Tag: Taxation

MLLG

Taxation in Biden’s America

George Noga

Taxation in Biden’s America

Do the wealthy and corporations pay their fair share?

GEORGE NOGA
March 17, 2024

President Biden’s State of the Union (SOTU) screed demagogued corporations and the wealthy, alleging they do not pay their fair share of taxes. He repeated his ersatz claim that no one with income under $400,000 would pay a penny more in taxes. This post lays waste to these and other Biden assertions, whose only aim is to divide Americans by income and to engage in unrestricted class warfare based on disinformation.

person holding paper near pen and calculator
Paying Income Tax

Do the Wealthy Pay Their Fair Share?

The top 1% of earners paid 42.3% of all federal income taxes¹ which is the highest in 20 years. That same 1% reported 22.2% of income (AGI) which means that cohort paid roughly double its share of income in taxes. The wealthy’s share of taxes was even higher because AGI excludes income from 88 government programs for low-income Americans, refundable tax credits and debit cards loaded with food stamp benefits.

The top 5% of earners reported 38% of AGI, but paid 63% of all income tax.² The lowest 50% of earners reported 10.2% of AGI and paid 2.3% of all income tax. When adjusting for credits such as the EITC, the bottom 60% paid only about 1% of all federal income tax. The top 1% paid an average tax rate of 26%, while the bottom 50% paid an average rate of 3%. To put a finer point on it, the wealthy in the US pay a far higher share of taxes than in Sweden and in every other developed nation.

As progressive as are federal taxes, deep blue states are even worse. In California and New York, the top 1% of earners pays 40% of all taxes. As high earners decamp California for friendlier climes, it has caused a budget deficit of $70 billion.

Tax Increases for Under $400,000 Income

Several of Biden’s tax increases directly raised taxes on low-income Americans; the increase in cigarette taxes comes immediately to mind. However, tobacco taxes are penny ante. The killer tax increase on low-income and middle-income Americans is inflation. And yes, inflation is a tax – just like any other tax. Economists of all stripes consider inflation to be a tax. Biden’s inflation, caused by blowout spending, costs families earning under $400,000 a whopping $7,000 per year in inflation tax.

Biden’s inflation has raised mortgage rates to multi-decade highs and added around $700 per month to new mortgages and to variable rate mortgages. Home ownership for first time buyers is nigh impossible. The rate on credit card debt (now at an all time high) has gone up 6 percentage points, or 30%. All these Biden-created inflation costs lay waste the budgets of Americans earning below $400,000.

Do Corporations Pay Their Fair Share?

It bears repeating that corporations do not pay taxes – only people pay taxes. Wouldn’t it be wonderful if we could magically impose taxes that no human had to pay? Studies have shown that 96% of all corporate income taxes are passed along to consumers as price increases. Thus, if Biden and his progressive cool-aid drinkers raise corporate taxes, the real burden will fall on low and middle income Americans.

In his SOTU speech, Biden resurrected his stale canard that some big corporations pay no income tax. The poster child for this is Amazon, which in some recent years paid no corporate income tax because in prior years it suffered humongous losses which, pursuant to law, Amazon was able to carry forward to offset income in subsequent years. Another case in point is FedEx, which owed no income tax due solely to lawful depreciation on its large fleet of new aircraft. However, both Amazon and FedEx paid billions each year in payroll, state and local taxes.

Warren Buffet and His secretary

Biden’s SOTU also repeated another red herring, i.e. some billionaires pay tax at a lower rate than their secretaries. This assertion made quite a stir in 2012 when Warren Buffet said he paid tax at a lower tax rate than his secretary, Debbie Bosanke. Indeed, it is possible that Buffet (or anyone) with income only from capital gains could pay a lower rate than someone with only ordinary income. However, that is only one of many parts of taxation and far from the whole story. Before anyone realizes capital gains, he/she must first pay income tax and then invest with after tax funds.

I computed the total taxes over the entire cycle on this tranche of income (including ordinary, dividends, corporate, capital gains and estate) and determined that Buffet would have paid overall taxes of 70% to 80% – far, far higher than Ms. Bosanke.

Raising the Minimum Wage

To complete Biden’s SOTU circle of disingenuity, he trotted out the minimum wage. Markets determine wages, not governments. However, far from helping those most in need, raising the minimum wage actually hurts them by putting the poor, young, minorities and low-skilled out of work. The minimum wage affects less than 1% of all workers and for only 6 months or less. Most earning minimum wage are not poor; they have household income over $60,000 and consist of spouses and teens living at home.

Taxation in Biden’s America

After a half century on the public payroll, Biden must be conversant with the facts reported in this post. If he isn’t, it is ignorance on an unimaginable scale. If he does know the facts, it can only mean he chooses to ignore them to incite class warfare. Either way, it is condemnable. To cap it off, Biden really does not want to soak the rich, i.e. his biggest donor base; he merely wants the appearance of doing so.

