Is the country headed for disaster??

[IlliniDave]

Of course, in a more naturalistic society, a man with your resources would be allowed/encouraged to take on one of those young welfare mothers as a second wife and thereby reduce your tax burden and stress level. I can't connect all the dots here but I also suggest that you might give Zola's "Germinal" a read.

I didn't intend to create a puzzle where dots need connecting, just spouting some opinions related to the subject questions and some of the ideas that followed. No hidden messages or anything. I don't have too big an issue with my tax burden, just an issue when someone says something like having a mortgage interest deduction is some sort of "government handout". I see a distinction between allowing someone to keep money they earned to begin with and some sort of government largesse.

I will, if I have a chance, check out the book recommendation, even though I think it's likely well above my comprehension level.

[7Wannabe5]

@IlliniDave- Crosspost. My comments were meant for the OP but you can have a second wife too if you want one. I'm feeling generous here today in my Queen of the Universe Chair : ) Quite a few of Zola's works involve the theme of inextricable link between sex/romance and money/work. IOW, if you want to get to the root of something, "follow the bunny" sometimes works as well as "follow the money." Nothing is simple. I knew one young woman who qualified for a SNAP card because on paper she had very little income from her profession of Grad Student in Political Science but she also had a second profession of very well paid escort and most of her clients worked in Washington DC. Any overly controlled public market will create a black market to better fill the supply/demand.

[RealPerson]

Any overly controlled public market will create a black market to better fill the supply/demand.

Absolutely. With sales taxes often over 20%, many places in Europe will ask you whether you want a cash transaction without receipt (i.e. no sales tax) or with receipt (you pay the sales tax). Excessive taxation creates a black market every time. The law of human nature.

[EdithKeeler]

A comparable amount is given to the upper middle class through mortgage interest and property tax deductions. This is one of the biggest government handouts, and it doesn't go to poor people! But I don't see anyone clamoring for this to go away. SNAP costs about $80 billion (~50 million people), about the same cost to government as letting people who make 100k+ deduct mortgage interest and property tax on their homes.

Well, the money is "given away" because home construction is a huge driver of our economy, and for years the government has strongly encouraged home ownership. Plus there are arguments that home ownership stabilizes communities, but I'm not sure of the validity of those arguments. At some point, we as a society have decided that home ownership was important, something to be encouraged, so we give tax breaks for it, to individuals. I'm much less worried about the corruptive power of giving individual homeowners each a few thousand in mortgage interest deduction each year, however, than I am about tax break and welfare to large powerful corporation who wield power and influence.

And think about it: we give tax breaks and benefits to individuals to encourage behavior that we deem positive: homeownership (correctly or incorrectly) is deemed to be positive, so it's encouraged by giving tax breaks. Saving for retirement is something that our society deems to be positive, so there are tax breaks and benefits to saving in certain types of retirement plans. Education is deemed to be positive, so certain costs are deductible and certain benefits are available.

But it doesn't seem to work that way with corporate tax breaks and benefits. OK, you can argue that companies provide jobs.... but stuff like Wal-Mart getting taxpayer funded air traffic controllers and expenses for the tiny airport that really only their jets use? (Apparently but for Wal-Mart's planes, the airport gets so little traffic it wouldn't qualify for needing air traffic controllers). Do big gas companies create enough jobs and bolster the economy sufficiently to deserve $4 billion in tax breaks (particularly in 2012, when they had record-breaking profits?) What about AIG? They paid back the bailout money... but in addition, also got some significant tax breaks. It's almost like double dipping, and was it worth it for everyone else? Boeing gets enormous tax breaks, and maybe deserved because of military contracts... but in return it held the state of Washington hostage by threatening to leave the state if they didn't get additional tax breaks in 2013.

And don't get me started on farm subsidies....

I guess my point is that comparing the tax benefit of the mortgage interest deductions to the tax benefits provided to corporations is like comparing blueberries to... watermelons? And the purposes of those tax benefits are significantly different, and ultimately can give the corporate recipient of those benefits even more power. I'm not sure that the mortgage interest deduction gives anyone much power to decide the future of the economy and public policy in this country.

