The Loophole Artist
December 29, 2010 12:00 PM Subscribe
Jonathan Blattmachr, one of the country's leading estates and trusts experts, feels that helping his clients reduce their tax liability helps the IRS close loopholes that he and his colleagues use. As with most attorneys, there are some clients who weren't happy with his work, but Mr. Blattmachr pushes on with his efforts.
Pepsi Legal
posted by T.D. Strange at 12:47 PM on December 29, 2010
posted by T.D. Strange at 12:47 PM on December 29, 2010
''Many lawyers . . . are often bewildered when trying to foresee what the full impact of implementing certain actions will be,'' Blattmachr once wrote. ''I have found that those who have studied mathematics can approach and master both the legal principles and their effect in a way which most others cannot.''
This is what happens when people like me get into tax law instead of, say, roleplaying games.
posted by kaibutsu at 12:49 PM on December 29, 2010 [2 favorites]
This is what happens when people like me get into tax law instead of, say, roleplaying games.
posted by kaibutsu at 12:49 PM on December 29, 2010 [2 favorites]
This is what happens when people like me get into tax law instead of, say, roleplaying games.
Jonathan Blattmachr, Tax Munchkin.
posted by Faint of Butt at 1:04 PM on December 29, 2010 [4 favorites]
Jonathan Blattmachr, Tax Munchkin.
posted by Faint of Butt at 1:04 PM on December 29, 2010 [4 favorites]
At level 20, they gain the ability to draw The Bottom Line. Anyone stepping over it is totaled.
posted by Malor at 1:07 PM on December 29, 2010 [2 favorites]
posted by Malor at 1:07 PM on December 29, 2010 [2 favorites]
This is what happens when people like me get into tax law instead of, say, roleplaying games.
"Sorry to tell you this but... you really rolled a one this year"
posted by fuq at 1:10 PM on December 29, 2010 [2 favorites]
"Sorry to tell you this but... you really rolled a one this year"
posted by fuq at 1:10 PM on December 29, 2010 [2 favorites]
For most people under the top 20%, "arranging your affairs that your taxes shall be as low as possible" requires spending more money than you would have paid in taxes. I try to arrange my affairs that all my expenses shall be as low as possible. There is certainly no patriotic duty to give money to corporations whose business plan involves overpricing.
posted by oneswellfoop at 1:13 PM on December 29, 2010 [3 favorites]
posted by oneswellfoop at 1:13 PM on December 29, 2010 [3 favorites]
The way I see it, there are things people should really be able to do to reduce their tax burden because as a society we see those things as pro-social and this view has been codified in the tax laws. That's not wrong. If there are things you can do to reduce your tax burden that are not intentional, then the government needs to keep up with this and the laws and regs should be updated accordingly. But if a certain behavior gets tax-favorable treatment, I think that it's really counterproductive to tell people they shouldn't engage in it because it gets tax favorable treatment. That's the whole point of having all these exclusions and exemptions and deductions and whatnot. If the system keeps up, then this guy's job is basically just to optimize his clients' behavior for the benefit of themselves *and* society, and I think that's a pretty cool thing.
If the government side is broken at present, well, we just need to get on fixing that.
posted by gracedissolved at 1:35 PM on December 29, 2010
If the government side is broken at present, well, we just need to get on fixing that.
posted by gracedissolved at 1:35 PM on December 29, 2010
there is not even a patriotic duty to increase one's taxes
This is primarily a marketing problem. By far the loudest voices talking about tax are the voices of those selfishly complaining about the amount of it, often about the existence of tax at all. Tax is your contribution to society, that you pay in exchange for receiving the opportunities and protection that society gives you. The more such opportunities and protection you have received, the more you can contribute, and in turn, the more you should contribute.
Secondarily, optimizers optimize, as kaibutsu points out. Tax law is always to some extent going to be optimizable, but its proliferation and complication is so ridiculously over-the-top that these attempts at optimizing it, and lobbying to make it optimizable, have seriously compromised the integrity of the system (and greatly bolster the whining of the complainers). It needs to be drastically simplified.
