The EU Strikes Again

In a 130-page decision from August that was made public on Monday, the European Commission, the EU’s executive arm, asserted that two Apple units registered in Ireland brought in $130 billion in profit over an 11-year period that should have been taxed at Ireland’s 12.5% corporate tax rate, but instead remained largely untaxed anywhere.

As the WSJ noted, this is an early volley in the struggle by European Union authorities to impose their tax will on scofflaw sovereign nations who are so impertinent as to apply to multinational corporations doing business within them national tax schemes and such emoluments as these nations deem useful rather than acceding to their EU Know Betters.

Never mind that the members of the EU still are sovereign nations.

Never mind that, in the present case, Ireland simply applied its domestic law to that subset of an international corporation doing business from within Ireland.

Never mind that Ireland has an unacceptably low (to the EU Know Betters) corporate tax rate, and so it’s winning the competition with continental Europe to attract business.

Maybe Ireland should reevaluate its relationship with the European Union.

Tax Cuts and Deficits

The Wall Street Journal had a piece earlier in the week that focused on Republicans’ dismay over President-Elect Donald Trump’s tax cut plans, his infrastructure spending plans, and the deficits that would seem to result from the two.

However.

Once again, the pundit takes tax cuts (and individual spending items) in isolation. Of course, he knows better: broad spending cuts must accompany tax cuts—and isolated spending items—even dynamically, in order to achieve budget surpluses and so reductions in our debt.

The last two times Republicans reclaimed the White House from Democrats—in 1981 and 2001—they also successfully pushed for large tax cuts. Deficits nonetheless rose during their administrations.

This happened because both times Republicans accepted Democrat promises to support spending cuts “later,” and both times Democrats welched on their promises. Since Democrats cannot be trusted, the Republicans this time around will have to cut taxes and spending while arranging spending increases on particular items without Democrat “help.”  And they have the numbers to do that, including without Democrat involvement at all, since all those worthies are interested in is their knee-jerk obstruction of all things not Democrat.

Donald Trump’s Taxes and our Tax Code

Republican Party Presidential candidate Donald Trump took a tax loss of more than $900 million in 1995.  This would seem to allow Trump to pay vastly reduced, or no, income taxes in the ensuing several years.  Democrats are all up in arms over that, and how unfair it is, and how Trump must be dishonest to do such a thing.

Never mind that it’s all perfectly legal.  Never mind that Trump has said that illustrates the byzantine nature of our tax code—and that he agrees it’s unfair, because most folks don’t have the ability to generate those losses or carry them forward into succeeding years to reduce those years’ income tax liabilities, and that our tax code ought to be simplified to make it fairer.  Never mind that he (as he’ll happily and enthusiastically tell you) is ideally positioned to do that tax code reform because he’s a skilled user of the tax laws.

What is it, then, that Trump was able to do?  It’s centered on a tax reduction device called “net operating loss carry-over,” which in very general terms allows a taxpayer’s business losses to be carried backward in time for two years, so a taxpayer can file amended returns to reduce his tax liability (and likely get refunds) for those two prior years and/or to be carried forward into future years (lots of them, today) to reduce tax liability on income generated or expected to be generated in those future years (the tax planning gets complex, which is part of the “unfairness” of this aspect: it takes money to afford the tax experts that can help with this planning).

This NOL loophole in our income tax code is almost as old as our income tax itself: the Revenue Act of 1918 created the concept.  The purpose was, ostensibly, to let businesses smooth out spikes in their incomes and losses in particular years so as to both weather general economic downturns better and to do more efficient planning for future years: planning for product development, sales and expenses predictions, and the like.  That’s one kicker, and I’ll come back to it.

Another kicker centers on the folks most likely actually to be able to use such a loophole:

Cyclical businesses that can suffer heavy losses in downturns, such as consumer-goods makers. Owners of real-estate investment firms, with big interest and depreciation deductions, also can benefit. Other rules benefit real-estate investors such as Donald Trump, including the ability to use losses to offset other kinds of income.

Which is why most folks don’t have the ability to generate those losses and then to carry them forward.

The losses don’t even have to be “real” losses, either.  Some taxpayers are able to structure their activities so as to generate paper losses while taking in actual dollars.  Many of these schemes are fraudulent, but many can be structured perfectly legally under our byzantine tax code.

Now to those two kickers.

