is a capital gain within a partnership and is rightfully taxed at the long-term capital gains rate — provided that the asset, or company, is held for more than one year.
…
The underlying principle is no different than two friends who partner together to purchase a restaurant. One might bring capital and the other brings expertise. The restaurant could be in disrepair or a great concept that needs additional capital to expand. The chef identifies the restaurant to buy and possesses the skills to manage the restaurant and add value to the enterprise over time. The friend has the capital to invest, but doesn’t possess the operational or investment skills to generate a return.
When they sell the restaurant years later, both partners receive capital gains treatment on their long-term investment. A private equity partnership works in the same way. This is Partnership Law 101.
Exactly. And it’s not like a salary, where somebody writes you a check. The private equity investor is taking a risk, and on any given investment is likely to get nothing. It’s not like, say, a tenured law school faculty paycheck that comes every two weeks.
ProTip: Don’t take your tax advice from rappers. This from Going Concern:
As you might expect, TMZ has the scoop and it quotes a number of artists who are currently considering tips for strippers as a legit deduction and therefore a serious tax strategy. And who doesn’t love creative tax planning? But how might they rationalize this idea?
Well, Bizzy Bone considers these young ladies to be like his family:
Bizzy Bone tells TMZ, “I’m giving charity to females who need their light bills paid. So, of course, that’s a write-off. You write off your kids, don’t you?”
Um, no. Mr. Bone might want to ponder the stories of Ja Rule, Fat Joe, and Beanie Sigel, to name a few, before he gets too smug about his tax deductions.
The Hawkeye State gets a black eye for being the second worst state for corporate taxes, with a 12 percent rate. It also ranks 37th in property taxes, 33rd in individual income taxes and 34th in unemployment insurance taxes.
They accompany the article with this photo of the “Field of Dreams” — an unwitting illustration of the problems of Iowa tax policy. The Governor last year signed a proposal giving a special sales tax exemption to a private athletic complex being built around the field, made slightly famous in the Kevin Costner movie. It’s special carve-outs like this that make for high rates and complicated taxes all around.
State leaders ballyhooed the plan as a way of moving from old-style industry to new.
Despite tens of millions of dollars in state investment, the promised 3,000-plus jobs didn’t appear. As the Detroit Free Press reported last year, the studio employed only 15-20 people. That isn’t boffo. That’s a bust. The studio has defaulted on interest payments on state-issued bonds, and the guarantors—the state’s already stressed pension funds—may wind up holding the bag. “In retrospect, it was a mistake,” conceded Robert Kleine, the former state treasurer who signed off on the plans in 2010.
He doesn’t neglect Iowa’s film fiasco:
Iowa ended its motion-picture subsidies in 2010, after officials misused $26 million in state money, leading to criminal charges. According to a 2008 investigation by Iowa Auditor David Vaudt, 80% of tax credits issued under the state’s film-subsidy program had been issued improperly (to production companies that weren’t even spending the money in Iowa, for example).
Two film credit recipients are now serving 10-year sentences on theft charges arising from the program. That’s fine, but I really want to see a groveling public apology from the Governor who signed the program into law, the “economic development officials” who turned the keys to the state treasury over to a former Walgreens photo desk clerk in charge of the program, and to the legislators — all but three out of 150 — who voted the moronic program into existence.
“At a minimum, it’s probably going to take longer for people to get through on the phone; it’s going to take longer for refunds to be processed,” said Floyd Williams, a senior tax counsel at Public Strategies Washington.
Williams, who worked for the IRS for nearly two decades and directed the agency’s legislative affairs office for 16 years, says the sequester could also be a boon to those who purposely commit fraud, or accidentally fill out returns incorrectly.
Good thing the IRS can redirect the employees who had been assigned to the preparer regulation program to do something useful, now that the courts have shut down that futile enterprise. The IRS can’t stand their good fortune, though; Tax Analysts reports ($link) that the IRS is appealing the court decision.
It would be even better if Congress stopped using the IRS as the Swiss Army Knife of public policy. Given the agency’s new mandate to take care of our health insurance, their performance at the job of actually collecting taxes is only going to get worse.
Preparers gone bad. Accounting Today rounds up the week in preparer fraud, including a guy in New Mexico who, while serving time for identity theft-related charges, has been hit with 56 counts of fraud and embezzlement. That would be overachieving in underachieving.
Durango man pleaded guilty to tax evasion this week in federal court in New Mexico.
Hak Ghun, 62, is facing 12 to 18 months in prison after signing a plea agreement with the U.S. Attorney’s Office. He also will be required to pay $249,567 in restitution to the Internal Revenue Service.
The man was accused of embezzling from a company that had received investments from the Navajo Nation. For those who don’t get the old TV show reference, here you go.
For the working poor, the EITC is unabashedly a welfare program. For the corporate recipients, the credit is touted as “economic development.” I’m sure EITC recipients feel the same way about their government checks.
The report shows that about $34.2 million of the $50.5 million claimed in research credits was refunded — about 2/3. The biggest recipient of the credit was Rockwell Collins, which received $13.8 million in credits. The report doesn’t say how much credit was refunded for each large recipient; If 2/3 of the Rockwell Collins credits were refunded, that means Iowa taxpayers gave the company $9.2 million
I don’t believe Rockwell Collins, or anyone else, should pay Iowa corporation income tax. It is a bad tax whose repeal would make life better for Iowans. But that’s a long way from saying that taxpayers should actually cut annual welfare checks to corporations doing business in Iowa. While I don’t blame them for taking the checks — who turns down free money? – don’t try to tell me that it’s good for me.
