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Summary and Comments

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Category: 

Government

Date: 

1998-05-12 07:03:43

Subject: 

Moynihan's Bill Reduces Supply of U.S. Programmers

  Link:

http://www.nytimes.com/library/tech/98/04/biztech/articles/27tax.html

Comment: 

Daniel Moynihan has been aggressive in warning the nation about y2k. Nobody in authority has paid much attention to him.

He also wrote a plank into the tax code which makes it very hard for programmers to set up as independent contractors. The IRS is enforcing this law aggressively.

This reduces income for programmers. Economics tells us that when a government uses coercion to reduce the price of any good or service, there will be a shortage at the artificial price.

Programmers who want to earn more money as independent programmers are not allowed to do it. Thus, Moynihan the y2k Cassandra is undermined by Moynihan the author of the tax code.

All this to gain a paltry $12 million a year, which Moynihan traded to give IBM a tax break.

The story appeared in the NEW YORK TIMES (April 27). [Registration is required.]

* * * * * * * * *

he Senate holds hearings this week on complaints of taxpayer abuse by the Internal Revenue Service, but the agenda does not include the role of Congress itself in creating taxpayer woes, particularly for tens of thousands of computer programmers.

But just ask Midge Johnson, a would-be programming entrepreneur, about a long-standing tax law that is pointed specifically at software professionals and prevents many of them from setting up freelance businesses. Lately, the IRS has been aggressively enforcing that law -- even as computer programmers are in such short supply that the Clinton Administration is pouring millions of dollars into Federal initiatives to train more of them.

It appears to be public policy in conflict with itself and it is making work life difficult for a category of citizens crucial to the digital economy. . . .

Mrs. Johnson, of Lanham, Md., knows that programmers are in such short supply that they can earn up to several hundred dollars an hour writing code for hire, and many in Congress want to let tens of thousands of foreign programmers migrate to the United States. She calculated that if she were in business for herself she could double her income.

Everywhere Mrs. Johnson went in the suburbs of the nation's capital, she said, she was offered work fixing and customizing software -- but only if she would close her business and become an employee. . . .

Mrs. Johnson and thousands of other computer programmers who want to work for themselves instead of being employees have run afoul of a 1986 law in which Congress decreed that most individual programmers cannot be entrepreneurs.

The law generally excludes programmers from statutes giving employers some flexibility to use independent contractors. Critics say that the IRS has recently stepped up its enforcement of the law in a way that effectively kills start-up programming businesses if their only employee is the founder.

The law, which was introduced by Senator Daniel Patrick Moynihan, Democrat of New York, was estimated to raise $60 million over five years, a figure based on a belief by a staff member of the Congressional Joint Committee on Taxation that employees cheat less on their taxes than independent contractors do. That was enough money to pay for a tax break, approved with Moynihan's support, that was sought by IBM for its overseas operations. Under the Gramm-Rudman deficit control act of the previous year, Congress was required to pay for any tax cuts with comparable revenue increases or spending cuts. . . .

But internal IRS documents show that in Alaska, California, Ohio, Minnesota, New York and New Jersey, IRS auditors as recently as last year hunted for corporations created by computer programmers. They found scores of such companies and then disallowed them for tax purposes. The papers show that they were disallowed because they were less than a year old and had only one employee, the programmer who created the corporation. . . .

The immediate effect of these audits is to force individual programmers like Mrs. Johnson to abandon their dreams of getting rich off their high-technology skills. But the broader impact is that small businesses started by one entrepreneur do not have a chance to grow into mighty enterprises that can create jobs and generate more taxes. "Who do you know who would hire someone who will bring with them trouble from the IRS?" asked Harvey J. Shulman, the Washington lawyer for the National Association of Computer Consultant Businesses, who made the audit documents available. . . .

Ed Myers, president of a company in El Segundo, Calif., that provides programmers to corporations, said that when his company was audited he and Shulman were able to defend the status of all but 3 of 50 workers as independent contractors.

"The auditor then said I had to give him two more people and I said, 'what do you mean?' and he said he had to have five people he could reclassify as employees because that was what his boss demanded and that if I would give him two more names he would close the audit.

"My first reaction was 'hell no,' because they are not truly employees," Myers said. "But my second reaction was that it makes no economic sense for me to fight this because it would cost another $50,000 or more, so I gave him two names."

The two programmers, he said, no longer speak to him.

Link: 

http://www.nytimes.com/library/tech/98/04/biztech/articles/27tax.html

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