Taxing People With No Money

Update:  Over the weekend, without comment, the Obama team pulled down the language below and put up new, vaguer language without the "required."  Discussion and a screen shot of the original is here.

How do you tax people with who have no money?  Why, you take their labor by force.  It worked when we dragged Africans over here against their will in the 19th century, and it can work today.  From the Obama transition site:

The Obama Administration will call on Americans to serve in order to meet the nation’s challenges. President-Elect Obama will expand national service programs like AmeriCorps and Peace Corps and will create a new Classroom Corps to help teachers in underserved schools, as well as a new Health Corps, Clean Energy Corps, and Veterans Corps. Obama will call on citizens of all ages to serve America, by developing a plan to require 50 hours of community service in middle school and high school and 100 hours of community service in college every year.

So what was that about no tax increase for people making under $250,000?  Because my guess is that most high school and college kids made close to zero, but here is Obama seeking to expropriate 50-100 hours of their labor.  Sure looks like a tax to me.  By law, high school kids, by DOL rules, can work up to 1200 hours per year.  For kid that works every hour she can, this is about a 4% tax.  Kids that work less pay a higher effective tax rate, up to infinite for kids not working at all  (hey, this tax is even regressive).  Also, richer kids trying to get into top colleges will be the least affected, as they are already volunteering at a level close to this, so most of the burden of this tax will fall on the poor.

I remember when I was slammed by Obama supporters during the election when I said that his call for "universal" community service meant that he was going to mandate it.  Carefully avoiding being clearer about what he meant before the election, Obama sure has not wasted any time making sure everyone understands he is talking about government coercion here, not volunteerism.

PS-  I thought this site was fake, because it was amazing to me to see Obama's intentions stated so baldly after he so strenuously avoided clarifying his position during the election.  But the Huffpo and other sites link to this site as if it is real, so I will treat it as such.

PPS - Here is Obama's pledge on taxes from the same site:

Middle class families will see their taxes cut – and no family making less than $250,000 will see their taxes increase. The typical middle class family will receive well over $1,000 in tax relief under the Obama plan, and will pay tax rates that are 20% lower than they faced under President Reagan. According to the Tax Policy Center, the Obama plan provides three times as much tax relief for middle class families as the McCain plan.

OK, we are not going to take more money, we are just going to take your labor directly.

Update:  Radley Balko adds the chilling speech implications of such a program:

So who gets to decide what constitutes "community service"?  Who gets to decide which causes and organizations will be credit-worthy, and which ones won't?

Something tells me that you'd be more likely to get one of Obama's vouchers by going door to door for one of ACORN's living wage campaigns than, say, volunteering for a libertarian nonprofit organization that advocates against things like government-mandated community service.

Obama supporters will say, no problem, we trust Obama.  Hmm.  The folks who wrote our Constitution designed our government assuming all politicians would be knaves.  Writing laws that depend on the good intentions, fairness, correct incentives, and intellectual capacity of the government folks who run it are doomed to failure.  Would Democrats have been happy to have GWB deciding what community service their kids were forced to endure?  I doubt it.  Well, we don't live in an autarky, and sooner or later GWB's party will be back and making exactly those decisions under such a program.

Posted on November 7, 2008 at 08:22 AM | Permalink | Comments (43)

I Guess I'm Not Patriotic

I have always been mildly suspicious of the word "Patriotism," particularly when it is used to mean supporting one's country even when it is behaving badly.  I prefer to say that I respect, even love this country for the high values it has historically set for itself.   But when it falls short of those values, it is going to hear it from me, patriotism or no.

But if patriotism is defined as having my money put in someone else's pocket, I am not a patriot.

Posted on September 18, 2008 at 09:02 AM | Permalink | Comments (8)

More on Those Tax Cuts For the Rich

As we previewed last week, the IRS came out with its numbers on 2006 taxes, and it turns out that the top 1% richest taxpayers earned 22% of the taxable income and paid 40% of the income taxes.  According to candidate Obama, this represents an unfair free ride for the rich.  These numbers increased from 21% and 37% in the last year of the Clinton administration.

I guess my question is, what's enough?  Already, half the country only pays less than 3% of the income taxes.  Do we really want a country where 50.1% of the people vote to live off the other 49.9%?

Postscript:  Yes, I know payroll taxes work differently and hit lower income folks pretty hard.  But then again, the Social Security program is supposed to be an insurance and retirement plan, not a transfer program. The left goes bananas when you suggest Social Security is welfare and not an honorable paid participation program.  So, like any other insurance, the premiums are flat rather than progressive.  You can't have it both way.

Posted on July 21, 2008 at 09:24 AM | Permalink | Comments (50)

Must Have Been Those Tax Cuts For the Rich

From Mark Perry  (a new favorite of mine)

Tax1

In related news, comes this from the WSJ via Evan Coyne Malloney

New data from the IRS will be out in a few weeks on who pays how much in taxes. My contacts at the Treasury Department tell me that for the first time in decades, and perhaps ever, the richest 1% of tax filers will have paid more than 40% of the income tax burden. The top 50% will account for 97% of all federal income taxes, while the bottom 50% will have paid just 3%.

Here is the same data from 2005:

Tax

This is really a huge threat to the Republic and the minority protections built into the Constitution.  Our government was most explicitly not meant to be a tyranny of the majority, where 51%+ of the people can legally abuse the rest with impunity, but this tax picture sure seems to be stepping over this line.  A particularly worrisome subset of this problem is the increasing legislative predilection for funding  projects with millionaire's taxes, as discussed here and here.  I discussed more about the implications of 52.6% voting for the other 47.4% to support them here.

Posted on July 10, 2008 at 09:41 PM | Permalink | Comments (16)

So Rich People Don't Count?

I generally like the work that Factcheck.org does, and am perfectly willing to believe that McCain's claim that Obama has voted "for higher taxes" 94 times is exaggerated.  However, some of their rationale leaves me flat:

Twenty-three [votes] were for measures that would have produced no tax increase at all; they were against proposed tax cuts.

Uh, OK.  It strikes me that voting against 23 tax cuts is voting for higher taxes 23 times.  I know that politicians work very hard to establish a sort of taxation Stare Decisis, wherein once a tax is in place it can never be questioned, but many of us think that tax cuts are fair game.  But then Newsweek, in reporting this story, goes on to repeat this claim over and over, as if that makes it correct:

By our count, about a quarter of these votes for "higher taxes" – 23 to be exact – are votes Obama cast against changing tax rates from what they were at the time. Taxes would not have gone up. They would have been "higher" only compared to the cuts being proposed.

Sorry, but this does not sound like independent fact-checking.  This sounds like political spin and hackery by folks in Obama's camp.  Voting against a tax cut is a vote for higher taxes.

Eleven votes the GOP is counting would have increased taxes on those making more than $1 million a year – in order to fund programs such as Head Start and school nutrition programs, or veterans' health care.

The implication here, I guess, is that the rich people don't count as people, and that raising taxes only on the rich does not count as a tax increase?  We see this same bias that rich people don't count in their summary:

It's true that most of the votes the GOP counts would either have increased taxes for some, or set budget targets calling for such increases. But by repeating their inflated 94-vote figure, McCain and the GOP falsely imply that Obama has pushed indiscriminately to raise taxes for nearly everybody. A closer look reveals that he's voted consistently to restore higher tax rates on upper-income taxpayers but not on middle- or low-income workers.

The other interesting pice of the previous quote is that tax increases don't count if they fund programs such as Head Start that the author of the study, presumably, supports.  The article goes on to say:

And in many cases, the legislation in question called for increasing taxes in order to fund popular programs, a fact not mentioned by the Republican opposition researchers. One such amendment by Sen. Christopher Dodd to a 2006 bill, for example, proposed the creation of a "veterans hospital improvement fund," financed by increasing the capital gains and dividend tax rates on those earning $1 million a year or more.

You get it?  Its not a tax if it is on the rich or funds a liberal program.  By the way, I find this increasing reliance on taxes on people making $1 million or more an enormous threat to the very basis of our demacracy.  It is always a danger in democracy to have 51% of the people vote themselves benefits at the expense of the other 49%.  But this becomes increasingly seductive as the numbers skew, until every politician is crafting programs that take from the top 1% and give to politically influential portions of the other 99%.  Here is a great example of that in California, with a program the majority of voters were not willing to pay for, but accepted when it was funded by a millionaire's surcharge:

Already, we see many states funding new programs with surcharges on the rich.  Here is but one example:

California voters agreed to tax the rich to support public mental health services. 

More than half of them (53.3 percent) voted last month in favor of Proposition 63, which will impose a tax surcharge of 1 percent on the taxable personal income above $1 million to pay for services offered through the state's existing mental health system. The initiative will generate an estimated $700 million a year....

Richard A. Shadoan, M.D., a past president of the CPA, wrote in Viewpoints in the September 3 issue of Psychiatric News, "The scope of the program and its tax-the-rich source will provoke a debate. But it's an argument worth having to make California face the neglect of not providing treatment to more than 1 million people with mental illness."

So what happened?  I don't know how many people make a million dollars in California, but it is certainly less than 5% of the population.  So the headline should read "53.3% of people voted to have less than 5% of the people pay for an expensive new program."  If the 53.3% thought it was so valuable, why didn't they pay for it?  Well, it is clear from the article that the populace in general has been asked to do so in the past and refused.  So only when offered the chance to approve the program if a small minority paid for it did they finally agree.  This is the real reason for progressive taxation.  (by the way, these 53.3% will now feel really good about themselves, despite the fact they will contribute nothing, and will likely piss on millionaires next chance they get, despite the fact that they are the ones who will pay for the program).

That example reminded me in turn of this story from history, one of what I call "great moments in progressive taxation,"  and the ultimate logical end of this desire to have fewer and fewer rich people fund services for everyone:

My story today comes from the Roman Empire just after the death of Julius Caesar.   At the time, three groups vied for power:  Octavian (Augustus) Caesar, Mark Antony, and republican senators under Brutus and Cassius.   Long story short, Octavian and Antony join forces, and try to raise an army to fight the republicans, who have fled Italy. They needed money, but worried that a general tax would turn shaky public opinion in Rome against them.  So they settled on the ultimate progressive tax:  They named about 2500 rich men and ordered them killed, with their estates confiscated by the state. 

This approach of "proscriptions" had been used before (e.g. Sulla) but never quite as obviously just for the money.  In the case of Octavian and Antony, though nominally sold to the public as a way to eliminate enemies of Rome, the purpose was very clearly to raise money.  All of their really dangerous foes had left Rome with the Republicans.  The proscriptions targeted men of wealth, some of whom had been irritants to Octavian or Antony in the past (e.g. Cicero) but many of whom had nothing to do with anything.  Proscribed men were quoted as saying "I have been killed by my estates."

I wonder how many of today's progressives would be secretly pleased by this approach?

Postscript:  I can't tell if this Newsweek article represents some sort of strategic alliance or deal with Newsweek, or just a one-off.  If it is some kind of alliance, I think we can write off any notion that Factcheck.org is still non-partisan.  I predict if this is the case we will see more pro-Obama spin out of Factcheck, or as a minimum, a cherry-picking by Newsweek of which checked facts it wants to publish and which it does not.

Posted on July 3, 2008 at 08:43 PM | Permalink | Comments (8)

Your State's Gas Tax

I find that in discussing gasoline prices, a lot of people don't know what their state's gasoline tax is.  So, as a public service (hat tip to Mark Perry)

Gastax

Posted on July 1, 2008 at 07:41 AM | Permalink | Comments (6)

A Different Kind of Trend

For about all of history, a large part of tax management has been in deferring recognition of income.  Everything being equal, its better to pay taxes further in the future, given the lower present value of deferred taxes.

This year is different.  As I talk to many other folks who run their own business, many are using every accounting trick in the book to pull income forward, into this year.  Why?  The reasoning is here.  Many folks are betting that their marginal tax rate will be going way up next year.  I know I will be drawing down every reserve and deferring every expense I can find to pull income into this year from next.

Posted on June 22, 2008 at 10:29 PM | Permalink | Comments (0)

The US Erects Its Own Version of the Berlin Wall

Though I would not want to trade my income taxes with those paid by Europeans, there is at least one area where the US has the worst tax regime in the world.  The specific area is the double standard the US applied on eligibility of income when other countries are involved.  For citizens of other countries, the US applies the standard that taxation is based on where one earns their income, so citizens of, say, France that are working in the US must pay US taxes.  However, for citizens of the US, the government reverses its standard.  In this case, the US applies the standard that taxation is based on citizenship, so US citizens must pay taxes on their income, even if it is all earned living in a foreign country.  Since most countries of the world apply the first standard  (which is also the standard individual states in the US apply), US expats find their income double taxed between the US and the country they are living in.

But now, it is just getting worse:

Queues of frustrated foreigners crowd many an American consulate around the world hoping to get into the United States. Less noticed are the heavily taxed American expatriates wanting to get out — by renouncing their citizenship. In Hong Kong just now, they cannot. “Please note that this office cannot accept renunciation applications at this time,” the consulate’s website states. Apart from sounding like East Germany before the fall of the Berlin Wall, the closure is unfortunately timed. Because of pending legislation on President Bush’s desk that is expected to become law by June 16th, any American who wants to surrender his passport has only a few days to do so before facing an enormous penalty.

…Congress has turned on expats, especially those who, since new tax laws in 2006, have become increasingly eager to give up their citizenship to escape the taxman. Under the proposed legislation, expatriates surrendering their citizenship with a net worth of $2m or more, or a high income, will have to act as if they have sold all their worldwide assets at a fair market price.