1      Based on official IRS data for 2020 – the most recent year for which data are available.

2     Tax Foundation data as reported in The Wall Street Journal.

© 2024 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com

MLLG State of the Union Address

George Noga

Biden’s SOTU address is this Tuesday. Following is MLLG’s SOTU speech.

MLLG State of the Union Address

By: George Noga – February 21, 2021

My fellow Americans:

I begin with first principles. Governments are instituted among men to protect their rights, which include life, liberty and pursuit of happiness. This is its only legitimate purpose. Experience shows legally sanctioned force, i.e. government is necessary to secure our rights and to protect us from foreign and domestic violence. Government is a dangerous, albeit necessary, force but is preferable to the alternative, i.e. anarchy.

All human history demonstrates that free people, free trade and free markets result in the greatest prosperity for everyone. Civil society and markets are 100% voluntary and non-coercive. No corporation, no matter how powerful, can compel you to buy its product. A consumer armed with a free choice is the most powerful force on earth.

In contrast, government is inherently coercive; it is not about reason, persuasion or logic. It is about brute force. If you run afoul of a government diktat, ultimately men with guns will come and take away your property, liberty or even your life. Because government is such a powerful and malevolent force, it must be limited, controlled, confined to its constitutional box and used only when absolutely necessary.

Ours is a government of laws and not men. Who holds executive, legislative, or judicial offices should be of little import to citizens, provided they remain inside the constitutional box. We must gradually shrink a severely bloated government back to its core responsibilities; this means we scale the government back to 15% of GDP, a level which empirically has been shown to maximize the well-being of all Americans.

The few legitimate functions of government should be vigorously carried out. Of these, none is more important than protection from foreign threats to our liberty; hence, we must make our military so strong no adversary would even contemplate challenging us. This means that we will spend whatever is required to defend our liberty.

We must begin to restore our constitutional republic back to first principles. Following are some of the other main goals and policies we will pursue in the time ahead.

– Free Trade: Prosperity is created by trade among people. The USA unilaterally will eliminate all tariffs and trade barriers – even if no other countries reciprocate.

– Sound Money: The Federal Reserve will have only one mission: sound money. It will be audited regularly and will take a hard look at returning to a gold standard.

– Taxation: As we scale government back to 15%, taxes can be reduced. All present taxes (income, payroll, etc.) will be repealed and replaced by a consumption tax.

– War on Drugs: The war is over; drugs won. Drugs will be legal, taxed, regulated and discouraged. Taxes from drugs will be spent on rehabilitation, not incarceration.

– Education: We will implement universal school choice and thereby solve the greatest civil rights issue of our time. Great God almighty – free at last!

– Regulation: All regulations automatically sunset after 10 years. Any regulations promulgated by bureaucrats and having an economic impact of more than $25 million must be approved by a vote of Congress before they become effective.

– Climate Change: Open scientific debate is encouraged. All climate spending will be subject to strict cost/benefit analysis. More funds will be allocated to mitigation.

– Entitlements: Social Security will be voluntarily privatized. All entitlements will be placed on the budget. Medicare will be converted to a premium support system.

– War on Poverty: This war also is over; this time we won. Americans living in poverty (by their own account) are down to 2-3% and consist nearly entirely of those with very low mental acuity, untreated mental illness and drug addiction. We will not abandon these people but will structure solutions better tailored to their problems.

There is more – much more. But the policy initiatives outlined above should provide a good idea of the direction we are leading America. Thank you very much. Good night and may God bless you, your family and these United States of America.

Next up on February 28th: Real doctors versus witch doctors.
More Liberty Less Government – mllg@cfl.rr.com – www.mllg.us

Uncle Sam is Coming for Your IRA

George Noga
“I rob banks because that’s where the money is.”  (Willy Sutton)
Uncle Sam is Coming for Your IRA
By: George Noga – November 17, 2019

        Our headline is incomplete. Uncle Sam is not coming just for your IRA; he is coming for your 401(k), 403(b) and corporate and government pension. In short, he is coming for all your retirement assets. The government is coming for your pension for precisely the same reason Willy Sutton robbed banks – because that’s where the money is. It already has begun with the imminent passage of the Secure Act.

      The “Setting Every Community Up for Retirement Enhancement” Act, known euphemistically by its acronym, the Secure Act, passed the House of Representatives 417-3 in May. It is expected to pass the Senate with widespread support although a few senators are holding it up for various reasons. The Secure Act is a poster child for two MLLG principles. The title of a law is inversely related to its effect and the more euphonic the name, the greater the harm. Second, any law that has near unanimous support is, ipso facto, bad for the nation – if both parties like it, we’re screwed.

