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Our Low-Tech Tax Code
theodp writes "After establishing that nothing can excuse Joe Stack's murderous intentional plane crash into an IRS office, a NY Times Op-Ed explains the reference in Stack's suicide note to an obscure federal tax law — Section 1706 of the 1986 tax act — which the software engineer claimed declared him a 'criminal and non-citizen slave' and ruined his career. Interestingly, a decade-old NY Times article on Section 1706 pretty much agreed: 'The immediate effect of these [Section 1706] audits is to force individual programmers ... to abandon their dreams of getting rich off their high-technology skills.' Section 1706, the NYT Op-Ed concludes, 'is an example of how Congress enacted a discriminatory law that hurt thousands of technology consultants, their staffing firms and customers. And despite strong bipartisan efforts and unbiased studies supporting that law's repeal, it remains on the books.'"
I remember when this law was passed. At the time, many large companies were switching to having huge numbers of contractors instead of regular employees. Uniformly, these companies denied any benefits, like health insurance. Job security was also lower. I personally did a lot of contract work at the time. After the law passed, the big companies were forced to hire most of those contractors, with benefits. I think this improved things generally all around. For some reason, full employment creates a bond of loyalty from the employee, and sometimes from the company, which is never there as a contractor. More programmers got health care. It was a good thing.
As a contractor, I was not personally effected, because I was an actual contractor, with multiple clients, self-employment taxes, and all. All you need to not be effected by the law is to be an actual contractor.
Celebrate failure, and then learn from it - Nolan Bushnell
Do you mean 'criminal and non-citizen slave'?
Or 'is an example of how Congress enacted a discriminatory law that hurt thousands of technology consultants, their staffing firms and customers. And despite strong bipartisan efforts and unbiased studies supporting that law's repeal, it remains on the books.'?
The gist of it is that the 1986 law withdrew a special exemption for high tech workers, along with a whole bunch of other tax shelters (the law is most hostile to individuals that work full time using resources provided by a company and with supervision from an employee of the company, while claiming that they are a corporation doing contract work for the company).
Nerd rage is the funniest rage.
From TFA: In an earlier interview, Tom Burger, the director of employment taxes for the I.R.S., said one of the agency's difficulties ''is that, and I need to pick my words carefully, Congress passes laws, often without asking us about them, and then tells us to enforce them.''
Translation: Politicians make laws without knowing jack about the consequences and not even bothering to ask those that could tell them what kind of can of worms they are about to open. And then they're too pussy to admit they blundered.
Sounds familiar? A law gets passed that should cure some problem with the economy and the only thing it accomplishes is to cause troubles where there were none before while the problem continues to exist.
If I get that right, the law aimed at eliminating the "fake freelancing", where companies pretty much forced programmers into freelancing instead of hiring them, resulting in cheaper labour for them and shifting the risk and insurance burden on their not-quite-really-employee. Now, that still exists, with programmers now being passed about like slaves by temp agencies where they enjoy little less risk or much more insurance while at the same time losing their freedom entirely, while those companies still get the cheap programming labour they wanted, and at the same time the whole deal also keeps those programmers that are good and sought after enough to actually be (really) self employed and successful at it from actually being this.
Sounds very familiar...
We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
That's not how I read the article. The law creates tax issues for individual programmers who incorporate: if your business has only one employee and is less than one year old, the IRS comes looking for you. And as a matter of policy, the IRS is harassing _the employers_ of such contracting companies. The result is to discourage individual programmers from incorporating on their own.
Partly due to the economic issues lately, I've had _a lot_ of recruiting companies trying to recruit me to leave my work and come help them earn their recruiting fees. It's taken me a lot to stop laughing, sadly, when they say how lucrative it is: salary equal to my current salary, but without benefits or vacation, unemployment, and on a "temp to perm" basis for a company that is already falling apart due to letting their qualified engineers go at the start of the crisis is not a good place to go. I've reviewed the potential for consulting, and while it makes sense for some, it's not the wonderful and economically sound decision that many recruiters would have you believe.