Repeal of giveaways like the refundable research credit and the “economic development” credits given to the big fertilizer companies would go a long way towards paying for repeal of the corporation income tax for businesses lacking the lobbyists and wire-pullers needed to hit the corporate welfare jackpot. Maybe some day we’ll demand the legislature replace the tax-some, pay-others Iowa tax system with something better, like The Quick and Dirty Iowa Tax Reform Plan.
Dislike. The left-wing high-tax advocacy group Citizens for Tax Justice is scandalized that Facebook isn’t paying income taxes on its 2012 income (via the TaxProf):
Earlier this month, the Facebook Inc. released its first “10-K” annual financial report since going public last year. Hidden in the report’s footnotes is an amazing admission: despite $1.1 billion in U.S. profits in 2012, Facebook did not pay even a dime in federal and state income taxes.
Instead, Facebook says it will receive net tax refunds totaling $429 million. Facebook’s income tax refunds stem from the company’s use of a single tax break, the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million.
So why are “executive stock options” deductible? Because they are taxable to the recipients as W-2 income. They are reported as taxable income on the executives 1040s at the same 35% top rate that the corporation pays. In other words, CTJ is upset because the executives, rather than the corporation, write the checks to the IRS.
There is no actual tax reduction. In fact, the government actually gets more income from the options than if Facebook had not issued the options and just paid 35% tax. Because they are also subject to the 2.9% medicare tax (3.8% starting in 2013), the option exercises actually generate additional revenue for the IRS. Presumably CTJ would want the executives to pay tax with no deduction on the other side. That seems unjust.
Kay Bell, Sign up now to pay your federal tax bill via EFTPS. With the ongoing disintegration of the postal service, it’s good to have a secure and sure way to get your taxes paid on time. I’m signed up.
Our new Marriage Bonus and Penalty calculator, despite all its Valentine’s Day finery, ignores the new 0.9 percent Medicare payroll tax hike buried in the 2010 health law. The extra levy affects only a few high-income couples but in very different ways. Lucky couples will collect marriage bonuses of up to $450. But those less fortunate—if anyone making $250,000 can be considered less fortunate—will incur marriage penalties of as much as $1,350 in additional Medicare tax.
Just another example of the whimsical and poorly-conceived nature of the Obamacare Net Investment Income tax.
The last three governors of Illinois all went to prison (and it’s equal opportunity corruption: both Republicans and Democrats). Joining them will be former Congressman Jesse Jackson, Jr. and his wife, Sandi (a former Alderman in Chicago).
Mr. Jackson resigned last November from Congress; Ms. Jackson resigned in January from the Chicago City Council. Both are pleading guilty: Mr. Jackson to conspiracy and Ms. Jackson to filing a false tax return. They pleaded guilty on Friday.
The scheme apparently had them using “business” credit cards (here, business is their re-election campaign) for personal expenses. As this blog has highlighted numerous times in the past (and will likely do numerous times in the future), you can’t put personal expenses on a business return. And we’re not talking nickel and dime purchases; the total is $582,772.58. Add in filing false campaign reports and you have problems.
When people complain about the need to turn power over to government instead of ”greedy corporations,” there is an implied assertion that the government and its operatives are somehow less vulnerable to avarice and self-dealing. Against all evidence.
Iowa House and Senate Republican leaders today proposed to give a flat $750 to every Iowa household in an effort to return to taxpayers the state’s $800 million budget surplus.
The money would be returned to taxpayers in the form of a tax credit, said Senate Republican Leader Bill Dix, R-Shell Rock, and House Speaker Kraig Paulsen, R-Hiawatha.
That seems pretty straightforward. Better still to give it back as part of simplifying the tax code, but better that than just spending it. Yet just spending it has its advocates:
Senate Democrats who control their chamber said that since it’s early in the session they are open to talking about the Republicans’ proposal, but they have other ideas.
Sen. Joe Bolkcom, D-Iowa City, who chairs the tax-writing Iowa Senate Ways and Means Committee, said Democrats are interested in providing earned income tax credits for lower-income Iowa families and raising the threshold for filing state income taxes. He added that Iowa needs to invest more tax money to clean up dirty rivers and streams, repair crumbling roads and bridges, upgrade the state’s education system and make other improvements.
The earned income credit is a welfare program run through tax returns, with a tremendous rate of fraud. It’s also a poverty trap. The phase-out of benefits with rising income serves as a stiff tax on improving your income. And spending doesn’t become something else just because you call it “investing.”
Taxpayers who took an IRA distribution in December can also roll that into a charity by January 31 and avoid having the distribution included in 2012 income.
These provisions were part of the Fiscal Cliff tax bill, which extended the tax-free status of IRA rollovers to charity along with a bunch of other expired provisions.
