Coyote Blog

My column this week in Forbes is a response to yesterday's Presidential budget speech.  An excerpt:

President Obama is working from the assumption that the political leader who suggests painful but necessary budget cuts first, loses.   He had every opportunity to propose and pass a budget when he had Democratic majorities in Congress.   But Democrats feared that showing leadership on the hard budget choices they faced would hurt them in the November election, so they punted.

Even when Obama did produce a budget, it was the closest thing to a non-entity as could be imagined.   A budget that doubles government debt over 10 years and raises interest costs (under optimistic assumptions) to a trillion dollars a year would likely be controversial in any year, but is a non-starter given fresh memories of debt crises in Greece, Ireland and a number of other countries.

Of course there is an 800-lb gorilla in the room that no one wants to acknowledge:  Three programs —  Social Security, Medicare, and Medicaid — grow in the next 10 years under current rules to at least $2.7 trillion dollars a year.  Recognize that this figure excludes all the other so-called non-discretionary payments (unemployment, food stamps, etc.) as well as everything else the government does including the military and Obamacare. The 2021 spending on just those three programs is 25% higher than the total revenue of the federal government from all sources in 2011.

Later in the article, I suggest ten principles that should be the foundation of a budget deal.

No, Mr. Obama, the fecklessness of politicians does not obligate me to send more of my money to the government.

Three times in my life I have lent money to people in serious financial straits.  In every case, they came back to me for more.  "X more dollars and I will be home free and can pay you back."  In a few cases I came up with a second infusion and in one case I (embarrassingly) actually gave money a third time.   In no case was I ever paid back.    I haven't heard this phrase in years, but when I was young stock investors had a saying -- "your first loss is your best loss."  This was just another way of saying don't throw good money after bad.

Obama and Bush (I haven't forgotten your culpability in all this George) sold the country, or at least Congress, on emergency spending for wars and bailouts and stimulus.  This was supposedly one-time spending only for the duration of the emergency.  But now Democrats and Obama are treating the peak of this emergency spending as the new baseline, from which cuts are impossible.

This lack of desire to cut spending and a resetting of norms as to "what is normal" is not just a government problem, it is endemic to every organization.  Private organizations face this problem all the time.  The difference is that when times go bad, private organizations do not have fiat taxation power, so that when they are underwater, they must cut bloated budgets or die.  Either way, the problem goes away.  Private companies differ from government not in that they don't have problems with beauracracy and risk aversion and deadwood and bloat and bad incentives - because they do.  The difference is that private companies cannot get away with allowing this stuff to linger forever, and governments can.

Government will never, ever, ever, ever cut spending unless all hope of new taxes is removed, and even then they will likely try to cut spending on the most, rather than the least, popular programs to build public support for more taxes.

In the early 90's, after the fall of the Soviet Union, we talked about a peace dividend from reductions in military spending.  I want a sanity dividend.

Postscript: We like to think that financial problems are due to bad luck, but they usually are due to poor management.  The guy I lost the most money with was producing a really interesting boat concept, basically as fun and lithe and fast as a jetski but enclosed so boaters who were less daring would not actually be in contact with the water.  I wanted a bunch for rental service at our marinas.  But he kept asking for money, saying that he had bad luck with this supplier or that supplier.  Eventually, I found out he was in this incredibly expensive commercial lease, and was burning all the money I lent him on useless rent payments.  Stupid.

After I graduated from college, I cashed in about $7000 in savings bonds I had accumulated.  I was going to make a fortune in the market.  After three years I had lost almost all of it -- right in the heart of one of the greatest bull markets in history!  A few years later, I was in a situation where I could have really used this money.  This was not bad luck or circumstances, I did stupid things.  I recognized something that many dentists and doctors never learn - it was possible to be a smart guy who sucked at investing.  I was one of them.  My investing has been in index funds ever since.

It looks like the simply awful 1099 provision from Obamacare will be repealed.

Via Megan McArdle

A New York court ruled last month that all income earned by a New Canaan, Conn., couple is subject to New York state taxes because they own a summer home on Long Island they used only a few times a year. They have been hit with an additional tax bill of $1.06 million.Tax experts and real estate brokers say this ruling could boost the tax bill for thousands of business executives who own New York City apartments they use only occasionally. It could also hurt sales in the Hamptons and New York's other vacation-home communities.