Were I to write tax law with a view to making it as un-optimizable and fair as possible, I would choose a transaction tax, ie every time money moves from one bank account to another, or between cash and numbers in a bank, one percent of that money should go to tax. This also functions as a sales tax, ie every time goods or services are purchased through a bank transaction, one percent of the price is remitted in tax. The more active the economy, and the wealthier the participants in it, the more money is taxed. This is of course open to the criticism of all flat taxes, that they strike the poor more harshly; but I would argue firstly that the poor make far more use of the cash economy, which under this model goes untaxed (perhaps this could be addressed with time-limited money, ie money printed with a date of 2010 is legal tender only in 2010, and must be banked by mid 2011 or its value is lost), and secondly that the proper way to address that is in the use of tax, ie taking the tax and using it to benefit the poor in various ways, so that despite their poverty people always have their basic needs met (funding a system that provides food, shelter, clothing and medical care), and have the opportunity to be educated, and time to make use of that opportunity. One of the worst poverty traps is long hours at low pay, which gives a person much less time to learn skills and/or run part-time businesses and so get out of poverty.
oneswellfoop I try to arrange my affairs that all my expenses shall be as low as possible. There is certainly no patriotic duty to give money to corporations whose business plan involves overpricing.
An excellent point that deserves emphasis and repetition. Because taxes are so reviled, the situation has gotten to the point that scammers of various kinds are able to convince people to give money to them rather than the tax department. Negative gearing counts to an extent, although it is offset by the theoretical purchasing of an asset, that asset has still been overpriced; its tax-deduction nature is accounted for in the price. They charge you more for it, because you bought it to avoid paying tax.
posted by aeschenkarnos at 1:58 PM on December 29, 2010 [3 favorites]
This is primarily a marketing problem. By far the loudest voices talking about tax are the voices of those selfishly complaining about the amount of it, often about the existence of tax at all. Tax is your contribution to society, that you pay in exchange for receiving the opportunities and protection that society gives you. The more such opportunities and protection you have received, the more you can contribute, and in turn, the more you should contribute.
Secondarily, optimizers optimize, as kaibutsu points out. Tax law is always to some extent going to be optimizable, but its proliferation and complication is so ridiculously over-the-top that these attempts at optimizing it, and lobbying to make it optimizable, have seriously compromised the integrity of the system (and greatly bolster the whining of the complainers). It needs to be drastically simplified.
Were I to write tax law with a view to making it as un-optimizable and fair as possible, I would choose a transaction tax, ie every time money moves from one bank account to another, or between cash and numbers in a bank, one percent of that money should go to tax. This also functions as a sales tax, ie every time goods or services are purchased through a bank transaction, one percent of the price is remitted in tax. The more active the economy, and the wealthier the participants in it, the more money is taxed. This is of course open to the criticism of all flat taxes, that they strike the poor more harshly; but I would argue firstly that the poor make far more use of the cash economy, which under this model goes untaxed (perhaps this could be addressed with time-limited money, ie money printed with a date of 2010 is legal tender only in 2010, and must be banked by mid 2011 or its value is lost), and secondly that the proper way to address that is in the use of tax, ie taking the tax and using it to benefit the poor in various ways, so that despite their poverty people always have their basic needs met (funding a system that provides food, shelter, clothing and medical care), and have the opportunity to be educated, and time to make use of that opportunity. One of the worst poverty traps is long hours at low pay, which gives a person much less time to learn skills and/or run part-time businesses and so get out of poverty.
oneswellfoop I try to arrange my affairs that all my expenses shall be as low as possible. There is certainly no patriotic duty to give money to corporations whose business plan involves overpricing.
An excellent point that deserves emphasis and repetition. Because taxes are so reviled, the situation has gotten to the point that scammers of various kinds are able to convince people to give money to them rather than the tax department. Negative gearing counts to an extent, although it is offset by the theoretical purchasing of an asset, that asset has still been overpriced; its tax-deduction nature is accounted for in the price. They charge you more for it, because you bought it to avoid paying tax.
posted by aeschenkarnos at 1:58 PM on December 29, 2010 [3 favorites]
"Negative gearing counts to an extent, although it is offset by the theoretical purchasing of an asset, that asset has still been overpriced; its tax-deduction nature is accounted for in the price. They charge you more for it, because you bought it to avoid paying tax."
For example, if the mortgage interest deduction were to disappear on Jan 1, home prices would drop dramatically, because the tax deduction has been factored into the price.
posted by etherist at 2:39 PM on December 29, 2010
For example, if the mortgage interest deduction were to disappear on Jan 1, home prices would drop dramatically, because the tax deduction has been factored into the price.
posted by etherist at 2:39 PM on December 29, 2010
Were I to write tax law with a view to making it as un-optimizable and fair as possible, I would choose a transaction tax, ie every time money moves from one bank account to another, or between cash and numbers in a bank, one percent of that money should go to tax.
I believe what you are doing here is building inflation into the system. I don't think that's a good thing.
