The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (38 page)

Louisiana and Pennsylvania are among the states that have relied on a firm called Economic Research Associates to justify these Hollywood welfare programs. News reports routinely described these reports as audits or studies, implying that they are neutral searches for fact and truth. The missing descriptive words for these reports are “bought and paid for” and “superficial.”

When a paying client asks, Economic Research Associates turns out “studies” that sell the absurd as fact. One such paper claimed that a nearly dead mall in Irondequoit, New York, part of whose market area is Lake Ontario, could grow sales fourteen fold from $30 million to $450 million annually. Never mind that the mall was in a county where population has been flat for decades and retail sales falling. Never mind that in the previous ten years total annual wages, adjusted for inflation, have fallen by $660 million. Never mind that the study was paid for by a developer seeking more than $250 million of taxpayer gifts, welfare he asked for while making campaign contributions to local politicians who were in a position to arrange these gifts. Never mind little details like facts and sense.

I got this study when I asked officials in surrounding Monroe County to show me their due diligence on the proposed subsidy for the dying mall. It turned out they had not one sheet of paper representing any independent inquiry to determine facts before spending money. All the officials could produce was the fantasy report by the developer hoping to pocket millions of taxpayer dollars. Reports by Economic Research Associates and other firms who get paid by those with their hands out for
subtle giveaways of your tax dollars, or credits to escape taxes, should be greeted with public laughter as fairy tales for the greedy.

So just how many jobs were created in Michigan with its $48 million of tax welfare to Hollywood? The moviemakers employed nearly 2,800 people, the Michigan State University researchers reported. Some politicians trumpeted this single fact as proof that the tax credit works. But the fine print revealed that the typical “job” lasted just twenty-three days. Turn that into years of labor, and the 2,800 jobs become the equivalent of 254 full-time jobs, though such temporary employment hardly compares with steady work. Divide the $48 million giveaway by those 254 jobs and the cost to Michigan taxpayers for each came to $189,000.

For context, consider that in 2007, when most families had two breadwinners, the average American household earned $48,000 in wages. The average Michigan household did not fare as well, earning just $44,000, federal and state tax reports show. So those 254 Hollywood jobs cost taxpayers nearly five times the wages earned by the typical Michigan household.

The good news is that this welfare for Hollywood only cost the average Michigan household $12. The bad news is that state political leaders are planning on increasing their giveaways to Hollywood in the years ahead. They would never say it this way, but what they plan is to take more money from the below-average-income earners of Michigan to give to the far-above-average income people of Hollywood. This is income redistribution, not downward to relieve the poor, the disabled, the sick, but upward to help the already rich.

As with Wisconsin, the numbers show that Michigan politicians who voted for these laws flunked elementary-school arithmetic. But this story is a two-reeler and the second reel is even richer for Hollywood than the first.

TAX CREDITS FOR SALE

Michigan lawmakers were careful to make sure that Hollywood would get the full benefit of these tax breaks even if the studio did not owe any Michigan taxes. How? Technically, what Michigan gives Hollywood is a tax credit. That is a dollar-for-dollar reduction in state corporate taxes. If the film company does not make any profit in Michigan, it has no use for tax credits since it owes no taxes. On the surface, a tax credit would be worthless. But just as in Wisconsin, if the film company does not owe any taxes to Michigan, the state just writes the company a check.

Film studios can also sell their tax credits to companies that do owe Michigan taxes. Because these tax credits can be traded, when you buy a ticket to see a film that gets these deals, you are helping companies with no relationship to the movie industry escape taxes.

The producers with tax credits to sell go to brokers, who typically charge a fee of about 4 percent. The buyers of these tax credits then bid for them. The amounts the tax credits are sold for are not disclosed. But let’s assume a million dollars of tax credits is sold for eighty cents on the dollar. The moviemakers collect $800,000, less the $30,000 or so in commissions to the tax credit brokers. The company that buys the Hollywood tax credits then gets to pay a million-dollar tax bill with a piece of paper that only cost $800,000. The only losers here are the taxpayers.

