Tag Archives: taxes

Distorting the Question

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There they go again.

Senator Dick Durbin (D, IL) suggests that the Republicans are being a tad disingenuous with their reluctance to extend the payroll tax “cut” of two per centage points on employee payrolls.  Pretending to not understand the reluctance, Durbin asserts

The Republican position is they’d raise the payroll tax on working families.  That just defies logic.  What we should do is to help these working families struggle through.

What defies logic, though, as Durbin understands full well, is the concept of reducing the payroll tax in the first place.  Regardless of what we might think of the present structure of Social Security and Medicare, the fact is both of these programs are within just a very few election cycles of being utterly bankrupt, and the payroll tax is the only way—by design—of funding these programs.  Reducing that funding only hastens those failures.

Americans aren’t as dumb as Progressives like Durbin would have it, either, and so we’re fully capable of seeing the foolishness of a payroll tax cut, and we’re fully capable of not confusing such a cut with an income tax cut.  Indeed, far from the jobs stimulus the Progressives claimed this would be when President Obama proposed the cut, most Americans promptly saved those few extra bucks, or used them to pay down personal debt.  Of course, since businesses had no such cuts to their payroll expenses, they received no incentive to hire, and the missing “cut” spending potentiated that lack.

Aside from this, though, the Durbin claim is little more than a Progressive distortion of the opposition party’s tax position.  To use the payroll tax reluctance in this way—as a “demonstration” that Republicans want to raise taxes in the middle of this deep recession—is to isolate one irrelevant position, payroll taxes that have nothing to do with jobs and everything to do with the way Social Security and Medicare are funded, and to ignore the whole position: that lower income and business tax rates are themselves job creators and further that they increase tax revenue through increased economic activity—producing, selling, hiring—which leads to additional hiring in a virtuous circle.  Which “help[s] these working families struggle through.”

Further, Republicans have been advocating for some time closing tax loopholes and ending subsidies as an additional means of raising revenues, another aspect of their composite tax position that Durbin carefully elides.  And his distortion ignores the fact  that the Progressives themselves insist on outright tax rate increases—to the tune of $1 trillion, as Obama threw in at  the last second to blow up an already tentatively agreed deal during the debt limit increase talks last summer, and which the six Progressives on the recently deceased Supercommittee used to blow up that group’s chances of fulfilling its mandate.

Then Durbin added a wholly irrelevant canard to explain Obama’s absence from the just concluded Supercommittee charade:

This was a congressional undertaking. And the Republicans made it clear that if President Obama weighed in, it would become another presidential issue.

Really?  In what way?  Durbin chooses to offer no facts to support his assertion.  He does choose to ignore, though, the fact that Obama has repeatedly refused Republican invitations to talk about any economic matter, preferring instead to hit the campaign trail and to dally in Bali for East Asia summit talks.

What is the President’s Jobs Agenda?

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What, exactly, is the President’s jobs agenda, now that he’s begun campaigning on one, a year ahead of the next election and three years into his administration—three years in which unemployment has been as high as 10% and has stagnated at 9% for the last two years?  Three years in which he has pushed through his Obamacare health care legislation and his Dodd-Frank Wall Street legislation.  Three years in which he has shaken his finger very firmly at America’s enemies as he has presided over our retreat from the world stage.

Let’s review the bidding.  His opening move, at the end of summer, was a $440 billion bill in which he collected parts of Stimulus I, with its spending imperative, added a push for higher taxes for his class warfare reelection campaign theme, and titled the collection “The American Jobs Act.”  What were the jobs?  There weren’t any, directly.  Much of that spending, though, was aimed at transfers of national taxpayer monies to state and local public service unions—teachers, police, and fire fighter unions—to retain their support in Obama’s campaign.

When that failed, his next move was to pull his jobs bill’s spend and tax legislation apart and push the spending piece parts—always paid for with higher taxes, rather than spending cuts elsewhere—separately.  He did this against the backdrop of his campaign for reelection.

In parallel with that, he’s been having his EPA write “clean” air rules that are Draconian in their effect on, for instance, coal-fired electricity generating power plants.  As Josiah Neely, an Analyst with the Texas Public Policy Foundation, points out, these rules threaten existing and future jobs in return for highly doubtful favorable effects on air quality.  The Electric Reliability Council of Texas, reports Neely, says that enforcing the Cross-State and related rules could result in power plant closures to the extent that 183,000 jobs could be lost every year until 2020.  Our president is unconcerned about this, however.  In 2008, Candidate Obama bragged that under his proposals “if somebody wants to build a coal plant, they can—it’s just that it will bankrupt them.”

