Tax Choices

Political decisions about taxes are not yet at the binary choice stage.  Congress critters, lobbyists, and The Donald are all trying to create support for some portfolio of tax changes.  We will review a number of proposals on three parameters.  First, is it a good idea?  Second, what are the prospects and third, is it worth fighting either for or against?

Eliminate the gas tax and replace it with a carbon tax with roughly the same impact on gas prices.  This is a great idea but it is mice to the GOP elephants.  We wouldn’t fight for it but we would love to see it get the Democrats on board for a portfolio of reasonable reforms.  We know it is exceedingly unlikely but we need to mention it.

We won’t provide details on eliminating all tariffs and the death tax.  We are for both but the former has no chance and the latter is small potatoes.  The Border Adjustment Tax (BAT) is more serious.  It is a bad idea.  The Donald has proposed it but not included it in his tax proposal.  We are against it and hope it is never included.  The rest of the tax bill would need to be great to vote yes on the whole thing that included BAT.

Reduce the corporate tax rate and tie it into reduced taxes on business income from other sources.  This is a great idea.  It should have great growth bang for the buck.  It makes the tax system more rational by taxing business income at one rate rather that giving special status to C corporations.  It is part of The Donald’s proposal so it has a real chance of success.  If the final proposal doesn’t include it we would have a hard time supporting it.  We are not, however, at 15 or fight for the rate.  We could see 20% as the final rate and still be reasonably happy.

We don’t support corporation lobby issues like immediate expensing of assets, special treats for manufacturers, or special treatment of research and development.  There will be lots of lobbying and some of these might get included in the final bill.  Unless they get too extensive we would still support the overall bill.

Reduction of individual rates beyond the Obamacare 3.8 percent surcharge is proposed by The Donald and a big deal to lots of conservatives.  If we have to pick between reducing business rates and reducing personal rates we go with business rates.  We are OK with reducing personal rates but reducing business rates come first.  If the proposal reduced personal rates and not business rates count us as a nay.

We support eliminating deductions except charitable donations and mortgage interest and increasing the standard deduction.  Count us in.  Some, like George Will, also want mortgage interest to be deleted too.  We would be OK with that but recognize the political price of doing it.  Increasing the standard deduction, however, will effectively eliminate the mortgage interest deduction because few folks will have sufficient deductions to exceed the higher standard deduction.

We are not yet to binary choice on taxes.  We need to weigh the costs and benefits of proposed policies with the political practicality of them.  We would like to see a bill that makes substantial progress and can pass.  Don’t let perfect be the enemy of the good.  At the same time we must fight for the best good.

Blues Learning The Hard Way

In Illinois the newspaper is learning even though the politicos are a lagging indicator.  In Connecticut the politicos are being taught a lesson.  We shall see what learning takes place.  WTNH, News8 says:

Connecticut’s state budget woes are compounding with collections from the state income tax collapsing, despite two high-end tax hikes in the past six years.

It means the current budget year, which ends in just two months, is now seriously in the red and next year’s deficit has ballooned to $2.2 billion.

It’s happening because the state of Connecticut depends too much on its wealthy residents, and wealthy residents are leaving, and the ones that are staying are making less, or are not taking their profits from the stock market until they see what happens in Washington.

The total budget is $41 billion so a $2.2 billion deficit (other reports have it a little lower) is a big deal.  Who would have thought that individuals react to tax policies?  Our only quibble with the report is that we would have changed despite in bold to because of.

Now the question is what will the political leaders and people of the Nutmeg state learn from all this?  Will they try to prevent wealthy residents from leaving like the US tries to prevent corporations from leaving?  Or will they just ride the swings described by the governor:

Governor Malloy added,  “The reality is that in Connecticut we get most of our money from very few people and that can produce some very wild swings.”

It is unclear if the Governor is getting wisdom or just trying to make a politically viable excuse.  It is up to you Connecticut.

George Supports The Donald?

George Will, as usual, has an interesting point at NRO:

Consider just one tax change that should be made and certainly will not be. The deductibility of mortgage-interest payments, by which the government will forgo collecting nearly $1 trillion in the next decade, is treated as a categorical imperative graven on the heart of humanity by the finger of God because it is a pleasure enjoyed primarily by the wealthy. About 75 percent of American earners pay more in payroll taxes than in income taxes, and only around 30 percent of taxpayers itemize their deductions.

We agree with George that it would be an improvement in the tax code.  What is unusual is that George doesn’t tie it to The Donald’s tax proposal that came out recently.  We all agree that his whole tax proposal will not pass as is but it is the proposal that we currently have.  According to USA Today, part of the proposal is:

The standard deduction, currently $6,350 for single people and $12,700 for married couples, would double. As a result, many more low to moderate income families would pay no taxes. But all other deductions, except for mortgage interest and charitable contributions, would be eliminated, including state and local taxes and medical expenses.

So for married individuals would need over $25,000 in deductions to itemize from just mortgage and charitable contributions.  According to USA Today, this change would reduce itemizers from George’s estimate of 30 percent to just five percent.  The Donald would effectively kill the mortgage interest deduction.  We are sure that The Donald can count on George’s support.

 

English Major Math

We like Kevin Williamson even more that Jonah but here we are complaining about both of them in one day.  Kevin often jokes about his English major math to show that even English majors can have a talent for economics and arithmetic.  Today, however, it lets him down.