I'm not a tax attorney, but I do know a little about the situation. Here's a brief summary:
There's a lot of concern over how to classify workers as either "employees" or "independent contractors." Each has its own pros and cons, but in general, it's better for a company to consider its workers as contractors from a tax perspective. Because taxes are radically different based on how an employee is classified, a misclassification that is turned up by the IRS can be very expensive for a company. As such, there is a "safe harbor" which protects companies who have a reasonable basis in considering an employee to be an independent contractor.
There was a sense this was being abused in the technology industry in the 1980s, and as such, Congress amended the law. The amendment didn't change the classification system of employees versus independent contractors, but did remove the safe harbor. As such, companies became much more reticent to hire a worker as an independent contractor, because the penalty for getting it wrong was much more likely to be assessed.
I'm a lawyer, but not yours. I wouldn't represent someone who thinks taking legal advice from Slashdot is a good idea.
The more interesting part of the tax provision was that it was introduced by Patrick Moynihan as a favor to IBM. A $60m tax cut type of favor. I'm not saying Joe was right in what he did, but it is rather apparent that to be noticed by government, you must either be insanely rich or insanely violent.
What changed under Obama? Nothing Good
Substitue "Mohammed al-Mohammed" for "Joe Stack" and "Section 1706 of the 1986 tax act" with "United Nations General Assembly Resolution 46/86" and you'll see what you folks are all doing - you're making up excuses for a terrorist because he happens to share your political views. This guy was a fundamentalist libertarian terrorist.
I remember when this law was passed. At the time, many large companies were switching to having huge numbers of contractors instead of regular employees. Uniformly, these companies denied any benefits, like health insurance. Job security was also lower. I personally did a lot of contract work at the time. After the law passed, the big companies were forced to hire most of those contractors, with benefits.
I remember that too. That was during The Bubble.
And then after the bubble? Why most of those people were laid off. Only instead of being able to get by with smaller amounts of work the way mot people do, they spent years unemployed because they couldn't contract anymore and they couldn't find permanent work either.
I don't know why on earth you would say "job security was lower" because contractors at least always had a defined term of work and only in the most extreme circumstances would you be able to get rid of them even if you as an employee thought they sucked. Meanwhile at any moment Hammer Of Rightsizing could come down on you as an employee.
As for healthcare, there are a lot of people with spouses also working that can cover the health angle or you can opt to go with the catastrophic coverage (still pretty cheap) along with the tactic of setting aside something more than the $2-$3k deductible in a medical savings plan. Then you are covered for the big things but also can do the small stuff too if you want.
"There is more worth loving than we have strength to love." - Brian Jay Stanley
The question I have is whether this guy is the tip of the iceberg or whether he's just another wing nut who can't admit when he's lost whatever argument he got in.
He does make some complaints in his screed about the kinds of issues that even rational people are worried about -- big government, big corporations and a "system" that feels stacked against individuals; some of these issues have been kicking around among conspiracy theorists and paranoids forever, yet a Treasury run by ex-bankers that loans out a trillion dollars to bankers and others who make sure the banks get paid is only too real.
Is unemployment and the rest of it going to create more of these guys?
Basically, it's a duck law. If it looks like a duck, quacks like a duck, and walks like a duck it is a duck.
If you work for one company long term, doing what is essentially a full time position, then you are an employee whether you want to be or not and are entitled to things like health care and you employer is required to pay payroll taxes. It doesn't matter if you call yourself a consultant or work out of some sort of shonky staffing agency, and more importantly it doesn't matter if your employer calls you a consultant and hires you through some shonky staffing agency.
In theory it's to protect the rights of workers so they get all the benefits of full time employees if that's what they are, however in reality it's to close a tax loophole. Ya see the thing is generally speaking capital gains tax is less than income and payroll tax. Consultants running their own companies generally pay capital gains on most of their income whereas employees pay income tax and their employers pay payroll tax, which generates more revenue for the government. The extra benefits for employees are nice too, but that isn't really the goal.
Now the thing about this law is that if you actually are a consultant(you know, changing clients regularly, working for multiple clients, or doing work that isn't standard 9-5 work) none of this affects you, you're still a consultant and you still get the pluses and minuses of that arrangement. If you're not really a consultant(more than a year at the same place, no additional clients, doing what would normally be a salaried position) then your employer has to treat you as an employee. This means paying payroll tax, health benefits, 401k if applicable, which is of course expensive. Generally speaking if this happens a company decides to either get a real consultant or get a real employee. If they make you a real employee it generally means a pay cut(since they're paying all those benefits) and essentially the end of the little consulting business you had going.
