Well, I certainly can't comment on this thread.

All sales taxes are regressive, since any given purchase represents a much greater percentage of a poor person's income than a rich person's. We should scrap sales taxes and get what we need from income taxes.

I now see that the point in #2 was made in the linked article itself.

MA has been cranking up the enforcement of the "use tax" side of this, by making it a major line item on the state tax return. They also provide a safe-harbor amount, based on income, and every year I've done the math the safe-harbor has been less than the use tax would have been for online purchases. So, yeah, there's money to be collected here.

The linked commentary is a bit ambiguous about the current state of the law. It seems to imply that sales tax does apply to internet sales, but that enforcement falls on the purchaser rather than the retailer, according to the Supreme Court. This seems spectacularly stupid - either abolish it altogether or put the burden of compliance n the retailer as it is normally. What's the relevant ruling here mand what was the justification?

In addition to the arguments based on tax neutrality and distributional equity, there might be a green rationale for harmonizing sales tax rates on in-state and internet purchases. There has been a decades-long trend to shrinking average shipment sizes, related to overall trends in supply chain management. E-commerce is just one facet of a broader trend to "break bulk" further and further from the ultimate consumer. When you move goods in smaller, less dense lots, you are trading higher transportation expense (especially fuel) for lower inventory expense. In other words, it's another manifestation of the "cheap fuel" bias of the contemporary American economy.

All the same, it's not self-evident that e-commerce is overall more carbon-intensive. For certain purchases, you could argue that a consumer would emit more carbon by driving around to three big-box stores looking for something than by having it shipped in a UPS fleet van. Also, e-commerce avoids the carbon footprint of a lot of intermediate distribution infrastructure such as warehouses.

But overall, I suspect that online shopping is more carbon-intensive than upscale consumers like to think, because the goods tend to move in one of the least fuel-efficient logistics networks (on a per ton-mile basis), and because the transportation carrier is roughly 100% insulated against rising fuel costs by means of fuel surcharges.

5 -- Here's the opinion in Quill v. North Dakota. An interesting tangle to sort out.

And here is National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967).

This seems spectacularly stupid - either abolish it altogether or put the burden of compliance n the retailer as it is normally. What's the relevant ruling here mand what was the justification?

IANAL, but the justification, as I recall, was a long-standing doctrine that states cannot compel juridical persons to comply with their tax reporting requirements if they have no physical nexus to the state. It is considered an unreasonable burden for merchants to have to keep current on and comply with tax regulations for 50 different states, just because a customer might cause goods to be transported to another state. I would hazard a guess that the Constitutional grounding is in the interstate commerce clause.

And I'd say that Justice Fortas, in his Bellas Hess dissent, has much the better of it:

It is hardly worth remarking that appellant's expressions of consternation and alarm at the burden which the mechanics of compliance with use tax obligations would place upon it and others similarly situated should not give us pause. The burden is no greater than that placed upon local retailers by comparable sales tax obligations, and the Court's response that these administrative and recordkeeping requirements could "entangle" appellant's interstate business in a welter of complicated obligations vastly underestimates the skill of contemporary man and his machines. There is no doubt that the collection of taxes from consumers is a burden, but it is no more of a burden on a mail order house such as appellant located in another State than on an enterprise in the same State which accepts orders by mail, and it is, indeed, hardly more of a burden than it is on any ordinary retail store in the taxing State.

Indeed. Mail order companies don't get out of other state laws, like, say, Texas's dildo ban. Why should sales tax be any different? And why is it more of a burden for a retailer to comply with the laws in the states to which it sells than for the consumer to comply with the laws in all the states they make online purchases in? It all seems perverse. I can understand not taxing for practical reasons, but to say the tax applies but that the retailer need not comply is perverse.

it is no more of a burden on a mail order house such as appellant located in another State than on an enterprise in the same State which accepts orders by mail, and it is, indeed, hardly more of a burden than it is on any ordinary retail store in the taxing State.

The latter clause is manifestly untrue. There is a huge difference between complying with the sales tax regulations of one state and complying with 50 states. It's not just different tax rates: some states have exemptions, concessionary rates for certain products, surtaxes on certain products, phase-out thresholds for exemptions, etc.

Now, if there was some kind of interstate compact whereby the merchants could comply with a simplified, unified tax regime (similar to the EU's minimum withholding tax on interest), the argument about excessive burdens would lose all force.

12 also underestimates the skill of contemporary man and his machines. Which have evolved plenty in the 40 years since that excerpt was written.

Sorry, I'm not going to put in my lot with economists. Elite opinion is always on the side of doing things that really disadvantages the vast majority of Americans. Tax bad! No tax good! Why do you hate the poor?

12 also underestimates the skill of contemporary man and his machines. Which have evolved plenty in the 40 years since that excerpt was written.

Sure, for the amazon.com's of the world it would be a mere nuisance, not an insurmountable problem. For small-scale internet merchants (e.g. a lot of sellers on e-baby), there would be an unpalatable choice between breaking the law, wading through a morass of regulations, or paying for a 3rd party service. I don't think it's unreasonable to think that the choice would deter a lot of marginal new entrants from the business.

The "infant industry" argument that prevailed a few years ago is obviously obsolete, but I still think that the optimal policy would be something that avoids placing the full burden of compliance on every merchant on the internet. Perhaps a generous de minimis exception would suffice, so that every e-bay seller isn't obliged to fill out a Tennessee state sales tax return for a tax liability of $2.57.

For the record, I am in favor of neutralizing the sales tax advantage of mail order commerce. But I think the alternative tax regime needs to be carefully thought through, and I'm not sure that the current regime (burden of compliance is on the consumer) isn't the second best option for the moment.

I've always felt that the justification for sales tax is that it pays for the services that the state government provides to the merchant - the public education given to its employees, the roads your customers take to get to your store, stuff like that. But when a product it shipped from out of state, the state government services that aid the transaction are minimal. So, to me, this is a case where the state wants their cut of the sale, but isn't providing services that would justify the 5-8% percent they are asking for.

16: The sales tax advantage is largely neutralized by the cost of shipping. Thats why local companies will always have an advantage on bulky or low-cost items. But you don't hear on-line retailers complaining about how thats "not fair".

3- The condition may be the same, but your solution is different and much better.

17: nice theorry, but I think the justification is just "collection of revenues", full stop. It's explicitly a tax on consumers, not on merchants (although merchants are required to collect it from the consumers at the point of sale).

eBay and its clients don't seem to have much trouble negotiating payments and shipping using a number of different vendors. Why should sales tax be so much harder to apply? Obviously, it would make sense to have some kind of exemption for the smallest transactions and/or traders. I can't imagine that the great State of Tennessee wants to see 2.5 million sales tax forms for amounts under $10 show up in its revenue department next year. But even in the last couple of years we've seen online filing of taxes become completely mainstream and widespread, so it seems unlikely that a reasonable in not-very-cumbersome solution could be worked out.

Having said that, I am of course opposed to the government, so I'm not going to stridently support any proposal along those lines.

W/r/t the carbon footprint issue, it would be interesting to see what kind of carbon burden the Mall of America represents, given all the people who fly in on shopping junkets, in part because Minnesota charges no sales tax on clothing.

18: local companies have to pay to ship the product to their local stores.

"and not-very-cumbersome" obvs.

So, to me, this is a case where the state wants their cut of the sale, but isn't providing services that would justify the 5-8% percent they are asking for.

The state is providing all the public goods that enable customers to live there and produce disposable income that they can spend on mail-order goods.

You want a market for your products? You need to be prepared to contribute to the public goods that sustain that market. Just as you contribute to the public goods that sustain the your production and distribution facilities.

For random ebay sellers and the like, they're almost all using large third-party payment systems as part of the transaction (paypal or various credit card processing front ends), so there's a clear place to locate the admittedly unwieldly tax table computations.

22- Also, online retailers are often able pass shipping costs to the consumer, in no small part because the consumer doesn't pay sales tax.

20: Its a tax on transactions, and there is a burden to both consumers and merchants. I understand that "collection of revenue" is a vital function, but when no services are provided in return, thats just being dickishly confiscatory. It doesn't seem justified when the transaction is effectively out of state. From the merchant's point of view, its taxation without representation.

22: I recognize that local merchants have shipping costs too, but shipping a pallet from a regional warehouse to a local store is far less expensive on a per-unit basis than UPSing a single item across the country.

From the merchant's point of view, its taxation without representation

Right, but--again--it's a tax on consumers, not merchants. And the consumer is not being taxed without representation.

Your point isn't without force--it's the current state of the law, in fact--but the point is that in the modern day and age it shouldn't geenrally be too cumbersome to collect.

Sales tax law really can be quite complicated, and easy for a small company to get wrong. I can imagine that this sort of change might actually make life easier for merchants in the medium run, as it might increase the offerings of good, affordable software tools for getting it right. Still, a simplified inter-state tax scheme would certainly be a nice thing to have, and a generally less regressive approach to taxing across the board would be nicer yet.

28: so you think online merchants should be partially exempt from taxes because they have less efficient logistics?

Sure, for the amazon.com's of the world it would be a mere nuisance, not an insurmountable problem. For small-scale internet merchants (e.g. a lot of sellers on e-baby), there would be an unpalatable choice between breaking the law, wading through a morass of regulations, or paying for a 3rd party service. I don't think it's unreasonable to think that the choice would deter a lot of marginal new entrants from the business.

