Politics & Policy

Payment-Card Reporting Nonsense

Another expensive bad idea from congressional Democrats.

Last week the House Ways and Means Committee marked up the so-called Alternative Minimum Tax Relief Act of 2008. As expected, the Democrats are proposing several permanent tax hikes in exchange for a provision to protect the middle class from the unintended consequences of the AMT. What wasn’t expected was the addition of a nasty new regulation.

The bill now includes a $30.98 billion capital-gains tax increase on the carried interest of general partners in investment partnerships and a $13.57 billion income-tax hike for oil companies. Basis reporting, which would require financial firms to report capital-gains basis information to the IRS, was thankfully not included in the bill. However, payment-card reporting was. This is real bad news.

Recommended by the Bush administration, payment-card reporting would require banks and other providers of merchant account services to report credit- and debit-card payments to the IRS. All credit-card sales essentially would be pre-audited, with detailed sales information given to the government.

The idea is to stop tax cheats, although the effectiveness of such a system is far from clear. Meanwhile, this new regulatory burden will cost credit-card networks, banks, and other payment systems in terms of time, money, and personnel. These costs will necessarily be passed on to businesses and retailers in the form of higher credit-card fees, and to consumers in the form of higher prices.

With tens of millions of payment-card transactions taking place each day, the amount of information reported to the IRS in this new scheme will dwarf anything that exists today. The collection, transmission, and storage of such a massive amount of personal data also raises serious concerns about privacy and security, particularly for the many smaller businesses that use Social Security numbers as tax ID numbers. The Center for Democracy and Technology has explained that payment-card reporting will undo the standard practice of deleting personal information once it has served its purpose. Considering the rising incidence of online identity theft, this is a particularly bad idea.

Making matters worse, payment-card processors will be deputized by the IRS not only to collect personal data, but to collect money, too. Under backup withholding provisions of the bill, if a processor is unable to verify a merchant’s taxpayer ID number, the processor will be required to withhold 28 percent of that merchant’s gross transactions. Any smaller merchant caught in this net will suffer a cash-flow nightmare.

Ironically, this big-government scheme is certain to elevate spending — the cost of building and maintaining a database of such vast scope would be considerable — with no guarantee that tax cheats will be caught and tax revenues will be recovered. Companies that cheat on their taxes by underreporting income typically fail to report cash transactions, not the credit-card transactions that are clearly documented and would be available during an audit.

And how will analyzing credit-card transactions allow the IRS to successfully identify companies for the purposes of auditing? The IRS has not demonstrated this. Most likely, this program will result in unjustified and unnecessary audits.

Payment-card reporting is another expensive bad idea from House Democrats. American taxpayers can only hope this extortion attempt fails, and that Congress passes AMT relief in a clean bill with no tax and regulatory hikes.


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