Just last week, Obama has decided to punt on the Keystone XL pipeline, a project proposed—in 2008—to build a pipeline to carry oil from Canadian tar sands to refineries in Texas and along the Gulf coast.  He said that, after these three years of review, he wants yet more, “to ensure that all questions are properly addressed and all the potential impacts are properly understood.”  This delay will cost 20,000 construction jobs and potentially 100,000+ downstream, more permanent jobs in the US.

Finally, we have this announcement from the Stryker Corporation, a firm that makes implants and instruments for orthopedics and neurosurgery.  Stryker is reacting to Obamacare taxes that are soon to take effect, and their press release, presented 10 November, says in part [emphasis added]:

Stryker Corporation announced its intention to implement focused workforce reductions of approximately 5% of its global workforce and other restructuring activities….  The targeted reductions and other restructuring activities are being initiated to provide efficiencies and realign resources in advance of the new Medical Device Excise Tax scheduled to begin in 2013….

Obama’s Medical Excise Tax is an Obamacare tax that applies to revenues, as opposed to profits, and it is driving companies that want to do development work in this area to reduce effort in this area and to reduce associated employment.  Other companies will likely outsource jobs to overseas jurisdictions that don’t have such counterproductive employment policies.  (As an aside, it needs to be noted that Stryker’s implants now will be harder, and more expensive, for our wounded veterans to obtain.)

Finally, Obama’s do-nothing Democrat Senate is sitting on 15 jobs bills that would have a real impact on our unemployment and our unemployment rate.

What is Obama’s jobs agenda, then?  He doesn’t have one.  He’s still working on his tax and spend agenda, and pushing class warfare to get more of it imposed.

Are the Republicans Panicking?

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It’s beginning to look like the Republicans are losing their nerve and starting to duck away from the fight that must be fought for our nation’s soul.

House Speaker John Boehner looks like he’s beginning to bend on the matter of tax increases; he’s conceding that a final deal, from the super committee or in Congress, could include revenue increases; although he maintains that “there clearly is a limit.”  Additionally, 100 Representatives, including 40 Republicans, have signed a letter to the super committee that insists that “all options for mandatory and discretionary spending and revenues” be considered.  Unfortunately, we know what the limit invariably is, once the camel’s nose is in the tent.

Senator Jim DeMint (R, SC), while professing general optimism, notes that one of the reasons he’s not endorsing any of the present Republican candidates for President is that he wants to focus on getting a greater number of conservative Republicans elected to the Senate in 2012.  He’s already seen in the past week, for instance, 32 of his colleagues side with Senate Democrats to block an amendment offered by Senator Tom Coburn (R, OK) that would have cut spending by $1 billion through reducing funding for the Rural Development Agency.  In the same week, 11 Republican Senators, together with the Democratic Party, couldn’t even figure out how to cut $6 million from the Small Community Air Service Development Program.  Senator DeMint has been forced to take a different route than he did in 2008 when he endorsed then-candidate Mitt Romney:

I want to do better for our next president than we did for George Bush. [He] had a Congress that wanted to spend money, and if he wanted anything done, he had to agree to that spending….”

Apparently too many Republicans, in the Senate, at least, have lost their stomach for this fight to reduce government and cut spending.

We cut our deficit and our debt by cutting spending.  Period.  This isn’t rocket science.  The government has too much money, already; there’s no need to raise taxes.  Eliminate loopholes—starting with the energy subsidies, both oil and gas and “green” energy subsidies—absolutely, and this will raise revenue sufficient to Boehner’s “revenue increases,” but it does so without raising taxes, without raising tax rates.  The surest way to increase government revenue, and the most economically sound way, the most moral way, is to get government out of the way of our economy, out of the way of our businesses, and let our economy recover and our citizens get back to work.  This demands, as a first step, spending reductions.  This requires cutting wherever the opportunities arise.  This requires forcing the Democrats—alone—onto the record as voting for spending increases.

If we need to alter our taxes, and we do, we need to do so by reforming our present system by replacing it in its entirety with a flat tax that has no subsidies, no credits, no loopholes, and that has everyone paying something.  Ten percent of Americans paying 70% of the nation’s income tax, while 50% of us pay 3%-4%, is a system that cries out for wholesale replacement.