"People will think twice about spending any summer time in New York," says Robert Willens, a New York-based tax consultant. "The amount of tax they could be subjected to is likely to outweigh the benefit."...

Judge Joseph Pinto, a New York administrative law judge, made the novel ruling in a 2009 case that was affirmed last month on appeal by the New York state tax appeals tribunal. Mr. Pinto seized on what is meant by a permanent residence, which is the benchmark for whether all, or just the in-state portion, of an individual's income is subject to New York state tax.

Mr. Pinto ruled that the couple's Long Island vacation home qualifies under the law as a permanent abode because it was suitable for living year-round--whether or not the couple actually stayed in the home wasn't relevant. Under the ruling, if an owner doesn't spend a single a day in a home it could still count toward a permanent residence.

I didn't really need a reason to not buy a home in the Hamptons, but just in case I were tempted, this would pretty much kill any such desire.  This, however, strikes me as one of those games (like trade wars) that New York has not thought out well before starting.  My admittedly uneducated guess from knowing some New Yorkers is that more New Yorkers own 2nd homes in Connecticut than vice versa.  If New York state is going to lose a tit for tat tax war if this is the case.

I had a real zoo of a week last week - one of those stretches I have every once in a while in business where new items were being tossed into my queue far faster than I could take care of them.

One of the most amazing was courtesy of the state of Florida.  Almost exactly a year ago, I submitted some backup data on my Florida revenues in 2006 to an auditor for sales taxes.  Such audits are entirely usual and routine (if irritating) and come up with some regularity.  There was no way the auditor could have figured out my tax submission from what I initially sent him - I would have to spend time explaining what different categories in my revenue reports and GL meant.  Further, I had data on seven locations which are divided in the tax reports into two county reports, but he did not have the data for which should go to which.

Well, I never heard from the guy for a whole year to clarify these issues.  Not sure what he was doing, but he was probably screwing up somehow, because on Friday his supervisor called me and told me that the statute of limitations was almost up on 2006 and they needed to complete the audit.  To this end, the auditor had submitted to her some mess of a set of numbers (see my comments above, he couldn't have done a correct job no matter how competent he was since he never asked me for all the information he needed).  I can see the guy rushing around trying to cover his ass having probably forgotten about it for a year.  Anyway, I told the lady that the statute of limitations was her problem, not mine, because her employee initially contacted me a year ago and had been sitting on the case all that time.

Well, I guess I was naive.  It turns out the statute of limitations is in fact my problem in the power imbalance that exists between me and the state of Florida.  She told me that, admitting she had no basis for doing so, she was going to file a lien against me for $40,000 in unpaid taxes as a "placeholder" to get in under the statute of limitations.  Yes, this would trash my credit and my legal standing and cause me no end of problems having a government lien on my company, but it would circumvent the horrible situation that when they actually did the work they should have done a year ago, I might owe taxes they could not collect.

Of course I told her this was BS and of course that got me about nowhere.  After a lot of time, I got one concession.  If I could prove I was clean by Monday, they would not issue the lien.  Well I spent all Friday, Friday night, and Saturday working up the analysis that is supposed to be their job, working on a 1 business day deadline because they had pissed away 250 business days sitting on my case file.  Completing the analysis, I calculated I under-paid taxes by just under $7.  We will see on Monday if I am able to battle back against this absurd thuggery.  By the way, we are being audited everywhere by local governments hoping to dredge up a few pennies from the couch cushions.  It is taking so much of my time that I actually chose to back off of bidding on a couple of new projects -- no time to spare.  So much for stimulus.

On the bright side, I have a lot of good stuff saved up to blog but I did not feel like it on Sunday.  Instead, I spent some time soldering switches and other trackwork on my n-scale railroad.  Made good progress, only about 3 more switches left to build on this module (the switches below are obviously before painting and adding wood ties.  Examples of finished work is here).

Update: By the way, I operate in red states and blue states and cannot detect any real difference in how arbitrarily I am treated by the state bureaucracy (with the exception of California, which stands alone at the top of the list of state bureaucracies that are a pain to deal with).  They differ in laws and tax rates, that often make red states more hospitable, but their bureaucrats are all about the same.