Now none of this is in and of itself a problem, people who were being exploited got their proper benefits, the tax man got his money, and real consultants weren't affected. The problem is that some people are either stupid or lying to themselves. They want all the stability and routine of a salaried position with the higher salary, lower taxes, and theoretical freedom of a consultant. Essentially they want to be consultants without incurring any risk. This, of course, doesn't work because the loser in this relationship is the government who gets fewer tax dollars, and everyone who does the right thing since they're paying extra tax to make up for you dodging yours.
There were a few problems because of people who really couldn't face doing either real consulting or real employment(which this guy seems to be one of with the whole slave thing) or who invested a lot of money and time into their business shell even though they weren't actually using it. All in all it's a fair law though, real consultants stay consultants, real employees stay employees, people who are in the wrong category get moved to the right one. Everyone pays the taxes they owe.
The moral of the story is that consultants get higher pay and lower taxes because they incur higher risk(a consultant/contractor may or may not have work at any given time and has pretty much zero protections) and you can't get rid of the risk and still retain the other benefits.
I'm pretty left wing, but I lived through that insanity:
1. The IBM PC had just become a viable business computer
2. Firms had an incredible need for decent programmers
3. Decent programmers commanded pay 2-3 times what was then considered reasonable salary for a recent college grad (i.e. way outside corporate pay scales)
4. Firms had a hard time telling good vs bad programmers apart
so...
5. Firms hire programmers as consultants, pay them market wage, but have the ability to easily fire them by not renewing contracts
6. Programmers self incorporate because that is the only way firms are equipped to pay them
7. Programmers quickly realize that they can write off giant amounts of income as business expenses (travel, meals, home computers, video games, home office space, etc.)
then...
8. Law is passed to prevent this if basically:
a. You claim to be a sole proprietor, and
b. All your billing is coming from a single corporation (i.e. you are really an employee, not a consultant.)
IIRC, I avoided the law by forming a two person corporation with multiple billing streams.
Yeah this poor guy could only afford a nice house and a plane. Just imagine, without that terrible law, he could have been able to afford a two engine plane and a slightly nicer house!
The other half of the equation is the $60m tax cut that was pushed by Senator Moynihan as a favor to IBM. You were clever and figured out a way to navigate the hurdle caused when congress had to find $60m to offset its favor to IBM (nice work BTW). The problem is, when there are a very few who can simply buy the laws they want via the legalized corruption of campaign donations, cleverness will not always be sufficient to overcome those hurdles.
What changed under Obama? Nothing Good
IIRC, I avoided the law by forming a two person corporation with multiple billing streams.
After reading the idiot pilot's letter several times as well as the links provided, the solution to this tax situation is exactly what you did: create a partnership/hire another person, and have multiple concurrent projects.
For all the tax-avoiding mental gymnastics many of the antitax crowd employ, and with how smart they think they are, you'd think a simple, straightforward solution such as what you did would be obvious. Some people just don't want to pay taxes.
As the son of the IRS employee who was killed in this incident said, "if he [Stack] has a house and a plane he can pay his taxes." (Austin American-Statesman, 2/21/2010).
For all the tax-avoiding mental gymnastics many of the antitax crowd employ, and with how smart they think they are, you'd think a simple, straightforward solution such as what you did would be obvious. Some people just don't want to pay taxes.
You've made a mistake here. The anti-tax crowd aren't against paying their taxes. They don't want to have to go through any kind of "straightforward" gymnastics to avoid taxes. They just want the taxes to not be in the way to avoid.
Because of the complexity of the tax laws, we now have a new activity which somehow is frowned upon by everyone (and committed by nearly as many.). An activity which is not only perfectly legal, but also presumably encouraged. You've even advocated that activity right here, but for some reason there are people decrying "Tax Avoision."
Why not just not have that complexity. Have a tax code that's short enough for a single person to read completely through in less than 2000 hours of reading (leaving two weeks for actual work). Every section you can't read is a section you can't be sure doesn't apply to you. If you're on the hook for criminal liability for failing to adhere to "must" sections, then you must be able to read them. And that's not even counting the money you lose by not having time to find "may" sections.
