Professor Joe Bankman has spent years working to harness technology for taxpayers. In today’s episode, he explains what a prepopulated tax return is and why much of the world uses them but the United States does not. We discuss the disruptive power of digital and how it is remaking the tax landscape in favor big multinationals while making it harder for small taxpayers to hide their income. Bankman also offers his perspective on what we can all learn from California’s budget woes and why its situation is both better and worse than that of the nation as a whole. The pencil question about the song “I Paid My Income Tax Today” comes from a book by Larry Zelenak.
Stanford Law School’s Joe Bankman writes on tax policy topics such as progressivity, consumption tax, and the role of tax in the structure of Silicon Valley start-ups. He has gained wide attention for his work on how government might control the use of tax shelters and has testified before Congress and other legislative bodies on tax compliance problems posed by the cash economy. He has written and spoken extensively on how we might use technology to simplify filing. He also worked with the State of California to create ReadyReturn—a completed tax return prepared by the state that is available to low-income and middle-income taxpayers.
Our student quote is read by Philip Wolf.
Resources:
Speaker 1:
All of us should be willing to pay whatever taxes are necessary to enable efficient government to improve or expand any essential service.
Speaker 2:
You have a beautiful tax return. The nicest one I've ever seen.
Speaker 3:
Okay, folks, but remember your manners. No stampeding, walk slow like you do when you come to pay your taxes.
Steven Dean:
Hi, I'm Steven Dean. This is the Tax Maven. Here, we are going to, in each episode, talk to our tax maven, who will be a person proving Archimedes's point that a single person with a lever long enough and a place to put it can change the world. The lever in this case is tax, and the place to put it is here at NYU Law.
Steven Dean:
I'm Steven Dean, the faculty director of the graduate tax program at NYU Law. I'm here today with Joe Bankman, the Ralph M. Parsons Professor of Law and Business at Stanford Law School.
Steven Dean:
Thank you for coming today, Joe.
Joe Bankman:
Well, thank you for having me, Steven.
Steven Dean:
Technology sometimes seems to create as many challenges as it solves. When it comes to tax, easy access to information often gives an edge to governments, but can also make life easier for you and me.
Joe Bankman:
We spend tens of billions of dollars filling out tax forms, but almost everything we put down the government already knows. It knows our wages. It knows the interest we paid to a lender. It knows the interest we got from a bank and so on. So a pre-populated return starts off with the government filling in things it already knows for you to review.
Steven Dean:
It sounds like a great idea. Is that something we do, something we don't do, something that other places do?
Joe Bankman:
I think it is a great idea. We don't do it. Much of the rest of the world does.
Steven Dean:
Why is that?
Joe Bankman:
We're a little exceptional in America, and sometimes not in a good way. In the rest of the world, making life easier for taxpayers seems like a no brainer. Here, it's run afoul, I think, in politics, in corporate lobbying, and maybe in a government agency that is underfunded and thinks it's incapable of doing things.
Joe Bankman:
When we say pre-populate, we can mean lots of things. It could mean you get a return with everything in it and a bottom line number. That's sometimes called the pro forma return. In California, we did a pilot program. We called it a ready return. Pre-populate has the government put in what it knows. That's kind of a lesser task. They might not know everything, but whatever they know, they put in. And I think that's probably the single most important way we can simplify filing.
Steven Dean:
And do you think there's any possibility that that may happen, or is it really not likely to happen in the US?
Joe Bankman:
I've been working on it for 15 years, and I'm always optimistic. So I was optimistic 15 years ago. I'm optimistic now. It's been a stubborn problem, but I think it's too insane the way we do it now because we make everyone take an unnecessary step. And if you're anxious, or avoidant, or bad at record-keeping, filing taxes can become a nightmare. And there's no reason for that to the extent that all you need to do is to review the figures that government already has.
Steven Dean:
So you mentioned California a minute ago, and the ready return. And I wonder, just having a great time looking at some of your work over the years, what do you think tax scholars can learn from California's budget woes?
Joe Bankman:
California's like everywhere else, like the country only a little more so. It's kind of like Texas, everything is bigger. We're about a seventh of the total, I don't know, country and GDP. So when we have good years, we have great years, and when we don't have good years, we have bad years. We spend a lot of money. It's a blue state with a lot of social services, and we're dependent upon the taxes of the very wealthy to float our boat, so to speak. So when the economy goes bad, we're in big trouble.
Steven Dean:
Through his writing and his advocacy, Professor Bankman's goal is not just to find great ideas, but to make sure that governments and the taxpayers they serve actually benefit from them.
Joe Bankman:
Our fiscal picture is kind of a nightmare. Actually, California looks pretty good compared to many states, and it looks terrific compared to the federal government. That's because California can't print money. There's just a limit to how much a state can over-commit and under tax, but there's no limit at the federal level. So what we've really done is we've mortgaged our kids' futures, and we've got a huge tax bill coming up because we spend more than we take in predictably in year after year.