[jacob]

Personal values---which depend a lot on neurochemistry, see Haidt---aside, what you want to be looking out for in terms of the "country heading for disaster" as opposed to "you heading for disaster" is

1) Are substantial amounts of money being paid out to unproductive sectors of the economy? For example, retirees, social transfers, the health industry (twice the waste of the next worst offender in the OECD), the defense industry (far bigger than the next OECD),...
1a) If this happens suddenly on a large scale, it results in consumer inflation, like Weimar Germany.
1b) If this happens slowly on a large scale, it results in Greece.
2) Are there any financial time bombs? Services/production done in the past paid for with a promise to pay in the future. In particular, are these promises based on magic (optimistic return rates)? E.g. Chicago, Greece, Detroit, ... [In general, you'd want to fund projects with a long horizon of usefulness, e.g. a bridge, with debt because people in the future will use the bridge too and should therefore pay for it too; and projects with a short horizon with income (taxes), because future people have no use... e.g. pension payments. If funded by debt, the present is on the hook for work at that was done long ago.
3) Are there any demographic time bombs? The ratio of working to non-working as a function of age. Health, non-health as a function of age. This stuff is extremely predictable. Due to the short quarterly or next election focus, the two governing systems of "democracy" and "capitalism" (I deliberately put these in quotation marks, go figure why) are remarkably short-sighted.
4) Are there any environmental/ecological/resource time bombs? Ditto. Also, infrastructure. Are we deferring fixes that ought to be done before they get even more expensive? Is the country investing for the future (best) or is it just letting things go (worst).
5) What's the culture? Is it a culture of corruption (e.g. cheat on taxes)? Is it a culture of profit at all costs (e.g. outsource production, then insource workers, double-whammying the many for the benefit of the few).

Also consider whether there are unjustified assumptions "things everybody knows" that might fall away in the future. THese are so-called anti-assumptions. Things we know to be true which actually aren't. Things we take for granted. E.g. certain advantages the US enjoys will probably not persist, e.g. #1 position, petrodollars, the Bretton Woods, other things?

It's been predicted that the Westphalian system will not endure. It's being slowly dismantled. Consider, for example, the TPP which is being rushed through the legislative system on a semi-secret basis despite its massive impact. The public is not allowed to read the law, but guess who wrote it ... power is being handed over to the transnationals behind the curtains.

Conversely, if the countries of the world were to avoid the 1-5% drag on GDP from failing to enact global solutions to the problems in (4), they'd have to cede to a supernational structure instead. That's almost going in the opposite direction.

It's pretty complicated.

SNAP is the least of my worries.

[Dragline]

This thread turned out to be much more philosophically interesting and fact-based that I usually would have expected.

Must be the inherent quality of the participants.

I was reminded of the wisdom of Jim Rohn on this topic. Listen here: https://youtu.be/FkC2poV41e4?t=1801

Or read this approximation (not quite as good):

"I realize that the topic of taxes may seem like a strange place to begin the discussion of creating wealth. And yet throughout our lives, whether young or old, we must learn the necessity of paying taxes. And as soon as they have any money at all, our children, too, must learn that when they spend money they immediately become consumers. And all consumers of goods and services, no matter how young, must pay taxes. Why?

Because we have all agreed to live as a society, and for that society to function properly, there are some things we cannot do for ourselves alone. For example, we cannot each build a piece of the street. The machinery would be too expensive, and it would take too long to learn how to use it. So we have a government. And a government is made up of people who do things for us that we cannot or do not want to do ourselves. Because the streets, the sidewalks, the police, and the fire department must all be paid for, we’ve agreed to add some money each time we buy something and give it to the government.

We then move on to federal taxes. Here is a good way to explain federal taxes. I call it “The Care and Feeding of the Goose That Lays the Golden Eggs.” It’s so important to feed the goose-not to abuse the goose or tear off its wings-but to feed and care for it.

What’s that you say? The goose eats too much? That’s probably true. But then, don’t we all eat too much? If so, let not one appetite accuse another. If you step on the scales and you’re ten pounds too heavy, you’ve got to say, “Yes, the government and I are each about ten pounds too heavy. Looks like we both eat too much.” No question about it. Every appetite must be disciplined-yours, mine, and the government’s. Hey, we could all go on a diet!

My mentor, Mr. Shoaff, urged me early on to become a happy taxpayer. Now, I must admit it took a while, but I finally did become a happy taxpayer. Part of this transformation occurred when I began to understand the function of taxes and that it is right for everyone to pay his or her fair share."