Just because your bank is a country bank doesn’t make the banker a bumpkin. Four Nebraskans have been charged with “structuring” — breaking deposits into chunks under $10,000 to avoid federal cash reporting requirements. Federal law requires banks to report cash transactions over $10,000. Folks who don’t want the government to know about their cash sometimes attempt to use multiple smaller transactions to fly under the radar; that’s illegal. Theindependent.com reports:
Randy L. Evans, 59, of Grand Island is charged in a 15-count indictment. In the first 14 counts, it is alleged that between March 29, 2010, and Dec. 27, 2011, Evans structured financial transactions to evade reporting requirements when he made deposits in the amount of $210,381 at Five Points Bank. Count 15 charges him with structuring financial transactions to evade reporting requirements when he made 449 transactions between Jan. 4, 2010, and Feb. 28 at Five Points Bank in the amount of $2,030,322.
Bankers are required to report suspicious transactions, and if you make yourself a regular, they’ll notice — especially in a small-town bank.
Regrettably, yes. Libertarian writer Sheldon Richman breaks the bad news: just because the income tax is a bad thing doesn’t make it unconstitutional:
Where does this leave liberty’s advocates? First, we have to face the facts. Like it or not, the U.S. Constitution empowers the Congress to levy any tax it wants. Anyone is free to come up with a contrary interpretation, but the constitutionally endowed courts have spoken. Reading one’s libertarian values into the Constitution is futile. For better or worse, the Constitution means what the occupants of the relevant constitutional offices say it means.
In other words, it doesn’t matter if you think the income tax is unconstitutional if the IRS, the federal judge, the Marshals Service and the Bureau of Prisons think otherwise. Fighting the income tax by not filing ruins your finances without hurting the Leviathan one little bit.
Luring and subsidizing your competitors with your tax money. Left-side advocacy group Good Jobs First has released a report slamming “incentive” tax breaks like those used for two fertilizer companies in Iowa last year. The report doesn’t mention Iowa’s programs, but it provides a depressing list of corporate bribery in other states, including subsidies to lure employers from Kansas City, Kansas across the river to Kansas City, Missouri, and vice-versa. Their press release gets it right:
Interstate job piracy is not a fruitful strategy for economic growth, [report author Greg] LeRoy noted: “The costs are high and the benefits are low, since a tiny number of companies get huge subsidies for moving what amounts to an insignificant number of jobs.” LeRoy added: “The flip side is job blackmail: the availability of relocation subsidies makes it possible for companies that have no intention of moving to extract payoffs from their home states to stay put.”
For all the abuse, the organization’s recommendations are modest. I would eliminate all such subsidies and replace them with a simple low-rate tax system for everyone. The Tax Update Quick and Dirty Iowa Tax Reformwould be a great start here.
Jamaal Solomon, Tax Organizer for Entertainers. Independent entertainers who cross state lines can find their taxes complicated, so good recordkeeping is essential.
New law webcast today! I will be participating in a webcast today on the new Fiscal Cliff law and other recent tax developments. The webcast, sponsored by the Iowa Bar Association, will start at noon. I will join Roger McEowen of the ISU Center for Agricultural Law and Taxation, and IRS Taxpayer Liason Christy Maitre. Cost: $35 for IBA tax school attendees and attendees of any 2012 CALT Farm and Urban Tax School; $35; $75 otherwise. Agenda here, registration page here. 2 hours of timely CPE and Tax Update fun!
No good will come of this. The 2013 session of the 85th Iowa General Assembly begins today, and the outlook for improvement in Iowa’s tax system is bleak. Iowa business groups have firmly embraced a state tax incentive policy based on taking money from all of us to bribe well-connected businesses to do things they would do anyway. From the Sioux City Journal:
Business groups like the Iowa Chamber Alliance, a non-partisan coalition representing 16 chambers of commerce and economic development organizations, are supporting a variety of tax credits to retain, grow and attract investments in the state. Those credits include restoring the $185 million cap on economic development tax credits that currently stands at $125 million for fiscal 2013.
Jason Hutcheson, chief executive officer of the Greater Burlington Partnership, said tax credits are a highly effective tool that deliver a high return on investment and are essential to retain, expand and recruit businesses and to attract technology and research. ICA members also are lobbying legislators to spend at least $25 million for business development incentives after the line item was shrunk to $15 million for the current fiscal year.
The politicians shed crocodile tears about just being forcedto go along with a system based on them granting special favors:
Senate GOP Leader Bill Dix of Shell Rock said there is opposition to government choosing winners and losers with taxpayer-funded incentives, but he added, “There’s no question in my mind that an incentive policy is the world we live in. I don’t appreciate that and wish it wasn’t the case, but we do need a policy that includes incentives.”
You know what would be a real incentive to grow a business in Iowa? A much simpler tax system with lower rates, one eliminating the corporate income tax altogether. Something like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.
Instead, Iowa has a horrible system built around complexity and high rates, made less painful — even lucrative — for those with the connections and lobbyists to score targeted tax credits. The legislators hear from those people — not from the more numerous businesses who quietly set up shop in South Dakota or other more friendly tax climates.
The Iowa Research Credit is refundable, so Iowa writes a check when the credit exceeds the computed tax. The $45.2 million in corporate research credits claimed in 2010 resulted in $43 million in refunds.
The best we can hope for from the legislature is prompt action on ”coupling” legislation to conform Iowa’s 2012 tax law to the federal changes passed earlier this month. The 2012 filing of many Iowa returns is on hold until they do so. We’ll see if they can even accomplish that much.
Scott Drenkard, Governor Jindal’s Bold New Tax Plan (TaxPolicy Blog). Could you live with a higher state sales tax if the income tax goes away? Even if it taxes accounting services? Tempting.
