Sunday, May 10, 2009

Starve the Beast

The Galt Effect on Uncle Sam:
There are a thousand reasons why Federal receipts are down, but the one that is most interesting is the attitude towards government effect. Our attitude about how our government is doing can be good or bad, depending on how we side on the issues. If we feel that government is doing a good job, we’re more likely to prepare our tax returns and calculate our withholding based on an optimistic outcome (taking fewer risks). The reverse is also true: when we believe that the government is doing a bad job or mishandling our tax dollars, we will take riskier deductions on our tax return, as well as calculate our withholding in such a way as to prepare for a bad financial year (to hold back as much cash as possible), or with the intent to starve/punish the beast.

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19 Comments:

Blogger LPF said...

Tax time has passed for now, and high fixed costs meaning truly going Galt isn't an option for me... but vacation dollars are another issue: I've been to Ireland and Canada so far this year, and I have a German vacation coming up (all flights on foreign carriers). My vacation dollars are going outside our borders until the Obamafraud is out of office.

7:02 PM, May 10, 2009  
Blogger GawainsGhost said...

Well, we just got the county appraisal district's valuation on our two condos. Their appraisal is more than double the current market value!

Oh, so the county is seeing declining revenues due to declining property values, so they figure they can just double property taxes?

Not very likely, not in our case anyway. Our partner is the head of the appraisal district, so we don't even have to bother with going to court. It's just a phone call to us.

I don't think this is a matter of people wanting to starve/punish the beast, the Leviathon. I think this is a matter of the Leviathon intending to punish the people, and the people are not going to put up with it.

I like a little TEA with my tax deductions and reductions, thank you very much.

7:24 PM, May 10, 2009  
Blogger Doom said...

That is why the IRS is beginning to be super funded. From what I am hearing, they are getting a very fat (comparative) increase in funding. I have to guess that the IRS will get more and more funding. It is too bad O and crue don't understand that blood does not come from rocks and that hard core tactics are poor choices with an already angry citizenry. Doesn't "Tea Party" show up in his memory at all, or what followed. History doesn't have to repeat itself, it does so only through ignorance of it. Oh, right, he is an Ivy League elite, if by quota. Is that a double negative?

7:40 PM, May 10, 2009  
Blogger pdwalker said...

Doom,

Increased funding of the IRS will squeeze more blood from a stone. And what can you do about it? Nothing. All you can do is keep your head down and hope they don't come for you. Most of us have too much to lose; our comparative wealth, our families, our freedoms even our lives to do anything more than complain relatively quietly about it.

9:17 PM, May 10, 2009  
Blogger Doom said...

I think this blog suggests you can do something about it. And, for my part, I think you can fight the beast as well. Beyond that, I do not think the "rich" are as alone as they may think. Though many from my "blue collar" economic level are freedom based, many of us realize there needs to be "princes and princess", of the free market varietal anyway (enjoy riches you create and nurture!). When all the sheep are being lead over a cliff, enough of us won't go easily, hopefully from every economic level. You do your part, we will do ours, and I think there are other allies... even within the government.

If you wish to despair, that is reasonable. Fear and being attacked merely for being successful should cause some shock and perhaps depression. But when you get over it, join the club, pick up whatever tools you have at your social and economic level, and begin digging in. Living in Iowa, I saw what friends, families, and good government can do when beset by disasters. Given that disasters are just that, and some people and economy might be lost no matter what is done, which is why it is called a disaster. Or, sit in the corner and whine. Both are risky, one helps not a whit.

As well, do you think it is just people with extra wealth who will lose? As is, I live pretty much month to month. As money is devalued by Mugabe's American kin, the month seems to get longer and the dollar really shrinks. I have no economic fat to rely upon or have taken from me. But I can end up living in a cardboard hut, mostly starving, and without many needs and basic wants because money is worthless.

Perhaps I did not understand your comment, but it looked like you are suggesting we all just give up. Taken to it’s ultimate, that means suicide.

9:46 PM, May 10, 2009  
Blogger Joe said...

I don't buy this theory in the slightest. It's just silly grandstanding. Tax receipts are down because the economy is off--in fact, it appears that tax receipts are holding up BETTER than the economy as a whole and certainly better than the stock market. Explain that.

10:34 PM, May 10, 2009  
Blogger Joe said...

By the way, one thing we do know is that increased taxes does NOT increase tax revenue proportionally. Unfortunately, the morons running the country right now refuse to acknowledge this documented reality.

10:35 PM, May 10, 2009  
Blogger Helen said...

Joe,

"Tax receipts are down because the economy is off-"

I doubt that's the only reason they're off and how are they holding up better than the stock market and economy?

