Apple & Taxes

(Photo credit: Wikipedia)

The U.S. senate has called shenanigans on Apple’s clever tax strategy.  While congress has been rather tolerant of other corporations who avoid taxes (such as GE), the senators have apparently decided to go after Apple.

In some ways, this situation is entertaining. After all, liberals who are against corporations are supposed to be all gooey about Apple, thus putting them into an emotional predicament. Also, conservatives who are supposed to not be fans of Apple’s alleged liberal leanings must be torn over going after a corporation on the issue of taxes. Someone more cynical than I might speculate that Apple’s main “crime” was failing to pay the most important tax of all, namely the congressional tax that is paid via lobbying.

The main attack on Apple is that the company was able to engage in some clever (or dubious) tactics that allowed them to avoid paying all the taxes that the company should have paid. Apple has pointed out that the company pays the most (billions) in taxes, but folks in the senate have claimed that Apple should still be paying more.

While I do have some concerns that the senate is unfairly singling out Apple while giving a free pass to companies that are infamous for not paying taxes, this situation does have some positive aspects to it.  Perhaps most importantly, it is drawing attention to the dubious tactics employed by companies to avoid paying taxes. Of course, I suspect that little reform will come out of this in terms of the more outrageous offenders when it comes to dodging tax obligations.

Someone more cynical than I might note that the existing system is, in many ways, a protection racket run by congress. They create harsh tax laws and then allow tax breaks for those who pay the congress “tax.” Companies generally consider this an acceptable deal-the congress “tax” is still less than what they would have to pay if they were fully subject to the corporate tax rate set by congress. Naturally, it would be better if the tax laws were both fairer and simpler, but it seems unlikely that enough folks in Congress are willing to make such changes.

The Income You Deserve

I Get Money (Photo credit: Wikipedia)

In the previous essay, I wrote about the notion of a person having the body he deserves. In response to the original blog post, commentator T.J. Babson inquired about replacing “body” with “income.” As such, the question raised is whether or not a person has the income he deserves.

In the case of whether or not a person has the body he deserves, I argued that this is generally the case. After all, laying aside unfortunate accidents and illnesses, a person has (or is) the body that he has earned by his choices and actions. I also noted that the luck (good or bad) of birth can also be factored out in terms of what a person has earned-after all, a person would still get what he has earned given his circumstances.

Naturally, it can be contended that the same would hold true when it comes to income. After all, if unfortunate accidents are laid aside and the luck of birth is factored out, then a person surely gets the income that he deserves. After all, a person gets the income he has via his choices and actions, just as is the case with getting the body he has (or is). Thus, we all make what we deserve.

Or so it could be argued. However, there is the obvious question of whether the two situations are analogous. That is, whether the matter of deserved income is adequately similar to that of having the body one deserves.

One obvious difference is the nature of the how earning works in regards to the body and income. In the case of the body, getting the body one earns is a purely mechanical, objective and automatic matter. For example, if I choose to take in more calories than I burn, then I will start storing fat, thus altering my body in a way that I have clearly earned. As another example, if I do more speed work on the track, this will alter my body in ways that result in greater speed when running. As a third example, if I do more pushups and pull-ups, the strength of my body will increase. I get these results based entirely on what I do and they correspond perfectly to my actions and choices. As such, these results seem to be exactly what I deserve. After all, what I get stems from what I do.

In the case of income, getting what one earns is a matter of human decisions, is subjective and is not automatic. For example, my income is based largely on what other people who control the funds elect to pay me based on what they think I should be pay. This is presumably based on a subjective assessment of what I should be paid—most likely based on such factors as what they think is the lowest amount that will keep me from accepting another job and what they think it would cost to replace me with someone that could do what I do. My income is also not an automatic matter—I would not get an income just for teaching and so on. There has to be the conscious decision to provide me with the income. In the case of income, what I get might have little or even no connection to what I actually do. Thus a person might not get the income that he deserves.

A second obvious difference is that what a person gets in regards to his body is always perfectly proportional to his choices and actions. If I run X miles per week at an average pace of P, then my endurance will be E. If I spent H hours strength training at intensity I per week, then my strength will be S.  Or, if I pack in E extra calories, then I get F fatter. As such, what I get from my choices and efforts is exactly proportional to the nature of my efforts and choices: what I do and what I receive are in perfect harmony.

In stark contrast, what a person earns in terms of income can (and often is) significantly out of proportion to the nature of her efforts and choices. For example, a professor might devote considerable effort to teaching her students and be very effective at this, thus creating educated citizens who go on to add considerably to society. This teacher might receive a rather low income. As another example, a professor might be clever at making connections and hit an academic fad at the right time and become a star. This star might spend his career pontificating at conferences and on talk shows, yet contribute little of lasting value to society all the while enjoying a rather nice income. As a third example, a person might develop a cunning way to create a financial instrument to hide toxic assets and engage in clever deceits when ranking said instruments, thus making a fortune for herself while contributing to a massive recession. In such cases, these people would not seem to be getting the income they deserve.