Lots of laws make distinctions based on the size of the business, though. It would seem easy enough to impose the burden of collection on online merchants, but carve out an exception for small-scale online merchants.

How becks' opinion was "swayed" by the linked article is beyond me. Buying out of state is a long-standing method of evading taxes. If I buy beer in NH rather than MA, I don't have to pay the fake recycling tax of 5 cents a bottle. If I want to buy a new video card, I'll trek up to Nashua. Damn and fuck the man who would have it otherwise. If no state can effectively exert jurisdiction over a given purchase, so much the better. I am a poor person, who buys little. My existence sucks pennies out of every dollar anyone makes in MA. But still I gladly pay tax off my meager earnings, because them's the rules, and I profit from it, and if you don't like it, take it up with the legislature.
In short, fuck you all, I've got health care.

One complication is that, theoretically, consumers owe state sales taxes on any out-of-state purchases--whether online or just across the border. If we're giong to require online merchants to collect sales taxes on behalf of out-of-staters, are we going to start to impose the same burden on the brick-and-morters that line the borders of a state? (I suspect not, but only because it's both a smaller problem in scale and more problematic to enforce. Not because of any good theoretical distinction.)

29: A national sales tax wouln't be too cumbersome to collect. The current mish-mash of constantly fluctuating layers of state, county, and municipal sales taxes would be a friggin' nightmare. Especially in as much as different taxes apply to different products.

34 posted before I saw 33. You owe the state money, foolishmortal.

31: No, my contention is that retailers who complain that its "unfair advantage" that on-line merchants have lower costs are full of it because on-line merchants do not, in many cases, have lower costs.

My contention that online retailers should be exempt from state taxed is based on my opinion that if governments want to collect money, they should provide services in return.

I'm going to contradict myself for a moment and consider an argument for continuing the current de facto exemption of interstate e-commerce from sales taxes.

W/R/T corporate taxation and personal income taxes, liberals are rightly concerned about a "race to the bottom", where the mobility of capital and highly compensated labor across state lines puts pressure on state legislatures to keep tax rates low, or even to shift the tax burden toward less mobile factors of production (e.g. through generous givebacks to companies that threaten to leave).

The same dynamic arguably applies to sales taxes in the age of e-commerce. But a race to the bottom for sales taxes is not necessarily a bad thing!

I would be happy, for example, if so many Tennesseans bought their stuff over the internet that the state legislature felt compelled to lower their ludicrously high sales tax and finally implement a progressive income tax. (Of course, the intermediary stage is that the legislature holds off on the income tax and slashes all programs that benefit the poor, but that's another story.)

34: Yeah, I've heard the state claim that, and I'm strictly in foolishmortal's column on this one. I'll recognize the state's right to tax me in their state - but fuck their right to tax me in another. This country was founded on tax evasion, and paying out-of-state taxes is downright unAmerican.

If I buy beer in NH rather than MA, I don't have to pay the fake recycling tax of 5 cents a bottle.

Plus, then you have a nice long drive home to start drinking on.

40: And a holiday from the taxes on the gas you use. A win-win-win strategy!

One complication is that, theoretically, consumers owe state sales taxes on any out-of-state purchases--whether online or just across the border.

Are states and cities themselves aware that this is the "spirit" of the typical sales tax law? Because it seems to me that they spend a lot of time nowadays enacting sales taxes specifically designed to be paid to a jurisdiction by people who do not live in that jurisdiction. On hotel rooms, rental cars, "amusement", et cetera.

This is often used to fund giveaways to sports teams, since it is the only tax that America's politicians are not convinced they will immediately be assassinated for enacting. "Okay, we pay for this stadium giveaway with a tax. But get this. It's a tax on hotel rooms and rental cars! You see what I'm saying here? It's a tax on everyone in the world except people who live in this fair city of ours! Pretty sweet, eh?"

Gaijin Biker has it in 2 -- drop the sales tax and adjust income tax as necessary to compensate.

I'd also be in favor of a general "consumption tax", which really would fall on consumers every April 15, and leave the merchants out of it. And its a lot easier to make something like that progressive.

40: It ain't that long. I'm from CA; it's like driving from Sacramento. Not enough time to get truly drunk. (This excuse may not convince a statie, unless one invokes an ongoing game (+2 to Charisma)).

Screw the GST! (Screw it!)

42: thowe are separate taxes altogether. And don't most state sales tax laws have exemptions for products purchased out-of-state on which the consumer is taxed? (I don't think I technically owe tax to MA on products purchased in, say, NY... but maybe I'm wrong?)

I was right!

taxpayers who pay a sales/use
tax to another state or U.S. territory are
entitled to a credit up to the 5 percent
Massachusetts sales/use tax rate if the
other state has a reciprocal sales/use tax
credit policy with the Commonwealth

Years ago I worked for a small but conscientious company that sold, rented, and serviced generators, and sold parts for them. Because of limits in our distribution agreements with manufacturers we officially provided service in only a limited number of states, but several of our customers were national companies based in our territory so we supported them nationwide. Some states considered the company to have had nexus the moment a technician crossed the border (and thus made us responsible for sales tax on all orders shipped to that state, and in one case a large bill on back taxes as they audited us for technician visits in previous years); some based nexus on the number of hours the technician did work in the state; some states said that a technician wasn't enough for nexus and so we didn't have to charge tax until we opened another office there. Keeping track of this was time consuming and expensive.

Requiring sales tax on internet sales does unfairly burden small companies, as the resources required to manage that sort of thing are a much larger percentage of operating expenses than they would be for a company on the scale of Amazon. I would argue that it is, in fact, more in states' interest to allow businesses to sell across state lines without charging out-of-state tax, as to do otherwise would bias the economy only in favor of large merchants (the ones who can easily afford to track contradictory state tax laws in 50 states and DC). That would take business completely out of the states where those small companies might be located.

The way to fix this is a simplified national sales tax, but I'm pretty sure such a thing has no chance of passing.

You don't owe tax to MA on products purchased in NY if NY charges at least the same amount of sales tax. But the general sales tax in NY is 4%, so in theory you owe MA the 1% difference.

paying out-of-state taxes is downright unAmerican.

The arm of the tax law is long indeed. Just try moving overseas to get out of paying income tax and see what happens. Not even renouncing your citizenship can save you.

48: And fortunately, it would not be at all burdensome to a consumer to figure out all the states from which they have purchased products online, compare the sales tax on those purchases to those imposed by the home state, and determine whether the foreign state has a reciprocal sales tax credit policy.

50: right.

51: really?

52: Indeed. Hence the safe harbor amount - $45 at my level of income - essentially a 0.05% increase in the state income tax rate.

51: Thats true of income earned in America, as it should be. But you don't get taxed on something like the first $80,000 of foreign income, which is pretty nice. And you can deduct whatever foreign taxes you pay, which is quite often higher than the American taxes anyway.

Yeah, if the IRS determines that your reason for renouncing your citizenship was primarily for the purpose of evading U.S. taxes, then you're stuck paying them for another 10 years after you leave. And U.S. citizens have to pay regular income tax on foreign-earned income, albeit with a pretty high deduction (80 or 90K, IIRC).

51 is true, but if you no longer carry a US passport, they're not going to have a lot of luck prosecuting in a foreign court. Or so my friends in this position believe.

It fucks with your tax rate, though. There's a weird calculation on the tax forms, but short form is, if one say, made $30K overseas and $20K in the states, one's tax rate is not just what it would be on the $20K.

Three guesses on how much fun I found that to be this past tax year.

49- The Feds could institute a national sales tax, but requiring states to scrap theirs would clearly be unconstitutional. Not all states have sales tax. Gaijin Biker in 2 has the solution, but it would have to be done by state.

56- Interesting. But we're only talking Fed taxes, obviously, right? Only income and not payroll taxes?

58: really, really fun?

Only sort of fun?

Maybe a little bit fun, but actually sort of neutral?

51: What? No, not really. The foreign income tax credit is very large and relatively straightforward to request.

Has this thread devolved into generalized bitching about taxes? Because I would like to bitch and bitch and bitch and bitch about the fact that you are rqeuired to pay employer taxes on a nanny. That makes a thousand times less than no fuckign sense. I don't run a business. I'm just purchasing child care services. It's NO FUCKING DIFFERENT, AT ALL, from putting my kid in a day care, except someone comes to my house instead of my taking my kid somewhere else. I am not an fucking employer--why am I taxed as one?

Oh man. I thought I got this all out of my system a few weeks ago. Apparently not. Now I want to punch something.

Yeah, to echo others, my mom does accounts receivable for a family firm with a few branch offices in different states, and the sales tax headaches coupled with shitty IT are a reliable gripe topic for her. So I definitely understand the burden-on-small-business argument, do not beleive its a smokescreen thrown by greedy online sock and t-shirt buyers.

Having paid-for complexities and loopholes of tax law disappear under the hood of a software package (that doesn't quite promise not to store a remote copy of your data, and which complains if taxes are prepared with no network connection active) seems like a way to weaken democracy. Having to read the fine print on those bullshit rules while doing the arithmetic is a very effective means of communication between legislator and voter, a link now mostly lost. Soon only the BMV and TSA will show the people the face or more precisely the voice of their government, with everything else invisible.