I guess time will tell. My guess is that unemployment will also stay higher than normal, even if the recession improves, as businesses understand that they may be choked with regulations and taxes and will be hesitant to add the burden of more employees to their payrolls. Many will figure it's best to hunker down for the duration due to uncertainty and an anti-business climate.

5:08 AM, May 11, 2009  
Blogger br549 said...

So what is it that you want Joe? I'm not following you. As I have said to many who believe we should all pay more taxes, there is nothing stopping those who think like that. The government will surely accept any funds over and above one's minimum.

Trouble is, they don't seem to be willing to go by themselves, nor have they truly defined the term "we". Seems a disproportionate number of Obama appointees don't walk the talk.

I don't think anyone really has a problem feeding the goose that lays the golden eggs.

My problem with it all is that while there may well be millions responsible for this situation, I am not one of them. And it can truly be narrowed down to a few people (in comparison) who saw this, knew it was coming, and allowed it to happen. And an even fewer amount who had the intestinal fortitude to speak up about it. I refuse to believe otherwise.

All that spoke up about it, as right as they were, have in one manner or another, been shot down and some, shredded.

10:05 AM, May 11, 2009  
Blogger Realism said...

So as satisfaction with the government continues to increase under this administration, apparently tax avoidance will be less of a problem.

3:27 PM, May 11, 2009  
Blogger Joe said...

So what is it that you want Joe?I'm not wanting anything; just pointing out that the declines in the stock market exceeded the declines in tax revenue and that it appears at first glance that the decline in tax revenues is less than, or at least not out-of-line-with the overall decline in the economy.

My second point is that liberals in general refuse to acknowledge that raising tax rates doesn't produce a directly proportionate amount of tax revenues.

Overall, I say that the evidence is that attitudes toward the government have a very small effect on tax revenue. People who play fast and loose with their deductions will do so regardless of their actual attitude toward government. People who are honest in their taxes, will tend to be so regardless.

6:33 PM, May 11, 2009  
Blogger Thomas said...

The best way to protest the government is to boycott GM and Chrysler until the government divests of their shares in those companies. Considering the superior quality of other manufacturers, it has to be the easiest thing on Earth to not buy a chevy. As these government-owned companies lose market share, Uncle Sam will be forced to pour in more resources and the Democrats and the UAW will look like fools.

6:53 AM, May 12, 2009  
Blogger Wayne said...

I'm not wanting anything; just pointing out that the declines in the stock market exceeded the declines in tax revenue and that it appears at first glance that the decline in tax revenues is less than, or at least not out-of-line-with the overall decline in the economy.

Actually, the declines in the Stock Market would not have much to do with tax revenue. Gains are only taxed when they are actually converted to income, and losses cannot all be deducted from your taxes. There would be some reduction in revenue from lower dividends, but the overall stock market is not going to affect the tax revenues that much.

I haven't seen the tax numbers, but I did see that the GDP contracted by 6.1% in the first quarter. How does that compare to tax revenues?

12:18 PM, May 12, 2009  
Blogger Ken said...

Karl Denninger at market-ticker dot org links to a press release from California:

http://sco.ca.gov/Press-Releases/2009/05-09summary.pdf

Highlights (for given values of high): Sales tax revenue for April '09 off almost 51% from April '08, and personal income tax revenue off almost 44% from April '08.

Denninger is no Austrian (well, he ain't Keynesian either, but he does advocate fractional-reserve banking), but he's worth reading.

1:00 PM, May 12, 2009  
Blogger geekWithA.45 said...

Color me skeptical...there's really not much of a thing as a "risky deduction"...it's either a valid deduction, and you're a fool not to take it, or it's not valid in the first place, and you're begging to be bit in the buttocks later on down the road by the IRS.

This is sort of like the bit of populist mythology that there are "tax shelters" "out there" that the rich can use to hide their money and reduce their tax burden.

I gotta tell you from personal experience: there was a point in my life when a stroke of luck and some lucrative contracts put me in position to rake it in hand over fist for a handful of years.

Sitting down with my tax people to figure out where these much vaunted shelters was an accelerated, formal education in "there ain't any such shelters, prepare for butthurt. You earned it, you're gonna pay tax on it, and if you invest it and earn more, you're going to pay tax on that too". It turns out that all the "tax shelters" are the same humdrum 401k and pay your childcare, prescriptions and parking with pretax dollar programs that everyone uses, and these are all capped so that their advantage doesn't scale with income.

Similarly, I also look skeptically on the claim that people will play with their with holding for the purpose of "starving the beast". If you run too lean, the IRS will slap you with quarterly interest, and if you're running too fat, then you're silly to give the .gov an undeserved, interest free loan. The best calibration is to rig it so that someone owes someone a couple hundred bucks at the end of the season.


