Thursday, December 28, 2017

The Tax Bill Is a Huge Win for Democrats

by Neil H. Buchanan

Surprising everyone (including themselves), Congressional Republicans joined hands earlier this month and said, "Look at us, we're finally doing something!"  They then passed a blatantly regressive and extremely unpopular tax bill and started celebrating.  Donald Trump signed it, and here we are.

It did not matter to Republicans:

-- that no one (other than Republican donors and ideologues) thought that changing the tax system was even a medium priority,

-- that the bill was written for (and in some cases was literally written by the lobbyists for) the largest corporations and wealthy people, 

-- that the bill received the worst poll ratings of any major piece of legislation in history,

-- that the bill made the tax system even more complicated than it already was,

-- that the process of creating the bill was chaotic, compressed, and entirely partisan,

-- that the Republicans went out of their way to take a whack at taxpayers in blue states, hypocritically violating the Constitution by deliberately setting up discriminatory treatment among the states (and all but dooming many of the sixteen blue-state Republicans in the House who lamely voted against the bill), or

-- that the Republicans lied nonstop about the magical growth effects of tax cuts.

With this mess now the law of the land, and the process of exposing its numerous hidden loopholes only beginning to flower, the next battle is over people's perceptions of the new law.  Republicans have convinced themselves that they can turn this around, that people will come to love this exercise in stroke-the-rich lawmaking.  They are fooling themselves.

The new story from Republicans is apparently that they lost control of the narrative about the bill as they sped it through Congress.  What everyone heard was that it was good for the rich and that the majority of non-rich people would end up paying more, but that latter part is only true several years down the road (and only if Republicans do not complete their bait-and-switch by making it all permanent, raising its costs and collateral consequences significantly).

For the Republicans to win the battle of spin, therefore, they have to get people to notice that nearly everyone gets at least a small tax cut almost right away.  This generation of Republicans was raised on the unchallenged belief that if you give people things, they will vote for you.  (This, among other reasons, is why Mitt Romney could not conceive of his 2012 loss as anything other than having been outbid by an opponent who offered more "free stuff" to the undeserving masses.)

Although it is true that most people will see their taxes fall in the next year or so, it is unlikely that Republicans will see much political benefit.  Democrats have a number of responses that have the virtue of being true.

Most fundamentally, if we want tax cuts for non-rich taxpayers, we can give tax cuts to non-rich taxpayers.  That is not difficult.  In fact, it is what Barack Obama and the Democrats did in the process of fighting the Great Recession in 2009.  Even though Republicans did everything they could to slow down the recovery, the economy finally bounced back (and Trump, of course, is now taking credit for an economy that is staying on exactly the same trajectory that it was on when Obama left office).

In addition, the tax cuts that non-rich people will receive are rather small, on the order of one percent or so of income (under one thousand dollars per year on average).  No one would leave a few hundred dollars on the table, of course, but these are not head-turning numbers.  In addition, these modest cuts will not be obvious until after 2018 is over, so even people who can be mollified by a few shiny objects and seashells will not see the baubles in a politically relevant time frame.

Last week, James Hohmann in The Washington Post summarized ten reasons why the Democrats would win the political battle over taxes.  His list was actually a distillation of a storm of responses that he had received after he had tried to argue that Republicans would benefit politically, and a chastened Hohmann then gave over his column to the overwhelming arguments on the other side.

Hohmann's list is worth looking over, mostly because it is a combination of wonky arguments and political arguments that add up to a pretty overwhelming story that should make non-Republicans smile.  In particular, the idea that Republicans can now win politically through simple public relations magic is almost laughable, both because they are not very good at public relations and because they have in fact been doing PR nonstop on this issue for months (years, really).  The notion that they were passively allowing the narrative to turn against them is nonsense.

Most importantly, however, Hohmann's list leaves out the two strongest reasons to believe that the Republicans are going to be punished by voters for shoveling money toward mega-rich political patrons.

First, turning around people's attitudes is notoriously difficult.  No matter the reason for the public's overwhelmingly negative reaction to the new tax law, Republicans are now swimming upstream.  The most important reason that people will be difficult to convince is that we all experience what is known as "confirmation bias," which is the all-too-human tendency to latch onto facts that support what we already believe and to reject (or simply ignore) facts that conflict with what we think we know.