BTW - There is a chain letter going around that claims the Obama administration is considering this. The Obama administration has barely even heard of it.
posted by It's Never Lurgi at 2:41 PM on December 29, 2010
I believe what you are doing here is building inflation into the system. I don't think that's a good thing.
BTW - There is a chain letter going around that claims the Obama administration is considering this. The Obama administration has barely even heard of it.
posted by It's Never Lurgi at 2:41 PM on December 29, 2010
I would choose a transaction tax, ie every time money moves from one bank account to another, or between cash and numbers in a bank, one percent of that money should go to tax.
Well, that will switch everyone to being paid in cash and doing all their spending in cash. Was that what you meant to do?
I love the fun game of "how to reform the tax system" - I play it with my wife, a tax accountant, although she tends to roll her eyes a lot. My favourites:
Do a lottery. Work out how much money you want to spend, then randomly select citizens, taking all their money, until you have enough money. The poor won't be so affected - they don't have savings - and the rich generally have resources to earn it back. The very rich will be incentivised to work harder, which because they're productive will be helpful for everyone.
Only tax land. It doesn't go anywhere, so someone has to own it. The poor don't own any. It'll encourage a fair price for food and a good allocation of it. Amusingly I discovered this actually has a history: Physiocrats.
Invade tax havens and loot them. I'm British, so several are nearby (Jersey) or sort-of-British anyway (Caymen Islands). It's short-termist, but it might get us over the baby boomer retirement hump.
posted by alasdair at 3:24 PM on December 29, 2010 [2 favorites]
Well, that will switch everyone to being paid in cash and doing all their spending in cash. Was that what you meant to do?
I love the fun game of "how to reform the tax system" - I play it with my wife, a tax accountant, although she tends to roll her eyes a lot. My favourites:
posted by alasdair at 3:24 PM on December 29, 2010 [2 favorites]
"We don't pay taxes. Only the little people pay taxes..."
Leona Helmsley
posted by yoyo_nyc at 4:09 PM on December 29, 2010
Leona Helmsley
posted by yoyo_nyc at 4:09 PM on December 29, 2010
I would choose a transaction tax, ie every time money moves from one bank account to another, or between cash and numbers in a bank, one percent of that money should go to tax.
This makes a heap of sense to me, and fits with (my) general mental model that transactions are the actual thing government protects. Money and goods don't do anything when they're sitting around, and are more vulnerable to scams, loss, theft, fraud etc. when moved. Government provides the roads, courts, armies, and other services that make it easier to move money and goods around, and that's largely where I think taxes should apply.
It's also the reason the term "double taxation" (as applied to corporate taxes vs. LLCs) has always bothered me. It's not the money that's being taxed "twice", it's each transaction into and out of the corporation.
Well, that will switch everyone to being paid in cash and doing all their spending in cash. Was that what you meant to do?
Sales tax applies to cash purchases.
posted by migurski at 8:09 PM on December 29, 2010
This makes a heap of sense to me, and fits with (my) general mental model that transactions are the actual thing government protects. Money and goods don't do anything when they're sitting around, and are more vulnerable to scams, loss, theft, fraud etc. when moved. Government provides the roads, courts, armies, and other services that make it easier to move money and goods around, and that's largely where I think taxes should apply.
It's also the reason the term "double taxation" (as applied to corporate taxes vs. LLCs) has always bothered me. It's not the money that's being taxed "twice", it's each transaction into and out of the corporation.
Well, that will switch everyone to being paid in cash and doing all their spending in cash. Was that what you meant to do?
Sales tax applies to cash purchases.
posted by migurski at 8:09 PM on December 29, 2010
Read this:
Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich--and Cheat Everybody Else. The system is rigged.
Blattmachr is featured within.
posted by 4midori at 11:06 PM on December 29, 2010
Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich--and Cheat Everybody Else. The system is rigged.
Blattmachr is featured within.
posted by 4midori at 11:06 PM on December 29, 2010
alasdair Well, that will switch everyone to being paid in cash and doing all their spending in cash. Was that what you meant to do?
Yes and no, and it's OK. Cash is entirely appropriate for transactions between individuals on the order of a couple of hundred dollars. Beyond that, it's simply too risky to be carrying large amounts of cash around. And why would you? You're saving yourself one percent. This is only useful if the activity is already illegal and un-launderable; and if the money is laundered in some way, it's now in the tax system.
