Tag: Income tax

We’re #3!

Well, friends, I think we can finally give our government some credit. After decades of effort, we are finally one of the top nations in the world in something. In fact, we’re the third best. Only France and Portugal are better. With a huge bipartisan effort and some fantastic leadership from President Obama, the United States is now third in tax shittiness:

If American businesses have begun looking for opportunities to relocate their corporate offices overseas, it’s not necessarily from a lack of patriotism. The Tax Foundation calculated the tax competitiveness of the 34 countries within the Organisation for Economic Co-operation and Development (OECD), nations at least nominally committed to free-market economics, as part of their annual ranking system. The US comes in 32nd out of 34, just above France and Portugal, but below such economic powerhouses as Mexico — and Greece

The United States places 32nd out of the 34 OECD countries on the ITCI. There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39.1 percent. Second, it is one of the only countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 46.3 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

This isn’t just a matter of taxes being high; many of the countries ranked below us have much higher overall tax rates and much larger governments. To get our #3 ranking, we had to put together a corporate tax system with both a high rate and ridiculous complications. We had to resist the global trend to not double-tax foreign earnings. We had to make our income tax ridiculously complicated and unfair. We had to create a tax system that is openly hostile to the idea of people working, investing and exporting goods.

So, congratulations to the Congress and President Obama! Between this and our rapid decline in the Economic Freedom Index, you’re making this country worse than the European socialist states!

Obamanomics in a nutshell…

And this Obamanomics phenomenon applies to collectivism’s economic precepts in general. The idea is to stifle small businesses by subjecting them to ridiculous tax rates, to control them and limit their ability to compete. After all, small businesses are anathema to the big government types, because in general, big government is the enemy of these entities and their biggest economic pain point. In the mean time the big corporations that the government elite favor, both as business entities and as the type of business said government feels should be economic winners, are given tax breaks. That’s always in return for said businesses supporting the efforts of the big government types. From the article:

The New York Times reports that President Obama is reviving an old proposal to lower the corporate tax rate from 35 percent to 28 percent (and 25 percent for manufacturers). Obama’s push to lower the corporate tax rate to 28 percent comes less than a year after he raised the top individual income tax rate, paid by many small businesses, to 39.6 percent.

In a speech delivered Tuesday afternoon, Obama did not explain why he thinks it’s a sound economic idea to raise the top marginal tax rate on small businesses but lower it for corporations.

It is not accidental that the nanny stater’s philosophy is to favor the big over the productive. That’s what the USSR was all about. Practically every entity in the collectivist’s way of doing things needs to be centrally managed by them, leading to a model where anything from manufacturing to healthcare end up as behemoths that are gigantic, inefficient, ineffective, and tied to the state’s whims. While we no longer have the collectivists in charge wanting the state to outright own everything like the good old days of communism, we should not be fooled into believing they have abandoned they belief in central planning and bigger is better. “Too big to fail” is something, and something really bad, the nanny staters gave us.

These days the collectivists masters prefer to create the veneer of free enterprise while setting up a legal system that makes them the de facto power brokers. The ability to pick the winners and losers and to create an incestuous dependency between big business and big government, has all but replaced that. And they still keep the ability to rile up the stupid masses through the usual marxist envy and jealousy based class warfare bullshit that has served them so well, while they and their crony corporatists buddies laugh all the way to the bank. The LSM might ignore the truth, but the facts speak for themselves. This is not happening by accident: it is by design.

Collectivists have no use for a middle class. Their system is predicated on an elite class that rules, and the serfs that serve them. That’s why their policies, while always sold as well intended, have as a side effect the erosion of the middle class at the same time as it expands the number of lower class members dependent on government handouts for their daily subsistence. Punishing small businesses and using them as a cash cows, while favoring the giant corporations that they favor, plays very well into this collectivist model. Collectivist are good at pretending to care, but what they do destroys prosperity. Ask the people that lived under the old Soviet system, the people left behind in communist China, the North Koreans and Cubans, and anyone else subjected to the whims of these fools.