The Republicans need to find their…sticking-place…and rescrew their courage to it.  One sitting Senator understands this need.

Taxes, or Whose Money Is It?

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Herman Cain advertises his tax proposal as being revenue neutral—it would raise as much tax revenue, in a static sense, as does the current tax program that his 9-9-9 plan would replace.  Arthur Laffer, writing in The Wall Street Journal, agrees with this.  “Mr. Cain’s 9-9-9 plan was designed to be what economists call ‘static revenue neutral,’ which means that if people didn’t change what they do under his plan, total tax revenues would be the same as they are under our current tax code,” Laffer writes.  Other attempts to change the tax code have been advertised as good at least in part because the changes would have been “revenue neutral:” the amount of revenue collected by the government after the change would have been the same as the amount collected before the change.

But this begs a number of important questions.  Why must tax code changes—or even wholesale replacement of our Federal tax code—be revenue neutral?  What goal is supported by this neutrality?  One goal is continued government spending and borrowing at current levels.  Is this a legitimate goal?

These questions hinge on two other sets of questions that must be answered before these can be usefully satisfied.  The first of those sets of questions is this:  “Whose money is it: whose money is being taxed, and whose money is the collected tax?”

After those questions have been answered, a second set can be addressed: “What is the purpose of government?  Given a government, what is the purpose of its spending?”

With the answers to these, the answer to the question of the utility, if not the necessity, of tax change neutrality becomes clear.  Herewith, then, I begin a short series of posts on the question of taxation.  In this post, I’ll explore that first set of questions, questions that center on whose money it is.  In a subsequent post, I’ll look into that second set of questions, concerning the nature of government and government spending.  In a third post, I’ll answer the question of tax revenue neutrality.

Whose money is it that’s being taxed?  John Locke, Jean-Jacques Rousseau, et al., asserted that all men, despite beginning in a state of lawless nature, had inherent in their existence certain properties, beginning with a property in their minds and bodies, meaning these were their own to control and no one else’s.  From this property, men also had a property in whatever in their environment they might manipulate for their own good or that of their fellows, as well as the results of that manipulation—they owned, for instance, the wheat they grew and the land on which they grew it, or the metals they mined and the land from which they mined it, or the shelters they built and the land on which they built them, or the ideas they had for better ways of doing these things.  No one else had any right to these things.  From this, these men owned whatever they might obtain from an exchange of their property for that of another.  A man who exchanged some of his wheat for some of another’s metal owned outright and exclusively that metal he obtained, and he gave up all claim to the wheat which he exchanged: that other man now had an exclusive property in that wheat.

And so it goes from a barter economy to a money economy.  The goods we obtain in exchange for money become our exclusive property, the money we pay for those goods becomes the seller’s exclusive property, and vice versa.  Our social compact’s principles statement acknowledges as much:

[All men] are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

John Adams, as I’ve written elsewhere, explained “Happiness:”

All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.

By the suite of our endowment and by our agreement in our American social compact, then, all property we gain from the sweat of our labor or the work of our mind is our exclusively owned private property.  All property we gain by exchange of our property for that of another’s, including money, is our exclusively owned private property.  Thus, the answer to our first question—whose money is being taxed—is straightforward: it’s our money.  It is not the government’s money that it is collecting; it is our money that we allocate to government.

This brings us to the question on the other side of this…coin.  Whose money is it after it’s been taxed and collected?

The answer to this is a resounding “it depends.”  It depends critically on the nature of a government and of the social compact that created that government—indeed, on whether such a compact exists at all.  There are three fundamental conditions here.  One condition consists of a polity in which there is no social compact: government exists because the men who populate it rose to the pinnacle of power by wile or by superior strength.  They govern because they can, not because the governed consent in any meaningful way to the governance.  In such a polity, the money, once collected as tax, is government property, if only because the government is strong enough to enforce its claim with blood.