Flickr image courtesy seriousbri under Creative Commons license.
Cause and effect: the Iowa Chamber Alliance can’t quite put them together. The umbrella group for Iowa’s chambers of commerce has issued its 2013 legislative agenda. The Des Moines Register reports (my emphasis):
TAXES: Iowa’s tax system is among the highest for businesses, the alliance contends, and commercial and property tax relief are needed. In addition, the group supports addressing unfunded mandates, public employee pensions and other measures to help offset rollback effects on local governments. The alliance also supports efforts to simplify and reduce corporate income taxes, and to streamline the personal income tax code.
So far, so good. But then:
ECONOMIC DEVELOPMENT: The Iowa Economic Development Authority needs money for flexible incentives to compete for investments and jobs, the allliance said. It backs a variety of tax credits to retain, grow and attract investments in Iowa, including restoration of the $185 million cap on economic development tax credits.
Let’s spell this out: Iowa’s tax code needs simplification because it is larded with “economic development” provisions, including dozens of “economic development tax credits.” The rates are high because if they weren’t, the special breaks would keep it from raising any revenue. To say you want lower rates, a simpler tax code, and economic development credits is like saying you want to lose weight and you want some more cookies.
If ideas proposed by the White House take hold—a long shot—rates for big companies likely would fall next year while those paid by many small-business owners through the individual tax system would rise.
That potential gap could encourage more companies to organize as corporations. For now, the prospect is strengthening alliances between Democrats and big-company CEOs on the one hand, and Republicans and small-business groups on the other.
It’s Warren Buffett and Goldman Sachs vs. the entrepreneur — influence and pull vs. the rest of us.
IRS reminds taxpayers of “Savers Credit” (IR-2011-121) This non-refundable credit matches as much as 50% of taxpayer contributions to their IRA or 4o1(k) accounts. It works on joint returns with incomes up to $57,500 and single filers with incomes up to $28,750. Savings made when young can do great things when compounded over a career, and this credit makes it painful. Giving your recent grad starting out in the world some cash to fund an IRA can help build a nest egg and net a nice tax refund.
Andrew Mitchel, Doctrine of Constructive Receipt. You can’t avoid the income this year by waiting until next year to cash the check.
The wind energy industry could be self-sustaining over the long term if its primary federal incentive is renewed in 2013 and then gradually phased out over six years, the industry’s trade association said December 12.
Because the last 20 years of the tax credit just weren’t enough for a good buzz.
A decade after the state tried to spark investment in young innovative companies, Iowa taxpayers will foot a $26 million bill — and potentially more — to meet the program’s obligations.
State attorneys reached an agreement in August to avoid a lawsuit from two lenders who backed the Iowa Fund of Funds, a program lawmakers created in 2002 to attract more venture capital investment in Iowa startups.
In August? And we’re just hearing about this now? Maybe it’s because it’s an embarrassment to the entire Iowa political class that they just want to have go away. While signed by a Democratic governor, it passed the Iowa House 90-3 and the Senate 39-5 — lots of votes from both parties there. When the state is giving millions in new tax credits for fertilizer companies, it would poop the party.
Let’s set the wayback machine to one of the earliest Tax Update posts — number 48 of over 8,000 — to see what we had to say about the Funds of Funds when it was enacted:
…is the concept behind the venture capital legislation. A state-owned for-profit corporation will set up a “fund of funds” partnership to invest in venture capital pools. The venture capital pools are to be chosen based on their commitment of funds to Iowa.
Investors in the “fund of funds,” which we will call the FOF, will receive certificates maturing no sooner than 2005 entitling them to a tax credit. This credit will reduce their Iowa tax dollar for dollar to the extent the return on the FOF is less than a fixed return computed on the certificate. In other words, the investors in the FOF get the upside, but the state absorbs the downside – and even some of the upside, to the extent that there is a positive return lower than the amount set by the certificate.
At the time we received a note from Steven Ringlee, described in today’s Register story as “an architect of the program,” telling us that this was still a terrific deal for Iowa taxpayers because the bill also had a cap on investor return as well as a taxpayer-funded guarantee against losses:
In fact, you fail to notice that, due to the tax credit which provides full repayment security to Iowa taxpayers purchasing the preferred stock of the Fund of Funds, their required rate of return will be similar to that on medium-term governmental debt instruments. In Oklahoma, where this plan was first implemented, the return on their Fund of Fund instruments (circa 1995) was approximately 8 percent. In today’s environment, it will approximate 5 to 5.5 percent. However, the average long-term rate of return on investments in venture capital limited partnerships has been in excess of fifteen percent over an extended period. Oklahoma experienced a 19 percent positive return during the five year period from inception through 2001.
So how did those 15 percent returns work out? From the Des Moines Register story:
“It’s been a disaster. As a model for creating jobs, it doesn’t work. … It’s turning into another bad deal for taxpayers,” said Sen. Joe Bolkcom, D-Iowa City.
Jeff Thompson, a deputy attorney general who helped negotiate the agreement, says Iowa taxpayers have always been on the hook for the program, originally authorized at $100 million and later limited to $60 million. This agreement reduces the potential costs and, perhaps more important, prevented lenders from cashing in up to $40 million in tax credits this summer to cover their loans, he said.