With a simplified tax code, this sort of thing would be vastly reduced.  With lower rates—a critical part of simplifying our tax code—the value of doing such a thing would go down greatly: with less money being lost to taxes in the first place, there’s less incentive for a taxpayer to go to lengths to protect his money from taxes.  Eliminating income taxes on businesses altogether—individual citizens wind up paying a very large fraction of the business’ taxes anyway through higher prices—would eliminate altogether the need to do things like NOL adjustments to tax liability.  Everyone would be treated substantially the same by our tax code, with differences centering only on actual income.

And: businesses wouldn’t need to incur expenses anticipating the future as it relates to tax planning; they could, instead, spend their resources on planning for product development, sales and expenses predictions, and the like.  Businesses could make their decisions based on business imperatives rather than on tax incentives.

Discretionary Spending

Much is made of the limits imposed on the Federal government’s discretionary spending by such “mandatory” spending items as Social Security, Medicare and Medicaid, and interest on the national debt.  Indeed, after mandatory items—these three major items and a few others—discretionary spending amounts to only 33% of total Federal spending as of 2015.

This dichotomy, though, isn’t only misleading, it’s entirely wrong.  The fact is, nearly all of Federal spending is discretionary: Congress sets the spending levels everywhere, and it decides the things on which to spend nearly everywhere.  There are only three categories of spending that our Constitution requires of Congress: to pay the Debts and provide for the common Defence and general Welfare of the United States.  Even in these three mandatory areas, though, the amounts to be spent are left to the discretion of Congress, even if the requirement to pay the Debts implies a requirement to spend at least enough to keep the debts current if not actually to move the size toward zero, and even if the requirement to provide for the common Defence implies a requirement to spend at least enough to keep our defense establishment superior to all threats.  Even the requirement to spend for the general Welfare is limited to the 16 items enumerated in Article I, Section 8; here, too, the amounts actually to be spent are left to Congress’ discretion.

There is, then, no requirement for Congress to spend Federal monies—citizens’ tax money—on Social Security or Medicare and Medicaid.  And no Federal money should be spent on these items, which as of 2015, comprised 49%, or $1.8 trillion of the total $3.7 trillion in Federal spending.

Think about the uses to which that money could be put were Social Security and Medicare privatized and Americans allowed to be responsible for their own health and futures, rather than being required to spend their money on others’ current retirement and health costs.  Think about the effects of block granting Medicaid payments to the individual States and then annually reducing the size of those grants to zero, so that the States would be allowed to be responsible for their own budgets and their citizens could spend that money on themselves.

Think about how $1.8 trillion could be redirected: lower tax rates and less government spending, so that Americans could keep more of their own money to spend on their own imperatives, needs, and wants, and the effect of their being able to spend in a market in which the Federal government isn’t crowding out private enterprises, private buyers and sellers with government competition for the same goods and services.

Think about other redirections of those $1.8 trillion: keeping lowered spending less than lowered tax revenues and so eliminating Federal deficits: budget surpluses and a significant fraction of those $1.8 trillion could be redirected toward paying down our nation’s exploding debt.  Another significant fraction of those $1.8 trillion could be redirected toward rebuilding and then vastly improving our national defense establishment, so that we can, not merely match, but exceed and defeat the threats against us, defeat our enemies and friends’ and allies’ enemies acting on those threats.

Congress has the discretion to do all of these things; its spending decisions—its revenue decisions generally—are not limited to those $1.2 trillion misnamed “discretionary.”

Unfortunately, the present Government doesn’t trust its employers, We the People, collectively and individually, to see to our own needs and wants; Government insists on determining these for us.  This Government, too, doesn’t believe we need a very large defense establishment at all.  It prefers, instead, to retreat from the world stage, to talk to Russia about its aggressions in eastern Europe and the Middle East, to talk to the People’s Republic of China about its aggressions in the East and South China Seas.  This Government doesn’t even recognize the Islamic terrorist threat and their war actively being prosecuted against us.

This needs to change.  Every single bit of it.

Another Thought on Clinton’s Death Tax

This one by Brad Anderson, ex-Best Buy CEO.

This is a devastatingly stupid idea…. I worked for a guy who was a high school graduate, created a company—it didn’t make money for 20-years. And after 20 years it finally starts to build up. He has a dream that he’s trying to build, that includes passing some of it along to his family and if you take that away, why does he pay the price?

And why does that man’s family pay an even bigger price?

Enterprises that are left to heirs with value above Clinton’s death tax threshold very often have insufficient cash from the nature of the business—a farm, for example, or a physical plant-heavy enterprise—to pay up.  As a result, the heirs must sell their inherited business to raise the money for her vig.  And so the heirs are left without their inheritance—and so too often destitute.

Never mind this insult added to that injury: this wealth has already been taxed in real time, and often several times, as it was being created, earned, and distributed.