The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (39 page)

The key to understanding how to eliminate time and money wasted in preparing taxes is to remember that taxpayers fall into two broad groups: those who itemize deductions and those who do not. About one in three taxpayers, generally the more affluent and rich, fills out lengthy tax returns in which they get to deduct charitable gifts, mortgage interest,
property taxes, exceptionally large medical bills and, in some cases, a wide array of other expenses, down to dry cleaning of uniforms. The majority of taxpayers only get the standard deduction plus an exemption for themselves, their spouses and any dependents. It’s the two-thirds for whom the make-work of filing tax returns could easily be eliminated.

A ReadyReturn experiment began in 2005 when the state of California sent completed tax returns to fifty thousand people. All of these people were wage-earning singles. All they had to do to file their state income tax returns was sign the forms and mail them back.

These completed tax returns were sent with no public announcement, no campaign to alert people and no advance letters that the finished forms would be arriving. Some of those who got the completed tax forms thought it was a scam and threw them away. Half of those who received the completed California tax returns did not even respond, which at first suggested they were not interested. Research later showed that most of these people had already filed their tax returns.

Among those who had not yet filed, more than half signed the returns and sent them in. It involved no cost, no aggravation and only the time required to sign and date the form, then pop it into an envelope.

How did the state know how to fill out the forms? Therein lies the reason why, for most people, completing a tax return is make-work. Federal and state law already requires employers to report how much they pay workers and how much tax is withheld from paychecks. For the two-thirds of taxpayers who do not itemize, all the government needs from taxpayers is their marital status, dependents’ names, and Social Security numbers. They already have the rest of the data.

California ReadyReturn was limited at the start in 2005 to singles. That made the pilot as simple as possible to both execute and evaluate. Those chosen to get prepared returns had only wage income and listed themselves as unmarried on their previous tax return. Excluding married couples and heads of households eliminated the need for any adjustments for newborn children or those no longer dependent.

ReadyReturn also allowed people to adjust their income up or down in case they made some money that was not reported or was less than their employers told the state. How many people used this feature indicated how accurate the ReadyReturns were. Just 4 percent of ReadyReturn users made adjustments. That low number suggests strongly that the returns were highly accurate. Further, it indicated that, as time passes and the system is refined, the tiny number of ReadyReturns requiring adjustments would shrink even more.

The advent of ReadyReturn made some interested parties very nervous. Intuit, for example, wanted to kill ReadyReturn, and spent at least $3.4 million making its case in lobbying expenses and in campaign donations to more than a hundred politicians just in California. It has also worked hard against such ideas in other states, including Virginia, where it persuaded lawmakers to vote for Intuit and against the constituents by keeping mandatory tax return filing.

But the best measure of its determination to get rid of ReadyReturn came in 2006, when Intuit gave a million dollars to support a single California state legislator who pledged eternal fealty to forced tax filing, which meant to Intuit’s profits. The huge donation went not to the candidate, but to a group supporting Republican state senator Tony Strickland. The indirect contribution helped obscure support for Strickland, who was running in 2010 for state controller against the incumbent, Democrat John Chiang. Strickland’s campaign spokesman, Michael Levoff, wrote to
Tax Notes
magazine, “Tony has been against it from day one, and always will” be against ReadyReturn.

Strickland, who lost that race, was at the time the California leader of the Club for Growth, a Washington antitax group that says it favors significantly reducing tax burdens (though, obviously, not the burden of filing or the cost savings it would produce). The Club for Growth raises money to defeat Republicans it considers weak on fighting for lower taxes, especially on investors and business owners.

ReadyReturn is also opposed by the National Taxpayers Union, which poses as a friend of taxpayers but, in this case, has befriended the tax preparation industry. The National Taxpayers Union dismissed ReadyReturn as “fools’ gold for the taxpayers.” Later it voiced strong support for a proposed federal law that would protect the tax-preparation industry. The bill’s title was dubbed, in classic Washington doublespeak, the Taxpayer Freedom to File Protection Act.

Opponents rely on false statements to make their case against ReadyReturn. Intuit has made nine claims, all of which Dennis Ventry, another professor of tax law, has shown to be untrue. He calls them Intuit’s Nine Lies.

The silliest attack, though, comes from Grover Norquist, president of Americans for Tax Reform. He says ReadyReturn and its online twin, CalFile, violate taxpayer confidentiality. In fact, as Norquist knows, all of the wage, interest, dividend, pension and other income is already reported to the authorities and, since the users are not itemizing deductions, there is no privacy to violate, only pockets to be picked by the
tax-preparation industry. Norquist’s group also pressures Republican politicians and Democrats in swing districts to sign pledges to never raise taxes, a pledge that violates the oath of office taken by members of Congress to make decisions unfettered by any allegiance other than to the Constitution. In 2012, Norquist promoted a new way to replace taxes: universal gambling. He urged Texas lawmakers to expand gambling, ignoring the fact that money government gets from gambling comes from taxing money that the casinos win when players lose.

Instead of ReadyReturn, Intuit has pushed for a system where it and other tax-software companies offer free tax return preparation online for some people. In theory this system covers seven out of ten taxpayers based on income, but that figure depends on the mix of offerings by all of the software firms. Each firm need only cover a smaller portion so long as together their different rules, known as “free file,” are available to 70 percent of taxpayers. Not surprisingly, Intuit’s offering covers a much smaller share than 70 percent of taxpayers.

Anyone who uses Intuit’s free service is bombarded with ads to buy its products, many of which literally offer no value to people filing the simplest tax return, Form 1040EZ. If you thought you might save more than the cost of software by buying it, would you? Many people do. And once people buy TurboTax they are more likely to buy it again and again, as well as the company’s related software, including Quicken electronic banking, and Intuit’s accounting for small businesses, QuickBooks.