The Senate will take a vote today to repeal the hugely onerous 1099 provision from the Obamacare legislation.   Good news, though Obama is opposed to the repeal as he feels (probably correctly) that it will open the floodgates to further repeals and amendments.  Which is pretty disingenuous, as one of the soothing memes he handed out when the legislation was being rushed through Congress was that there was plenty of time to amend and fix its rough edges.  How he needs to decide if he was lying about that, as Congress addresses a rough edge that had nothing to do with health care but created a huge and largely useless burden on businesses.  I know that this provision would really kneecap my business.

Meanwhile, small businesses are staring in horror toward 2013, when the 1099 mandate will hit more than 30 million of them. Currently businesses only have to tell the IRS the value of services they purchase from vendors and the like. Under the new rules, they'll have to report the value of goods and merchandise they purchase as well, adding vast accounting and paperwork costs.

Think about a midsized trucking company. The back office would have to collect hundreds of thousands of receipts from every gas station where its drivers filled up and figure out where it spent more than $600 that year. Then it would also need to match those payments to the stations' corporate parents.

Most Democrats now claim they were blindsided and didn't understand the implications of the 1099 provision"”which is typical of the slapdash, destructive way the bill was written and passed. As the critics claimed, most Members had no idea what they were voting on.

Democrats are trying to water down this repeal:

Yesterday the White House endorsed a competing proposal from Florida Democrat Bill Nelson that would increase the 1099 threshold to $5,000 and exempt businesses with fewer than 25 workers. Yet this is little more than a rearguard action in favor of the status quo; the Nelson amendment leaves the basic architecture unchanged while making the problem more complex.

Businesses would still have to track all purchases, not knowing in advance which contractors will exceed $5,000 at the end of the year. It also creates a marginal barrier to job creation"”for a smaller firm, hiring a 26th employee would be extremely costly. The Nelson amendment also includes new taxes on domestic oil production, as every Democratic bill now seems to do.

This analysis is dead on -- our company generally cannot predict exactly how much we will purchase from a specific vendor in a year, so we would still have to collect tax ID's from every single vendor, not knowing which would cross the hurdle.

From Kevin Drum

Bob Somerby is following the latest Social Security chatter and hopes that Paul Krugman can explain how the trust fund works in an understandable way:

The trust fund is just an accounting fiction "” a pile of worthless IOUs! Generations of voters have been misled by such skillfully-wrought presentations.

....Krugman is our most valuable player by far "” our only player at the top of the press corps. Can he disentangle the trust fund scam in a way average people will understand? We don't know, and it isn't his job; no player should be expected to carry the ball on every play from scrimmage. Tomorrow, we'll offer our own ideas at how the "there-is-no-trust-fund nonsense" might best be approached, in a way average people can follow.

Well, hell, I'll take a crack at it. Here's the simple version.

In 1983, when we last reformed Social Security, we made an implicit deal between two groups of American taxpayers. Call them Groups A and B. For about 30 years, Group A would pay higher taxes than necessary, thus allowing Group B to reduce their tax rates. Then, for about 30 years after that, Group A would pay lower taxes than necessary and Group B would make up for this with higher tax rates.

This might have been a squirrelly deal to make. But it doesn't matter. It's the deal we made. And it's obviously unfair to change it halfway through.

This is an incredible fantasy.  Absolutely no one thirty years ago (Drum dates the "deal" to 1983) explicitly or even secretly crafted any such deal.  Seriously, is Drum really positing that a Democrat-dominated Congress led by for-god-sakes Tip O'Neil really said "lets have poor people pay some of rich people's taxes for thirty years?"  Just last night I was reading a quote from Hitler late in WWII that asserted he actually let the British escape from Dunkirk on purpose because he wanted the British to know he had no real quarrel with them.  While it certainly is true Hitler never really wanted a war with Britain, this is just a self-serving rewrite of history.  Drum is doing the same thing.  Its amazing to me that an obviously intelligent person can convince himself of this.

Here is the real, simple explanation of the Social Security trust fund:  Social Security was spinning off huge piles of money and no Congress person of either the Coke or the Pepsi party could resist grabbing it and spending it in a way that would support their reelection.  They ended up spending it all.  Every bit of it, all gone.  The Social Security trust fund is the Enron 401K plan stuffed with Enron stock.

