After Tax: What slavery scam says about the code

The saddest tax scam of the new millennium is the so-called slavery reparations tax credit or "black tax rebate". In recent years, a number of tax professionals - or purported tax professionals - have told African-American citizens that they are legally entitled to some form of tax relief as compensation for wrongs against their ancestors during the period of slavery in the US.

This, however, is complete fantasy.

Thus the Internal Revenue Service finds itself in the position of reporting that Gregory Bridge, a Virginia accountant, was sentenced to 57 months in prison for filing false returns and advising black taxpayers that they were entitled to special tax breaks.

In addition to arguing that there is such a thing as reparation for blacks via the tax code, fraudulent tax advisers are apparently leaning on the phrase "black tax", which students of modern culture use to describe the hidden costs of residual racial discrimination. In this instance, the scamsters are presenting a figurative tax as a literal one, and promoting a rebate to go along with it.

The "black tax credit" is no small story. The IRS said it received nearly 80,000 claims for slavery reparations in 2001. Taxpayers asked for a total of $2.7bn in refunds.

"Promoters are shamelessly preying upon people," IRS Commissioner Charles O Rossotti has said. The IRS is furious.

And no wonder. In hearings before Congress a couple of years ago, the agency got raked over the coals for auditing a high proportion of lower earners. This wasn't really the IRS's fault. The problem lay with the Earned Income Tax Credit, a generous programme for lower earners that is so complicated - and tempting - that many citizens abused it, intentionally or unintentionally.

Now the same scenario confronts the IRS again. If it is to police the black tax scam effectively, it will have to audit lower-earning Americans. And nobody likes to make poor, lawyerless people miserable, not even IRS agents. Filers who fail to refile after the IRS rejects their fraudulent claim will be hit by a $500 "frivolous filing charge". Ouch.

All this begs the question of why black citizens actually believe the scamsters. One reason is, clearly, that many are not familiar with the workings of US tax law. But that likely isn't the whole story. I think the answer here is that the tax code today offers so many socially oriented giveaways and breaks that this one didn't seem so unusual.

There are, for example, any number tax breaks for victims of September 11. There are tax breaks for anthrax victims. There are tax breaks available for the relatives of those who died in the Oklahoma City office building. There are supposedly endless tax breaks for specific subsets of big business.

In the case of the black tax scam, there is also the fact that many black leaders have called for reparations to the black community for slavery. Indeed, this past week, the first lawsuit was launched against a US company (Aetna, the insurer) seeking reparations.

Among those politicians discussing reparations is Congresswoman Eddie Bernice Johnson of Texas. Her constituents, or constituents of the Black Caucus generally, have heard so much about reparations that it seemed possible to them that a black tax break might already exist.

After the black tax scams multiplied, Ms Johnson had to put out a statement to tell taxpayers that there was no black tax break.

All of which tells us it is time to reconsider what the tax code is for. In the past, taxes used to be only for collecting revenue. If lawmakers wanted to be humane, they wrote welfare entitlements. These days, however, the tax engine has supplanted the entitlement engine as the nation's premier social machine.

The result is a code so complicated and irrational that it takes on a lottery-like feel, rather akin to the feel of modern-day, no-holds- barred litigation. The game is big and scary, but - taxpayers and plaintiffs suspect - also may yield up giant prizes. Indeed, in the black tax scam, we have a rare thing which is the conflation of two troubled aspects of US culture: the litigation explosion and the tax explosion.

Matters are made worse by the fact that some injury awards or settlements (physical injuries, for example) are not taxable, says Harry Hives of law firm Covington & Burling. Winners cash in in two lotteries. Neither of these lotteries is going to go away until lawmakers make clear to voters what lawsuits and taxation are really about.

In the case of lawsuits, this means meaningful tort reform. In the case of taxation, it means restoring the code to something closer to a simple revenue engine.

Paul O'Neill, the Treasury secretary, has been lately suggesting exactly that. If there's a silver lining to the reparations tax scam, it is that it makes clear tax reform is in the interest of every person, black or white.

© Copyright 2002 Financial Times

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