Joe Bankman:
And I think one of the things that tax scholars have to be is the kill-joys at a party that keep pointing it out. Better that we learn that now and correct course than we learn that when we can no longer float our government debt at a reasonable interest rate.
Steven Dean:
And I don't know whether you agree with this, but I suspect you might. You might say that tax scholars tend to be somewhat conservative, and view their mandate as a rather narrow one. Are there things a tax scholar should be doing, questions they should be asking that they're not currently asking that you would encourage them to? Or is that something that you think they need to leave to others?
Joe Bankman:
Well, here's the problem, and I think you put your finger on it. On the one hand, we all want to do what we're super competent at doing, and if I'm a tax scholar, and I specialize in retirement plans and the taxation of them, I know everything I say there is going to be right. We can't say that about fiscal policy because it's a combination of what we take in and what we spend, so a lot of us are really uncomfortable BS-ing in that kind of big picture.
Joe Bankman:
The problem is nobody else can do it either. So there's kind of a vacuum created where people on the tax side don't think they can say it because they're not on the spending side, and vice versa. So nobody says it. So I think a lot of us have to kind of grin and bear it, and be willing to state that we think a fiscal policy is unsustainable.
Steven Dean:
We're all familiar with the way technology seems to stack the deck in favor of big companies at the expense of local businesses. That same pattern has emerged in the tax system.
Joe Bankman:
Each year, we lose about a half trillion dollars of uncollected tax. That's a lot of money, even in a big economy and in a big government sector. And about half of that loss comes from the cash business sector. And we know general contractors, your favorite Ma-and-Pa store or restaurant on the whole are paying about half the tax they owe.
Joe Bankman:
So that's where the money's going. The question is, what can we do about it? Well, as cash dwindles and credit receipts increase, that problem does go down a little bit. Ultimately, it's a hard problem to completely eliminate for two reasons. First of all, there's a lot of small fry out there that we don't really want to step on. It's not like these people are living the life of Reilly, the life of luxury. They're running the ethnic restaurants we love so much perhaps.
Joe Bankman:
That's one of the problems. The other problem is there's not a lot to be gained by the government with respect to any particular taxpayer. Nonetheless, we can look at this as a half trillion dollar subsidy that we'd never give if we voted on this directly.
Steven Dean:
So to me, the other side of the coin is something else you're working on currently. This is one of your most recent projects, collecting the rent. It's a project you're working with a few co-authors. Right now, and I'll let you explain what is it you're focusing on and what you're thinking about it, but this, to me, seems the other side of the coin. So the rise of the digital ecosphere is making it easier to collect taxes in one way, but is either raising new challenges or at least reframing old challenges in another way.
Joe Bankman:
That's right. It used to be that the big company around was your public utility, and it had a dam and a lot of transmission lines. It was easy to tax. It wasn't going to go anywhere. Now, all our values and intellectual property, that can be placed anywhere. So suppose a US company places its intellectual property in a tax haven, which is what our big multinationals did in the last few decades. It might have to pay an exit toll, so to speak, to get out of the country, and it does, and it did. But suppose that exit toll is too small. Now, we've got all this valuable property somewhere in the world, and where should it be taxed?
Joe Bankman:
And I think every country in the world is now trying to figure out how to tax property which is everywhere and nowhere, right? It's intellectual property that's on servers all throughout the world, and is actually consumed everywhere and nowhere.
Steven Dean:
So that seems like a big challenge.
Joe Bankman:
Yeah. Yeah. I think none of us really know what the future is going to be as far as that goes.
Steven Dean:
So I feel like we're taking instead of one step forward and two steps backward, if digital is allowing it to solve the under-reporting of receipts by our ethnic restaurants, but making it impossible for us to tax big companies like Apple, that doesn't sound like a promising future for our tax system.
Joe Bankman:
No. One of the truths about taxing is it's efficient to tax people who are absolutely stuck and can't get out of the tax man's way. That's true with the public utility, but it's no longer true with big companies and their IP. It might no longer be true at some point even with people like you and me. Right now, our language skills, at least in one case, they're such that I'm stuck in this country, but might not be true of everyone, particularly with places like Google giving us Google Translate and the like. So as people become mobile, just like property becomes mobile, they're going to be harder and harder to tax.
Joe Bankman:
It's hard enough figuring out what the optimal tax is in a jurisdiction where nobody can go anywhere, but now you have a jurisdiction where anybody can go anywhere, and you've got competing jurisdiction. So solving that problem is kind of logarithmically harder. And I think all of us in this business and everybody in government is trying to figure out how do we solve that problem as opposed to merely react to tomorrow's emergency.
Steven Dean:
Do you have a favorite solution?
Joe Bankman:
I don't on the big problem. I think that the current law we had, which allowed our multinationals to pay no tax so long as they kept money outside of this country, and that's a big simplification for the listeners out there, that couldn't have been the right answer. The new tax act, which has a lower rate on corporate America, but a kind of worldwide rate, is probably a better answer, but that's not to say the rate is correct.