Drum gets to his bizarre theory because he believes the fiscal discipline problem over the last 30 years was all due to tax cuts rather than spending, and that all these tax cuts were for rich people.   Of course, throughout the last 30 years, the share of taxes paid for by the rich have steadily risen, so the claim is absurd on its face, but the false assumptions it is built on are ones that every progressive accept as holy writ.

This paragraph is particularly a howler:

The physical embodiment of this deal is the Social Security trust fund. Group A overpaid and built up a pile of bonds in the trust fund. Those bonds are a promise by Group B to repay the money. That promise is going to start coming due in a few years, and it's hardly surprising that Group B isn't as excited about the deal now as it was in 1983. It's never as much fun paying off a loan as it is to spend the money in the first place.

It would be some exercise to try to define groups A and B in a non-overlapping manner.  The fact is everyone is in group A, as almost everyone overpays into Social Security on a return on capital basis -- the retirement income most people get represents generally a negative net ROI on the "premiums" paid.  And it is amazing to me that I have never heard that we now have government bonds that must be paid back only by a specific sub-section of the population.  It may very well have been a progressive assumption that only rich people would be on the hook for every dollar of government debt run up over the last 30 years, but that fact will likely be a surprise to just about everyone else in the country.  Here is his conclusion:

But pay it off they must. The rich have been getting a loan from the middle class for decades...

Delusional.

...is my corporate Federal and multi-state tax return.

The enterprise-killing nature of taxes isn't just the money.

I offer as the irritating story of the day, this one on sales tax audits of restaurants in New York.

The state also recently started using desk audits, in which they use third-party information to scrutinize whether businesses may be making more money than they're reporting. For example, the state can look at how many pizza boxes a vendor has sold to a pizzeria and if the number of boxes is more than the number of pizzas the company said it sold, the state can look closer to find whether tax evasion is the source of the discrepancy.

"If the state went through a normal audit process and determined that we owed money, we wouldn't fight it. We're not opposed to paying taxes," said Panaro.

Instead, he said he was told all of his paperwork checked out, but he didn't meet the state's standards for keeping "adequate records." The restaurant had failed to keep every paper copy of each guest's order receipt for the entire three-year period. That opened the door for the auditor to use "indirect audit methods" to estimate what he thought the restaurant owed.

The method of estimation the state used was to observe the restaurant's sales for a day, then compare it with the same date on a previous year. The previous year's reported sales were 25 percent lower, so the auditor took that percentage and multiplied it over each day's sales of the three-year period, deciding the restaurant did enough unreported business to owe an additional $330,000 in sales tax....

Joe Giafaglione, owner of Bar Bill Tavern in East Aurora, has been audited twice in the past four years. His purchase of ground hamburger raised suspicion when it was found there were no hamburgers on the menu (it was being used as an ingredient in chili).

"It's totally ridiculous the way they come up with figures without any evidence," said Giafaglione. "They say they need 20 [documents], so you give them 19 and they say, "Ah, you don't have that? Well, now we'll have to estimate.'"š"

A similar situation occurred with our company a number of years ago on a contract where some of the work had to be done using Davis-Bacon type mandated wage rates.  These rates, for those who have never seen them, come in two parts.  They might say, for example, that the minimum for such and such a job is $12.10 per hour plus $3.07 per hour cash instead of fringe benefits for a total of $15.17.

Using these figures, we gave folks an offer letter saying you will be paid $12.10 base pay plus $3.07 fringe for a total of $15.17 an hour.  Then on the paycheck, they just got one line for their total hours times $15.17.  Well, said the Department of Labor in an audit, you are not paying them the fringe, you are just paying the base pay -- we only see one number on the pay check.  So you owe $3.07 times 20,000 or so hours, pay up.

Well, I was pretty surprised.  I said it was pretty clear I was paying the fringe - why in the heck else would I pay someone an oddball wage like $15.17 that just so happened to be equal to the sum of base plus fringe.  You can see the calculation in each offer letter.  No dice, they said, the law requires that the payments have to be broken out on the pay stub.

