Sunday, December 14, 2014

157. Taxes: Who Pays Them and Who Doesn't

   No subject can raise more hackles than taxes, including above all income taxes.  Long ago in Alaska, before that territory had become a state, a resident urged me to urge my Congressmen to endorse statehood for Alaska.  And if that meant more taxes, so be it.  “You can’t have civilization without taxes,” he insisted.  This is not an opinion shared universally.  In our Western states, especially, citizens are wary of government, convinced that the IRS is out to grab their hard-earned cash and give little in return for it.  But tax avoidance, so common in many foreign countries, is not sanctioned here.  Back in the 1950s, when I was hanging out at the San Remo bar in the West Village, I overheard snatches of conversation from two Frenchmen, one new to the States and the other his mentor, who were watching “les existentialistes américains,” a scruffy bunch of bohemians imbibing at the bar.  But the Frenchmen were discussing other matters.  Said the veteran to his newly arrived friend, “En Amérique la taxe est sacrée” (In America taxes are sacred). 

     New York is a notoriously high-tax state, and residents of New York City are hit with a triple whammy: federal income tax, state income tax, and yes, believe it or not, a city income tax.  The state income tax alone is grounds for complaint.  In the 1970s, when I was doing research in Putnam County, I observed that if two New York City residents got together, they talked about crime, whereas when two Putnam County people got together, they talked about taxes.  And dodging the state tax was not unheard of.  From a friend who taught there, I learned that some of the professors at Skidmore College in Saratoga listed a summer residence in Vermont as their main address, so as to escape the New York State income tax.  Whether the state ever got wise to this, I have no idea.

     Another form of protest came from the Iroquois people, who claimed to be a sovereign independent state and therefore not subject to New York State taxes.  In 1957 native American medicine man and activist Wallace Mad Bear Anderson led several hundred Mohawks on a march to the courthouse in Massena, New York, burn court summonses issued for unpaid taxes.  Again, how this finally worked out I don’t know.

     One thing is certain: New York State welcoming signs at the state line cannot match Nevada’s, which proclaims

                                     NO INCOME TAX
                                     NO SALES TAX
                                     NO INHERITANCE TAX
                                     NO CORPORATION TAX
                                     NO GIFT TAX

                    A DEBT-FREE STATE WELCOMES YOU

And if one enters that tax-free paradise, as I did once at night on a bus, the explanation becomes immediately apparent.  As the bus sped through the darkness over the bleak and level landscape, at intervals lights would appear in the distance, and as the bus pulled in to the station, one could see a brightly lit interior with rows of slot machines.  With legions of one-armed bandits everywhere, not to mention casinos, there was no need of taxes.

File:Vegas slots.JPG

     Since New York State is not so blessed, what do its tax-burdened citizens do?  At tax time – the months and weeks preceding the dread deadline of April 15 -- they go to accountants, of course, to save themselves the ordeal of preparing their tax returns themselves, and to pay the least amount of taxes possible.  And those accountants, those wonder workers, those toilers in the bureaucratic maze, thrive.

     My partner Bob once went to an accountant named Russo (not his real name).  One year, since Bob was in charge of acquiring recordings for the Fine Arts Department of the library system he worked for, Russo suggested that he deduct the cost of all his opera tickets as a necessary business expense.  After all, how can you acquire recordings of current performances, if you haven’t heard the performances and evaluated them?  So Bob, a real opera buff, claimed the deduction.  I thought this a bit of a stretch, but maybe worth a try.  Alas, the IRS didn’t go for it.  They called Bob in for an audit, and when, dismayed, he didn’t contest their finding and cooperated, they let him off and went after Mr. Russo.  What came of it I don’t know, but Russo was a pretty shrewd operator; I doubt if he got more than a reprimand.

File:US-InternalRevenueService-Seal.svg     My own accounting adventures had to do with an accountant named Mateo Morales (again, not his real name), another shrewd operator, hefty and glib of tongue, whom I soon nicknamed Immorales.  (Not to his face, of course.)  Having no college degree to his name, he admired those who did and was especially happy  doing their tax returns; he was recommended to me by a fellow instructor at Columbia, who praised him to the skies.  Mr. Immorales too was adept at finding possible deductions, but nothing so dubious as Mr. Russo’s suggestion.  Even so, on one occasion I was summoned for an audit.  The prospect of an audit can be daunting, all the more so in my case, since a friend of mine, very vulnerable, had gone to one, encountered an aggressive auditor, and been devastated by the experience.  So I offered to pay Mr. Immorales whatever he wanted, if he would go in my place, and with some reluctance he agreed.  On the day of the audit I got a phone call from him late in the afternoon.