It could be countered that a person does get the income he deserves by definition. That is, one earns what one gets, thus it is earned. Being what is earned, it is what a person deserves. This is, obviously enough, what philosophers are often accused of: mere semantic trickery.

Also, to use the obvious analogy, this would be rather like claiming that a prisoner deserves her sentence on the grounds that it is the sentence she was given and it is thus just. Obviously, the mere fact that a person has been sentenced to a certain punishment or has received a certain income is not proof that either is earned.

It could also be argued that employers decide what a person deserves and that a person can decide if he agrees. If he agrees and accepts the income, then he gets what he deserves. While this has a certain appeal, it assumes that the person is not tricked by fraud or compelled to accept the income. To use an analogy, if I agree to give a person something based on a lie or because he points a gun at me, I do not thus get what I deserve when I lose my property.

In some cases, people do get to select their income without any fraud or compulsion and they have many opportunities available to them. In most other cases, people are at a considerable disadvantage relative to those who offer income. For example, a person who works for the state is often subject to the whims of those above them in power. If a newly appointed director decides that he would prefer to relocate his department in a city near his second or third house then the employees have to choose between uprooting their lives (and often families) and losing their jobs. If they lose their jobs, then they need to find another employer and hope that their new job will last.

It might be replied that people get what they deserve even in these cases. After all, if they were smart enough to see through the fraud or capable enough to avoid being compelled, then they would have a better income.

While this has a certain appeal when it comes to economic matters and matches the ideal of the rugged individual making her fortune, this would require accepting that a person who is deceived by another is responsible for his failure to detect the deceit and that anyone who is compelled deserves the results of that compulsion. To use an unpleasant analogy, this would be rather like blaming the victim of a date rape for being raped. After all, if she had been smart enough to see through his deceit to his true intentions or strong enough to protect herself, then she would not have been raped. As such, if she is raped, then she would have gotten exactly what she deserved. Likewise, if someone was smart enough to avoid deceit or strong enough to avoid being compelled economically, then she would not have a low income.  After all, she should have been able to command a better income or start her own company. As such, if she does have a low income, she must be getting exactly what she deserves.

As such, while each person generally has the body he deserves, the same does not hold for income.

My Amazon Author Page.

Very Taxing

Taxes (Photo credit: Tax Credits)

In 2012 I made about $6500 selling my 99 cent books through Amazon and Barnes & Noble (I get about 35 cents a book). On the plus side, the extra income offset the effective salary cut provided by Governor Scott of Florida. On the minus side, this royalty income is taxed using the self-employment rate. In 2012, the self employment tax rate was 13.3%. In 2013 it will be 15.3%.  In contrast, Mitt Romney pays taxes at under 15%. If I only got royalties from non-work sources (like copyrights), I’d be paying much less.

Without this income, my tax software reported that I’d get back about $2400. With this income, I’ll be getting back $36. So Uncle Sam gets a nice chunk of my book income.

On the plus side, my modest stock returns were taxed at an incredibly low rate. This is not surprising since capital gains taxes cap out at 15%. Yes, I do endeavor to plow as much money as I can into increasing my capital gains. And into my IRA.

I’m not mentioning this to brag about my modest success as a writer nor to weep about my taxes. Rather, I am bringing this up to explain why I fully accept that the idea that the tax system in the United States needs to be overhauled. I have, of course, had a general commitment to the idea that the tax system is a needlessly complicated mess packed with unfairness. However, really seeing the disparities in the tax system shows there is a problem. After all, I am taxed rather differently for my normal wages, for my self-employed income, for my capital gains, and for my interest income. It seems rather odd to have so many different tax rates based not on the amount of income but where it comes from. After all, income should (in general) be treated as equal-after all, it is all income. It should not matter that a specific dollar came from my writing, my stock, my savings interest or my job.

Not surprisingly, income from work has high tax rates relative to the others (especially capital gains). Of course, this makes sense: congress members and their supporters make most of their money in the areas that enjoy the lower taxes while people who work for a living pay higher rates. However, this disparity in rates is unfair and should be changed.

I do also see the appeal of having lower taxes. When asked how I’ll handle the tax increase for this year, I had to say the obvious: I’ll have to spend less. Of course, I also recognize that there are legitimate expenditures for the state and, as a citizen, I am obligated (and proud) to contribute to the general good. I am not, of course, keen on having my money wasted. I only wish the politicians thought the same way.

