Tag Archives: taxes

A Tax for a Health Fiscal Cliff

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It joins Democratic Presidential Candidate Barack Obama’s enormous tax hike he has taking place at the start of the new year, and it also creates a health cliff for the nearby future as it actively stifles medical innovation in the US.  “It” is the 2.3% tax that will be charged to American medical device manufacturers—on top line revenue—sales—not on profit.  Former Governor and US Senator from Indiana, Evan Bayh (D, IN), offered some thoughts on this problem in a recent Wall Street Journal op-ed.

As a result of this problem,

For a typical company, a 2.3% tax on revenues equals a 15% tax on profits.  When combined with a 35% corporate tax and state corporate taxes, the tax rate for the medical-device industry will exceed 50% in most jurisdictions.

[This inflicts an] added cost of $30 billion—according to the Congressional Budget Office—to the industry.  This tax comes straight out of a company’s bottom line.  Because many devices are sold to hospitals, physicians and other providers through multiyear contracts, the prices are already locked in, so the tax cannot be passed on to the buyer.

Think about the effects this will have on medical innovation.  Governor Bayh did:

America is a global leader in medical-device production and sales.  Last year the US device industry earned $5.4 billion more in exports than we spent on imports of such devices.

Even more important to the average American is the industry’s role in saving and sustaining life.  Medical devices have contributed to remarkable advances in numerous areas: artificial hips and knees, and devices used in the treatment of cancer, and for angioplasty, vascular surgery and in-vitro fertilization, to name a few.  Many of these devices have not only improved the quality of life for patients, but also produced health-care cost savings—for instance, each time an angioplastic balloon made open-heart surgery unnecessary.

and

Especially hard hit could be the hundreds of small companies developing medical software applications. These apps promise to revolutionize the practice of medicine—for instance, by delivering blood-sugar test results for diabetics.

But now

Thirty billion dollars must be taken out of operations or R&D.  Who knows what lifesaving devices that might have been developed will fall victim to this tax?

What about jobs?

Many US device companies, in response, have already announced layoffs, canceled plans for domestic expansion and slashed research-and-development budgets.  This month, Welch Allyn—a maker of stethoscopes and blood-pressure cuffs—announced that it will lay off 10% of its global workforce over the next three years, but all of the jobs being cut are in the US[]

and

In my state of Indiana alone, Cook Medical has canceled plans to build one new US facility annually in each of the next several years, and Zimmer plans to lay off 450 workers, while Hill-Rom expects to lay off 200.  Stryker, based in Michigan, anticipates having to lay off 1,000 workers[]

and

[P]roduction is moving overseas, good jobs are going to Europe and Asia, and cutting-edge medical devices will now be produced elsewhere for import into the US.

Of course Obama and his Progressive Congressmen knew this when they wrote the tax; it’s part of why the entire bill was written behind closed doors in the back of Harry Reid’s office suite, and why Nancy Pelosi was so anxious to get the bill passed before “we can find out what is in it.”  So much for Obama’s concern for the little guy.  So much for Obama’s concern for the health of Americans.  So much for Obama’s concern for America’s innovation leadership.

Update: added the actual name of the man in the first paragraph.

Switzerland Giving up Its Tax Haven Status?

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Spiegel International Online has an article that discusses the possibility of Switzerland giving up a major portion of its banking secrecy laws under political pressure from the US and Germany.  Although the purpose of the article is to discuss the degree of importance (or lack) of the Swiss’ status as a tax haven to the Swiss economy, the discussion raises another question, immediately germane to our own economic condition, about tax havens generally.

Should we care if Switzerland remains a tax haven or gives that up?  If our own tax code weren’t so Byzantine, with such high rates, and with so many excused from taxes altogether (whether from the aggregate of subsidies, credits, exemptions, pick-a-loophole, or just from belonging to a protected class), Americans would have no need of tax havens.

If privacy is our concern, still we should be looking here at home, and reining in an overreaching government.  Sort of the kind of thing elections are for.