Politicians and IRAs are analogous to grave robbers and King Tut’s tomb

         The Secure Act destroys decades of meticulous planning by millions of middle class Americans by eliminating the stretch IRA – that allows savers to leave their IRAs to children and grandchildren and to stretch distributions over their lifetimes. This taxpocalypse gobbles up 35% of inherited IRAs without Congress having to vote for a tax increase; it upends college planning; and, it creates an estate planning cataclysm. Although the Secure Act targets IRAs, it also ensnares Roth IRAs, 401(k)s and the entire panoply of retirement assets which can be rolled into IRA accounts.

The Secure Act is only the beginning; it gets worse – much worse

        Among the Secure Act’s occult provisions is a mandate that annuities be offered as a payout option on all retirement accounts. This is the camel’s nose under the tent and could lead to mandatory annuitization of all retirement accounts. That would force distributions into higher brackets, accelerate taxable distributions and eliminate all inherited IRAs – not just the stretch ones. Best of all for politicians, they could accomplish this without voting for a tax increase. But wait; it gets even worse.

        The spending crisis will reach critical mass – likely in the coming decade. Please see our four-part series on the US spending crisis that ran from April 28 to May 19, 2019; it is on our website: www.mllg.us.  US public debt will approach $40 trillion by the end of the coming decade. By a calamitous coincidence, US retirement assets also will approach $40 trillion in exactly the same time frame. BINGO!

         When the debt crisis is tearing America asunder and there is a pool of money that would pay off the entire debt, is there any sentient person who believes the ineluctable won’t happen? The government, either piecemeal or in one fell swoop, will seize all your retirement assets and convert them into government pensions to be paid in fiat currency. Think this is farfetched? In recent years, Poland, Hungary, Bulgaria, Ireland and France have, through one artifice or another, seized money from pension assets.

        It’s so obvious Willie Sutton and King Tut’s grave robbers understood it. Uncle Sam must go where the money is and that is your retirement assets. The Secure Act is but the first step in what will be a long train of usurpations of your retirement assets.

Next up on November 24th is our special Thanksgiving posting.
      .
More Liberty Less Government  –  mllg@mllg.us  –  www.mllg.us

Taxation in America – Part V

George Noga
The new tax law makes America competitive and will bring about a veritable cornucopia of new investment, job creation, productivity and economic growth.
Taxation in America – Part V
New Tax Law Analyzed and Dissected
By: George Noga – December 22, 2017
       I promised a final blog in our Taxation in America series immediately following final passage of tax legislation; otherwise, I would not post this close to Christmas. This is the final part; the prior four parts can be accessed on our website: www.mllg.us. We are taking a brief holiday respite; thus, our next post will not be until January 14.
     My “take” on the new tax law is similar to that of many other commentators; nonetheless, I hope to add some fresh insight and perspective. For corporations and businesses, the new law is utterly transformational. Lowering the corporate rate to 21%, expensing 100% (for 5 years), changing to a territorial tax system and the deemed repatriation tax all are highly salutatory. These changes make America competitive with most other nations and will result in a veritable cornucopia of new investment, job creation, productivity and economic growth for years to come.
      For individuals, there is little to cheer. There are modest tax cuts for most taxpayers and the $24,000 standard deduction, combined with the new deduction limits, will provide simplification to many. Repeal of the Obamacare individual mandate is a big winner. For individual taxpayers, Congress missed a once-in-a-generation opportunity to substantially lower taxes and to reform and to simplify the tax code.
    Regrettably, the law also contains many lese-majeste provisos: (1) seven tax brackets; (2) absurdly high (106%) marginal brackets due to recapture; (3) gaming potential and complexity on the business pass-through tax; (4) high capital gains rates; (5) sunset provisions after 8 years; (6) failure to repeal the death tax; (7) the enhanced and now partially refundable child care credit which is pure social policy; and (8) the tax treatment of carried interest remained unscathed. The changes to the individual parts of the tax code will produce little or no economic growth.

Tax Law Exposes a Deeply Flawed Political Process

     A parallel story about the 2017 tax legislation is the structural flaws it exposed in our political process. The Byrd Rule (no deficits beyond 10 years) hamstrings and contorts the ability of Congress to act. CBO scoring is pure voodoo; they are consistently wrong and highly political, yet they establish the parameters the law must follow. The PAYGO rule, requirement to offset higher spending, is also unleavened sorcery that thwarts the will of the people. Reconciliation is yet another political dysfunction that determines what can and cannot be considered a tax matter.
     The political process also is pregnant with demagoguery. No matter what the law contains, progressives were going to assert it favors fat-cat corporations and the rich and savages the poor. Recall that: (1) the top one-half of one percent of Americans pay 70% of all income tax; (2) America has the most progressive (by far) tax regimen in the world; and (3) the bottom 60% of Americans pay less than 1% (net of credits).