[IlliniDave]

But it doesn't seem to work that way with corporate tax breaks and benefits. OK, you can argue that companies provide jobs.... but stuff like Wal-Mart getting taxpayer funded air traffic controllers and expenses for the tiny airport that really only their jets use? (Apparently but for Wal-Mart's planes, the airport gets so little traffic it wouldn't qualify for needing air traffic controllers). Do big gas companies create enough jobs and bolster the economy sufficiently to deserve $4 billion in tax breaks (particularly in 2012, when they had record-breaking profits?) What about AIG? They paid back the bailout money... but in addition, also got some significant tax breaks. It's almost like double dipping, and was it worth it for everyone else? Boeing gets enormous tax breaks, and maybe deserved because of military contracts... but in return it held the state of Washington hostage by threatening to leave the state if they didn't get additional tax breaks in 2013.

And don't get me started on farm subsidies....

I guess my point is that comparing the tax benefit of the mortgage interest deductions to the tax benefits provided to corporations is like comparing blueberries to... watermelons? And the purposes of those tax benefits are significantly different, and ultimately can give the corporate recipient of those benefits even more power. I'm not sure that the mortgage interest deduction gives anyone much power to decide the future of the economy and public policy in this country.

One thing about corporations is that in general they do not amass/retain wealth, strictly speaking (Apple at present being a notable exception). They grow and/or pay out profits to shareholders. The largest group of shareholders I believe are the institutional investors (pension funds, endowments, and the like). The next largest is probably people like us accumulating for retirement. Granted there are some questionable things that occur in the US regarding executive compensation, and on Wall Street. But a significantly large fraction of corporate profits stay in motion. And as long as the money is moving around, the gov't can do plenty of bill-dipping, and opportunity is created.

It's people like me perhaps that are more of a "problem", since I take wealth out of circulation and essentially sit on it. It minimizes the croupier's take. Somewhere down the line the money will get spent, but in a consumption society/economy, the model would have been for that same money to be spent many times over during the same time period.

I've never really understood the angst over corporate taxation, especially of public corporations. That's one area where I think a lower, flat, but loophole-free approach would be better.

[Chad]

I've never really understood the angst over corporate taxation, especially of public corporations. That's one area where I think a lower, flat, but loophole-free approach would be better.

It's one reason Apple has enough cash to buy roughly 30% of the largest corporation ever (by market cap)...itself. It potentially could take itself private by 2020.

http://seekingalpha.com/article/1725412 ... te-by-2020

It's not like any of these companies pay anywhere near the top rate anyway. The problem is getting rid of the loopholes, not reducing the base tax amount. Too many special interest groups.

[Riggerjack]

As long as this is going down the corporate tax rate route, I'm going to respectfully disagree.

The corporate tax rate should be zero. Nada. Nothing.

Corporations are not people, and shouldn't be treated as such. All corporate taxes are simply hidden taxes on their customers. They are part of the cost of doing business, and that cost will be passed on to the customer. The only advantage to the corporations in tax avoidance, is if they can avoid a cost their competition can't.

Historically, Federal revenue has been 18% of GDP. In an ideal world, we would just set taxes at 18% of profits, be they earned income, capital gains, or any other form. Money made, minus money spent to make that money, times 18%, equals federal tax bill. No special favors, deductions, exemptions, incentives or subsidies. The same rules for expenses, regardless of source of income.

This would focus all taxpayers on efficiency, rather than tax efficiency. It would remove the incentive to contribute corporate monies to politics. And that's why we can't have it. Congress is in the business of selling favors. Remove the special favors, and suddenly that Congressional seat is not worth the money spent to run for it.

But since we still hear people using phrases like "tax breaks for the rich" while talking about INCOME TAXES, and "corporate welfare" being accelerated depreciation schedules, or "47% don't pay taxes", we can be assured that the population still operates on a soap opera level (the good guys wear white, the bad guys have a goatee) understanding of taxation. That soap opera worldview is what has allowed us to get where we are.

[jacob]

+1!!!!!!

[Dragline]

As long as this is going down the corporate tax rate route, I'm going to respectfully disagree.

The corporate tax rate should be zero. Nada. Nothing.