The trading of state tax credits is now a growing corner of business. It creates no wealth—arguably it destroys wealth, by helping the Hollywood rich collect welfare from you.

Next time you go to a movie with location shots, stick around when the action ends and watch the credits roll. Somewhere after the names of the stars, perhaps down where they list the chauffeurs and the caterers, you may see a list of people being thanked. One of the firms cited in the screen credits will probably be Tax Credits LLC, a New Jersey firm that specializes in helping studios sell their tax credits in fifteen states.

Hollywood is far from alone in arranging these deals buried deep in the fine print. A whole industry has arisen to soak the taxpayers on behalf of the rich through tradable tax credits and subsidies that put money in the pockets of filmmakers, factory owners, hotel developers, shopping mall owners and anyone else among the very rich who has no shame about being on the dole. Not having any shame is, of course, a lot easier when hardly anyone knows you are on welfare.

21.
Joe Bankman is
a Stanford University professor of tax law with a really smart idea. He knows how to end what, for many people, is the single most aggravating aspect of being an American and, in doing so, may save taxpayers billions of dollars per year, free up billions of hours of people’s time and cut the cost of government.

Bankman’s brainstorm? Get rid of income tax returns for most people by having government calculate their income taxes for them.

If adopted by Congress, Bankman’s modest proposal could eliminate about 100 million of the more than 140 million tax returns filed annually. Plus Bankman’s idea has been tried and tested. It not only works, but people who have tried it love it, with a 98 percent positive rating in surveys. “Best government program ever!” is a common response.

Think of mandatory income tax return filing for most people in the twenty-first century as the equivalent of Congress passing a law in 1908, when the first Ford Model T was sold, that every one of those newfangled automobiles come with a buggy whip. The buggy whip makers would want such a law in effect, just as the tax preparation industry likes mandatory tax returns; in both cases, one theoretical and one real, only the self-interest of an industry argues for being mired in an unnecessarily costly past.

Bankman calls his idea ReadyReturn. If embraced by Congress and the legislatures in the forty-four states with income taxes, it could
eliminate the aggravation of tax return filing for most Americans. With minor tweaks in tax law, as many as 120 million federal tax returns and almost the same number of state returns could be eliminated. If Congress streamlined the tax code, only sole proprietors and people with trusts and complex international investments would have to file tax returns.

Most modern countries have already eliminated tax return filing for the vast majority of their people. The Organization for Economic Cooperation and Development, which represents thirty-four countries with modern economies, has documented how these programs are being expanded, easing burdens on taxpayers while saving money spent processing tax returns.

Taxpayer savings result because ReadyReturns are prepared automatically using the same data that government collects from employers (as well as payers of pensions, interest and dividends). Such returns by definition do not contain the kind of mistakes by taxpayers and tax return preparers that require costly review by tax agency workers. Errors, both innocent and deliberate, cost money because of the cost of audits and other enforcement actions. ReadyReturns would also eliminate the cost of keypunching data into computers.

The use of such returns could be optional. If the government makes a mistake or the taxpayer disagrees with the record sent, the taxpayer is free to file his or her own tax return. But ending tax return filing as we know it would be immensely popular, a means of ending the tortuous annual process of filling out tax forms, begun in 1943 as an emergency measure to restrain domestic spending and raise money to finance World War II. Back then, filling out paper forms was the only practical way to collect information on how much people made. Thanks to digital technology, this annual drudgery could be swept into the dustbin of history for most Americans.

People dislike filling out tax forms so much that they routinely pay to outsource the pain. Accountants and others signed as preparers on 82 million of the more than 140 million American tax returns filed in 2010. The average fee charged by accountants and tax preparers in 2009 was about $220, while tax preparers at firms such as H&R Block and Jackson-Hewitt charged an average of about $181. The software company Intuit, which specializes in tax preparation (Quicken and TurboTax are two of its products), told its shareholders in 2011 that Americans spent $22 billion for tax preparation services. That was close to double the total IRS budget of about $12 billion that year.

