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Saturday, February 5, 2011

WSJ: Is 1099 Repeal a Controlled Burn of ObamaCare or Uncontrollable Wildfire?

Weekend Wall Street Journal editorial, The 1099 Repudiation: A Revealing Debate Over One of Washington's Dumbest Ideas:

Democrats now claim that the infamous 1099 business reporting mandate that the Senate repealed this week was an accident, as if they were as surprised as everyone else to learn that this destructive provision had crept by itself into law. The truth is that the 1099 rule emerged from the same core ideology as ObamaCare, and its overwhelming repudiation by Democrats may be an important inflection point in the health-care debate.

The 1099 rule is the first of the ballast to go over the side, and Democrats hope that such "improvements" will be enough to ride out the public storm. Then again, they also claimed that voters would learn to love ObamaCare once it had been stuffed through Congress, among many other misjudgments. The political history is revealing and instructive.

Less than a year ago, liberals couldn't see how anyone could possibly object to a rule requiring businesses to file 1099 tax forms with the IRS every time they spent more than $600 with a single vendor. Yes, this would result in a vast new paperwork and accounting burden for 30 million businesses and hit start-ups hardest, not to mention farms, charities and churches. But Democrats saw IRS surveillance of nearly all business-to-business transactions as merely an exercise in good government.

The point was to close the "tax gap," the largely mythological difference between the estimated taxes due under the business tax code and what the IRS actually collects. During the Bush years, Democrats and more than a few Republicans convinced themselves that businesses were cheating the government out of revenues through deliberate under-reporting and various tax shelters. ...

The 1099 ObamaCare footnote thus received no scrutiny at first because it was so mundane. Everyone in Washington agreed that corporations were stealing billions of dollars every year that rightfully belonged to Congress to spend. (The issue only blew up when the IRS's National Taxpayer Advocate Nina Olson, followed by the GOP and the business lobby, made it a priority last summer.) ...

[T]otal repeal sailed through the Senate on Wednesday, 81 to 17. The mystery is the 17 Democrats who continue to think this is a good idea ,,,

The larger political question is whether voters will be satisfied by this or that "improvement" to ObamaCare. The White House is trying to outflank public opposition with a controlled burn, but wildfires often move in surprising and unmanageable directions.

For a contrary view, see Linda Beale (Wayne State), More on Tax Information Reporting by Third Parties:

I’m more and more convinced that it is not the deficit that the Republicans hollering for “entitlement reform” care about–it is that they just simply want to destroy all of the things that the New Deal did to provide a safety net for ordinary people, while making sure that they reinstate brute-force capitalism like existed in the 1920s, back when Teddy Roosevelt made his famous statement about the corporate titans and malefactors of great wealth.

For rejoinders, see:

http://taxprof.typepad.com/taxprof_blog/2011/02/wsj-is-1099-repeal-.html

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Comments

The 1099 reporting requirement was first proposed by Treasury during the GW Bush administration.

Posted by: Bob | Feb 5, 2011 7:11:03 PM

99% of individuals who receive W-2's report their income accurately.
90% of individuals who receive 1099's report their income accurately.
Individuals who receive do not receive a W-2 or 1099 (any form of information reporting) report their income accurately less than 50% of the time.

So 1099's and information reporting = less cheaters and more revenue collected. Less cheaters and more revenue collected = lowering the tax gap.

The tax gap is not a "myth" it is a fact. If the tax gap did not exist, and everyone reported and paid their income properly, there would be no need for Revenue Agents or Revenue Officers. The very fact that the IRS determines deficiencies and that far more than 1 are sustained is irrefutable evidence of the tax gap.

I do not understand this "let cheaters prosper" mentality. On top of that, Feds have to endure a pay freeze, the rich get billions of dollars in extended tax cuts, and lets not have information reporting that will keep people honest. This is so ridiculously backwards that I will stop my rant and rely on res ipsa loquitor.

Posted by: tax guy | Feb 5, 2011 10:43:00 PM

Bob, if true then that further illustrates that the statism, "the same core ideology" in the WSJ editorial, we see today gathered momentum before BHO. 1099 reporting burdens purchasers with the added task of helping the IRS enforce corporate tax compliance by vendors. I know how to avoid that problem: Corporations should not collect taxes, the euphemism of "paying" taxes on their profits. Govt should collect taxes on personal income including dividends. Eliminate mortgage interest deduction and make savings interest non-taxable income. Then watch employment go up. Simple. You're welcome.

