The Messenger reports that the US IRS (Internal Revenue Service) will be going fully paperless (i.e. digital) by 2025.

This transformation will:

• Speed up tax refunds;
• Make it easier for Americans to file their tax returns, with fewer opportunities for mistakes;
• Save the IRS millions of dollars in effort to process and check returns (which is the real reason for them making the change).

US citizens should not have any illusions about this digital transformation; the IRS will certainly screw it up, so that the full benefits may take several years to fully materialise.

I recently saw a report on the BBC (actually not relevant to this post) about layoffs and layoff anxiety, which got me thinking more about my previous post in this thread about trickle-down economics.

Layoffs primarily happen to lower paid staff, and produce trickle-down impacts in reverse: people lose their income, so they spend less, meaning other people (shop owners, online retailers, service providers such as telecommunications companies, and the like) have reduced income. Governments also have reduced tax revenue.

All this means that the impact of one layoff is actually much larger than it at first appears. It also means that the cost/benefit case for government intervention to prevent layoffs is stronger than governments are willing to admit.

I think it is time that some unbiased independent financial analysis was applied to the rationale from companies and governments for layoffs.

One of the ongoing scandals around the world is the habit of governments to keep giving tax breaks to rich people and large corporations, while lower-income workers and the unemployed are ignored. The justification by those governments is always trickle-down economics.

The theory behind trickle-down economics is simple, and seems plausible: if you give people money in any way (tax cuts, grants and subsidies, paying for education or even in the form of food banks which leave people more disposable income), they will spend at least some of it. Governments get a proportion of the money back in the form of sales tax (VAT) and income tax, and most of the rest is spent again, reaping more tax income for governments and another round of people getting their share and spending, and so on, ad infinitum. The theory is often interpreted to mean that it doesn't matter to whom you give the money, and this is used to justify giving it to the rich.

Trickle-down economics came to the fore under Ronald Reagan, and seemed to work [accordding to The Balance Money] (but he also ran a huge programme of government spending that stimulated the US economy, and also cut income tax for lower income workers as well as the rich). The theory has, however, since been thoroughly debunked and is rejected by the International Monetary Fund (IMF) [see here on The Balance Money]. Despite the theory being debunked, governments are still applying it by giving tax cuts to the rich (see here on the BBC.

Trickle-down economics is widely, and justly, blamed for the ever widening wealth gap in today's society. There is a table here on Global Finance Magazine which shows how bad things are.

I recently read an article (which I can no longer find - sorry) explaining, at least in part, why trickle-down economics, as currently implemented by most governments, doesn't work: if you give rich people money, they are much less likely to spend it because they don't need it, so it gets saved and doesn't trickle down. There is a more detailed analysis of what is wrong with trickle-down economics here on Fair Economy. It is clear from this explanation what needs to change: trickle-down economics can only work if the money is given to lower income and unemployed people (those who need it and are guaranteed to spend it, thus driving the trickle down).

It is time for governments to actually listen to economists and:

• Raise taxes on the rich;
• Cut taxes on the poor;
• Introduce (or increase) wealth tax on the excessively rich;
• Introduce a comprehensive welfare system (unemployment benefit, health care, etc.) which will actually drive the trickle-down and generate more tax revenue for governments.

I just had the most bizarre phone conversation with a man at the Munich Finanzamt (Tax Office). I don't know whether the problem is with the staff that work there, or the systems and infrastructure that they work with.

One of my colleagues has a problem with his tax. He is one of many working for my employer who arrived last year from India. Having paid tax in India, he is due to get money back from the German tax authorities. Unlike the dozens of others in this situation, he is having problems, and yesterday asked me to translate a letter he had received from the tax office.

Today he phoned the tax office to get clarification about what information and documents he should send. The bureaucrat who answered spoke very little English, so I was asked to speak to him in German.

The tax official was asking for a copy of a letter. This letter was sent to my colleague by the tax office, but apparently it is not possible for them to find this letter, and they need him to send them a copy.

My colleague, being Indian, has a surname which is unusual in Germany, and also very easy to spell. I would have thought that being able to look people up by name would be a basic function of any filing system or database, but apparently this is not the case at the Finanzamt.

There is industrial action in the UK due to the introduction of IR35 taxation rules for locum doctors, as reported here by the BBC. Doctors are threatening to refuse to work as locums because their work will now be covered by the new IR35 rules (for more explanation of IR35, click here).