While it will cost me more in taxes, I still encourage everyone to buy my books: My Amazon Author Page

What’s the Plan Mitt?

Like most Americans, the economy is in my list of top concerns and I would prefer if things were going better. Both Romney and Obama claim that they have a plan to swing things around and it is likely that their ability to convince voters in this matter will have a meaningful impact on the election.

(Photo credit: Wikipedia)

In the case of Obama, I have a good idea of his plans and the likelihood of success. While there are various straw man attacks against Obama and some conspiracy theories regarding the employment data, the overwhelming evidence shows that the economy has been slowly recovering. At the top, as always, things are rather good. Corporate profits are high, taxes are low, and the stock market has been mostly positive. While the president’s impact on the economy  can be reasonably debated, if there is an impact it would seem that Obama’s has been largely positive. After all, even the Republican narrative has changed from a tale of complete failure to the complaint that the recovery under Obama has not been dramatic enough. Naturally, Romney claims that he will be able to turn things around.

One of Romney’s main plans is to cut taxes by 20%, presumably in the hope that this will help the economy. As might imagined, the causal connection between tax cuts and economic recovery is a rather dubious matter. It mostly seems to be a matter of ideology rather than evidence-conservatives tend to swear by it while liberals tend to reject it. In any case, the economic crash took place after the Bush tax cuts went into effect and, of course, large corporations are very adept at not paying taxes-thus raising clear questions about the efficacy of tax cuts in this matter.  As such, it would be unwise to infer that this plan will jump start the economy.

Romney has also claimed that his tax plan will not change the progressive aspect of the current tax system. The narrative against Romney is, of course, that he intends tax cuts for the wealthy while shifting the cost burden downward. Since the vast majority of voters are not wealthy, Romney needs to convince these voters that he will not be shifting the burden to them. By claiming he will keep the progressive aspect of the current system, he can claim that the burden will not be shifted.   On the face of it, cutting taxes and keeping the progressive system in place seem compatible.

Most importantly, Romney has claimed that his plan will not increase the deficit. Given that his proposed tax cut would (if not offset) increase the deficit by $5 trillion, Romney needs a plan to prevent that from happening.

Romney has, of course, claimed that he will make cuts in spending. One specific example was that he would cut PBS’ federal funding. Since this would only cut spending by about $430 million, Romney would need to come up with much more in the way of cuts. While people are often quick to condemn the entitlements they do not receive, most people receive entitlements that they certainly do not want to lose. As such, it is no surprise that Romney has not laid out a detailed plan of cuts.

Romney has also claimed that he will close loopholes and eliminate deductions to offset the tax cut. He has not, of course, specified what loopholes he will cut or what deductions will be eliminated. This is politically wise of him-as with entitlements, many people have beloved loopholes and deductions (such as the mortgage deduction). Committing to eliminating popular loopholes and deductions, such as the mortgage deduction, would cost him votes and hence he is not committing. Rather, he says that the details will be worked out after he is elected-thus he is comMitting rather than committing. As such, voting for Mitt is voting for something of a mystery.

There is also the factual issue of whether or not closing loopholes and eliminating deductions would suffice to offset the tax cuts. While various scenarios can be considered, without knowing Mitt’s actual plan, the issue cannot be properly  settled. Also of concern is the matter whether or not Mitt would be able to hold his ground against the addition of new deductions and loopholes (and the return of the old ones). As such, much that is important is also a mystery.

A final point of concern is to note that Romney seems to be claiming that his plan will result in no meaningful change. That is, the tax income will remain the same and the system will remain progressive. As such, one might wonder what the plan actually does.

So, what is the plan, Mitt?

My Amazon Author Page

Commence Obama bashing red herrings to switch the issue away from Mitt’s plan in…

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Taxing Mitt

(Photo credit: Wikipedia)

While Mitt Romney has released his recent tax returns, he has taken considerable heat for not releasing more of them. While it is no surprise that the Democrats have been pushing Romney on this, some conservatives have also urged Romney to release these returns.

Romney’s view seems to be that he has done what is required and his wife said that  they have “given all you people need to know.” This does raise a legitimate question about what voters have the right to know about candidates. While presidential contenders have historically released tax returns covering many years, Romney is not violating any laws by refusing to release the tax returns in question. Assuming that the law defines what voters have the right to know, then the voters have no right to know the content of these returns. Of course, what people have a right to know (as defined by the law) and what people need to know can be two distinct things. After all, in order to properly assess the candidates, voters might claim to need information that the candidates are not legally obligated to share. For example, some people wanted to know a great deal about Obama and desired to see his college transcripts. In the case of Romney, some voters seem to think they need to know about these tax returns. However, the mere fact that voters want to know or think they need to know something does not entail that they actually have a legitimate need to know it. That is, that they have a right to know. While politicians can legitimately be expected to provide more information to the public than a typical citizen, they do not surrender their privacy completely. As such, there is still a legitimate question of whether the public has a legitimate need to know about these tax returns.