Under this model if cash is spent at a business, the business owner has to decide whether to bank it or put it in his/her back pocket. If you bank it, you lose a whole one percent. That's ten dollars per thousand. That's a hundred dollars out of ten thousand. It's trivial. One of the major advantages of the transaction tax model is, while the aggregate tax raised is vastly greater, the amount per transaction is so tiny as to barely matter. Depriving the tax department of it is so obviously petty and stupid that even a libertarian would notice.
The tax has to go onto transactions, not just bank transactions. While the overwhelming majority of transactions in a modern economy occur through a bank, or a bank-like entity, if the law said "banks" then it would become in the interests of larger entities to set up internal mechanisms to not use banks. A transaction basically has to be defined as the movement of money, or a record of money, from an account owned by one individual to an account owned by another individual (or corporate person; this is one of the few areas where corporate personhood works against corporations). Setting up joint accounts etc is one obvious workaround but unless a corporation wants to give all of its employees access to all of its payroll account, the wording of the relevant Act could be something along the lines of "the list of owners of account A differs in any way from the list of owners of account B". Which means that larger entities who split their accounts for various purposes, or individual people who like to maintain multiple bank accounts and move money around (which is actually a very good way to get financially organized, which really only applies to rich people, and is part of why they are rich people), get taxed a lot more.
But let's say that for whatever silly reason you as an individual business owner decided not to bank your cash. (Incidentally, EFTPOS, and giving cash out with purchases, is an absolute boon to robbery-prone businesses such as service stations; robbers can really only take cash.) That means you can't record it anywhere else where it shows up as a transaction to another entity. You have to use it to buy stock (from a non-banking stock supplier), pay employees (who don't bank it, and didn't get a payslip for it), pay your personal bills out of it, etc. You're spending $10,000 per month and appear to have an income and assets of zero. That's obvious audit-bait.
There are two very important things that such a tax model does to tax enforcement and compliance. Firstly, it simplifies the auditing process by at least three orders of magnitude. Secondly, it increases the amount of tax coming in. The tax department could fire half of its staff and still do dozens of times as much tax auditing.
More importantly, cash-in-hand doesn't show up in your business's takings and turnover. If you run a business that actually turns over $100,000 per year, with costs of $40,000 per year, and you actually take $40,000 per year as "under the table" cash, you do not have a business that gets you $60,000 per year (and is worth ~$180,000); what you have is a business that gets you $20,000 per year (and is worth ~$60,000, maybe), and that if you ever sold to a person who actually did account for all takings properly, would get you audited.
Walmart isn't going to work on a cash in hand basis. Nor is Borders. Or any other entity that's big enough to use EFTPOS and cash registers. While an entire sector going onto a cash-in-hand basis could reduce the revenue taken in, for any given business it's a very great nuisance for very little gain. It's really not in a serious business's interests to work on a cash basis.
The only people who would be working and living on a cash basis under this system, are a subset of the people who already do.
posted by aeschenkarnos at 12:22 AM on December 30, 2010 [1 favorite]
Yes and no, and it's OK. Cash is entirely appropriate for transactions between individuals on the order of a couple of hundred dollars. Beyond that, it's simply too risky to be carrying large amounts of cash around. And why would you? You're saving yourself one percent. This is only useful if the activity is already illegal and un-launderable; and if the money is laundered in some way, it's now in the tax system.
Under this model if cash is spent at a business, the business owner has to decide whether to bank it or put it in his/her back pocket. If you bank it, you lose a whole one percent. That's ten dollars per thousand. That's a hundred dollars out of ten thousand. It's trivial. One of the major advantages of the transaction tax model is, while the aggregate tax raised is vastly greater, the amount per transaction is so tiny as to barely matter. Depriving the tax department of it is so obviously petty and stupid that even a libertarian would notice.
The tax has to go onto transactions, not just bank transactions. While the overwhelming majority of transactions in a modern economy occur through a bank, or a bank-like entity, if the law said "banks" then it would become in the interests of larger entities to set up internal mechanisms to not use banks. A transaction basically has to be defined as the movement of money, or a record of money, from an account owned by one individual to an account owned by another individual (or corporate person; this is one of the few areas where corporate personhood works against corporations). Setting up joint accounts etc is one obvious workaround but unless a corporation wants to give all of its employees access to all of its payroll account, the wording of the relevant Act could be something along the lines of "the list of owners of account A differs in any way from the list of owners of account B". Which means that larger entities who split their accounts for various purposes, or individual people who like to maintain multiple bank accounts and move money around (which is actually a very good way to get financially organized, which really only applies to rich people, and is part of why they are rich people), get taxed a lot more.