If the message is "the government is benefiting from folks paying more tax because they don't have competent tax preparation advice", then my advice is to stop giving it away, and get competent help.

If the message is "the government is *dependent* on people paying more tax than necessary because of said lack of competent help...." well, then, all I gotta do is smile, because that makes our job a lot easier.

3:19 PM, May 12, 2009  
Blogger The said...

Geekwitha45:

Behavior and attitude do alter tax paying behavior, even if you don't think it should factor so highly.

Many people use software such as Turbo Tax. That software evaluates your audit risk based on your deduction types. People are also aware that some types of deductions raise a flag for an audit. If individuals and businesses are only benefiting by a small amount, taxpayers will often skip those types of deductions. It isn't as though they are not entitled to take it, only that people are keenly aware that having pristine records for everything is difficult, and don't want to unnecessarily raise audit flags.

These are the types of "risky" deductions I meant. Risk in the audit sense, not in the legal sense.

Law abiding people will tend to err on the side of conservative deductions if they believe that the tax code is fair, their government is doing a proper job managing their tax dollars, and if they have the leverage to do so.

When people believe that their government is behaving unlawfully or unfairly, it will alter their taxpaying behavior.

It is similar to tipping behavior, where someone will generally tip at the normal rate of 15%, even if the service isn't very good, as long as the server and other staff treated them respectfully. The food may be terrible, but it won't translate to altering their tipping behavior unless they are treated rudely. They will also alter their tipping behavior if their perception of value is low, deducting from the tip the amount they believe they were overcharged for their food.

As I mentioned in the post and again in comments, quantifying the Galt Effect is difficult. We cannot know with certainty, this early in the collections cycle, how much of the change in receipts dynamic is psychological, ideological, or out of necessity. What we do know is that some of the behavior has changed:

-37% of taxpayers filed for an extension
-a remarkable number of taxpayers changed their withholding in 1Q. The percentage change is outside the % who may be dealing with a spouse's job loss.

Many people cannot afford a tax adviser and prepare their returns themselves. It is perfectly appropriate to challenge that some tax advisers may not be properly fulfilling their duties, but that only applies to the dataset of people who can afford to buy their expertise. Tax advisers also have a responsibility to tell their clients which deduction types may flag an audit, and will advise against certain types of deductions if the individual doesn't have pristine records.

Back in the days of typed returns and old fashioned photocopiers, some tax preparation companies (those who advertised that they would cover the costs of any fines resulting from an audit), would use a blue pencil on the forms to note where they gave the client advise not to take a particular deduction because they didn't have the records to back it up. They made these notations to cover their company's risk, and often did not actually provide the advice. The blue pencil did not show up on the copy they gave the client, but was in their files. The fine print in the fines guarantee did not apply if the client was advised, but overrode the advisor's advice. This was unscrupulous behavior, but it was a common practice. I mention this to demonstrate that even among tax preparers, there is a great deal of hedging behavior demonstrated to protect themselves and their clients from audits.

Your comment is perfectly valid in a level playing field environment (a perfect world) of facts and reason, devoid of emotion. Unfortunately, human beings don't always behave the way you expect or they way they should in a perfect environment. There are a variety of factors, including emotion and feelings, that will determine how they behave.

Withholding amounts is a decent dipstick measurement of an individual's attitudes about their financial status. If they believe that the year will be profitable, they will have a tendency to withhold at a higher level. If they believe that they might suffer a layoff or that there will be another type of downturn in their financial status (without facts, just hunches) they will under-withhold, preserving as much cash as possible. Individuals will also look for ways to deny the government as much as they can, even taking audit risk deductions, if they have a negative feeling about their government, or if they feel their government is not handling the economy properly. When tax day comes, they'll have to find ways to avoid the under withholding fines, and they will look for additional deductions, even those with a higher audit risk.

It is a well documented fact that tax compliance (paying on time, paying the full amount owed, and the types of deductions claimed) are higher when the tax rates are lower. When the Channel Islands needs to increase revenue, they will lower the tax rate to increase compliance. It works so well that they then have to raise the rates again later so they don't raise too much revenue. People who have the choice to accrue tax hits will also take them when they believe that tax rates may go up at a later date, or defer them, in hopes that the tax code will treat them more fairly in the future. The Laffer curve takes these factors into account.

As I'm sure you are aware, economics is the study of human behavior and attitudes, weighing all the various factors that will have a particular result. It is a "soft" science in that sense, rather than a hard science dealing only with fixed facts. Tax preparation and payment includes all of those same dynamics.

7:56 AM, May 13, 2009  
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11:42 AM, May 24, 2009  

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