This was back in my younger, naive days, when I thought the "expert" auditors actually knew the law.  Now I know they are sometimes just making stuff up, but I was smart enough at the time to ask them to show me the legal requirement that these two payments be broken out on the pay stub -- show me something in writing.  Nothing was forthcoming.   My attorney later educated me that there is hierarchy of quality to what might be in writing:

This is where I began to learn about the hierarchy of labor law. As I understand it (and remember, I am not a lawyer) it is something like this, from strongest to weakest:

1. The actual statute as written by Congress, e.g. the Fair Labor Standards Act
2. Court rulings and precedents
3. Approved regulations what have been through the public comment and approval process
4. Formal DOL rulings
5. Internal DOL guidelines and manuals
6. Informal DOL rules of thumb

Numbers 1, 2, and 3 have a lot of legal force. Five and six may or may not "“ they represent the DOL's opinion, but that opinion has not been vetted by a regulatory hearing or court decision. These get overturned by courts all the time.

When the DOL tells you can or can't do something, they likely will say it with equal authority if it comes from 1 or 6. For example, in this case, the DOL said with total authority that the wage and fringe have to be split on the paycheck.

Anyway, I read the actual law myself.  The only mention of anything even related to this was the need for adequate record-keeping to prove we had foll0wed the rules.  I searched as far as I could through labor department regulations online and found no more detail.  So I argued that unless they could produce something different, my position was that the offer letter plus the pay stub was adequate record keeping.

Eventually, the DOL let the issue drop - petulantly, they never actually dropped the claim, just told me they were choosing not to go to court against me at that time.  Of course I am only a glutton for so much punishment, so in the future we split the payments out on the pay stub.  It creates more work doing payroll, but what is government for, after all?

PS, if its helpful, I have a three part series on my interactions with the Department of Labor beginning here.

Via TJIC:

By the way, where does the government get the money to fund all these immensely useful programs? According to a Fox News poll earlier this year, 65 per cent of Americans understand that the government gets its money from taxpayers, but 24 per cent think the government has "plenty of its own money without using taxpayer dollars." You can hardly blame them for getting that impression in an age in which there is almost nothing the state won't pay for.

This is lifted from an email I got from America Outdoors

A little noticed provision in the recently passed health care reform bill will require every payment to corporations over $600 to be reported on a Form 1099 to the IRS, including payments for the purchase of merchandise and services. This provision takes effect in 2012.

The current law requires a Form 1099 to be submitted to the IRS when your business pays more than $600 for rent, interest, dividends, and non-employee services if the payments are made to entities other than corporations. Currently, payments made to a corporation and payments for merchandise are not required to be reported.

To file the required 1099, a business will have to obtain and keep track of a Taxpayer Information Number (TIN) from every vendor before submitting the 1099 to that business and the IRS. Under current tax law, one copy of the form is sent to the IRS, and another copy is sent to the person to whom the business made the payments.

Rep. Dan Lungren (CA-3) introduced "The Small Business Paperwork Mandate Elimination Act" (H.R. 5141). The legislation would repeal the expanded 1099 reporting requirement.  Lungren correctly asserts that the burdens placed on small businesses by this reporting requirement would be overwhelming.

Call your U.S. Representative today and ask them to cosponsor H.R. 5141. The House switchboard number is 202-225-3121.  Ask to be connected to your Representative's office.

My small business has over a thousand vendors.  I would have to hire someone full time for a month to do this.  And it would be to zero purpose.  The IRS would be so flooded with forms that there would be no way they could pull any useful information from the blizzard.  This is yet another example of legislators operating with absolutely no idea how commerce actually works.  We have coined a name for it within our firm -- we call it arrogant ignorance.

Chris Edwards at Cato had more on this a while back.

I'm stunned that there wasn't a broader debate before such a costly mandate was enacted. If it goes into effect, it will waste vast quantities of human effort in filling out forms, reworking computer systems, collecting and organizing data, and fighting the IRS. The struggling American economy can't afford anymore suffocating tax regulations. This mandate is a giant deadweight loss. It should be repealed.

From Chicago Sun-Times

In one of the largest Statehouse rallies ever, thousands of unionized government workers and social-service advocates rallied for an income-tax hike that could avert billions of dollars in crippling budget cuts.Three hundred busloads of people, mostly from AFSCME Council 31, SEIU, the Illinois Education Association and the Illinois Federation of Teachers, converged outside the Capitol while lawmakers were in session.

