Blaming Excessive Taxation on .... Capitalism?

Megan McArdle has a lot more patience than I explaining to a writer at Crooked Timber why artists don't get special tax deductions that aren't available to anyone else.

But what I thought was amazing, was the fact that they seem to blame an overbearing and over-reaching IRS on .... markets and capitalism. I'll give one example of the general tone:

One of the days, I’ll get around to reading the copy of Sandel’s ‘What Money Can’t Buy; The Moral Limits of Markets’. It’s even made the exquisitely painful cut of being one of only two dozen books brought on our three-month sojourn on the south coast of England. When I do read Sandel, I hope to acquire a greater appreciation for exactly how market thinking has permeated and corrupted so many aspects of human life.

One surprising place a weirdly attenuated and manically zealous form of market thinking has popped up is in the Minnesota tax office. (via BoingBoing) They’re running a quite unhinged vendetta against Lynette Reini-Grandell and Venus DeMars, a married couple who make music, art, poetry and teach English. The taxman running their audit says Reini-Grandell and DeMars’ creative activities don’t make enough money, and haven’t for years, thus proving the artists are mere hobbyists who shouldn’t get a tax break. Either they should turn a consistent profit by now, or have given up already and gone back to being good little consumers.

I am exhausted with people with people equating free markets and capitalism with the crony corporate state we have today.

By the way, I am the first to acknowledge that the government does not consider non-monetary benefits in many parts of their legislation.  Just one example is minimum wage legislation. For a teenager without work experience, being able to have an internship where they can prove they are reliable and learn how to work in an organization has tremendous value.  But these huge non-monetary benefits (so large many teens and low-skilled workers might take a job for free, at least to prove themselves initially) cannot be counted in the minimum wage calculation.

  • NL7

    The fight is pretty clearly over business loss deductions, as McCardle points out. So the taxpayer is the one with a business mindset, counting his costs as business expenses instead of consumption. The hobby loss rules are generally tough because rich people could claim that horseback riding and sailing are businesses, then deduct their tremendous losses while never caring to turn a profit because they have income from somewhere else. I'm not a tax fan, but a tax system shouldn't treat business costs and luxury consumption the same way and still call itself an income tax. If luxuries are not taxable, then what is?

  • http://www.facebook.com/matthew.slyfield Matthew Slyfield

    If you are talking about income taxes it is the Income not the luxuries that are taxable whether the costs of the luxuries are expensable or not.

  • slocum

    To be fair, I was somewhat surprised to see that the Crooked Timber commenters don't follow Maria Ferrell's lead and actually do figure it out.

  • NL7

    Yes, income is taxable but the calculation of adjusted gross income and taxable income allow for various deductions. One of the deductions is for business expenses, and this artist is claiming that his expenses for art are a business and not for recreation, luxury, or other non-business purposes.

    The question for an income tax is not just "how much" to tax, but also "what" is income. If everybody can claim a deduction for luxury and recreation, then it creates an enormous loophole from income.

    So if Warren claimed that he occasionally sells computer systems or train models, then all his recreational expenses buying electronic parts and model inputs are expenses. He posts a huge loss on these side businesses, and maybe even tries to offset income from his regular business with these hobby losses. The IRS and the state taxing agencies are aware of this trick.

    The fight is over whether these are business expenses or non-business expenses. If they are not business expenses, then presumably they are for recreation or luxury. Assuming he has X income, if he spends Y on allowable expenses, then his AGI is X minus Y; if the expenses are disallowed, then his income remains X. The very question of his income is implicated, because business is considered an allowable expenses (generally speaking) and luxury consumption is not. So this really is a question of taxing or not taxing luxury consumption, at least from the perspective of the taxing agency; the fact that it's collected at the incidence of income is misleading.

  • http://thegameiam.wordpress.com David

    So a question then:

    Presume that a hobby (eg painting pictures) has expenses of $1000/year, but very occasionally generates income (say $100/year). Do either the income related to that hobby or the expenses related to that hobby need to touch a tax return, or are they just treated as a "null" from the IRS point of view? What if the ratio is the same but the numbers have an extra digit - 10k and 1k?