The Bottom Line

      As always, the proof is in the pudding. The 2017 revolutionary transfiguration of corporate and business taxes and the repatriation of trillions of dollars has the potential to bring about a Reaganesque revival. The best hope for America’s future lies in sustained, robust economic growth; it is not only the most important thing, it is the only thing that matters. Without strong growth, we cannot properly defend ourselves; we face an imminent debt and deficit crisis and the social fabric of our beloved republic will be further rent. All Americans should hope the pudding tastes good!
Best Wishes for a Merry Christmas and Happy New Year
Our next post is scheduled for January 14, 2018

Taxation in America –  Who Pays How Much

George Noga
Americans in the bottom 60% pay around 1% (net of credits) of all income tax. Ipso facto, any tax cut must necessarily benefit only the top 40% of Americans.
Taxation in America –  Who Pays How Much
By: George Noga – November 5, 2017
        This is Part IV of our intermittent series: Taxation in America. The first three parts are on our website: www.mllg.us. The final part likely will be in January once the outcome of tax legislation is known. This post reveals who pays how much in federal income tax. Also, I propose a new intrepid minimum and maximum tax plan.
        IRS data show Americans in the top 1% of income pay 40% of all federal income tax; the top 10% pay over 70%. Converting those data to living, breathing humans means that only 1.7 million people (one-half of one percent) pay that 70%. The bottom 45% of households pay no federal income tax whatsoever, while the bottom 60% pay about 1% (net of credits) of all income taxes. Note: people and income cohorts are not aligned, i.e. the top 10% of income is not derived from the top 10% of taxpayers.
      US corporate tax rates (including states) are 40% – the highest in the developed world. Politicians fool people into believing they will impose taxes on business or property – but not on real people. Economist Walter Williams uses a good example. You are a homeowner and the government imposes a property tax but tells you it is not a tax on you but on your property. You see right through that fraud. But when liberals say they are taxing corporations (and not you) you are suckered in. Corporate and business taxes are passed along to you in the form of higher prices just as property taxes are passed on to the homeowner. Only living, breathing people pay taxes!

MLLG Boldly Proposes New Minimum and Maximum Taxes

      Something is dreadfully wrong when in the richest nation on earth, 60% of its citizens pay virtually no income tax and hence have no skin in the game. They form a brawny advocacy group favoring government spending (since it costs them nothing) and opposing tax cuts because they threaten their government benefits and they will not benefit directly from lower taxes. This is something we must fix.
       MLLG’s minimum tax plan would continue to exempt the bottom quintile (20%) of Americans from income tax. The second lowest quintile would pay a de minimus tax rate of 6% subject to a minimum tax of $1,200 per year. The middle income quintile  (half of which by definition earn above average income) would pay a 12% rate subject to a minimum tax of $2,400. This minimum tax plan would give 80% of Americans a vested interest in reducing spending and taxes along with the, not inconsequential, quiet dignity of being a taxpayer and contributing to the common weal.
      When surveyed, large majorities of Americans consistently respond that no one should pay more than 33% of income in taxes. The MLLG maximum tax plan would cap all taxes at 40% – including federal, state and local income taxes, payroll taxes, property taxes (principal residence only), sales taxes and certain other taxes The maximum tax would be computed on a new one-page form filed along with your income tax. If taxpayers paid more than 40%, they would get a credit or refund from the IRS – which could recover pro-rata from the other taxing jurisdictions.
      MLLG’s minimum/maximum tax plan would make America a much fairer place while preserving a high degree of progressivity. When you hear that the rich do not pay their fair share, recall that one-half of one percent of Americans pay over 70%
      Inscribed directly above the entrance to the IRS Building in Washington is: “Taxes are what we pay for a civilized society“. Stop and think about that one for a while. They got it dead wrong. Taxes are the price we pay for an uncivilized society!
In our next post November 12, we take on Neo-Nazis and Antifa.

Taxation in America – Buffet vs. Bosanke

George Noga
Taxation in America resumes by examining the progressivity of the US tax code; also, we compare Warren Buffet to his secretary, Debbie Bosanke. 
Taxation in America – Buffet vs. Bosanke
By: George Noga – July 30, 2017
     We examine liberal assertions that: (1) the US tax system favors the rich; and (2) Warren Buffet pays a lower tax rate than his secretary. When including refundable tax credits, the lowest income 60% of Americans pay less than 1% of individual income taxes. This is by far the lowest of any nation; moreover, the share of Americans not paying tax has doubled in recent decades. OECD and other studies confirm America has the most progressive tax system including federal, state, local and payroll taxes.