That sounds like a return of something less than 15%. The Register story doesn’t quantify the losses. Mr. Ringlee didn’t exactly rule out the possibility of losses in 2002, but he made them seem unlikely (my emphasis):
As a result, appropriate compensation-for-risk-assumed is in fact given to the State, the grantor of the contingent tax credits. For what is likely to be zero cash outlay, the State of Iowa, (at the end of the FoF lifetime) receives all accumulated net profits above a nominal return in the range of 5.5%. Of course, the probability of this occurring is directly related to the skill sets of the VC managers selected to invest the funds. Because VC historical returns are in fact measurable and venture managers’ skills may be examined in detail, and because good managers tend to have consistent track records, the Fund should be able to select those managers able to deliver above-average results. Hence, the Fund can improve its ability to deliver stellarreturns to the State (the residual legatee) by carefully selecting and supervising its venture capital limited partnership managers. It will do so through the judicious selection of a skilled, experienced “gatekeeper” fund allocation manager, a common practice in the venture industry.
Oops.
Folks, when the government guarantees something, the proper assumption is that the guarantee will be called upon (Solyndra, anyone?). If private investors aren’t willing to make a deal, they probably have good reasons. If it’s a good company, private money will probably be there, if perhaps on stiffer terms. And just because the guarantees are run through tax returns doesn’t make them somehow not spending.
Senator Joe Bolkcom (D-Iowa City)– who was one of the few who voted against the program in 2002 – makes a good point:
Bolkcom said the state needs to rethink how it approaches economic development.
“The idea that we can create these third-party arrangements, where we turn over taxpayers’ money and not expect problems to develop, is folly. We have very little control after the law was created,” he said.
The best the state can do for economic development is to leave it alone. The Quick and Dirty Iowa Tax Reform would get rid of all of the dozens of ”economic development” tax credits, and do more for the Iowa economy than all of them.
Oh, Goody: “Taxpayers and the IRS could be looking at three filing seasons in 2013 if Congress and President Obama fail to prevent the government from going over the fiscal cliff at year’s end, according to National Taxpayer Advocate Nina Olson.” (Tax Analysts, $link)
Even if Republicans were to agree to Mr. Obama’s core demand — that the top marginal income rates return to the Clinton-era levels of 36 percent and 39.6 percent after Dec. 31, rather than stay at the Bush-era rates of 33 percent and 35 percent — the additional revenue would be only about a quarter of the $1.6 trillion that Mr. Obama wants to collect over 10 years.
Christopher Bergin, ‘Small Ball’ — Obsessing about the Rich: “Sticking it to rich people may play well to a populist theme, but it’s “small ball” and does little to address our fiscal problems or our broken tax system.” (Tax.com)
These are in effect pleas / warnings to taxpayers to turn themselves in by joining OVDP 2012. I suspect that the truth is that, if a significant number of taxpayers do not turn themselves in, the IRS will have limited ability to discover, investigate and prosecute criminally or civilly all of that dataset. DOJ Tax and the IRS are trying to convince taxpayers that the form of audit lottery they play going far now will have worse odds than it had previously. Perhaps everyone involved will not suffer the consequences, but many will and, among the many that will, could be you. And the consequences could be far worse than if you come clean now and get right for the past and going forward.
If you really are a tax cheat, by all means consider using the OVDP program. Still, it would probably be much more attractive if the IRS didn’t treat foot-fault violators as international tax criminals.
The purpose of the Tax Code is to raise the income necessary to run the government. It should not be used to solve all the financial and social problems of the country. It should not be used as a method of distributing social welfare program benefits. It should not be used as a means of “redistributing” income among the “classes”. The Tax Code is not Robin Hood.
It’s hard enough to determine taxable income, compute a correct tax, and remit it. You can’t also ask Iowa tax authorities to administer filmmaking or venture capital. And to expect the undertrained and undermotivated members of the shrinking IRS work force to administer industrial growth, social justice and, oh yeah, the health care system is folly. And official policy.
Promotional image for “The Scientist,” one of the projects of convicted film tax credit recipient Wendy Weiner Runge.
Jailing them instead of bribing them. Iowa has drastically altered its approach to the film industry in the last few years. Where it once lured them with lavish film credits, meaning free cars and cash, it now merely provides lodging. From WHOtv.com:
The Iowa Court of Appeals has affirmed the sentencing of a Minnesota filmmaker who pleaded guilty to fraudulent practices.
Wendy Weiner Runge was sentenced to 10 years in prison after pleading guilty in connection with Iowa’s film tax credit scandal. She was the owner and operator of a film company that applied for tax credits from the Iowa Film Office in 2008.
Ms. Runge said the sentencing judge improperly considered her combative blog posts as evidence of lack of remorse. The appeals court held otherwise:
Similarly, here, the court properly considered Runge’s statements criticizing the court’s process and disparaging the prosecutors and the judge personally in considering her lack of remorse.
You don’t need to go to law school to figure out that if you plead guilty to something, it’s unwise to publicly rip the judge before sentencing.
Iowa spent over $30 million on the film industry via transferable film credits — another way of saying “subsidies.” A state auditor report said that 80% of the credits were improperly granted. It might have been cheaper to just imprison the filmmakers in the first place.
From films to fertilizer. The Iowa corporate welfare machine now is focused on a less glamorous industry. On the heels of a huge tax credit grant to build a new fertilizer plant in Eastern Iowa, Iowa announced yesterday an award of up to $70 million of tax credits for a new Sioux City fertilizer plant for a different fertilizer company.