I am not an fucking employer--why am I taxed as one

Butcha ARE, Blanche! Ya ARE!

Brock do you mean social security taxes and other withholding?

62. Do you pay your nanny? If so, you're an employer. Same like your cleaner, etc. Maybe you don't like it from the tax angle, but if you pay somebody to work for you, you employ them. It's what the word means.

60: The words 'if this happens again, you will be filing 2008 singly' may have been uttered.

62: It is to the extent that if you were taking your kid to a daycare service, they would be responsible for the taxes.

But honestly, fuck taxes.

I won't tackle 62 on the merits, because I'm trying to get some work done here and Brock is wrong in so many ways don't have time to recount them, but this an opportune moment to plug the au pair option again. They're cheaper (in a high labor cost environment, anyway), their wages are exempt from taxation, and they are generally younger and cuter. [Note to Fleur: that last part was a joke, sweetest. You are my one and only love.]

He's not employing a nanny. He's bribing them. It's different!

Or do you pay a company which actually employs your nanny?

[Note to Fleur: that last part was a joke, sweetest. You are my one and only love.]

You could just append this to your pseud in the Name field, then you wouldn't have to keep typing it out.

62: Amen, brother, and again I say AMEN!

Not only is it a fucking con to have to pay taxes for a baby-sitter -- especially when you, say, only need a nanny for a few months over the summer. It is a royal fucking pain in the ass to figure out all the stupid paperwork for declaring the wages and so on and so forth. Yes, i know. The point is to try to prevent nannies from evading income taxes on their wages. So then maybe require me to report the wages without charging me an arm and a leg for the privilege of doing so.

Also more isolated and so easier to seduce.

51, etc.: Also, the US is pretty much the only nation that taxes income made out of the country. I'm certainly not aware of any others, and I know for sure much of the EU and the more developed east Asian countries don't. I would be pretty amazed if anywhere in the OECD did.

Screw charging for citizenship like that. You should only pay where you make the income. If they really want to cover costs of embassies, etc., implement a fee for usage if you're a foreign resident.

then you wouldn't have to keep typing it out

Yeah. Women, doncha' know? You tell them you love them, and they keep wanting you to repeat yourself again and again, as if you wouldn't have told them if something changed. Haven't they ever heard of exception reporting?

Do you pay your nanny? If so, you're an employer.

I paid the guy who fixed my garage door -- I am not his employer.

If I bring my kid to the nanny's house every day, the nanny can be considered an independent contractor rather than an employee.

Yeah, I know, there are good policy reasons for the nanny tax. But it really is incredibly frustrating for an average schmoe who has never had employees to figure out all the requirements.

Yes, legally I'm her employer, but my point is that's nutty. It would make SO MUCH MORE sense for it to be characterizes as me purchasing services (no different from getting a haircut, or, you know, putting a kid in daycare), and her as self-employed.

Let me re-state: I'd be 110% perfectly happy to pay taxes on amounts paid to a nanny if I could deduct wages paid to her from my own income taxes. (Which is what every real business that employs people does with the wages of its employees.) But of course I can't, because I'm not running a business. But, if I'm nopt running a business, why do I have employees? Ahhh, my head is exploding.

You can hire a nanny through an agency, or you can hire a nanny who's set up to do her own taxes as an independent contractor, but if you hire someone under the table that means that they don't have social security, disability benefits, or medicare in old age. Nannies grow old, too.

I do know someone who worked under the table for decades, and they're now approaching a very impoverished old age, with only the minimum social security.

Hiring under the table is at the bottom of a stepwise move away from good jobs. Declaring workers to be management when they're not is step one (so they don't get overtime), contracting out to agencies is step one (only temp jobs, no job security), and declaring workers to be independent contractors when they're not is next.

77: so you'd like the poor babysitter to have to fill out reams of paperwork as a self-employed "contractor" rather than taking the tiniest bit of overhead out of the windfall profits you no doubt earn as a parent?

You, sir, are the worst kind of capitalist swine.

I'd be 110% perfectly happy to pay taxes on amounts paid to a nanny if I could deduct wages paid to her from my own income taxes.

Yep!

You could also start "Keep Brock Jr. Entertained and Fed, LLC", and pay the nanny through that entity.

What the hell am I doing giving (presumably incorrect tax advice)?

La la stupid jokes la la look at the funny clown!

(dances, sticks out tongue)

I'd be 110% perfectly happy to pay taxes on amounts paid to a nanny if I could deduct wages paid to her from my own income taxes. (Which is what every real business that employs people does with the wages of its employees.) But of course I can't, because I'm not running a business. But, if I'm nopt running a business, why do I have employees?

Oh, this is interesting.

"two"

My advice to all of you: move to Bolivia. Cheap rent, cheap food, and cheap broadband = paradise. Barefoot kids clustered around one WoW account: how cute! Experience the decline of the dollar first-hand! Memorize the following: Kay Poota Bootch and you're good to go.

I not advocating hiring under the table--that's a very bad idea that I never even considered (even though about 90% of candidates we interviewed literally said "not interested" and hung up the phone when I said I planned to report wages).

and they are generally younger and cuter

This was recently an issue for my family. My sister had a second kid, needed a nanny and opted for an au pair for the reasons enumerated by KR. Her husband has a history of being a philandering shithead, though, so we encouraged her to find an ugly one.

I'd be 110% perfectly happy to pay taxes on amounts paid to a nanny if I could deduct wages paid to her from my own income taxes. (Which is what every real business that employs people does with the wages of its employees.)

It is? Businesses can use the wages they pay employees as a tax deduction? That sounds ridiculously implausible.

Why do they care what they pay their employees, then?

You can hire a nanny through an agency, or you can hire a nanny who's set up to do her own taxes as an independent contractor

From what little I could parse of the IRS rulings, if the nanny provides service in your home, you CANNOT call the nanny an independent contractor.

so you'd like the poor babysitter to have to fill out reams of paperwork as a self-employed "contractor" rather than taking the tiniest bit of overhead out of the windfall profits you no doubt earn as a parent?

Honestly? Id like to see some simplified treatment that makes it easier all around. And, yeah, let me deduct the cost of childcare completely instead of just the minimal fractional credit they allow now.

||

I can't figure out how to feel about this.

On the one hand, every time Bush actually pays attention to governance things go to hell, but on the other hand can it really be true that our nation is at this moment better off with nobody minding the store

Aaaaah!

Have to say -- these issues were once part of my job, they are very obscure and complex, and this comment thread is excellent. The great thing about net conversations is that it takes only a few people who really know the details to lay them out, and then everyone else can bounce off that.

All sales taxes are regressive, since any given purchase represents a much greater percentage of a poor person's income than a rich person's. We should scrap sales taxes and get what we need from income taxes.

The numerous exemptions (for food, etc.) actually make it sort of hard to figure out how regressive sales taxes are, since many exempted items are neccisities that represent a greater fraction of spending for the poor. But it's also true that many services tend to be exempted, so you get luxury services that go untaxed.

My least favorite sales tax exemption: the California exemption for candy and soda, which is written into the state constitution. Gotta love the initiative process.

On nexus for on-line companies, states have had some success getting nexus if the company has any in-state establishment at all for handling returns, etc. California did this with Borders' web operation. (New York is now trying to do it using the physical location of web sites that Amazon advertises on!). Brick and mortar companies try to get around this by creating "web affiliates" with a separate corporate structure but a similar name (BN.com for Barnes and Noble, etc.). I think that's kind of questionable.

What? No, not really. The foreign income tax credit is very large and relatively straightforward to request.

IIRC, This depends on the tax treaty status of the relevant countries (and you have to refer to the actual text of the treaty).

It can get really annoying if you earn income in more than one country.

"Also, the US is pretty much the only nation that taxes income made out of the country. I'm certainly not aware of any others, and I know for sure much of the EU and the more developed east Asian countries don't. I would be pretty amazed if anywhere in the OECD did."

The last time I read an article on the subject, Burkina Faso was listed as the only country with a comparable system. That was years ago, though.

It is? Businesses can use the wages they pay employees as a tax deduction? That sounds ridiculously implausible.

It's a business expense, just like buying a computer is or paying rent on office space.

re: 86

My wife was working as an au pair when we started going out. I heard all the au pair stories. As far as I could tell, at least 25% of them were sleeping with or had slept with the 'man of the house' and another 25% were being near stalked by the 'man of the house', and either pissed off about it or resignedly amused.

87: IRC 162(a)(1):

There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including--
(1) a reasonable allowance for salaries or other compensation for personal services actually rendered

95: So, why is it that we can't take the nanny salaries as a deduction from our income, as this is certainly a necessary expense to my continuing to have a job?

96: Because you aren't a business.

if the nanny provides service in your home, you CANNOT call the nanny an independent contractor

This is true. And you often can't legally classify the nany as an independent contractor even if the services are provided outside your home, unless the nany is essentially running a daycare (with other kids).

97 is both a non-sequitur and the correct answer to 96.

re: 97

And, following on from that, it's pretty standard that businesses can deduct for things that individuals cannot.

93, 95: so I must seriously ask: Why do businesses care what they pay their employees, if it just ends up getting deducted from the corporate income tax?

I mean....this is really surprising to hear.

Why do businesses care what they pay their employees, if it just ends up getting deducted from the corporate income tax?