Corporations are not people, and shouldn't be treated as such. All corporate taxes are simply hidden taxes on their customers. They are part of the cost of doing business, and that cost will be passed on to the customer. The only advantage to the corporations in tax avoidance, is if they can avoid a cost their competition can't.

Historically, Federal revenue has been 18% of GDP. In an ideal world, we would just set taxes at 18% of profits, be they earned income, capital gains, or any other form. Money made, minus money spent to make that money, times 18%, equals federal tax bill. No special favors, deductions, exemptions, incentives or subsidies. The same rules for expenses, regardless of source of income.

This system would be easily gamed, because you have implicitly assumed that the goal of a corporation is necessarily to have customers or run a business and distribute profits to its owners, which is nice and tidy assumption for certain economic arguments, but not grounded in reality. There is no legal requirement that a corporation do any such things or act as some kind of pass-through entity.

The first thing I would do is register a company, put all my assets in it, make myself an employee of the corporation that gets paid a dollar every once in awhile, but the corp. pays all my expenses as part of my "employment". I never make any profits or any income yet my lifestyle does not change. No taxes for me! And I wouldn't have any employer pay me much. Instead, they would agree to pay me a token wage and buy "services" or other tokens from my company that I would never cash out.

Any system that treats one type of legal entity differently than others for tax purposes can be gamed.

And lets not get started on what we would do with partnerships, "funds", trusts, LLCs, LLPs, and non-profits . . .

[Chad]

@Riggerjack
Your proposal would be ideal (corporations are not people), but there would still be issues. On top of what Dragline mentioned, corporations would still have plenty of reasons to buy Congress. Glass Steagall and Sarbanes Oxley were not really opposed by Wall Street because of any impact on taxes. Comcast trying to prevent competition and create monopoly, etc.

We would also have to turn around and raise personal income taxes to make up for the loss of revenue from the corporate tax.

[IlliniDave]

I think the point is, corporate tax is, in the end, personal income tax (or more accurately perhaps its first cousin--sales tax). In the end, all taxes burdens are borne by individuals. Businesses have to pass them on to their customers (and to a degree employees) until it ultimately stops at the individual consumer. There is no other option.

We as a society like to have a villain to punish. Corporations, being faceless, are low fruit. High income earners, being few in number, are low fruit. Both understandably fight back the only way they can, with what they have (money) replacing what they don't have (votes). Hence the mess.

The worst thing about taxes is the lack of transparency of so much of it. When you buy something, you use money that you generally had paid taxes on, AND typically you pay sales tax at the time of purchase, which are pretty apparent. But built into the price you pay is a portion the taxes of everyone who's ever touched that item in its production and distribution. I don't even know how much of every dollar I earn is ultimately sucked up by some government entity somewhere as tax revenue and/or equivalent fees. I remember estimates some years ago that it was north of 50%, and those estimates probably assumed a lower marginal tax rate than mine. We've heard the phrase the "miracle" of compound interest. How do you describe compound taxes?

I recognize that government is necessary and adds some value (how much and of what type is debatable, of course). So I don't reject the idea of paying taxes out of hand. But I would like to know how much I'm paying.

I know it's controversial, but I like the idea of a eliminating all income tax in favor of a consumer sales tax. Encourage saving, investing, and more responsible consumption. No filing, IRS, audits, any of that BS.

Just a fantasy.

[GandK]

I know it's controversial, but I like the idea of a eliminating all income tax in favor of a consumer sales tax. Encourage saving, investing, and more responsible consumption. No filing, IRS, audits, any of that BS.

Just a fantasy.

My mom did public accounting for 25 years and that was what she used to say when I asked her what the best/fairest tax would be. All consumption, point of sale, with exemptions for food and housing.

[Scrubby]

I think the point is, corporate tax is, in the end, personal income tax (or more accurately perhaps its first cousin--sales tax). In the end, all taxes burdens are borne by individuals. Businesses have to pass them on to their customers (and to a degree employees) until it ultimately stops at the individual consumer. There is no other option.

Businesses are trying to make as much money as they possibly can. Taxes on corporations takes a share of the profit, it's not like sales tax that is added to all prices. With your system the corporations would do all their business in the countries with the best infrastructure (including anything that makes it easier to run a business), and the owners would funnel the profits to the countries with the lowest taxes. This would essentially be a transfer of wealth from the workers who pay the taxes which pays for the infrastructure, to the rich who reap the benefits without giving anything back.

