Entries Tagged 'Privacy and Tax' ↓

The United States is starting to look like Eastern Europe in the bad old days.

There is a new directive from the Department of Homeland Security.  (Warning, PDF).  It says what can and cannot be grabbed when someone is passing through customs at the U. S. border.

Here’s how I interpret the directive:

1. We can take your computer and hang on to it for as long as we want to.  Other stuff too, if we feel like it.
2. We pay lip service to the attorney-client privilege (see E(3) in the document, but we’re still going to take your computer and other stuff too, if we feel like it.
3. Go stick your nose in a dead bear’s bum.

Sorry, dear MacBook (yes, the black one; I paid the black tax).  You don’t get to travel anymore.  Your trip to Switzerland two weeks ago was your last trip.  This is not a difficult technical problem to solve for me.

The bigger problem is the phone.  Do I leave my iPhone at home, too?  I think I have a solution to this, too.  I’ll have to test it.  (Yes, DHS droids, you can watch all of the Diggnation episodes on my iPhone if you want to.)

This is unmitigated stupidity.  It is nothing but security theater.

This is unmitigated stupidity.  It does nothing for security of the United States.  It MAY catch a few dim bulbs who don’t have the wit to follow an obvious plan such as the one that occurred to me 4 seconds into reading about the government’s new strategies.

This is unmitigated stupidity.  It is hampering international trade.  I know that because making international business transactions is my business.  This is slowing me down.  It is causing my clients from outside the United States to pause momentarily and say “Hey, wait a second, do I really want to invest in the U. S.?”

This is unmitigated stupidity.  It is attempting to achieve something by measuring the wrong thing.

I guess I shouldn’t be surprised by the profoundly stupid governmental bureaucracy.  But I am.  Silly me.

There is a lot going on in the offshore tax evasion world these days.  I’ll start commenting a bit more on that in the upcoming days.  After all, we deal daily with offshore trusts, money in Switzerland, and all that fun stuff.

Hidden agendas?

It seems to me that a lot of the commentary about the “rich” (definitions vary) and taxation have a hidden agenda.  That agenda is “us vs. them” with a thin veneer over a lake of resentment.

Why do we tax?

The objective of a tax system is to gather money so the government can spend it.   Moral outrage is misplaced.

Why do people cheat on their taxes?

If you’re wondering why people hide money and don’t pay tax, think about these points:

1.  A small percentage of people will always cheat and lie. 

Bell curve, people! Just like a few people will break into cars and steal your stereo, there will be a few people who will hide money and lie about it to not pay taxes.  It’s there.  Live with it.  Set up appropriate systems but you’re going to have that background noise as long as humans are involved.

2.  Tax systems can encourage cheating and lying. 

How?  A couple of ways.  One is with penalties.  If you (metaphorically speaking) have the death penalty for all crimes from parking violations to murder, well, you’ve decreased the incentive to pay attention to penalties.

We do international tax stuff for humans and companies.  In this arena the compliance (translation = paperwork and forms you have to file) is so complex–and the penalties so draconian–that you’re essentially at the mercy of a tax auditor who can club you to death for accidental errors.

In other words, the pain differential between lying and trying to do the right thing?  It’s shrinking.  At the margin this increases the number of people who are willing to throw up their hands and not try to do the right thing.

3.  Tax rates encourage lying and cheating.

The higher the rates, the more likely you are to see scheming and tax evasion.  It is here that I see the Outrage and Wailing by commentators.  This is where I’m going to have to back up my hunches with reality, but here goes.

I’m guessing that it is a decision made at the margin.  Is it cheaper to pay the tax and sleep well at night?  Or is it cheaper to lie and live with the anxiety?

If this kind of marginal utility thinking is right, then a lower tax rate would encourage more people to live in the light rather than in the darkness.

Anecdotally I see that kind of thinking, particularly because of the capital gains tax rates.  People can–and do–say “Meh, I’m just going to sell and pay the tax because the rate is 15%.”  In California you have the 9.3% State income tax as well, so it pushes the cost closer to 25%.  People pay that.  I’m not sure they would think that way if the combined hit started to exceed 30%.  But that’s guessing.

