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A taxing issue.

Pro and Con

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1richardbsmith
Feb 22, 2012, 9:32am Top

http://www.bloomberg.com/news/2012-02-22/obama-to-ask-congress-to-lower-corporat...

We will see how this public discussion moves. The change in corporate tax rates and tax credits cannot be revenue neutral, I don't think.

Does it increase revenue?
Does it improve market competitiveness?
Does it increase consumer cost?
Does it help economic growth?

2richardbsmith
Feb 22, 2012, 11:43am Top

http://www.washingtonpost.com/blogs/ezra-klein/post/wonkbook-tax-reform-is-reall...

Tax reform is really hard. But I think it is the issue of the election, for me. And it is time for a serious public discussion about how to pay our bills, and I guess what are to be our bills.

3richardbsmith
Feb 22, 2012, 11:44am Top

4margd
Feb 23, 2012, 10:35am Top

I think you are right that tax reform will be shaped by election. Players are right now setting up pieces for big game after election?

President Obama proposes reducing the corporate tax rates and eliminating tax shelters and deductions, but watching Congress one wonders how many tax shelters and deduction will remain standing after lobbyists do their work. Still, he can say he cut corporate taxes (or tried to), taking wind out of Republicans' sails on that issue. (Not that corporations will love him for it--I'm wondering if high gas prices are in part oil comanies' way of influencing the election?)

We might need payroll tax holiday to help the economy, but we wage-slaves lose argument that Social Security is paid for specifically now that general funds are being tapped. I think that's why House Republicans went along: not only can they say they cut taxes for regular folks, the cut will help them down the road in their efforts to remake (decimate?) social security program.

5Bretzky1
Edited: Feb 25, 2012, 10:09am Top

Does it increase revenue?

Maybe. Obama is, however, claiming that his proposed changes will be revenue neutral. Of course, they can't be revenue neutral to the penny, but they can be revenue neutral to a point of having an inconsequential effect on the budget deficit.

Does it improve market competitiveness?

I'm not entirely sure what you mean by "market competitiveness."

Does it increase consumer cost?

That depends on what effect the changes would have on corporate taxes. Corporations don't really pay very much of the income taxes on their profits, their customers pay those taxes through the imposition of higher prices for the goods and services they buy. Increase taxes on corporations and you increase the cost of goods for consumers. But if you lower corporate taxes, you also lower consumer costs (with the old economic caveat of "all other things being equal" of course).

Granted, the ability of businesses to pass on taxes to the consumer is not absolute, but, in the main, consumers pay much more of a tax than the business does, and the percentage that consumers pay rises with the price inelasticity of the good or service. For example, every time the state raises taxes on cigarettes, that's money coming directly out of the pockets of smokers, not the tobacco companies.

Does it help economic growth?

That depends on what is holding back economic growth in the first place. Is it due to a lack of investment on the part of suppliers to meet current demand, or is it due to a lack of demand from buyers (i.e., is it a supply-side or a demand-side problem)? If the former, then a reduction in corporate income taxes can stimulate the economy by making more investments profitable for potential investors. If the latter, however, reducing corporate taxes can have a positive effect, but not a large one. Reducing corporate taxes can improve consumer demand through two avenues: 1) it puts more money in the pockets of those people who own the corporations by giving them higher dividend payments, and 2) it increases corporations' disposable income. But, as you might suspect, this isn't going to be a very large boost to the economy because corporate income taxes are only about 2.5% of GDP to begin with.

Tax reform, insofar as you make the tax code simpler, could have a stimulative effect, however, if it reduces how much money corporations pay toward: 1) complying with the tax code and 2) lobbying for targeted deductions. That's billions of dollars that could be freed up for businesses to invest in new production or simply returned to shareholders that is now being wasted on highly unproductive activities.

6richardbsmith
Edited: Feb 25, 2012, 2:29pm Top

Great responses. Thanks.

Maybe we could discuss one at a time, or look at other questions as they come up.

Why would the government want a simplified tax code that does not increase revenues? It would lessen their boon from the lobbies. And if it were simplified, it would remove a campaign issue. They would no longer be able to promise to simplify the tax code.

Of course a push to simplify the tax code would cause an immediate flood of lobby money and interest from corporations wanting to keep their special deductions.

7Bretzky1
Feb 25, 2012, 3:26pm Top

Why would the government want a simplified tax code that does not increase revenues? It would lessen their boon from the lobbies. And if it were simplified, it would remove a campaign issue. They would no longer be able to promise to simplify the tax code.

Well, there's always the "it's good for the country" reason, which policy I believe that most of our elected representatives still have a desire to implement.

Of course a push to simplify the tax code would cause an immediate flood of lobby money and interest from corporations wanting to keep their special deductions.

