How to turn in your tax-cheating neighbor(professional.wsj.com)
professional.wsj.com
How to turn in your tax-cheating neighbor
http://professional.wsj.com/article/SB10001424053111903352704576540840395329676.html?mod=WSJ_hp_editorsPicks_1
38 comments
Tax laws need to be much, much simpler. The more complicated they are, the easier it will be for people to sneak by without paying and for loopholes to exist. It's the same thing that happens when a program drifts away from triviality - the probability of bugs increases greatly. Make tax laws trivial, and most of these problems - and most of the need for the IRS - would go away.
Tax laws generally start out simple, then get complex patching holes. My favorite example.
Once upon a time a long time ago, a company wanted to pay a dividend to shareholders. That would be taxed as ordinary income to the shareholders. The company's accountants had a brilliant idea.
1. Do a stock split. Say, 105 for 100.
2. Do a stock buyback, where the company buys back 1/21 of the outstanding shares.
Net result to shareholders: every 100 shares becomes 105, then the company buys back 5 out of every 105, leaving the shareholder with 100 and some cash. Since the cash came from the sale of stock, it's capital gains.
The tax code was fixed so this would not work, by inserting a new section that gives conditions that a stock buyback must meet to be considered a stock buyback. If it fails to meet the conditions, it is considered to be equivalent to a dividend distribution and taxed as such. The conditions have to take into account a bunch of factors, so as to not penalize legitimate buybacks but not leave holes that allow abuse.
I believe that a large part of the complexity of the tax code comes from this kind of thing.
Once upon a time a long time ago, a company wanted to pay a dividend to shareholders. That would be taxed as ordinary income to the shareholders. The company's accountants had a brilliant idea.
1. Do a stock split. Say, 105 for 100.
2. Do a stock buyback, where the company buys back 1/21 of the outstanding shares.
Net result to shareholders: every 100 shares becomes 105, then the company buys back 5 out of every 105, leaving the shareholder with 100 and some cash. Since the cash came from the sale of stock, it's capital gains.
The tax code was fixed so this would not work, by inserting a new section that gives conditions that a stock buyback must meet to be considered a stock buyback. If it fails to meet the conditions, it is considered to be equivalent to a dividend distribution and taxed as such. The conditions have to take into account a bunch of factors, so as to not penalize legitimate buybacks but not leave holes that allow abuse.
I believe that a large part of the complexity of the tax code comes from this kind of thing.
Why should income and capital gains be taxed differently anyway?
If it's to stop Grandma getting hit with a huge marginal tax when she sells her house (despite it being a once-off kind of thing), just introduce some kind of smoothing. If your income is uneven, the tax man can give concessions (if you get a lot of money after a period of low income), and rebates (if you have a low income period after making a lot of money).
Easy, right? No more need for tricky rules about how to move money between the different categories.
If it's to stop Grandma getting hit with a huge marginal tax when she sells her house (despite it being a once-off kind of thing), just introduce some kind of smoothing. If your income is uneven, the tax man can give concessions (if you get a lot of money after a period of low income), and rebates (if you have a low income period after making a lot of money).
Easy, right? No more need for tricky rules about how to move money between the different categories.
Because income and capital gains are two different things. Capital gains should be lower because there is a risk that you may lose money, if you add a high tax on top of that lots of investments become not worth it.
The problem with this way of thinking is that, this is not necessarily true: Regular ways of getting income also make you take part in the risk of whatever or whoever you get your income from, and as a result, more and more things that would be income get wrapped into capital gains.
The fair thing to do would be something where losing money (or unvoluntarily suffering relocation expenses or losses as a result of your source of income) gives you a tax credit, valid for the next 10 years.
The fair thing to do would be something where losing money (or unvoluntarily suffering relocation expenses or losses as a result of your source of income) gives you a tax credit, valid for the next 10 years.
If you start a company and then pay yourself part of the earnings, there is a risk too that the company goes bankrupt. If you specialize in an industry and get a paid job, there is a risk too that you dont find a job or get laid off. I dont see how the risk of capital investments is any different to other kinds of investment that would justfy it to be taxed differently. A better explanation would be the higher capitalization of the groups lobbying for a lower tax for that income group.