      Let’s turn from the bottom 60% to the top income cohorts. The highest income 10% of Americans pay 35% more of the total tax burden than in Sweden for cryin’ out loud. Data are similar for the top 1% or 5%. During the past 30 years, the US has become far more progressive relative to Sweden, Germany, France and Finland. Corporate tax rates in America also are the highest in the developed world – by a large margin.

    The liberal reflex is to blurt out, “Although income taxes are progressive, payroll taxes are steeply regressive and this makes the overall tax system regressive.” They fail to distinguish between a general purpose tax and one linked to a specific benefit to a specific taxpayer. Consider: (1) the tax base is capped, but so is the benefit; (2) higher income taxpayers receive less of a benefit as a percentage of contributions than lower income taxpayers; and (3) Social Security income is subject to highly progressive income tax rates. Independent studies, including by the Social Security Administration, conclude that both Social Security and Medicare taxes are progressive.

Warren Buffet Versus Debbie Bosanke

    Using virtually any metric, the US tax code is the world’s most progressive. Liberals trot out disingenuous comparisons for misdirection and maskirovka to try and show the system favors the wealthy. Perhaps the most bizarre liberal attempt to bamboozle and to hoodwink is the assertion Warren Buffet pays a lower tax rate than his secretary.

    MLLG once published a highly detailed tax computation showing Warren Buffet’s true tax rate; this post was one of our all-time most popular and is easily accessible on our website: www.mllg.us.  This post summarizes and updates data from the original.

     Buffet asserted he paid 17.4% in income tax and his secretary paid a much higher rate. In truth, Buffet paid close to 80% solely on that tranche of his income. Before Buffet can invest, he must first earn income subject to taxes of federal 39.6%, payroll 6.2%, Nebraska 6.8% and Obamacare 3.8%. He may then invest his after tax income in Berkshire and pay federal tax on his share of Berkshire’s income at 35% and Nebraska tax at 7.8%. When he sells stock he pays a 20% capital gains tax. At death, Buffet is subject to a federal estate tax of 40% and a Nebraska tax of 18%. Whew!

     When properly computing his tax, Buffet is subject to an overall rate of nearly 80%. The 17.4% rate he cited was cherry picked from only the capital gains phase of the complete tax cycle. Furthermore, Debbie Bosanke earns $250,000+ per year – unlike a typical secretary who earns more like $25,000 and pays little or no income tax.

      Buffet (like liberals everywhere) was cynically banking on the ignorance and class envy of the American people. His deception transcends political spin and crosses into a netherworld of duplicity and deceit. It froths with contempt for the American people. All we can do is shine the bright spotlight of truth on this sordid affair.
We now begin our summer in Montana and the next post is a surprise.

Taxation in America – The Ideal Paradigm

George Noga
This post presents the theoretically correct approach to taxation in America.
It is vital to understand the ideal – even if it has no chance of becoming law. 
Taxation in America – The Ideal Paradigm
By: George Noga – July 9, 2017
       Economists often begin by defining the ideal. In that spirit, we present the ultimate plan of federal taxation. Our plan is transparent, fair, simple, pro-growth and neutral with no corporate welfare or social policy. Compliance (now $600 billion per year) is cheap, quick and easy; evasion is nigh impossible. It abolishes the IRS and the need to provide government personal financial data. It taxes the underground economy (an enormous revenue enhancer), broadens the tax base and has no exemptions or mandates. It taxes consumption and not income, savings, investment or wealth.

      The ideal tax is a tax on consumption collected from consumers at the point of sale. All other federal taxes are abolished. Individual and corporate income taxes, payroll taxes, capital gains taxes and death taxes are abolished. Every American would know each time a purchase was made that he/she was paying a tax and the amount of the tax. If government raised taxes, Americans would be painfully aware every time they bought something. The true cost of government would be manifestly transparent.

       Everyone, even the poorest, would pay the tax. However, government could make the tax burden fair to all by any one of several means such as tax rebates for the first tranche of annual consumption or by a form of UBI (universal basic income). It is the proper role of government to decide which citizens are subject to the tax and the best method to rebate money to those who are fully or partially exempt from the tax.

      The national consumption tax (“NCT”) would be progressive, as those who spend more would pay proportionately more tax. Lower income Americans would benefit enormously because an NCT would be incredibly pro growth. Without a corporate tax, jobs and investment would flood into America from abroad. Without taxes on income, savings, investment or wealth, capital would surge into new investments creating new jobs; productivity would go on steroids. Note: The NCT could be in the form of a VAT, provided the tax was collected from consumers and not embedded in products.