…That expats want to leave at all is evidence of America’s odd tax system. Along with citizens of North Korea and a few other countries, Americans are taxed based on their citizenship, rather than where they live. So they usually pay twice — to their host country and the Internal Revenue Service. As this makes citizenship less palatable, Congress has erected large barriers to stop them jumping ship. …[I]t may have the opposite effect. Under the new structure, it would make financial sense for any young American working overseas with a promising career to renounce his citizenship as early as possible, before his assets accumulate.

This is simply awful, and is another example of fascism in the name of egalitarianism (the fear is that a few rich people will move to tax havens to avoid US taxes).  Add up your net worth - equity in your house, retirement savings, etc - and imagine having to pay 35% of that as a big bribe tax to the US government to let you leave the country. 

Posted on June 20, 2008 at 10:43 AM | Permalink | Comments (13)

100% of People With No Mortgage Payment Rate their Mortgage Payment as "Fair"

Apparently, according to one survey, a majority of people think their taxes are "fair"

Fairtax

The 60% is an interesting figure.  It also roughly corresponds to the percentage of people who get more government benefits back than they pay in taxes:

Taxfoundation

So 60% of the people vote themselves goodies from the other 40%, and coincidently, 60% of the people think the arrangement is fair.

Posted on April 15, 2008 at 10:09 PM | Permalink | Comments (8)

Just Because We Elect Them Now...

Richard Conniff in the NYT:

But we need language to remind us that this is our government, and that we thrive because of the schools and transit systems and 10,000 other services that exist only because we have joined together. Instead of denouncing taxes, politicians would do better to appeal to the patriotic corners of our hearts that warm to phrases like “we the people.” “Taxation” is a throwback to the time when kings picked our pockets. “Paying my dues,” a phrase popularized in the jazz music world, is language by which we can stand together as Americans.

I am confused as to what the substantial difference is between 1 king picking our pockets and 535 kings picking our pockets.   Just because I get the annual opportunity to cast a meaningless vote between the Coke and Pepsi party does not change my view of government. 

To my mind, this is the #1 incorrect perception people have about the American Revolution.  So many people, like this author, seem to think it was about voting and democracy.  Bleh.  The Revolution was about the relationship between human beings and government.  Voting was merely one tool among many the founders adopted to try to protect man from government.  Unfortunately, this intellectual battle is being lost. 

JFK was the president that first made it clear that those of us who love freedom have been losing this battle.  In his famous quote "ask not what your country can do for you - ask what you can do for your country,"  JFK defined the heads-statists-win-tails-freedom-loses choice that people like Mr. Conniff continue to try to present us with.   These collectivists define our relation to government as either the recipient of unearned loot or milch cow to the whims of the voters.  Neither part of JFK's challenge represents a relation between man and government a freedom-loving person should accept.

More on why voting is not what makes our country great here.

Posted on April 15, 2008 at 09:55 PM | Permalink | Comments (2)

A Few Tax Day Thoughts

From Jane Galt:

All this useless activity is so that our politicians can look like They Care by giving tiny tax breaks to all of their favorite people--that is to say, the people who vote for them and give them money. All of these tax breaks, almost without exception, do the most good for the people who least need them. Meanwhile, they waste time for the rest of us, distort the economy, and require us to pay extra people to process tax returns. It's lose-lose-lose all around unless you owned a seal-fur farm between 1987 and 1991.

She also outlines her alternative tax plan.

From the Beatles (yes, those guys)   (Beatles, Robin Hood, and of course they perform the song)

From yours truly, the five worst traits about taxes

Posted on April 15, 2008 at 09:56 AM | Permalink | Comments (3)

Carbon Tax vs. Cap and Trade

I don't believe man-made global warming is substantial enough or catastrophic enough in its effects to warrant expensive public action.  But if we did feel the need to do something, John Tierney echoes a theme I have been sounding for a while (emphasis added):

The CBO report concludes that a tax on carbon emissions “would be the most efficient incentive-based option for reducing emissions and could be relatively easy to implement. If it was coordinated among major emitting countries, it would help minimize the cost of achieving a global target for emissions by providing consistent incentives for reducing emissions around the world.” But the major presidential candidates aren’t supporting such a tax, and the few proposals on Capitol Hill to impose a tax are not expected to go anywhere anytime soon.

Instead, the candidates and most legislators prefer to talk about cap-and-trade schemes like the Kyoto protocol. These schemes have the great political advantage of hiding the costs from consumers and voters, but they cost more and accomplish less. The CBO calculates that the net benefits of a tax would be five times higher than for a cap-and-trade with inflexible targets. A more flexible cap-and-trade system wouldn’t be quite as bad a deal economically, but it would create all sorts of political temptations for doling out exemptions and subsidies to well-connected industries and companies.

Posted on February 18, 2008 at 09:58 AM | Permalink | Comments (0)

The Income-Shift Is Reversed

Typically, wealthy individuals and investors will work hard to delay declaration of income and to push taxes off as far into the future as possible.  The present value of taxes paid a year from now are less than paying the taxes today.

But over the last several weeks, I have had casual conversations with entrepreneurs and individuals from the moderately to very wealthy, and almost to a one they have said they are trying to pull income into 2007 and 2008 in anticipation of potentially large increases in capital gains tax rates and the rates at the top of the bracket.

On a different topic, a friend and I depressed ourselves in a bar last night laying out the case that the next decade may in many ways be a repeat of the 1970s.  Already, we see both parties reverting to the economic prescriptions they promoted in the 1970s.  Further, this week may herald the beginning of an inflationary monetary and fiscal policy combined with government enforced structural limits on growth (e.g. Co2 abatement policy, trade protectionism, price controls, high marginal tax rates and capital gains tax rates, lending restrictions, etc.)  We are seriously discussing nationalizing a major industry (health care) for the first time since the 1970's (when nationalizing oil was seriously considered).  Currently we have a Republican President who is less market-oriented than his Democratic predecessor, and at least as clueless on economic issues as were Nixon and Ford.  All that's left to do is elect a new Jimmy Carter in 2008...

Posted on January 23, 2008 at 12:04 PM | Permalink | Comments (10)

Great Moments in Taxation

A few weeks ago, my wife's car was totaled when a guy in a large van fell asleep and slammed into her car when she was sitting at a red light.  Since he admitted culpability, his insurance company quickly came up with a settlement amount for the totaled car based on blue book values and such. 

Here is the interesting part -- since the insurance company is technically buying the wrecked hulk from us, Arizona treats the payoff as a taxable transaction, and charges its full automotive sales tax rate on the settlement.  It's incredible to me that having my car wrecked is considered by the state of Arizona to be a taxable event, and that the tax is owed in this case by the victim.  I am glad my house didn't burn down, the state might have bankrupted me!

This all seems odd to me, since if I had sued the driver to make us whole, rather than accepted the insurance settlement, any amount I won in court would not be taxable.  My guess (and hope) is that they are only taxing me on the scrap value of the hulk, not the entire transaction, but I have to do more checking.

Note before commenting that laws and rules on this are highly variable by state.

Posted on October 26, 2007 at 09:24 AM | Permalink | Comments (7)

We Just Don't Have Enough Taxes

I propose a survey.  We will ask 500 CEO's of large company's and 500 small business owners just one question

1.  Do you agree/disagree with the following statement:  In order to make my business more competitive in international markets, the federal government needs to raise taxes and expand its scope

How many out of the 1000 would answer "Agree?"  Well, at least the number won't be zero, as long as you ask the NY Times:

…the taxes collected last year by federal, state and local governments in the
United States amounted to 28.2 percent of gross domestic product. That rate was one of the lowest among wealthy countries - about five percentage points of GDP lower than Canada’s, and more than eight points lower than New Zealand’s. …the meager tax take leaves the United States ill prepared to compete. From universal health insurance to decent unemployment insurance, other rich nations provide their citizens benefits that the U.S. government simply cannot afford. …revenue will prove too low to face the challenges ahead.

I love the part about unemployment insurance particularly -- other countries are more competitive than we are because they pay their citizens more not to work.  Huh?  Daniel Mitchel responds:

The editorial conveniently forgets to explain, though, how America is less competitive because of supposedly inadequate taxation. Is it that our per capita GDP is lower than our higher-taxed neighbors in Europe? No, America’s per capita GDP is considerably higher. Is it that our disposable income is lower? It turns out that Americans enjoy a huge advantage in this measure. Is our economy not keeping pace? Interesting thought, but America’s been out-performing Europe for a long time. Could higher rates of unemployment be a sign of American weakness? Nice theory, but the data show better job numbers in the United States.

I also would point out the general direction of net immigration, which has always been towards the US from nearly every country in the world rather than the other direction.

The favorite argument du jour for more taxes is that the US has more income inequality than other countries.  Well, that is sort of true.  Our rich are richer than theirs.  But are our poor poorer?  In fact, as I posted here, the data (from a liberal think tank) shows that they are not.   The poor in European countries have a higher percentage of a lower median wage.  When you normalize European income distribution numbers to percentages of the US median wage, you can see our poor do at least as well as those in Europe, while our middle class and rich do better.

Study2

The US poor still trail countries like Switzerland, but that is because of very different immigration realities.  The US numbers for the bottom quartile are weighed down by tens of millions of recent immigrants (both legal and not) whereas those of Switzerland and Norway are not.  If you left out recent immigrants, my guess is that the US poor would be the richest in the world.

Posted on October 25, 2007 at 09:04 AM | Permalink | Comments (4)

A Nation of Slaveholders

With the northern victory in the Civil War, and the subsequent passage of the 13th amendment, slavery was formally ended in this country.  Specifically, the 13th amendment stated:

Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

Unfortunately, over a century later, slavery has returned to the United States.  Today, through the exercise of political power and the redistribution of wealth that should never have been Constitutional, 55% of Americans hold the other 45% in bondage, living off the product of their efforts just as surely as the white plantation owners of the Old South lived off the sweat of their African slaves.  The basis for this new servitude, however,  is not race, or religion, or national origin, but productivity. (via TJIC)

From the Christian Science Monitor:

Slightly over half of all Americans - 52.6 percent - now receive significant income from government programs, according to an analysis by Gary Shilling, an economist in Springfield, N.J. That’s up from 49.4 percent in 2000 and far above the 28.3 percent of Americans in 1950. If the trend continues, the percentage could rise within ten years to pass 55 percent, where it stood in 1980 on the eve of President’s Reagan’s move to scale back the size of government.

Meanwhile, Ari Fleischer writes in today’s WSJ (sub req) that the top 1% of income earners pay 37% of total income taxes, the top 10% of income earners pay 71% of total income taxes, and the top 40% of income earners pay 99% of total income taxes.

The latter analysis is a bit off because it does not include payroll taxes, but if you include these taxes you still have under 50% of Americans paying virtually all the taxes (table at top of this page includes payroll taxes

The second greatest failing of the Constitution as originally drafted (the first being legality of slavery) is the lack of clear protections for property and commerce.  As a result, the only protection we have against full confiscation of everything we own is the whim of the electorate.  Now that a clear majority of voters are on the receiving end of money confiscated from a minority of voters, how good is this last protection? 

We have become a nation of slaveholders, with the majority holding the productive minority in bondage.  Inserting government in the middle of this process as an agent, so the recipients of this slave labor don't have to get their own hands dirty, does not change the nature of the relationship one bit.  It just pretties things up for our conscience.

Update:  Is the word "slavery" over the top?  Maybe, and I guess I could be accused of trivializing the true horrors of African slavery in the 19th century.  So substitute the word "serfdom" for "slavery". 

Posted on April 16, 2007 at 10:41 PM | Permalink | Comments (13)

Unfortunately, We Knew This Was Coming

The fact that this was predictable does not make it any easier to swallow:

The bill set to reach the House floor today (resembling the Senate version) would raise taxes an average of $1,795 on 115 million taxpayers in 2011. Some 26 million small-business owners would pay an average of $3,960 more. The decreased number of Americans subject to income taxes would all pay higher taxes, and 5 million low-income Americans would be returned to the rolls.

It just flabbergasts me that anyone can make the case that the feds don't have enough money, and that there are no spending cuts to be found.

Posted on March 29, 2007 at 10:56 PM | Permalink | Comments (3)

Estate Tax Confusion

It is not surprising that that a debate like the one over estate taxes that attracts so many class warfare fanatics should miss the point on a lot of issues.  However, the estate tax debate has been handled in the media perhaps worse than even other tax debates, which is a pretty low bar to try to crawl under.  The reason I say this is that the most serious "end the estate tax" type proposals out there have two parts, only one of which I have ever seen mentioned in the press:

  1. End the federal tax on estates (this, of course, is the part that gets the press)
  2. End the stepping-up of the cost basis of financial assets at death (this part never gets mentioned)

This 2nd piece of the proposal may seem arcane to some -- let me explain.  Most large estates (ie, the ones that estate tax supporters are concerned about) are dominated by financial assets (e.g. stocks, bonds).  These financial assets, typically held for years, tend to have a cost basis far below their current market value.  An example might be shares of Microsoft held for 10 years that were purchased for only a small fraction of the current price.  The cost basis of a financial asset is generally its purchase price plus commissions and other transaction charges.