Statement of bias

I favor vastly simpler tax systems, even though it would cost me most of my livelihood.

I favor much lower tax rates.  MUCH lower.  No carve-outs for people to take tax deductions here or get credits there.  Use the tax system to collect revenue only.  Don’t use the tax system as a method to promote specific types of economic behavior, and don’t use the tax system to engage in moral judgments (hint:  if the word “should” is in a sentence, you’re in bad shape).

A quick aside

Here’s the TaxProf’s post on this topic.  It triggered today’s post from me.

It has some statistics in it.  The statistics are claimed to be true, and the facts suggest a certain conclusion.  In fact the conclusion fairly well shouts out at you.

A Federal judge has issued an order allowing the IRS to proceed against UBS AG, in their never-ending quest to find tax evaders.

U.S. people with undisclosed Swiss bank accounts?  The bell tolls for thee. *

*Kinda ironic that the quote comes from John Donne’s poem that starts “No man is an island” when people think they can hide money in palm-fronded island paradises.

Senator Carl Levin (D-Mich) introduced the Incorporation Transparency and Law Enforcement Assistance Act on May 1, 2008. This law (God help us all if it ever becomes law) would force States to determine the “beneficial owners” (the really-truly owners, not fakey-fakey owners) of corporations and LLCs.

Professor Bainbridge has commented on this. He’s way smarter than I’ll ever be. Go there for the reasoned analysis. Come back here for the rant.

<rant>

CURE IN SEARCH OF A DISEASE

This is a cure in search of a disease.

Senator Levin says this law will protect the United States from U.S. corporations being misused to commit terrorism, money laundering, tax evasion, or other misconduct.

I’d like to know how to do this, please. In my world everything is potentially visible to the government all the time.

If you have a reason to know who owns a corporation, you can get that information. No problems.

• Corporation owes you money? You’re suing the corporation, right? There’s this little thing called discovery.
• You’re the IRS? Don’t get me started. They already have plenty of clubs to beat this information out of you.
• You’re law enforcement? Don’t get me started.

What if you’re going to do a business transaction with a corporation? You think maybe there’s a skanky person who “really” owns the corporation.

Simple answer, easily solved without a Nanny State: you ask for the information, you get a personal guarantee from the people behind the corporation, or you don’t do the deal. See, all you need to be is an adult.

Yes, people are going to lie. They will lie you, to the IRS, to the FBI, to your mom. This proposed law won’t change anything. If someone is going to lie about a foreign bank account under threat of $250,000 fine or 5 years in prison (Form TD F 90-22.1), (warning: PDF) do you think Senator Levin’s new law is going to make the difference and scare them straight?

THE REAL BENEFIT OF THIS LAW?

So I guess I don’t see the added benefit to the government for collecting this data in terms of law enforcement. Well, except for the fact that the government slowly beats more data points out of us, randomly, so that some day in a fit of fiscal pointillism the government will see everything and will be able to tax everything.

I don’t think that’s Senator Levin’s motive.

Maybe he believes the bogeyman argument. “Look! Over there! Behind that tree! A terrorist!” I doubt he is that gullible.

So why is it proposed law on the table? Hmmm. Maybe because it is politically expedient during an election cycle?

NEW MINIMUM QUALIFICATION REQUIREMENT FOR SENATORS?

I propose a new entry requirement before someone is permitted to run for the Senate.

Before you run for election, you should have to own and operate a business for two years. If the business succeeds, you get to sleep in a warm, dry place every night and feed your kids. If the business fails, well, I’m so sorry.

The exercise of dealing with employment taxes and making sure that employees get their paychecks on time — that alone — just might be the sanity pill that we need.

</rant>

Sorry this post isn’t nuanced.

The Liechtenstein tax evasion drum has been beaten by the German tax authorities and German tax evaders are running for cover. It’s time for U.S. residents to listen to the rhythm.