In a second fundamental condition, a social compact exists, and its terms essentially cede all power and control to the government created by that compact.  It’s important to understand at this point that a social compact, even in a polity such as this one, is an agreement among the members of the compact; it is in no way an agreement between the compact’s members and their government.  This is straightforward: men first exist without a government, thus they can only agree among themselves; there is no government at this early stage with which to agree.  Any cessation of power to the government they create can only be by agreement of the collection of men among themselves.  Having ceded power to their government, though, the question of ownership of money collected as taxes becomes clear: that money belongs to the government.  When a polity cedes all power over itself to its government, it necessarily cedes (or tries to cede—see Locke and a Creator’s endowment—but functionally, trying to cede and ceding have the same result over the lifetime of the men involved) power over—ownership of—private property, including tax collections, to government.  Money, having been collected as taxes, then, is government’s money in this case.  (Of course, this condition implies that ownership of the money before it’s taxed also falls to government, but we’re considering here post-collected ownership.)

The third fundamental condition is our American social compact: we’ve assigned a short, explicit list of powers to a government which we have created through our compact, and that government, also by the design of our compact, is entirely subordinate to us and it serves at our pleasure.  One of the things we explicitly have not ceded to our government is a thing that we explicitly retain for ourselves (that principles statement again, and additionally, our government’s blueprint, the Constitution): our exclusive ownership in our own properties.  Among the places in our blueprint this is spelled out are Article I, Sections 8 and 9, and our Bill of Rights.  Thus, our money, which is ours before we allocate it to government as taxes, remains ours and not government’s after it’s been collected as taxes.  This is true through another pathway: by the terms of our blueprint, our government is permitted to spend money only on specific things; it cannot legally (not just may not, it can not, legally) spend that money for any purpose it pleases.  I’ve been saying we allocate money to government, rather than we pay tax money to government, on purpose.  We allocate money, in the form of taxes, for the specific purposes we’ve authorized the government and for no other.  That we retain ownership of our money after a tax allocation is true through yet another path: our government exists as our common representative.  Thus, things we allocate to our government, like our money, we are only allocating to ourselves.

Whose money is it after it’s been collected as taxes?  It’s ours.  We’ve only allowed our government to use it for a bit.

Tax Reform = Flat Tax

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Caution: long post….

President Obama and his Progressive Democratic Party insist that all of us should pay our “fair share” of the nation’s tax requirement.  I agree: all of us should pay our fair share.  The top 10% of Americans by income paid nearly 70% of the total personal income taxes collected by the Federal government in 2008, while the bottom 50% paid nearly 3% (that’s no typo) of the total in 2008.  Further, the rich may be getting richer, but they’re also paying more in income taxes.  In 1999, those top 10% paid a little over 66%, and the bottom 50% paid 4% of the total.

It’s time to reform the tax code and make it easy for all of us to pay our fair share.  In 2007, according to Census Bureau data collected from IRS-aggregated Form 1040 filings, 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.  According to Government Accounting Office data for that year, Americans paid an aggregate of $1.15 trillion dollars in taxes on that income.  The present tax system is perceived as unfair by all participants, and they have arguments for their views.  Progressives view the rich, paying 70% of the total tax receipts, as not paying enough to be fair.  On the other hand, modern Conservatives consider that the bottom 50%, paying little to no taxes, also to be not paying enough.  Further, the complexity of our tax code is proverbial; not even professional tax accountants understand it well, and the IRS’ own advisors often provide erroneous help to inquiring taxpayers.

Our personal income tax code should be simplified, with the various filing statuses and tax brackets replaced with a single filing category and tax bracket.  Each household should pay a single, flat rate: all income above a level equal to half the then-current year Federal Poverty Income Guideline should be taxed at a rate of 10%.

Tax breaks, tax subsidized transfers, deductions for this or that expense—including the mortgage interest deduction and medical expense deduction—should be eliminated.  Note that this will include the standard deductions for family dependents; the Poverty Guideline includes an adjustment for family size.  Further, the elimination of all those deductions, credits, exceptions, and so on will greatly reduce the ability of special interest groups, and of politicians generally, to manipulate the tax code for their own ends.  The removal of the market distortions created by using tax policy for social engineering and wealth redistribution will lead to falling prices for those subsidized goods, and it will make it easier for all participants in the market—we Americans—to make our own decisions.  Finally, this equal percentage paid by all still leaves the actual dollars paid in taxes quite progressive: a man making $20,000 per year above that exempted income amount will pay $2,000 in Federal income tax.  A man making $200,000 per year above that same exempted income amount will pay $20,000 in Federal income tax.

