The Chairman’s Report November 12, 2021

  • by:
  • Source: FAIRtax
  • 11/12/2021
CRONY CAPITALISM, PLAINTIFFS’ LAWYERS AND THE INCOME TAX

The Merriam Webster Dictionary defines crony capitalism as: an economic system in which individuals and businesses with political connections and influence are favored (as through tax breaks, grants, and other forms of government assistance) in ways seen as suppressing open competition in a free market.

Only the most ignorant people would believe that when interest groups spend billions of dollars on lobbyists, they expect nothing in return. Lawyers are near the top of this pyramid. “Crony capitalism” has been alive and well for centuries. It existed even before the United States became a country.

The following chart was published by Forbes.

Forbes and other business writers have polled the public to assess who are the most trusted professions. Lawyers are near the bottom of the list of trusted groups—not far above Members of Congress (many of whom are lawyers) and car salespeople.

Most lawyers work in anonymity, out of the public’s view, but one large and highly visible group of lawyers are the personal injury attorneys. Their ads are everywhere—on billboards, on city buses and of course on television. They implore you to call them if you’ve been injured. They entice you to call them by saying “you may be entitled to substantial compensation”. They promise to do all of the work, pay all of the costs and you will receive a large amount of money.

Here’s the rest of the story. Accident investigation and going to court are expensive. There are investigative and accident reconstruction engineering fees. The court filing fees, deposition fees, expert witness fees and numerous other “costs” which must be paid if you are going to litigate a lawsuit. Then there’s the lawyer’s fee itself, which can be equivalent to $1000’s of dollars per billable hour.

Most people can’t afford the high costs of going to court. Consequently, almost all personal injury attorneys enter into a contingent-fee arrangement with their clients. A contingent-fee arrangement provides:
 
  • The lawyer will loan the client the money to cover the costs of the case.
  • The lawyer spends his/her time preparing and handling the case and receives no current payment for his/her time.
  • If the lawyer wins the case or if there is a settlement, the lawyer first recoups the loan for the costs out of the settlement amount.
  • Then, instead of receiving a fee based on billable hours, the lawyer generally gets between 20% and 50% of the remaining amount.
The reason that the contingency-fee arrangement must be a loan is because just paying financial assistance to a client is against the “ethics” rules governing the practice of law.  These laws vary some from state-to-state but failure to follow these guidelines can lead to a lawyer being disbarred—losing his/her privilege to practice law.

This is how the contingency-fee arrangement can work.  Assume you are injured in a car accident.  You and the insurance company can’t agree on the amount of compensation you are due, so you go to court.
 
  • The case is settled for $50,000.
  • The costs are $10,000.
  • The lawyer is first paid back the $10,000 in costs leaving $40,000.
  • If the lawyer’s percentage is 40%, he/she receives $16,000 for his/her services.
  • The client is left with just $24,000—less than half of the original settlement.
If the lawyer loses the case and there is no settlement, then the lawyer loses the $10,000 loan and receives no compensation for the time and effort spent in preparing and handling the case.

CURRENT INCOME TAX LAW

Under current IRS rules, business expenses have to be ordinary and necessary to be tax deductible. A loan is not deductible.

If you loan someone money for their business, then the loan is not currently deductible to you on your income tax.  It can only be deducted later if the loan is not repaid at some future date.

Since contingency-fee arrangements provide that the costs advanced by the lawyer are a loan and will be repaid if there is a settlement, those costs are not deductible at the time the loan is made.

If there is no settlement and the loan does not get repaid, then the loan amount becomes deductible as a business expense.  (There is a way in the Ninth Circuit for personal injury lawyers to deduct costs if they structure their contingency-fee arrangements a certain way but not in the rest of the country.)

The practical impact of current law is that a personal injury lawyer who advances these costs to a client will have to do this with after-tax dollars.  For example, assume the lawyer:
 
  • Loans $10,000 in costs;
  • Pays income tax at a 33% rate;
The lawyer will have to earn $15,000, pay one-third or $5,000 in income taxes, in order to have the $10,000 to loan to the client.

