Leaning On The Tax Code

The lesson I'm drawing from all of these Obama Administration cabinet nominees with tax troubles is that the relevant Senate committee staffers are the only ones performing audits on people of means:

For starters, the IRS strongly disputes a report this week from the Transactional Records Access Clearinghouse that says audits of the wealthy have fallen off.

The bottom line is that "if you're a millionaire, you're a lot more likely to hear from the IRS than taxpayers in any other income bracket," says agency spokesman Terry Lemons.

Taxpayers who make more than $10 million a year or more have nearly a 10% chance of being audited, he adds.

People with $1 million and up are "clearly are getting more scrutiny," says Benson Goldstein, technical manager at the American Institute of Certified Public Accountants.

TRAC, a research group affiliated with Syracuse University, interpreted agency data to show that the IRS audit rate dropped by at least 19% on the 300,000-plus returns reporting income of more than $1 million between fiscal 2007 and fiscal 2008. The decline reflects IRS "failure to keep its eyes on the ball," TRAC co-director Susan B. Long, also associate professor of managerial statistics at the Martin J. Whitman School of Management at Syracuse University, told Dow Jones Newswires.

The IRS, like many bureaucracies, are large and unwieldy and unlikely to have a dedicated system to shield certain classes of taxpayers from audits. But there is such a thing as a culture, and given the permissiveness from government toward the wealthy and powerful in general, particularly in the past three decades, I will have to side with the TRAC on this debate.

The overarching point is that legislating through the tax code often makes bad policy, and without the IRS as an overseer, individuals and companies can frequently get away with murder.

Thanks to an obscure tax provision, the United States government stands to pay out as much as $8 billion this year to the ten largest paper companies. And get this: even though the money comes from a transportation bill whose manifest intent was to reduce dependence on fossil fuel, paper mills are adding diesel fuel to a process that requires none in order to qualify for the tax credit. In other words, we are paying the industry--handsomely--to use more fossil fuel. "Which is," as a Goldman Sachs report archly noted, the "opposite of what lawmakers likely had in mind when the tax credit was established."

Basically, the process of paper making produces a sludge called "black liquor," which is subsequently used to heat pulp and turn it into paper. To qualify for the alternative energy tax credit, paper companies ADD diesel fuel - which is not needed - in the process, and reap the rewards. This PR flak for International Paper is unapologetic.

Despite the obvious contrivance of the procedure, Wrobleski is unapologetic: "The credit is supposed to encourage the use of green fuel." Sure, I said, but isn't it a bit weird you're now adding diesel fuel to the process in order to take advantage of it? "It is what it is," she said.

Others are less charitable. "You use the toilet every day," said one hedge fund analyst who's been closely following the issue. "Imagine if you could start pouring a little gasoline into the bowl and get fifty cents a gallon every time you flushed."

If you think this is an anomaly, you haven't been paying attention.

Unlike George Bush, who famously said that taxes shouldn't be raised because rich people will just avoid them, I think the goal should be to both simplify the system to reduce the number of deductions and then stringently look at every single return. And as for the constant efforts to encourage or discourage behavior through the tax code, we need to re-think the over-reliance on that technique. We could outright BAN certain fuels instead of messing with the so-called "free market" to make them more or less attractive. We could mandate wind and solar, instead of trying to even out the price with tax credits. It just takes a new perspective.