Between the two plants, the state has awarded up to around $180 million in tax credits. This compares to budgeted net receipts for Iowa’s corporate income tax of under $400 million.
The state claims the project will bring 2,000 construction jobs and 100 full-time jobs at the plant. If they max out their tax credits, that works out to about $33,300 per job, or $700,000 per “permanent” job. Heck of a deal. Meanwhile every other business has to cope with a horrendously complex state tax system with high rates to support these big credit grants.
It’s the housing version of “cowl lamp violations.” A few years ago an Iowa county prosecutor ended up in hot water over the practice of rewriting serious traffic offenses, like drunk driving, down to “cowl lamp” violations, sometimes in exchange for contributions to charities or government agencies. Cowl lamps are something your great-grandpa’s car might have had.
That may have given the Iowa Civil Rights Commission an idea. From Reason.com:
The Des Moines Registerreports that for five years ending in February 2011, the Iowa Civil Rights Commission shook down landlords for “voluntary contributions” in exchange for dropping discrimination complaints. The Register obtained copies of 27 settlement agreements involving about $20,000 in contributions. Unlike money from fines, which end up in the state’s general fund, the donations went directly to the commission, creating “the impression that justice is for sale,” as state court administrator David Boyd puts it. The commission ended the practice after Winterset attorney Mark Smith questioned its propriety.
Creates the “impression?” Creates the fact. Instapundit explains:
I think that all revenue collected by all agencies should go to the general fund. Otherwise, it doesn’t just give the impression of corruption, it’s corrupting.
Why Iowa tax reform will be hard. The politicians will no longer get articles like this from Radio Iowa:
State economic development officials approved financial help for six companies Friday. The Iowa Economic Development Authority awarded tax benefits to Alfagomma America to move its stainless steel tube production from its plant in Italy to its only U.S. plant in Burlington.
The company is investing 1.3 million dollars and is expected to create 14 new jobs.
With a non-corrupt system where everybody is treated the same, there would be no more press releases. The state economy would be much stronger, but the politicians wouldn’t get to cut any ribbons.
In a more just world, the economic development bureaucrats would have to call a press conference any time a business closed or fled as a result of Iowa’s whimsical, byzantine and sometimes punishing state tax system.
Crime doesn’t pay, but turning state’s evidence might. The ex-wife of a Minnesota real estate magnate gets three months after cooperating in the case against him. He got 4 1/2 years.
That won’t stop them for a minute? “Do education tax benefits produce more educated Americans? Congress has no idea.” (Marie Spirie, Tax Analysts – subscriber link)
The weekend Buzz from Robert D. Flach. This part is very true: “In my 40+ years in ‘the business’ I have found that IRS notices are more often than not incorrect (and state notices even more so).”
Iowa’s Governor Branstad seems to be serious about this tax reform thing. From WCFCourier.com:
Gov. Terry Branstad cautioned lawmakers against finding ways to spend the state’s projected budget surplus, while calling Monday for across-the-board tax changes.
Speaking at a Statehouse news conference, Branstad said he’s working on a tax reform proposal to “dramatically” cut personal, corporate and property taxes in the state.
Specifics would be announced later, he said, possibly when he delivers the Condition of the State speech next year.
An automotive representation of Iowa’s income tax.
Iowa’s basic tax system is little changed structurally from the one we had when the Governor took office the first time in 1983. Substituting rate schedules, you could almost prepare a 2011 Iowa 1040 on 1984 forms. You wouldn’t even have to substitute the rate schedule to prepare a corporate return; Iowa’s highest-in-the-nation corporation rate is unchanged since 1981.
While the basic structure is unchanged, the system has become infested with special interest deductions and credits over the years — a process that started under Governor Branstad and that got out of control during the 12-year interregnum between his fourth and fifth terms.
But Governor Branstad also has some history as a tax cutter. He signed a big rate cut that took effect in 1987, reducing Iowa’s highest individual tax rate from an insane 13% to a still painful 9.98%. Yet that cut left the basic Iowa structure — including the individual deduction for federal income taxes — untouched. When he made the huge allocation to the Orascom plant, he was at least embarrassed enough to say that it was an argument for corporate tax reform.
So will the Governor go big? Will he embrace important elements of the Tax Update’s Quick and Dirty Iowa Tax Teform Plan, which would eliminate Iowa’s corporation tax and cut individual rates to around 4%, while sweeping away the federal income tax deduction and all special carve-outs? Stay tuned.
The Tax Foundation released its 2013 State Business Tax Climate Index. Iowa dropped one place, to 42nd, switching places with Maryland in the bottom 10. Iowa’s poor score has much to do with its terrible 49th-place ranking for corporation income tax.
Iowa scores badly on its corporation tax on a number of fronts:
- We have the highest stated corporation tax rate, and the second-highest effective rate taking the deduction allowed for half of the federal corporation income tax.
- Iowa has its own state corporation alternative minimum tax.
- Iowa no longer allows a corporation net operating loss carryback, distorting the tax on cyclical businesses.
- Iowa’s tax code is distorted by “incentive” tax credits that tend to favor pet industries and the well-lobbied.
