Heresy – Can It Be A Good Thing?

Reihan Salam invites conservative opprobrium in what we think is the latest National Review (yes, we admit to being behind on our reading) when he says we should consider raising the top tax rate to a number that starts with a four.  This will bring reasoned responses like: Kill the witch!

Well, seriously, we might consider Reihan’s suggestion.  We agree with him that there are two questions: What are the options and what you get in return?  Like Reihan, we want corporate tax reform.  Unlike Reihan, we prefer rate reductions rather than immediate expensing.  At a minimum we would also eliminate the Alternative Minimum Tax or AMT as part of the trade-off.

Before you get out the robes and start the incantations for Reihan and your humble scribe, you need to think about what is actually going to be proposed and what will pass.  This is nowhere near our proposed policy but our priority is corporate tax reform.  What are your priorities and what deals are you willing to make?  If you are not willing to go the full Monty Hall then do you think that anything will change for the better?

Venezuela And US Taxes

OK, it is a bit of a stretch but there is a comparison between the debacle in Venezuela and reforming US taxes.  It comes from Larry Kudlow’s discussion with Art Laffer and Steve Forbes posted on NRO.  They are talking about how to restore prosperity:

Incentives matter: If you reward an activity, then people do more of it. If you punish an activity, people do less of it.”

But for the tax side of “one big idea,” Laffer would like to see corporate tax reform. I agree. Reagan used to say, “Give me half a loaf now, and I’ll get the other half later.” Well, I’d take the half loaf of corporate tax cuts right now. And that would work for Forbes, who can see income-tax reform following corporate-tax reform. “Even if we get to this two years down the road,” he said, “I think [Trump would] be amenable to doing something radical like a flat tax.”

Socialism and the lack of incentives to produce are part of what is killing Venezuela. The other part is the incentives and abilities socialism gives to those in power.

Incentives are a big problem because the US corporate tax is just about the highest in the world and it is one of the few that is world-wide rather than territorial.

Sidebar One: A more nuanced explanation from the Christian Science Monitor says that most systems are hybrids of territorial and world-wide.  The issue is still the same: Do we (the US) want to tax US corporations that want to invest international funds in the US.  The incentives are really far wrong when we penalize US companies for investing in the US.  End Sidebar One.

Sidebar Two: Most of the problems with writing US tax rules and enforcing them relate to the high US rates.  If the US rates were equal to or lower than most other countries then corporations would not try to use legal and sometimes illegal means to move income out of the US.  The Congress would not need to worry about all the fine print on transfer prices and the like.  The IRS would not need to spend so much time enforcing the fine print.  Lower corporate tax rates are win–win-win.  End Sidebar Two.

We are happy to see Larry, Art, and Steve endorsing changes in the corporate tax system first.  We wish they did it with more conviction.  We wish they would leave out first.  The choices about what to do about Venezuela are complicated and difficult but relate to getting incentives better.  The choices about US tax legislation are easy.  Do corporate taxes by lowering rates and making it easy to invest in the US.  We don’t care if the solution is territorial or hybrid as long as it fixes the problem.  It is the biggest opportunity to improve incentives the most.

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.