It gets deducted from the taxable income. That is, it decreases the amount of money they have to pay taxes on; it's not directly deducted from their tax bill itself.

||

Holy shit. See especially the last photos on the page.

|>

If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income...up to $85,700 of your foreign earned income in 2007.

They can't "use it as a tax deduction"; it's just that they're taxed on profit, which is the difference between revenue and expense, and employee salaries are an expense.

re: 101

Also because lots of businesses may little or no corporate income tax anyway. So there's not a lot to deduct from.

101: I'm going to take a flyer on: businesses have so many ways of getting tax exemptions -- on the taxes which only accrue on profits, anyhow -- that the wages are much higher than any potential tax liability in any case. Businesses with very high profit to employee ratios probably have a lot less downward pressure on wages, but that's to be expected regardless of tax liability.

105: Funny, that.

re: 107

Yes, innit

104: I would encourage you to re-read 95. Click the link if you'd like.

Oh, well that makes sense.

It still seems like something that should be condemned by principled conservatives and libertarians as distorting the labor market and leading to unjustly high salaries for people who deserve far, far less. But I guess it helps businesses more than it helps people.

101: I think you may be confusing a deduction with a credit.

To illustrate: Tax rate is 25%. Company A has gross profits of $100. It pays $25 in salaries to it's employees. Before tax is imposed on the profit, the salaries are deducted -- ergo, Company A pays 25% of $75, or $18.25

If employer could take the salaries as a credit, on the other hand, tax would be calculated on the full $100 -- thus, $25 in tax, resulting in zero liability after a $25 credit is applied.

something that should be condemned by principled conservatives and libertarians

I also can't understand why the elves and unicorns lobby doesn't take a stronger stand.

It still seems like something that should be condemned by principled conservatives and libertarians as distorting the labor market and leading to unjustly high salaries for people who deserve far, far less.

No this is mental. There's no possible way of taxing corporations at all without regarding labour costs as an expense. If I have a business with revenues of $100 and salaries of $99, then I have profits of $1 and taxes of 30 cents. If you want to tax me on the $100, then go ahead but you cannot set that tax at 30% because my company does not have $30 to give you.

Also, the deduction doesn't encourage excessive salaries -- the business is getting a break equal to only a fraction of your salary. They still keep more, net, by paying you less.

Of course it's subtracted from revenue when calculating profits. Just the way Brock phrased it made me think it was some special extra tax credit. Anything is possible in the US when it comes to creating tax loopholes to help corporations.

113: but you're just making up numbers. (Put another way, I could as easily say "There's no possible way of taxing individuals at all without regarding job-related costs (including child-care) as an expense. If I have a job with a salary of $100 and child care costs of $99, then my only real income is $1 and taxes should be 30 cents. If you want to tax me on the $100, then go ahead but you cannot set that tax at 30% because I do not have $30 to give you.")

101: Employee wages don't get deducted from business taxes so much as it goes into the expense column on their balance sheet. More expenses = less profit, less profit = less taxes.

Businesses care what they pay their employees because, in taxes notwithstanding, they still want less expenses and hence more profit.

The solution, and I think Brock in 77 is very right about this, is that the employee expense of childcare should be deducted 100% from personal income for tax purposes, just as it would be from business income.

116: c'mon Brock, you don't really expect to get the corporate treatment, do you?

The was I phrased it? I'm just quoting the tax code!

The solution, and I think Brock in 77 is very right about this, is that the employee expense of childcare should be deducted 100% from personal income for tax purposes, just as it would be from business income.

From the IRS's point of view, the problem with any scheme like this for individuals is that it is very easily gamed, and difficult to catch you out at.

Of course this is true in the corporate world also, but not seen as a problem.

And to be clear on a basic point, businesses aren't taxed on anything called "profit". They're taxed on "income", just like you and me. They just get to deduct away the expenses incurred in generating that income, which gets close to something like what we mean when we say "profit".

From the IRS's point of view, the problem with any scheme like this for individuals is that it is very easily gamed, and difficult to catch you out at.

It's no easier to game this than to game the nanny tax thing in the first place. Brock and I (but for our virtuous characters!) could simply fail to declare the wages paid to nannies just as easily as we could overstate the amount paid when trying to get a deduction. And, in fact, since we pay payroll taxes on the total paid, there'd be little or no incentive to overstate in a system where we got a 100% deduction combined with the reporting/payroll tax obligation.

Hell, allowing a 100% deduction would probably improve the chances of such wages actually being reported.

No more nanny state nanny tax on nannies!

122: Perhaps I misunderstand the nanny tax then, but a 100% deduction would easily allow you to displace taxable income to a lower bracket. Sure, it's fraud, but its the easy sort of fraud that is typically broadly employed unless carefully monitored (like `home business' expenses, which iirc were originally loose enough to be broadly abused). All you need is a compliant `nanny'. It's very difficult to cost-effectively monitor this stuff.

So I'm not disagreeing with you both, but I can see why the IRS might.

Hell, allowing a 100% deduction would probably improve the chances of such wages actually being reported.

People like Di who are absolutely dependent on child care to earn a living have my sympathy, but the proposed fixes on offer here are bad policy.

The current system, which allows a tax credit under certain conditions, and phases out above a certain income threshold, is a good one (though arguably not generous enough). It focuses the benefits on lower income earners, it does not favor one kind of childcare over another, and restricts the benefit to families where the child-care enables a second income (as opposed to freeing up mom for tennis).

A 100% deduction, by contrast, would be worth a lot to Di (and those with higher incomes), and worth nothing to low income earners who are exempt from income tax. Exempting in-home nannies from payroll taxes would tend to favor expensive one-on-one care (the preferred kind for the affluent) over daycare, and would effectively promote the further brazilianization of the economy, where the poorly paid many work for the well paid few.

If you don't want your liberal-in-good-standing cards revoked, you lot need to quit your whining and start abstracting a little bit from your personal circumstances.

Well, I think a 100% deduction is a second-best policy anyway. Like I said, a more rational approach would be to say I am purchasing a service and the nanny is self-employed, and tax both accordingly.

And 125 is nutty anyway. There's no good reason to make the tax code illogical and complex, and in some cases patently unfair, simply to preserve a modicum of enhanced progressivity. Just untangle all that mess and make the code a little more progressive. (Or, hell, a lot more progressive.) We're talking policy, not politics, right?

Knecht does make good points, though I don't think either Brock or I were suggesting allowing a 100% deduction for nannies employed to allow mom (or dad!) to keep a tennis date. I guess I'm also not sure how you'd ever get a "compliant nanny" to go along with fraudulent reporting of higher wages than actually paid -- the nanny pays taxes on what you declare! I'm not convinced that the tax savings from dropping the employer's income down a bracket is going to exceed the tax liability from increasing the nanny's income tax and adding in the additional payroll taxes. But I'm not actually motivated to try to do the math.

Businesses care what they pay the lower level employees, because it frees up that money to be payed into the top execs and such. You know, the only people in the company whose pay isn't based on performance.

I'm also not sure how you'd ever get a "compliant nanny" to go along with fraudulent reporting of higher wages than actually paid -- the nanny pays taxes on what you declare!

Really? I've known a half dozen people pulling a very similar scheme in the past --- they just make up the difference. Some but not all within family. I assumed this would be easy to set up in the situation you describe, maybe I'm wrong.

Like I said, a more rational approach would be to say I am purchasing a service and the nanny is self-employed, and tax both accordingly.

Better for you. I don't understand your reasoning. Employing someone is employing someone, regardless of whether you're a for-profit (or non-profit) business. Why would it be better to shift the obligation to handle taxes from you to the nanny? She isn't self-employed, she works for you.

Brock, you could possibly incorporate, but you'd still have to pay the babysitter out of your taxed salary. Even for a business, that's not considered a reasonable expense.

But you're right that it should be counted as a service, not as an employee-employer relationship.

127. Obviously. But tax codes aren't designed by systems analysts. They grow by accretion over centuries, so they're full of insane shit that might have made sense once under completely different conditions.

....regardless of whether you're a for-profit (or non-profit) business or not.

133: Which is why every once in a while the whole thing should be thrown out and replaced by a rational system (which will then accrete bs over the years)

130: sure, this could be a potential source of tax fraud. But I don't think it is materially easier to implement or more difficult to detect than many of the many relatively simple ways determined individuals can now defraud the government. And it's not as if there isn't plenty of fraud currently involved in nonpayment of the "nanny tax".

We're talking policy, not politics, right?

Sure. And I don't think either Brock or Di has offered a compelling policy alternative, or even a compelling critique of current policy beyond "it's inconvenient", "it offends my personal sense of fairness", or vague assertions about a different policy leading to higher rates of compliance.

My position: the mechanics of the current policy are sound bordering on optimal (given the political environment), and the highest priority reform should be to increase the upper limit on the credit.

There's no good reason to make the tax code illogical and complex, and in some cases patently unfair, simply to preserve a modicum of enhanced progressivity. Just untangle all that mess and make the code a little more progressive.

Well then in that case, there would be no deductions for childcare at all, just a highly progressive taxation structure (preferably with no deductions) that helps fund highly subsidized or free childcare.

It would be a service if she came in on an ad-hoc basis, like an electrician or plumber, and worked for a number of different people. But someone like that could be regarded as an independent contractor. My understanding is that nannies work for a single family.