Lets take a gentleman who dies and whose estate is made up entirely of $10 million worth of Coca-Cola stock bought years ago for just $5 million.  The estate all goes to his one daughter.  Under estate law, two things would happen.  The estate pays a large tax on the $10 million, and the remainder flows through to his daughter.  Lets say taxes take half, and his daughter now has $5 million of stock with an original price of $2.5 million.  The other thing that happens is the basis of assets is stepped up to current market value.  That means that as far as the IRS is concerned, his daughter owns stock worth $5 million with a basis of $5 million.  If she immediately sold the stock, she would have no capital gains tax.

There are a couple of good arguments against the estate tax.  From an efficiency standpoint, it diverts large pools of capital from private investments into the hands of the Federal Government, where only the most ardent statist would argue that it is better spent.  Also, billions and billions of dollars are spent every year with lawyers, accountants and financial planners to find ways to dampen the impact of the estate tax.  This is all wasted, unproductive effort that would immediately be redirected to more productive uses if the estate tax were eliminated.

From a fairness standpoint, the estate tax acts as a second tax on income that has already been taxed before.  In our example, though the $5 million capital gain is getting taxed for the first time in the estate, the $5 million original costs, which must have come from taxed income at one time, is getting taxed for at least a second time.  The other fairness problem becomes visible if we change the name of the stock from Coca-Cola to "Dad's private company."  For family businesses, ownership is not as easily divisible - you can't sell half or two-thirds that easily in part because there is not much market for minority shares of small family businesses.  What therefore happens in practice is that the daughter must sell the family business to pay the taxes.

The estate tax reform plan outlined above eliminates both these latter problems.  Under these rules, the daughter would inherit the full $10 million of stock, but, unlike today, her basis would remain the same as her dad's -- in this case, $5 million.  She would not pay any tax until she sold any of the assets.  And then she would pay capital gains taxes using the lower basis of her father's.

This results in two beneficial outcomes:  a)  taxes are only charged on the part of estates that have not already faced income taxes and b)  taxes are only paid when the individuals who inherit choose to make an asset sale and convert assets to cash.  The timing of assets sales drive taxes, whereas today, in all too many cases, taxes drive the timing of asset sales.  (By the way, supporters of the estate tax also argue that it is good because the estate tax incentivizes charitable giving.  The argument is that the tax is so confiscatory, and that the government so well-known as a black hole for money, that rich people decide it is better to give it away than to let the government take it all.  This is an odd argument for statists to make, but they do.  Note that in this estate tax proposal, the daughter would inherit a lot of low-basis stocks.  The same charitable giving incentives exist for low-basis stocks, since the IRS will give you credit for the market value as a deductible gift but you don't have to pay the capital gains).

Asymmetrical Information has been on this case for a while:

There is no case for saying, as the New York Times inexplicably does, that "Repeal would shield the estates of the very wealthiest Americans from the tax." It does not. It does, however, defer taxation. Because basis will no longer be 'stepped-up' after death (except for a $1.3 million exemption) they will simply be taxed like all other capital gains - at the time those gains are realized.

Stepped-up basis is one of the four legs of the estate-planning stool along with the life insurance tax exemption, minority discount valuations and the division of income and principal interests (such as the "estate freeze"). It is not entirely clear that beneficiaries of large estates are better off after repeal when the full toolkit of estate planning techniques is taken into account - unless capital gains tax is done away with altogether and the states stop taxing estates. Neither is likely to happen.

Given the large estates I've seen avoid taxes, I am skeptical of analyses that suggest an enormous impact to revenues from this repeal. I don't believe they factor in the new potential revenues from carryover basis outside the traditional estate tax shelter vehicles. Certainly, the capital gains rate is lower than the estate rate, but when estate tax shelter vehicles dwindle away, more assets will ultimately be subject to capital gains taxation. Based on what estate planning professionals tell me, it will be a wash in many cases and more expensive in some significant estates. In other words, with respect to the Estate Tax, we may still be in the fat part of the Laffer curve, where a lower statutory rate may yield higher revenues over time (due to avoidance behavior, not a lack of work incentives).

This post also cites a study that says that increased capital gains taxes on inherited assets could offset estate tax losses to the government.  That seems aggressive, assuming a lot of assets are getting passed in vehicles (trusts?) that avoid or limit estate taxes, but the offset is there never-the-less and is something you will never ever see in a newspaper article about the estate tax.

I haven't paid attention to the current Congressional proposals out there, but the post goes on to argue that Congress, as is its wont, has chosen the worst of both worlds while maximizing rent-seeking opportunities.

postscript: By the way, shame on all of those accountants, lawyers, and others in the estate planning profession.  They all tell their clients that the estate tax is confiscatory, and can go on for hours with a client about various things that are unfair in the system.  But at the same time they run to Congress begging them to keep the whole tottering complex system in place to protect the rent they extract from inefficiencies in the system

Posted on July 14, 2006 at 04:11 PM | Permalink | Comments (9)

Oakland Passes Anti-Individual Responsibility Tax

Oakland is fed up with high school kids that litter, throwing the lunch wrappers from their Big Mac on the ground rather than putting them in the trash.  The city is arguing that these folks' inconsiderate littering is making a mess of the town and costing the city a fortune in clean up.  The city wants to send a clear message to its kids that this is not going to be tolerated and they expect people to take responsibility for this, so the City Council has boldly passed a new law to ... tax McDonalds to clean up after the little darlings.

So City Council Member Jane Brunner is proposing to charge major fast food restaurants a fee of $2,400 to hire crews to pick up garbage around town. She says a study shows fast food restaurants account for 20-percent of Oakland's litter.

Vince Thomas, Kentucky Fried Chicken franchise owner: "I don't have any control over it once it leaves my lot."...

The Restaurant Association reminded the council it could be getting itself into a discrimination lawsuit.

Johnnise Downs, California Restaurant Association: "Because it singles out and penalizes one specific group of businesses, and basically places the entire burden of Oakland's litter problems on those businesses."

You know what this reminds me of?  It's as if parents were frustrated that their kid never cleaned up after himself and always left messes around the house, so they choose to deal with it by hiring a maid to clean up after him.  What about actually, you know, enforcing litter laws.

By the way, here's another question.  We all know how little of the tobacco settlement that was ostensibly to fund health care actually went to health care.  I wonder in this case how much will actually go to incremental trash pickup and how much will just be dumped into general revenue.

Posted on February 23, 2006 at 08:42 AM | Permalink | Comments (4)

Big Bone Lick

Kentucky, the state that made me get an egg license, is in the news again because it is complaining that it is not getting its fair share of the tobacco settlement funds, and so needs to increase cigarette taxes even more. 

Don't feel guilty if you can't actually remember what the settlement was about other than just more tax money.  The settlement was the result of a series of lawsuits from state AG's against cigarette companies arguing that use of their product is costing the states money in the form of higher medical costs (the health care as Trojan horse for total government control argument I have discussed before).  The substantially increased taxes on cigarettes was supposed to both deter use and to raise money for state health care.

Well, check out this statement form the Kentucky governor as to why he wants to raise the cigarette taxes, and notice what justifications for the taxes are NOT there:

The additional revenue from the tobacco settlement, according to [governor] Fletcher, would increase the state’s debt capacity and allow for more spending on more projects, such as an information technology research center and expanding the Big Bone Lick State Park. He also says the added revenue would allow the state “to ease the tax burden on small businesses.”

I do have to admit that "Big Bone Lick" state park seems the perfect monument to government taxation.

This is a great example of the perverse incentives "sin" taxes put on government.  First put in place to reduce some behavior, once government officials become addicted to the spending the tax allows, the government tends to shift posture to supporting, rather than reducing, the "sin" since its continued existence is required to maintain tax revenues.  This is happening all over with the tobacco settlement, as government has suddenly become the tobacco companies' partner in maintaining revenues and market share.  And here I wrote about a similar occurrence.

Postscript:  By the way, not accounted for by the governor in his "fair share" of settlement funds are the large subsidies that flow to Kentucky tobacco growers.  In surely one of the best examples of how most government programs are all about rent-seeking rather than whatever their stated purpose is, the US is vigorously taxing tobacco, ostensibly to reduce its use, while at the same time aggressively subsidizing the production of tobacco.

Posted on February 1, 2006 at 08:54 AM | Permalink | Comments (4)

A Voice For Businesses in California

California is one of the toughest states in the country to do business in.  Bill Leonard, a member of the California BOE*, takes a refreshingly free market approach for a left-coast politician.  From looking at his site, he and I may not see eye-to-eye on immigration, but he has been a lone voice of sanity on tax and regulatory policy in California for several years.  If you are interested, his email newsletter is generally filled with news and commentary on how California tax and regulatory law is changing and how these changes may affect local businesses.  You can sign up for his newsletter here.

*  You know your state is in trouble when the department of taxation and revenue calls itself the "Board of Equalization", though I am told this originally referred to equalization of tax policy across counties rather than having the redistributive overtones it has today.

Posted on August 30, 2005 at 12:33 PM | Permalink | Comments (0)

More on Bureaucratic Hell Mono County

I have written a number of times about bureaucratic hellhole and most bureaucratic county Mono County, California.

Today, they confirmed by mail that my 11 campgrounds, all within 3 miles of each other and managed under a single contract as a single complex with the US Forest Service, now need to be registered separately with 11 tax ID's and 11 separate sales tax reports.  I must fill in the same detailed application 11 times, and each application has 3 pages plus 3 carbons for a total of 66 pages of information.  So, in order to collect exactly the same amount of tax that I have been collecting on exactly the same campgrounds for the last several years, Mono County needs 66 pages of paperwork, and apparently needs these same 66 pages filled out again each year.  Also, instead of filing a single consolidated sales tax report each quarter, I now must file 11 separate reports for a total of 44 a year. 

Can you imagine the insanity if the whole state adopted this approach?  That McDonalds in California or Unocal would have to file thousands of reports a month instead of one?  This is what happens when you let bureaucrats run amok.

Posted on August 8, 2005 at 05:18 PM | Permalink | Comments (2)

Bureaucrats of the Week: Mono County, California

I got a call today from Mono County, California.  They require us to charge our visitors a 12% lodging tax on campground stays in any of the 11 campgrounds we operate in our county, which we report on a single quarterly filing.  Today, the County has suddenly decided that they need a separate sales tax report filed each period for each campground, so instead of 1 we need to file 11.  If every taxing authority tried to pull a Mono County on us, we would have to file at least 250 separate sales tax reports each month.

In case you miss the implication of this, consider if the state of California did this for sales tax.  It would mean, say, that Unocal would have to file a separate sales tax report for every single gas station in the state - ie thousands of them each month  Of course, even California does not have the guts to require something so absurd.  We, like Unocal, register all of our separate locations with California but report all their sales and sales taxes in one unified report. 

So why can't Mono County be satisfied with the same approach?  Well, apparently a couple of their auditors had to spend some extra time trying to figure out which campgrounds belonged with which permits in a recent audit.  In order to save their auditors a few minutes of time in the future, they want to require me and others to spend many extra hours with these additional filings.  This is typical of government bureaucracies, which in doing cost-benefit analysis put enormous value on their own time but value taxpayers time at $0 an hour.  If all the reports I file had to be justified while valuing taxpayer's time at even $50 an hour, I would have a lot less feeding of the government to do.  More on my efforts to feed Vol (gratuitous Star Trek reference) here.

Posted on July 25, 2005 at 11:18 AM | Permalink | Comments (0)

Business Relocations and the Prisoners Dilemna

As I have written before, one of the favorite past-times of local and state politicians is to hand out grants, subsidies, and tax breaks for businesses to relocate to their district.  Billions and billions of dollars are given out every year to everyone from movie producers to sports teams to Wal-marts in order to "bring jobs" to the local community.

Economists have argued for years that these subsidies are a total waste (more on this below) but the Club for Growth links a great article demonstrating that they are not only a waste, they also are downright fraudulent.

Gov. George Pataki's administration gives millions of dollars every year to businesses that promise to hire more people or retain jobs. It's a promise that is often broken.

Almost half of those companies helped by New York taxpayers fell short of the job targets that are part of their deals with the state, records show.

In fact, a quarter of the businesses took taxpayers' money and loans, then cut jobs.

The article is quite detailed, but here is one example:

Take the case of Ingram Micro, a global computer-parts wholesaler with a distribution center near Buffalo.

In 1999, it accepted $675,000 in taxpayers' money and promised to add 542 workers. Instead, it cut its workforce by nearly 400.

The state demanded a penalty of $176,985, but an Ingram spokesman said it has not paid and is negotiating with the state.

Last month, Ingram Micro announced it will lay off another 120 Buffalo workers and send the work overseas.

OOPS!  One is driven to ask the obvious question - why are these subsidy programs so popular?  I can think of at least three explanations.

The first explanation is political.  These subsidy programs tend to satisfy important bases from both political parties, thereby ensuring their bipartisan support.  Democrats like the idea of spending government money to create jobs, while Republicans like tax breaks and supporting business.  This explanation is unsatisfying.

The second explanation probably hits closer to the mark, and it is the cynical-political explanation that politicians like buying votes with other people's money.  When they campaign for re-election, politicians like to have a couple of "scalps" they can wave around to show the voters that they are doing something (a consistent history of sober fiscal responsibility seems to be unappealing, I guess).  Being able to say "I brought Microsoft to the town of West Nowheresville" or better yet "I brought 1000 jobs to this community" are political favorites of both parties (Here is what New Yorkers are really paying for - the ability of George Pataki to post on his web site a press release saying "Bedding Company to Create 240 New Jobs in New Baltimore").   These are priceless campaign slogans that didn't cost the politician a dime, since they were funded by taxpayers.

