Sometimes changes to the US tax code seem like they are “floated” just to stir up money-making opportunities. Interest groups react to proposed changes by contacting, and throwing money at, lobbyists who counsel Congress against or for whatever was floated. There seems to be no recognition that managing the US tax code should be treated as a steering mechanism on a $20 trillion “truck.” Care should be taken when operating it, as if even a slight wrong move can send it careening.
In a macro sense, we remind ourselves to review Hauser’s Law. In 1993 Mr. Hauser, a San Francisco investment economist, said, “no matter what tax rates have been, in post-war America tax revenues have remained at about 19.5% of GDP.”[1] From 1950 to 1993, marginal tax rates ranged from 90% to 28%, but the actual revenue collected by the government was inexplicably constant at 19.5% of GDP. Perhaps, taxpayers adapted. A review of Hauser’s Law in 2019 had to adapt itself to a comprehensive revision of the calculation of GDP in 2013, which increased past estimates of GDP. From 1946 to 2018, total tax collections have averaged 16.8% of GDP with a standard deviation of 1.2% of GDP.[2] Still amazing and inexplicable.
In a micro sense, the effort to tax billionaires evidences frustration. An income tax needs to tax income. “An unrealized capital gain is exactly that: unrealized.”[3] Instead of realizing income, “billionaires” borrow against appreciated assets to fund personal expenses.[4] This tactic is not without risk. It probably creates an unequal relationship with investment bankers if asset values fall. Elon Musk adopted a more straightforward approach of paying for personal expenses by selling appreciated assets and paying the taxes due. Congress should probably let the give-and-take of the free market convince “billionaires” to pay taxes, rather than try to legislate that behavior.
For the Winter 2020 QMP, we reviewed the state of the Internal Revenue Service (IRS) as reported in its own, but separate, National Taxpayer Advocate’s 2018 Annual Report. The most current annual report is for 2021, which covers the fiscal year ending September 30, 2020 (FY2020), over 15 months ago. Some of the Advocate’s suggestions for statutory remedies are the same as three years ago: fix the earned income tax credit (EITC) and reduce the complexity of certain provisions that confuse ordinary taxpayers. In advocating for more funds for the IRS itself, it presents a bleak picture, which will be familiar to those who practice before the IRS: “the IRS received over 100 million telephones calls in FY2020, yet employees were only able to answer about 24%. Antiquated information technology systems limit the ability of customer service representatives to effectively assist taxpayers and prevents the IRS from offering fully functional online taxpayer accounts.”[5] The IRS operated in FY2020 on a budget of $11.51 billion.
Recently the IRS warned of delays anticipated for the upcoming tax filing season, which is scheduled to run from January 24, 2022 to April 18, 2022. Usually the IRS enters the filing season with about a million pieces of backlogged work from prior years. However, this year “the IRS had six million unprocessed 2020 returns as of December 23, plus 2.3 million unprocessed amended tax returns.”[6]
As preparers, we’ve had a brief taste of having access to the IRS computer files for our clients who grant us permission. Online is wonderful. Investing in IT to bring the IRS online would be acceptable and overdue. It has probably already been appropriated for, but perhaps, misspent. Hiring of more government employees, as recently advocated, makes no sense.
If you or any of your other advisors have questions about the issues raised here, please contact your investment manager or one of us.
William H. Darling, Chairman & CEO
Jeanne M. FitzGerald, CPA – Tax Manager