The New Corporate Welfare

This is somewhat disconcerting:

The report from Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations, identifies 16 states that let companies divert some or all of the state income taxes deducted from workers’ paychecks. None of the states requires notifying the workers, whose withholdings are treated as taxes they paid.

General Electric, Goldman Sachs, Procter & Gamble, Chrysler, Ford, General Motors and AMC Theatres enjoy deals to keep state taxes deducted from their workers’ paychecks, the report shows. Foreign companies also enjoy such arrangements, including Electrolux, Nissan, Toyota and a host of Canadian, Japanese and European banks, Good Jobs First says.

Why do state governments do this? Public records show that large companies often pay little or no state income tax in states where they have large operations, as this column has documented. Some companies get discounts on property, sales and other taxes. So how to provide even more subsidies without writing a check? Simple. Let corporations keep the state income taxes deducted from their workers’ paychecks for up to 25 years.

Good Jobs First, I should point out, seems to be interested in a slight variation on corporate welfare, declaring that they want corporate subsidies to be “accountable and effective”. I agree with the first, but the second is incredibly dubious. I don’t think that any of this corporate welfare business is effective in building economies. In the end, the state expends more money and effort scratching the backs of fat cats than they can possibly recoup. Unprofitable business are propped up at the expense of ones that can survive on their own. A better idea would be to simply make your state a good place to do business in general: keep taxes low, regulations reasonable and your budget balanced.

Of course, then the halls of our state houses wouldn’t be filled with rich guys begging favor of and giving contributions to two-bit politicians. So, we can’t have that.

Still, this confiscation of income taxes is a step past the usual corporate welfare. Money is fungible, and maybe there’s no difference between keeping your employees’ witholding and turning it over to the state before getting it back in a subsidy. But it reeks even more than usual.

The Other Way

As I’ve said before, I don’t think we can balance the budget without raising taxes. Of course, tax hikes have to be conditional on even larger spending cuts (a 3-1 ratio at least). And they should be real spending cuts, not phony-baloney baseline cuts or giving ourselves credit for ending the war in Afghanistan.

Given that, you might think I see Obama’s tax proposal — which mainly involves setting higher marginal rates for millionaires — as the beginning of a “Grand Bargain”. But I don’t. It’s a perfect example of how not to do tax policy. It’s built on the Warren Buffet complaint about not being taxed enough (even though Berkshire-Hathway owes hundreds of millions in back taxes). It then institutes a series of escalating marginal rates that, incidentally, will not tax Warren Buffet since his salary is actually small.

It’s crap. It’s the same mentality — we must tax X! — that gave us the abomination that is the Alternative Minimum Tax. That creature was started because of hysterical media reports about millionaires not paying any taxes because deductions wiped them out. The tax burden of the AMT is bad enough, but the deadweight loss — the time, energy and money burned to comply with it — is death.

Our hideous and destructive tax code has been built by bullshit like this. No one sat down and said, “What’s the best way to raise the money for our government while minimally impacting the economy?” Instead, it’s been built of a series of things we should subsidize (kids, home ownership, charity) and things we should punish (rich people). It’s been built on they hysteria-of-the-week. And it’s a simple fact that you will not create a good tax system this way.

Taxing Warren Buffet more is not the basis of good policy. Taxing Warren Buffet more should not be our goal (although it may be the result). Narrow aims like that are what have given us the current mess in which the IRS can’t tell you whether your tax return is right or not. Narrow aims like that distort markets and create unintended consequences. Narrow aims like that result in stories like this, where ex-pats in foreign countries are being threatened for not filing tax returns because someone got a bug up their butt about it.

There are a number of viable alternatives. Milton Friedman proposed a flat tax calibrated to provide negative tax to poor people, the negative tax replacing the welfare system. Simpson-Bowles outlined a number of proposals that the GOP is currently favoring that would eliminate most deductions in favor of a lower overall rate. The Value-Added Tax is a possibility and would be far better than the Fair Tax. One change I would like to see: eliminate the corporate tax completely but tax capital gains and stock income at normal income rates.