The third explanation comes from economics and is the most interesting.  If you shed any notion of morality or ethics (e.g. that one has no right to give one person's money to another just to make their re-election more likely) then politicians who are approached by a company looking for a handout for business relocation faces what is called the prisoner's dilemma.  Many of you may know what that is, but for those who don't, here is a quick explanation, via the Stanford Encyclopedia of Philosophy:

Tanya and Cinque have been arrested for robbing the Hibernia Savings Bank and placed in separate isolation cells. Both care much more about their personal freedom than about the welfare of their accomplice. A clever prosecutor makes the following offer to each. "You may choose to confess or remain silent. If you confess and your accomplice remains silent I will drop all charges against you and use your testimony to ensure that your accomplice does serious time. Likewise, if your accomplice confesses while you remain silent, they will go free while you do the time. If you both confess I get two convictions, but I'll see to it that you both get early parole.  If you both remain silent, I'll have to settle for token sentences on firearms possession charges. If you wish to confess, you must leave a note with the jailer before my return tomorrow morning."

The "dilemma" faced by the prisoners here is that, whatever the other does, each is better off confessing than remaining silent. But the outcome obtained when both confess is worse for each than the outcome they would have obtained had both remained silent.

I hope you can see the parallel to subsidizing business relocations (replace prisoner with "governor" and confess with "subsidize").  In a libertarian world where politicians all just say no to subsidizing businesses, then businesses would end up reasonably evenly distributed across the country (due to labor markets, distribution requirements, etc.) and taxpayers would not be paying any subsidies.  However, because politicians fear that their community will lose if they don't play the subsidy game like everyone else (the equivalent of staying silent while your partner is ratting you out in prison) what we end up with is still having businesses reasonably evenly distributed across the country, but with massive subsidies in place.

To see this clearer, lets take the example of Major League Baseball (MLB).  We all know that cities and states have been massively subsidizing new baseball stadiums for billionaire team owners.  Lets for a minute say this never happened - that somehow, the mayors of the 50 largest cities got together in 1960 and made a no-stadium-subsidy pledge.  First, would MLB still exist?  Sure!  Teams like the Giants have proven that baseball can work financially in a private park, and baseball thrived for years with private parks.  OK, would baseball be in the same cities?  Well, without subsidies, baseball would be in the largest cities, like New York and LA and Chicago, which is exactly where they are now.  The odd city here or there might be different, e.g. Tampa Bay might never have gotten a team, but that would in retrospect have been a good thing.

The net effect in baseball is the same as it is in every other industry:  Relocation subsidies, when everyone is playing the game, do nothing to substantially affect the location of jobs and businesses, but rather just transfer taxpayer money to business owners and workers.

This subsidy game reminds me of the line at the end of the movie Wargames

A strange game.  The only winning move is not to play.

Postscript:  As a libertarian, I have gone through phases on targeted tax breaks. There have been times in my life when I have supported tax breaks of any kind to any person for any reason, by the logic that any reduction in taxation is a good thing.  I know there are many libertarians that take this position.  Over time, I have changed my mind.  First, targeted tax breaks seldom in practice reduce the overall tax burden - they tend to be made up somewhere else.  Second, these tax breaks tend to be gross examples of the kind of government coercive technocratic meddling in commerce and individual decision-making that I despise. Almost always, they are trying to get individuals to do something they would not otherwise do, so in practice they tend to be distorting and carry all kinds of unintended consequences (as well as being philosophically repugnant).

Update 9/29/05:  We are suddenly getting a bunch of visitors from Econ.Aplia.com, which I presume is related to a university assignment or blog post somewhere.  Can someone email me in at the email in the right bar if folks are coming here from a particular site or university.  Just curious.

Update 9/30/05:  Thanks to a couple of emailers, the cat (err, bulldog?) is out of the bag and I know that Yalies are in the house.  Welcome.  I don't know if they teach free-markets any more in college, but your welcome to look around and take a walk on the libertarian dark side.  Good luck with economics, even if you did pick the wrong school.  --Coyote, Princeton '84, Harvard MBA '89

Update Again:  By the way, I discuss here the odd issue of why I and so many people misspell "dilemma" as "dilemna", as I did in this post.

Posted on May 25, 2005 at 08:38 AM | Permalink | Comments (2)

The New Huey Long

Rep. Don Young (R-AK) is vying to become the new Huey Long.  As head of the House transportation and infrastructure committee, he is in prime position to bring home massive, unnecessary infrastructure projects to his district.  Huey Long, former emperor governor of Louisiana, is justly famous for acquiring funds to build some spectacularly unnecessary bridges over the Mississippi above and below New Orleans.

Representative Young seems to be headed for the same achievement.

If Rep. Young succeeds, tiny Ketchikan, Alaska, a town with less than 8,000 residents (about 13,000 if the entire county is included) will receive hundreds of millions of federal dollars to build a bridge to Gravina Island (population: 50). This bridge will be nearly as long as the Golden Gate Bridge and taller than the Brooklyn Bridge.

The Gravina Bridge would replace a 7-minute ferry ride from Ketchikan to Ketchikan  Airport on Gravina Island. Project proponents tell the public that the bridge is a transportation necessity, though the ferry system adequately handles passenger traffic between the islands, including traffic to and from the airport.1  Some herald the project as the savior of Ketchikan because it will open up land on Pennock Island to residential development, despite the fact that Ketchikan's population has been shrinking.

Taxpayers for Common Sense have a great article here on how the whole earmark thing works.  Here is just a taste:

By the time this is over, Congress will have packed this with a record level of transportation pork. The political formula was simple: $14 million was the minimum for every district. Anybody who sits on the Transportation and Infrastructure Committee can expect $40-60 million, and House and committee leadership will get $90 million or more.

If you look at it on a per capita basis,  the highest per capita earmark spending is ... in the home state of the committee chairman, Young (gee, what a weird coincidence):

In total dollars, California is the biggest winner so far with nearly $1.4 billion in earmarks. Delaware receives the smallest share, with only $12 million. On a per capita basis, however, Alaska wins going away. Based on the $722 million in earmarks for Alaska in the bill's current version, $1,151 would be shipped north for every man, woman, and child in the state. Rep. Young's isn't done yet, however, and before this bill is law, Alaska's share of earmarks will likely increase even more. Alaska did nearly as well last year; during the failed attempt to pass a transportation bill, Rep. Young secured nearly $600 million for Alaska, including $375 million for two bridge projects, Gravina Access project in Ketchikan and the Knik Arm Crossing in Anchorage.

Update: Via the Club for Growth, comes this related story of the $1.5 million bus stop in Anchorage.

Tom Wilson is faced with a problem many city administrators would envy: How to spend $1.5 million on a bus stop.

Wilson, Anchorage's director of public transportation, has all that money for a new and improved bus stop outside the Anchorage Museum of History and Art thanks to Republican Sen. Ted Stevens (news, bio, voting record) — fondly referred to by Alaskans as "Uncle Ted" for his prodigious ability to secure federal dollars for his home state....

The bus stop there now is a simple steel-and-glass, three-sided enclosure. Wilson wants better lighting and seating. He also likes the idea of heated sidewalks that would remain free of snow and ice. And he thinks electronic signs would be nice....

"We have a senator that gave us that money and I certainly won't want to appear ungrateful," he said. At the same time, he does not want the public to think the city is wasting the money. So "if it only takes us $500,000 to do it, that's what we will spend."

That is still five to 50 times the typical cost of bus stop improvements in Anchorage.

Posted on May 24, 2005 at 04:56 PM | Permalink | Comments (4)

Perhaps the Best Reason for Private Accounts

Frequent readers will know that I have little patience with the argument against private Social Security accounts that goes something like "Americans are too dumb to be trusted with their own retirement funds".  Today, however, I am going to put that aside for perhaps a better question:

Can the government be trusted with our retirement funds?

This is the argument made by Brad DeLong and quoted in Marginal Revolution:

We need to raise our national savings rate. But if we just raise Social Security taxes, Congress will treat these taxes as general revenue and spend them. Only by funneling Social Security contributions into some vehicle that Congressional representatives cannot interpret as a resource available to fund current spending can we raise the national savings rate. And private accounts are the best vehicle we can find to (a) accumulate contributions without (b) allowing Congressional representatives to seize them as resources available to fund current federal spending.

Congress has taken all the savings surpluses built up by Social Security over the past decades and it has spent them.  Republicans have spent the money.  Democrats have spent the money.  It is gone, spent on cruise missiles and welfare moms and ethanol subsidies and PBS broadcasts and snail darter studies.  No matter what verbal acrobatics people try to engage in to argue that there is a real "trust fund", the fact of the matter is that all that is in the Social Security till are IOU's that can only be redeemed by raising taxes. 

The situation with Social Security is entirely equivalent to having invested your money in a mutual fund and only later finding the directors of the fund spent your money on themeselves rather than investing it in redeemable securities.  The only differences are that:

  • The proprietors of that bogus mutual fund may go to jail, but Congress won't
  • Congress can raise taxes to get the money to bail themselves out of their malfeasance

Think of it this way: 

  • There were more real assets of value remaining in Enron in its bankruptcy to divide up among investors and creditors than remain in the Social Security "trust fund" to divide up among program contributors.
  • There were more real assets of value remaining in the Teamsters retirement fund after years of being raped by organized crime than remain in the Social Security "trust fund"

Stop handing over our savings to such unsavory racketeers (ie. Congress).  We certainly can't do a worse job for ourselves.

Posted on May 6, 2005 at 09:54 AM | Permalink | Comments (4)

Update: More on Taxes and Class Warfare

Earlier this week I posted my thoughts on taxation, which included thoughts on taxation and class warfare and linked this recent WSJ editorial on tax shares paid by the rich.

Today, Kevin Drum rebuts the WSJ editorial with a post of his own.  Though I find Mr. Drum's consistent socialism and the-rich-will-be-first-against-the-wall rhetoric tedious, he is a smart guy and does have a point.  There is, as usual, a mixed message in the data.  However, this also means, as I will point out in a second, that Drum is guilty of picking and choosing his data points just as much as does the WSJ.

Drum points out, rightly, that while the share of taxes paid by the "super rich" (his term for the top .5% of income earners) has increased, their share of income has increased faster, such that their rates have gone down (god forbid that anyone violate the left's rule of the tax ratchet that says that tax rates may always go up but can never ever come down).  Using the same study as the WSJ, he rebuts this table of share of tax burden...

Share of Taxes (Income & Social Security) Paid By Income Classes

Category of Earners

1979

1999

1999 (at 2003 rates)

Top .1%

5.06%

11.05%

9.52%

Top 5%

14.69%

16.84%

17.75%

Top 20%

58.28%

68.17%

67.47%

Bottom 20%

1.22%

0.63%

0.65%

...with this chart , including Drum's subtle annotations in red:

His point is that the Super Rich actually pay lower rates now and the middle class pays higher rates, or as he puts it:

So shed no tears for the super rich in America. Their incomes have tripled in the past couple of decades and at the same time their tax rates have decreased by 9 percentage points. That's a pretty sweet deal in anybody's book.

Here are some thoughts on Drum's rebuttal:

Drum cherry-picked data too:  I will get back to the folks in the top 1 percentile in a minute.  Leaving them aside for a minute, note that Drum's storyline breaks down for everyone else.  If you compare the merely rich in the 1-20th percentiles, they got a smaller reduction in the Bush tax cuts than anyone in the middle and lower quintiles.  For example (comparing the 1999 before tax cut and 1999 after tax cut lines) the 1-5% richest got a rate reduction of 0.21%, while Kevin's favored group at 40-60% got a 1.45% rate reduction.

Don't blame this administration for previous tax increases:
  Drum is correct in saying that the tax rate has risen for the middle class over 20 years, but incredibly disingenuous not to explain why.   Note that the 1 point rise (which presumably Drum wants to hang on the current administration) actually consists of a 2.5 point rise from past tax increases, AMT creep, and payroll tax changes (passed by Democratic Congresses and generally supported by Drum) offset by a 1.5 point cut courtesy of the current administration.  Drum is in fact using data that clearly disproves his ongoing "tax cuts for the rich" mantra.  By the way, it is also interesting to see a good "progressive" ignoring progress on the lower two quintiles to decry higher taxes on the upper middle class -- seems like an interesting shift in focus.

Payroll taxes skew the picture:
  Including payroll taxes (social security and Medicare) in these numbers causes funny things to happen.  Why?  Because social security tax is straight-out regressive since it is flat up to about $90,000 in income and then zero after that.  This means that the total tax rate shown for the lower quintiles will include nearly 8% for payroll taxes (if this looks funny to you because it seems to imply that the lowest quintile must be paying negative income taxes, you are right, they are paying negative income taxes via the EITC).  However, as incomes rise above $90,000, taxpayers get an effective total rate reduction.  For an income of $180,000, a taxpayer only is effectively paying 3.1% to Social Security.  At $1 million, they are only paying 0.56%.  So, even if income tax rates were perfectly flat with no deductions for anything, those in the 1% category of richest people would have a total rate including payroll taxes over 5.5% points lower than the middle class.  If you recast the numbers above leaving out payroll taxes, you would not see the decrease in rates into the 1% group, the numbers would continue to increase, as can be seen here (from government data):

Effective Income Tax Rate (excludes payroll taxes) by income class

Category of Earners

2005 Fed Income Tax rate (effective)

Top 1%

21.4%

Top 5%

19.2%

Top 20%

15.4%

2nd quintile

7.5%

3rd quintile 4.1%
4th quintile 0.6%
Bottom 20% -5.6%

So, for income tax rates, there is still progressivity all the way to the top.  If you want to argue Social Security taxes, fine, but don't use Social Security tax effects to make a point about income taxes

By the way, in terms of the regresivity of Social Security, the defenders of that program need to stick with a story - is it a transfer payment or is it a government run insurance program?  If it is a government run insurance program (as defenders want to argue, since that seem more palatable to the public) then the $90,000 income cutoff makes sense:  Since the program does not pay benefits based on any incomes higher than this, "premiums" shouldn't be based on higher incomes.  Update: Kevin Drum says in this post that Social Security is

a modestly progressive social insurance program that's paid for by everyone and that benefits everyone. If it ever stops being that, if it ever stops being universal, it will eventually cease to exist.

