New York taxpayers are getting a nasty surprise in the next months, as retroactive tax increases require them to set aside much more money in their quarterly tax payments. The Wall Street Journal reports that this change is hitting taxpayers who have high deductions especially hard. Those tax hikes were tempting, but this kind of story showcases one of the big problems with raising taxes during a recession: that unstable tax code gives everyone an incentive to earn less and lie more, since they don't know what they'll actually get to keep. Instead of spending big during good times and squeezing taxpayers during bad times, states should plan ahead for this kind of crisis. A better plan is to set aside savings for bad times -- New York could have kept spending low during the boom years, paid down debt, and had a large expense cushion when times got more difficult. That might have slowed the boom down a bit (with less hiring going on at city hall, wages citywide would be a tad lower), but that's not such a big problem: a crash from a Dow at 13,000 or 12,000 is less painful than a crash from 14,000, and if the ...

Coming soon: you can use your $8,000 new-home tax credit to make a down payment on your new home. We're now several years into a credit crisis caused by people buying homes they couldn't really afford. And the response? Creating a new incentive to buy more homes — and to borrow money to do it. There is no way this will end up moving prices to an appropriate level, and no way it's going to make the finance and housing industries change their behavior. In fact, the main result is to make things even worse: in the past, the government just made borrowing cheaper (through the income tax deduction, which made interest cheaper than other kinds of interest, and through Fannie and Freddie, which made mortgage loans easier loans to make). With this new law, they've gone from making promises to just plain writing checks. You can't really take this much farther without making it even more absurd. In the future, we're going to have to raise taxes (on everything except real estate, apparently). Or huge deficits will lead to rampant inflation (making dollar bills worth less than wallpaper — also a boon to the housing industry, incidentally).

A single letter to the editor in a small Texas town has made it around the country in just a few weeks. Ed Barnett, a typical taxpayer, penned this justified rant to his hometown Wichita Times Record News (I am assuming their archrival is the Wichita Daily Weekly Recorder Courier Journal Democrat-Republican): Dear IRS, I am sorry to inform you that I will not be able to pay taxes owed April 15, but all is not lost. I have paid these taxes: accounts receivable tax, building permit tax, CDL tax, cigarette tax, corporate income tax, dog licence tax, federal income tax, unemployment tax, gasoline tax, hunting licence tax, fishing licence tax, waterfowl stamp tax, inheritance tax, inventory tax, liquor tax, luxury tax, medicare tax, city, school and county property tax (up 33 percent last 4 years), real estate tax, social security tax, road usage tax, toll road tax, state and city sales tax, recreational vehicle tax, state franchise tax, state unemployment tax, telephone federal excise tax, telephone federal state and local surcharge tax, telephone minimum usage surcharge tax, telephone state and local tax, utility tax, vehicle licence registration tax, capitol gains tax, lease severance tax, oil and gas assessment tax, Colorado property tax, ...

The latest bailout update is that the investment banking industry may net billions of dollars thanks to an obscure tax law the treasury department is flagrantly violating. Two quick summaries: TaxProf, if you'd like to know why to blame the Democrats, and A Taxing matter in case you'd prefer to blame the Republicans. Essentially, the function of this new rule is that banks that acquire other banks can shelter their own profits by applying the past losses of their acquisition target to their own profits. So if Citigroup buys out a company that just lost $1 billion, Citi can avoid paying taxes on another $1 billion in profits (assuming Citi ever makes a profit again). There are basically two views on this: one view is that it's a terrible move, because the treasury is basically giving away money to the banks; the other is that this is true, and that they're doing so while stealing Congress' ability to make the rules. It's bad enough that the treasury department can invest $700 billion with basically no oversight -- but it's much worse that they can arbitrarily rewrite tax laws without Congress' permission. That said, it's important not to forget the rationale for this move. This law ...

Tax evasion is usually less exciting than it might sound. Often, it just amounts to shuffling some papers to create fake losses or shift profits -- or, more often, 'forgetting' to do the paperwork that might cause a taxable gain. Not so with the case of Igor Olenicoff and Brad Birkenfeld. Everyone in this deal tells a different story (one thing every version has in common is that the narrator is innocent), but it looks like it went something like this: Birkenfeld was a middling banker at a very well-reputed bank, with exactly one great client. Igor Olenicoff was a billionaire with office space and apartments in Vegas, Arizona and Florida -- he wasn't exactly thrilled with the performance of his bankers. At some point, Birkenfeld started shifting assets offshore, presumably to keep Olenicoff happy. Unlike a normal tax cheat who might do this by wiring money around cleverly, or arranging dummy sales, Birkenfeld stuffed diamonds into a toothpaste tube and personally carried them overseas. A bad idea for several reasons, not the least of which is that X-rays see right through toothpaste tubes. Somehow, Birkenfeld wasn't caught for years -- but once he was, he helped nail Olenicoff for his role in ...

Congress is debating a whole slew of new energy proposals, including adjusting or abandoning ANWR and coastal drilling restrictions, raising emissions standards, and adopting a new tax-and-credit scheme to encourage a shift from fossil fuels to alternative energy. It's all decent, well-meaning stuff, but the problem with these tax incentives is that they're just not as dramatic as the 'tax' Americans pay when oil prices rise. This tax creates a huge incentive to find alternative energy sources, with or without a subsidy -- and as long as no viable alternative is in sight, the prospect of using up oil reserves pushes prices that much higher. It's tricky to analyze a balanced situation like this, particularly when turmoil in the financial markets has had an effect on prices. But to anyone who dreams of building an electric car, an ultra-efficient solar panel, or a cost-effective geothermal system, every 1% increase in oil prices is a 1% larger market to sell to (and a market that's that much more angry at oil companies, and that much more willing to consider alternatives). The very goods Congress is taxing function as a 'tax' on consumers and a 'subsidy' for anyone with a better plan. With oil down ...

That's actually a fairly complicated question. From an accounting standpoint, you're paying all of the taxes. But from an economic standpoint, the question of who pays the taxes depends on the elasticity of the product. Elasticity refers to how use responds to price changes. For a product that's competing directly with lots of other, similar products, elasticity is very high: if a gas station raises their prices 5%, but the one across the street keeps prices constant, nearly all of first station's customers will desert it. But for a low-elasticity product, the opposite is the case. If you consider an addictive product (like cigarettes or alcohol), or a cheap product that you have to buy repeatedly to make an expensive product work (movies for your big screen TV and surround-sound system; replacement razor cartridges), changes in price don't make a big difference. Smokers might complain, but they wont kick the habit over a 10% increase in cost; similarly, you won't let your $4000 entertainment system go to waste because your Friday night movie rental costs $1 more. What economists have found is that when there's a sales tax, normal spending behavior is distorted. If there's a 10% tax on gas that costs $3.50 ...