Many states provide tax credits which lower the effective tax rates for certain industries and/or investments, often for large firms from out of state that are considering a move. Policymakers create these deals under the banner of job creation and economic development, butthe truth is that if a state needs to offer such packages, it is most likely covering for a bad business tax climate. Economic development and job creation tax credits complicate the tax system, narrow the tax base, drive up tax rates for companies that do not qualify, distort the free market, and often fail to achieve economic growth.
Recently Iowa City policy analyst Peter Fisher wrote an op-ed piece saying that Iowa’s corporation buisness climate is just great, largely on the basis that it doesn’t collect much tax. A big part of the reason it doesn’t collect much is the special breaks granted to favored businesses by smokestack-chasing politicians. The Tax Foundation notes that these “economic development incentives” don’t work, citing the work of none other than Peter Fisher.
- Abolish all economic development tax credits and special deductions. You name the special break, I’m against it.
- Lower the personal income tax rate to 4% or less with the money saved by eliminating complicated deductions, tax credits and subsidies.
Iowa’s political leaders – both parties — trip over themselves throwing tax credits and special breaks around. But does anybody think that “no corporate tax” wouldn’t be a better way to attract and grow industry than “we have dozens of special tax breaks if you know the right people”?
Roberton Williams, Marginal Tax Rates Matter More than Average Tax Rates (TaxVox). This is relevant to Peter Fisher’s argument that Iowa’s highest-in-the-nation corporation taxa rate doesn’t matter because Iowa’s loopholes let so much revenue slip through. It’s the rate on the next dollar of income that affects decisions.
Thirty-nine years ago today, Spiro Agnew resigned the vice-presidency to pursue other interests, but mostly to plead guilty to tax evasion. The Washington Examiner reports:
He was accused of receiving kickbacks from contractors while he was governor of Maryland. He claimed the charges were “damned lies” and eventually pleaded in federal court in Baltimore to no contest to not paying taxes on $29,500.
As part of his plea deal, Agnew agreed to resign from office. He was sentenced to three years’ probation and fined $10,000. He was disbarred.
Coincidentally (I think), the debate between the two major party Vice-Presidential nominees is tonight.
In other crime news:
Judge rejects Wasendorf’s bid for jail release (KTTC.com). The confessed embezzler couldn’t convince the judge that a prison term that will keep him behind bars past his 100th birthday might be a reason he might flee.
A federal jury has convicted a Rapid City surgeon on 13 felony charges related to income tax evasion.
Edward Picardi, of Sturgis, was accused of sending millions of dollars of income out of the country and filtering the money through offshore accounts to avoid paying taxes on it. His trial lasted three weeks.
Sturgis would seem like a funny place to look for the Tax Fairy.
…is the subject of a first-degree theft and fraud investigation, according to a report on file at the West Des Moines Police Department.
In that report, Des Moines contractor Priority Excavating claimed losses of $850,000 the company paid InFocus Partners’ subsidiary, ILC Staffing Inc., to administer its payroll.
Owner Tobias “Toby” Torstenson told police Detective Tom Boyd that he was contacted by the IRS and informed his company has not paid federal taxes since 2009.
Torstenson paid the money to InFocus, who was supposed to forward it to the IRS but never did, the police report said.
The IRS will still want the taxes from clients that have forwarded them to the payroll provider. If you outsource your payroll compliance, sign up for EFTPS so you can verify online that your payroll provider is remitting your payments.
Complaints about Iowa’s business tax system are puzzling, because businesses get a really good deal here.
First, as the Iowa Fiscal Partnership has shown, Iowa’s overall state and local taxes on business are lower than average. Only nine states take a smaller share of private-sector output in corporate income taxes.
So Iowa’s tax system is good because it’s ineffective. Noted. Later Mr. Fisher unwittingly gets to the real problem with Iowa corporate taxes.
We go through this every few years. Business lobbyists complain about Iowa’s corporate tax rates, but ignore the way they are applied. Iowa’s effective tax rate on businesses makes our state highly competitive with our neighbors. It’s Iowa’s great secret.
The problem with Iowa corporate taxes is that there are so many loopholes and special deals made for select companies. Many companies get away with paying no income tax and instead demand subsidy checks for many thousands and even millions of dollars.
With the highest corporation income tax rate in the nation — even after the 50% deduction for federal taxes that he points out — some businesses really get clobbered — particularly Iowa corporations selling primarily to Iowa customers. The clobbered ones subsidize the ones that “get away with paying no income tax and instead demand subsidy checks for many thousands and even millions of dollars.” That’s why the net corporate tax is a so small — the state only gets what’s left after it takes cash from the average taxpayer and transfers it to the well-connected ones with the “loopholes and special deals.” It’s a textbook model of crony capitalism.
Mr. Fisher’s solution is not to alleviate the suffering, but to spread it around. There is a better way.
U.S. District Judge Richard Young also ordered 54-year-old Richard E. Brown of Mount Vernon to pay a fine of $30,000 and nearly $190,000 in restitution and to serve three years supervised released after his prison term.
Prosecutors say Brown used his position as the office manager of Walker Investments in Evansville to pay his personal expenses with a company credit card and company checks to pay expenses of his church, Oak Hill Christian center in Evansville, where Brown was the bookkeeper.
He needs to re-read that “give unto Caesar” thing.