Posted by: Dick | Feb 6, 2011 4:55:32 AM

As a small business owner, though I have few vendors that I spend $600.00 with, filing out 1099's is a pain in the kazoo. Repeal is good, though it would have been better never to have passed that law in the first place. I would have spent an extra 15 hours doing that in our last year alone.

Posted by: GM Roper | Feb 6, 2011 4:57:35 AM

Thanks for the update, Bob. Would be nice if you had had cited the source. However, you will note that it was not passed into law during the GW Bush administration. It took the combination of an overwhelmingly Democrat congress and Democrat president to make it law.

Posted by: Charles | Feb 6, 2011 5:00:38 AM

Just because GW proposed something it does not mean it was a good idea. He was behind the "immigration reform" too.

Posted by: jb | Feb 6, 2011 5:17:19 AM

Bob, proposals are less important than legislation.

Posted by: bgates | Feb 6, 2011 5:18:28 AM

Clearly whoever wrote the 1099 provision thought there was a giant sea of unreported income out there that would become reported income if only there was (another) law requiring you to account for it. If people are really doing that much business under the table, what on Earth possessed Congress to make them think that a(nother) law micromanaging their reporting of it would make them want to do *less* of it?

Also, the "Tax Cheater's Lobby" link you provided doesn't seem to be a defense of the 1099 provision, it seems to be about reporting interest earned at U.S. and Canadian banks. Maybe large businesses are different, but you'd think small businesses (to whom will go the majority of the 1099 suffering) generally have far fewer bank accounts than customers.

Posted by: Wacky Hermit | Feb 6, 2011 5:23:04 AM

Bob...cite?

Posted by: anon | Feb 6, 2011 5:26:28 AM

Bob, Bush was no paragon of conservative thinking. Just because "Bush did it too" is no excuse. He had a Democratic majority behind him.

Posted by: Dandapani | Feb 6, 2011 5:31:35 AM

It really shows how out of touch with on-the-ground reality Washington is. They really have no clue how their policies play out in the real world. These are people who have never managed anything and never made a pay role. They have no clue about how the real productive work in our civilization gets done.

It's like we've put a monkey in charge of a reactor.

Posted by: Shannon Love | Feb 6, 2011 5:33:36 AM

"Bob | Feb 5, 2011 10:11:03 PM"

Yes. But it was stupid enough it took Democrats to pass it!

Posted by: Tom Perkins | Feb 6, 2011 5:47:07 AM

So? It's still a dumb idea. Can't believe all the Democrats voted for it in the first place.

Posted by: Dean | Feb 6, 2011 6:19:23 AM

Interesting but irrelevant, Bob. The point is that Dems voted overwhelmingly for it during THIS administration.

Posted by: Stu | Feb 6, 2011 6:22:57 AM

So, Bob, are you saying the Republicans are better able to shoot down stupid ideas than Democrats on a legislative feeding frenzy?

Posted by: Jeffersonian | Feb 6, 2011 6:36:37 AM

The 1099 reporting requirement was passed into law by the Democrat controlled House and Senate during the BH Obama administration.

Posted by: Al | Feb 6, 2011 6:42:44 AM

...and it was a stupid idea then too, Bob.

Notice that it was a mere "proposal" then...

Now? The idiots made it LAW...

We are in the best of hands....

Posted by: MJN1957 | Feb 6, 2011 6:52:21 AM

The Government Accountability Office (GAO) has been touting the favorable cost-benefit result of issuing 1099s to corporations since 1991. Presidents Bush and Obama included the idea as a revenue raiser in their budget proposals for fiscal years 2008, 2009 and 2010. (Treasury, General Explanations of the Administrations Fiscal Year 2010 Revenue Proposals, May 2009, page 90; FY2009 report, page 63; and page 63 of the FY2008 report).

http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2010/CorpTax/Badand_the_Ugly.jsp

A separate issue is the 1099 requirement for owners of rental property to report payments to vendors. That provision was not in the healthcare legislation, but in the Small Business Jobs Tax Act enacted last September.