A Social Security System Proposal

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Social Security, as we know it, is going to go broke in a few short years.  Demographics guarantee this.  When Social Security was instituted, it was a supplemental income program for our retired, who were expected to continue to rely on their own resources and those of their families for their retirement years.  Moreover, at that time, there were roughly 7 workers paying into the system for every retiree and a retiree lifespan in retirement was about 6 years.

Today, Social Security is expected to be an income replacement program.  Moreover, the number of workers paying into the system is around 3 for each retiree, and that number is falling.  Then, each retiree is expected to live for 17+ years in retirement.

But one thing has remained constant.  Each worker paying into the system is paying for someone else’s current retirement—the money paid in is not set aside to accumulate for the payer’s benefit.

I propose to change this in the following way.  It will eliminate Social Security as we know it, but it also will preserve and strengthen the promise of social security: a reasonably comfortable retirement for the retiree.  Privatize, entirely, Social Security.

Eliminate the payroll tax for both employer and employee (think about the immediate stimulative effect from reduction in the cost of labor of 6.2%).  However, require the employee to set aside 6.2% of his income from all sources, not just from wage income (just to keep it simple, and consistent with a tax proposal nearby).  Why 6.2%?  That’s the current employee payroll tax for Social Security, absent any temporary reduction.  Eliminate, also, the present upper limit on income (wages) subject to the Social Security payroll tax.  However, instead of this money immediately being paid out to someone else’s present retirement, it will be put into an account owned and managed by the employee, and the money will accumulate for his own future retirement.

Let’s look at the effect of this on a hypothetical man’s retirement.  Let’s say the man earned $100,000 per year in his last years of working.

Under the current system, that man retiring at 66 will receive $25,800 per year until 2033, when the Social Security Trust Fund will be exhausted and payroll taxes will only be able to support payouts at 75% of their nominal rate—our man, after having been retired just 20 or so years (never mind the 17+ years of an actuarial retirement), will see his payout cut to $19,400 per year (note that for this, I’m ignoring inflation and cost of living increases).

Now suppose our man has been socking away 6.2% for his, let us say, 40 years of working life, and he’s still making $100,000 in his last years.  Again, we’ll ignore inflation, and we’ll take a naïve position of his having started out making $20,000 per year and received constant annual pay raises to reach his present $100,000 annual income.  With his 6.2% set-aside each year naively left to grow with the market (the S&P500 historical growth rate has been 9.77% since 1926—a period including the Great Depression, the Carter Recession, and the Panic of 2008), our man will accumulate enough by the time of his retirement to withdraw over $55,000 per year over the course of a nominal 18-year retirement, or more than $29,000 per year, if he expects to have a 34-year retirement (i.e., live to 100).  And he won’t have a reduction to 75% of that because the government ran out of money.  Of course, this table napkin analysis ignores inflation, also, and it ignores leaving the remainder of the man’s accumulated retirement fund still invested—now perhaps in bonds.

Notice one other critical factor here: with privatized retirement savings in place of Social Security, each man will be working for his own future instead of working for someone else’s present.  With his own money at stake, the man will do a far more careful job of managing for his future retirement than the government already has done—with OPM.

There is, of course, the risk that the man may invest foolishly, or he may invest wisely but have a run of bad luck in the market—downturns do occur.  What happens to him in this brave new world?

First, look at what happens in the present situation, where the impending failure of the Social Security System is an empirical fact.  In this scenario, where the government’s management of our retirement accounts has failed, the disaster affects all of us—every retired individual; every soon-to-be-retired individual; and each of the rest of us, who must find a way to support these unfortunates.

If the man fails, though, whether through his folly or his bad luck, the effects of his failure is limited to him and his family; it is not a national disaster.  And these individuals will be few enough in number that help—a hand back up, generally, or support if his failure comes too late for him to recover—can come from his family, his local community, church and/or charity, and, yes, as a last resort, state government.