This does not even qualify as a strike in the normal sense of the word. Locums, like so many medical professionals, are not employees, but freelancers. If the pay and conditions are not good enough they are able to withdraw their labour largely without putting themselves in breach of contract.

Medical authorities use locums when other staff are sick, on vacation, or there are staff shortages for other reasons such as bad management, usually with very short notice. Like all interim staff, they are expected to come ready trained, and work unsociable hours; they get no pay for vacations and public holidays, nor for training (they are expected to keep their knowledge and skills up to date on their own time). The can be "fired" (taken off the list of approved locums) with little or no notice. In exchange for that flexibility, they have a right to expect good pay rates.

It is not only medical locums who object to IR35. All freelance contractors (like me) dislike it (here). I am now seeing more and more jobs advertised as being covered by IR35. It is part of a decades-long campaign to make life difficult and expensive for this important sector of the workforce, by increasing their tax burden, increasing bureaucracy, and imposing hypocritical and inconsistent regulations. Freelance contractors have long been required to be employees of a company, either their own company or an umbrella management company (many UK contractors opted to have their own company) and to pay tax and national insurance on the same basis as a permanent employee; but when their contact ends (as they do) and their employment is terminated (in the case of contractors with their own companies, they have to fire themselves) they find the government unwilling to pay unemployment benefit (the government argues that firing themselves is not valid); not much of an insurance for all those NI payments! Freelancers are an important wealth generating part of the workforce, and I do not understand why the government seems to hate us so.

The bizarre thing is that the review of IR35 was one of the election promises of the current government. Well, you can't trust politicians, and certainly not their campaign promises!

I have been contracting now for very many years. That means that I have invested a great deal of my time and money in being able to do an effective job. The last time I claimed any kind of unemployment benefit was when I was a student, during vacations. The last time I made use of national health service funding for medical costs was in the 1980s. The last time that anyone other than me paid for my training or eduction was in 1996. When I work, I work long hours; I "hit the ground running"; I am available for work at short notice; and although I earn good money, I have high costs (away from home accommodation, meals and travel) and frequently have gaps between jobs with no income. I pay tax and social insurance (e.g. NI), and for that I received absolutely no benefits. I am not unusual in this. Like all contractors who work in multiple countries, I always have to worry about the risks of double taxation (the inter-country agreements on no double taxation are a joke - see here for more details.)

It is high time that governments around the world (it is not only the UK government that is at fault here) stopped treating us freelance contractors as cash-cows, realised the benefits that we provide to the economy, and treated us fairly!

A few days ago I was in The Ophelia Bar (just opposite my hotel - I am a regular there, because the food and drink are good, prices are OK and the staff friendly) with Renato, and we started talking with the owner about tips. Since most things are paid on credit cards here, if you want to give a tip you have to add it to the amount on the credit card terminal; and we were wondering whether the waiter/barman gets the tip, or if the bar keeps the money. It turns out the the waiter/barman keeps the tip (at least at the Ophelia - each sale is tagged with the service person's name), less a deduction that goes as tip to the kitchen staff. Tips seem to comprise about half of the barman's income.

That all sounds very fair, but then we started discussing tax, assuming that tips would be taxable. Apparently that is not exactly the case, as the Norwegian government charges you tax anyway on assumed tips; if you earn more tips than they estimate, you are winning, but if you earn less, or if the company pockets them, then you are screwed.

Taxi drivers are similarly screwed by the tax office. Again, most people pay by card, and can add a tip if they choose. Even if customers add a tip on the card, the tax department assumes that there is an additional cash tip, and taxes taxi drivers on it. So much for "innocent until proven guilty"!

There are lots of other bizarre regulations in Norway, mostly relating to tax and/or alcohol. You can only buy alcohol in government monopoly shops (there is the same system in Sweden). In bars, you cannot order a double of any spirit (but you can order one, and another on the side which you can then add to the first glass). Bars and restaurants may not offer you a complimentary drink (brandy, limoncello, or whatever) after your meal, no matter how much you spent; the same seems to apply to free coffee.

Bars may not give their staff complimentary drinks (not even a coffee), nor free meals (they can sell staff a meal at cost, but not free). The owner of the Ophelia was charged once for having a free coffee at his own bar (the charges were eventually dropped). If he wants a drink he needs to either buy one, or drink from his private cabinet containing bottles he bought separately.