With consumer taxes only the taxes will have to be very high, making it extremely profitable to move to countries with low tax countries. Even more of the business owners who benefit from the infrastructure mentioned above would do so.

I don't see any other way to solve it except forcing businesses to pay taxes in the countries they do business. Anything else leads to a race to the bottom and/or tragedy of the commons scenario.

[Dragline]

I know it's controversial, but I like the idea of a eliminating all income tax in favor of a consumer sales tax. Encourage saving, investing, and more responsible consumption. No filing, IRS, audits, any of that BS.

Just a fantasy.

My mom did public accounting for 25 years and that was what she used to say when I asked her what the best/fairest tax would be. All consumption, point of sale, with exemptions for food and housing.

Yes, it would be very difficult to game such a system -- at least within the country -- and very easy to calibrate it to current expenses by raising or lowering the going rate. The gaming would come via exemptions and going across borders to buy stuff, which was relatively easy to stop before the internet, but now it might be much more difficult.

But our system is built on relatively high sticker rates with plenty of exemptions for a bevy of favored economic behaviors. Every once in a while there is partial "clearing" like what happened in 1986 (interest on consumer debt used to be deductible), but that's not likely to happen any time soon. Truth is, most industries like to have the exemptions to make their line of work look better than others (the real estate tax deduction is the prime example; special treatment for hedge funds in another; special saving/retirement vehicles are a third) as long as they can get their exemption and keep it. Something like half or more of the tax code is essentially exemptions for a relatively small number of economic actors, both individuals and corporations. Your average wage earner generally has the fewest options, though.

The best practical thing an individual can do (call her the stoic taxpayer) is structure their economic behaviors to take advantage of as many exemptions/breaks as possible. Better to light a candle than curse the darkness. Fortunately, while annoying in some of the complexities and requiring a bit of planning, its actually not too hard to do.

[IlliniDave]

I think the point is, corporate tax is, in the end, personal income tax (or more accurately perhaps its first cousin--sales tax). In the end, all taxes burdens are borne by individuals. Businesses have to pass them on to their customers (and to a degree employees) until it ultimately stops at the individual consumer. There is no other option.

Businesses are trying to make as much money as they possibly can. Taxes on corporations takes a share of the profit, it's not like sales tax that is added to all prices. With your system the corporations would do all their business in the countries with the best infrastructure (including anything that makes it easier to run a business), and the owners would funnel the profits to the countries with the lowest taxes. This would essentially be a transfer of wealth from the workers who pay the taxes which pays for the infrastructure, to the rich who reap the benefits without giving anything back.

The money used by the business to pay the taxes comes out of the pockets of the customers/consumers. Prices are set high enough to generate sufficient income to the company/corporation so that they make an acceptable profit net of taxes. Taxes take a percentage of income. True profit is what's left after all expenses, including tax, are paid out of the income. In other words, income taxes paid by the business are part of the price the customer/consumer pays for the good or service. So they are added to the price, just not explicitly, and paid by the end user.

Businesses already adjust their operations to take the best advantage of different tax situations in different locations.

With "my system" the businesses wouldn't funnel their profits anywhere for tax reasons because they wouldn't pay tax on their income. Tax would would be collected only at the time their good or service is paid for.

[Scrubby]

The money used by the business to pay the taxes comes out of the pockets of the customers/consumers. Prices are set high enough to generate sufficient income to the company/corporation so that they make an acceptable profit net of taxes.

What is sufficient income? Why is it so much higher for some companies than others? Apple and Microsoft pay very little taxes, but they still charge very high prices for their products compared to what it costs to make them.

Businesses aren't charity operations. If they can charge high prices they will. If all taxes on profits went away they wouldn't lower their prices, they would just pocket the extra money. As they are already trying to maximise their profits it naturally follows that increasing the prices would lead to lower profits after taxes, not matter what the tax rate on those profits is.

[henrik]

What is sufficient income?

Sufficient = enough to justify keeping capital in that business compared to other investments.

[Scrubby]

What is sufficient income?

Sufficient = enough to justify keeping capital in that business compared to other investments.

Which to any investor worth his salt means the highest possible risk adjusted income. How many investors are thinking 'yeah, I could make more money, but the taxes are low enough that I'm just going to give away that income'?