OK, but stop lumping the "premiums" of this program in with income taxes to try to prove a point about the income tax system.

All that being said, there may be something funny going on in the top 1%:  As pointed out above, a portion of the apparent rate reduction for the top taxpayers is in fact due to the odd math surrounding Social Security taxes.  Any income tax cut, even if it is progressive, can make total taxes more regressive by shifting the mix to the very regressive social security tax. All that being said, the taxes of the very very rich are odd, because their income streams are so very different than those of you and I.   In particular, that weird mess of targeted tax reductions that I have decried on any number of occasions come much more into play in the very rich's tax returns, with results that are almost impossible to understand or forecast.  If Drum wants to use this data to argue for flat taxes and an elimination of deductions, I am all ears.

Posted on April 27, 2005 at 10:40 AM | Permalink | Comments (3)

Five Worst Traits About Taxes

Generally, in any discussion of taxes, I focus on the foundations of property rights, to argue that taxation is no different than stealing.    Most of us agree that grabbing someone else's money at gunpoint is immoral.  I do not hold to a theory of government that says that this immoral action is suddenly moral if 51% of my neighbors sanction it.

Anyway, I am going to leave behind the moral basis (or lack thereof) for taxes and focus instead on five practical problems that a well-crafted tax system should be able to avoid.

1.  Complexity and Preparation Time

I probably don't need to go into great depth on this one to convince you that taxes and tax returns are ridiculously complex.  We all know how complicated even the individual 1040 has become, so much so that using tax preparation software is nearly de riguer for most middle class taxpayers.  Last year, our federal and state income tax returns for the company were over 400 pages long.

For a small business, the tax preparation burden goes much further.  For example, the burden of payroll tax preparation, not to mention staying on top of compliance issues, is so high that no sane business person does payroll in house any more.  Quarterly state and federal unemployment and withholding tax returns must be filed, with salary detail to the last penny for every single employee.   As a result, everyone uses a service like ADP, and though this solves the workload problem, it still costs money - about $12,000 a year in our case.  That's not the tax bill, just the cost to keep up with the government paperwork. 

But with payroll taken care of, businesses still must file sales tax returns, excise tax returns, detailed property tax returns, census data requests, labor and commerce department surveys, and of course income tax returns.  Each of these typically have to be done at the state level and in many cases separately for every single county and city where we do business.  Each in and of itself is horribly time consuming - see this example for property taxes, this one for sales taxes, and this one for government surveys

In Kentucky, for example, we have to file quarterly state withholding tax returns, quarterly payroll withholding returns in each county we operate in, a quarterly state unemployment return, an annual property tax return in each county, and annual income tax return at the state level, an annual income tax return in each county, a monthly sales tax return, a monthly survey for the US Department of Labor about Kentucky headcount levels, an annual foreign corporation renewal, a new hire report whenever we hire a new employee, and a monthly report to the workers comp state fund


2.  Disguising the Tax Load

Quick, how much total do you pay in taxes?  Perhaps the greatest innovation of statists in the 20th century was the tax load shell game - the clever balkanization of the tax load that makes it nearly impossible for the average person to truly know how much they pay in taxes to the government.

Start with income taxes.  OK, April 15 has just passed, but even so, how many people know how much they paid in income taxes last year?  For many people, this is the single largest expense they have, but the total amount is disguised by the fact that most income taxes are taken out as direct payroll deduction.  Statists and leftists everywhere in the US should get up in the morning and give thanks for direct payroll deduction -- without it, if every American had to write a single check once a year for the sum total of their annual income taxes, there would have long since been a revolution.

OK, so you don't know how much you paid in federal, state and local income taxes.  But in addition to that, how much did you pay in social security and medicare (typically about 8% of salary)?  Property taxes (typically 1-2% of your home value)?  How about sales taxes (typically 6-9% of your purchases)?  What about vehicle licensing fees and special taxes on hotels and airfare and rent cars?  If you add all these up, the average American pays about 30% of his/her salary in taxes.  The Tax Foundation has a great chart summarizing this shell game, with relative burdens expressed as days of work each year required to pay the tax.  Note that on average, your federal income tax is only 1/3 of the total of what you are paying:

 

Taxchart


 
So those are the direct ones, but how much are you also paying in higher prices due to government import duties?  What about the 8% FICA and medicare that employers pay on your behalf - how much higher might your salary be if they did not have to pay these?  What about corporate taxes - you may not pay them directly, but they certainly get passed on to you in the form of higher prices and lower dividends.  What else? - try this list on for size.

3.  Taxes on Wealth and Savings

Most taxes are on income or sales, and so they are at least marginally calibrated with an individual's cash flows.  The exceptions to this are property taxes and inheritance taxes.  These two taxes both go after an individual's savings -- property taxes mainly on the home, the primary savings vehicle for most Americans, and inheritance taxes on everything you've saved when you die.

Lets take property taxes first.  Many people complain that modern life has become a treadmill, forcing families to work harder and harder to keep up their lifestyle.  To a large extent, I think this is a myth - people may be working harder but their effective standard of living is way, way higher than say 30 years ago.  But one of the things that definitely creates a treadmill are property taxes. 

Many people have worked hard to pay off their mortgage, thinking they could settle down into their retirement in a paid off house.  Unfortunately, they may find that their home has increased in value so much that their property taxes at retirement are actually much higher than their original payment on the house.  Take the case of a couple who bought their house in an urban area for $25,000 and find its now worth $375,000 forty years later (this is an average urban price increase over the last 40 years).  For simplicity, we will assume the effective tax rate has stayed at $1.50 per $100 for these forty years (though its more likely to have gone up).  In 1965, they paid $375 a year in taxes.  Today, they have to pay $5,625.  In other words, their property taxes today are over 22.5% a year of the original price they paid for the house.  Now, this is all fine if the couple strove to work up the corporate ladder and get promotions and grow their income proportionately.  But what if they didn't want to?  What if they just wanted to buy that house, pay it off, and live modestly selling driftwood sculptures at farmers markets, or whatever.  The answer is, because of property taxes, they can't.  Likely they will have to sell this house, give up the urban life they wanted, and either move to an urban dump they can afford the property taxes on, or they move out to the country.  Here is an example, via Reason, of this process of property taxes forcing out urban residents living small in favor of yuppies living the dream.  It is ironic that a tax initially invented for populist reasons to cut back on wealth accumulation hurts the lower income brackets and those trying to step off of the capitalist treadmill the most.  In fact, it was the poor in the Great Depression who typically lobbied for laws to put moratoriums on property tax collections.

The estate tax has many of the same origins and issues.  The biggest downside of the estate tax is that it tends to force premature sales of productive business assets to pay the tax.  Rather than leaving small businesses in the family, who have the experience and passion to make them work, they typically must be sold to third parties outside the family to pay the estate taxes.  Again, the law of unintended consequences crops up - estate taxes and the sales they force have done more to contribute to merger and acquisition activity, which in turn drives consolidation of economic assets into fewer and fewer corporations.  The tax meant to stifle wealth accumulation among individuals has in fact spurred wealth accumulation among corporations.  While used for many purposes today, LBO's, that bogeyman of the left, were invented to manage this estate tax forced sale problem.

Asymmetrical Information has a thoughtful series of posts going on estate taxes.

4.  Picking Favorites for Special Treatment

One of the defining characteristics of statist politicians of both the left and the right is that they think they are smarter and more moral than the average American, and certainly than the average American businessman.  Statists and technocrats distrust markets and assume that they can succeed in managing the economy in general and individual decision-making in particular where markets have "failed" to reach whatever end-state politicians would prefer.

Therefore politicians insist on using tax policy to reinforce (or discourage) certain behaviors or to influence certain outcomes or to frankly enrich some favored group.  Examples are all around us, but include:


5.  Class Warfare and Punishing Success

Many of the taxes we pay - income, property, estate - have strong class warfare origins.  Heck, the income tax and the Constitutional Amendment that made it possible because Americans were told that only the richest 1% or so would ever have to pay it.  Today, tax debate is littered with class warfare arguments. 

Today, the richest 1% of Americans pay about a third of the total individual taxes, and the richest 10% pay two-thirds.  The richest 50% of Americans pay 100% of the taxes (in the other half, some pay a bit, and some get a bit back in EITC, but the net is zero).  So, a small percentage of Americans pay for the services and government cash subsidies enjoyed by the majority.  So how do we treat these people?  As heroes, or benefactors, or as the most productive?  No we treat them as evil parasites who are not doing their fair share.

By the way, These shares paid by the rich actually went up after the Bush tax cuts (yes, that's not a typo).  The very fact that this statement might seem unbelievable points to how much ridiculous class warfare demagoguery permeated the last election.  By the way, these numbers are for income taxes.   The numbers for total taxes, including the regressive payroll taxes, yields slightly different numbers but the same results, as outlined in TaxProfBlog today.

The fact is that most "progressive" taxes are in fact punishing the successful and most productive.  The Left loves to wave Paris Hilton around as an example of the useless and unproductive rich who presumably should be taxed into poverty.  They want to obscure the fact that 99% of the rich got to be rich honestly, through hard work, and via the uncoerced interaction with others.  Because saying that your government rewards success with its highest tax rates and confiscates the vast majority of its operating funds from the people who would employ this money the most productively, um, doesn't sound very good.

UPDATE:  I have more here, including a rebuttal of Kevin Drum.

Posted on April 26, 2005 at 12:24 AM | Permalink | Comments (5)

The ACLU is a Little Late to the Party

Reason reports that the ACLU is jumping into the fray to try to prevent Las Vegas from levying a special sales tax on strippers (emphasis added)

A Nevada bill that would impose a 10 percent tax on strip club dancing will be struck down in court if lawmakers pass it, an American Civil Liberties Union lawyer said on Wednesday.

"You can not have a special tax aimed at First Amendment activity based on content," said Allen Lichtenstein, general counsel of the ACLU of Nevada.

"Adult entertainment, which is protected by the First Amendment, is being targeted to bear the burden of taxes where other businesses are not," Lichtenstein said, referring to the bill. "To single out a particular business based on content and tax it with a special tax is unconstitutional."

Don't get me wrong, I am certainly happy that the ACLU has suddenly discovered the rights of taxpayers, but they seem a bit late to the party.  I mean, states that charge the same tax to every business, especially the same sales tax rate, are the exception.  States all charge special hotel rates, rent car taxes, airport fees, long distance surcharges, etc etc.  For example, here are just a few of the special unique industry-specific taxes on the California BOE site (by the way, you know you live in a socialist state when your tax department is called the "Board of Equalization"):

This is far from a complete list, but you get the idea. This article from the Tax Policy Center explains that narrow industry specific excise taxes have a very long history in this country.  And this completely leaves off the issues of subsidies that are targeted at particular industries, such as the billions in direct subsidies received by farmers, not to mention the additional billions in price supports they get as well.  (Reason, by the way, has done some entertaining research on the millions of dollars of farm subsidies received by the family of Farm-aid founder John Cougar Mellancamp).  I am eager to see the ACLU begin tackling these other "special taxes" on "particular businesses".

I am not sure what motivated the ACLU to finally join the taxpayer cause, other than perhaps a personal financial interest their leadership team might have in this particular tax, but I for one am happy to welcome them to the cause.

Update: I am still having fun trying to imagine how the ACLU, the supposed protector of individual rights that has never had a problem up 'till now with our class warfare tax rates that are zero on some Americans and 40+% on others, suddenly had an epiphany about unequal levels of taxation when it comes to taxing strippers.  I have this visual picture in my head of the local head of the ACLU slipping a five into an entertainers g-string but getting mad when he couldn't get the two extra quarters in there to pay the tax.

Update #2: By the way, for all the flippancy in my post about the ACLU, they are absolutely right in this case, if way too narrowly focused.  I criticize the ACLU often because of the 21 policy areas it considers critical to individual rights, none have anything to do with property rights or economic freedom.  However, the ACLU is a strong and consistent defender of free political speech during a time when speech is under attack from all sides of the political spectrum.  The ACLU realized early on something the left still won't acknowledge, that it is impossible to separate regulation on spending for speech from restrictions on speech itself

Unfortunately, what the ACLU refuses to recognize is that all commerce, not just purchasing political ads or buying couch dances, is a form of communication and free expression.  The economy is nothing more than individuals, millions of times a day, communicating and reaching agreements to trade for mutual benefit.   Why is it any less of a restriction of free speech when the government places restrictions on this communication, say by restricting the range of wages I can offer an employee?  Or, more obviously, how can the government place regulations on what I can say about my company in an advertisement, but not on what I say about a political candidate?