The tax office also investigates discounts (also heavily controlled), and may charge owners if the tax and discount accounts do not all balance.

I thought Germany was bureaucratic and had invasive taxation rules, but Norway really wins the prize!

I haved written previously in this blog about tax, and most especially about unfairness in the tax systems around the world.

The BBC have just published this report, which seems like a rather poor attempt to shed some light on the issue of tax havens and tax avoidance. It is interesting mainly because of the assunmptions that it documents, and because it misses the main point.

The first person interviewed is obviously an apologist for tax havens, as he is chairman of the Cayman Islands Stock Exchange. He makes some statements about the issue, but sheds no light at all. His arguments seem empty or circular.

The second person interviewed in the piece is the founder the Tax Justice Network, which campaigns against tax havens, so his allegiance is clear. He says something quite staggering: "Suppose we have a company that is registered in the Cayman Islands, but which trades in the UK. If the UK wanted to ask a question about that company, first of all it has to find a good reason why it needs the information, and secondly the Cayman Islands have to have a good reason to link that company to the UK". Well yes, I should hope so. If you want non-public information about any person or organisation, whether within a jurisdiction or cross-border, you most certainly should be required to provide a reason; the same rules as if you want to search a property or tap a phone. Any tax cooperation rules that erode this basic right to have to justify intrusive investigation (spying) are most certainly not acceptable. It is worrying that the Tax Justice Network seems to think otherwise.

British Member of Parliament, Margaret Hodge actually seems to be onto something when she says that tax avoidance has hit a raw nerve, but seems to have misread the root of the issue of public opinion, in my view. Yes, of course, everyone thinks it is unfair if they are taxed, and other people avoid paying tax. Right there is the key: "fair".

People think that tax should be fair, and right now it is very far from fair:

• Rich people can pay less tax than poor and middle-class people;
• International companies can pay less tax than other companies, but if they don't use these legal loopholes, they end up being penalised (paying more) just because they are international;
• Internationally mobile workers are similarly penalised, having to pay tax in multiple jurisdictions, and then claim one tax bill as a deduction against another (getting the money back a year or two later);
• The assumption of guilt until innocence is proven (the police may not but the tax man may!).

Fairness of the taxation system is not only a reasonable expectation, but a legal right. It is also a precondition for companies and individuals to come clean and play by the rules. Make the rules fair, and people will stop looking for loopholes and using tax havens; try harder to enforce unfair rules (e.g. by closing down tax havens) and people will find new tax havens and new loopholes.

Remember, almost every reader of this blog has engaged in tax avoidance (claiming deductions against your tax bill), so maybe it is not such a heinous sin after all.

One of the things that I often complain about is extraterritorial legislation. There is a lot of it about, and the main source of it is the USA.

In case you are unaware of it, some examples include:

• The US tax department's insistence that all US citizens file a tax return (for their whole life!) even while living and working exclusively overseas. Failure to comply may result in loss of citizenship and/or denial of entry into the USA.
• The US tax department's regulation that anyone who lives outside of the USA who marries a US citizen also living overseas must register with them and receive a US tax number, and data about this non-US citizen's income must be filed to the IRS by their spouse.
• The Helms-Burton Act, under which even companies which are not based in the USA may have any of their US assets seized if any part of the company does business with Cuba in defiance of US anti-Cuba sanctions.
• The decision by an EU privacy watchdog that the "right to be forgotten" (which is only a right within the EU) must apply to all of Google's search engines around the world, thus reducing freedom of information for all nations' citizens.

My girlfriend has long learned to live with filing tax returns in both the USA and Germany, although the US filing is much more complex (despite that she never owes tax to the USA) and more stressful. Now she has received a letter from her German credit card company, asking for her US tax registration details. Apparently the credit card company may be penalised if they fail to provide this information; in other words, they are being blackmailed into complying with the US legislation (only for their customers who are US citizens, at least so far).

It is not just that such extraterritorial legislation is passed, and no-one seems to have any moral issues with their own country doing so; it is also that it is allowed by other countries to be enforced. Our governments around the world are enabling foreign governments (mainly the USA, but also others) to enforce their foreign laws on us. Our governments are thus complicit in the erosion of our rights and freedoms.

Some of us live in countries with written constitutions which guarantee certain rights, while others have a more complex underpinning to basic rights. On top of that, we all have laws which similarly define our rights in various areas. It seems, however, that what we think our rights may be are affected by foreign legislation, and also sometimes by the nationality of our spouse. As far as I am concerned, this situation is not acceptable.