Because of incentives, because the actions that created the capitals gains in the first place were already taxed, to be able to correct for the self-employed who incorporate vs those who don't (situation of getting dividend on 5 stocks Coca Cola is very different from being a sole proprietor and paying yourself effectively through dividend), to keep the administration sane (how can you smooth a windfall like selling a house? You'd have to do it over 10 years or so, how are you going to keep track of that? What if the person moves, across the country or abroad? etc...)
None of it is as simple as it looks - there is a reason we ended up in the situation we are now. Nobody likes it, the IRS itself the least. It's not a matter of saying 'oh let's just start from scratch'. (See also: 'second system syndrome', which applies to law just as much as to software)
None of it is as simple as it looks - there is a reason we ended up in the situation we are now. Nobody likes it, the IRS itself the least. It's not a matter of saying 'oh let's just start from scratch'. (See also: 'second system syndrome', which applies to law just as much as to software)
> Why should income and capital gains be taxed differently anyway?
Because of inflation, because there's already a corporate income tax.
Because of inflation, because there's already a corporate income tax.
The correct way to deal with corporate income tax is to have corporations disburse their income, and to disburse the tax credits along with the income.
The correct way to deal with inflation is to to keep it low, and understand that inflation + capital gains tax creates an effective wealth tax, and that some wealth tax in the mix, along with income and consumption taxes, is a good thing. Inflation is not, and should not, be taken into account on term deposits for the same reason.
The correct way to deal with inflation is to to keep it low, and understand that inflation + capital gains tax creates an effective wealth tax, and that some wealth tax in the mix, along with income and consumption taxes, is a good thing. Inflation is not, and should not, be taken into account on term deposits for the same reason.
1) Inflation effects salaries just as much as capital gains. Inflation does not discriminate between income types.
2) I pay capital gains tax rates on some of my income but I'm not a corporation so I pay no corporate income tax. The 2 are only tangentially related.
2) I pay capital gains tax rates on some of my income but I'm not a corporation so I pay no corporate income tax. The 2 are only tangentially related.
1) Inflation does discriminate between income types, in the following manner. If there's 5% annual inflation and somebody pays you a dollar for some work today, you're getting one dollar in whatever today's dollar is worth, and you're paying income taxes in whatever today's dollar is worth. If there's 5% annual inflation, and you invested $20 a year ago and today you sold your investment for $22, you've made $1 in whatever today's dollar is worth. But you're paying income taxes on $2.
2) Corporate income taxes decrease the amount of capital gains you have.
2) Corporate income taxes decrease the amount of capital gains you have.
Good analogy. Although I've mentioned this before here, it's relevant; the way the tax law was originally put into effect was very smart and not complicated at all. ($4000 in 1893 ~ $100K today)
(1) Zero tax on any person making under $4,000 per annum (2) Begin graduated tax rates on person making $4,000 or more per annum (with special attention paid to trustees and other persons whose income source is derived from estates) (3) All corporations with profit subject to tax
http://books.google.com/books?id=ogUNAAAAYAAJ&pg=PP1#v=o...
Very simple. If the original tax code were dropped into place today, it would be greatly simplified for most people.
However, I disagree that tax laws need to be simpler for high-income, high-volume franchises. Following the original program analogy, it's necessary to be very strict and put many layers of control around processes that have the ability / potential / likelihood to zombie.
I guess that's where we are today with the US tax code: zombie processes' wasting CPU (GDP) pretty much hijacked the whole system.
(1) Zero tax on any person making under $4,000 per annum (2) Begin graduated tax rates on person making $4,000 or more per annum (with special attention paid to trustees and other persons whose income source is derived from estates) (3) All corporations with profit subject to tax
http://books.google.com/books?id=ogUNAAAAYAAJ&pg=PP1#v=o...
Very simple. If the original tax code were dropped into place today, it would be greatly simplified for most people.