All of these are viable options. Any is preferable to the system we have now. And while none would stimulate the economy right away, the long term effects could be dramatic:

It will make U.S. multinationals more competitive and more likely to increase employment here in the U.S. It will shift employment away from the tax avoidance industry of lawyers and accountants to skilled workers who actually produce goods and services. It will cut down on the roughly $2 trillion U.S. multinationals have stashed overseas to avoid high U.S. taxes. It will stop rewarding U.S. multinationals for carrying debt and building financial services subsidiaries and will make them less vulnerable to financial crises. It will increase dividend payouts. It will lower the cost of capital and increase investment. These benefits only arise after firms change the way they operate, and that will take time, like many years.

On the individual side of the income tax, tax reform will reduce the excessive subsidies for housing and redress the disadvantage of renting. It will reduce health benefit subsidies which drive up health care costs. It will reduce the complexity which forces most taxpayers to use a tax preparer. With some extra effort, we could go to a return free system for most taxpayers.

Tax reform is the definition of long-term thinking. It will take years to do (Reagan had to fight for two years to get even mild reform) but will pay off over decades. If Obama were serious about both the deficit and the economy, this would have been the subject of his speech this week.

It wasn’t. Campaigning for 2012 was.

Attack of the Buffett

Warren Buffett has an op-ed calling for higher taxes on the rich that has been sent to me by just about every liberal I know, every liberal I’ve ever heard of and, I understand, was found in alien radio transmissions detected by the revived SETI network.

I’m hesitant to disagree with a titan of finance like Buffett. And, in fact, if you push aside the class warfare gibberish and straw manning of the opposition, I think he makes some valid points:

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

What he’s dancing around is that we tax people a *lot* less for flipping money around than working. If you’re a doctor making six figures saving people’s lives, you’re taxed at a marginal rate of 33%, plus state taxes and payroll taxes. But if you make money on credit default swaps, stock market gambling and housing flips, you’re taxed between 15-20% with no payroll tax. We conservatives always say that incentives matter. You don’t have to be a rocket scientist to see why so many of our best and brightest have moved from making and building and doing things to playing with money and wrecking the economy.

Buffet also debunks a talking point I’ve grown tired of. The argument that the rich are taxed too much is based on what percentage of income tax they pay versus what percent of income they take. However, this fails to account for all taxes, specifically capital gains taxes.

However, Buffett isn’t completely in Earth orbit. He complains about the payroll tax not applying to the rich. But first off, the Medicare tax does apply to the rich, at least for income. And second, the Social Security tax is capped because benefits are capped. You can remove that cap if you want (and give us a gigantic marginal rate) but you then have to stop pretending Social Security is anything but a welfare system.

But the biggest problem with Buffett’s article is his laser-like focus on the “mega-rich”. He ignores that, for Democrats, “the rich” start at $250,000 and most of the “rich” are closer to $250,000 than they are to $10 million. Of course the mega-rich will be fine no matter what the tax system does. They’ll buy enough Congressmen to create loopholes and exemptions for them (Buffett himself is heavily invested in “green” technologies which are getting tax benefits). It is the “not-so-mega-rich” who are most sensitive to tax policy.

To wit: Buffett does not mention the AMT at all, which is a huge regulatory and financial burden on the not-so-rich. He says nothing about the small business that drive the economy, many of which pay taxes as individuals and many of which are about to get hammered by PPACA taxes. He conspicuously fails to mention Sarbanes-Oxley, which may a bigger burden on our system than taxes. And he fails to note that the higher marginal rates of the past were leavened with huge tax shelters which benefited … the mega-rich like Warren Buffett. He also doesn’t talk about the inheritance tax, which can hit small business very hard. Ted Frank has claimed that one of the ways Berkshire-Hathaway makes money is by buying business that have to sell because of the inheritance tax.

In short, this crosses me as a very rich person arguing for a tax system that will hit him, but hit the competition harder. Haven’t we danced that dance enough times?

The more we debate tax policy, the more something along the lines of Simpson-Bowles looks like a smart idea. Eliminate as many loopholes, deductions and exemptions as possible; eliminate the distinction between capital gains, stock income and earned income; lower the marginal rates into the 20’s. This would bring more revenue to the Feds while minimizing the tax burden on investors and business owners. And it would especially do it without knee-capping those who compete with Warren Buffett.