It’s better to give than to receive, but receiving can be lucrative. From therepublic.com:
The founder of USA Harvest was charged Wednesday with failing to pay taxes on $553,891.67 from 2005 through 2008 — including funds prosecutors say he stole from the charity and personal expenses he billed to the organization.
In a bill of information, 63-year-old Hugh “Stan” Curtis of Louisville is charged with taking $183,354 in donations from the charity and charging $370,537.67 in personal travel expenses. He faces charges of mail fraud, money laundering and filing false income tax returns.
The story says that the organization takes extra foods from restaurants and other food service providers and delivers it to the hungry.
The group’s efforts have drawn assistance from the Goo Goo Dolls, who used to pick up food in their concerts in benefit of the organization and actress Scarlett Johansson, whose photo is featured on the organization’s web site.
Yes, this picture.
Per Diem rates updated. The IRS has updated the “Special Per Diem Rates” for away-from-home expenses for taxpayers in the transportation industry (Notice 2012-63). Taxpayers can use these rates in lieu of substantiating actual away from home business meal and lodging costs.The notice also provides the new incidentals-only amount ($5 per day) and the rates for “high-cost localities” for taxpayers in all industries. The Journal of Accountancy has more. The GSA web site has the rates nationwide.
Was Iowa bidding against itself for fertilizer plant? From the Quad City Times:
When Iowa Gov. Terry Branstad pulled the trigger on the biggest incentive package in state history, he said he did so, in part, because of competition from neighboring Illinois.
But economic development officials with Illinois Gov. Pat Quinn’s administration say they wanted no part of the project after they got wind of Iowa’s “excessive” bid for the $1.4 billion fertilizer plant for which the Branstad administration offered up to $240 million in state and local tax breaks.
“To be clear — the state never put an offer on the table. We recognized early on that Iowa’s bid was excessive, and we were not going to engage in a bidding war,” Marcelyn Love, communications manager for the Illinois Department of Commerce and Economic Opportunity, wrote in an email.
True, the word of Illinois politicians isn’t the most reliable thing in the world. Then again, neither is the word of people telling you why you should give them money:
Tina Hoffman, spokeswoman for the Iowa Economic Development Authority, said the authority relied on the word of Orascom corporate officials and news reports to determine that Illinois was making a play for the fertilizer plant.
“Company officials indicated the tax savings would be in excess of $130 million. That information was validated when an Illinois senator was quoted in several news outlets about the bill he was sponsoring to assist a project like the one Orascom was proposing,” she wrote in an email.
All right, then! If you say so, here’s your $107 million!
Subsidizing the fertilizer plant would be unwise even if there were a bidding war with Illinois. It’s never wise to take money from your taxpayers to lure and subsidize people. As I’ve pointed out, it’s like taking your wife’s purse to the bar to buy drinks for the girls. It’s neither effective or impressive. But apparently there was no real bidding war, and Orascom was going to come to Iowa anyway; if so, they just bluffed Iowa into helping pay for it — and maybe also into indirectly helping finance their purchase of The Weitz Company, Iowa’s oldest and largest construction contractor. Not exactly a shining moment for Iowa tax policy.
[Birkenfeld] told Bloomberg: “I’m the most famous whistleblower in the history of the world. It’s a question of doing the right thing, and that’s what I did.”
What would have been right was not participating in tax evasion in the first place.
…
The author of the whistleblower law that so benefited Mr. Birkenfeld was none other than prairie populist Sen. Charles Grassley, who issued a statement this week: “An award of $104 million is obviously a great deal of money, but billions of dollars in taxes owed will be collected that otherwise would not have been paid.”
This is the same Mr. Grassley last heard calling for AIG workers “to resign or commit suicide” during the 2009 retention bonus furor, which also saw the New York Attorney General implicitly threatening to publish the names of innocent AIG employees who didn’t “voluntarily” relinquish money they were legally entitled to.
This is the same Mr. Grassley whom Wikipedia baldly states “repeatedly introduced measures that increase the level of double taxation on American citizens living abroad, including retroactive tax hikes.”
Need we add that Mr. Grassley’s longtime aide, who actually drafted the whistleblower law, now represents Mr. Birkenfeld and stands to collect an interesting percentage of the award Mr. Grassley so obligingly applauds?
Senator Grassley has been a major play in tax policy for nearly three decades. The state of the tax law today isn’t exactly a tribute to the senator.
Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.
The current federal tax rates on investment income — dividends and long-term capital gains — expire at the end of this year. Today, the top tax rates for both dividends and capital gains are capped at 15 percent. But if Congress and the president don’t act to extend them, the top tax rate on capital gains will rise to 20 percent and the top tax rate on dividends will rise to 39.6 percent.
It’s worse than that. With the Obamacare tax hikes set to kick in, the actual top rate for dividends will hit 43.4% — nearly tripling the old top rate of 15%.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Answering the wrong questions. The Iowa Chamber Alliance asked 
New law webcast today! I will be participating in a webcast today on the new Fiscal Cliff law and other recent tax developments. The webcast, sponsored by the Iowa Bar Association, will start at noon. I will join Roger McEowen of the ISU Center for Agricultural Law and Taxation, and IRS Taxpayer Liason Christy Maitre. Cost: $35 for IBA tax school attendees and attendees of any 2012 CALT Farm and Urban Tax School; $35; $75 otherwise. Agenda 
Today is the extended due date for 2011 calendar year 1041, 1065, 1120 and 1120-S returns.
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