Can you be Even More Awesome?!
Here is the deal - companies pay out money in a few different ways.
They can pay money to vendors for services rendered. Generally there is no tax on this, but it can't go to an individual directly, and it might be taxable by states/etc.
They can pay money to an employee - W-2 and all that. That is how 99% of the US population gets paid. The recipient pays income tax on that.
They can pay money to their shareholders in the form of dividends. The shareholders pay capital gains taxes on that money, which is a nice low percentage so that rich people don't have to pay taxes. There is also the issue of double-taxation, but most big corporations have so many tax shelters that they don't pay those anyway (just watch the Frontline episode on companies buying sewer systems in Europe and leasing them back to communities, and so on).
When you have a company of 1 you can elect to pay yourself in salary, or in dividends. The latter is FAR more beneficial tax-wise, although you first need to realize the money as corporate profits and pay corporate taxes on it. If you pay yourself as salary then chances are you won't have many corporate profits to speak of and so corporate taxes will be low (a salary counts as an expense on the balance sheet - a dividend does not).
The reason dividends are attractive is that before you pay them to yourself you can offset them with all kinds of expenses. Driving to your client pays for your car, any computer used mostly for work purposes is a deduction, lunch with the client is a deduction, and so on. Ordinary employees are expected to pay for their own commutes and pay taxes on that money at a much higher rate on top of that.
Hope that explains some of the nuances here. Disclaimer: I'm not a tax accountant, and I'm not an expert on this stuff in any way so a detail here or there might be off.
But they don't. See the thing is once you have so much money you basically can't spend it all. Add to that they will be paying less tax as a percentage of income and it gets really unfair. Heck, they also tend to spend lots of money on things that are not property so more money they spend without paying taxes on.
The only real fair tax would be, no tax on first X dollars made and Y% on every dollar made after. With no difference between money made via honest labor or capital gains, or dividends.
Look: If you want economic security as your top priority, don't be self-employed. Starting a business or going out on your own universally means that one must be willing to accept a lack of security. And for all that you have to work harder than anyone else.
Furthermore, every new business fails. It isn't a question of if you will run out of money. It is a question of when. More money doesn't solve that problem. What separates out a successful from an unsuccessful business is that the successful one manages to keep going through the failure and eventually arrives at success. If you don't have the fortitude to do it, don't.
There are a lot of benefits to starting such a business, though. They include freedom and the possibility in time to earn more than you would working for someone else. I prefer this route, but I would certainly not recommend it to everyone.
LedgerSMB: Open source Accounting/ERP
More accurately, it is likely he had a house and a plane because he did not pay his taxes.
After paying for his legally required share of the two utterly ridiculous wars we are prosecuting, US bases all over the world, the cost of keeping an unprecedented number our citizens in jail, subsidies for businesses that otherwise would naturally fail... he might very well have been unable to purchase a house, much less an aircraft. 20% to 40% of one's income in your hands over the years (more, if you actually do the math*) makes for quite a difference in how you can approach purchasing big ticket items like homes and boats and so forth; and if in doing so, whether you ride the wheel of debt that has been arranged for us, or if you are able to actually make such purchases without incurring additional costs in interest.
It is well to keep in mind that like any enterprise that involves the legal system, trying to stand up for a position that the government finds itself in disagreement with - legitimately or otherwise - is also a hugely expensive undertaking, easily capable of bankrupting any person of average income. The presumption that you can fight city hall is false for most people. It's just another way to shipwreck your life.
Perhaps taxes are too high, and government too large, after all. I seem to recall that there are Americans who are looked upon as heroes because they fought against unreasonable tax policies. Is it fair to assume that each and every one of those we hold in such high regard perfectly managed their lives? This guy clearly could have made different decisions (no doubt most of them to his detriment), but would they have been "right", or merely compliant?
I could point out many historical examples of "law abiding citizens" that most certainly were not doing "right." To call this fellow an "idiot", as you do, is to attempt to wrap the whole event in a nutshell of disrespect that does not serve the interests of the dead IRS employees, the family Stack left behind, or, frankly, the rest of the nation.