Given that other presidential candidates have released extensive tax records, it does seem well established that there is  legitimate expectation on the part of voters that they will have access to such information. Of course, it could be countered that this is a mere tradition and has no moral weight. That is, the fact that other candidates (including Romney’s father) released their returns does not entail that the voters have a right to see Romney’s tax returns-even if they would be relevant in making their voting decision.

Naturally, it could be argued that Romney has tacitly made the tax returns a matter of legitimate public concern. After all, much of his case for why he should be president is based on his success in business. If the voters are to properly assess Romney’s business competence, the voters need access to these financial records. As such, it could be argued that Romney has given voters a legitimate need to know about these returns. As such, the voters do not have all they need to know and the returns should be released.

Romney has also argued that he does not want to release them because the Democrats would go through them looking for material with which to attack Romney. As the Democrats see it, this means that the tax returns must contain things that would give them plenty of ammunition against Romney. As Romney sees it, the Democrats will twist and misuse the returns to make him look bad. As such, he seems to think he is better off taking the criticism for not releasing the returns than sustaining the damage that would result from releasing them.

On the one hand, it could be contended that Romney has a legitimate point. If there is nothing bad in his tax returns, but the Democrats will be able to somehow manufacture ammunition from this nothing, then releasing them would unjustly damage him. On the other hand, it can be contended that this reply is rather dubious. After all, if there is nothing bad in the tax returns, then the Democrats would simply be making things up if they said bad things about the returns-something they could do with or without the actual returns. To be fair to Romney, pundits and spinners are often able to twist innocuous things to make them look terrible. For example, pundits on the right have managed to do this sort of thing to Obama even when he released what was demanded, such as his birth certificate. However, there is the rather important question of whether or not there is anything bad in the returns and it does seem that voters have a right to know about this.

Some of Romney’s fellow Republicans are urging him to release the tax returns, mainly because of the damage that his making an issue of this is doing to his campaign.  Given that Obama has released several years of tax returns, it does make Romney look bad, especially since a beloved narrative on the right has been that Obama is a keeper of secrets. While people are generally not consistent in politics, Romney’s secrecy in this matter is not playing well even among those who are not fans of Obama. After all, it is natural to infer that if someone is keeping something secret, what is being concealed must be worse for the person than the damage done by people knowing they are keeping secrets. By keeping the returns secret, Romney invites speculation and causes people to wonder what terrible secrets he is hiding. This is, obviously enough, not a good strategy. Unless, of course, what is being concealed really is so bad that keeping it secret is preferable.

It is unlikely that the tax returns contain anything incredibly dire, such as evidence of criminal activity. While this is mere speculation, I suspect that the returns show that Romney made vast amounts of money and made use of every loophole and trick to pay as little taxes as possible. Since most people try to do the same (that is, pay as little as possible) and everyone knows Romney is rich, there must be something that the returns will show that would be damaging in some way. Speculating once again, I think that the problem might be that Romney’s tax returns would provide the Democrats with vivid ammunition against the Republican narrative that the job creators are over-taxed. After all, if Romney’s people were able to work the existing laws to keep Romney’s taxes rather low, this would enable the Democrats to point directly to Romney as evidence that the rich are underpaying rather than overpaying.

There might be other things on the tax returns, such as Swiss bank accounts, that would also provide the Democrats with considerable political ammunition to use to counter the Republican narratives about taxes, job creators and wealth. Of course, most of this would merely confirm what people already know: Romney is very rich and no doubt does all the sorts of things that rich people do that less affluent people cannot. However, the tax returns might provide such clear evidence of class disparity in America that they would actually hurt Romney’s chances. Or perhaps not. After all, people already know that Romney is exceptionally rich and upper class and he seems to be doing well despite (or perhaps because) of this.

Tax or Penalty?

Taxes (Photo credit: Tax Credits)

The United States Supreme Court ruled that the ACA is constitutional. However, there was an interesting twist in the ruling: while the administration’s main argument for the mandate was made in the context of commerce, this was rejected. Instead, the ruling noted that the ability to impose the penalty for not purchasing the insurance did legitimately fall under the right of congress to tax.

Not surprisingly, a rhetorical battle began shortly after the ruling regarding whether or not the penalty is a tax or not. The Republican’s main narrative is that the penalty is a tax and that it will be very bad indeed. The Democrat’s main narrative is that it is a penalty and that it is a necessary if not good thing. There is, of course, the question of what the truth of the matter might be.