     “I had a long session with the auditor,” he said in his quietly competent, slightly oily voice, “and at one point I raised my voice within the hearing of all the auditors in the room, ‘Madam, are you accusing me of proposing something illegal?’  That put her on the defensive.  When all was said and done, you owe them nothing more in taxes.  And she was rather intrigued by you and asked if you were married.  At that point, I confess I exaggerated a little, saying you were a brilliant scholar so involved in your studies that you had no time for social life, much less marriage.  I even said your apartment was so jammed with books and papers that you kept books in the oven.”

     By now I was laughing heartily, and all this for a fee of only $25!  Of course this was long ago, when $25 went a lot further than now. 

     Mr. Immorales continued diligently and cannily in his profession, while affording
us, his university clients, glimpses of his yearnings, his vulnerabilities.  He once told me that he could write a story that would glue me to the page, but when I suggested that he show some to an agent, he flashed a sour look and changed the subject, hinting that he had tried this without success.  (Scratch an accountant, you may find a writer; scratch a dentist, you may find a sculptor.  And that’s not just New York.)

     But you mustn’t go to an accountant in his busy season with a mishmash of papers, a friend of mine learned, when I recommended Mr. Immorales to her.  She went at the last minute with a shoebox full of documents, expecting him to do her tax preparation.  First I got a phone call from him, reporting that she had left his office very hostile, since he had declined to take her on at this late date, with her papers in such disorder.  Then I got a phone call from her, very indignant, saying that it was his job to do this stuff.  I announced to both that he was still my accountant and she my friend, and took some responsibility for the incident, having recommended him without realizing her papers were so disorganized. 

     Another friend told me how, when Immorales finished his return, he had asked the accountant if there was any favor he could do him.  There was: could he, using his college diploma, create a fake diploma that Immorales could hang on the wall?  My friend agreed and somehow was able to copy his own degree, substitute Immorales’s name, and so create the diploma, which promptly went up on the wall of the accountant's office.  Rather sad, I and my friend thought; deceptive, to be sure, but mostly just sad.

     There was sadder news yet to come.  Immorales had a stroke, and when that same friend went to see him at tax time, he found him utterly changed.  Instead of the keen mind and glib tongue we were used to, the man was vague, unfocused, slow of speech, lost.  By then I was no longer seeing him, but I was saddened by the news.  What then happened I have no idea, but he must have lost most of his clients.  Yes, sad, very sad.

     For years I did my own tax returns, simply following what Mr. Russo had done for me one year; the figures changed, but the basic pattern didn’t.  I was a freelance editor now with a home office and self-employed, so I had to fill out Schedule C and itemized my business expenses.  A home office and itemized deductions are often red flags to an auditor, but luckily I was never audited.  And when I went to Europe in the summer of 1963, I deducted as business expenses the basic costs – travel, meals, hotels – of the time I spent in French-speaking countries.  Far-fetched?  Not really, since there had been a recent IRS ruling acknowledging that foreign language teachers need to keep up their skills in this way.  I was careful in the deductions and – miracle of miracles! – wasn’t audited.

     In time, computing my own taxes became an arduous ordeal involving this or that form, this or that regulation, and endless mathematical computations: enough to unsettle the sanest of citizens.  All my friends used a tax preparer, and marveled at my doing the stuff myself.  Finally, I tried TurboTax, a system that does it for you online if you feed the proper info to them.  Their website shows an attractive young woman grinning at you, while her laptop announces, “Nice refund, Pat!  $2,744.” I expected no such bonanza, just a lot less computing, but believe it or not, TurboTax found a substantial deduction for my New York State return that I had been unaware of.  I checked the NYS tax regulations online, and they confirmed it, so TurboTax, even if it cost me something, also saved me money.

