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May 3, 2010
Taxes, Spending, Politics, and a Shelf Project Idea

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By Kip Dellinger

Kip Dellinger is a CPA in Santa Monica, Calif. He is a former chair of the American Insitute of Certified Public Accountants Tax Division Practice Responsibilities Committee and writes and teaches in the areas of tax practice quality control and tax practice conduct standards and ethics.

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This is the first of what will hopefully be many articles in this column. Some will endeavor to provide counterpoint to my more liberal friends, others may address what I believe to be legitimate criticisms of the manner in which our federal tax system is administered, and some may take exception to how the tax profession views issues or address the conduct tax professionals engage in. Others will point out the perspective of the much larger tax professional community that prepares vast numbers of tax returns but whose members do not make up the regular readership of Tax Notes. The interests of these tax practitioners do not always coincide with those of the country's largest law and CPA firm tax practitioners, or of their clients.

It is anticipated that some feathers will get ruffled along the way, and I hope we may generate some worthwhile conversations about important tax practice and policy issues. Some Tax Notes authors would have us believe they and their suggestions are "above" politics. This writer believes that is nonsense, because policies are always limited by political reality — or politics always impose limitations on what might otherwise be good policy. And while many of us will easily agree on what is good policy, there will be many instances when we don't because our values differ. And in the political arena, values define our choices. When values come into play, arguments cannot be settled by the simple process of resolution through discussion or debate, because few, if any, change their values based on debate.

Prof. Calvin H. Johnson serves as the coordinator for the Shelf Project, which is described as a collaboration among tax professionals to develop and perfect proposals to serve Congress when it is ready to raise revenue.1 In a recent column, Johnson told readers: "Congress faces a revenue crisis because government receipts are at 13.4 percent of GDP and long-term projections for government spending are at 22.4 percent of GDP, which implies an increase in necessary revenue on the order of 168 percent of current yields. Provisions that are politically impossible in ordinary times will become political necessities in an impending revenue crisis."2

Note that government spending at 22.4 percent of GDP is simply accepted as unchangeable3 and revenues must simply catch up to spending. Note as well that catching up is to the Shelf Project simply a matter of raising taxes. If the collaborators argue that "our objective is only to identify revenue sources," then it seems perfectly acceptable for others to suggest that perhaps — just perhaps — the beast of federal government has exceeded its bounds. That's much of what the tinkling of teacups is about.

Another columnist for Tax Notes, my friend David Cay Johnston,4 similarly couches his arguments for both more and fairer taxes in terms that indicate that government spending is not the problem; it's just more taxes we need, and we need to get them from the rich.5 This idea that there is some monolithic group of the rich in America is misleading. First, the income quintiles often cited by Johnston and others are just that — income quintiles. They may or may not inform us about wealth. The wealthy may or may not earn oodles of income, and the many high-income earners may or may not be wealthy.6 And those income quintiles can be very deceiving. This writer has visited each of them more than once during a long professional career, with positions that ranged from sole practitioner to staff member and partner at CPA firms of just about every size — national on down. What do they tell us about being rich? Nothing.

Moreover, we hear from groups like United for a Fair Economy7 (see most recently Tax Notes, Apr. 12, 2010, p. 147, Doc 2010-7607, or 2010 TNT 66-2) that households earning more than $180,000 a year should pay more taxes (as opposed to the $250,000 income threshold repeatedly referred to by President Obama during the 2008 presidential campaign). Apparently this group is oblivious to the fact that a huge number of these households are in cities like New York, San Francisco, Chicago, Los Angeles, and Washington, where $180,000 gets an overpriced (yes, still today) house or nice apartment (nothing upscale), isn't enough to avoid public schools for the children, and leaves nothing to be saved.

Also, there's a big difference in disposable income at the million-a-year range compared with $180,000 (or $250,000), no matter where earned.8 A senior school administrator in Los Angeles married to a member of senior management in the police department reach that income level. Senior? Oh, my. Does movement up and down those income quintiles have something to do with age and experience?

Warren Buffett's preening about tax increases is most amusing. He and Bill Gates's father are stumping for the reintroduction of the estate tax. They argue that the opportunity to be here in the United States creates an obligation to pay the country back. However, although Buffett makes these suggestions, he doesn't much trust the government to spend his fortune. Instead the Sage of Omaha is reportedly giving all his wealth to Gates's charitable foundation, which actually spends a ton of money not in Omaha, Peoria, Portland, or Albuquerque, but in foreign countries. So much for Buffett's principled argument about one's duty to America. One wonders as well if he would support a revision to any prospective estate tax regime to impose the income tax deductions limitations to estates.9

Hopefully this column will be appreciated by at least some who believe it is unjust10 that an ever-smaller proportion of working American taxpayers are (1) supporting almost 50 percent of the working population that do not pay income taxes with a variety of income and tax credit supplemental benefits, and (2) supporting a disproportionate, growing number of government employees who make more than those who hold similar jobs in the private sector, while also receiving far superior retirement and fringe benefits. Yes, private-sector workers do pay taxes, but if that federal bureaucrat earns $67,000 plus the present value benefits of another $20,000 a year, the excess of her own tax payments into the system has to come from somewhere — and that is taxpayers in the private sector.

It is, of course, easy to see where the country is headed. Just look at California and Michigan for a real-life mock-up of the federal system a few short years down the line. These are two states loaded with politicians and voters who insist on unsustainable spending and tax policies because it is morally right. Of course, in many cases, "morally right" is simply code for favoring preferred (or prospective) voting constituencies to ensure one's right to remain in or attain office.