      Economists of all stripes agree on much, if not all, of this. There is widespread consensus to abolish corporate and business taxes as nearly every dollar of such taxes comes from higher prices paid by consumers. Since most consumers are not wealthy, corporate taxes are highly regressive, harming the poorest among us. Payroll taxes are regressive as they are imposed only on the first tranche of income. The 50% paid by employers is entirely regressive as it really is the workers’ money. All in all, the new NCT would be less regressive than all of the taxes that are abolished.

        America can enact a simple, fair tax regimen that is the envy of the world. We can create a veritable cornucopia based on sustained economic growth for all Americans. We could generate enough growth to defuse the crisis of spending, debt and deficits, buttress Social Security and Medicare and fund a robust national defense.

    Unsurprisingly, the main obstacle is the Sturm und Drang between politics and economics. Economists of all persuasions broadly agree on a plan such as presented herein. Politicians however, prefer things complex and opaque; they prefer class warfare and demagoguing about how to divide the pie rather than growing the pie. They prefer to milk the system for political contributions. Saddest of all, they prefer to see their political enemies fail far more than they wish to see America succeed.
We return to Taxation in America in a week or two, following other posts.

Taxation in America – First Principles

George Noga
As America debates tax reform, MLLG provides the appropriate perspective.
Taxation in America – First Principles
By: George Noga – June 25, 2017
      This begins our series about taxation in America; it coincides with the debate over tax reform and Trump’s tax proposals. Our tax series consists of several parts that will run during the summer; some parts will run consecutively and some intermittently. We begin by presenting ten wholly objective and nonpolitical principles.
  1. Taxes should be simple and transparent. Citizens should demand transparency and simplicity; however, it is in the interest of government to make taxes complex and opaque. A sales tax collected from consumers at the point of sale meets these criteria as people know they are paying a tax and the amount. Conversely, a VAT, embedded in the cost of products, is opaque; consumers don’t always know they are paying a tax nor the amount. Business taxes, which are passed along to consumers as higher prices, are totally opaque. Government always goes to great lengths to maximize opacity.
  2. Only living, breathing humans pay taxes. Businesses and corporations do not pay taxes; they may remit taxes, but it is not their money. The burden of all business taxes falls on owners, employees and (95% of the time) on customers as higher prices. Business taxes are a myth propagated by government to beguile voters into believing they are not paying tax. The 50% of payroll taxes “paid” by employers is really borne by the employee – not the employer – and is simply government maskirovka.
  3. Taxes should not impede growth. The goal of taxation should be to maximize economic growth. Politicians can and should debate how to carve up the pie but never should do anything to shrink the pie as this harms all Americans. Taxes on capital (such as capital gains) are harmful to economic growth and result in locked-up capital, misallocation of resources, under-investment and loss of productivity.
  4. Taxes must be stable. Once enacted, a tax regimen should be permanent and rarely amended. Politicians can’t resist using the tax code for class warfare and political fundraising. Individuals and businesses need long-term tax stability to plan their lives and investments. Uncertainty is a mortal enemy of investment and productivity.
  5. Taxes should be neutral. Taxes should impose identical burdens on all taxpayers regardless of the nature of their businesses. Under the current tax code, businesses with substantial fixed assets are taxed much differently than service businesses.
  6. Know Hauser’s Law. Tax revenue as a percentage of GDP is constant regardless of the top marginal tax rate. From 1945 to 1963 when tax rates were 90%, tax revenue was 15%-18% of GDP. In the late 1980s when the top rate was 28%, tax revenue was 18% of GDP. Tax revenues vary according to economic conditions but not tax rates. Hauser’s Law works because taxpayers modify their behavior based on tax rates.
  7. Taxation is not for corporate welfare. Simple, transparent, neutral and low corporate taxes would eliminate most of the rationale for corporate welfare. Businesses never should be rewarded for lobbying activity more than for growing their businesses.
  8. Governments should compete on taxes. Nations and states should compete on rates. People always win with competition. Competition from much lower tax rates abroad has created tax inversions. Ultimately, this will be solved by lowering US tax rates.
  9. Taxation is not for social policy. Taxes are for raising revenue in the simplest, most efficient, transparent and economic friendly manner possible; they never should be an instrument for social policy. To the extent government has legitimate social goals, they should be addressed directly and not via the tax code. The worst abuse of this principle is the death tax, which is not about revenue but about class warfare and politics.
  10. Understand the Laffer Curve. Tax revenue maxes out at 30%-35% for individuals and 20%-25% for corporations; anything higher actually produces less total revenue.
      Keep these ten principles in mind throughout our series on taxation in America and as Congress debates tax reform this summer. The closer the final outcome conforms to these principles, the better for every American.
Don’t miss our next posting on Independence Day (July 4th); it is a real keeper!