Posted by: Bob | Feb 6, 2011 7:05:06 AM

I think Bob is missing that this idea originated from the professional bureaucrats at the Treasury. It's not so much a matter of party identity as a matter of insular bureaucrats with no business experience.

Individuals who receive do not receive a W-2 or 1099 (any form of information reporting) report their income accurately less than 50% of the time.

Again, this demonstrates a high degree of naiveté about business accounting. Wage accounting is very easy because it is fixed and recurrent. People who don't work for wages have a very, very complex system for figuring out their taxes. This is especially true of people who take income from a small business.

Even the concept of "accurate" reporting is naive. It based on the naive premise that tax law is well established and universally understood by all. In reality, tax law is ever in flux and not even the IRS understands the law. It usually takes the courts to thresh out precisely what is and is not taxed.

Why do thing people spend so much money on tax accountants? It takes specialized education and a lifetime of continuous education to even have a hope of complying with tax laws. Even then disagreements are common. An ordinary person is utterly helpless in the face of tax complexity.

So, it's a joke when the government can says that non-wage earners report their income accurate less than 50% of the time because the government doesn't actually know what taxes people should be paying. How can they know if they can't track all the economic activity of businesses and the law is ever in flux?

Posted by: Shannon Love | Feb 6, 2011 7:23:09 AM


"...brute-force capitalism like existed in the 1920s, back when Teddy Roosevelt made his famous statement about the corporate titans and malefactors of great wealth."

For God's sake, Teddy Roosevelt died in early 1919.

"I’m more and more convinced that it is not the deficit that the Republicans hollering for “entitlement reform” care about..."

Linda Beale, I am more and more convinced you are a damn idiot.

Posted by: Chester White | Feb 6, 2011 7:27:53 AM

The 1099 bill was written by people who have no idea how the economy works, how accounting works, or how tax evasion takes place.

The law would have created millions of pieces of new paper without any significant impact on the tax gap.

Prof. Beale, like most government employees in Michigan, is unhappy that the tax system is not beating business owners and the wealthy into submission, which is why both groups are leaving Michigan.

Posted by: save_the_rustbelt | Feb 6, 2011 7:39:58 AM

Either way... BURN BABY, BURN!

Posted by: Bonfire of the Idiocies | Feb 6, 2011 7:53:54 AM

Bob, did GW propose that the 1099 issue be dealt with by burying it in a "Health Reform" bill that the public didn't get to see until it was passed?

Is "stealth legislation" the way government of, by and for the people is supposed to work, Bob?

As for Linda Beale: it's interesting that the people hardest hit by the 1099 nonsense were small businesses that haven't even had the chance to become "malefactors of great wealth".

Face it: for some lefties, their motto is "All your money are belong to us".

Posted by: John Link | Feb 6, 2011 9:40:43 AM

People here seem to be forgetting that the major virtue of the enhanced Form 1099-MISC reporting was that it supposedly helped "pay" for ObamaCare. The fact that it mercilessly harrassed small business for a very questionable amount of revenue was irrelevant. In this sense, it fufilled its purpose,as far as the Democratic leadership was concerned.

So shouldn't we repeal ObamaCare since yet one more budget gimmick and phony assumption has been unmasked?

Posted by: Elmer Stoup | Feb 6, 2011 1:01:09 PM

A simple addition to common small-business software could have taken care of this, and could have provided us with some small bit of vengeful satisfaction at the same time.

A typical check-writing program prints a check on a two-page form - the check, and the record.

Add a third page for a 1099. Print the 1099 for each and every check you print. Mail them all in to the IRS weekly.

I bet Treasury would decide it was too much work.

Posted by: bobby b | Feb 6, 2011 1:02:25 PM

Bob makes the same logical fallacy that all liberals engage in ("the rich get billions of dollars in extended tax cuts"), making it clear his/their belief that the money earned by people is not THEIR money; it's really the government's money, the people just get to be the middle-men. Seriously, that's all you ever need to know about liberals and their way of thinking, when they call tax cuts (actually, tax RATE reductions) government "spending."

Posted by: njoriole | Feb 6, 2011 4:28:42 PM

I own a small business, supply parts to other small businesses, and until recently was employed by a small business. This would have been a MAJOR pain in the ass. But I think the republicans should have let it stand.

