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Pastimes : Discussion Thread

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From: TimF8/20/2010 5:09:46 PM
   of 3816
The Limits of Enforcement

Jul 27 2010, 10:19 AM ET | Comment
Most people I've talked to both on and offline are in agreement that requiring 1099s for equipment purchases is a pretty egregious waste of enforcement energy. But there are a few who argue that it's really, really important to crack down on tax evasion.

I will not defend tax evasion. But it's not true that we should, always and everywhere, crack down on this sort of thing.

Every time there's a policy debate, Waste, Fraud, and Abuse once again rears its ugly head, and we hear that we could save vast sums by eliminating them. Leave aside the fact that these estimates are, necessarily, very approximate; if we could count all the waste, fraud and abuse, we wouldn't have much of it. Even if the numbers are correct, they're only useful in some frictionless universe where we can easily eliminate 100% of the dreaded WFA.

Unfortunately, in our non-frictionless universe, eliminating these things is often very costly--and the smaller the transactions, the more costly it is. My favorite example of this is an office I once temped for--for one long, long week. Some office manager had decided that to cut down on the expense of supplies, each person would only get one of key things, like pens. In order to get a new one, you had to turn in your old pen.

Needless to say, this did cut down somewhat on the pen outlay. However, it diverted considerable employee energy into pen-loss mitigation strategies. As soon as one person misplaced their pen, pen theft blossomed. As did the gray market in pen security equipment. By the time I arrived, employees were spending a considerable portion of their day looking for ways to indelibly mark their pens as their own, and the rest of the time trying to steal someone else's poorly marked pen.

I don't know what they were spending on pens, of course, but I don't see how this could have been a cost-effective outcome. I assume that the practice was eventually ended, but their receptionist eventually came back from vacation (to a penless desk, of course) and I never learned the end of this sad story.

That's why drugstores budget for shrinkage rather than locking everything away, putting it behind the counter, or searching the patrons as they leave. It's why businesses do not actually attempt to make sure that every expense is 100% justified.

In fact, systems often need this kind of loss to reduce friction in the system; I've heard a plausible case made, for example, that without Medicaid fraud, virtually no one on Medicaid would be able to secure primary care outside of a hospital clinic. The reimbursement rates are simply too low.

In the case of the 1099s, at $1.7 billion a year I don't see how the increased taxes can possibly justify the enormous new compliance burden, especially when you consider that some of that burden will be a direct cost to the government in the form of IRS agents dispatched to untangle the inevitable false flags in the audit system. There are some bits of tax revenue it just isn't worth going after--even though, yes, it means that some small business owner, somewhere, is probably getting away with something.

williambswift in reply to willallen2

Actually, the $600 exclusion does not help - since it is $600 over a year, you need to keep a running total of what you spend in smaller increments to even know if you have gone over the $600 in many cases. Remember, only $12 per week will add up to $600 over 50 weeks.

huadpe in reply to James Hare
The $600 rule is rather trivial actually. I need to collect the necessary information from all my suppliers, in case later in the year I go back and get something from them later. I need to update my database to accept all this new information, which will cost thousands of dollars in man-hours. I need to get a TIN, since I don't want to have to give my social security number out to all my clients. I need to make sure the IRS keeps track of my TIN and association with SSN. I need to train my 2 employees to get this information from all vendors (some of whom may not be equipped/willing to provide it, e.g. buying a computer system off ebay). I need to figure out whether this applies to the broker or the salesperson (e.g. amazon marketplace or the vendor I find through it). All in all, I expect this to reduce my profits by something like 5 to 10%.

The 5-10% estimate is first year, mostly for the database update, after that maybe 2-4%. Also, how the hell do I 1099 my property taxes? As far as I know the city doesn't have a TIN I can use to 1099 them, and they don't like credit cards.

SgtFraggleRock in reply to Alan
But remember, this isn't a tax increase on those making under $250,000.

This? This is the "waste and fraud" that I'm told is the difference between surplus and deficit - if only I hand over my life to central control. This?

What's next? Are we going to track down babysitters? Maybe shadow married couples who go to movies or dinner and arrest them and the babysitter for tax evasion.

Yard sales? Are we going to send un-marked cars to yard sales and crush people for not paying their sales tax?

And don't forget kids selling lemonade.

It is infuriating to see this kind of noise dressed up by the fools we call "Congress and the President" to appear to be actually significant and relevant. These are red herrings, intentionally meant to divert us from the incompetence behind them.

Hey, this weekend I got a cup of coffee at Dunkin Donuts. My dogs were in the back seat, and the woman at the drive through asked if they could each have a Munchkin. I said "sure."

I feel so dirty now. No taxes were paid on that transaction...
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