That's probably true. Although, it's not about the overall tax burden, but about which individual corporations have to pay it. What Obama means by saying that his plan is revenue neutral, of course, is that the government would not lose or gain revenue, but that does not mean that individual corporations would not pay more or less tax. What those targeted deductions and loopholes allow corporations to do is to reduce their tax burden per dollar of profit relative to those competitor businesses or industries that do not qualify for the special treatment (or that have simply failed to find out about the special treatment).

Matthew Yglesias has a post that references this at his blog Moneybox.

8richardbsmith
Feb 25, 2012, 4:27pm Top

Bretsky1, I truly wish I thought our elected representatives were motivated by a desire for the good of our country. I do not think that is the case.

However, in what way is a simplified tax code good for the country? I can think of some possible reasons, but I think the good of the politicians from selling tax breaks outweighs any good for the country from a simplified tax code.

I will look at the moneybox blog post. I have not heard of that blog.

Thanks,

9jjwilson61
Feb 25, 2012, 4:56pm Top

I'm confused. Are you trying to determine if this policy is good for the country, or merely in impugning Obama's motives?

10richardbsmith
Feb 25, 2012, 5:24pm Top

I was not targeting the president especially. But yes the question is why a simplified tax code is better for the country. If it is then I might have another questio

11Bretzky1
Feb 25, 2012, 6:36pm Top

#8:

Actual tax rates aside, the reason that a simplified tax code is better for the country has to do with economic incentives.

In theory, all productive assets are put to their most productive (i.e., most profitable) use. When you have a highly complex tax code, you create incentives for taxpayers to devote a higher proportion of their assets to: 1) complying with the tax code, 2) protecting the parts of the tax code that are beneficial to them, and 3) getting new benefits put into the tax code. These incentives are created by a highly complex tax code because using one's assets in pursuit of these goals becomes more profitable (i.e., more productive) than using them to do what you would do if the tax code weren't so complex.

By simplifying the tax code, incentive #2 would disappear immediately. Incentive #1 would still exist, but the amount of assets required to comply with the tax code would be greatly reduced. Incentive #3 would probably last for awhile, but if you are able to keep from re-complicating the tax code, those taxpayers expending assets on incentive #3 would eventually stop because they would hopefully realize that that is not the most productive use of those assets.

Instead of assets being used to pay for accountants and lawyers and lobbyists, they could be used to expand production. That is, if you use the expenditure method of computing GDP, C (consumption) would decrease while I (investment) would increase. These changes would initially probably cancel out, but over time, the increases in I should lead to a higher C as well, which would increase GDP. And if tax rates are held steady, then tax revenue should increase as well, reducing the government's deficit.

12Bretzky1
Feb 25, 2012, 7:07pm Top

Cont.

I actually forgot one major benefit of having a simplified tax code. It's actually one that Yglesias mentions in the blog post that I linked to. In essence it comes down to fairness.

Powerful corporations and industries are going to be far more likely to have gotten favorable treatment in the tax code than are less powerful ones. Because of this, established businesses and industries have an advantage in attracting capital over ones that have yet to establish themselves. But it is these not yet established businesses and industries that are usually: 1) the most in need of capital and 2) the most likely to generate the most job growth in the coming years.

Established businesses can always move into these not yet established industries, but that's often a recipe for disaster. It's generally the little guys who know these rising industries best and who are best placed to turn them into profitable, job-producing industries. There's a reason why Microsoft essentially created the home computer operating system and IBM didn't.

13richardbsmith
Feb 25, 2012, 10:50pm Top

Bretsky1,
I agree 100%. I hope to have time to check out Yglesias' blog tomorrow.

My next question is why the tax code is not already simplified?

14SimonW11
Feb 26, 2012, 12:10am Top

all tax breaks distort the market when markets become too distorted they are unable to compete with other markets, as to why it has not simplified I suspect it has been from time to time, Its a bit like clearing the drains, every now and then someone notices the sink is a bit sluggish and they get out the draino.

15richardbsmith
Feb 26, 2012, 6:45am Top

That brings up the second question in the OP. Will tax simplification improve market competitiveness? Bretsky was not sure of what was meant by the question, because it was worded so poorly.

Apparently though the answer to the poorly worded question is Yes. Tax simplification will improve market effectiveness by removing political distortions to some degree.

What about US competiveness in the global economy - labor, GDP, trade balance, company willlingness to operate in the US?

SimonW11, I would be very interested in reading about (a layperson's version) of the tax code history - use, abuse, tides of complication/simplification. I think it has never been simplified to a significant extent, that it only grows in complexity as politicians need to sell more influence. (I should quit slamming politicians, though, my thoughts are known and I suspect you all are tired of reading my cynicism.)

16Amtep
Feb 26, 2012, 7:23am Top

Hmm I think there are non-nefarious reasons for the tax code to grow more complex. For one thing, any changes have to go through several committees :) When is the last time you saw a committee produce a simple rule?