Joe Bankman:
The problem with the new system is that we've gotten to a rate that's so close to zero that it will always look great in terms of the inefficiency it causes, but it deprives us of the tax revenues. So maybe a compromise would get us through the next five, 10 years.
Steven Dean:
Well, it'll be very interesting to see what happens because I do think we live in interesting times for tax people. So much been changing both domestically and globally. It really does seem like a moment where interesting things could happen.
Joe Bankman:
Yeah, absolutely. And politically as well. What we've seen come out on this latest campaign is something that we wouldn't have guessed that we'd see five years ago, for example.
Steven Dean:
And do you think the conversation is evolving in an interesting way? So it's certainly, I agree, it's unexpected. I would never have guessed that we'd be having these conversations, but do you find the paths its moving along productive or just sort of confusing?
Joe Bankman:
Well, I imagine for the average person who gets confused by everything tax-wise, that's not their field. They're living busy lives. Of course it's confusing and it's overwhelming. For tax scholars, it's almost like being a kid at a candy store, because now in addition to anything else we could write about, we can write about a wealth tax. And that was just off the table for the last 50 years.
Steven Dean:
Yeah, it'll be various things how it happens.
Steven Dean:
So now we've gone from talking about things that you know a lot about to things that I don't know whether you'll know. And really this is an unfair question, but arguably related to the kind of work you do. So I'm going to ask a question about a song, and I'm going to see if you know who wrote the song. I'm not going to sing the song. I'm not going to sing the song, but I'm going to tell you the title of it, and I can tell you a little bit about some lyrics.
Steven Dean:
So the title of the song is I Paid My Income Tax Today. That's the song, and a few of the lines of it say "lower brackets, that's my speed. Mr. Small Fry, yes, indeed. But, gee, I'm proud as can be." So those are a few lines from I Paid My Income Tax Today, and the question is who wrote it? And I'll give you three choices. It might be Irving berlin, it might be Johnny Cash, or it might be Bob Marley. So who wrote I Paid My Income Tax Today?
Joe Bankman:
Irving Berlin. That's my guess.
Steven Dean:
You're you're right. And you were so fast on the draw, I didn't have a chance to tell you what the very high stakes of it were. And maybe it was better, because you weren't nervous because you didn't know the lovely NYU graduate tax program pencil that was at stake. But you definitely got it. It was Irving Berlin.
Joe Bankman:
Well, there you go.
Steven Dean:
And I will tell you that I learned this from reading a Larry Zelenak piece, a book Learning to Love the Form 1040: Two Cheers for the Return-Based Mass Income Tax. So we both learned something about income tax we maybe didn't know, that it inspired Irving Berlin to write a song about filing tax returns. So you wouldn't want to rob him of that pleasure, would you?
Joe Bankman:
Well, I think that song is indicative of an earlier age when people associated government with good things. Government had just solved the public health crisis. Cholera was gone in this country. What an enormous victory, and that was a victory for government.
Joe Bankman:
So when Irving Berlin comes here as an immigrant jew, he sees all of this ,and paying the tax seems I'm part of something great. And you get an immigrant's view, too. By the way, that's an immigrant a lot of undocumented workers I think have today in California. If they're working in the fields of Salinas, and you talk to people, they're paying the taxes for a new country seems that's a pretty good deal. But after a while, you get used to what's good, and you become cynical about your country, and it's a hundred years later on a different place.
Steven Dean:
That's very true. Well, thank you very much, Professor Bankman. It was great to have you here today.
Joe Bankman:
Thank you for having me.
Steven Dean:
Thank you for listening to the Tax Maven, and I also want to give a very special thank you to those that helped make the podcast possible. Patrick Kelly, Joe Rivera, Greg Addison, Rebecca Carmichael, Jill [Rachlin 00:16:39] and Anthony [Piotrangela 00:16:40]. And thank you, Rachel Burns.
Steven Dean:
The NYU Law graduate tax program has been the premier place to learn about tax law for the past 75 years, so please visit us on the web. Visit our graduate tax program website to see the different programs we offer both in-person and online, both for lawyers and non-lawyers. Take a look at what we offer, and I hope you consider joining us.
Steven Dean:
And now we like to end each of our episodes with a quote about taxes read by one of our students. Today's tax quote from Phillip Wolf, from Alameda, California.
Phillip Wolf:
Suddenly, I realized why I studied tax. At the low-income taxpayer clinic where I volunteer, a recently widowed immigrant came rushing in pleading "I'm facing eviction and can't even read these returns because I don't speak English well. Please help." When I looked at his returns, I realized they were a puzzle, and my tax knowledge made you one of the few people who could solve them. I spent hours poring over the complexities of tax credits, and was able to find items he did not even know he was entitled to, which allowed him to pay his rent.
This experience confirmed what a tax professor once told me that there's always work to be done for tax lawyers, just sometimes they price themselves out of it.
Steven Dean:
Please email us at info@taxmavenpodcast.com if you have any questions or comments or suggestions. And if you are a student and want to email us a recording of your favorite tax quote, please email it there as well. Thanks for tuning in.