Americans pay others to prepare their tax returns because they find the IRS forms confusing, they do not trust their knowledge of the tax law, and for many other reasons. They worry a mistake will mean they’ll be hounded or even prosecuted by the IRS. That fear is encouraged by television ads from tax services and superficial stories by journalists, but it’s greatly overblown. In 2010 the government prosecuted only 1,430 cases listing any tax crimes, even as part of prosecutions for drug dealing or official corruption. An analysis of Justice Department data by the Transactional Access Records Clearinghouse at Syracuse University shows that fewer than 600 of those cases cited a tax crime as the primary offense.

As a matter of written government policy, mere mistakes are not prosecuted nor are one-time violations, unless there is compelling evidence of a plot to hide a huge income, say millions of dollars from the sale of a business.

The simplest tax return, Form 1040EZ, is so daunting that 11 million Americans, half of those who use this one-page tax return, pay an average of $50 each to have someone else fill it out for them. That cost is more than half a day’s take-home pay for a worker earning the median wage of slightly more than $26,000 per year, a significant burden that would be eliminated if the IRS used ReadyReturn for most taxpayers.

WHY NOT READYRETURN?

Most of the 58 million returns completed by taxpayers were prepared using tax software like Intuit’s TurboTax, the overwhelming favorite with more than 70 percent of the market. Such a large market share gives Intuit monopoly pricing power. More significant, Intuit exerts influence with government, which has been a very good friend to Intuit shareholders.

Intuit is one of the most profitable companies in America. Overall, the fourteen thousand biggest corporations, which account for 85 percent of revenues, keep about a dime out of each dollar as profit before income taxes. Intuit kept twenty-five cents out of each dollar in 2011. For Intuit, your aggravation is money in the bank.

For more than a decade, TurboTax sales have been mushrooming. Intuit sold 24 million TurboTax subscriptions on disc and online in 2011, many of which were used to prepare multiple returns. On average Intuit collected $54 for each copy of TurboTax, a total of $1.3 billion of revenue.

Sales of TurboTax have been growing much faster than the number of taxpayers. From 1998 through 2011, the number of taxpayers grew about 13 percent, but Intuit’s sales increased 390 percent. TurboTax sales grew thirty times more than the number of taxpayers, partly because the software works well and gets better each year. But there was also another factor.

TurboTax sales got a significant boost from the hidden hand of government. Policies in Washington and most state capitals steered customers toward TurboTax and the other much smaller tax software firms through a host of subtle policies. Intuit will offer free state-level filing to lower-income taxpayers, but only if states promise not to prepare returns in advance (such as California’s ReadyReturn) or let people fill out their forms online at a state-run Web site. And to reinforce this, when a state tax agency gets its budget cut, Intuit sometimes offers free software help in return for renewing those promises.

Because of the economics of software, as Intuit’s sales grow, its profits on each copy of TurboTax should grow much faster. And TurboTax is already an exceptionally profitable product. Had you invested a dollar in the overall stock market in 1998 and another dollar in shares of Intuit, your returns would be dramatically different. By late 2011 your investment in the total stock market would have lost a bit of value, even after collecting dividends, while the dollar you put into Intuit would have grown to almost $7. For that investment to remain so lucrative, the law must continue to require people to file tax returns, even though that is a necessity whose time passed with the arrival of the digital age.

Much of the $22 million Americans paid for income tax preparation in 2011 was wasted, a drag on the economy that enriches only tax preparers and tax companies like Intuit. Intuit has told its shareholders to expect future growth of 10 percent to 15 percent annually, even though the number of taxpayers grows at only about 1 percent per year. This suggests that the more sand Intuit throws into the gears of the economy, the more it profits, an issue similar to how the telecommunications companies profit by making sure America has an Internet that is slow and serves only densely populated, higher-income areas. Policies that create profits by working against the national economy need to be replaced yesterday.