File:Dollar.PNG     It’s fashionable to complain about our broken tax system, and there is merit to many of the criticisms.  Loopholes and special dispensations abound, sometimes through Congress’s negligence and sometimes through its subservience to special interests, who often seem to write the laws.  Recently it was reported by Citizens for Tax Justice (CTJ) that 26 of the biggest U.S. corporations quite legally paid no federal income tax from 2008 to 2012, and 93 out of the 288 analyzed companies paid below 10%.  Critics often decry the high U.S. corporate tax rate of 35%, but many companies exploit tax breaks, loopholes, and accounting schemes to their advantage.  And who are some of the companies that paid no federal tax whatsoever?  Here are a few:

·      Boeing
·      General Electric
·      Verizon
·      Consolidated Edison
·      Corning
·      Duke Energy
·      PG&E Corporation

And many other utilities.  The report is of course disputed by the companies named, who point out that it ignores other taxes that they pay, such as state and local taxes.  True enough, but the report is still pretty damning.  One online article on the subject includes a photo of a white-haired lady holding up a sign in bold print: 


      And people?  Here are some who have been prosecuted for tax evasion and related charges, starting with the most recent:

·      2013: Accounting firm Ernst & Young paid $123 million.
·      2008: Senator Ted Stevens, Republican of Arkansas, convicted on 7 counts of bribery and tax evasion.  He ran for re-election but lost.
·      2008: Representative Charles Rangel, Democrat of New York, paid $11,000 in back taxes and – a truly rare event -- was censured by the House.
·      2006: Lobbyist Jack Abramoff was fined $24.7 million and is now serving 70 months.
·      2006: Representative Duke Cunningham, Republican of California, was fined $1.8 million and sentenced to 8 years, 4 months.
·      2002: Six members of the Christian Patriot Association, a white supremacist organization based in Oregon, were convicted of tax fraud and tax evasion and faced up to 5 years each in prison plus a $250,000 fine.

     But why go on?  The list is endless, includes both major parties, and usually involves those in or close to government.  But often there is more to the story.  Ernst & Young had advised 200 wealthy clients who then avoided  $2 billion in unpaid taxes.  Ted Stevens got off when his indictment was dismissed because of prosecutorial misconduct.  Duke Cunningham was still entitled to a pension for his years of service in the Navy and Congress.  The Christian Patriot Association, which had helped 900 people evade taxes on $186 million over 14 years, believed that white people were the chosen people of God and therefore entitled, apparently, to not pay taxes.

In financial fortresses like this one, who knows what fortunes
are hidden?  And whose?

Palm jumera

     But these are the ones who got caught.  What about all those others with money stashed in offshore accounts maintained by Swiss banks, whose legendary secrecy is now under attack by the U.S. and the European Union?  Not to mention such tax havens as Luxembourg, Andorra, and Liechtenstein, tiny European countries thriving on their tax-haven status, and such exotic locales as the Bahamas, the British Virgin Islands, Monaco, Panama, Singapore, and numerous others.  In the 2012 Presidential campaign Mitt Romney, the Republican candidate, had trouble explaining why he had millions stashed away in Bermuda and the Cayman Islands.  Though not illegal, it looked fishy, and demolished any chance he had (and it wasn’t much) of appearing to voters as an ordinary guy just like you and me.  Obama could be a bit distant and dispassionate, but at least he didn’t have a fortune offshore.

File:Seven miles beach-Grand Cayman.JPG
Seven Miles Beach, Grand Cayman Island.  In such an idyllic setting, how could anything
dubious occur?

     Everyone agrees that our tax system needs to be drastically reformed, but few agree on how to do it.  Some want to tax the rich more, some want to tax them less.  And since Congress is a pack of millionaires who, with some exceptions, think the present system is just dandy – or at least have reasons not to meddle with it – meaningful reform is not likely to come very soon.  Meaningful reform may require a groundswell of opinion from below, and there’s little sign of that at this time.

     Here’s a novel solution proposed by nutritionist and WBAI commentator Gary Null and some others: tax both individuals and corporations a flat 10%, with absolutely no loopholes or exceptions.  Doing this, Null insists, would let us abolish the Internal Revenue Service altogether.  An enticing prospect, though I’m not sure how various income groups would fare.  And in the present circumstances there’s no chance of it being enacted or even seriously discussed.

     Everyone – and especially accountants – love to disparage the IRS, and New York State as well.  But I have sometimes including a note with my state and federal returns, telling them that I trust their judgment because they have treated me fairly in the past.  And I haven’t been audited.  Clever on my part?  No, the comment is sincere.  On several occasions the IRS or the state has found an error in my return and sent me a refund.  So a letter from these authorities isn’t always bad news.