It does, however, serve the needs of the government. An entity that is more in need of careful pruning than encouragement, in my opinion. I can't support Stack's action, because in the end, these people were neither his enemy nor the source of his problems. However, from where we stand today, it is history, and all I can do is hope that more people think about the problem, instead of assuming it is inevitable that we pay such huge amounts for "services" that primarily benefit other than the general population. Perhaps while they're at it, they'll think about how the government has stepped outside the boundaries defined for it by its formal authorizing mechanism.
After all, a government that is doing what it was actually authorized by its citizens to do is a lot less likely to incur the wrath of its citizens, thinking rationally and "acting rightly", or not.
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*note: The amount of your money that goes to taxes is the amount you actually pay directly, plus the amount paid by any first-party you do business with. For instance, if you pay a plumber $100 to fix your pipes, and the plumber is paying a 25% tax rate, then $25 of the $100 you gave the plumber goes directly to the same tax well that your direct taxes do. Here's the math. Let's say you and the plumber are both paying 25%. Then, you initially earned $133; the government taxed you 25%, which is $33.33, and now you have $100 left. Now you give that $100 to the plumber, who in turn has to give $25 of that income (25%) to the government. $75 of your $133 has arrived in the plumber's hands, actually paying for the plumbing work. Your actual tax rate here is 75/133 which is about 56% - not the 25% that it initially appears to be.
And the income of the plumber, w
I've fallen off your lawn, and I can't get up.
One thing everyone is forgetting about health insurance. They cheat. Insurance doesn't pay what they should, and they'll always have some excuse. They can outright deny your claims. More common is burying you in technicalities that somehow amount to them paying a good bit less than they ought while trying to convince you and the doctors that they've paid their share. Watch Sicko sometime, and try not to let any bias you may harbor about the director interfere with the message.
First thing you know is the hospital is hitting you with one of their fantasy bills for something you thought was covered. You think you're only on the hook for 10% of the 30% of the completely scandalous list price the insurance negotiated when they entered into an agreement with the doctors. But then they won't pay it. They give you and the hospital a load of crap about how some of the drugs and procedures aren't approved, the visit is classified in a certain way, the particular deductible hasn't been met yet. They've got a mile long list of excuses. Denied by insurance, the hospital has the gall to turn around and demand from you not just the 30% the insurance was supposed to pay, no, but the full 100%, because of course you don't have any such agreement with the hospital. Pretty big jump when your share of the bill changes from 3% to 100%. I've had the hospital harassing me with weekly calls and finally siccing a credit collection agency on me for a bill that the insurance bastards should have and finally did pay after much determined calling and calling and calling and waiting on hold and waiting while they "investigate" and waiting for supervisors and listening to them blame the hospital for entering incorrect codes (to which I replied that it was the insurance's fault if they'd made the system too complicated for the doctors to get right), and angrily refusing when they try to tell me I should just pay up and stop making trouble. Cost me a lot of time to straighten out just one-- so much time that maybe I could have earned as much or more money than what the insurance tried to cheat me out of. I have several others that look like they're never going to be paid. And they didn't surface until more than a year after the medical work was all done-- that's how long the hospital tried to get fully paid through the insurance. To be fair, the hospital shares a good bit of the blame for their outrageous billing practices, in particular, the miserable fee for service system with the completely insane rates that somehow can't be figured out in a timely fashion because they've got to pack it with every service they can. Decided I was through arguing about it all and am just letting the rest rot. Statute of limitations FTW!
You may even have to find a lawyer to threaten to sue the damned insurance company.
Intellectual Property is a monopolistic, selfish, and defective concept. It is "tyranny over the mind of man"
No. In the 1770's, the government taxed imports for its operating funds. It did not tax income. It was not authorized to tax income, and if you had suggested that they should do so at the time, likely you would have been shot, hung, or worse. Here's how it actually went:
The federal income tax was first enacted in 1862 to pay for civil war expenses on the part of the Union. They subsequently eliminated it in 1872; turned around again and revived it in 1894; and then finally it was declared unconstitutional by the Supreme Court in 1895. Then in 1913, the 16th Amendment put income tax into the "authorized powers" category, and that's where we are today.