This report from the BBC should have all Britons worried.

The UK government are not alone in trying to cut down on the amount of tax evasion and tax avoidance that goes on, in an attempt to increase tax revenues. The proposed new rules will mean that the tax office (HMRC) will demand payment in advance for any disputed tax bills, and will be empowered to take the money directly from the bank accounts of "the debtors". It is estimated that about 33,000 people who invested in tax avoidance schemes will be affected.

Just to remind you, tax avoidance is the taking of legal measures to reduce your tax bill. So now the government is going to require people to pay in advance for disputed tax bills, and pay the money back if you are able to prove that you are within the law.

What about that most basic of legal rights, to be considered innocent until proven guilty? What other rights are the UK government planning to cancel in their search for money?

It is times like these that make me think that Britain needs a written constitution, like they have in the USA.

There has been lots of news lately about tax, both personal tax and corporate tax:

• Whether Prince Charles is paying the right amount of tax (corporate and personal income tax),
• How little corporation tax is paid to the UK government by big businesses (Vodafone, Google, Amazon, & Starbucks)
• The G20 group of nations agree to a plan to tackle widespread corporate international tax avoidance and evasion,
• The scandal about German tax authorities buying illegally obtained data on Swiss banks deposits held by German citizens continues.

So, there is a strong focus by governments on maximising tax revenues, and a steady shift in public opinion against individuals and companies who avoid or evade tax.

I know two people who have been charged with tax evasion in Germany (tax avoidance is the legal minimisation of tax liabilities; tax evasion is the illegal avoidance of tax payments), going all the way to arrests and strip-searches at work, home raids, the seizure of records (paper and electronic) and computer equipment, criminal charges and civil debt proceedings.

Those of you whose tax affairs are more conventional may ask why people get into these situations; why not just pay the tax and avoid the hassle? If only it were that simple.

Many freelance contractors work in many different countries, and, unless very careful, can end up owing tax in multiple tax jurisdictions. Although there is the "183 day rule", meaning that if you live and work in any one tax jurisdiction for less than half a year, you do not need to pay personal tax there, this rule can be interfered with if you were liable for tax (resident for tax purposes) in that tax jurisdiction the previous year (or even the subsequent year). This means that it is relatively easy to have tax bills in two different countries for the same tax year. Because the tax years in different countries are not aligned, it is even possible, although rare, to have tax liabilities for the same period in three countries at once!

So, you might ask, what about all those "no double taxation" agreements? Well, they work like this:

1. In some jurisdictions (such as in some parts of Germany), freelancers and small businesses are assessed for tax in advance (before the money is earned, and before it is known to whom tax is owed), and this must typically be paid in advance.
2. Only once the whole tax year is complete, is it possible to file a tax return, and have the tax authorities calculate how much is actually owed. Your tax liability will be calculated on the basis of your worldwide income for the whole tax year (all money that you earned in all tax jurisdictions, including interest and dividends). Eventually you will get a tax bill from each of the tax authorities (lets assume just two of them, for now).
3. Once you have an actual tax bill from the authorities in each tax jurisdiction, you can claim one tax bill as a deductible against another. Ideally you will want to claim the smaller one as a deductible from the larger one. Whilst you can claim income tax from one tax bill against another, you generally cannot do so with health care. pension and other mandatory social insurance costs, so you may just have to pay those twice (actually the situation for social insurance costs is very complex, and people who move for work are severely financially penalised in this regard).
4. When they get around to it, and after appropriate validation of the bills, the tax authority will (usually - there is no guarantee, and you may need to go to court to enforce your rights) pay you back the second tax bill. If you are dealing with a tax authority which requires prepayment of tax based on estimates, it can easily be three years between when you pay the first bill, and when you get the double tax back, and during most of that time, you will be out-of-pocket by two tax bills, and two sets of social insurance costs.

Please bear in mind that total deductions (tax and social insurance) in places like Germany, the Netherlands and Scandinavia can be around 50% of your income (especially since initial estimates for prepayments err on the high side), and that paying tax in two such jurisdictions therefore leaves you nothing to live on, for up to three years.

Can you afford to live on fresh air for three years (or even just one year)? I think very few people could. So, even if you don't approve, perhaps now you understand why people don't always pay tax.

Of course, the situation is a little different for corporations. That needs a post of its own.