Given the ruling, the Supreme Court’s view (or at least 5 of the 4 members) seems to be that the penalty is a tax. This is mainly because the power to impose the penalty comes under the power of congress to tax rather than being justified in regards to commerce. As such, the idea that it is a tax has a reasonable foundation. That said, it seems to be an unusual sort of tax in that it functions more like penalty-that is, one pays it for failing to do something that is required.

On the face of it, taking the penalty to be a tax is somewhat like taking a ticket for not wearing a seat belt (a common practice in the United States) to be a tax. After all, one has to pay a penalty for not following the requirement to wear a seatbelt just as one has to pay a penalty for not following the requirement to get insurance. It seems rather odd to call such penalties taxes. After all, folks generally don’t say things like “I was taxed for speeding today” or “I got taxed because I parked illegally.” In the case of penalties, they generally seem to aim at punishing people for what they did (or failed to do).

While taxes do cause pain, they generally seem to differ from penalties. After all, when I pay a sales tax, this does not seem to be a penalty (or maybe it is—perhaps I am getting punished for buying local rather than via Amazon.com). Similarly, when my salary is taxed, I find that unpleasant, but it is not intended to deter me from working. That is, it is taxing but not penalizing.

As such, the penalty would seem to be a penalty that has been legally justified under the power to tax.

The obvious reply to this is that this makes all the difference. While it is a penalty, it is justified under the power to tax and is thus a tax. This, of course, does raise a question about what justifies the state in imposing penalties. The state can, of course, arrest me, lock me up, take my property, and kill me and these are justified in terms other than taxes. That is, an execution is not a tax one pays with one’s life. If the state can impose such penalties to get people to do and not do things without them being taxes, then it seems to indicate that the penalty in the ACA could be so justified. The main difference is that the mechanism of imposition is via the IRS rather than via the police.

The obvious reply to this is that involving the IRS makes it a tax—after all, that is what they do.  If the penalty was handled another way by another agency, then it might not be a tax. But, if it is handled via the IRS, then it is a tax.

While this does have considerable appeal, there are other cases in which one agency performs a function that does not automatically make it a function of that sort. For example, the military sometimes functions in a police role or a firefighting role, but it would not be claimed that police functions or firefighting are thus combat actions because they are done by a government body that normally engages in combat. Likewise, just because the IRS is providing the mechanism by which the penalty operates, it need not be a tax.

The counter to this is, of course, to note that the IRS is handling it like a tax. So, if it walks like a duck and quacks like a duck, then it is a duck. So, the penalty is a tax.

At this point (if not earlier), readers might be wondering why it matters. After all, calling it a “tax” or calling it a “penalty” does nothing to change anything about the penalty/tax and this makes it seem to be a mere semantic point.

This does, in fact, seem to be the truth of the matter. The main dispute is not something substantial that would change the law if one side was right and the other wrong. Rather, it seems to be entirely a rhetorical battle. On the current typical Republican narrative, if something is a tax, then it is bad. So, if the penalty is a tax, then it is bad. By imposing this tax, the ACA is also bad.  Plus, Obama claimed he would not raise taxes for the non-wealthy and that the penalty is not a tax—so if it is a tax, he would be wrong twice. As such, the Republicans can score rhetorical points if it is seen as tax.

On the Democrat’s narrative, the penalty is a penalty, but it is what makes the ACA work and hence it is a good thing because the ACA is a good thing. Plus, the claim is that only a tiny percentage of people will actually be impacted by the penalty.

Thus, it does seem that the dispute is not over anything substantial but rather a rhetorical battle. This is not to say that the dispute is not important. It is, since there are political points to be won or lost here based on which label sticks. For those of us on the receiving end, whether it is a tax or penalty does not seem to change anything—either way we have to get insurance or pay. Or do we?

One part of the dispute that does have substance is the matter of the impact of the tax/penalty (perhaps it should be called a tanalty as a bi-partisan compromise). On the Republican narrative, it is supposed to be something both substantial and bad. On the Democrat’s narrative, it is supposed to be minor and good (or at least necessary).

Interestingly, Forbes did an analysis of the penalty that seems to indicate that both narratives are flawed.

It is estimated that, using today’s data, that about 7% of those under 65 would face the possibility of the tax/penalty. The other 93% either have insurance or are exempt from the penalty/tax.

Of those who might be subject to the tax/penalty some will probably buy insurance. About 60% of them will qualify for insurance subsidies. 3% of those possibly subject to the penalty/tax will have to pay full price. Of course, changes in 2014 (when the law goes into effect) could result in changes in these numbers. However, unless there are radical changes, the vast majority of people will not be subject to the tax/penalty.