Professor Bankman’s idea makes a great deal of sense, both for you and for efficient government. As voters, we should remind Congress that, when it passed the 1998 Taxpayer Protection Act, one of its promises was to make the tax system simpler and to make it easier to pay your income taxes. A national ReadyReturn would accomplish exactly that.

22.
Take a look
at your pay stub. In all but six states, workers will see a deduction for state income taxes. You probably expect that money to finance public schools, the state university and college system, law enforcement and the other services that businesses and individuals rely on. Mostly it does, but in a growing number of states, your state income taxes will also be increasing the profits of your employer.

You read that right. Many employers in nineteen states can now keep state income taxes withheld from paychecks. General Electric, Goldman Sachs and Procter & Gamble have these deals, along with a host of foreign firms from the German computer maker Siemens to the Swedish appliance maker Electrolux and a host of Canadian, European and Japanese banks. In all more than 2,700 companies get to pocket the state income taxes withheld from some of their workers’ paychecks.

In Illinois, for example, six big companies made deals with the state to pocket half or all of the state income taxes paid by their workers over ten years. Ford got a deal in 2007 by threatening to close an automobile assembly plant. In 2009, when the economy was in the worst shape in eight decades, Chrysler and Mitsubishi used threats of assembly plant closings to get similar deals.

In 2011, three more companies threatened to move out of Illinois. The state paid them off by letting them keep all the taxes withheld from their workers’ paychecks for ten years. The German tire maker Continental will
pocket $22 million of its workers’ taxes, about a tenth of what it invested to modernize a tire plant in poverty-stricken southern Illinois, retaining 2,500 jobs and creating 444 more. Navistar, maker of big diesel trucks for industry and the military, threatened to go to Alabama or maybe Iowa. In return for staying put, Navistar will pocket almost $65 million.

The big winner, though, was Motorola Mobility, the cell phone maker. Just for promising not to move out of state and take three thousand jobs with it, Motorola gets to siphon $136 million from the paychecks of its well-paid high-tech workers. As if to make this transaction all the more interesting, Motorola Mobility agreed to be acquired by Google soon after the state made the big tax deal. The Motorola board then paid its CEO, Sanjay Jha, to go away. He received $66 million. Thus, Illinois taxpayers underwrote his golden parachute, which amounted to roughly half the value of the worker taxes flowing to Google.

Google hardly needs a subsidy from Illinois taxpayers. It dominates the worldwide search engine and advertising business. Its founders, Larry Page and Sergey Brin, are each worth more than $15 billion. Monopoly profits are the key to such fortunes and oversize toys: at a Capitol Hill hearing in September 2011, Senator Herb Kohl of Wisconsin asked if Google was effectively a monopoly and Eric Schmidt, Google’s CEO, acknowledged, “We’re in that area.”

If you work for one of the above companies in Illinois, you probably have not heard that your employer is keeping the state taxes taken out of your check. The diversion is stealthy by design. No law requires the companies to notify the workers that state income taxes are being diverted. The state treats you as having paid your taxes even though it never got the money.

The few news reports about these deals, most of them scanty and vague, often characterize this pilfering of worker taxes as a public benefit that creates or saves jobs. The reality is that companies getting such benefits can actually negotiate to destroy jobs, as Navistar did. It can fire up to 900 of its 3,100 headquarters workers and still keep the taxes its remaining workers pay.

What economic argument justifies letting companies take taxes withheld from paychecks, much less companies that plan mass layoffs? In return for pocketing the taxes the companies agreed not to destroy even more jobs. Think of it as antipink slip blackmail. And like most blackmail arrangements, you never hear about them even when they happen in your neighborhood.

Warren Ribley, the director of the Illinois Department of Commerce
and Economic Opportunity, told me “it’s a fair question” as to whether taxpayers should be subsidizing businesses. But he said that was the duty of elected leaders, and that the public should debate the issue; assessing the pros and cons was not part of his job description.

“In the meantime,” Ribley said, “I am out there competing every single day with states and countries across the entire globe. I have got to have the tools and I have to use the tools provided by the General Assembly,” as the Illinois legislature is formally known.

State representative Jack Franks, a Democrat from the northern end of Illinois, said the deals “are fundamentally unfair” to taxpayers and other companies. He pushed to get copies of the contracts, which Ribley’s office eventually turned over. Once Franks read the contracts he became incensed. He realized that some of the six companies made deals allowing them to fire workers en masse and yet pocket tax dollars. “Our current governor,” he said, referring to fellow Democrat Pat Quinn, “had the genius idea of giving to Motorola and Navistar and others…yet he is allowing Navistar to fire up to twenty-five percent of their workforce and still get millions from the state” by pocketing taxes withheld from their workers’ paychecks. “People should be outraged,” he said.

Why would states do this? The answer is that this is the only remaining way to funnel taxpayer money to big companies without writing them checks. The biggest companies already pay little or no state income tax, thanks to friendly legislators ever grateful for campaign contributions. In Connecticut, home to about forty companies with a billion dollars or more of annual revenue (among them General Electric), only one large company paid more than a million dollars in state corporate income tax in 2003, the latest year for which the state has released such data. In Wisconsin, multibillion-dollar giants like the family-owned company SC Johnson, maker of Raid bug spray and Ziploc bags, have not paid Wisconsin income taxes in years. We know that because of an unusual Wisconsin law that, for a $4 fee, permits any state resident to get a report that discloses how much tax a corporation paid the state.

This is, of course, perfectly legal. Legislatures pass laws that let national and multinational companies pay, through a host of techniques, little or no state income tax. One of the most common is the same technique used by multinational companies to convert profits earned in America into tax-deductible expenses.