Under your reasoning, someone with a full-time nanny, gardener, cook, and cleaning lady would not be an employer either, but would be hiring contract employees.

the mechanics of the current policy are sound bordering on optimal (given the political environment)

given the political environment, this doesn't say much. Or rather, it does, but it's depressing.

I don't think Knecht makes such good points. I favor tax progressivism, but why the tax system is so much more solicitous of home ownership--even multiple home ownership--than having & educating kids, I have no earthly clue, & that's separable from how progressive the tax system should be. That said, you should be paying payroll taxes on someone who depends on you (& other couples paying by the same mechanism) for a sig. % of their income.

The "freeing up mom for tennis" thing isn't much of an argument either; easy enough to hire a college or high school kid off the books for tennis lesson purposes. Most people paying a nanny or daycare are doing so for the sake of a second income & get no sig. tax break for that.

the whole thing should be thrown out and replaced by a rational system

Your rational? MacManus' rational? minneapolitan's rational? McArdle's rational? Or Halliburton's rational? You guess.

139: yes!

Double taxing the nanny is just regressive & crappy though.

144: yes.

And it's not as if there isn't plenty of fraud currently involved in nonpayment of the "nanny tax".

Yeah, I'm not familiar enough with the mechanics of this one to see the balance, really. I was just pointing out that I could see resistance from the revenue people for no other reason than this is the sort of thing that has been widely abused in the past. It's easy to game, hard to audit, and perhaps doesn't strike a lot of people as being `really' fraudulent (because they perceive the system as unfairly biased against them already).

someone with a full-time nanny, gardener, cook, and cleaning lady Is probably already effectively avoiding income tax, so doesn't really care.

vague assertions about a different policy leading to higher rates of compliance

Okay, I'll try to make this one a little less vague. Currently, the parents who pay a nanny are obligated to (a) pay the nanny, (b) report the wages paid, and (c) pay state and federal payroll taxes on the wages reported. The nanny pays income taxes on the reported wages. Both the nanny and the parents have a financial incentive to go under the table -- if the wages aren't reported, both get to evade somewhat substantial tax liabilities with neither reaping a benefit (beyond clear conscience) from reporting. (The potential for getting caught is, of course, an incentive for honest reporting -- but I gather the risk is slight? Not sure what enforcement mechanisms are actually in place.)

By giving families a benefit from reporting -- i.e., a deduction -- the government increases the incentive for reporting. A 100% deduction probably is bad policy from that perspective -- because the taxes paid by the nanny and the payroll taxes paid by the employer probably don't offset the taxes saved given a 100% deduction. But the more you allow families to deduct, the more incentive they have to report.

I concede completely that the remainder of my complaint is "This is the first time I ever had to deal with it, and it was really, really hard."

Your rational? MacManus' rational? Mineapolitan's rational?

Assumes facts not in evidence.

I'm enjoying Knecht's 125 tremendously.

With respect to taxing internet commerce, yes to various points upthread that it's a significant burden to small businesses, and to the extent that such a tax is justified, a simplified national sales tax is the only reasonable answer.

90: (New York is now trying to do it using the physical location of web sites that Amazon advertises on!)

Rather minor point, but I believe NY is trying to do it based on the physical location of affiliate retailers who advertise on Amazon; not where Amazon itself advertises. This is a sort of a mess even if you supposed that NY consumers should actually comply with existing state law: they're to pay sales tax on their online purchases, but realize that while they pay, in this case, Amazon for the purchase, in many cases the merchandise is not provided by Amazon itself. It may be provided by my bookshop in Maryland. The buyer's credit card shows a charge from Amazon, however. From whom did the buyer buy? A mess, you see.

1.) Does anyone know what the threshold amount is for having to report the income at all? I mean, you don't have to report the cash that you pay the hig h school kid to mow your lawn or babysit your kid on Saturday night.

2.) There are services which will handle your payroll for you.

3.) Having said that, and while I do think that the taxes are reasonable, I will say that state revenue boards can be a pain in the ass to deal with. We had a cleaning woman for about six months, and we reported everything faithfully. We let it be known when we stopped having her come, and we continued to get contacted by the state on a quarterly basis. Randomly, they bugged us two years later after we'd thought that we had finally settled everything.

151.1 -- I think it's something like $1500 in a given quarter. Plus, I think when you are hiring a kid to babysit every now and then on a Saturday night, they truly aren't an employee, because there are no regular hours, etc.

151.3 -- Yeah, really I don't mind the actual taxes so much as the degree of administrative hassle involved.

There's some incompleteness in my 150.last, but I'm not sure there's a point in completing it. The legal unfolding in the NY/Amazon case will be interesting to watch.

59: I don't think the solution in 2 solves the problem at all. Available evidence indicates that no single taxation solution is preferable for all circumstances, considering the variation in income, sales, and property taxes across the country.

And my idea in 49 isn't so much that the Feds would abolish state sales taxes, but that there would be a simplified system to which a state could choose to opt in, with the alternative being self-reporting by state residents on out-of-state purchases (the status quo). Call the national tax 4% for argument's sake, so a state with 8% tax would then weigh the benefit of 100% compliance against the benefit of higher percentages paid by those who self-report (and the costs of enforcement and audits for non-compliance). Also the feds *should* legislate what constitutes nexus, as that's interstate trade, blah blah.

It would be a pretty simple system for businesses:

1. If you have nexus in a state, you charge that state's taxes as applicable.
2. With no nexus, your sales could be subject to the national tax (if the state opted in) or no tax (one could argue that vendors should report all non-taxed sales to those states, but I can't see the benefit of that to states being worth the data management problems).

No vendor without nexus should be required to manage 50 states plus DC worth of sales tax laws.

The legal unfolding in the NY/Amazon case will be interesting to watch.

Even from the cheap seats....

Does anyone know what the threshold amount is for having to report the income at all? I mean, you don't have to report the cash that you pay the hig h school kid to mow your lawn or babysit your kid on Saturday night.

It's a bit complicated. In general, if you pay any single household employee $1,600 or more p.a., you are liable for FICA contributions. You can withhold 50% of the FICA contribution from the employee's wages.

If you pay more than $1,000 combined on household employees (can be more than one) in any fiscal quarter, you are liable for Federal unemployment compensation contributions. There is a specific exemption for part-time employees under 18, so you don't have any liability for paying the weekend baby sitter or the kid who cuts the grass.

IRS publication 926 is the place to go for details.

We had a cleaning woman for about six months, and we reported everything faithfully.

This one is super easy to get around. If the cleaning person does not use your tools (i.e. he brings his own mop, bucket, and vacuum cleaner), and you are not the sole client or the principal source of income, the IRS will recognize it as a contractor relationship. The contractor is then liable for the entire FICA contribution (the so-called self-employment tax). There's no good reason to pay FICA on a cleaning person, it's easily avoidable.

Holy crap, KR. Translating crass latin poetry and reciting semi-obscure IRS guidance for the wealthy all in one go. You're pretty terrifying.

Double taxing the nanny is just regressive & crappy though.

In what sense is this double taxation, Katherine? Wage and salary income (with certain exceptions) is subject to FICA. The employer is responsible for remitting the entire amount, and the employee is responsible for paying half. Child care employees are no different from anyone else. Under IRS regs, anything that looks like a nanny cannot be an independent contractor, ergo a nanny cannot legally be liable for self-employment tax (i.e. both the employer and the employee contribution).

The "freeing up mom for tennis" thing isn't much of an argument either

If the U.S. went from the current (limited) tax credit to an unlimited deduction (as Brock and Di seem to want), that's exactly what you'd enable--indeed, encourage.

why the tax system is so much more solicitous of home ownership--even multiple home ownership--than having & educating kids, I have no earthly clue, & that's separable from how progressive the tax system should be

Far be it from me to defend the home mortgage interest deduction--it's terrible tax policy. The child care tax credit is good tax policy--it's just not generous enough, as I have cheerfully conceded. For any given amount of tax subsidy, the current policy will produce more progressive outcomes than the alternatives being proposed here.

And if anyone wants to propose universal childcare vouchers and publicly funded creches, I'm all for that, too, and I'd like a rainbow colored unicorn that cries Veuve Cliquot to go with it.

I cross posted with your concession. At the same time, it is deeply irksome, to put it extremely mildly to have all suggestions for alleviating the least family-friendly & particularly mother-family government policies of any developed country by a ridiculous margin placed in the "unicorns and Veuve Clicquot" box.

And the first part of 160 is just flat misreading my comment, which was to say that making the nanny pay taxes life she was self employed would be crappy.

With all of the tax complaining around here I thought I was reading a libertarian blog. Election day should be April 15.

158: I'm pretty sure that she used our tools and was more of a housekeeper than just a cleaner. She was there a few times a week.

There was another woman years ago whom we didn't report properly who cleaned for my grandmother and my family. She didn't want us to report. She had 6 clients whose houses she visited once a week, though maybe she saw my grandmother twice. I really regret that we didn't, because she later got sick, and her benefits were not what they should have been post-stroke. We did give her some money, but FICA would have been better. It might have been an independent contractor relationship, but I'm paternalistic enough to think that for certain types of household help, the relationship is not strictly a business one, i.e. an employer should make sure that a nanny/housekeeper who works for the family for 20 years is taken care of.

