Our OPM Culture

Back in 1969, bureaucrats testified to Congress that 155 high earners had managed to work their tax returns to where they paid no income tax… in one specific year.

Anyone who understands the vagaries of business investing, capital gains and losses, tax loss harvesting, etc, and has even the slightest sense of the depth and complexity of the tax code, along with the countless narrow incentives therein that involve tax deduction or deferral, can easily understand how a particular high-earner can manage to work a return in a single year to a zero-tax-liability point.

Even a simplified tax code, e.g. a deductionless flat tax, would produce such an outcome from time to time. Sell an asset at a massive loss in a year, you offset all your income, end up at zero. Doesn’t mean it happens every year, or even more than one year.

Of course, it works both ways – one can have an extraordinary year, if one sells a singular asset held for a long time, or if one gets a big fat cash bonus for a rare event.

The government has no qualms taxing the bejeezus out of those who have those extraordinary years – progressive taxation hitting the latter (the cash bonus) especially, and they’ll tell us it’s “fair.”

But, stay within the law and get a low- or no-tax outcome one year, despite paying plenty every other year, and suddenly you’re an abomination.

So, in 1969, they enacted the Alternative Minimum Tax, to ensure such abominations were properly soaked. Two tax codes – you pay whichever requires you to pay more. Just to grab a few extra shekels from a trivially small number of taxpayers, and more importantly to make a big scene.

The gag was that they didn’t index the AMT to inflation, so its scope grew from millionaires to a sizable chunk of the population, and it got to where repealing it would make a notable dent in revenue. Thus, the “mission creep” from tagging a few rich people to soaking several million taxpayers became harder and harder to correct. Trump and Congress adjusted the AMT in the Tax Cuts and Jobs Act of 2017, cutting the number affected from 5-7 million down to 200 thousand, but that adjustment expires in 2025, and barring an extension (much dependent on who’s in power, I safely surmise), millions of earners who were not the target of Congressional ire half a century ago will end up getting soaked again.

In short, a bit of rationally dismissible class envy prompted policy that ultimately affected millions not remotely part of the ‘outraging’ class. But, of course, soaking taxpayers is what politicians live for, after all.

Today, the Democrats (note, I don’t say “Congress,” because the Dems have decided the GOP is not to be involved) are wrangling over a gigantic “reconciliation” bill, sometimes dubbed the Build Back Better Act. Widely reported to “cost” $3.5 trillion, the reality is that this estimate relies on various artificial bounds (a 10 year scoring window), and some gimmicks (planned expiration of popular provisions that everyone knows will be renewed), and the true size is estimated from 4.3 to over 5 trillion dollars in new spending. It would represent the largest expansion of government spending in American history, and this comes on the heels of 4 trillion dollars in various COVID-19 relief spending acts.

Whether the Dems get their $3.5T package, or a “mere” $1.5T that Senator Joe Manchin has ceilinged remains to be seen. There’s an internecine conflict between the progressives and the “moderates” (scare quotes because it’s farcical to dub someone willing to tack on $1.5T to the already vast spending of recent years moderate) that will likely produce a bill of lesser scope but also riddled with tricks and maneuvers to game the scoring system and mask the true cost even further, but only an ostrich would dare think that some form of this monstrosity won’t be enacted.

Contained in this bill are myriad changes to the tax code, intended to “pay for” all this spending. I object to the phrase “pay for,” because it implies that the government is an earning entity rather than a leech, but it’s how they describe it. Among those are an expansion of IRS power and funding, purportedly to capture tax cheats, but one of the power expansions is a requirement that banks report, annually, all cash flows in and out of personal and business accounts that exceed a $600 threshold. This has been widely reported as being about individual transactions, but to the best of my investigation, and with the caveat that this bill is still not law and remains fluid, the report is for total annual in and out flows. Nevertheless, it’s a massive intrusion on financial privacy, and while it’s pitched as targeting mega-rich scofflaws, the $600 threshold is a tell-tale.

Why, if it’s about catching big-buck tax dodgers, is the annual cashflow minimum such a trivially small number? Anyone who works for a living, even part time, even a couple weeks a year, will trigger the reporting requirement. In other words, this reporting requirement will provide the IRS with pretty much every American’s cash flow.

It’s likely, I surmise, to be used for auditing rank-and-file Americans, who far outnumber the purportedly tax-cheat millionaires that our current, massive, over-bloated, spendthrift, bottomless-pit-of-money government hasn’t brought to heel… because it doesn’t have enough money to do so? While, say, garage sale proceeds are not taxable, might not such reporting coupled with a good haul from a decade’s worth of spring cleaning trigger an audit? Audits can feel like domestic terrorism to an average citizen, and an emboldened IRS might have no qualms about shaking down settlements from the working masses the way local governments have no qualms piling fines and fees on those same citizens, simply because it wants ever more and more money.

I won’t go into all the other tax code changes, other than to note that they disproportionately burden high earners, who already carry the heaviest share of tax burden (it bears repeating, nay, screaming, that America’s tax system is already among the most progressive in the world, and most other countries that proffer social safety net benefits and government funded health care actually tax those who avail themselves of these, rather than “someone else” in order to pay for them), and raises corporate taxes (which ultimately pass through to consumers, but don’t say that too loudly). Lots of hyperbolic “soak the rich because they’re not paying their fair share,” no matter the facts, figures, or realities. Truth doesn’t matter in matters of class warfare.

There are several certainties in such matters. One – government programs always cost more than predicted. Two – government programs never live up to promises or predictions. Three – tax increases never produce the predicted revenue. Four – government spending always precipitates frenzied grabs of Other People’s Money (OPM).

Our nation has morphed into an OPM culture. From the biggest corporations to the most hardscrabble citizens, the attitude of “how can I get a piece of the OPM pie” is increasingly displacing the notion of self-reliance and a work life apart from government involvement. Whether it be by regulation, contracting with the government, subsidies, or direct payments, every economic transaction involves some form of coercive transfer of OPM by the government.

We are, each, limited by the hours in a day and our individual capacities for productivity in our earning power. We can apply a modest multiplier to our earning power with passive forms of income (i.e. investing) and the power of compound interest. But, when it comes to OPM, the limits fall away. A well-timed political contribution of thousands of dollars can translate into a contract of tens or hundreds of millions of dollars. A vote for the right politician, costing nothing more than transportation to a polling site, can translate into a lifetime of government largesse, on someone else’s dime. In short, OPM is easier, by far, than simply earning a living, and made even easier as earning is made harder by the same government that is insatiably obsessed with OPM.