The next few months (and beyond) will be filled with plenty of stories about one loophole after another that has been discovered by expensive tax lawyers and exploited by their well-heeled clients.  Even the non-news will be about how big the difference is between the paltry tax cuts for most people and the lavish benefits for people who can figure out (to take but one easy example) how to become pass-through entities.

People already hate this law, even though Republicans have been strenuously trying to convince them that it is "a middle-class tax cut."  There will be, at best, mixed evidence about that claim moving forward.  The evidence that supports people's negative initial response will resonate.  The rest will fall victim to the old political adage: "If you're explaining, you're losing."

Second, Hohmann's list does not mention anything outside of the debate over the new tax law, even though the larger context is going to be disastrous for Republicans.  They simply will not be able to stop themselves from trying to repeal the New Deal and the Great Society, which means that they will now go after Social Security, Medicare, and Medicaid.  They were even stupid enough to tell us that they were going to do so even before they passed the new tax law.

The fact is that people love Social Security, Medicare, and Medicaid.  There is a reason that Social Security was long called "the third rail of American politics," that even anti-government activists say stupid things about keeping "your government hands off my Medicare," and that the Medicaid cuts in the Republicans' repeal-and-replace health care bills were wildly unpopular.

Democrats would be in a very strong position if people were merely saying, "Yes, I got a small tax cut, but the super-rich really made out like bandits, and I'm tired of growing inequality."  But now it is even better for Democrats, because people will be saying (quite correctly), "My small tax cut will be used as an excuse to cut my future Medicare and Social Security benefits, and Medicaid might not be able to cover my parents' final years in a nursing home."

Earlier this year, after an initial hiccup, House Republicans passed a health care bill that supposedly fulfilled their promise to "end Obamacare."  My immediate thought at the time was that the Democrats should be celebrating.  They needed to try like crazy not to allow the bill to become law, of course, because it would gratuitously harm vulnerable people, but it was a political winner either way.

Republicans failed to repeal the Affordable Care Act only after going to the mat to try to pass a series of increasingly unpopular health care bills.  And they have now passed a historically unpopular tax bill that will only look worse over time.  If the Republicans were going to succeed at something, this is the best possible combination of outcomes, not just for Democrats but for the American people, because reversing the damage from the Republicans' health care bills would have been much more difficult (bordering on impossible), whereas the tax bill can be relatively easily reversed when the Democrats get the chance.

In the coming weeks and months, there will no doubt be occasional navel-gazing pieces by supposedly centrist journalists with titles like, "Rethinking the Republicans' Tax Law: Is It Really 'the Worst Tax Bill Ever'?" or "Give Trump Credit for Signing a Big Tax Cut, Whatever Else Might Happen."  That is how political commentary works.

But people already know that the new tax bill was a terrible idea, and convincing them otherwise seems all but impossible.  The Democrats will show endless loops of Republicans high-fiving each other, interspersed with Republicans' somber-faced subsequent pronouncements that "we" all must now face the music and cut popular social programs.  Plenty of people will see the connection, even if Democrats were not all too happy to do it for them.

20 comments:

Shag from Brookline said...

The NYTimes has an interesting article* today on the search for loopholes in the Trump/GOP Tax Re-Form Act of 2017, using as an example a tax provision enacted earlier this 21st century providing tax benefits for domestic manufacture/products which resulted in successful challenges to IRS attempts at limitations on creative loopholing efforts that had a comedic sense. This reminded me of W.C. Fields' "looking for loopholes" comment when he was observed while hospitalized looking through the Bible; here's a link:

https://quoteinvestigator.com/2016/05/08/loopholes/

Perhaps a "loopholes" blog might be established in keeping a focus on this Act.

*Does this post link to that article?

Shag from Brookline said...

Yes, the post links to the NYTimes article.

Shag from Brookline said...