The ACLU in this case seeks to evade sanctioning free speech in that dirty commercial world by apparently arguing that stripping is not commerce but artistic expression.  But by that logic, the government shouldn't be allowed to tax building and construction, for surely buildings are a strong and lasting form of art and expression.  Or how about cars - I certainly consider a Ferrari a much higher form of expression than a couch dance.  How can the government tax cars?  Or what about T-shirts with a political message -- can governments charge sales taxes on those?  What about the lawn service I pay to have a beautiful green lawn, which is the ultimate form of suburban expression?

At the end of the day, it is impossible to separate money and commerce and property from speech and expression.  Commerce is the most ubiquitous and important form of free expression we have in this country.  So far, the ACLU seems to acknowledge this fact only for topless dancers and politicians.  I wish they would extend their efforts to protect both free speech and free commerce to the rest of us.

Posted on April 16, 2005 at 01:18 AM | Permalink | Comments (2)

Movie-Making Becoming a Subsidy Magnet

Politicians seem to love the movie business, or so I infer from the rash of proposals of late to subsidize the movie business. 

New York City seems to have been first out of the blocks, with this program to provide tax rebates and free advertising for shooting movies in NYC.  The article tells us this is the only industry being so targeted at this point by NY.  Why?  Why are movie jobs and movie makers somehow better than every other kind?  Maybe its because they think the movies provide good advertising for NYC, like the great light they cast on the city in movies like this and this.

Anyway, the trend got my attention when our own Arizona governor lamented that Arizona is no longer home to as many movie shoots as it once was decades ago.  Far be it for me to suggest that this is probably more of an issue of westerns going in and out of style (since about a majority of movies shot in Arizona were westerns).  Nevertheless, Napolitano is pushing ahead with her plan to improve the net income line of Hollywood studios by subsidizing production in Arizona.

Finally, via Reason, we see that Hollywood is worried that it is being left out of the subsidy competition, by actually paying companies to film in LA:

Mayor James K. Hahn on Thursday announced a plan he hopes will keep Hollywood in Hollywood — by paying film production companies to shoot in Los Angeles.

Hahn's proposal, which was inspired by a program that New York City adopted in December, would use as much as $15 million in public funds to reimburse companies that make a movie in Los Angeles, paying them 5% of their production costs or up to $625,000.

OK, so one would think that all these locations have struggling media and production industries.  But in fact, just the opposite is true.  In New York:

But Wylde thinks film is just the tip of the iceberg. The city's entire media sector is growing explosively, she notes. From Time Warner to Hearst to Bloomberg LLP, media firms account for $13 billion in city wages, 50% more than tourism.

And, in LA:

Last year, however, film, video and television production in Los Angeles actually reached record highs. Entertainment Industry Development Corp. issued permits for 52,707 location production days — one day representing a single day of work on a single project — a 19% increase over 2003.

Doesn't sound like they are in much trouble.  Their film and media businesses are already growing explosively to record highs.  So why do they need a subsidy?  Doesn't exactly sound like the New England textile business.

Look, at the end of the day, this is about politicians handing taxpayer money to powerful media people, people who have the ability to disproportionately influence public opinions and things like ... elections!  This is a barely disguised campaign expenditure, except for the fact that taxpayers pay the bill.

I wrote more about the idiocy of subsidizing corporate relocations to one's state or city here.

Update:  Match Welch has more

Posted on April 14, 2005 at 09:37 AM | Permalink | Comments (0)

State Payroll and Tax Links

Here is a great link page to tax and employment related agencies in the 50 states.  And this is a good link page pointing to the text of labor law from all 50 states.  This is particularly useful if you do business in multiple states or you are considering growth into a  new state.  Thanks to George's Employment Blawg for the link.

Posted on April 14, 2005 at 09:05 AM | Permalink | Comments (0)

April 17 is Tax Freedom Day

Per the Tax Foundation:

The report compares the number of days Americans work to pay taxes to the number of days they work to support themselves.       

“Despite all the tax cuts that the federal government has passed recently, Americans will still spend more on taxes than they spend on food, clothing and medical care combined,” said Hodge.

In 2005, Americans will work 70 days to afford their federal taxes and 37 more days to afford state and local taxes. Other categories of spending measured in the report include housing and household operation (65 days), health and medical care (52 days), food (31 days), transportation (31 days), recreation (22 days), clothing and accessories (13 days), saving (2 days) and all other (42 days).

Tax Freedom day has moved around over the last few years:

Tfd1800px_1

Enjoy!


Posted on April 11, 2005 at 10:51 PM | Permalink | Comments (1)

"Sin" Taxes Put Perverse Incentives on Government

The government has found over time that it is able to sell higher taxes to the voters on certain items if they can portray those items as representing some socially unwanted behavior. These are often called "sin" taxes. The justification for the tax in its beginning is as much about behavior control as revenue generation.  Taxes on cigarettes, alcoholic beverages and even gasoline and plastic grocery bags have all been justified in part by the logic that higher taxes will reduce consumption.

However, a funny thing happens on the way to the treasury.  Over time, government becomes dependent on the revenue from these taxes.  The government begins to suffer when the taxes have their original effect -- ie reducing consumption -- because then tax revenues drop.  The government ultimately finds itself in the odd position of resisting consumption drops or restructuring the tax so it no longer incentivizes reduced consumption so that it can protect its tax revenue collections.

Cigarettes are a great example.  In this article, via overlawyered, from Forbes (simple registration required):

Big tobacco was supposed to come under harsh punishment for decades of deception when it acceded to a tort settlement seven years ago. Philip Morris, R.J.Reynolds, Lorillard and Brown & Williamson agreed to pay 46 states $206 billion over 25 years. This was their punishment for burying evidence of cigarettes' health risks.

But the much-maligned tobacco giants have subtly and shrewdly turned their penance into a windfall. Using that tort settlement, the big brands have hampered tiny cut-rate rivals and raised prices with near impunity. Since the case was settled, the big four have nearly doubled wholesale cigarette prices from a national average of $1.25 a pack (not counting excise taxes) in 1998 to $2.10 now. And they have a potent partner in this scheme: state governments, which have become addicted to tort-settlement payments, now running at $6 billion a year. A key feature of the Big Tobacco-and-state-government cartel: rules that levy tort-settlement costs on upstart cigarette companies, companies that were not even in existence when the tort was being committed.

So, a tax that was originally meant to punish supposed past wrong doing by cigarette makers is causing problems because it was... actually doing what it was supposed to by hurting those companies.  Lots of good stuff, I encourage you to read it all - basically state governments have gone from opponents of the cigarette companies to their partners.  Antarctic Liberation Front opponent Eliot Spitzer comes in for particular attention.

A second example I discussed comes from San Francisco, where a tax aimed at discouraging use of plastic garbage bags was modified so that it collected more money, but no longer discouraged use of plastic.

A third example comes to us via Vodka Pundit, which points out that California now is considering supplementing their gas tax with a per-vehicle-mile tax.  The gas tax was always effectively a per-vehicle-mile tax, since the amount of gas you used was proportional to the number of miles you drove.  And, of course, the gas tax is far easier to manage than a per-vehicle-mile tax (yes, coming soon, its the odometer auditors!)

So why a need for the new tax?  Well, it turns out that Californians are buying a lot of very fuel-efficient cars, including new hybrids, which reduces gas consumption and thus taxes.  Of course, this is EXACTLY what most people hope the gas tax is doing - helping to conserve gasoline and reduce emissions and incentivizing people to purchase efficient vehicles.  Now California is considering substituting a new tax that collects more money but provides no conservation incentives.

UPDATE:  Welcome Carnival of the Vanities!  If you're looking to kill more time at work today, check out my rant on the recent New London eminent domain case in front of the Supreme Court titled "all your base are belong to us".

Posted on February 17, 2005 at 11:30 AM | Permalink | Comments (2)

Anatomy of a Tax Increase

Via the Club for Growth:

[San Francisco's] Commission on the Environment is expected to ask the mayor and board of supervisors Tuesday to consider a 17-cent per bag charge on paper and plastic grocery bags. While the goal is reducing plastic bag pollution, paper was added so as not to discriminate.

“The whole point is to encourage the elimination of waste, not to make people pay more for groceries,” said Mark Murray, executive director of Californians Against Waste.

Environmentalists argue that plastic bags jam machinery, pollute waterways and often end up in trees. In addition to large supermarkets, other outfits that regularly use plastic bags, including smaller grocery stores, dry cleaners and takeout restaurants, could eventually be targeted.

Officials calculate that the city spends 5.2 cents per bag annually for street litter pickup and 1.4 cents per bag for extra recycling costs.

What might have started out as a desire to change behavior or pay for a specific problem has become, as is typical, a general revenue grab.  Note two things:

  • They want to reduce plastic bag use, but put the tax on all bags.  Therefore, it will have no effect on behavior in the market when someone asks "paper or plastic" since they still will cost the same.  If they had put it only on plastic, then people might well have shifted en mass to asking for paper - I certainly would, as I am usually indifferent as to bag type.  But someone probably pointed out that if they only taxed plastic, everyone would shift to paper and they would get no extra revenue, despite the fact that the behavior shift was what started the proposal in the first place.
  • If they really only wanted to pay for cleanup costs, which presumably were calculated based on plastic since paper biodegrades pretty fast, they would not have made the tax 2.5 times their calculated cost.  What is the extra amount over 6.6 cents for?  General revenue of course.

If you think I am reading too much into this, ask how much of the cigarette taxes imposed by the tobacco liability settlement really went towards education and the health care costs of smoking-related illnesses (the original intent).  The answer is well less than half, and in some states, none.  In fact, the tobacco settlement has become such a strong general revenue source for states that some states are now supporting legislation to protect the business of large tobacco companies in the settlement. 

By the way, in a story only related because it involves taxes in California, all I can say is go, Arnold, go.

Posted on January 27, 2005 at 02:20 PM | Permalink | Comments (1)

Local Subsidies for Business Relocation

It is not that often I get the opportunity to find something about taxes and markets in Kevin Drum's column that I agree with, but his guest blogger Paul Glastris has a good series of posts on state and local tax breaks, and even direct subsidies, for relocating businesses (first post here).  Glastris argues for the elimination of these tax breaks and subsidies, and I agree 100% with this conclusion, though not necesarily his legal justification for doing so (more on that later).

I have written a number of times about my frustration with a particular type of these subsidies - the public financing of stadiums for private sports teams (here, here, and here).  This stadium construction is usually undertaken as a result of corporate blackmail, where sports teams threaten to move unless they get a new stadium.  The dynamics of other tax breaks and subsidies to relocating businesses referred to by Glastris are usually similar, though these companies don't tend to have the monopsony power of sports franchises so they often get a smaller payout.

Why do local governments pay out huge incentive to corporations who after all have to put their business somewhere?  The answer is that they are caught in a classic prisoner's dilemma.  Basically, in this "game", each participant has individual incentives that seem to point to a certain set of actions.  Unfortunately, when players follow these incentives, the result is sub-optimized for everyone.

In this example, local authorities see a business that may move to town, and decide it is better to have it in their city with tax concessions than to have it in another city.  Since cities lose some of these battles and win some, and since cities that lose one battle tend to pay more to win the next one, the end result is that businesses end up being distributed fairly evenly, but cities have all given up huge tax concessions.  Clearly the ideal state, at least for city governments, is to not give any tax concessions at all.  In this case, businesses would likely still end up being distributed fairly evenly, but cities would not have given out tax breaks.

The only way to get to this end state is 1) have a philosophic change, with local citizens rejecting the use of government to affect relocation decisions (ie become libertarians!); 2) collude - have the council of mayors get together and sign a no new subsidy pledge or 3) have some higher authority police the local governments (that is the option explored in the Glastris article - can the US Government or courts constitutionally stop this). 

The Washington Monthly, in opposing these tax breaks, has a problem, though.  As good technocrats and liberal interventionists, they wholeheartedly support the government's right to regulate the hell out of business and commercial decision-making.  They can't, therefore, take the much cleaner libertarian argument I do, that the government should not be interfering in free, arms-length commercial decision-making at all. 

They are stuck with narrowly opposing just one kind of government interventionism (tax breaks to business) and this leads to a couple of problems in Galstris's argument.  The first is a consistency problem, which you can see in the attorney's letter Glastris quotes.  He argues in the first paragraph of his letter that these tax breaks violate the commerce clause because they unduly influence interstate commerce, then argues in his second paragraph that these tax breaks have no discernible influence on corporate decision making.  Well, if the second part is true, then their logic in the first part can't be true.

The other problem with their argument is that liberals want a commerce clause, as redefined by courts in the 1930's, as enabling massive government intervention, but in this case Glastris is trying to use it in its pre-1930's use, which was restrictive.  If the Glastris wants to take the position that the commerce clause limits state and local businesses from trying to change the decision-making and cost structure of businesses engaged in interstate commerce, wouldn't this same logic extend to making unconstitutional state-based business regulations?  If you can't give a local tax break to a certain industry, doesn't that mean you can't give a higher tax (say on lodging) to another industry?  The specific words of the Ohio decision referenced says:

... the tax scheme discriminates against interstate commerce by granting preferential treatment to in-state investment and activity.

I might ask, if you take this argument, wouldn't laws that make in-state investment and activity less attractive than other states also be unconstitutional? 