However, I disagree that tax laws need to be simpler for high-income, high-volume franchises. Following the original program analogy, it's necessary to be very strict and put many layers of control around processes that have the ability / potential / likelihood to zombie.
I guess that's where we are today with the US tax code: zombie processes' wasting CPU (GDP) pretty much hijacked the whole system.
Zombie processes aren't scheduled for execution and therefore don't consume CPU resources.
Exactly. Unfortunately, there are so many special-interests and lobbyists who will fight dollar-for-dollar to keep their special perks. Why else could it be that the most profitable industries (like oil) have some of the biggest allies in Congress?
This might be the most terrifying program I have ever heard of. I am struggling to think of anything other than the potential consequences of this.
Terrifying? Even if you're anti-tax, those to fail to pay taxes are a big part of the problem. What's the motivation to fight over-taxation if those who wish to opt-out can simply do so with little chance of consequence.
I know of at least two business owners who are flat out stealing from the IRS and their employees. Both of them are more than three years behind on federal withholding tax payments. It's not even their money! This is their employees' withholding tax. I know this because of public filings against them. I can only imagine their personal tax situation.
Everyone I talk to says the same thing: "Ooooooh boy, they've really got it coming." When? When do they have it coming, exactly? Because as far as I can see, they're both still driving cars that are more expensive than mine, live in houses that are bigger than mine, and spend money like it's going out of style.
I have no desire to skip on my taxes, and I'm perfectly happy with the life I live, but it flat out pisses me off to see these people cheat the system and get away with it. It makes me feel like the "big bad IRS" is just some children's fairy tale meant to scare normal people in to compliance. Meanwhile, a whole pack of miscreants run amok with other peoples' money. It's just not right. Frankly, I'd rather see these people in jail than the pot head down the street that is spending 90 days in jail for the joint he had in his pocket while walking home from work. True story.
I know of at least two business owners who are flat out stealing from the IRS and their employees. Both of them are more than three years behind on federal withholding tax payments. It's not even their money! This is their employees' withholding tax. I know this because of public filings against them. I can only imagine their personal tax situation.
Everyone I talk to says the same thing: "Ooooooh boy, they've really got it coming." When? When do they have it coming, exactly? Because as far as I can see, they're both still driving cars that are more expensive than mine, live in houses that are bigger than mine, and spend money like it's going out of style.
I have no desire to skip on my taxes, and I'm perfectly happy with the life I live, but it flat out pisses me off to see these people cheat the system and get away with it. It makes me feel like the "big bad IRS" is just some children's fairy tale meant to scare normal people in to compliance. Meanwhile, a whole pack of miscreants run amok with other peoples' money. It's just not right. Frankly, I'd rather see these people in jail than the pot head down the street that is spending 90 days in jail for the joint he had in his pocket while walking home from work. True story.
I really don't understand why OP has his knickers in a twist. What're the potential consequences of falsely reporting someone? They get audited? The IRS already does random (but infrequent audits).
Given the fact that the IRS would indeed have to investigate and then prosecute whatever fraud may be present, they would have to have a fairly solid and material understanding of the circumstances leading to tax dodging. People who are filing false claims can and probably should be prosecuted for misleading the government officials.
The IRS isn't some inhuman soul sucking beast. It is a bureaucracy, but when you get down to the level of dealing with individuals who have discretion to make decisions, every experience I've had with them so far has been friendly and understanding. As far as i can tell they really do try to err on the side of not screwing individuals at the very least.
Given the fact that the IRS would indeed have to investigate and then prosecute whatever fraud may be present, they would have to have a fairly solid and material understanding of the circumstances leading to tax dodging. People who are filing false claims can and probably should be prosecuted for misleading the government officials.
The IRS isn't some inhuman soul sucking beast. It is a bureaucracy, but when you get down to the level of dealing with individuals who have discretion to make decisions, every experience I've had with them so far has been friendly and understanding. As far as i can tell they really do try to err on the side of not screwing individuals at the very least.
Obviously you have never been through an 'audit' before, and last I checked, the IRS is very inhuman
whooooahhh buddy -- did you just seriously have the audacity to use the phrase "other people's money" wrt to collecting taxes?? Seriously??