Over at TPM, Josh Marshall has an interesting post on the loss/lessening of SALT deductions that just might serve to bite Republicans in the derriere. Here's an interesting paragraph to consider:

"From a macro perspective, the SALT change means that the higher tax states (mainly but not exclusively blue states) will be sending a lot more money to the federal government. This is on top of the fact that blue/high tax states already send much more money in taxes to the federal government than they receive back in services, grants, general spending, etc. There are significant exceptions. But by and large federal taxing and spending policy draws money from the blue states and reallocates it into the red states. Indeed, a state like Louisiana, for instance, is able to keep its taxes low not simply because it has less expansive government services. It is also because it funds its state government in part by a key reason why states like Louisiana are able to keep taxes relatively low is that, in addition to having fewer social services, they finance their state budgets in part from subsidies from the federal government. The new bill will intensify this existing pattern."

If it's unfair to Red states with low-SALT to subsidize high-SALT Blue states, then it's unfair for Blue states to send tax money to be reallocated to Red states for their low funded social services.

David Ricardo said...

The tax legislation is likely to be somewhat neutral with respect to the 2018 elections as Mr. Buchanan avers. The legislation will not change support in favor of the GOP for reasons stated in the post and because voters just do not seem to have taxes as a priority in their issues. But Democratic opposition to the legislation is not like to sway voters towards the Democrats. In the end, most voters have other issues.

The major impact of the new tax law on elections will be from two issues that are not tax related at all. The first is the repeal of the individual mandate. Insurers and health care providers are not stupid. They know that without the mandate millions of largely healthy people will drop out of the health care market. The remaining pool will be skewed towards those who need costly care. The result, health insurance carriers will raise rates substantially for individual plans, health care providers will raise rates in anticipation of higher bad debt expense and group plans will raise rates in anticipation of the providers raising prices. By mid 2018 everyone on private plans, whether individual or employer group sponsored plans will see substantial premium increases.

Republicans will seek to blame the increases on ACA, and the challenge for Democrats will be to explain how Republicans essentially repealed a large part of the non-Medicaid part of ACA is the cause of the increases. Health is the top issue going into 2018, but Dems should not just assume it works in their favor and expect voters to reward them and punish the administration and Republicans in Congress without a fight. In fact, the major risk to Democrats is the belief that all they have to do is show up on the ballot to win.

The second issue is the deficit. The tax law and other factors are likely to push the deficit towards the $1 trillion level, with likely forecasts for 2019 of a deficit over $1 trillion. The deficit hawks, paritucularly those in the Republican party will re-emerge. They may not vote for Democrats but they may not vote at all, giving us an encore of the Moor Jones election where Democrats were energized and Republicans stayed home. So Democrats have an oppotunity, not a certainty. Gerrymandering in the House and math in the Senate races could easily leave Republicans in charge of the Congress.

With respect to the loopholes that Shag mentioned, it's like shooting fish in a barrel. One area we are working on in how to place high seven to eight figures residences of wealthy clients into pass through entities. Because the tax bill limits property tax deductions for individuals but not for pass through entities placing a residence in a pass through will allow full deduction of property taxes. Over a 10 year period a residence valued at $8 million for example placed in a pass through could generate as much as $$400,000+ in tax savings over what is now current law. This will take a little bit of design, but nothing a junior tax accountant cannot manage.

For Mitt Romney and his many residences, Mitt may well be Legal Tax Evader of the Year for many years to come.

Shag from Brookline said...

David, your first sentence (as well as much of the rest of your first paragraph) was troubling to me, so after reading your comment I reread Neil's post. I have a different reading of Neil's post than you do.

Did you read Bret Stephens' NYTimes column earlier this week on the new tax law? It sounds like you did. Today's NYTimes has 5 letters reacting to the column that are interesting. I'm basically retired but may attend a seminar that most likely will be planned in the Boston area soon. I do expect that the new tax law will be a major part of Democrats' efforts at a wave midterm election. On an earlier thread, you made a point of potential problems with new withholding tables that might result in wage earners owing significant balances on April 15, 2019. I expect narratives of the process of the new tax law to be potential fodder that wage earners may understand. And the continued understaffing/underfunding of IRS may cause some havoc for wage earners and other taxpayers in understanding how the new tax law impacts them. With other major tax bills, with tax professionals involved in the process, transitions were much smoother. There's a recent story about the role of PA Sen. Toomey in the process that may get more play. Sen. Collins will continue to be exposed, as will others. As to property tax limitations on deductibility, what if there is a significant drop in residential pricing? Quicken Loans may not have the answer. Yes, there is plenty of other things Democrats have to do as 2018 is not a one-horse pony. The only surer thing in life than taxes is death. And that brings in health care. And I think national security will be a major issue for Democrats to overcome Trump's constant threats. And then there is the irony of Putin warning America not to mess with Russia's elections, as if Trump has that on his agenda.