     Admittedly, a dreary subject over all.  My advice to all U.S. citizens: when tax time comes, organize your records, get yourself a good accountant, and pray.

New York notes

1.  What three rights do all New Yorkers claim?  (1)  The right to complain.  (About New York, of course.)  (2)  The right to boast.  (About New York, of course.)  (3)  The right to jay-walk.

2.  Even so, at what intersection would I never dare to jay-walk?  Columbus Circle, where traffic comes at you from all directions.

3.  Who are most likely to offer me their seat on a crowded subway train?  African American women.  I usually decline the offer, but it is much appreciated.

4.  Which are the ten most dangerous U.S. cities for pedestrians?  Which have the most pedestrian deaths from traffic accidents?  Surprise, surprise: New York isn’t one of them!  The fatal ten, with 1 being the most unsafe:

1.    Orlando
2.    Tampa
3.    Jacksonville
4.    Miami
5.    Memphis
6.    Birmingham
7.    Houston
8.    Atlanta
9.    Phoenix
10.  Charlotte

     So what’s with Florida, that the top 4 are in that state?  And what's with the South, that all but Phoenix are in that region?  But I have to add that pedestrians do get hit by vehicles in this dear city of mine, especially when the vehicles making a turn cross into a pedestrian crosswalk.  Just the other day, as I crossed in a crosswalk, three cars whisked by me in quick succession without my being aware of their approach.  (They came from behind, not from a right angle, and other sounds masked the noise of their approach.)  The first car’s action was pardonable, since it could go past without making me halt.  The second was about four feet away – too close for comfort.  And the third was even closer; at him I yelled a full-throated expletive.  No wonder the mayor has reduced the permitted speed in the city from 30 to 25 mph, not that this would have saved me, had the third car miscalculated ever so slightly.  But it must be worse in Orlando.   

     Good tidings from the AARP Bulletin:  The last bit of news about pedestrian deaths I found in the December 2014 issue of the AARP Bulletin, which comes to members of the AARP (American Association of Retired Persons), the Golden Oldies club and union, though it welcomes anyone over 50.  Info like this you will find squeezed in among upbeat articles about how great it is to be elderly, and ads for walk-in bathtubs, impotence remedies, auto insurance (yes, they still drive!), travel (yes, they still travel!), a motorized wheelchair ingeniously named the Rascal, and best of all,  SEX.  IT’S  NEVER  TOO  LATE  TO  LEARN  SOMETHING  NEW,  an ad for a video series, with a picture of two dashingly youthful-looking seniors in a passionate embrace.  Among the nonsense, however are useful tips for seniors regarding scams, investing, healthy living, and pending legislation that may affect them. 

     Included in this issue was a map and chart showing, state by state, donations to charity as a percentage of adjusted gross income in 2012.  So what states are the most generous?  New York?  No way.  Utah, with 6.56%, tops the list.  After that come Mississippi, Alabama, Tennessee, Georgia, South Carolina, Idaho, and the District of Columbia, in that order, with DC registering 4.00%.  And New York?  2.86%, in a sort of low middling rank.   And the lowest?  New Hampshire, with 1.74%.  So what should one make of all this?  The most charitable states, it seems, are those where religion still holds fast: Mormons in Utah and Idaho, Baptists and other sects in the South.  Clearly, believers are more ready to part with a buck.  Liberal, more secular New England comes off as the stingiest – or should I just say frugal?  And for this telling bit of data we can thank the AARP Bulletin, that chronicle of dynamic aging.

     Coming soon:  Goldman Sachs, vampire squid or patriot and martyred innocent?  Plus collateralized debt obligations and credit default swaps, but don’t worry, I don’t understand them either.

     ©  2014  Clifford Browder


  1. Whenever I have questions like this, I always get a new set of eyeballs on my papers. The library in our town has retires IRS agents working on tax preparation for free for residents. These guys know their stuff and have decades experience and knowing what triggers red flags and could possibly get you in trouble. Go see a professional to get help.

    Wanda Hanson @ Tax Tiger

  2. My wife and I keep good records so we have the best shot at getting a good refund when it comes tax time. That is your best bet when trying to navigate the world of the tax code. We, too, use online tax preparation and found that it gets us about the same refund that an accountant would.