Death & Taxes

April 9th, 2004

On November 13th, 1789, Ben Franklin wrote to his friend Jean-Baptiste Leroy. Here is part of what he said:

Ben was certainly right about the last two, although given the situation in our country today, the permanency of the Constitution seems to be in doubt. But I’ll get back to that later.

No federal institution is more unpopular than the IRS. Just today it is particularly low on my list as I paid my taxes. I can add, by the way, the Department of Revenue of the State of Pennsylvania and the Lower Saucon tax collector Berkheimer and Associates, are not too popular in our house either, never mind the school district on whose board I serve. The IRS is accused of everything from stupidity to cupidity. It is thought to create forms that even an accountant can’t decipher, it makes ghastly errors, seizes property on no or little notice and makes the average couple who only cheat a little on their taxes very nervous. Moreover, even if you get things right, an audit is very expensive to defend.

Some of this criticism is unfair. After all, you can hardly blame the garbage man for smelling bad. Somebody has to do the work. (Actually, in my humble opinion, the analogy between garbage collection and tax collection is not bad, although the former is generally recognized as a more useful occupation.)

The forms business is a bad rap. The IRS does not create the tax law, congress does. If the tax return form has a way too many lines and several dozen attachments, the IRS only puts them there because the congress made them. If there is confusion, it is not the IRS’s fault. They only saluted and charged ahead.

Congress presumably does this in the instance of fairness, whatever that is. Of course, fairness to Congress is a matter of whose ox is being gored. To the Republicans and President Bush, the rich are sacrosanct. It is unfair, they say, to levy high levies on the rich merely because they are rich. After all, if you take money from them, they won’t have enough money to spread around to encourage the economy.

Of course, the same argument might be made for middle class tax cuts. In fairness to Bush and the Republicans, they have thrown bones to the working middle class, but at the risk of sounding like too much of a popularist, Mr. Bushes tax reforms are making the filthy rich even filthier richer. Yet it doesn’t matter. We simply only have to borrow more money to keep the government, and the war, and the other idiocies going. Not to worry, we won’t be around to have to pay and if our children are really bright, maybe they can all migrate to China where the good jobs will be and the debt not an issue. And if not, maybe Ben was right, the constitution may not be permanent. The government will abrogate the debt and the Constitution along with it.

Back to the IRS and fairness. If, for example, you lose $25,000 in the stock market and your spouse makes $25,000, and you each had separate brokerage accounts although you file a joint return, the IRS allows you to deduct one from the other and no capital gain is recognized. Not so fast on your Pennsylvania tax return. In that situation, Pennsylvania requires that the spouse who made the $25,000 report it as a capital gain, but allows no deduction on the return for the loss by the other spouse. Don’t believe me? Check it out with your accountant.
The Pennsylvania Department of Revenue, by the way, doesn’t do a lot of its own investigating but certainly rides the coattails of the IRS. Its forms are a lot easier to fill out mainly because there are not nearly so many deductions allowed as there are on the federal form.

Lower Saucon and the school district are even worse than Pennsylvania in fairness of taxation.

We have a long history in this country of believing that a gradual system of taxation is best and fairest (there’s that word again). The general idea is that $5 to a poor person is much more meaningful than $5 to a rich one. The wealthier one gets, the more taxes one can afford to pay because after payment one will still have a lot more than people below them on the economic scale. The trouble with the Bush tax is that it violates this principle, not totally but certainly by a large degree. The trouble with the Lower Saucon tax is that it is not graduated at all. Rich and poor pay the same percentage of their income. And the trouble with the School tax for the largest part it is on real estate which really has little to do with the ability of the property owner to pay.

Moreover, as my friend Andy Wilt has pointed out almost endlessly, the property assessment system, which is controlled by Northampton County, not the District, is unfair in that it generally it under assesses expensive property and over assesses relatively less expensive property. For reasons known only to the tax assessors, the idea is to bring assessments toward a mathematical mean. Back to school, I say, for the assessors, whose idea of ethics is about as good as their prowess in mathematics.

But enough. All that remains to be said is, if the IRS bounces my taxes back this year, I’m gonna kill myself. The death taxes will not be a factor.