David Ricardo said...

Far be it from me to put words in Mr. Buchanan's mouth, as we have no idea where those words have been and besides Mr. Buchanan is more than capable of eloquently presenting his case. But it did seem that the body of his post was somewhat in opposition to the headline and more moderate about the reaction to the tax legislation.

Both Bret Stephens and Peggy Noonan wrote how the Dems will rue opposing the tax bill, that it will be very popular and Stephens going so far as to say he thinks the rate reductions at the top should have been higher:

“But here are two things to know: Slashing corporate rates — the bill’s central achievement — is good economics. And wailing against the bill as an American Armageddon is dumb politics, at least for Democrats. . . .

Maybe the current bill cuts the rate too far — or, as I think, doesn’t cut it far enough.”


This just shows how politically tone deaf they are. Both of their columns were the source of great laughter.

The roles of Sens. Collins and Toomey and the intricate provisions of pass through entities and the impact of property/state income tax limitations will not impact regular voters. The problems with the tax bill are huge and look for massive technical corrections bills in the years to come. Drafting even preliminary regs and getting comments will take years. But this stuff appeals to us tax geeks, not to middle income workers. The deficit may be an issue resulting from the tax bill could be significant politically but not until 2019-20.The media will soon turn to other topics.

It is likely the 2018 and 2020 elections will be decided by events unanticipated and yet to happen. The Mueller probe will release new info in 2018. Health care tops some polls in voter concerns. If one of the three senior Supreme Court supporters of Roe leaves the Court a massive confirmation battle will take place and abortion rights and SSM will take center stage. The Korean issue is quiet at this point but no one knows how it will play out in 2018. Debates over Medicare, Medicaid and Social Security funding could be big if Ryan is stupid enough to try and pass legislation reducing benefits. Some 'black swan' issue may emerge, much like sexual harassment came to the floor in 2017, totally unexpected. Will Bannonism split the Gop?

Personally I wish the tax bill and its horrendous provisions would provoke outrage in the American republic, but it's hard to see that happening.

Shag from Brookline said...

Mike's final post of the year ties into Neil's post and its thread. I thought Mike's Verdict column was well done as it adds to Josh Marshall's TPM post I referenced in my earlier comment regarding the SALT deductions under the new tax law.

Keep in mind that Trump trumpeted the new tax law as a Christmas present to Americans, all Americans. Alas, it is an unopened present as it will unwrap next year. And how it unwraps for many of us we do not know. Will 2018 be a MAGA moment as we learn the contents of this Christmas present? Trump has tried to revive "Coal" which many taxpayers may have found lumps of in their Christmas stockings. Rather, with the new tax law Trump has revived "Kohl," e.g., the non-hood brothers. The December holiday season may have served to mask the horrors of the new tax law. But after celebrating New Year's Eve and Day, there'll be a reality check on the new tax law.

As to the wisdom of the corporate tax cut, perhaps reform was appropriate. But this was not done on a partisan basis with public hearings, experts, etc, that accompanied earlier tax reform measures. And how will corporate tax reductions be treated by corporations cashing in? Will significant stateside jobs be created or will significant tax savings see increases in executive compensation and stock buybacks and stock dividends? Regarding stock dividends, keep in mind how such unearned income received favorable treatment from the Bush/Cheney tax cuts of 2001 that to a great extent continue in place. And then there's the pass through benefits of the new tax law that could reduce tax receipts well beyond dire forecasts, further increasing deficits, leading to safely net cuts. The "We the People" of the Constitution's Preamble now include corporations and pass throughs? Democrat have to heat things up by throwing "Kohl" on the political fire.

And perhaps what appeals to "tax geeks" may appeal to voters. There are narratives on the new tax law that may be very telling. In the past, tax cuts had to be undone (e.g., Reagan) so that government could function. This brings in national security. Maybe even the "Know Nothings" (aka Trump's "Forgotten") will learn something.

John Barron said...

David R.: "Over a 10 year period a residence valued at $8 million for example placed in a pass through could generate as much as $$400,000+ in tax savings over what is now current law."