The "freeing up mom for tennis" thing isn't much of an argument either

If the U.S. went from the current (limited) tax credit to an unlimited deduction (as Brock and Di seem to want), that's exactly what you'd enable--indeed, encourage.

Not true. Under the current deduction, the childcare expenses have to be incurred in order to enable the parents to work -- with the deduction capped at the lower wage-earning spouse's income, if the nanny exceeds that.

Except they're distributive arguments.

166 to 163

161: Snarkiness duly retracted, Katherine. You and I are on the same side w/r/t family-friendly policy. Part of the genius of the Clinton administration was to listen to the wonks who told them to hide the progressive social policy in the tax code, the way that the GOP hides their regressive policies in the tax code, and to do so in ways that don't produce excessive complexity (a problem that befell Al Gore's platform in 2000).

The child care tax credit is a shining example of good progressive policy. There is nothing wrong with it that can't be fixed by making it more generous (say, to 2/3 the median cost of full-time child care).

There is probably some room for experimentation at the margins with supply-side solutions that increase the availability and quality of child care, and I'm all for that, but realistically, any program of state-subsidized child care that was big enough to make a dent in the problem would be untenably vulnerable to budget cutting.

All this talk of exempting nannies from FICA or making child care deductible from federal income tax are steps in the wrong direction, policy-wise, and smart liberals need to see through that, whatever the drawbacks of the current system.

156: Even from the cheap seats....

You betcha. A number of aggregate internet merchants are going to be in trooouuble for their current practices (not directly tax-related) if NY wins. Everybody's watching, baby.

165: I'm not understanding your argument, Di. The current system restricts the child care (actually, "dependent care") tax credit to families with two incomes. The Ruprecht family is not eligible for the credit, because if we were, the rest of you would be subsidizing our decision to have Fleur stay home and raise the children with help (she doesn't play tennis, BTW). If you make child care expense deductible, you enable the Ruprecht's to enjoy a tax subsidy that the Katherine's and Di's of the world have to finance. And, because we're in a high bracket, it will be worth a lot more to us than to waitress who really needs the help.

If you think this one through, it's not even a close call: a limited, refundable credit is good, progressive policy. A deduction is bad policy.

I'd be 110% perfectly happy to pay taxes on amounts paid to a nanny if I could deduct wages paid to her from my own income taxes.

You can! It's called the Child and Dependent Care Credit. Allows you a credit of 20-35% of child care expenses (depending on income) on up to $3000 of care for one dependent, or $6000 for two or more.

And it seems that it has already been brought up. Well then.

In which Matt F flies so quickly that he is able to spin the Earth back on its axis and reverse the flow of time!

170: it doesn't exclude single parents, does it? Because that would be really stupid.

"I'm also not sure how you'd ever get a "compliant nanny"..."

Add another one to the list of dodgy search referrals.

All this talk of exempting nannies from FICA or making child care deductible from federal income tax are steps in the wrong direction, policy-wise, and smart liberals need to see through that, whatever the drawbacks of the current system.All this talk of exempting nannies from FICA or making child care deductible from federal income tax are steps in the wrong direction, policy-wise, and smart liberals need to see through that, whatever the drawbacks of the current system.

Except that, from a policy perspective, I don't see a huge difference between increasing the child care credit and allowing some amount of deductibility for child care expenses.

I think Brock's original point, and one I'm certainly on board with, is that it's a bit incongruent to impose all the formalities of being an employer (not just paying the taxes on April 15, but registering for a FEIN, preparing and reporting W2s, etc.) without providing the ordinary benefits a business employer would have (deductions). I don't know if there's any real solution to that.

I just got out of an exam. My brain isn't moving at the proper speed yet.

170: I'm not sure where I'm losing you. Given that the current credit is restricted to two-income families, why do you not think it is also possible to restrict a deduction to two-income families?

" I don't see a huge difference between increasing the child care credit and allowing some amount of deductibility for child care expenses."

1) Some credits are refundable even if you don't pay federal income taxes or they exceed your taxes (though I don't know about this one)

2) A deduction is worth more the higher your marginal rate--deducting $3000 that would be taxed at 30% saves you more than deducting $3000 that would be taxed at 15%.

I think.

179 makes sense. Credit = more progressive than deduction.

it's a bit incongruent to impose all the formalities of being an employer (not just paying the taxes on April 15, but registering for a FEIN, preparing and reporting W2s, etc.) without providing the ordinary benefits a business employer would have (deductions)

This is an area where public discussion of tax policy tends to be really incoherent because people don't understand or don't think about the difference between deductions that are performing an income-measurement function (most business deductions) and deductions that are basically subsidies run through the tax code (most personal deductions). You don't get to deduct wages you pay to someone who performs personal services for you because it's an expense of running your life, not an expense of running a business.

There are interesting discussions to be had regarding how families should be taxed. It doesn't make sense to tax a family of four--two employed adults and two kids--the same way as you tax two single adults. Kids aren't consumer goods and shouldn't be treated as such by the tax code. But expenditures on household help are personal expenses, not business expenses, and it's hard to talk coherently about changing policy without understanding what you're trying to change.

You don't get to deduct wages you pay to someone who performs personal services for you because it's an expense of running your life, not an expense of running a business.

I'm going to disagree with you here. Childcare expenses are an expense of performing my business in that I can't go to work if I don't have someone to watch my child. It's just not the same thing as a cleaner or lawn-mower or personal chef.

You don't get to deduct wages you pay to someone who performs personal services for you because it's an expense of running your life, not an expense of running a business.

Oh, interesting. Because it actually sounds, per some of Di's remarks regarding the extent to which childcare is necessary to her generating income (true enough), as though present-day americans are beginning to view themselves as businesses. I've just never quite framed it in that way to myself, but it seems clear enough.

Ah, anticipated by Di, I see.

Parsimon, I think you make an important observation that this is a shift in mindset. Once upon a time, wage-earners could go earn a wage without incurring childcare expenses because they could count on wives or grandmothers, etc. to take care of the kids. That is becoming less and less of an option.

182: How about business clothes, commuting costs, additional housing costs for living in a city with good jobs, cost of educating yourself to qualify for those jobs, etc.? For that matter, you can't go to work if you don't eat, so food must also be a business expense, and you need some fun in your life to be able to concentrate at work, so entertainment's a business expense, and so on.

I'm being intentionally a bit hyperbolic, but the point is that the line-drawing you're suggesting just doesn't work. The subsidiary point is that a lot of this stuff got thought through in the fairly early days of the income tax system, and they basically got it right.

Given that the current credit is restricted to two-income families, why do you not think it is also possible to restrict a deduction to two-income families?

Sure, it could be. But IIRC, Mrs. Landers is not currently employed, so I was responding to Brock's complaint about deductibility.

It doesn't exclude single parents, does it?

No, my wording was misleading. The custodial parent can claim the credit, provided the other usual conditions are met.

Credit = more progressive than deduction.

Now you're speakin' my language!

186: Well, yes, this all got thought through at one point. But it got through back when the assumption was that I should stay home with the kids and let my husband support the family. I'm suggesting it ought to be rethunk if we want to support both families and women having careers.

But, because I spreche Knecht's sprache, I agree that credits are a more targeted approach than deductions.

Yes, but Di, there's a broader shift at work that I'd want to think carefully about. One also requires a car (in most cases) in order to earn a wage, and a variety of other things. We could make these all tax deductions. We could essentially treat ourselves as businesses. It's an interesting idea. I don't say that childcare isn't a special case, just that the more general shift is of interest. We remember when corporations became legal persons, and some of us curse that day; instituting the reverse, well, troublesome at least on its face.

But this is all really about the current IRS laws regarding independent contractor status, isn't it?

189: I don't think you can treat child-care as special without running into problems. What if we move far enough out of town so that we can afford 1 income, specifically so my wife/husband can take care of the children. Is my increased transit cost really fundamentally different than living in town and paying for childcare?

There's nothing particularly special about childcare this way, this is all about models for living and what is societally encouraged or discouraged (financially subsidized/penalized).

190: Agreed, and I was pwned by 186.

cost of educating yourself to qualify for those jobs, etc.?

Damn it, I can't remember the rules on this. You can deduct educational expenses like continuing education courses, but you can't deduct the original degree which qualified you to work in a profession. A J.D. is not tax deductible, but an LLM in tax law can be either partially deducted or paid for by your employer without your incurring an income benefit. I don't remember what the exact standard is, but it relates to teh fact that the LLM in tax law supposedly allows you to continue in your current employment as a lawyer. Frankly, I think that this is a bit disingenuous, since an advanced degree may qualify you for stuff that you weren't qualified for before.

Damn it, I can't remember the rules on this.

BG, an easy rule of thumb for these rules is this:

"Recall that tax law for continuing education is specifically tailored to let self-employed doctors and lawyers deduct resort junkets as a business expense. For any given case in question, ask yourself, 'Which interpretation of the law would be most narrowly targeted to making a legal seminar at Aspen tax deductible?'"

193 is depressing

LB's thing that would annoy many in a minor way!

187: Mrs. Landers is employed--that's why we go thte nanny. What the hell did you think she did--play tennis all day? Actually, waita minute... why do you have an au pair if Fleur is not employed?

196: duh!

192 is basically correct, as is 193.