A Tax Proposal

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In 2007, according to Census Bureau data collected from IRS-aggregated Form 1040 filings, we Americans earned $17.8 trillion dollars from all sources: wages and salaries, interest payments, dividends and capital gains, gambling earnings, pass-throughs from their small businesses, and so on.  In 2007, according to Government Accounting Office data, we paid an aggregate of $1.15 trillion dollars in taxes on that income.  That’s an aggregate rate of around 6.5%, with the top 10% of taxpayers paying 70% of that bill (compare that with the roughly 20% paid by Republican Presidential Candidate Mitt Romney over the last 20 years, and the roughly 20% paid by Democratic Presidential Candidate Barack Obama last year).

That’s a ton of money for the government, paid by those who actually pay taxes (50% of Americans pay taxes in the range of 0%-3%).

What would happen, though, to revenues if we moved to a flat tax of 10% with no deductions, credits, or other loopholes, and everybody pays?  One immediate result is that the government would collect $1.78 trillion in income tax revenue—a one-third increase.  Think about what that would mean toward paying down our $16 trillion debt.

Such a static analysis is interesting but unsatisfying since it doesn’t consider the dynamics of an economy.  Let’s look at the impact on a hypothetical family of four, making (to keep the arithmetic sort of simple—we’re dealing with the tax system, after all) $100,000 per year, and taking a currently normal set of deductions: married filing jointly, exemptions for dependents (four, in this case), and they donate $5,000 to charity (this is a bit high for a conservative family, and quite a bit high for a liberal family, but we’re keeping the numbers round).  Let’s also say they own a $200,000 house and they’re four years into a 30 year mortgage at 3.5% (a roughly current market rate in the middle of the range of rates Bankrate.com says can be found for the Dallas area in a quick search last Sunday).  We’ll also say they’re healthy, and their other deductions don’t meet the 7% or 2% thresholds.

Their deducitons, then add up this way.  Their annual mortgage interest deduction is in the neighborhood of $6600 dollars.  Four dependents at $3,700 per gives them a total exemption of $14,800. Add their charity giving, and all of these together reduce the family’s income to a taxable amount of $73,600.  The 2011 IRS tax tables put this family’s tax bite at $10,656.

Now take away all those deductions, and bill the family on the top-line (now bottom line, also) $100k at 10%, and they see a drop in their taxes of $656.  That’s a fair amount of beer and pizza.  Or a mortgage payment.

Some might argue that such a no-frills tax system hurts the poor (now they’re payers of taxes, instead of receivers).  Accordingly, what happens when we allow a single exemption: half the then-year Federal Poverty Guideline.  For our family of four, this would be half of $22,350 for 2011, or $11,175.  Now the 10% tax bite is reduced to $8,882—a reduction relative to our proposed system of $1,118 and of $1,774 relative to the current tax system.  Add pretzels to the beer and pizza.  Or another mortgage payment—every year.  Or car payments—every year.

How does this scale to the national level?  Again, only looking at the back of our envelope, and saying that our 2011 non-retired population consists entirely of families of four, that makes 68,000,000 filings taking that $11,175 exemption: a $760 billion reduction in the government’s tax collection relative to the simple flat tax collection, and a $120 billion reduction compared to last year’s collections and a $544 billion reduction compared to 2007’s actual collections.

Looks like a disaster.  But we’re still in the static analysis stage.  Think about the stimulative effect of those additional $1,774 available for private use, instead of government “investment.”  For those 68,000,000 families of four, that’s those $120 billion left in private hands.

All that money represents additional spending and saving and paying down  personal debt (faster, we already are to a certain degree) represents an active, dynamic economy, with all the revenue that will generate in increasing employment (more folks earning income, and so paying taxes), increasing business activity—which feeds investment and hiring—and so on.