On several occasions during the late-morning rally, protesters turned away from the stage across from the Capitol to face the ornate seat of state government and chant, "Raise our taxes!" and "Save Our state!"

James King here in Arizona thinks the new "I didn't pay enough" law here is dumb.

Feel like voluntarily ponyin' up some of your hard-earned cash to help legislators dig themselves out of the budget crisis they created? Of course you don't, but that didn't stop legislators from taking time out of their day to pass a bill that asks taxpayers to do exactly that.

The "I-didn't-pay-enough fund" is the creation of numb Skull Valley Representative Judy Burges. It asks taxpayers to voluntarily donate money to the state government to help chip away at the state's $2.6 billion budget shortfall.

What he doesn't readlize is that it is aimed directly at the folks that are protesting in the example above.   Want to pay higher taxes, then send in a check!  But don't make the rest of us do so.

I was navigating around the Kentucky property tax forms site (one of the really tedious tasks for our company this year is to fill out zillions of personal property tax forms listing virtually every pencil we own in any number of counties and states).

While we run campgrounds, we do not run long-term trailer parks, but this requirement caught my eye as fairly onerous.  Apparently trailer park owners must fill out this form and report on the detailed description, owner, and address of every trailer renting space on their land, so that the state can come after these folks easier for property taxes on their personal property.

For those who may shrug their shoulders, this is not materially different than the owner of an apartment complex reporting on all the large assets his tenants own, or walking through his parking lot taking down car descriptions and tag numbers so the DMV can make sure there are no violations by any of his tenants.

I don't like when the government forces me to be their busybody.

I think a majority of small business owners and entrepreneurs are skeptical about government and taxes for a variety of reasons.  Large companies tend to shelter their workers from the vagaries of changing and hostile government regulation, but there is no such shield for people who own their own business.  At tax time this year, I had two thoughts about small business owners and taxes:

1.  We see the cost of taxes directly.  This year my taxes were X higher than I expected, where X is a pretty large five figure number (pretty large for me, at least).  To pay off X, I took the money directly out of an order we were placing for capital investment and new equipment, reducing the order by X.  At our company this year, there was a one-to-one scavenging of capital investment by taxes.

2.  Unlike most workers, entrepreneurs actually write checks for their tax bill rather than have it deducted stealthily from their paycheck.  I have always thought that this was the true purpose of withholding -- not compliance, but to try to hide people's tax bill from them.  If everyone wrote a check  (or four quarterly checks) each year for their tax bill (as I do), there would almost certainly have been a tax revolt years ago.

California has a ballot initiative to raise taxes on wine, perhaps the state's highest profile export after movies, by 12,600%.  The South Bend Seven find the real howler though -- apparently 15% of this tax increase or over  a billion dollars a year will be directed to naturopathy programs.  Apperently a bid by astrologists to get a share of the tax increase narrowly failed.

The CBO, which Democrats frequently tell us to pay close attention to only when it is giving them the answers they want, is not particularly sanguine about the US budget deficit:

President Obama's fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation's economic output by 2020, the Congressional Budget Office reported Thursday.

In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president's budget would generate a combined $9.75 trillion in deficits over the next decade.

Bruce McQuain, as always, has some good analysis.

States, apparently, are not in much better shape:

Pension plans for state government employees today report they are underfunded by $450 billion, according to a recent report from the Pew Charitable Trusts. But this vastly underestimates the true shortfall, because public pension accounting wrongly assumes that plans can earn high investment returns without risk. My research indicates that overall underfunding tops $3 trillion.

The problem is fundamental: According to accounting rules adopted by the states, a public sector pension plan may call itself "fully funded" even if there is a better-than-even chance it will be unable to meet its obligations. When that happens, the taxpayer is on the hook. Yet public pension plans ignore market risk even as they shift into risky foreign investments, hedge funds and private equity....

In a recent AEI working paper I've shown that the typical state employee public pension plan has only a 16% chance of solvency. More public pensions have a zero probability of solvency than have a probability in excess of 50%. When public pension assets fall short, taxpayers are legally obligated to make up the difference. The market value of this contingent liability exceeds $3 trillion.

Productive people in this country are about to get plastered with huge new taxes.  Hang on.