195: Once they got into the room, she produced that little sales tax policy issue from her handbag, and they did the thing that would annoy many in a minor way, something he had never heard of in all his life. He had lost his mind to her demented form of lust. Danger! Imminent exposure! That thing that would annoy many in a minor way!

190: Well, except that (as a single mom) paying for childcare is not a "lifestyle" choice. It's a necessity.

And yes, given a two-parent family, childcare may be a lifestyle choice to the extent one of the two parents can earn enough to support the family (not always true).

And of course the tax code is all about encouraging some things and discouraging others. I see no sound policy argument for encouraging longer commutes or more expensive work clothes. I do see very strong policy arguments for enabling dual-income households or easing the burden on single income households. The latter not necessarily so big of an issue at my income level -- fully conceded -- but hugely important at lower income levels.

200.3: There's at least near-unanimity here that more support for working parents' childcare needs would be a good thing. The disagreement is over whether that justifies treating childcare as a business expense.

200: We're not disagreeing, I was just saying that there isn't an easy bright line. As others have noted, credits are generally better than deductions for targetting this sort of thing where it is most needed.

I'm not against dramatically expanding childcare tax credits. I'm just against treating different forms of childcare so dramatically differently in the tax code, for what I still maintain is no good reason (and especially doing so in a way that throws a complicated set of employer-related tax burdens on individuals who are generally ill-equipped to navigate them).

One of the biggest complaints of the American public is the "unfairness' of the tax codes. A large part of the "unfairness" is the result of the social engineering that goes on. In the land of rainbows and unicorns the taxes are collected to fund the government, not for social engineering purposes. That is a wholly separate (cabinet level) department, where one has to stand in line if one has not made an appointment, which can be done online.

" I'm just against treating different forms of childcare so dramatically differently in the tax code, for what I still maintain is no good reason"

I thought the reason was: someone has to pay the nanny's FICA--the alternative is making her pay it & that's worse.

201: Okay, butmy point in 200.3 was that saying "But then all these other things could be called business expenses!" isn't really a sound argument against treating childcare expenses as such because, sure, they could be, but there's no sound policy for treating them that way and there are sound policy agreements for treating child care that way. To argue, "But then we'd have to have a deduction for shoes!" is silly if we are all agreed that whether or not to grant a deduction is basically a policy decision.

Actually, waita minute... why do you have an au pair if Fleur is not employed?

It's an extravagance, really. We got the first one to save our marriage: I was gone all the time during the week, Fleur was struggling with an infant and a two-year-old, she resented me for leaving her at home for the luxury of a quiet hotel bed and restaurant meals. At first we had a mother's helper who came for X hours per week to lighten the load, but we came to realize that the real need was to have someone there when Fleur was alone in the evening (the most stressful time of the day for her, with bath and bed time) and overnight (when she had to deal with things like night terrors and ER visits). So we got the au pair to deal with that.

As the children have gotten older, the au pair has become more dispensible, but it is still a nice luxury to have someone to help Fleur when I am gone and to babysit on Saturday evenings.

My mother and her mother both consider it a frivolous waste. Most of our neighbors either resent it (the working mothers) or think it's crazy ("You leave your husband alone in the house with her?). But the hedonic treadmill being what it is, we've stuck with it.

205: Okay, then let me deduct from my income the wages paid to my "employee".

a complicated set of employer-related tax burdens on individuals who are generally ill-equipped to navigate them

Yeah, this is my biggest gripe, too. Since I am not actually a business, I don't actually have an accountant to figure this shit out for me.

It could be simplified: A schedule or form on which I report what I paid and my nanny's ss#, a worksheet or formula to figure out how much that increases my tax obligation, and then the IRS can figure out how much of that to give FICA, Medicare, etc. and so on...

208: Brock, I still totally fail to understand why you deny that your employee is your employee. You're a small employer who employs one person. Lots of small businessmen are in your situation, and they all complain too, but they learn to deal with it.

210: they are trying to run an business and generate profits. I am not. They are able to deduct wages paid to their employees. I am not.

John, I don't think the complaint is so much with calling the nanny an employee as it is with doing so, but not making those wages deductible the way they generally are with employees.

Look, it's simple: Brock is saying that you should be able to deduct your expenses from your income, like a business does. So if you make (e.g.) 100k in a year, and you spend 100k, you should pay zero in taxes. It's only fair!

In the land of rainbows and unicorns the taxes are collected to fund the government, not for social engineering purposes.

Bwwooop, bwooop, bwooop, Strawman Alert!!

Tax policy is unavoidably about social engineering. The decision of what to tax (personal income, corporate income, corporate gross sales, personal property, sales of certain commodities, etc.) is inextricably linked to value judgements (including distributive equity), empirical beliefs about the impact of taxes, and pragmatic concerns about intrusiveness of enforcement.

There is adequate room for debate about exactly when the extra costs of complexity (perverse incentives, burden of compliance, cost of collection) outweigh the social good being generated, but the child care tax credit, as currently designed, is not a particularly egregious offender in that regard. You want to get rid of social engineering in the tax code? Start by getting rid of accelerated depreciation allowances, preferential treatment for capital gains, and the interest tax shield on corporate income*. Those three factors drive more resource misallocation in a good month than every bit of liberal do-goodery since the dawn of time.

*and lower the applicable corporate tax rates to make it revenue neutral in aggregate, if you like.

Fine, but you hire someone and someone has to pay their social security. That someone would be you, because you're the employer.

Maybe you deserve a deduction, but denying that your employee is an employee doesn't make sense. If you hired a groundskeeper full time you'd have to pay his social security too, even though you aren't a business and even though groundskeepers aren't deductible.

Those three factors drive more resource misallocation in a good month than every bit of liberal do-goodery since the dawn of time.

unfortunately, so true.

213: That's not a fair reading of what anyone has suggested at all.

Sounds like the Ruprechts' situation is much more easily addressed with an au pair than lots of other kinds of child-care needs would be. (Which is to say: maybe it's not so helpful to suggest au pairs as the fabulous alternative to nannies for everyone else.)

217: no, no it isn't.

214: See how complicated things get when experts get involved? And all to the disadvantage of real Americans. What could be simpler than a single flat tax that everybody pays?

I'll tell you the obvious solution nobody's even suggested, though: good ol' fashioned caging. You pay sales tax on the original purchase and then you're done. Shoot, buy this bad boy and you don't even have to pay them.

maybe it's not so helpful to suggest au pairs as the fabulous alternative to nannies for everyone else

I'm not an evangelist for it, rfts. It has its own set of headaches (especially for the woman of the house) that make it Not for Everyone. But if you live in a high wage environment where good nannies are scarce and expensive, it can be a cost-effective alternative for some folks.

Okay, then let me deduct from my income the wages paid to my "employee".

Once again, Brock, I suggest that you abstract from your personal situation and make a reasoned policy argument why making the Landers nanny a deductible expense from personal income would be a superior policy alternative, dollar for dollar, than the system we have in place. In a pinch, just explain why it would be more just, consequences be damned. IMO you haven't advanced the argument beyond "doesn't seem fair to me."

From her perspective she is certainly the employee of some entity. Whether that's a profit-making entity, a nonprofit entity, a wealthy aristocratic household, or something else does not cancel that out.

It's not nice to call Brock an entity, Fatman.

222: Mostly that the system in place doesn't really doesn't provide much of a credit at all. The credit was less than the payroll taxes I owed for 10 weeks of having a nanny last summer.

From her perspective she is certainly the employee of some entity

Not necessarily -- she (or he) may just as well feel like an independent contractor.

Okay, you've broken me. I'm willing to accept a dramatically increased childcare credit as the sole remedy here. But it needs to be dramatically increased! Until then I will continue to complain about the injustice.

Mostly that the system in place doesn't really doesn't provide much of a credit at all. The credit was less than the payroll taxes I owed for 10 weeks of having a nanny last summer.

While reiterating my belief that the credit should be more generous, I suspect that in your case the amount was so meagre because your income puts you well into the phase-out range, which is a feature, not a bug, from a distributional perspective. I say this with no direct knowledge of Di's tax situation, but my mental math says that 15% of wages over 10 weeks is well, well under the maximum for the credit.

I'm willing to accept a dramatically increased childcare credit as the sole remedy here. But it needs to be dramatically increased.

Sorry, buddy, but you're above the phase-out threshold too, if your compensation is typical of Big Law associates.

I was just about to remind Brock that I want to restore the Clinton-era top marginal rate of income tax as well, but I was afraid I might push him over the edge into Republicanism.

Just remember, Brock, they don't care about your tax bracket: they're content to tax you to death with the AMT because they know you're a Dem-leaning demographic. They're only concerned with lowering taxes on income from capital. Also, they're responsible for making it so hard to get pot, and they only pretend to care about abortion.

229: Isn't it capped at something like $3k? That's way too low (irrespective of income).

above the phase-out threshold children are just conspicuous consumption, certainly not something to be encouraged by tax-writing philosopher kings.

It's the implied moral lessons in the tax code that sting, not just having to pay more. You imagine that there are people behind the regulations, and you want to yell at them, but of course they are hiding.

Or maybe I calculated my credit wrong... I do kinda suck at math. And taxes...

But looking at the link provided above, it looks like the credit maxes out at $1050 if you earned less than $15K and $600 if you earned greater than $43K. I got $600.