But, suppose that a person is subject to the penalty/tax and a person refuses to get insurance. The Republican narrative is that this will be a significant tax while the Democrats claim it will not be that bad.

The price starts off at a modest $95 in 2014 and increases to $695 or 2.5% of your income (capping at $2,085—adjustable for inflation). While not something I would like to pay, the penalty/tax is not terribly high. Of course, I am sure that most folks would prefer to avoid paying it at all—which seems to be something that can easily be done.

While the law specifies that the IRS is to enforce the law by imposing a tax penalty, the law also prevents the IRS from using most of its standard tax enforcement methods. For example, the IRS is not permitted to treat the refusal to pay the tax penalty as a criminal act, thus eliminating that avenue of enforcement. Imposing a tax lien will also apparently be rather difficult. In fact, Professors Barry and Camp contend that the mandate is not very mandatory.

The main tool that the IRS does possess in the context of the ACA is that it can reduce a person’s refund. This does provide some bite since about 2/3 of taxpayers get a refund. This does lend some credence to the penalty being a tax—after all, by removing it from the refund it as if the person’s tax burden has increased. Of course, the overall result is the same as a penalty—a traffic ticket for $95 would have the same overall impact as the penalty in 2014.

Of course, even this bite is not as toothy as it might seem. After all, low income households are exempt from this tax penalty and hence their refunds would be untouched even if they decided to do without insurance.

In the face of this, it would seem that the Republican narrative that the tax will be a significant burden seems to be untrue. After all, it will not apply to the vast majority of people, the price itself will be fairly low, and it seems that even those subject to it stand a good chance of being able to avoid it. At most, it will impact those who are well off enough to afford insurance and who will receive a refund and who do not have insurance. That will probably be a rather small number of people.

Ironically, the same facts that seem to defeat the Republican narrative also seem to undercut the main point of the tax penalty. The ACA requires that pre-existing conditions can no longer be a factor in a person qualifying for a policy or its cost. Naturally, the insurance companies are in the business of making money, so they need to cover the additional costs this will impose on them. The tax penalty is supposed to be onerous enough to push people into buying insurance, but it does not seem to be harsh enough or certain enough to serve that function. It also does not seem that it will generate enough revenue to help offset the increased cost. This, interestingly enough, does support another Republican narrative, namely that the ACA is supposed to increase insurance costs. Somewhat ironically, this narrative seems plausible because of the seeming implausibility of another Republican narrative. After all, if the tax penalty were as onerous and sweeping as has been claimed, then it would either push people to buy insurance or provide revenue to offset their failure to do so. As such, it would seem that both parties appear to be in error. That, I am sure, shocks no on.

Corporate Taxes, Again

Tax (Photo credit: 401K)

One common theme pushed by folks on the right is that corporations are taxed too much. When making a case for this, people point to the fact (and it is a fact) that the corporate tax rate is 35%.  From a sensible view point, that does seem rather high. After all, having the state skim 35% off the top would make it much harder for business to hire people, re-invest and do all those other things that are rather important to keeping the balloon of capitalism expanding. As such, the call to cut corporate taxes often has significant appeal. However, there is on rather obvious problem with the argument: some corporations pay no taxes and the average is around 12%.

This lower actual rate is due to the fact that corporations are able to take advantage of various tax laws (often created at their behest or via heavily lobbied deals). This laws allow corporations to use loop holes and other means to lower their taxes significantly. Lest I be accused of ignoring the obvious, the tax laws also allow individuals to also lower their taxes through various deductions and exemptions.

One reason why the facts are important in this situation is that much of the rhetoric and (limited) arguments for lowering  corporates taxes are not based on what corporations actually pay. To use the obvious example, when someone rails against the high corporate tax rate, they do not say that the average tax rate for American corporations is 12.1% and they most certainly do not mention that some companies (most infamously GE) are able to avoid having any tax obligations. After all, a 12% tax on what are often massive profits would not strike most people (especially those of us who work for a living) as particularly onerous. In fact, given the significant benefits enjoyed by corporations (corporate subsidies, use of infrastructure, military and diplomatic operations on their behalf and so on), this seems like an excellent deal.

Another reason why the facts are important is that they are rather important to having a rational discussion of what corporate tax rates should be. As noted above, the stock line is that corporations are being harshly taxed and these taxes need to be lowered. When the tax percentage is presented as 35%, that does seem rather harsh and lowering it seems reasonable. However, this claim has the obvious problem of not being what corporations actually pay. The average is, as noted above, 12.1% and this seems like a rather low figure already relative to corporate earnings. Also, if someone where to argue that the tax rate for corporations should be 15% (the cap for capital gains taxes), then the obvious response is that corporations already pay a smaller percentage, thus eliminating the need for such a reduction.