Inequality in America II – Income, Taxation and Spending

George Noga

Part II of our series, Inequality in America, focuses of inequality of income.

By: George Noga – May 8, 2016

  There are numerous and mind-numbing statistical methods for calculating income inequality. The Census Bureau alone reports the Gini coefficient, Theil index and MLD (mean logarithmic deviation). Many of these statistics do indeed show more inequality now than in past decades; however, peeking inside the numbers is revealing. Note: Most data herein are from US Census Bureau and BLS reports published in 2013-2014.

   By every measure extant, inequality rose more under Clinton than Reagan – Theil at double and MLD at triple the rate. The same is true with Obama’s first six years vs Bush 43. The Gini coefficient rose triple the rate under Obama; MLD rose 37% more; and Theil is up sharply while it fell under Bush 43. It is not a giant leap to deduce that most of the putative increase in income inequality results from progressive policies.

   Despite all the esoteric statistics, we really know very little about income inequality because all the data are – to use a highly technical term – crapola! Every study is fatally flawed by inconsistencies and limitations affecting source data; the major flaws are:

  1. Statistics are based on AGI (adjusted gross income) and not on all income. Much income is not included in AGI, such as contributions to IRA and 401(k) plans. AGI excludes the non-taxable portion of Social Security, EITC, Medicare, Medicaid and SNAP. Every one of these, if included in AGI, would significantly reduce inequality.
  2. Data use household instead of individual income. This renders all comparisons between time periods and income quintiles meaningless because the number of people per household changes over time and also changes between quintiles. For example, the number of one-person households has sharply increased in recent years (mostly in the bottom income quintile) making it appear there is more inequality among households even though, in reality, there is much, much less inequality among individuals.
  3. Quintiles are inconsistent. The top quintile has 3.2 people per household whereas the bottom quintile has 1.7; the income in the top quintile must be spread among twice as many people as the bottom quintile. It also means there are 25 million more people in the top quintile versus the bottom. Use of household data paints a deeply flawed picture of increased inequality between income cohorts – inequality that doesn’t exist.  
  4. Aggregate statistics don’t compare the same groups. Statistics showing inequality increasing over time don’t track the same people. New people (most poor immigrants) keep entering the back of the line, skewing all data downward. If they tracked the exact same people (and excluded new people), the data would show decreasing inequality.

   Does our tax system result in inequality? In one word, no. The US has one of the most progressive tax regimens in the world. Even Social Security and Medicare are somewhat progressive when taking (as should be done) the benefits into account. Moreover, increasing marginal tax rates on the wealthy would not result in their paying more in taxes – a principle well documented and even codified in Hauser’s Law.

   No discussion of income inequality would be complete without genuflecting to the so-called gender gap. However, economic analysis shows that the gap between incomes of men and women completely disappears when properly adjusting for level of education, type of degree, experience, hours worked and level of danger.

   The Census Bureau also reports data on spending by income quintile. The lowest quintile spends $2 for every $1 of reported income. Some of this comes from the underground economy – which logically is the province mostly of that cohort. If we were to gauge inequality based on actual spending rather than on fatally flawed measures of income, the effect would be a signal decrease in inequality in America.    

The next post in this series on May 15th addresses the $15 minimum wage.