Now, it is true that if we accept the philosophy underpinning the Shelf Project, the suggested proposals often presented in Johnston's Take, and the redistribution goals of Buffett and those other millionaires who want everyone like them to pay more taxes, we will eventually look just like Sweden, Norway, or France (although we may also suffer the fate of Greece, and soon Spain). But this writer bets that no matter how most Tax Notes readers may feel about those outcomes, the Joe and Jane Six-Packs of the country (union members or not) simply may not be willing to embrace such a future for themselves or their children (you know, public-school-educated kids). Polling and the rattling of teacups seem to suggest unrest even in the face of attempts to buy off the middle class with ever-growing entitlements.11

A Shelf Project Idea

But if we are to have more fairness, higher taxes on the wealthy, and a need for tax revenue, why haven't we started at the top — if for no other reason than to ensure integrity in our tax system and demonstrate that we hold our rulers to the same high standards expected of all?

Why not simply enforce the existing tax laws (section 527) regarding political organizations? The press reminds us daily of the enormous sums of money that flow through the hands of political organizations and participants.

Some may be certain to remind us that oversight of political participants is regulated by the Federal Election Commission and corresponding state organizations. That ignores those section 527 organizations that fall out of their respective jurisdictions. It also ignores the fact that these political enforcement bodies were largely neutered at conception, and it specifically ignores the fact that standalone tax law exists under section 527 (and similar state statutes) and it must exist for a reason.

Viewed from any reasonable perspective, the IRS appears reluctant, if not terrified, to engage in enforcement initiatives with regard to the country's political class. Section 527 and the regulations12 require expenditures of political organizations that are not incurred in advancement of the political objectives or purposes of the organization to be taxed to the individual beneficiary of the expenditure regardless of who that individual is.

An examination initiative geared toward sitting politicians and political organizations across the country at all levels of government will surely lead to discovery of other untoward tax behavior, including slush funds and legal defense funds that violate the spirit and intent of the statute.

Of course, this idea raises three questions: (1) Why aren't the tax authorities ensuring the integrity of these expenditures, organizations, and individual participants? (2) Is it because the tax authorities are afraid to bite the hand that feeds them?13 (3) Why haven't we addressed these issues prominently and frequently in Tax Notes?

It's not too late to start answering them.


While the project is characterized as a collaboration and the associated tax professionals were once named to great fanfare by Johnson in the introductory article (see Tax Notes, Dec. 10, 2007, p. 1077, Doc 2007-22632, or 2007 TNT 238-37, it appears that the overwhelming majority of suggestions are those solely of the professor with some input from others (the collaborators, one presumes).

2 See Johnson, "Common Trust Funds: The Living Fossil of Passthroughs," Tax Notes, Apr. 5, 2010, p. 103, Doc 2010-5540, or 2010 TNT 66-4.

3 Actually, it is probably the low watermark before a tsunami of future deficits if one looks at the current administration's spending goals coupled with the kleptocrats in control of Congress. It seems that those who populate the pages of Tax Notes generally accept as an article of faith the growth of government as virtuous and, therefore, also the taxes that spending supports.

4 This writer cherishes his inscriptions on my copies of each of his books — Perfectly Legal and Free Lunch.

5 Ironically, in a recent column, Johnston attacks a conservative commentator for glib comments only a few paragraphs after Johnston himself glibly attacks Karl Rove — albeit, one man's seriousness may be another's glibness. The same column also condemns out-of-control budgets and spending during the administrations of George Bush, George W. Bush, and Ronald Reagan, while extolling the budget balancing and spending policies of the Clinton administration. Admittedly, Bush II and the Republican House and Senate were profligate spenders (in some respects to overcome the Clinton recession and, shortly thereafter, the negative economic impact of September 11), and they were voted out of the majority. Strangely, however, Johnston does not address the fact that Bush I and Reagan faced spend, spend, spend Democratic majorities in Congress most of their terms. Congress, as well, in return for tax increases, promised Reagan spending cuts that never took place. Clinton on the other hand, was disciplined by a Republican Congress and was blessedly fortunate his healthcare monstrosity failed.

6 Of course, the tax-and-spend crowd would like to punish the success of both.

7 Self-described as a group comprised of liberal millionaires.

8 Readers might also refer to Alan Reynolds's "The Rich Can't Pay for ObamaCare," The Wall Street Journal, Mar. 30, 2010 and, particularly to his discussion of the economic axiom "the elasticity of taxable income."

9 One might also wonder how much of a fan of the estate tax Buffett would be if the estate tax charitable contribution were capped at, for example, 30 percent. After all, for all his preaching about taxes, he hasn't — to anyone's knowledge — made voluntary contributions to the treasury. And Berkshire Hathaway, the engine of his wealth is not so pure that it doesn't have any uncertain tax positions lurking on its consolidated financial statements. One problem with the repeal of the estate tax is that the Republican majority did an abysmal job of explaining and selling the replacement impact of the carryover basis provisions (and the fact that a sizable portion of any estate was not subject to those taxes, making everyone more equal).

10 And the "they pay social security taxes" argument is a red herring, because the lower-income working population, in fact, receives social insurance coverage for themselves and their dependent children and retirement benefits, as well, associated with those payments.

11 When it comes to taxes and spending, we might all be wise to remember the words of Lord Melbourne, Queen Victoria's first Prime Minister: "What all the wise men promised has not happened, and what all the damned fools predicted has come to pass."

12 Reg. section 1.527-5 is brief and unchanged over many years; in view of the vastly expanded role of money in politics and the revisions to section 527, placing increased enforcement in the hands of IRS, it would be expected that the IRS would revise and expand the regulations.

13 One concern is whether enforcement will come from an agency that, charged with enforcing a new penalty regime enacted in the healthcare bill, immediately began dissembling about whether it is going to be required to hire thousands of folks to enforce the variety of mandates it is responsible for under the legislation.


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