Since bradleyland stated It's not even their money! This is their employees' withholding tax., it appears the point was the malefactors withheld money from their employees, and then failed to pass it along to the feds.
Hence, if I read OP correctly, the money in question was taken from their employees.
Hence, if I read OP correctly, the money in question was taken from their employees.
You nailed it. It's one thing to skip on your own taxes. I fully grok the philosophical disagreement that objectivists have with taxation, but to misappropriate someone else's tax funds is theft, plain and simple.
Despite the sensationalistic leded about ratting out your brother in law, if you read the details of the article, this is program really about getting accounting professionals to report large-scale tax evasion by businesses they work for or with. The IRS doesn't want your vague reports that someone you know brags about not paying his taxes; they want details and specifics, and they won't pursue it unless the numbers are very large.
Agreed. I find it disturbing that other commenters in this thread would evidently use this program if they had a chance.
I can sense the downvotes already... but let me explain why this program is terrible. If I charged everyone a tax, and threatened people with violence if they didn't pay up, then everyone would recognize it was wrong. When government does it, the brainwashed masses think it's a good thing. But it is bad when the government taxes people just like it would be bad if I taxed people. It doesn't matter what the government does with the money (which is mostly wasted, but that's beside the point). It is still wrong.
To rat someone out who opts not to pay for the protection racket that is taxes is to participate in the crime of stealing their wealth. That is why this program is terrible. It converts ordinary citizens into criminals.
Government has one tool that legitimate organizations don't have: force. Because it is wrong to force people to do stuff, government is immoral. Government is therefore a criminal organization, like a scaled up version of the mafia. If these ideas appeal to you, I recommend reading the works of Murray Rothbard, in particular "For a New Liberty", but his books on economics will also set you on the right path.
I can sense the downvotes already... but let me explain why this program is terrible. If I charged everyone a tax, and threatened people with violence if they didn't pay up, then everyone would recognize it was wrong. When government does it, the brainwashed masses think it's a good thing. But it is bad when the government taxes people just like it would be bad if I taxed people. It doesn't matter what the government does with the money (which is mostly wasted, but that's beside the point). It is still wrong.
To rat someone out who opts not to pay for the protection racket that is taxes is to participate in the crime of stealing their wealth. That is why this program is terrible. It converts ordinary citizens into criminals.
Government has one tool that legitimate organizations don't have: force. Because it is wrong to force people to do stuff, government is immoral. Government is therefore a criminal organization, like a scaled up version of the mafia. If these ideas appeal to you, I recommend reading the works of Murray Rothbard, in particular "For a New Liberty", but his books on economics will also set you on the right path.
How do you propose public services are paid for and law and order is maintained?
This is a minor problem, since public services make up a very small portion of government spending in the US. Most government spending is merely redistribution.
http://usgovernmentspending.com/piechart_2009_US_total
http://usgovernmentspending.com/piechart_2009_US_total
Public services would be provided by businesses like everything else. "Law and order" would be maintained primarily the way it is now, which is through social custom. But since there would still be aggressors, you would have to pay for private security. And you would probably want to carry a weapon with you.
All of these issues are discussed extensively in the libertarian literature. Murray Rothbard and Stefan Molyneux are good places to start.
All of these issues are discussed extensively in the libertarian literature. Murray Rothbard and Stefan Molyneux are good places to start.
Perhaps public services (including the legal system) could be funded by donations instead of tax money.
Should everyone be allowed to use these public services when not everyone is donating? Should you be allowed to use the police even if you haven't been donating to their budget? What if the police have two calls: one from someone who has donated and one from someone who hasn't? Who has priority?
The tax system exists to fund services that are generally not used by someone until they are needed (FEMA, Medicare, unemployment, etc.). I can honestly say I would never pay into any of these programs unless I had to and I think most people would do the same (even if they wouldn't admit to it openly).
The tax system exists to fund services that are generally not used by someone until they are needed (FEMA, Medicare, unemployment, etc.). I can honestly say I would never pay into any of these programs unless I had to and I think most people would do the same (even if they wouldn't admit to it openly).