I've fallen off your lawn, and I can't get up.
The point isn't about economic security. (Although there's really very little more as an employee than as a contractor.)
The point is that the IRS has singled out - for persecution, one might argue - small (both one-man and slightly larger) technology companies to investigate this issue.
The preferred solution is to not have a problem.
As the son of the IRS employee who was killed in this incident said, "if he [Stack] has a house and a plane he can pay his taxes." (Austin American-Statesman, 2/21/2010).
Corporations with multiple headquarters and Lear jets don't end up paying the taxes Joe was required to pay.
The only people who don't are those who want to avoid paying their proper share.
And people who understand the time value of money, which you obviously don't.
It's not enough to bash in heads, you've got to bash in minds. - Captain Hammer
I'm sorry, but I work for a company in the top 10 of the fortune 500 and with the economy the way it is I'll be _lucky_ to not be outsourced by the end of this year.
Job security in IT is _not_ joining a large company that is going to ship your job overseas the second they realize they will save 50%+ letting you and your staff go.
Going out on your own may not yield the best results up front, but once you get a somewhat stable client base you are basically secure.
In the world of outsourcing IT, keeping yourself visible and available is the way to go. Not locking yourself behind some corporate facade that will drop you first chance they get.
If you're living below poverty then you don't have the perspective of those of us living well above it. They aren't taking what they want. They're taking what you told them to take.
My only income isn't my job. It's the lion's share, but I have investments, too.
My withholding is set - by me - so that the monies that come out of my paycheck cover my expected investment income too.
Just how do you expect to the IRS to manage that trick?
By the way, why wouldn't you file taxes for every tax year you can if they owe you? A 1040-EZ is, well, easy. Back when I owned a business I helped a number of my employees do them rather than pay the H&R Block bastards. If you can do basic math it takes about 20 minutes.
If you're living on that little money, I'd think an extra few hundred or thousand would be most welcome.
The preferred solution is to not have a problem.
I'm pretty certain the Stack tragedy represents the outcome of some form of mental illness, not terrorism or a political statement. The jury is still out, but the rant seems kind of pointless.
OTOH, section 1706 has been a bone in my craw and the deep seat of a sincere grudge I hold very firmly. It was obviously a sop to IBM and when it emerged from reconciliation, also Cap Gemini and other large contracting organizations (at the time, AKA "body shops"). It was very obviously intended as an anti-competitive measure against people just like me. I have personally observed the negative influence of section 1706 on my business and career on more than a dozen occasions.
For the people who say "just work around it" - that's the point - it's another increment in the cost of doing business. Also it increases the risk to your customers - they have to verify you're not going to face them with an unforeseen tax liability. And so the whole market was modified to favor the large firms at the expense of entrepreneurship. And then there's the obvious begging hand of Congressional shakedown held out whenever someone tries to get the law changed to remove this double-dealing injustice.
Fucking Parasite Bastards. I'm sure I'm not the only one who feels this way. All these holier-than-thou pro-IRS bigots who holler "we're just following the law" or "We did our job fairly" need to consider the consequence of laying down to bed with tyranny. It isn't something which may be excused with happy talk and a smiley face!
The fact is, your real tax rate specifically determines what goods and services you get for your dollar. That means taxes applied to your purchases - no matter what they are called - reduce the ability of your dollar to function on your behalf.
You are implying that if that tax rate was lessened, I would somehow have had "more money" to spend on plumbing. But that is not necessarily true because prices are set by the market not by the tax rate. Even if the plumber had to pay $0 in taxes, he would still charge me the same $100 if the market would bear it. The taxes that businesses pay are simply a cost of doing business, which is only one input into price.
My hope for you is that someday you actually understand what is being done to you.
This seems really melodramatic. You said that maybe Stack could not have afforded his house if he had paid his taxes, but I pay my taxes every year and presumably so do most of the businesses where I spend my money. And yet, I have little problem affording my house and many businesses turn profits. Taxes are simply a cost to be managed. It's a very good idea to minimize them--yes--but IMO it's ridiculous the degree to which some people get emotionally involved in the concept of taxation.
Build a man a fire, he's warm for one night. Set him on fire, and he's warm for the rest of his life.