One final note.  As a libertarian, I have gone through phases on targeted tax breaks.  There have been times in my life when I have supported tax breaks of any kind to any person for any reason, by the logic that any reduction in taxation is a good thing.  I know there are many libertarians that take this position.  Over time, I have changed my mind.  First, targeted tax breaks seldom in practice reduce the overall tax burden - they tend to be made up somewhere else.  Second, these tax breaks tend to be gross examples of the kind of government coercive technocratic meddling in commerce and individual decision-making that I despise.  Almost always, they are trying to get individuals to do something they would not otherwise do, so in practice they tend to be distorting and carry all kinds of unintended consequences (as well as being philosophically repugnant).

Posted on January 4, 2005 at 08:57 AM | Permalink | Comments (2)

Seasonal Business and Unemployment

Most of the campgrounds and recreational facilities our company runs are seasonal, meaning that they are only open from late-Spring to early-Fall.  Many are at high altitude, and are under 10+ feet of snow this time of year, so that they couldn't be kept open even if there was any customer demand.

The problem with this business model is that it tends to saddle us with a huge unemployment tax bill.  For those that don't know how unemployment taxes work -- and I certainly didn't before I got into this -- each time someone files for unemployment, the business is sent a notification.  If the person was fired for cause, or quit when work was available, and the business can prove it to the state, then the person is either denied unemployment or your business is at least not hit with the cost. 

In any other case, the person will get unemployment, and your business "experience" account is hit for your proportional share of that person's payments -- if you provided them with 100% of their employment the last couple of years then you get 100% of the cost.  Each year your tax rate (a percent of wages) is reset based on your experience account - so more unemployment claims by your ex-employees drives higher tax rates.

Even before recent problems I will describe in a moment, I have always felt that unemployment tax systems unfairly punish seasonal businesses.  Unlike at another company where a person might think they are getting a permanent job, then get laid off, my employees join in March and accept the job knowing that the job ends in September.

Well, I could live with that problem- we get hit with a month or two of unemployment until folks find another job.  Unfortunately, we now have a much worse problem, particularly in California (of course). 

Many of the people we hire are full-time RVers, meaning that they no longer have a permanent home, but roam about the country all year in their RV (I wrote about this trend here).  They work for us in the summer, and then many of them vacation all winter in places like Arizona and Mexico.  Unfortunately, many of these folks, particularly Californians, are filing for unemployment all winter while they play.

Now state rules, including those in California, require that folks applying for unemployment be looking for work, and so certify on a regular basis to the state.  However, a number of our folks are, I hate to say, lying about this.  I know of at least one pair who are on California unemployment and are not even in the country right now.  As a result, in California in 2005, I will be paying nearly 7% of wages in unemployment taxes, and the state of California will be paying in additional money from other sources, to help fund these people's winter vacations.

This really, really is irritating me, and I don't know what to do about it.  I have called the state of California on several occasions, but as long as the employee says they are looking for work, the state can't, or won't, do anything about it.  Some really annoying person at the state unemployment office told me that it was my fault, that my business should learn to plan better and this is the cost I pay for messing with people's lives by laying them off. 

Unfortunately, this "the business is evil, the employee is always right" attitude permeates nearly every state labor-related agency I have ever dealt with.  About a year ago I fired an employee for chasing a customer around with a baseball bat -- I even had a letter from the customer testifying to the whole sorry story -- and the state employment department refused to certify that the employee was fired for cause and our experience account got hit with all of the unemployment payments for this individual.

Posted on December 29, 2004 at 10:18 AM | Permalink | Comments (1)

Fairly Rich Irony

Apparently blue state Democrats, who a couple of months ago were bashing Bush for his "tax cuts for the rich", have a new-found concern about...taxes being too high on the rich.  Specifically, as in this post on BlogCritics, the AMT is apparently hurting blue state rich folks disproportionately:

There is certainly a measure of rich irony in hearing stalwart Democrat Congressman Marty Meehan fretting (in front of microphones and camera of course) that the Bush administration's future tax policies will hit the well-to-do among his constituents. Says Meehan, "if this tax is not fixed, virtually every four person family in Massachusetts making $75,000 a year will have its taxes automatically increased by the AMT".

Duh.  I have been saying for years that the AMT, particularly without indexing, will soon constitute a huge stealth tax increase.  Which is why I hate this kind of unprincipled partisanship out of the Republicans:

Some Republicans have suggested leaving the minimum tax in place because those hardest hit tend to be in states that did not support Bush, including Massachusetts, California, and New York. ‘‘It is a tax of people living in ‘blue’ states,’’ said Grover Norquist, the conservative activist who heads Americans for Tax Reform.

Wrong.  Taxes on the rich, even with recent tax cuts, are unbelievably high, even after the Bush tax cuts.  As I wrote here, the wealthiest 10% already pay 2/3 of the income taxes.  It is time for AMT reform.

Posted on December 18, 2004 at 09:41 AM | Permalink | Comments (1)

Washington State is Grabbing from the Feds

By Federal law, U.S. Federal Government lands and property are exempt from state and local property taxes, just like sales to the U.S. Government are exempt from state sales taxes.  This means that, for example, the feds don't have to pay property taxes to Wyoming for the buildings and improvements in Yellowstone National Park.

Most states may sulk about this but they live with it.  However, a few of the most tax-avaricious states, including California and Washington, have found partial way around this. 

I just got my "Leasehold Excise Tax Return for Federal Permit or Lease" from the state of Washington.  What the heck is this?  First, some background.  My business runs campgrounds under concession contract with the US Forest Service in Washington State.  These concession contracts are legally like leases, in that I lease the facilities for a percentage of sales payment in return for running them for-profit.  Washington State can't charge property taxes on the campground itself, since its Federal property, so they charge a steep tax on the rent we pay to the Federal Government.  In Washington, the tax this year is 12.84% of the rent payed.

Yes, that's right.  The state only charges this special tax for rents payed to the US Government. No other rents get taxed.  The tax exists for no reason other than to get around the limitations on taxing the US Government's property.

If asked, Washington would piously state that, oh, we aren't taking any money from the feds, we are taking it from private entities.  Yes and no.  Yes, I as a private entity, I am paying it.  But, given how I bid for these leases, the state tax clearly comes right out of the Feds hands.  When I bid this project, I figured out what rent I could pay the government, and then backed out how much I would have to pay Washington State and bid the lower sum to the Feds.  In this case, Washington State is very clearly taking money right out of the US Government's pocket.

And for what?  Washington State provides no services or utilities to the campground.  The US Forest Service provides the fire protection, its own law enforcement officers, its own water and sewer systems, and its own roads.  There are no residents on the property, so no one associated with the property is using schools or other services.  And, because of sky-high sales and lodging taxes in Washington (from 10-12.5% of sales for camping), the properties are already contributing a ton to state coffers.

Posted on December 14, 2004 at 09:11 AM | Permalink | Comments (0)

Caveat on Social Security Reform

I had some links on Social Security reform here

One thing I forgot to mention -- No matter what we decide to do, please, please do not let the government invest social security funds in private equities.  I am all for giving individuals control of their social security funds and allowing these individuals to make their own investment choices.  But, allowing the government to invest in equities will lead to all sorts of problems:

  1. The most obvious is creeping socialism and regulation, particularly of companies that are not well-loved by the intelligentsia.  Mad at Dick Cheney?  Pass a law that the trust fund can't invest in Haliburton.  Don't like Dan Rather?  Pass a law that the trust fund can't invest in CBS.  You get the idea.  The mere threat of disowning the company's equity from the trust fund investments portfolio would force companies to kowtow to the populist notion of the moment.
  2. If you worry about private individuals manipulating the stock market, just wait until the government has the incentive to get in the game.  The government has all kinds of ways, from small (control of economics data) to large (interest rates and SEC regulations) to manipulate the market for short term gain. 

Marginal Revolution also has an interesting post on whether the historic equity premium would still exist if the government invested massively in equities.

Posted on November 17, 2004 at 08:42 AM | Permalink | Comments (4)

The Good, the Bad, and the Ugly of State Sales Tax Systems

Note that this is the newest in my series of "real-world" small business issues.  Other posts in this series include Buying a Small Business and Working with the Department of Labor

One of the things I did not mention in my series on buying a small business was the notion of complexity.  Our business manages over 175 sites with 500 seasonal employees in 10 states.  I have friends who own businesses that have the same sales, and more profit, from working alone from their home.  As I often tell people, I love what I do, working in recreation and spending most of my time in National and State Parks, but it is overly complex for the money we make.

The one advantage of this is that, despite being a small business, I get to observe business practices in many parts of the country.  And one business-related practice that varies tremendously from state to state is sales taxes.  (By the way, before I bought this business, I was a strong Federalist.  Putting most regulatory power in the states slows government encroachment.  It also limits anti-business regulation, because states know that such unilateral regulation will just chase employment across state lines, as California has found out.  However, having to deal with 10 different tax and regulatory regimes every day is causing me to revisit Federalism a bit).

Anyway, based on this experience, I will dedicate the rest of this post to my observations of the good and bad of state sales tax systems.

Background

Unless you live in Alaska, Delaware, Montana, New Hampshire, or Oregon, you are probably used to paying sales taxes on most retail transactions (those five states have no general sales tax).  Sales tax is generally a percentage, typically between 6% and 9%, that is added at the register to most sales.  Unlike VAT taxes in Europe, sales taxes are only applied to the final sale to the consumer -- items sold as inputs to a manufacturing process or to be resold at retail are not taxed).

In addition to state taxes, many counties and/or cities have their own sales taxes that are added on as well.  Also, special additional sales taxes are added for things like lodging or rental cars.  (Tourism related special sales taxes are very popular, in part because proceeds are sometimes used for local tourism promotion, but more so because locals like having a tax that is mostly paid by visitors and non-residents).  Depending on the state, certain items are generally exempt from sales taxes, such as groceries.  Some states have coy alternate names for sales tax, like "transaction privilege tax", but its all basically the same. 

Businesses who collect the tax are responsible for keeping track both of sales and sales taxes collected, and to report these monthly or quarterly (depending on the state and their sales volume).  Businesses, not consumers, are accountable for making sure the right tax is collected and paid.  So, if a business forgets to charge sales tax on a taxable transaction, the state department of revenue will come after the seller, not the buyer.

The one exception to this is the use tax, the one "innovation" in sales taxation that has occurred over the last couple of years.  Irritated that they have been constitutionally limited from collecting taxes on mail order and Internet sales made across state lines, states have invented the use tax.  Basically, it is just a sales tax the buyer must pay on interstate retail purchases where no sales tax was paid.  Suffice it to say that the paperwork to pay this tax correctly is a nightmare and I would bet that 99.9% of companies out there are not in compliance.  Is anyone in your company filing use tax reports on that last Dell you bought?

Near the Ideal

For small businesses that only have one location, sales taxes are probably not a hassle.  My wife runs a purse business, with just one sales location, and her returns are no problem.  However, once you cross the line to having multiple locations, and as soon as these locations start crossing county or state lines, sales tax returns are going to start to be a hassle.

From a business person's point of view, the ideal sales tax system is one that does not care what part of the state those sales occurred in, and applies one and only one rate to all purchases in all parts of the state.  The sales tax return would then be very simple, with a box for "sales" and a box for "tax owed".  The return could fit on a 3x5 card.

Of the states in which we do business, Kentucky and Minnesota come closest to this ideal.  Both have one statewide rate for all locations, don't differentiate between types of retail sales, and have very short and simple returns.  Each, however, being government entities, have to do some small things, though, to make sure they fall short of perfect. 

Kentucky, for example, insists that you use the pre-printed form they send you - you can't download a blank off the Internet.  That means that, since you have to use ink to fill it out, if you make a mistake, it becomes a big scratched out mess.  Minnesota has a very simple return, but does not allow paper returns - you have to use the Internet.  I assume this is irritating for businesses that have difficulty with Internet access.  I am comfortable with an Internet form (except for this) but of course, since their is absolutely no alternative, their online site has a terrible uptime.  I once had one of the phone representatives piously tell me that I was still liable for all late penalties even if the reason I could not file was that their site was down for nearly a week.

Way too many rates

We haven't operated in every state, but I can't imagine that there is any state with more special local rates than Washington State.  I don't know if this is a function of not having an income tax, or just the general socialist slant of most of the state's government (at least west of the cascades), but it is a real mess.  Many states have rates that vary by county, but in Washington state, there may be as many as 15 or 20 different rates in a single county.  As you might imagine, you have to stare at an online map pretty closely to make sure you have the right rate.  Plus there are sales-based occupancy taxes that vary by type of business and there are lodging taxes that vary by geography and number of rooms (or campsites) in the establishment.  There are convention taxes, rapid transit taxes, and stadium taxes that all have their own boundaries that don't necessarily match any county lines.

The result is a sales tax return 8 pages long, even longer than the ridiculously complicated California return.  Each time we add a campground in the state, we spend literally hours pouring over maps and rules trying to figure out what taxes we owe.  And, even then, we sometimes get notified that we missed something or find out later that we have been collecting a tax we were not supposed to collect.

Way too Arcane

For all of its complexity of rates, the Washington return is actually laid out in a clear manner and is pretty easy to understand.  On the opposite end of the scale is California, which has a return that is ridiculously difficult to understand.  Even having filled out this return for two years now, I still have to pull out an old return every time to figure out how to fill in the form.

Way too Many Registrations

Most states only require one registered account per state.  If you have multiple locations, the state generally requires you to register each location and get a certificate to put on the wall of the establishment, but all the locations can be registered under one master account. 