We agree with his article that the corporate tax rate should be zero.  It is the only correct answer to the question: What should the corporate rate be?  We agree with his reasoning that it would eliminate all the lobbying joy of getting deductions from Congress and accounting joy of creating ones the Congress didn’t quite envision.  It is also much easier to tax capital gains and dividends.  Increasing both of those will recover some of the lost revenue.

The arithmetic problem.  Sigh.  Kevin says:

The simplified version: If Corporation X makes $1 billion and has $900 million in expenses, then it has $100 million in taxable income, which is subject to a top rate of 39 percent. Most corporate income is taxed at the highest rate.

The corporate tax schedule does have a top rate of 39% but very little is taxed at the highest rate.  See tax rates here.  The highest rate is only for income from $100,000 to $335,000.  The tax on $100 million would be 35% or $35 million.

We do support eliminating the corporate tax (the death tax, the gas tax (replaced by a carbon tax), and all tariffs ) but the average and marginal corporate is 35% after $18,333,333.  That’s why the table says 35% of the amount over zero.

Press And Tax Illiteracy

The Donald’s administration had to act on tax illiteracy as reported in the WSJ.  First, the administration said correctly:

When he was asked about tax incentives for retirement, Mr. Spicer said that the only deductions protected from repeal in a tax code overhaul were those for mortgage interest and charitable contributions.

But some tax illiterate reporters thought that this would endanger the tax status of 401-k plans.  So they needed to reiterate:

The administration clarified Mr. Spicer’s comments after the briefing, making clear no changes to 401(k)s and similar retirement accounts were proposed as part of Wednesday’s announcement. The breaks for 401(k)s aren’t technically deductions; contributions are excluded from the income-tax base. [Emphasis added]

Nope, they didn’t clarify Mr. Spicer’s comments.  They might have reiterated or explained them but there was nothing unclear about the first briefing.  The technically we bolded is simply an admission of error.  The sentence is more accurate without it.  We expect that the misunderstanding on the part of reporters is more likely to be foolishness rather than nastiness.

Growth And Research Skills

The Donald has allegedly released a one page document that outlines his tax proposal.  We say allegedly because lots of folks are evaluating the document but nobody says where it is.  It isn’t on the White House site (at least as of now).  We can’t find it linked on any of the WSJ, NYT, or WAPost articles.

Sidebar: We did find this from Laura Saunders:

Say a business owner has net income of $1 million a year from a partnership, plus substantial other income. Currently the top tax rate on the $1 million is 39.6%, or $396,000, whether the income is wages paid by the partnership or business income.

Laura and her editors should know that 39.6% is the marginal rate that kicks in, depending on your filing status, after $400,000 in taxable income.  She is confusing the average tax rate with the marginal tax rate.  Thus, her analysis of the potential savings to business owners is way off.  Her evaluation of the ease of transferring salary to business income is also way off.  It is a challenge but the IRS is willing to litigate historically.  There is no reason to think that they would change their behavior when more is at stake.  Despite Laura getting the arithmetic wrong, it would be a benefit to the owners organizations like accounting firms.  End Sidebar.

There do seem, however, to be some agreement on the points of the plan:

  • Reducing corporate tax rates substantially [Yea!, Yea!, Yea!]
  • Reducing pass thru rates (as in the sidebar) substantially [Yea!]
  • Going to a territorial tax plan [Yea!, Yea!]
  • Reducing individual rates [How much?  We would not go far.]
  • Eliminating some deductions and increasing standard deduction [Yea!]
  • Eliminate the Alternative Minimum Tax [Yea!, Yea!]
  • Eliminate the Death Tax [Yea!, Yea!]
  • It does not include the Border Adjustment Tax (BAT) [Yea!, Yea!]
  • The plan will pay for itself [Boooo!]

It looks like a rational plan.  We believe in the growth fairy but are concerned about the impact on the deficit.  The plan needs to be evaluated on dynamic scoring but the deficit reduction cannot be a vague plan in the out years.  The Donald has wisely left out lots of details to give room for  negotiation.  The downside is that it leaves open the deficit solution of bringing in the BAT.  Let’s consider the plan in regular order.

Tax Errors

We really enjoy Holman Jenkins at the WSJ.  He is almost named after a local town and he is not afraid to say what he thinks.  We generally like his article today called Semi-Accidental President.  We are not big fans of The Donald but we voted for him because he is better than his predecessor and better than the alternative (Herself).  Without being very good he looks good despite his faults.

In one sentence, unfortunately, Holman said he didn’t understand taxes:

 All the other handouts that 71% of Americans depend on—Medicare, expanded Medicaid, the giant tax deduction for employer-provided insurance—will remain intact.  [Emphasis added]

The tax benefit for employer-provided insurance (EPI) is that it is not income to the recipient.  There is no reasons, except politics, to stop EPI from being a tax deduction.  EPI is compensation for the employee for work done.  Just like wages or pensions, EPI is an expense for the employer in the current period.  EPI should be income for the employee because the tax code says:

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1)

Compensation for services, including fees, commissions, fringe benefits, and similar items;

Notice that the Code specifically identifies fringe benefits as income.   EPI is not income because of a wartime exception and that is the problem.  If EPI was taxable income then most of our health care problems could be solved.

Interesting articles become clunky where there is a glaring error like that.  We think he is very close to right on The Donald as president.  He will be an improvement even if that is faint praise.