"If a principal purpose of any transaction is to evade or avoid liability under this chapter, this chapter shall be applied (and such liability shall be imposed) without regard to such transaction." 26 U.S.C. § 9722.

My first thought is to throw the $8M ski chalet into an FLP. If you are giving away a portion of the property--and you were going to do it eventually, anyway--you can argue that there is actual economic substance. (Tax avoidance is a principal purpose of most transactions, fwiw.) But this is pocket change.

The real abuses will come where those who can end up keeping their income in corporate solution. Earn $1M. Pay tax @ 21%. Need some cash to live on? Trundle down to your friendly banker and borrow it, using the stock as collateral. Save $100K/year. Lather. Rinse. Repeat.

The bill is so easy to beat that the advertised $1.5T deficit will end up being twice that.

John Barron said...

We DO need corporate tax reform--and not just in America. Giants like Apple arrange their affairs in such a way to create a form of tax arbitrage. The most recognizable trick is the corporate inversion, where mighty mite Tim Horton's swallows the Burger King whole. Another is the infamous "Double Irish With A Dutch Sandwich," explained here: https://www.investopedia.com/terms/d/double-irish-with-a-dutch-sandwich.asp . Apple is a tutorial on how to evade taxes: https://www.usatoday.com/story/news/world/2017/11/07/paradise-papers-apple-shifted-billions-offshore-avoid-tax/839565001/ :)

The simple fix is to impose a flat tax on street income, apportioned on the basis of sales. Under that system, income is income is income. You take away one of the most powerful tax planning tools: changing the character of income. Moreover, it would be harder to change the timing, and you wouldn't get that much of a benefit if you did. Sell 25% of your products in the US, pay on 25% of your GAAP income--what you report to the Street--at a 25% rate. For Apple, that's $48B x .25 x .25 = $3B, which is $3B more than they pay now.

My preferred solution is to tax the fuck out of them at the state level. Every State could go to this method of corporate taxation, and there is nothing that would stop a State from imposing a 20% surtax on certain pass-through income. Tell Congress that we are going to use this revenue to offset planned cuts in Medicare, Medicaid, and Social Security. Add a 70% unified estate and gift tax, taxing the last dollar of any estate of those who are not residents, and you could see how the Bribery Act could be undone.

At the federal level, the Ds should be resolute. Any suggestion that we don't have the money to pay for entitlements should be met with "You should have thought about that when you rammed through tax cuts for the people who bribed you," and "You bought this problem; we will not vote for even one dollar in cuts to MMSS."

David Ricardo said...

John is correct in citing the anti-abuse/anti tax shelter section of the code, but the problem is that with this bill the abuses will be overwhelming and the enforcement resources of the Treasury so underwhelming that what we call the tax lottery will prevail, with abusers as winners. In the tax lottery a taxpayer files a return that is likely to contain abuses that are not allowed but where a filing position can be made. That is it can be argued that given the ambiguity of the tax laws and regs the position the taxpayer has taken may be incorrect, but since it had a basis it is not fraudulent. If caught, pay the back taxes and some interest and get out of jail free. So many loopholes, so little time.

But unless they are subjected to in an intensive audit, something that is unlikely to occur, the abuses just go undetected and remain in place until regs or court rulings absolutely forbid them. That will take years. The taxpayer wins the audit lottery, that is, they are not audited. As for the ability to move property taxes into a deductible mode John is also correct that an FLP could be one vehicle to do this. The use of a life estate placing the property into an LLC might also work as could a real estate investment LLC where the residence along with other real estate holdings are contributed for interests in the LLC. The LLC is designated as a vehicle to manage the investments, not avoid taxes. Voila, it passes the smell test.

So there are lots of opportunities, and I could say more and no I would not have to kill you but I would have to charge you.

And yes this might be small amounts of savings to wealthy taxpayers, but you have no idea the hatred these people have of paying taxes and how much they like to avoid even the smallest amounts. My experience is that many of these people will take a lower after tax return on partially or fully tax exempt investments than they would get on fully taxable investments after paying the tax, but they really, really, want to avoid paying taxes even if it costs them money to do so and they are net/net worse off.

Shag from Brookline said...

To what extent might the use of pass-throughs result in decreases of payroll taxes? I recall games could be played with S-Corps on payroll taxes.