Except for Florida.  Florida requires a company to obtain a different sales tax number for every location in the state.  In fact, for a few of our campgrounds that also had a store, we had to obtain a separate sales tax number for the store and the campground.  As a result, despite having fairly modest operations in Florida, we have about 10 sales tax numbers.  In the beginning, Florida tried to get us to file a separate return for each location, but after a lot of back and forth with various customer service agents (see below) we were able to settle on filing 2 consolidated statement, one for each county that we are in.

Bad Customer Service

One of the nearly universal features of state departments of revenue is bad customer service.  This can take the form of really long processing times (it took Wisconsin 6 months to process my original filing for a tax ID) or long phone hold and wait times (in nearly every state).  Or, in the case of Florida, the state can feature all of the above, plus what I call "magic 8 ball" customer service.  Every time I call Florida on a particular issue, I get a different answer to my question, sometimes from the same person. 

Asking for Useless Information

One of the toughest things as a manager is to fight against the tendency to ask managers to report too many things every month.  I am constantly getting requests from my staff to build "X" data request into the monthly or weekly report.  I try to be pretty ruthless with these requests, limiting what managers have to report to just what we really need to know in HQ.

Unfortunately, state departments of revenue have the same pressures, and sometimes they are not very good at resisting this pressure.  For example, in Arizona, the state made a modification to the sales tax reports recently requiring us to break down all of our deductions by location, by type of sale and by type of deduction.  This is far more detail than any other state asks for, and one wonders why they need it, or if it just gets filed away unused.  Since this is a three-dimensional matrix, the number of line items can get very long (in our business, we have about 9 locations times up to 3 sales types times up to 4 deduction types).

Egregiously High Rates

Every once in a while, we run into a community that adds a ridiculously high rate to a particular type of retail sale.  More often than not, this occurs with lodging taxes.  Take the example of Mono County, California (on the east side of the Sierras in the Owens Valley).  Mono County adds on a 12% lodging tax, in addition to all other taxes.  Now, I can understand a high tourism community where infrastructure impacts from visitors drive higher taxes, but even tourist overwhelmed Sedona, Arizona (most beautiful spot in America, by the way) only adds 6% to lodging taxes.  The best I can guess is that Mono County, whose tourists are mostly from Los Angeles, are still angry at LA's taking all their water and are now getting revenge.

Conclusion

In starting your own business, sales tax registration and research should be a key item on your checklist.  As your business grows, be ready for substantial increases in your tax filing complexity.

Posted on November 12, 2004 at 11:09 PM | Permalink | Comments (3)

Filing Sales Taxes Online

Just finished up preparing our sales tax returns for October.  We file in 9 states (Oregon does not have a sales tax) and about 5 municipalities or counties.  Being located outside of cities cuts down on the number of separate returns we have to file, but being in the lodging business adds returns (there are a lot of local lodging taxes out there).  NONE of these taxes work the same, and every return is unique.

I am working on a longer post with some observations about sales taxes, the states that have it right and the states that are over-complicated messes.  However, in the mean time, one observation.  Most states offer an online filing option.  If every state had a nice online tool, or better yet, a tool I could upload data to right out of Excel, I would love it.  This is a true win-win, with the business owner saving time and the state saving LOTS of time by not having to re-key handwritten returns.

However, several states currently have awful, totally non-intuitive online filing systems, or systems that are down all the time, or systems that make correcting errors a real pain in the butt, or all three.  The problem is, in most states, there is no way to try before you switch.  Many states play a kind of brinkmanship, requiring that if you file even once online, you can never go back to paper.  I did this with one state and the online tool really sucked, and now I am stuck  using it, despite the fact that their paper return is easier to use.

So, as a result of this nutty requirement, despite being totally committed to doing things online, I sit here filing paper returns, too risk-adverse to play Russian Roulette with various states' online filing systems.

Posted on November 10, 2004 at 11:30 AM | Permalink | Comments (1)

Unemployment and a Seasonal Business

Our business is seasonal, meaning that most of the facilities we run are open from about mid-April to mid-September.  Our employees are hired in the spring and then laid off in the early fall.

The unemployment bill is a killer.  Everyone we lay off in the fall, whether they intend to work in the winter or not, files for unemployment.  Like any insurance, your premiums are based on your actual claims, and as a result our unemployment insurance rates are sky-high. 

A few or our employees are actively looking for winter work, and I am OK with their claiming unemployment.  However, the vast vast majority of our employees work for the summer and vacation all winter, since working for us really just supplements their retirement pay.  I know for a fact that some of those who have claimed unemployment in the past weeks are in Mexico on vacation or on the Colorado River or wherever.

Unemployment agencies are NOT doing their job.  By law, in most states, they are not supposed to pay unemployment to people unless they are actively looking for work.  Heck, most of our employees, during the winter, are not even in the state that is paying them unemployment - they are down south or even out of the country vacationing.  However, I have not found a state agency yet that has any interest in dealing with this fraud.

Posted on November 9, 2004 at 09:49 AM | Permalink | Comments (1)

On Class Warfare and Taxes: Part 2

In part 1, which you should read first, we discussed how the US has crossed a milestone where fewer than 50% of the taxpayers in this country pay about 100% of the personal income taxes. We also discussed how the recent tax cuts actually shifted personal income tax burden more onto the rich, rather than less.

However, John Kerry has cited the same CBO Report I used to make the points in the previous post to say just the opposite - i.e. that the recent tax cuts actually shifted the tax burden away from the rich to the middle class. Assuming he is reading the study correctly (which he is) how can this be?

The answer is in the difference between Federal income taxes and total federal taxes. The tables I used in part 1 were for income taxes only. It strikes me as reasonable to use income tax numbers for analyzing income tax changes. The total tax numbers Kerry uses includes not only income taxes but social security and Medicare taxes (including the employer contribution), federal excise taxes (such as the gasoline tax) and the corporate income tax. Lets look at who bears the brunt of these taxes.

1. Social security taxes are regressive. Very regressive. While your paycheck may show 6.2% FICA, the bill is really 12.4% because your employer matches this payment with funds they probably would otherwise pay you in wages. What makes this tax regressive is that it is a straight 12.4% of every dollar up to a limit, currently $87,900, after which the tax is zero. This kind of profile would never be tolerated in the income tax system. The reason for this is the carryover of the original idea that social security is not a tax and social benefit program but an insurance and retirement plan, a characterization that is becoming increasingly out of whack from reality. (If it was a private retirement plan, the managers would all be in jail right now for the terrible long term returns it pays out).

2. Gas and excise taxes are generally considered regressive as well, since gasoline is probably a much higher percentage of lower and middle class spending than for the rich (those rich who own Hummer H2's notwithstanding).

3. Its harder to pinpoint who pays corporate income taxes. The CBO report allocates corporate income taxes in proportion to dividends reported on income tax statements, which seems reasonable. Fifty years ago, one would have said that this meant the rich pay it, since we pictured the rich as owning all the stock. Today, in our mutual fund world, a lot is probably born by the middle class, particularly middle class retirees.

As a result, the sum of these non-income taxes are probably net regressive - i.e. they disproportionately hit the lower and middle classes. This means that an income neutral income tax cut, i.e. one that does not shift the tax burden but lowers it proportionately for everyone, will still shift the total tax burden to the middle class, because it reduces the amount paid in the progressive system (e.g. income taxes) in proportion to the amount paid in the regressive system (e.g. social security).

This leads me to a couple of thoughts. First, I think while he is quoting correct stats, Kerry is using the data a bit disingenuously. First, it implies to people that the middle class is paying more so the rich can pay less, which is untrue - everyone is paying less. Second, he is trying to use the data to show that personal income tax burden is shifting to the middle class, which we showed in post 1 that it is not - it is actually going the other way. Third, he uses it to justify a tax increase (or a tax cut rollback) on the richest Americans. We showed that already the Bush tax cuts shifted more of an already ridiculously high burden to the rich. This will shift even more.

However, there is a point here if Kerry wanted to latch on to it. Forget the class rhetoric about the income tax system - focus instead on social security. There are two good reasons for this: 1) Social Security is broken, and the financial reckoning is coming 2) unlike the income tax system, social security is truly indefensibly regressive. Yes, you can dig through Kerry's web site and find something on this, but he is for some reason so drawn to the income tax issue he never really hits it hard.

If John Kerry really wants to take up a populist tax banner, leave income taxes as they are (for all the fiscal deficit crisis talk, an economic recovery plus fewer new military invasions will bring the deficit back in line without tax increases). He should instead propose a reduction in the 12.4% FICA tax rate and then an elimination of the $87,900 wage cap. To make this palatable to Congressional Republicans (and me, if I were voting) it should be tied to a package of other reforms such as allowing some investment choice by individuals.

Of course, this is not going to happen. Politicians have used Social Security scare tactics with retired and older people so often that these folks have come to react negatively to any hint of change to Social Security. Reasonable discussion about the future of Social Security is just not possible in the last five weeks of an election, particularly with Florida in play.

Posted on October 8, 2004 at 08:53 AM | Permalink | Comments (3)

On Class Warfare and Income Taxes, Part 1

This has actually become part 1 of a two-part post. In part one, we will look at the unbelievable proportion of income taxes paid by a small percentage of people in this country, and reflect on how crazy it is to talk about the rich getting a free ride. In post 2, we will look at a couple of truly regressive taxes where the rich really do get a free ride, and wonder why these issues get mostly ignored.

Something interesting has happened in this country over the last decade, and it is shown below in one of my favorite statistics. There is much talk in the media about this or that group paying their "fair share" of taxes, but as is usually true in the media, there are depressingly few facts in these articles. This is strange, since there are several government reports that pretty clearly outline the share of taxes paid by various income brackets. The numbers below are from a Congresional Budget Office Report, but the same numbers are buried in the IRS web site as well.

For 2003, the estimated share of total individual income taxes paid by:

Wealthiest 1%: 33.6%
Wealthiest 5%: 55.1%
Wealthiest 10%: 67.9%
Wealthiest 20%: 83.0%
Wealthiest 40%: 97.8%
Wealthiest 60%: 103.0%

The way to read this is that the wealthiest 10% of taxpayers pay 67.9% of the country's individual income taxes. And yes, that 103% is not a typo - the bottom 40% in income as a group pay negative personal income taxes (because of the EITC).

This leads to the following fascinating conclusion: Half of the people in this country pay more than 100% of the personal income taxes. The other half get, as a group, a free ride (though there are individuals in this group that pay paxes, net, as a group, they do not). We are basically at the point in this country where 51% of voters could vote themselves all kinds of new programs and benefits knowing that the other 49% have to pay for them.

Extra Credit Exercise: Given the numbers above, and all the talk about "tax cuts for the rich", craft an income tax cut that does not disproportionately benefit the top half of the income spectrum.

Hard, huh? The same CBO report had an interesting comparison. They estimated what these same numbers would have been without the recent tax cuts. Without the "George Bush tax cuts that unjustly benefit the rich" these same numbers in 2003 would have been:

Wealthiest 1%: 31.9%
Wealthiest 5%: 51.8%
Wealthiest 10%: 63.9%

OOPS - Coyote, that can't be right? That means that the wealthiest people pay a higher share of income taxes after the Bush tax cuts. That must mean that the tax cuts disproportionately helped the lower income brackets? Can that be right?

Yes, thats right. Without the Bush tax cut, the top 60% would have paid 99.9% of all individual income taxes. Now, after the tax cut, they pay 103%, meaning the bottom 40% have gone from paying about 0% to actually getting a bunch of money in net EITC.

Which just goes to prove a related point I make a lot - agree with him or disagree with him, G.W. Bush has got to be one of the worst presidential communicators in recent memory. For further proof, see debate #1.

Interestingly, John Kerry used this same report to say that these tax cuts shifted the burden of taxation to the middle class. And, in one way, he is right, though not in the way that his statement is generally interpreted. For more, see part 2, coming soon. (hint - think total taxes, not just income taxes)

UPDATE

Reason, my favorite libertarian rag, has a related analysis from Nick Gillespie and Mike Snell here. I don't think I trust either Bush or Kerry on fiscal discipline. Neither, apparently, do Gillespie and Snell:

But the fact remains that Bush's cuts have reduced the amount of income tax we all pay. Though Kerry will certainly suggest otherwise in Friday's debate, the trouble with Bush's budget policy isn't that he cut income taxes. It's that he hasn't cut spending. Indeed, perhaps the strongest case for electing Kerry may be that he will usher in an age of divided government that will restrain federal spending and the various problems that accompany it.

UPDATE #2

Fixed an unbelievably bad triple negative - Even I could not figure out what I was trying to say.

Posted on October 6, 2004 at 02:01 PM | Permalink | Comments (3)

OMG -- Wash. State Sales Taxes

Just pulled out the new Washington State sales tax forms to do my September taxes. The form is now 8 (dense)pages long! This is really getting out of control. In contrast, the sales tax forms for Florida (which has other problems, but we will talk about those later) fit on one side of a 3x5 card.

Washington is the worst offender I have seen in at adding jillions of new small targeted sales based taxes. They have become even more complicated than California. The basic sales tax rate varies by industry and by location - and I am not talking about just by county or city but by town. Each of something like 350 towns have their own tax rate. Then there are add-on taxes that don't follow any recognized borders, such as convention taxes and transit district taxes. Then there are lodging taxes, that vary by town but also depend on the number of sites we have in a campground, but of course that threshold number of sites changes by town as well. I have spent litterally hours with maps trying to figure out what rate we collect at for each of our locations. The Washington State tax return takes longer to prepare than any 4-5 other returns we have.

Posted on October 4, 2004 at 11:52 AM | Permalink | Comments (0)