Why? So they could let voters behold the stupidity of the Obama administration and all those democrats who passed the bill so we could find out what's in it.

Leave it in and hold the democrats feet to the fire until they repeal the who mess.

Posted by: TakeFive | Feb 6, 2011 5:12:08 PM

why is it that everyone feels sorry for the middle class small business owner but not for middle class Federal employees. Woe is me that a small business has to fill out another form! it is about time those rich Feds got their pay frozen! WTF?

"Wage accounting is very easy because it is fixed and recurrent." Yes, wage ACCOUNTING is very easy, wage REPORTING to the government is not. Anyone who has not worked in a cash business or been paid in cash is in no position to argue that lack of reporting does not lead to failure to report income. Even though the IRS audits virtually no one (an individual audit is like an electron spinning around a proton), virtually everyone who gets a W-2 or 1099 accurately reports their income on account of fear of detection by the IRS.

"Even the concept of "accurate" reporting is naive. It based on the naive premise that tax law is well established and universally understood by all. In reality, tax law is ever in flux and not even the IRS understands the law. It usually takes the courts to thresh out precisely what is and is not taxed." Um, section 61 is pretty straight forward on things that constitute income. Those very well established, in fact codified, items of income are unreported or underreported in instances where there is a lack of information reporting. So, apart from the "flux" and "complexity" of the Code, in reality most people and businesses are not faced with those types of problems; they are faced with double sets of books and zappers that eliminate transactions from cash registers.

"An ordinary person is utterly helpless in the face of tax complexity." Thus the very need for more information reporting. It leads to less confusion. Taxpayer looks at information return, enters figures on return (or into Turbo Tax) and moves on without worry. What could be easier than giving taxpayers information returns that explicitly direct what is income and reminds them of income they earned earlier in the year but may have forgotten ob account of poor record keeping. An hours or days long nightmare is turned into 2 minutes at best for the taxpayer.

"So, it's a joke when the government can says that non-wage earners report their income accurate less than 50% of the time because the government doesn't actually know what taxes people should be paying. How can they know if they can't track all the economic activity of businesses and the law is ever in flux?" Are you seriously arguing for TMCP audits? People went nuts, especially Republicans, about TCMP audits so that the IRS could have an accurate DIF score to determine which taxpayers to audit and which taxpayers not to audit. I can only imagine how beneficial TCMP audits would be nowadays given the massive advance in computer technology. Of course, TCMP audits are not only excruciating to go through they also require addition Revenue Agents to conduct them, which adds to the Federal deficit AND to the Federal payroll--two things I am pretty sure the Republicans still don't like.

"As a small business owner, though I have few vendors that I spend $600.00 with, filing out 1099's is a pain in the kazoo. Repeal is good, though it would have been better never to have passed that law in the first place. I would have spent an extra 15 hours doing that in our last year alone." I can't believe that you are whining about 15 hours. Last I checks that is less than 2 days work for an 8 hour day. 15 hours to ensure that taxpayers correctly report the taxes they owe? I am sorry, but I do not feel sorry for you. If you prepared all of your own already required information reporting returns, how much time did that take? If you outsourced your information returns, you could outsource these too, and it would take a professional substantially less time to prepare the information returns than it would for you.

To me this all sounds like Monty Python dialogue:

"Dennis: Come and see the violence inherent in the system. Help! Help! I'm being repressed!

King Arthur: Bloody peasant!

Dennis: Oh, what a giveaway! Did you hear that? Did you hear that, eh? That's what I'm on about! Did you see him repressing me? You saw him, Didn't you?"

Of course oppressed works better than repressed, but it will do. but this whole "woe is them/me" scene pretty much sums up the Republicans and the small business lobbyists. "Well, your type makes me sick! You come in here, you get treated like Royalty, and everyone outside thinks you're a bloody martyr."

Posted by: tax guy | Feb 6, 2011 5:54:26 PM

I didn't realize that posting 14 words could result in so many assumptions and attacks from others.

Posted by: Bob | Feb 6, 2011 6:07:21 PM

Tax guy,

I can see the benefits for government. For the economy not so much.

"He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass [sic] our people, and eat out their substance."

Posted by: M. Simon | Feb 6, 2011 7:26:06 PM