And, yeah, I agree that it is less important for me to get a big tax credit than for the guy making $43K and under. I do think jumping through the formal hoops of being an employer is unnecessary for people employing nannies -- just put the FICA etc. on my 1040 or something.

Or, you know, maybe I should find a tax preparer.

I'm going to riff off 196 and 207 and suggest, tongue only half in cheek, that a good solution to the two-working-parents/childcare/financial security issues is to stop coupling up and start tripling up.

20-35% of 3K, 6K if you have more than one kid.

Or, you know, maybe I should find a tax preparer.

Last time I did that, it was $250/hr, for a bunch of hours. Might not help you with a $600 credit. To be fair, my situation was/is complicated.

Shit, really? Never mind then...

20-35% of 3K

Yikes, for a year?

I have a really good tax code/family structure/marriage penalty anecdote, but I need to re-check a book at home to make sure I'm getting it right it's too long to fit in the margin.

Ergo, not a huge credit.

237: Also to be fair, what made them expensive was tax-treaty stuff and multiple countries, etc. I'm sure you can find cheaper for less entangled issues.

i.e, my $250/hr was for proper accountants set up to deal with more than one country, which is a fair ways from the guy with a tax-credit-today table at the mall. So your mileage may vary.

I'm not an evangelist for it, rfts. It has its own set of headaches (especially for the woman of the house) that make it Not for Everyone. But if you live in a high wage environment where good nannies are scarce and expensive, it can be a cost-effective alternative for some folks.

Mostly the kind of folks who don't (both) have to go off to work all day, though, it seems. And it's cost-effective in part because it's a way of avoiding the tax liabilities that you're scolding people for minding.

Not necessarily -- she (or he) may just as well feel like an independent contractor.

What you are isn't a subjective state. As I've said, I know someone who is facing miserable poverty and will need to be bailed out by friends and family because they worked for several decades as an independent contractor / under the table.

Redefining jobholders as independent contractors is a major way of stripping benefits and security from workers in general. It's widespread nationally at all levels and can have very negative effects on workers.

243: and you have to have a spare bedroom in which to house the au pair, which many people don't.

Redefining jobholders as independent contractors is a major way of stripping benefits and security from workers in general. It's widespread nationally at all levels and can have very negative effects on workers.

Absolutely. It's a very bad situation, and GOD PLEASE CAN WE HAVE UNIVERSAL HEALTHCARE PLEASE ALREADY oops, sorry, sometimes I get a little overcome.

Di, at least spend $50 and get TurboTax or TaxCut. It will make your life easier and probably save you money.

Also, consider going for the Dependent Care Flexible Savings Account, if your employer offers one, instead of the tax credit. You can pay for a portion of your child care expenses with pre-tax dollars (note to Brock--this is equivalent to making a portion of the expense deductible!), which might be worth more to you than the credit, depending on your tax bracket.

Isn't it customary for the au pair just to crawl into bed with the couple like in those fun movies?

Au pairs work fine for families where both parents work, the agencies pay tax on them, though not withholding since they're not citizens and won't collect SS. Not sure if that's a shortcut or not. There are pools of ex-au pairs working for cash in most big cities I think. I think they're cost-effective for roughly the same reasons that noncitizen gardeners, mechanics, and handymen are cost effective, and certainly they have an out if their employers get to them.

|| Stupid administrative Hassle. I am trying to put in an application for a job at a hospital which is part of the dominant healthcare player in the state using some sort of People Soft application.

I tried to upload my cover letter and resume as a pdf, but it said that the document was too big. When I did it as a word document, they loaded fine, but then the system tried to extract data from my resume and organize it according to its application fields, and it mixed up bits of my address with bits of the hospital's address that I'd included in my cover letter. It extracted the departments I'd worked in as the companies I've worked for.

I didn't think that my resume was that unusually formatted, but it is in a table.

Most infuriatingly the system won't recognize the schools I went to when I try to edit the fields, and I get a weird 15, 18 data error.

I have spent 20 minutes on this damn thing.

|>

Mostly the kind of folks who don't (both) have to go off to work all day, though, it seems.

Actually, it's more flexible than daycare--you can assign 45 hours per week more or less as you choose, subject to certain restrictions (e.g. no more than 10 hours per day). So if you have to stay late at work, no problem, you call the au pair and tell her she needs to work a little longer. That doesn't work so well with daycare.

And it's cost-effective in part because it's a way of avoiding the tax liabilities that you're scolding people for minding.

Uh, no. It's cost-effective because au pairs earn the federal minimum wage less an allowance for room and board. I think they get the princely sum of $160 per week, which is significantly less than the going rate for a nanny in the coastal metropolises. The FICA savings are the least of it.

247.1: and won't do shit for 90% of your adminstrative reporting requirements (state unemployment contributions, quarterly state wages, workers comp., etc.)

247.2: a bullshit small portion.

252.2 Comity!

Okay! I may be working with some unfair prior notions about au pair reliability and practicality.

Knecht, you are of course correct that all tax policy, in fact government itself is social engineering. which is why I placed the statement in the land of the unicorns. More to the point, current tax policy was formulated at a time when a different set of assumptions were commonplace. Changing the assumptions requires just as much political capital as changing the actual policy.

Remember, when you change an assumption, you change the ass of u and mption.

I have changed mptions ass many times, Sifu. All good fathers have.

above the phase-out threshold children are just conspicuous consumption, certainly not something to be encouraged by tax-writing philosopher kings

While I'd be as happy as any other upper-middle-class parent to be getting more tax advantage out of the child-raising thing, I think the issue isn't so much that Congress wants to screw upper-middle-class people with kids as that they prefer phaseouts of all sorts to the horror of actually, straightforwardly raising rates.

244: Redefining jobholders as independent contractors is a major way of stripping benefits and security from workers in general. It's widespread nationally at all levels and can have very negative effects on workers.

This makes me feel vaguely ill.

148

"... Both the nanny and the parents have a financial incentive to go under the table -- if the wages aren't reported, both get to evade somewhat substantial tax liabilities with neither reaping a benefit (beyond clear conscience) from reporting. ..."

This is wrong. Payroll taxes are unusual in that they entitle the employee to individual benefits such as social security, disability insurance, unemployement insurance and worker's compensation. An employee might not value these benefits as much as the immediate cash but they are definitely giving up something working off the books. Note while it is often claimed that social security taxes are regressive this is false when the benefit is taken into account as the benefit formula strongly favors low income workers.

Or what Emerson said in 244.

Of course this doesn't apply to illegals who aren't entitled to social security.

66

"... It's what the word means."

Unfogged commenters prefer to define words to suit themselves.

Others have made the following point also but I think it is worth repeating. The current mismash of sales and use tax regulations really are insanely complicated and impractical to fully comply with.

NY state recently added a line to the state income tax return to collect use taxes. So pages of the absurd regulations are now included in the income tax instructions. For example NY doesn't have just one sales tax rate it varies geographically over numerous subdivisions. If you live in an 8% sales tax area and buy something in a 7% sales tax area a few miles away and bring it back to your house you theoretically owe the 1% difference as an use tax. And there isn't just one rate on everything, some classes of items are exempt and some are not exempt but are taxed at different rate. The boundaries between the classes are complicated and arbitrary. Finally just to add to the fun the state sometimes has tax holidays for particular items for short periods of time like no sales tax for clothing on Memorial Day weekend. And of course only some of the numerous local taxing authorites sign up for them.

Until NY does something to make the laws easier to comply with they will get scant sympathy from me.

261: Except that, in this case, saying "that's the definition of employer" doesn't cut it. OFE suggested you are an employer if you pay someone to do work. This is not, in fact, the applicable definition under the tax code or under the law in other contexts. Whether or not you are an employer turns on an analysis of the degree of control exerted over the work. In this context, the IRS has ruled (correctly, I agree) that a nanny is an employee -- but not just because you pay the nanny to perform work. It has to do with the fact that you have specified hours, generally pay them by the hour or week with a regular paycheck, and there is a pretty strong presumption that you exercise control over the manner in which the work (i.e. caring for your child) is performed. You pay a babysitter to do the same type of work on an ad hoc basis, but don't have an employer/employee relationship because there's not that same regularity, etc.

Language in any context is packed with nuance and arguing that "that's how the word is defined" don't always adequately address that nuance.

Dear lord. You guys are citing Mike Mazerov on Unfogged? This is a really really scary place.

Michael has done more to help keep public services funded and have corporations pay their fair share than anyone else I can think of. And yes, we should be charged the sale tax on our Internet transactions.

Are you guys all aware of the massively complicated and ponderous process by which states are trying to align their sales tax codes to make it easier to charge the appropriate tax rate? The streamlined sales tax, children. One day I may tell you all the story of how I worked to preserve the concept of a "0" tax rate in the sst so that states would not see their future tax bases arbitrarily limited. Good times

Really, the idea is to have a uniform definition of goods across states for tax purposes so that all you need is a computer program to spit out and apply the proper rate, you then send your stuff on to a clearinghouse -- that most of the plans called for this to be a private vender and not some intergovernmental agency like an arm of the multistate tax commission made me apoplectic -- and with minimum muss and fuss your compliance problems are mostly solved.

And what have you done with my unfogged? I can get Mazerov at work.

They are taxed. In Califronia at least there is a spot on your income tax return to declare your online purchases and pay the tax on them. I wonder if there is any data on how much is collected this way.