One aspect of a Dutch tax simplification initiative has stuck in my mind. The initiative was the usual approach: lower the overall rate and eliminate deductions. One of the changes was to make the business lunch no longer deductible. But then it went through committee. Ok, the committee said, we have a status quo where the business lunch is 100% deductible and a proposal where it's 0% deductible. So let's talk about this.

They ended up with a rule where business lunches were 50% deductible in some cases and 75% deductible in other cases. It was more fair that way.

17richardbsmith
Edited: Feb 26, 2012, 8:22am Top

I don't know if anyone looked at the link in >3 richardbsmith:, but here is the first paragraph.

"Tax expenditures make up a substantial part of the federal budget. Some of them are larger than the entire budgets of the programs or departments that spend money for the same or related purposes; for example, the value of the tax breaks for homeownership exceeds total spending by the Department of Housing and Urban Development."

Now I am in mortgage finance, and I am a homeowner. I benefit from home ownership tax breaks. But if those tax breaks total exceeds the spending of HUD, well damn. That doesn't make any sense.

And we could talk about other specific deductions and credits - business lunches, depreciation come to mind.

But I think along with simplification, we need, in the US, more revenue. I don't understand why it is important that simplification be revenue neutral, other that the politics of the phrase. It will not be revenue neutral, there will be winners and losers, and that will play out through lobby influence and dollars (oops sorry).

And I think we need less market distortion. But then I am not an economist, and there are massively large and unknown numbers of possible impacts from subtle changes in the tax code.

What happens to restaurant industry if tax deductions for business lunches are not allowed? What happens to the rental housing market if depreciation is taken away?

And of course, things that are costs of business should be deducted from revenue, they are not income? A mechanics tools, a worker's uniforms, a sales person's business travel. They are as much business costs as the cost of goods sold is to a retailer or a manufacturer.

Real business expenses and real work expenses reduce income, cost of work for some is as real as the cost of goods is for others.

18richardbsmith
Edited: Feb 26, 2012, 2:08pm Top

An interesting post from the Brooking Institute link in comment 3.

http://www.taxpolicycenter.org/publications/url.cfm?ID=901481

"Public discourse, meanwhile, is hung up on the idea of attacking "loopholes" when the real action is in tax breaks that benefit millions of taxpayers"

"Even as they seek a reasonable compromise, reformers should continue to articulate their visions of an ideal tax system. Mine would reflect five principles. First, the government should raise enough money to pay its bills. That likely means higher revenues, relative to GDP, than we've had historically. Second, it's better to tax bads rather than goods. That means greater reliance on energy and environmental taxes. Third, it's better to tax consumption than income; policymakers should thus limit how much they tax saving and investment. Fourth, the tax burden should be shared equitably both across income levels and among people of similar means who make different choices (for example, renting versus owning a home). Finally, the best tax systems have a broad base and low rates."

These sound like good attributes of any reform.

I absolutely agree with a broader base and lower rates, and that we need revenue to pay the bills.

And I don't think that folks understand the big bucks are in the tax breaks that benefit the "millions of taxpayers" - such as mortgage interest deduction, health care deductions (insurance and bills), and pension payments.

19Bretzky1
Feb 26, 2012, 9:44am Top

My next question is why the tax code is not already simplified?

My guess on how the tax code becomes complex is that each measure that gets put into the code does not, by itself, provide very much complexity. So when lawmakers are considering each individual measure, none of them seems like a bad idea from a complexity perspective, because none of them will alone over-complicate the tax code. But after enough time passes, you have passed a number of measures adding a small amount of complexity to the code that, when added up, create a very complex tax code. It's essentially a process of complexity by accretion.

What about US competiveness in the global economy - labor, GDP, trade balance, company willlingness to operate in the US?

Simplifying the tax code could make the U.S. economy more competitive, but that doesn't necessarily mean that it will. There are so many other factors that affect the overall competitiveness of an economy that a relatively small factor like a complex tax code will only have a small effect when it changes, even drastically. That doesn't mean that improving U.S. competitiveness can't be a reason for simplifying the tax code, it just means that if that is your real goal, then you are better off putting your resources toward other, more durable efforts, like education or immigration reform.

20Bretzky1
Edited: Feb 26, 2012, 10:19am Top

And of course, things that are costs of business should be deducted from revenue, they are not income? A mechanics tools, a worker's uniforms, a sales person's business travel. They are as much business costs as the cost of goods sold is to a retailer or a manufacturer.

While costs of business are costs and not income, there is no reason why corporate "income" tax couldn't be paid on revenue instead of profit. There's also no reason why personal "income" taxes couldn't be paid on gross income.