But perhaps the people who point to the 35% and call for lower taxes do not mean that they think that 35% is too high. Perhaps they are well aware of the real percentage but merely use 35% as a rhetorical trick because they think that the percentage that corporations pay on profits should be even lower than 12.1%. Of course, that would seem to be rather low, given what wage earners pay in terms of a percentage of their income. After all, corporations already tend to pay a lower % than many folks who work for a living. This might, of course, mean that the taxes on the working people are too high as well.

But, if they are, then we must explain the deficit entirely in terms of needless overspending. After all, if the state is taking in too much money, then the most plausible explanation for a deficit would be that we are spending too much on needless programs. This could very well be the case and should be duly considered. Of course, the key word here is “needless”-if we actually do need to spend tax dollars, then the tax rates should be devised so that they enable us to meet our legitimate expenses. The challenge, which is a very serious one, is sorting out the needless spending from what we should be spending. Naturally, everyone tends to hold that what the think benefits them is essential and what they think does not benefit them is needless. Unfortunately, there seems to be little tendency to address this matter in a rational way and the “discussion” seems to be based mainly on rhetoric, partisan ideology and unrestrained emotion.

Tax Rates

The Tea Party made a lot of noise about our being Taxed Enough Already. While I am sometimes cast as a liberal, I am actually a fiscal conservative and I agree that many of us are taxed enough-if not too much. However, I also contend that some of us are under-taxed in a way that causes the rest of us to be over-taxed, which is probably one reason I get branded as a liberal.

A typical person, say a teacher, who makes $50,000 a year gets taxed at an effective rate of 17.2%. Mitt Romney gets taxed a bit under 15%, mainly because he and his lobbyist cohorts saw to it that the tax laws benefit his sort of people rather than the folks who earn a paycheck. Of course, even Mitt is paying a modest piece of his income compared to some others.

According to the IRS and Citizens for Tax Justice certain industries have managed to get rather desirable tax rates. Aerospace and defense companies are doing very well, having an average tax rate of 1.6%. The telecommunication folks are worse off at 7.5% and the often vilified folks in petroleum and pipelines are taxed at an effective rate of 13.1%. Above that are the utilities who are hit hardest at 14.4%. Of course, some clever folks at the top companies have worked out the means of paying no taxes (most famously GE).

Tax (Photo credit: 401K)

A rational, objective look at the numbers shows that the claim that companies are overtaxed seems to be untrue. After all, they are taxed at a rate less than a person who earns $50,000 by working. Of course, it could be contended that everyone is being overtaxed and that the people who work for a living and do not have armies of well paid lobbyists and lawyers are being brutally overtaxed. If so, it would seem that the focus should be shifted from trying to rescue the corporations from the cruelty of their relatively low effective tax rate to rescuing the working people from their much higher tax rates. After all, corporations have been enjoying record profits and CEO compensation is most excellent while the middle class is generally struggling or sinking into the lower class.

Naturally, there has been some talk about helping out the middle class. However, while politicians have bent over backwards after being slathered with cash from the corporate lobbyists, little has been done for the middle class. Given that the middle class lacks the unified cash to hire lobbyists and lawyers, this is hardly a surprise. However, the pain of the middle class can be cleverly exploited. After all, if we feel hurt by our taxes, it is usually easy to get some of us to shed tears for the corporations on the assumption that if we are being cruelly taxed, then so are they. Of course, this is not true-they are doing quite well.

As far as what to do, the usual call from conservatives has been to lower spending to address the problem of deficits. While that is a reasonable idea, there is the obvious question of whether or not these cuts will be best for the country. After all, we could also address the deficit by increasing the taxes paid by the very wealthy to match those paid by the middle class in terms of percentages. That is, if folks like Buffet were taxed at the same rate as their secretaries, then there would be considerably more revenue while the rich would still remain rich.

It might be objected that taxing the rich at this rate would be harmful. However, the obvious reply is that if someone who makes $50,000 a year can manage to survive while being taxed at 17.2%, someone who makes $ 50 million a year can also survive at that tax rate or even higher.

35% versus 15%

Image by 401K via Flickr

Mitt Romney garnered considerable media attention by his rambling answer to the question of whether or not he would make his tax returns public. While Mitt should have just said “yes”, he eventually noted that he probably paid at a tax rate of about 15%. He did note that he probably paid a higher percentage on his speaking fees, but he said he didn’t make much from that-a mere $374,328 last year.

While the capital gains tax caps at 15%, income tax caps at 35% (for those who have a taxable income of over $388,350). By way of comparison, a  person who earns $8,701-35,350 pays 15% income tax. Naturally, the actual percentage will vary based on factors such as deductions. However, it is certainly interesting that someone like Romney (who makes a fortune from capital gains) pays at the same rate as a person who makes vastly less by working.