Marketwatch has published an article, “Offshore-Account Holders Bite Their Nails“, which shows the pressure being imposed on U.S. residents. It also contains a quick overview of how you (hypothetically, because of course YOU would never be a tax dodger, would you? :-) ) can clean up this mess if you didn’t disclose off-shore assets:

• Pretend there isn’t a problem and cross your fingers (the “ostrich” approach);
• File amended tax returns (and other forms that might be required) quietly, pay the taxes, and hope things don’t blow up too badly (the “quiet disclosure”); or
• Hire a lawyer who goes and talks to the IRS to work out how you come in from the cold in a pain-minimizing way. (the “noisy disclosure”).

None of this is new. And the IRS has long had a particular affection for chasing people with hidden offshore income.

WHY DELAY HURTS TAX EVADERS–EFFICIENCIES

It’s a glacial change. Slowly but surely it becomes easier for the tax authorities to see hidden money. This happens because information technology gets better. So just like better instruments help astronomers find black holes, so does better IT help the tax authorities find the money that’s not there.

The longer you wait, the more probable it is that tax evasion will be discovered, simply because of business efficiencies built into the financial systems.

WHY DELAY HURTS TAX EVADERS–YOU CAN’T SPEND IT ALL

Let’s say you stick $1,000,000 in an offshore bank account and don’t declare the income. Invest wisely. Years go by. Now you have $10,000,000.

If your strategy is “I will travel abroad and spend the money while travelling”, then my humble suggestion is at some point the money in the bank is simply too much for you to dissipate in dissolute living, cruise ships, five star hotels, and haute cuisine. There’s a lot of money, and you’re decades older. You can’t party down the way you used to.

I’ve seen this situation in my law practice, by the way.

WHY DELAY HURTS TAX EVADERS–MORE PRIVACY LEAKS

The recent events in this department of international tax has been triggered by privacy leaks, either by disgruntled ex-employees and paid snitches. Humans will continue to do things they aren’t supposed to. If you are relying on those humans to keep your information secret and keep you out of jail, you’re on a fool’s mission. The longer you wait, the more likely it will be that one of these leaks will affect you.

WHY DELAY HURTS TAX EVADERS–TARGETED INVESTIGATIONS

Look at how the IRS went after tax shelter investors: (1) find the tax shelter promoter; (2) get the promoter’s client list; (3) bring the hammer down on the tax payers who bought that tax shelter.

Look at how the IRS goes after abusive trust arrangements: (1) find the abusive trust promoter; (2) get the promoter’s client list; (3) bring the hammer down.

Now think for a moment. Who is the “promoter” in these offshore banking arrangements? Answer: easily visible banks in easily identifiable countries. The IRS is already moving on step 2 in the equation.

RECOMMENDATION

At the risk of offending everyone, here’s my advice.

If you have undisclosed income and assets (offshore or not), repent and come to Jesus. Figure out how you’re going to square things up with the tax authorities, and do it.

Don’t turn a money problem into a jail problem.

The fallout starts. Apparently 195 Germans confessed to tax evasion. There are 20 uncomfortable Australians. The United States is getting into the act and has a list of 100 American taxpayers they are looking at.

To summarize the business plan:

1. Some people figured that they could hide money, lie about it, and not pay tax.
2. They stuck the money in Lichtenstein banks.
3. Real, grown-up countries (Germany, U. K., and who knows who else in in on this), by apparent bribery, bought the services of someone who was willing to break the laws of Lichtenstein and steal bank data that revealed everything about.
4. ???
5. Profit! (For the tax collectors in Germany, the United Kingdom, the U. S., and elsewhere).

Unlike the underpants gnomes‘ business plan, THIS business plan worked.

Possible countermeasures for people like this, who are yet undiscovered:

• Jump up and down and say “It’s not right! The government can’t do illegal stuff like that!” (Response: So what? Cat. Bag. Out.)
• Sit tight and do nothing. (Response: Inevitable merely postponed. Pain handed to your kids because you won’t deal with it.)
• Run away to Panama. (Saw that happen last week for a U. S. citizen I know. He is a fugitive for the rest of his life.)
• Be a grown up and clean up your mess. (Why make a money problem into a jail problem?)