Bernie Madoff’s Ponzi scheme ripped off thousands of investors, foundations, colleges and universities, and financial institutions for as much as $50 billion. Over the years, investors paid taxes on capital gains and interest their accounts supposedly generated for them. But after Madoff confessed to the largest private Ponzi scheme in history did investors realize they had been victimized twice, once by Bernie and the second time by the government that taxed their nonexistent gains.
The federal government is returning some of the taxes paid by Madoff’s victims. (See the following article about how the IRS will treat Madoff’s victims’ losses. ) However, New Jersey may not allow investors to recoup the taxes they paid on phantom income while they were being swindled by Madoff.
In New Jersey the income tax allows few deductions but there are hefty taxes on capital gains, interest and dividends. However, Madoff’s victims paid state income taxes on income and capital gains that were bogus. Thus, Madoff’s victims should receive refunds on all taxes they paid to the Treasury that were based on phantom income.
The State of New Jersey taxed nonexistent income from Madoff’s victims, making the Treasury a beneficiary of Madoff’s Ponzi scheme.
If the State of New Jersey keeps the ill gotten gains from Madoff’s victims, then the State is in many ways no different than a recipient of stolen loot from a bank or any other robbery. Wouldn’t law enforcement require the recipient of stolen goods, money, merchandise, etc., to return the ill gotten gains to the victims of the theft? By the same token, the State of New Jersey should return the taxes paid by Madoff’s victims ASAP.
If the State of New Jersey does not refund the taxes paid to Madoff’s victims, then this episode would underscore Frank Chodorov’s observation that the income tax is indeed the root of all evil.