If the loan to the client was currently deductible, the lawyer pays the $10,000 for costs, deducts it from his/her income and saves one-third of the $10,000--$3,300, in income taxes.

This means that the loan would effectively be made with $6,700 of the lawyer’s money and $3,300 of the federal government’s money that would have been paid in federal income taxes.

Which would you rather pay--$15,000 or $6,700?

THE PROPOSED CHANGE

According to a November 7, 2021 editorial in the Wall Street Journal:
 
  • One of the provisions of the House Democrats’ 2100-page budget bill is a provision that will only benefit attorneys who file suits on a contingency-fee arrangement.
  • It would allow lawyers to immediately deduct the cost of loans made to clients as the loans are made.
  • The deduction would cost the federal treasury $2.5 billion over a decade, according to the Joint Committee on Taxation.
  • By reducing trial lawyers’ legal costs, it would effectively subsidize contingency-fee cases.
  • Lawyers will be more likely to file dubious lawsuits and drag out cases if they can immediately deduct their expenses.
  • This is a direct income transfer to plaintiffs' lawyers, who will turn around and finance Democratic election campaigns. It’s the definition of a corrupt political bargain.
CONCLUSION

You might ask, “Why should the rest of us support wealthy personal injury attorneys by creating the legal fiction that a loan is deductible only for them but not to any of the rest of us who make business loans?”

The problem is that as long as you have an income/payroll tax system, this type of benefit can be quietly provided to the groups who pay the most for tax favors.  One personal injury lawyer is reputed to have contributed $3 million to political action committees and has been rewarded by this proposed law change.

The FAIRtax eliminates this opportunity to sneak provisions into the tax code that benefit favored groups with the right political connections.  It is a simple retail sales tax on new retail goods and services.  There are no exemptions, no deductions, no loopholes.

Yes, with the FAIRtax, the personal injury attorney would not be using “after-tax” dollars to finance the loan but neither would the rest of us.  With the FAIRtax, people with the means to do so could no longer buy preferential tax treatment and thereby transfer their federal tax burden to the rest of us.

Obviously, one of the main reasons that the Ruling Class and their minions in D.C. oppose the FAIRtax is that this sort of graft will no longer be available to them.

Now the FAIRtax won’t eliminate crony capitalism altogether.  The Ruling Class and their special interest groups will seek other ways to sell favors.  But when the FAIRtax is the law of the land, they can’t bury their dirty deals deep within an incomprehensible tax code where they’re almost totally hidden from the public.

As Theodore Roosevelt said, “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”

Since we still have elections, we have the ability to elect federal representatives who will replace the complex income/payroll tax system with the FAIRtax.

We just need to keep pointing out the insanity of the complex income tax and the benefits of the FAIRtax to everyone.  Our friends and neighbors who we need to vote with us for a sane system of taxation just need to be informed.

WHAT CAN EACH OF US DO?

We can write letters and make calls to our elected representatives demanding that if the government really wants to eliminate the burden of filing income tax returns, they should enact the FAIRtax and do away with tax returns altogether.

The great 18th century Irish statesman Edmund Burke made a statement that applies in many ways,

“Nobody made a greater mistake than he who did nothing because he could do only a little.”

If you want to prevent the IRS from being further weaponized to punish those of us who may object to the D.C. opinions and dictates of what is good for us, then help us PASS THE FAIRTAX!

The IRS will be gone and we will pay our taxes when we make purchases.  WE and not D.C. Elites will decide how much federal tax we pay!

If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org.  Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.

Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.

Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:

“If you want a picture of the future, imagine a boot stamping on a human face—forever.”

Is it hopeless?  When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?”  But I dream things that never were; and I say “Why not?”

Isn’t it time for us to ask, “Why not?”

HELP BRING ABOUT REAL TAX REFORM AND STOP FUTURE IRS ABUSES


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