The stock justification for this disparity is that it is intended to promote investment and that investment drives the economy. However, the fact that other income (like paychecks) can be taxed at much higher rates would seem to indicate that working for a living is regarded as less important than receiving profits from investments. This does seem to be something of a mistake: after all, without people actually doing things, there would be no point for the capital investments. That is, there would be no actual things to invest in (well, other than the arcane results of financial engineering). As such, if the low tax rates on capital gains are intended to promote investment, it would seem that comparable tax rates should be placed on other income to encourage people to work.

After all, it has been common for politicians and pundits to claim that higher tax rates on capital gains will destroy job creation because job creators will be de-motivated from investing. However, that logic would seem to entail that the higher tax rates on other income should also de-motivate people. That is, people should stop working because of the higher tax rates. Perhaps this explains the unemployment numbers-just as the pundits predicted, taxes have destroyed their motivation to create value. In fact, if the pundits are right, it is a wonder that anyone who makes more than $35,350 goes to work at all-after all, they have to pay more than 15% and this is the level that is apparently deemed to be the maximum percentage that investors can tolerate.

This disparity not only indicates the perceived value of work versus investment, but also the political influence. Those who derived most of their income from capital gains (like Mitt Romney) tend to be wealthy and generally tend to have far more influence than those who merely work for a living. Also, there is the obvious fact that the folks who write the laws tend to be heavy investors as well. As such, the tax laws are written to benefit the wealthy-which is hardly shocking. While the wealthy do have to pay some taxes, even this modest burden is seen as grotesquely unfair by some of them and some of their stalwart allies (who also tend to be wealthy). Romney is a natural poster boy for the incredible disparity in American incomes and his various comments nicely show the disconnect between most of the top 1% and the rest of America.

Citizen, Consumer, Taxpayer

Image by kevindean via Flickr

Once upon a time, people were subjects of a ruler (in some places, it is still once upon a time). In democracies (or republics) people could be citizens of the state. Crudely put, a subject can be seen as a sort of political property-the subject is subject to the will of the ruler. In contrast, the citizen is a member of a community and has, at least in theory, a vote and a stake in the matters of said community.

In the not so distant past it was common to refer to people in the United States, the UK and other democracies as citizens. However, there was an interesting change in vocabulary in that the term “consumer” began to gradually replace the term “citizen.” This change in terms reflected economic changes-after the second World War the United States (and some other countries) became a consumer country. This change in terms reflected this shift. Whereas once an American was a citizen who was, at least partially, defined by his or her membership in a community, Americans became primarily defined as consumers of economic goods. This resulted in a comparable change in values and virtues and the economic virtues of consumption, ownership, and production became important focuses. As such, it was hardly surprising that after 9/11 Bush said, “I ask your continued participation and confidence in the American economy.” He did not, as some claim, actually tell people to “go shopping.”

With the rise of the Tea party, there was also another change. While Americans are still referred to as “consumers”, there was (and is) a new emphasis on Americans as taxpayers. While the consumer view of Americans focused on Americans as purchasers of goods and services, the taxpayer view focuses on Americans as payers of taxes (obviously). While the consumer model made a virtue of consumption, the taxpayer model seems to make a virtue of selfishness. The idea, put roughly, is that people should focus primarily on the taxes they pay and what they personally get in return. Whereas a citizen is enjoined to be concerned with the general welfare and to ask “what can I do for my country?” , a taxpayer is told to be self focused and enjoined to ask “what’s in it for me?”

This sort of attitude is, of course, a classic view put forth by various ethical egoists from Glaucon’s unjust man to Thomas Hobbes to Ayn Rand. This view is also the model of what can be considered the dark side of capitalism (selfishness and greed).  Not surprisingly, the concern some people express about paying too many or too much taxes is also often accompanied by concerns that tax dollars are being spent on various aid and assistance programs, such as welfare, student loans, and medicare. This is, of course, perfectly consistent with the view that a person is a taxpayer rather than citizen. After all, a citizen is a member of a community and, presumably, has a stake in that community and a fellowship with other members. A taxpayer is, essentially, in an economic relationship of paying taxes and getting (or not getting) goods and services in return. In short, this is a business sort of relationship.

It can, of course, be contended that the taxpayer relationship is the realistic and practical view of the world. After all, as Ayn Rand argued, the way to be happy is to be concerned solely with your own happiness. The altruism needed to be an actual citizen is not compatible with this-it is every man, woman and child for himself. Only a fool would concern himself with others or, god forbid, love her neighbors as herself.