MLLG

What You Should Know about Tax Inversions

George Noga
By: George Noga – October 24, 2014
      I had not planned a posting about corporate tax inversions but I am working this in because I believe you will read a perspective herein not to be found anywhere else and, as a CPA, I don’t need to invest a lot of time in research. To begin, a tax inversion is the relocation of a US corporation’s headquarters to a lower tax nation so that it “inverts“, i.e. becomes a foreign corporation for US tax purposes. The US, unique among developed nations, imposes taxes on income earned abroad by American corporations – but the tax is not payable until the income (cash) is repatriated, i.e. returned to the US from abroad. Although there often are crucial non-tax considerations involved in inversions, the main driver usually is avoidance of US tax on income earned abroad and the ability to repatriate such funds.
    Because US taxes are not due until the foreign-earned profits are repatriated, US corporations with foreign operations keep the money offshore. For perspective, 75% of US corporations’ cash is kept outside the US – about $2.1 trillion currently. For example, Microsoft has $70 billion but less than $10 billion is in the US. Money held outside the US can’t be used for investment in plant, equipment or training in the US or to hire Americans; instead, it stays abroad.
       The Obama administration rails against inversions because they assert it reduces the amount of corporate income tax collected. Bear in mind that most companies currently do not pay the tax anyway – that’s why they keep the $2.1 trillion overseas. Following an inversion however, profits (cash) can be brought back into the US without tax and be used to invest within the US to create new American jobs. The increased productivity from this added investment in capital goods, job training and hiring of new workers helps all Americans and increases their standard of living. Arguably, inversions are a net blessing to America in the long run even if corporate tax collections suffer in the short run.
       I return to tax inversions and repatriation infra, but inversions do not exist in a vacuum. They are but one part – and a rather small one at that – of the overall US tax scheme. To put inversions into a proper framework, we must step back, understand what is really going on and look at US tax policy from 30,000 feet.
Getting the Most Feathers from the Geese with the Least Amount of Hissing
       As described in the above aphorism from Louis XIV’s finance minister, Jean-Baptiste Colbert, politicians approach taxation as an art form in which they pluck the geese (taxpayers) to get the most feathers with the least hissing. The main alternatives (cutting spending or raising taxes directly) are anathema. Politicians always enact or raise taxes to make everything as opaque as possible to taxpayers. This, of course, is diametrically opposed to the best interests of taxpayers who should want all taxes to be as transparent and direct as possible. The best tax for taxpayers would be a tax on consumption or a flat tax on income with no deductions or exemptions whatsoever.
“Don’t tax me; don’t tax thee; tax the man behind the tree.” 
       Let’s postulate the US had a flat consumption tax of 19% with no other federal taxes, exemptions, or  deductions whatsoever and that 19% tax represented 100% of the revenue to the government. If politicians wanted to increase spending, the only alternative would be to raise the tax rate to 20% or higher. Such a tax increase would be 100% transparent to every American every time he/she purchased anything. Citizens would know the true cost of government and everyone would have an interest in keeping spending under control. The reason we have a corporate income tax (and are now discussing tax inversions) is because it is a tax that takes many feathers from the geese without the geese ever being aware they are missing feathers. This is an important concept and is explained below.
Corporations Never Pay Taxes – Only People Pay Taxes
        Wouldn’t it be nice if no homo sapiens ever again paid tax? Only artificial constructs like corporations, with no heartbeat or pulse, would be taxed. This is like the mythical Germanic kingdom where candy grew on trees, lemonade flowed in rivers and the fattest, ugliest and stupidest  man was king. Alas, non humans paying tax can’t happen even though politicians would like you to believe it. All taxes always are paid by real, living, breathing people; corporations never have, do not now and never will pay a penny of tax. If the government increases the tax on a company by “say” $1 gazillion, there are three, and only three, possibilities for bearing the burden of the tax.
       It is true that businesses may remit tax revenue to the government, but it is not their money; they are simply transmitting funds to the government they have collected from other people. If the business chooses to pay the tax by reducing its profits by $1 gazillion, the owners (stockholders) pay the tax via lower dividends and/or a lower stock price. Most stockholders are ordinary thinking, feeling Americans investing through mutual funds, IRAs or 401(k) plans. Second, the company can cut its costs $1 gazillion; this of course means firing employees –  again, very much alive ordinary Americans. Third, the company can increase its prices by $1 gazillion (and this is what happens 90% of the time) meaning consumers, again scient, feeling ordinary Americans, are paying the tax in the form of higher prices.
       In reality, unlike in the mythical German kingdom, corporations don’t pay income taxes; there are only real-life human beings paying taxes; but politicians want to beguile you into believing fat-cat corporations are somehow not paying their fair share. Politicians want you to buy into their class warfare canard and they are counting on keeping you ignorant. In reality, the issue of tax inversions is moot and is a contrived tempest-in-a-teapot. Moreover, as observed supra, inversions in the long run may be a net benefit to ordinary Americans as it enables more money to be repatriated which can be used in America for capital investment to increase productivity and to employ more Americans.
       Now that we all understand just how inconsequential inversions are, we still are faced with a political issue searching for a solution. The US corporate tax rate is the highest in the world at 35% federal and 6% state for a total of 41%. Everyone, including President Obama, agrees it should be lowered. Everyone also agrees the $2.1 trillion being kept abroad should be repatriated. A reasonable compromise would be to lower the US tax rate to 20% for a combined federal/state rate of 26% even though this still is higher than many countries that are between 12.5% and 20%. This should be combined with a tax holiday for companies to bring home the $2.1 trillion being held offshore by paying a nominal one-time tax. This was done in 2004 and 800 companies participated, repatriating over $300 billion in overseas profits.
       In any other time with any other president, a compromise would be easy. However, President Obama, is intransigent; he will only compromise to lower the tax rate and to repatriate the funds if new and highly punitive corporate tax measures are part of the deal. Consequently, nothing will happen while Obama remains president. Inversions will continue; trillions of dollars will remain offshore; and ordinary Americans will suffer the consequences. Obama is banking that these same ordinary Americans will succumb to his anti-business, class warfare narrative that corporations pay tax and that inversions are a manifestation of corporate greed. In short, he is demagoguing the issue to death.