From the new bill signed by Obama today:

Under the new law, businesses that hire anyone unemployed for at least 60 days would be exempt from paying the 6.2 percent Social Security payroll tax through December. Employers also would get an additional $1,000 credit if new workers remain on the job a full year.

This is absurdly game-able.  How do I know?  Because as I read this here (I have not read the legislation) this is a ridiculous windfall for our company.  As a seasonal business, my current payroll is about 40 people.  Over the next two months, I will hire nearly 400 workers for the summer, most of whom have not been working over the winter as they are retired and just work a few months of the year.  Am I really not going to have to pay Social Security taxes on all these people?

And how is anyone going to administer this?  Are my payroll company and I going to have to figure out the employment status of all of our hires for the last 60 days to figure out what taxes to collect?  Does anyone in Congress even think about this stuff when they pass this garbage?

Update: ADP has more

Update #2: Here is my prediction, if they forgot about seasonal hiring  (again, I have not read the letter of the law yet).  This will be like the cash for clunkers program - in a month or two they will announce that they have used up the money they had allocated for the whole year.

From the TaxProf:

President Obama today issued a presidential memorandum directing the Office of Management and Budget, the Treasury Department, and other federal agencies to block contractors who are delinquent on their taxes from receiving new government contracts. The memorandum also directs the IRS to review the accuracy of companies' tax delinquency claims and asks Congress to enact enforecement tools.

This administration continues to follow the consistent principle that taxes should be applied ruthlessly to out-of-favor and unsympathetic groups, and forgiven or exempted for friends of the Administration.  Does anyone else find it odd that our first black President is doing so much to undermine the equal protection clause of the 14th Amendment?

Every year, the government forced nearly every working American to give it an interest-free loan.   Each person pays his taxes (via legally required withholding) as much as 16 months early, with not a cent of interest from the government for this loan of funds.  Several states have been toying of late  (and California actually implemented) schemes in which the required withholding rates are jacked far above any conceivable level of tax liability.  These are desperate financing approaches from entities who are no longer able to borrow (or afford the interest of) money at arms length, and so much use the coercive power of the government to force its citizens to fork over interest free loans.

Apparently, the Obama administration is looking at such a scheme, but on steriods:

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

Whatever their stated justification (I am sure it is somehow for the children), I think Dale Franks gets at the actual motivation:

There literally isn't enough money in the world to float the T-notes the Treasury must issue in order to prop up our unsustainable spending path.  There are, however, about $3.6 trillion in funds just sitting in 401(k) accounts.  If the government can urge"“or force"“you to convert your 401(k) into T-note funded annuities, the Treasury can continue to issue those notes to float the government's deficit.  Essentially, you'll be converting your retirement funds into an IOU from the government"¦just like your social security account has already done.

This will allow the Treasury to keep borrowing money"“from your retirement"“in order to keep issuing more debt that they may or may not be able to pay back to you

The Florida sales tax auditor has been in my office for 2 days and shows no sign of leaving.  Most of the audit is as expected and I ceased long ago getting ticked off about it;  but the new focus on use tax - ie, not just did you collect and pay sales tax on your retail sales but did you pay proper sales tax on every purchase, is really annoying.  We are going to have to be pulling invoices and xeroxing for weeks.  Somehow, if as a retailer I don't collect enough sales taxes, I am liable for the shortage.  But if someone else sells me something and there is not enough sales tax collected, I am again apparently liable for the difference.  The latter makes no sense to me.    Apparently I owe taxes in this non-symmetric way based on the deep philosophic principle that he is sitting in my office, not theirs.

Update: Now he suddenly thinks that I am getting over because there is no sales tax shown on my liability insurance premiums.    AAArrrrggghhh.  Two entire days lost.

The Senate health care bill relies for much of its funding on a tax on so-called "Cadillac" health care plans.  But what happens when employees and employers inevitably change their behavior in the face of different incentives?

History teaches us that tax policy has a huge effect on behavior.  Witness the fact in health care the non-nonsensical fact so many people rely on their employer for health care.  As we see today, this is a really bad idea, but it was hatched because tax law provided incentives for paying compensation in the form of health insurance premiums, since these are not subject to either income or payroll taxes.