But let's say that for whatever silly reason you as an individual business owner decided not to bank your cash. (Incidentally, EFTPOS, and giving cash out with purchases, is an absolute boon to robbery-prone businesses such as service stations; robbers can really only take cash.) That means you can't record it anywhere else where it shows up as a transaction to another entity. You have to use it to buy stock (from a non-banking stock supplier), pay employees (who don't bank it, and didn't get a payslip for it), pay your personal bills out of it, etc. You're spending $10,000 per month and appear to have an income and assets of zero. That's obvious audit-bait.
There are two very important things that such a tax model does to tax enforcement and compliance. Firstly, it simplifies the auditing process by at least three orders of magnitude. Secondly, it increases the amount of tax coming in. The tax department could fire half of its staff and still do dozens of times as much tax auditing.
More importantly, cash-in-hand doesn't show up in your business's takings and turnover. If you run a business that actually turns over $100,000 per year, with costs of $40,000 per year, and you actually take $40,000 per year as "under the table" cash, you do not have a business that gets you $60,000 per year (and is worth ~$180,000); what you have is a business that gets you $20,000 per year (and is worth ~$60,000, maybe), and that if you ever sold to a person who actually did account for all takings properly, would get you audited.
Walmart isn't going to work on a cash in hand basis. Nor is Borders. Or any other entity that's big enough to use EFTPOS and cash registers. While an entire sector going onto a cash-in-hand basis could reduce the revenue taken in, for any given business it's a very great nuisance for very little gain. It's really not in a serious business's interests to work on a cash basis.
The only people who would be working and living on a cash basis under this system, are a subset of the people who already do.
posted by aeschenkarnos at 12:22 AM on December 30, 2010 [1 favorite]
There are loopholes and there are loopholes. A lot of the tax code is not just oversight, it is bought and paid for. You will find things like, say, tax relief for trusts initiated in the state of Arkansas during the month of August 2008 (I made this up, but such things do exist in the code). Clearly drafted with intent, probably by one of Mr Blattmachr's less high-minded fellows, but good luck trying to find out by whom and for whom and what cost. I have sometimes wondered what I would need to pay to get a private exemption inserted into the tax code.
if the mortgage interest deduction were to disappear on Jan 1, home prices would drop dramatically, because the tax deduction has been factored into the price.
Maybe, maybe not. That deduction is actually a lot less valuable than most people realize, especially as the standard deduction keeps rising. For those who pay AMT, it's pretty much useless - and since most people apparently don't pencil and eraser their own taxes or even sophisticated people don't always know what AMT is, or just how empty that mortgage deduction pot of gold really is. (Time was, not sure if this is still the case, TurboTax would automatically push you into AMT without bothering to explain that you might have the other option if you just cut back on the itemizing. Then too, far too many people appear not to know the difference between a deduction and a credit.)
Imagine, however, that we rid ourselves of cash entirely. Credit and debit cards all around for everything. Suddenly no off the books transactions. Everything accounted for, everything taxed. Probably causes prices to rise and civil libertarians to scream bloody murder, but efficient! Interesting effects as well on the criminal world. (Please don't come back with practical objections. This is a thought experiment only.)
posted by IndigoJones at 8:41 AM on December 30, 2010
if the mortgage interest deduction were to disappear on Jan 1, home prices would drop dramatically, because the tax deduction has been factored into the price.
Maybe, maybe not. That deduction is actually a lot less valuable than most people realize, especially as the standard deduction keeps rising. For those who pay AMT, it's pretty much useless - and since most people apparently don't pencil and eraser their own taxes or even sophisticated people don't always know what AMT is, or just how empty that mortgage deduction pot of gold really is. (Time was, not sure if this is still the case, TurboTax would automatically push you into AMT without bothering to explain that you might have the other option if you just cut back on the itemizing. Then too, far too many people appear not to know the difference between a deduction and a credit.)
Imagine, however, that we rid ourselves of cash entirely. Credit and debit cards all around for everything. Suddenly no off the books transactions. Everything accounted for, everything taxed. Probably causes prices to rise and civil libertarians to scream bloody murder, but efficient! Interesting effects as well on the criminal world. (Please don't come back with practical objections. This is a thought experiment only.)
posted by IndigoJones at 8:41 AM on December 30, 2010
(Not that I have the kind of money that would make a private exemption worthwhile, mind, but as you see, I like to engage in what ifs.)
posted by IndigoJones at 8:43 AM on December 30, 2010
posted by IndigoJones at 8:43 AM on December 30, 2010
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posted by gyc at 12:39 PM on December 29, 2010