The present corporate tax structure leads to the following distortions (among others) of business incentives in the United States: because it is imposed on income from capital, it biases decisions about how much to save and therefore influences overall capital investment and business growth.  It also creates a bias in favor of financing through the use of debt.  Further, because the law treats a corporation as a separate taxable entity, from which shareholders subsequently receive a portion of their income in the form of dividends or capital gains, the relatively beneficial tax treatment of capital gains under the personal income tax code creates a bias against paying dividends.  Finally, because the corporate tax code also uses schedules for depreciation that do not correspond to real wear and tear on equipment, it creates a bias in investment and production toward those capital assets more lightly taxed.

From these high, complex, and in some cases unrelated to reality, tax requirements, we can see that our corporate tax code discourages foreign companies from investing in the US or from setting up branches of their operations in the United States (known as “insourcing” in the same way American companies sending work outside the US is known as “outsourcing”).  Our tax code also creates incentives for American companies to build their new branches in other nations with lower corporate tax rates (Ireland, for instance, before it was dragooned into accepting an unneeded European Union bailout, taxed corporations at 15%).  Both of these incentives tend to reduce employment in the US, since the companies involved opt for foreign locales.

It’s time to apply a flat tax to corporations, also, and that corporate rate also should be 10% of all income (note that, even though the government and the Courts have said that corporations are “persons,” there are no Federal Poverty Income Guidelines for corporations, thus there is no income exemption here), both domestically earned and foreign-earned.  Tax subsidies, deductions, credits, and so on should be eliminated.  The elimination of these will have the same decision-making outcomes and economic effects as their elimination from personal income questions: the biases will disappear, and free market participants will make their own decisions.

To be sure, there will be disruptions in various markets while the changes ripple through the economy, but with the simplified code, compliance will increase (an increase in revenue for the government), and more importantly, the net result of the elimination of the market distortions will be a small decrease in overall prices that will go along with wages and salaries that have not dropped commensurately (wages do not fall at all as rapidly or as easily as do market prices).

There have been suggestions of having a national sales tax in lieu of any sort of income tax.  A tax on consumption would amount to everyone paying “their fair share,” and it would represent a great simplification of the Federal tax code.  The simplification argument could certainly be true.  However, a consumption tax would hit the poor much harder than it would anyone else.  Some consumption is absolutely necessary and cannot be avoided.  Everyone must buy food, everyone must make rent or mortgage payments, everyone must pay transportation costs of some sort.  A tax on these necessities would be a cost to the poor disproportionate to the costs others are paying: a consumption tax is regressive; there is nothing flat about it at all, in any way.

Some will argue that the poor could get a tax refund at the end of the year, based on some rule for refunds, just as income tax refunds are available now.  This, though, does not address the current tax burden that they would have to suffer for an entire year before they could get that refund.  Their cash flow would suffer, and later remediation would do nothing to eliminate the ongoing pain.

Others will argue for not taxing food, or fuel, or rent payments.  Making such exceptions, though, would only be the camel’s nose in the tent.  There are always worthy causes that should receive special tax treatment.  If we start making such exceptions, we will very shortly have a consumption tax code every bit as Byzantine as our present income tax code.

Yet others will argue that a flat income tax is itself regressive, and more so than a consumption tax.  However.  A tax on income does not hit those who do not work, but must still buy necessities.  A tax on income, in fact, is completely independent of the market choices anyone makes.  Compare, also, the amount of consumption taxes paid by the two men in our example above.  Let’s assume, for the sake of argument, that actual necessities—food, housing, and transportation, for instance—cost $18,000 per year.  Let’s assume, further, that comfort-level expenses—dining in restaurants, a better house, a fancier car, a better entertainment system, music and movie DVDs, for instance—cost an additional $18,000 per year.  Finally, let’s assume a consumption tax rate of 10%.  Our man making those $20,000 above the exempted amount is going to pay all of those $18,000 for necessities—those expenditures are unavoidable.  Let’s assume that, as a responsible adult, planning for his family’s future, he splits his remaining $2,000 of income between savings and comfort-level expenses.  His sales tax bill, then, will be 10% of $19,000, or $1,900: a slight reduction in his tax bill compared to his flat tax bill.  Let’s say our man making those $200,000 above the exempted amount buys all of those comfort-level items in addition to the necessities; his consumption expenditures, then, are $36,000, and he has a consumption tax bill of $3,600.  He’s paying less than a fifth of his flat income tax bill.  Indeed, our “rich” man would have to spend, voluntarily, 95% of his income on consumption alone—as our “poor” man had to do—in order to have the same relative consumption tax bill.

Tax reform is a flat tax.