Simplification under the new tax law may be complex. The IRS will have to respond quickly for purposes of taxpayers addressing estimated tax payments during calendar year 2018. So not only wage earners might be concerned about tax payment balances due by April 15, 2019 for calendar year 2018.

Tax preparers (especiallyy CPAs, attorneys) serve as gatekeepers. Their clients may be aggressive, willing to play the tax lottery. What do these gatekeepers do when a tax client presses for the tax lottery? No one likes to lose paying clients, especially when there are preparers out there ready to hold the gate open to the tax casino. How will IRS funding be addressed in the budget to be decided upon for the current fiscal year to make sure the new tax law is adequate and promptly implemented?

David Ricardo said...

In tax strategy there is a range in which some advisers will take only certain and near certain positions while at the other extreme there are those who construct and sell tax shelters that are near certain to be disallowed if the client is audited. A number of the large CPA firms were in the latter category but appear to have cut back somewhat in the face of Treasury opposition and prosecution.

Our position is straight forward. We will not take a position unless we have a viable argument in favor of that position. We explain to the client that the Treasury may not accept that position and also explain how the process of appealing a Treasury position would work and what it would cost to defend the position at various stages of appeal through the Treasury and through the courts.. We also give the client an estimate of how likely we are to prevail and we do not ever advise the client that they should adopt a position they think is too risky in hopes of not being audited.

We tell the client that in the event we are unable to prevail with the Treasury that they would be assessed back taxes and interest, which is not a penalty as they would have owed the taxes in the event they had not filed the way they did and the interest is a charge for using money that should have been paid earlier. We also advise the client on the likelihood of penalties and if interested we explain the filing position and also explain how the Service might contest our position. At that point the client will make the decision of whether or not to take the more aggressive stance.

The problem is that complexity breeds confusion. There are a number of instances where we have contacted the IRS for guidance on an issue and the answer is 'we don't know, all we can say is go ahead and file and see how it is resolved. And if you get a chance let us know how it turns out.' An adverse positions taken by a client and Treasury is often the only way difficult issues are resolved because IRS decisions are subject to review by the courts and ambiguity is the rule not the exception.

I had one situation where Treasury said they would settle on less than what they said we owed, but wanted us to turn it down and take the issue to court because they wanted a test case to settle the issue once and for all. We settled on their offer, happy to let someone else fight the battle. Personally in the past I have been involved in several situations where we prevailed but lost in the long run when the Service successfully petitioned the Congress to fix the loophole we exploited..

But getting back to the point at hand, the 2017 tax bill, you can see that it will involve massive regulatory activity and a large number of court cases. And yes, as noted earlier in a comment the resulting deficit will be much higher than anticipated. See Kansas for example.

In terms of the ethics of all of this we believe that Judge Learned Hand had it right, although I am not sure what the term “mere cant” means.

"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.
Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)

Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.
Commissioner v. Newman, 159 F.2d 848, 851 (2d Cir. 1947) - dissenting opinion"

John Barron said...

David and Shag,

Absolutely agree w/David's overall assessment. We have not yet begun to plan.

Concur wrt tax-avoidance obsession of wealthy clients. Can't tell you how many times I had advised them to not let the tax tail wag the dog. Docs were the worst: An M.D. was a license to buy bad tax shelters. :) My best clients understood.

My first reaction to folding the ski chalet into a single-person LLC is that it would be a disregarded entity for tax purposes. Haven't done the research, but throw that out as a note of caution. For 2018, the best move (varies from state to state) was to prepay. See e.g., Rev. Rul. 71–190, 1971–1 C.B. 70.

In my State, tax professionals are bound by Circular 230. The downside of getting too aggressive in playing the audit lottery is that you might find yourself out of a career (not a big deal for us elders). Compliance people have to file "audit me letters" (the 8275/UTP), and decide how much risk THEY want to take. Always been a gamblin' man, but preparer penalties are getting oppressive.

John Barron said...

David nailed it. The decision always resides with the client, but we can't always go where they want to go. Part of the skill in advising clients is in estimating what the Service would do.

Shag from Brookline said...

Is there a difference in estimating what the IRS would do if the IRS were adequately funded versus inadequately funded in determining the skin invested? Can we go back to the days of the Big Eight for some experiences on the competition in estimating?