The government likes to say that each $1 in its “investment” returns a $1.5 to the economy as that spent dollar circulates and gets spent again and again, multiple times, before it’s fully absorbed.  That compares with each $1 of spending in the private economy returning $1.7, but let’s use the government’s own figure.  Those $120 billion left in private hands through the lower tax rate will return $180 billion, just in the first year.  And it will grow in subsequent years as economic activity continues to increase from this freeing of us from our present, heavier tax burden.  The revenue “deficit” disappears in very short order.

Nor will I get into the premise that tax reform needs to be revenue neutral at all; nor will I get into the fallacious premise that the government is somehow entitled to our money; nor will I get into the need for government to cut spending—this is a tax reform proposal.

The higher total tax revenue I mentioned at the outset?  That results from the far broader base of folks who actually pay taxes under this proposal and so who now have positive reason to be active participants in our political process.

I will ask a question, though, since the idea of losing all those deductions and credits will itself be questioned.  What’s the value of those deductions and credits when their sole purpose is to reduce the tax bite from tax rates that are artificially elevated to begin with in order, in part, to recover the “cost” of those deductions?

There’s another aspect to this, also, and that’s the idea of business taxes.  American businesses “pay” taxes, nominally, at a rates as high as 35%, the highest rate in the known world.  Leaving aside examples like GE, which paid no net taxes on revenue of around $148 billion in 2010 (a result of our corporate tax system being as Byzantine as our personal income tax system), our businesses paid in the aggregate some $370 billion in Federal income taxes in 2007 (to keep the year of interest consistent).

I used quotes on “pay” taxes on purpose, though.  Even though the business’ officer signs the tax check, the business isn’t paying a penny of those taxes.  From the business’ perspective, the tax bill is just another cost of doing business, and that cost is passed on to its customers in the form of prices that are elevated to cover that cost, just as the price is set to cover all the other costs that a business encounters.  The customers—you and me at the end of a chain of intermediaries and stores—are the ones who are paying that tax through that elevated price.

My tax reform proposal, then, includes this: eliminate the business income tax altogether.  Reduce our tax bite even further, in the form of reduced prices.

What’s the outcome of this loss of $370 billion in revenue to the government?  First, see the multiplier discussion above.  Then, consider our neighbor to the north; Canada’s example offers an answer.  The chart just below, from the Cato Institute’s “Corporate Tax Competitiveness Rankings for 2012,” shows the effect on the Canadian GDP over the years since 2000 that the Canadians have been drastically reducing their corporate tax burden.

The effect has been nil: corporate revenues as a per cent of GDP have been stable over the entire period of steady reductions.

The chart below shows Canada’s GDP growth in real terms since 1999; I constructed it from these data.

Plainly, drastically reducing (eliminating in my case) the corporate tax bill has no material effect on GDP.  Not only did the rapidly falling tax bite not impact the Canadian government’s corporate tax revenues as a per cent of Canadian GDP, that reduction had no negative effect on the GDP itself.

It’ll be the same in the US, with the single difference that Federal tax revenue as a per cent of US GDP will drop, some, from the elimination of Federal business income taxes.  The per cent of GDP won’t go to zero, though, because I’m only talking about the Federal tax burden; states will remain free to tax—in competition with their fellow states—their domiciled businesses.

Taxes

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Now we’re getting this, via Yahoo!News:

[Republican Presidential Candidate Mitt] Romney and his wife, Ann, donated roughly $4 million to charities last year, but they only claimed a deduction of $2.25 million on their tax return, filed with the Internal Revenue Service on Friday.

…

Democrats quickly leaped on the documents, saying Romney had claimed fewer deductions than he was entitled to just to keep his rate at such a level.

Let me see if I understand this.  The Party of Tax the Evil Rich now is whining that one of those Evil Rich paid too much tax.

Hmm….

Leave it to Stephanie Cutter, the Obama advisor of questionable integrity, to put this spin on it:

[P]eople like Mitt Romney pay a lower tax rate than many middle-class families because of a set of complex loopholes and tax shelters only available to those at the top.

But reform our tax code so as to eliminate some or all of those loopholes?  Nope.  Can’t have that—that’s a Republican idea, so it can’t be any good.