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  • Paying for it

    Posted by Mitch Townsend on July 8th, 2009 (All posts by )

    On the one hand, we have the Obama administration’s grand plans for universal health care, investment in our infrastructure, reducing our atmospheric carbon output, and world-wide reduction in sea levels. On the other, we have the requirement to pay for it, assuming the Chinese would like to have some significant portion of their money returned to them. Currently, the administration seems to favor increased taxes (sorry, “contributions”) on those with the highest incomes. The problem is that there are not enough rich people to go around. Even at a tax rate of 100%, there is still not enough money to pay for all the urgently needed good stuff. What to do, what to do…

    A possible remedy comes from the Internal Revenue Code, which starts with this:

    § 61. Gross income defined
    (a) General definition
    Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
    (1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
    (2) Gross income derived from business;
    (3) Gains derived from dealings in property;
    (4) Interest;
    (5) Rents;
    (6) Royalties;
    (7) Dividends;
    (8) Alimony and separate maintenance payments;
    (9) Annuities;
    (10) Income from life insurance and endowment contracts;
    (11) Pensions;
    (12) Income from discharge of indebtedness;
    (13) Distributive share of partnership gross income;
    (14) Income in respect of a decedent; and
    (15) Income from an interest in an estate or trust.

    The definition is broad enough to encompass just about anything that could be construed as income; that is, anything that would result in the improvement in the economic situation of a person or entity. Cash need not be involved. Income can be recognized, and taxes must be paid, on the unrealized gains of certain derivatives (§ 1256, § 988), on bonds that do not pay anything at all until they mature (§ 1272), and even in some situations where you pay too little for something (§ 1274). This is a marvelously flexible idea, and suggests that we can close our budget deficits not by raising the tax rates, but by discovering and taxing previously undiscovered sources of income.

    No one would quarrel with the idea that an elective office is worth something. After all, if a salary must be paid to the occupant, that in itself is recognition that there is some value in it. And yet, salary does not seem to be the motive for seeking office. An ordinary congressman is likely to raise funds for election and re-election that can be orders of magnitude higher than the salary. The current base rate is $174,000 per year, or $348,000 for the two-year term. A successful campaign for an open House seat will run you about $2 million, give or take. The most expensive race, the NY 20th, involved over $11 million. Clearly there is additional value involved, value well in excess of the nominal salary.

    All that money has to come from somewhere, and it has to have a purpose behind it. Something for nothing makes the news when it happens, because it doesn’t happen often. If it the money were just meant for the betterment of mankind and the relief of the downtrodden, it would have gone to the Salvation Army. If it were meant simply to recognize and reward public-minded citizens, it would not have gone to someone already drawing a salary for being public-minded. No, value for value is the usual way, and I think it is reasonable to assume that someone is paying good money so that a politician will do, or refrain from doing, something within the power of his office. In other words, the congressman is receiving “compensation for services, including fees, commissions, fringe benefits, and similar items.” Why not tax it?

    You may object that the contributions are not made directly to the congressmen, and therefore should not be imputed to the congressmen. While I am not a lawyer, I believe that there are circumstances where the IRS can consider the economic reality of a transaction, rather than its formal legal arrangement. You could set up a trust, for example, with yourself as beneficiary and serve as the sole trustee, but if you failed to include the trust’s income in your own tax return, the agents of the federal and state tax authorities would be after you with sharp implements to separate you from your personal property, including any organs worth harvesting. In this case, the situation is clearly someone selling services and someone else paying for those services. There is no exception in the Internal Revenue Code for services that may be illegal, like prostitution, or merely disgraceful, like running for Congress.

    We might even consider applying an excise tax on top of the income tax. In theory, at least, the taxpayers are entitled to the honest services of their congressional representatives. Since we have been essentially outbid for those services, a 100% excise tax on congressional salaries might be in order. It would also be worth looking into some of the more clever ways of buying and selling congressional services. Bargain purchases of real estate, as was the case of the former junior senator from Illinois and the current senior senator from Connecticut, are a well-established way of exchanging value for value without the vulgarity of cash-filled envelopes. There are no limits to human ingenuity in avoiding taxes, and it would probably be impossible to find and stuff up the mouse holes faster than the mice can gnaw. Why not just simplify the calculation? It could be a model of tax simplification.

    Box 1. The congressman’s net worth at the end of his term of office
    Box 2a. The congressman’s net worth at the beginning of his term of office.
    Box 2b. The congressman’s declared income during his term of office.
    Box 2c. Add box 2a and 2b.
    Box 3. Subtract box 2c from box 1. Add this amount into the congressman’s adjusted gross income.

    If the funds raised from these provisions prove inadequate, we might explore other ways of calculating income from political favors. I have discussed the taxation of the value received by the legislator, but what about the value received by the donor to the legislator? Surely he will realize a gain on his contribution. Perhaps the congressman’s or the lobbyist’s income should include the dollar amount of harm done to the electorate; that is, it might include whatever additional expense the taxpayer has to cover as a result of the buying and selling of favors.

    I hesitate to call for additional provisions in the US tax laws, onerous as they are, but these are desperate times. Of course, part of the reason the times are so desperate is that government is bought and sold like lap dances. Really, the only way to ensure that government is not bought and sold is to make sure the governing class has little or nothing worth selling, because otherwise someone will surely buy. What they sell is their ability to order us about and to make us pay for whatever glistening utopias with which they might replace West Virginia.

     

    3 Responses to “Paying for it”

    1. Dan from Madison Says:

      Good post but looks like it repeats itself. Worth repeating though. Probably a format issue.

    2. Mitch Townsend Says:

      Thanks. I got disconnected & timed out a couple of times while trying to edit and post this, and it looks like something weird happened. Fixed now.

    3. bgates Says:

      By the time we get to Box 1, we’re in estate tax territory.