David Ricardo said...

I operate on the assumption that every return for a high net worth client will undergo an audit by the Service with respect to any items outside normal entries (w-2 income, 1099's etc). The justification is prepared and reviewed (and argued about) at the same time the return is finalized. In a similar vein, given the intelligent comments by Shag on this Forum I strongly believe that likewise he assumed that every opinion letter he issued to clients would be challenged and that he prepared the back up documentation at the same time the opinion was drafted. Good practices are good practices.

As for the Big 8, now the Big Whatever they have been the most notorious and aggressive and quite frankly in the most in error with respect to the tax shelters they designed. Much of their stuff was like a red flag in front of an IRS Audit bull. And given their structure that's not the only place that the term 'bull' was appropriate. It's like they didn't even try.

I realize we have gone rather afar from Mr. Buchanan's original post, but the exchanges here and the fact that I imagine they have produced yawns of boredom by those reading this Forum does I believe illustrate how the intracies of the tax bill are likely to be neutral with respect to politics. And think how bad a tax bill it has to be to achieve that.

Shag from Brookline said...

The intricacies of Obamacare were not neutral with respect to politics, despite the fact that Obamacare provided benefits to those millions who joined. Obamacare went through a year long legislative process with actual hearings in which Republicans actually participated. The Republicans made it political and have yet to kill Obamacare. Compare this to the lack of normative process with the new tax law. The new tax law will not be neutral politically as it exacerbates the long lasting (cite, Ronnie Reagan) income/asset gap and might increase medical costs. Democrats should use the same tactics that Republicans used in constant attacks on Obamacare in messaging voters on the Second Gilded Age documented by the new tax law. The message will get across. But Democrats have more messages. Obamacare was unpopular until the results of the 2016 elections were revealed. Obamacare helped people, saved lives. The new tax law will be healthier for the already wealthy, who will be eating the cake with crumbs trickling down for the masses. Even Trump's "Forgotten" base will be aware that Trump has not kept his promises on taxes, such as getting rid of hedge fund capital gains treatment for carried interest. And the increase in debt resulting from the new tax law will move Republicans to reduce safety nets for the masses. The Second Gilded Age is a class issue that will be a political issue and gated communities will not protect the 0.1%ers. Tax policy discussions may be boring to many but when they work against the masses, it's political all the way. And consider the impact of the new tax law on national security that adds to the continuing political dysfunction. There remains a lot of digesting of the new tax law that just might result in national heartburn as we unwrap this Trump/GOP Christmas present. Quick! Get the Airwick! [I'm dating myself on olfactory problems.]

Shag from Brookline said...

One plus from the new tax law might be a big increase in sales of green eye shades for poring over its provisions in efforts to understand it and searching for loopholes. Also, arm bands may make a comeback.

Shag from Brookline said...

Let me add, before I have breakfast, today's NYTimes editorial "Don’t Cheer as the I.R.S. Grows Weaker" as part of the conversation. It says a lot.

Shag from Brookline said...

Now that I'm nourished, here are a couple of key paragraphs from that NYTimes editorial:

"Americans should reserve their rage for Republicans, who have spent years targeting the I.R.S. for political gain. Since 2010, Congress has cut the agency’s budget by nearly $1 billion, or 18 percent, adjusted for inflation, as the I.R.S. processes about 10 million more tax returns. Its work force has been whacked by 21,000, or nearly one-quarter; taxpayers who need help — often individuals preparing their own returns — have a hard time getting anyone to answer the phone.

"This underscores the peril of demagoguing the I.R.S. It’s not the little guy who benefits most from diminishing the agency; it’s the scam artists and sophisticated high-dollar cheats."

The "little guy" doesn't have the benefit of "estimating" in the voluntary compliance tax system with his W-2s and 1099s, living paycheck to paycheck, being limited to playing the State Lottery. For the wealthy, with "libertarian" instincts, what's the risk of playing the tax lottery armed with professional "estimating" other than interest, but no penalties, as the IRS lottery wheel has infrastructure problems created by Republicans' defunding? Perhaps the" gray areas" addressed by "estimating" cloud (and cross) actual red-lines. Let's hope the IRS budget will fund more green eyeshades and arm bands for its employees to protect the fisc.