Yup. People love to skip out on paying for services, and then scream bloody murder when they don't get those services later when they need them.
http://www.msnbc.msn.com/id/39516346/ns/us_news-life/t/no-pa...
http://www.msnbc.msn.com/id/39516346/ns/us_news-life/t/no-pa...
Your parent probably hasn't thought it out that far; your parent probably started at "gee, I don't like paying taxes" and stopped at "therefore, taxes are bad! Down with taxes!"
Alternatively, your parent could belong to the set of people who basically figure the money will just come from somewhere. They don't really care where, so long as it's someone else's money.
Alternatively, your parent could belong to the set of people who basically figure the money will just come from somewhere. They don't really care where, so long as it's someone else's money.
government is immoral. Government is therefore a criminal organization
Well, the simplest of the logic errors there is that one. Immoral does not equal illegal. I'm not even going to get into the fact that it's not always wrong to force people to do things.
Well, the simplest of the logic errors there is that one. Immoral does not equal illegal. I'm not even going to get into the fact that it's not always wrong to force people to do things.
> Immoral does not equal illegal.
I meant criminal as in immoral, not as in illegal. Obviously the government is going to declare its taxes legal.
> I'm not even going to get into the fact that it's not always wrong to force people to do things.
There are cases where it's OK to force people to do stuff, just like there are cases where it's OK to kill someone. But those cases are rare. Government employs force beyond those rare moral cases, and is therefore immoral.
I meant criminal as in immoral, not as in illegal. Obviously the government is going to declare its taxes legal.
> I'm not even going to get into the fact that it's not always wrong to force people to do things.
There are cases where it's OK to force people to do stuff, just like there are cases where it's OK to kill someone. But those cases are rare. Government employs force beyond those rare moral cases, and is therefore immoral.
I meant criminal as in immoral, not as in illegal.
That's not what criminal means. Except in the sense of "deplorable and shocking" criminal means "of or relating to a crime." Crime means "An action or omission that constitutes an offense that may be prosecuted by the state and is punishable by law". Crime has one non-legal definition, "An action or activity that, although not illegal, is considered to be evil, shameful, or wrong" but that's the sense applied to, for example, Apartheid, not to organized crime.
But those cases are rare.
No they aren't. I put a fence around my property to force people to go around it. It works 24x7x365. If people choose to circumvent that fence, I will personally force them to leave my property. This will happen precisely as often as people choose to bypass my fence.
That's not what criminal means. Except in the sense of "deplorable and shocking" criminal means "of or relating to a crime." Crime means "An action or omission that constitutes an offense that may be prosecuted by the state and is punishable by law". Crime has one non-legal definition, "An action or activity that, although not illegal, is considered to be evil, shameful, or wrong" but that's the sense applied to, for example, Apartheid, not to organized crime.
But those cases are rare.
No they aren't. I put a fence around my property to force people to go around it. It works 24x7x365. If people choose to circumvent that fence, I will personally force them to leave my property. This will happen precisely as often as people choose to bypass my fence.
Here's a link to the full article: http://online.wsj.com/article/SB1000142405311190335270457654...
Googling "tax fraud" offers links to bounty hunting with this program.
Edit: This wasn't a suggestion, but rather an observation.
Edit: This wasn't a suggestion, but rather an observation.
The U.S. has been rewarding people who turn in fellow citizens or companies defrauding government programs since Congress's passage of the False Claims Act in 1863. Whenever there has been an income tax—briefly during the Civil War, and permanently since 1913—the IRS (or its predecessor) has had its own whistleblower program, says tax historian Joseph Thorndike of Tax Analysts, a nonprofit publisher. But payments tended to be small and rare because IRS officials were uncomfortable with "bounty hunting."
The landscape changed in 2006. Heartened by the success of a whistleblower program for nontax issues such as government contracts, Congress overhauled the special tax provisions on whistleblowers and set up the IRS's large-award program.
The IRS does not want your tax-cheating neighbor, but if you work for a company that is cheating the government out of tens of millions of dollars, I think we all want you to act.