In fact, one of the perverse aspects of the corporate income tax is that by permitting deductions of business expenses, it favors low profit businesses relative to high profit ones (and that's not even considering the loss carry-forward provisions of the code). For example, if you have two corporations that each pull in $10 million in revenue in a year, but A Corp has a profit of $1 million and B Corp has a profit of $2 million, then B Corp is going to pay twice as much income tax on its $10 million of revenue as A Corp will. Why should B Corp have to pay twice as much income tax as A Corp just because it has better control over its costs?

There's also the tendency for high-profit-margin businesses to be in growing industries and for low-profit-margin ones to be in mature industries (i.e., ones that aren't growing and not adding jobs). Shouldn't we want businesses in growing industries to have as much capital as they can get their hands on, since those are the businesses that will likely be the job creators going forward? (Of course, there is the flip side of this in that firms in dying industries also tend to have higher profits than those in mature industries, so having an income tax based on revenue instead of profit will benefit them as well.)

If Obama succeeds at nothing else in his effort to get a simpler tax code, the one measure that will make this all worthwhile is if he manages to get the deduction for interest expense taken out of the code. It is bad policy to use the tax code to influence how corporations spend their money, but it is particularly pernicious to use the tax code to influence how they capitalize the firm. The tax code favors debt over equity in two ways: 1) interest expenses are deductible and 2) dividend payments are double-taxed. I have no hope that the latter issue can be addressed, but the former one is within reach and should hit the chopping block.

21SimonW11
Feb 26, 2012, 11:57am Top

"Tax expenditures make up a substantial part of the federal budget. Some of them are larger than the entire budgets of the programs or departments that spend money for the same or related purposes; for example, the value of the tax breaks for homeownership exceeds total spending by the Department of Housing and Urban Development."

It is a mistake to equate a tax on something to goverment expediture on it. We do not expect the government to spend the alcohol taxes on building breweries. or a pollution tax on producing chimneys.

22richardbsmith
Feb 26, 2012, 4:53pm Top

SimonW11,
Agreed. I think though the point that I took from that observation is a perspective and a reality check about how we are not paying for our government.

About taxing revenue vice income - I had not considered that approach. And I guess there is no reason we cannot tax revenue. How might that impact low margin, high cost manufacturing? Perhaps there are not such things, I don't know the profit margin for heay equipment or for airplane manufactuing, or for commercial construction.

It appears though from our short discussion that the approach should have a broad perspective based on revenue needs and economic priorities and goals. And it probably should begin with a budget - how much revenue.

I think our political system does not support such an objective discussion. Can the public even be engaged at this level of discussion? Will politicians see any political gain to such an open and difficult process.

As each interest group fought to add their tax benefit, each a small part of the accretion towards burdensom complexity, each interest group will pressure to retain their tax benefit.

Tax simplification then is likely not possible, in one big move. Is it possible to work towards simplification in steps.

We need to increase revenue. We need to increase market competitiveness. We need to measure impacts on individuals and industries.

Is there an agreement on the big picture of tax reform - say adequate revenues and minimal market distortion and a broader tax base with lower tax rates?

I am not sure that is the case, as I suspect numerous groups think specific interests need subsidies and specific social goals need encouragement.

23Bretzky1
Feb 26, 2012, 6:05pm Top

#22:

As the saying goes, "Politics is the art of the possible."

24SimonW11
Feb 27, 2012, 12:49am Top

I do not see major tax reform occurring without a stronger government than the American system is generally capable of producing. Our Westminster model has produced a system where supporters of the government all stand together to get things done, or lose power, strong government is not optional. A British government that failed to produce a budget would be replaced within the month. And a Party who's chancellor introduced a reforming budget could not maintain power if they rejected his proposal.The American model of checks and balances makes a true consensus a necessity. Multiple small reforms are more likely to succeed or would be if republicans did not appear to have withdrawn their consent to just about everything.

25Lunar
Feb 27, 2012, 1:44am Top

#24: Our Westminster model has produced a system where supporters of the government all stand together to get things done, or lose power

As far as I can tell, that's only happened a grand total of three times in the past 100 years. I'm sure if we gave the US congress a similar power to decide whether they should make themselves run for reeelction, they'd use that power just as rarely. But even the US doesn't have quite enough lemmings to go for such a "Don't rock the boat!" system.

26margd
Mar 29, 2012, 12:08pm Top

Oh, grr--executives who take compensation in stocks pay 15%(?) tax. Wage slaves who saved for retirement can end up with a marginal tax of 46.25% (2006). It's called the Tax Torpedo:

"Yet the tax situation is often worse for the retiree than
expected. Once a very low income threshold is met
($34,000 for singles and $44,000 for married couples),
every dollar received from an IRA causes up to 85% of a
Social Security dollar to become taxed also. This creates
a marginal tax of 46.25% in 2006—an amount that will
likely increase in the future under current law."

http://research.prudential.com/media/managed/IB-InnovativeStrategies.pdf

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