Already, employers are offering employees what are effectively buy-outs of health care -- higher pay in return for reduced health care benefits.  For employers, the upside risk on health care costs now outweigh the tax advantages of health insurance as a compensation tool.  Given this trend, what do you think will happen when employees suddenly have the same incentive, to roll back health care coverage to get under whatever bar is set for an insurance package Congress thinks is too rich (hint:  wherever the bar is set, it will be below the health insurance Congress provides itself).  Employers and employees are now going to have a shared incentive to back off on health care benefits in exchange for more cash.  Think of the sharp minds on both sides of a UAW contract negotiation - does anyone really think that these guys won't figure out a win-win to avoid paying the surtax?

Three to five years from now, even before the system goes bankrupt from inevitably expanding costs  (you didn't really buy that stuff about the operator of Amtrak and the Post Office improving the industry's efficiency, did you?), we are going to be talking about the gross shortfall in tax revenues to support these programs, all because people change their behavior in the face of changing incentives.

Politicians claim to be looking out for the poor when they exempt food purchases from sales taxes.  The logic is that sales taxes on food are particularly regressive and hard on the poor.  Which is all fine and good, until bureaucrats' jobs are on the line, and then regressive taxes sound find and good.

Obama continues to deny that the health insurance mandate which is backed with a penalty to be collected by the IRS is a "tax."  He says "For us to say that you've got to take a responsibility to get health insurance is absolutely not a tax increase."  Three responses:

1. Asking people to take individual responsibility for their health care expenses is not a tax.  Asking them to do so via a particular method, in this case the purchase of an insurance policy rather than, say, just paying expenses as they go, is a tax.
2. Obama might argue that since people are getting value for the policy they have to buy, there is not net tax but just a (forced) exchange of value.  But this is the classic technocratic fault, to assume that the central planner's definition of value is the same as every individuals.  But its not.  Many folks don't get value from a policy, which is why they don't buy one today
3. Even if Obama were right in #2, he would still be wrong given the rules embedded in this bill.  Young, healthy people will be forced to subsidize the old and those with pre-existing conditions by the rules imposed on insurance companies.  These rules effectively make it impossible to charge full cost to the old and sick, so that the young and the healthy will have to pay more.  Because the young and the healthy will not see values in policies at the prices they will be paying (given these transfers), they won't value the policy with is EXACTLY why the law has to force them to buy it.  Which is why it is a tax.

John Stoessel via Carpe Diem

Competition is a "discovery procedure," Nobel-prize-winning economist F. A. Hayek taught. Through the competitive market process, we producers and consumers constantly learn things that force us to adjust our behavior if we are to succeed. Central planners fail for two reasons:

First, knowledge about supply, demand, individual preferences and resource availability is scattered -- much of it never articulated -- throughout society. It is not concentrated in a database where a group of planners can access it.

Second, this "data" is dynamic: It changes without notice. No matter how honorable the central planners' intentions, they will fail because they cannot know the needs and wishes of 300 million different people. And if they somehow did know their needs, they wouldn't know them tomorrow.

From the Tax Foundation via Bruce McQuain, I don't think this needs any comment:

My vote:  mandatory income tax withholding.  Taxpayers never see most of the money they pay the Feds.   They don't have the shock of seeing the amount of money going to the government in one big check.  Since most formulas lead to over-withholding, people are actually eager to file their tax returns to get refunded the money that was withheld in excess of liability (e.g. interest-free loan to government).  Employers, who live in fear of violating one of a hundred thousand different labor rules, are more than willing to withhold whatever the government asks - they certainly aren't going to stand in front of the tanks to protect their employees' money.

California is taking this law to the next logical level of abuse:  Increasing the interest-free loan that citizens must give the state.  If free credit markets won't lend you money at a rate you can afford, force your citizens to lend it for free:

Starting Sunday, cash-strapped California will dig deeper into the pocketbooks of wage earners "” holding back 10% more than it already does in state income taxes just as the biggest shopping season of the year kicks into gear.

Technically, it's not a tax increase, even though it may feel like one when your next paycheck arrives. As part of a bundle of budget patches adopted in the summer, the state is taking more money now in withholding, even though workers' annual tax bills won't change.

Think of it as a forced, interest-free loan: You'll be repaid any extra withholding in April. Those who would receive a refund anyway will receive a larger one, and those who owe taxes will owe less.

I am starting to feel a sort of anti-irredentism for California.