Tax law, according to John Grisham

“Halfway through college, and still drifting, I decided to become a high-powered tax lawyer. The plan was sailing along until I took my first course in tax law. I was stunned by its complexity and lunacy, and I barely passed the course.”

This is why some of my friends make big bucks.  Grisham abandoned tax pronto on his way to writing best sellers.

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Bright and silly lines

Two recent examples in the news prove that drawing reasonable lines in taxation is not child’s play.  New York taxes sliced bagels at 9 percent, as it taxes bagels with cream cheese spread by the seller, and exempts unsliced bagels.  Federal tax on loose cigarette tobacco is about 10 times that on pipe tobacco.

In the New York case, the answer seems to me to be to exempt bagels that are simply sliced.   They are more like a loaf of bread than they are like a sandwich.  More transformation than just slicing, like combining (as with cream cheese) or heating should be required for a change in tax categories.  The answer should definitely not be to create a new category and tax it at 4.5 percent.  Fairness is the enemy of simplicity.

In the tobacco case, I don’t know about the differences in the kinds of tobacco, but roll-your-own smokers are now happy to put pipe tobacco in their cigarettes.  The 10-fold difference is way out of whack, it seems.

This line-drawing comes up all the time.  It produces weird and embarrassing results for those of us who support some kind of taxation, but it’s manageable.

What’s not manageable is different excise tax rates based on hidden characteristics of the purchaser.   No one I know suggests having the rich and poor pay different sales taxes when they buy the same item, like shampoo (we may get some progressivity anyway if the rich buy costlier stuff).  But some proponents of medical marijuana contend that when marijuana is legalized for all, medical users should pay no or less tax.  That would be weird.

When smokers draft the marijuana laws

(For a more comprehensive discussion of this issue, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.)

The process of initiative and referendum that California and other, mostly Western, States use is a weak instrument for creating a new system of taxation and regulation .

California’s Proposition 19 reflects the wishes of the powerful forces in the marijuana community.  For instance, it doesn’t even tax marijuana:  it allows localities to tax or not tax.

This one-sided drafting is a recipe for backlash.  In a deliberative process, by contrast, if marijuana becomes legal, opponents of marijuana won’t necessarily be convinced it’s OK, but some of them may cut a deal if they see enough benefit from the revenue gain.

The American way of the Founders is not the victory of one faction over another, but accommodation.  Meaningful taxation of marijuana is the middle ground we may get to one day.

Proposition 19’s  revenue is so speculative and ephemeral that even if it passes, all the tax thinking remains to be done.

Why we can’t raise taxes

Mr. Rangel, lauded here in a previous post, is an example of the reason people don’t want to pay taxes.  He treated himself better than most people could treat themselves, thanks to the power of his office.  His success came thanks also to his friendliness and love for people, to be sure, but he broke the rules.

So people distrust their representatives who write Federal tax laws and want to keep their power down.

Our work is cut out for us.  The Democrats could gain a lot of credibility by trying Mr. Rangel and voting against him not on friendship but on the merits.

Reaping what we sow

As the public resists taxation,  end games for our democracy are foreseeable, though the timing is beyond me.  The military leads the list of institutions that Americans have confidence in (76 percent) followed by small business (66 percent) and the police (59 percent).  The Presidency and the Supreme Court tie at 36 percent, while Congress brings up the rear with 11 percent.  http://www.gallup.com/poll/141512/congress-ranks-last-confidence-institutions.aspx

So here’s the result: eventually unable to borrow and still unable to tax, States and the Feds cut spending to the point where passable roadways, crime-free neighborhoods, and then clean water go missing.  The military steps in for the benefit of the public.  The Constitution is suspended.  The military takes what assets it needs to fund a government.  Police units help out.

Another end game is conflict with China as we renege on our debts, maybe by fast or slow devaluation.  The military will need all the confidence it can get in that scenario, too.

I’m for balancing the budget, like many Republicans from the middle of the 20th century were.

Some arguments against medical marijuana

[An updated version appears as part of http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.]

While marijuana helps some people with illness, I am very wary of exemptions, lower rates, or special rules for marijuana when it’s said to be medicinal.  No proscription, no prescription.

First, any special rule puts the government in charge of making decisions about individual people.  The government can distinguish, however awkwardly, among substances, so as to tax wine with an alcohol content of 13.9 percent at a lower rate than wine with an alcohol content of 14.0 percent.  But putting human beings into categories can be more difficult.  To be sure, there are easy cases, like the extra Federal tax exemption for individuals 65 and over (you just produce that birth certificate or otherwise prove your birth date as Mr. Obama has done to the satisfaction of most).  But even the extra tax exemption for blindness on the Form 1040 creates a regulatory tangle and even a few disputes.  Deciding whether someone has some ailment as subjective as chronic pain is a task that I hate to see government taking on.  Folks who are distrustful of government ought to be especially careful about this kind of official categorization of individuals.

Second, any special rule rewards hypocrisy with a special right. Folks who pretend to be sick get something that honest folks won’t allow themselves to get.

Third, providing even any perceived benefit, even a placebo, to folks who say they are sick encourages people to think of themselves as victims.  (The argument back is that we all may have chronic pain in our souls: it’s the human condition.)  Having people think of themselves as victims has a positive aspect:  it encourages them to seek help (and it encourages others to try to get them help).  But such thinking tends to weaken the thinker.

Fourth, any special rule adds complexity.

Finally, any special rule diminishes the tax base.

Rand estimates of marijuana legalization

A new Rand corporation study, “Altered State?  Assessing How Marijuana Legalization in California Could Influence Marijuana Consumption and Public Budgets,” estimates revenue from the California proposals.  http://www.rand.org/pubs/occasional_papers/2010/RAND_OP315.pdf

It’s quite elaborate.  I’m working through it, but it seems to do a good job of spotting the issues.

A couple of quick reactions:

The uncertainty in Rand’s conclusions makes the case for having the State be the sole retailer (and maybe having the State own the whole supply chain).  Rand finds it hard to estimate elasticities and can’t pin down bootleggers’ reactions or even current price.  Setting a tax rate too firmly fixes a probably incorrect rate in place.  So following the lottery model, where the State can adjust prices quickly, looks appealing.

Their analysis makes the case for measuring potency and taxing on the basis of it.  First, they note the incentive, long noted on this blog, that a per-ounce tax gives to produce more intoxicating cannabis.  But second, there’s more to it.  Measuring potency officially by the State will give consumers certainty about what they are getting.  Bootleggers can’t supply that certainty.  Folks will pay a premium for it.

The imprecise statement that potency testing will cost $100 per test needs elaboration.  The cost must include fixed and variable costs, and they need to be stated.

Still, this is the most thorough and serious look at revenue I’ve seen.  And I’ve just started to study it.