• About

Sacred Cow Chips

Sacred Cow Chips

Tag Archives: tax inversion

A Trump Tax Reform Tally

03 Wednesday May 2017

Posted by pnoetx in Big Government, Taxes, Trump Administration

≈ 1 Comment

Tags

Alternative Minimum Tax, Border Adjustment Tax, C-Corporation, Capex Expensing, Capital Tax, Carry Forward Rules, Child Care Tax Credit, Don Boudreaux, Double Taxation, Goldman Sachs, Immigration, Interest Deductibility, Kevin D. Williamson, Mortgage Interest Deduction, Pass-Through Income, Protectionism, Qualified Dividends, Revenue Neutrality, S-Corporation, Shikha Dalmia, Standard Deduction, Tax Burden, Tax Incentives, tax inversion, Tax Reform, Tax Subsidies, Territorial Taxes, Thomas Sowell, Trump Tax Plan

IMG_4199

The Trump tax plan has some very good elements and several that I dislike strongly. For reference, this link includes the contents of an “interpretation” of the proposal from Goldman Sachs, based on the one-page summary presented by the Administration last week as well as insights that the investment bank might have gleaned from its connections within the administration. At the link, click on the chart for an excellent summary of the plan relative to current law and other proposals.

At the outset, I should state that most members of the media do not understand economics, tax burdens, or the dynamic effects of taxes on economic activity. First, they seem to forget that in the first instance, taxpayers do not serve at the pleasure of the government. It is their money! Second, Don Boudreaux’s recent note on the media’s “taxing” ignorance is instructive:

“In recent days I have … heard and read several media reports on Trump’s tax plan…. Nearly all of these reports are juvenile: changes in tax rates are evaluated by the media according to changes in the legal tax liabilities of various groups of people. For example, Trump’s proposal to cut the top federal personal income-tax rate from 39.6% to 35% is assessed only by its effect on high-income earners. Specifically, of course, it’s portrayed as a ‘gift’ to high-income earners.

… taxation is not simply a slicing up of an economic pie the size of which is independent of the details of the system of taxation. The core economic case for tax cuts is that they reduce the obstacles to creative and productive activities.“

Boudreaux ridicules those who reject this “supply-side” rationale, despite its fundamental and well-established nature. Thomas Sowell makes the distinction between tax rates and tax revenues, and provides some history on tax rate reductions and particularly “tax cuts for the rich“:

“… higher-income taxpayers paid more — repeat, MORE tax revenues into the federal treasury under the lower tax rates than they had under the previous higher tax rates. … That happened not only during the Reagan administration, but also during the Coolidge administration and the Kennedy administration before Reagan, and under the G.W. Bush administration after Reagan. All these administrations cut tax rates and received higher tax revenues than before.

More than that, ‘the rich’ not only paid higher total tax revenues after the so-called ‘tax cuts for the rich,’ they also paid a higher percentage of all tax revenues afterwards. Data on this can be found in a number of places …“

In some cases, a proportion of the increased revenue may have been due to short-term incentives for asset sales in the wake of tax rate reductions. In general, however, Sowell’s point stands.

Kevin Williamson offers thoughts that could be construed as exactly the sort of thing about which Boudreaux is critical:

“It is nearly impossible to cut federal income taxes in a way that primarily benefits low-income Americans, because high-income Americans pay most of the federal income taxes. … The 2.4 percent of households with incomes in excess of $250,000 a year pay about half of all federal income taxes; the bottom half pays about 3 percent.”

The first sentence of that quote highlights the obvious storyline pounced upon by simple-minded journalists, and it also emphasizes the failing political appeal of tax cuts when a decreasing share of the population actually pays taxes. After all, there is some participatory value in spreading the tax burden in a democracy. I believe Williamson is well aware of the second-order, dynamic consequences of tax cuts that spread benefits more broadly, but he is also troubled by the fact that significant spending cuts are not on the immediate agenda: the real resource cost of government will continue unabated. We cannot count on that from Trump, and that should not be a big surprise. Greater accumulation of debt is a certainty without meaningful future reductions in the growth rate of spending.

Here are my thoughts on the specific elements contained in the proposal, as non-specific as they might be:

What I like about the proposal:

  • Lower tax rate on corporate income (less double-taxation): The U.S. has the highest corporate tax rates in the developed world, and the corporate income tax represents double-taxation of income: it is taxed at the corporate level and again at the individual level, perhaps not all at once, but when it is actually received by owners.
  • Adoption of a territorial tax system on corporate income: The U.S. has a punishing system of taxing corporate income wherever it is earned, unlike most of our trading parters. It’s high time we shifted to taxing only the corporate income that is earned in the U.S., which should discourage the practice of tax inversion, whereby firms transfer their legal domicile overseas.
  • No Border Adjustment Tax (BAT): What a relief! This was essentially the application of taxes on imports but tax-free exports. Whatever populist/nationalist appeal this might have had would have quickly evaporated with higher import prices and the crushing blow to import-dependent businesses. Let’s hope it doesn’t come back in congressional negotiations.
  • Lower individual tax rates: I like it.
  • Fewer tax brackets: Simplification, and somewhat lower compliance costs.
  • Fewer deductions from personal income, a broader tax base, and lower compliance costs. Scrapping deductions for state and local taxes in exchange for lower rates will end federal tax subsidies from low-tax to high-tax states.
  • Elimination of the Alternative Minimum Tax: This tax can be rather punitive and it is a nasty compliance cost-causer.

What I dislike about the proposal:

  • The corporate tax rate should be zero (with no double taxation).
  • Taxation of cash held abroad, an effort to encourage repatriation of the cash for reinvestment in the U.S. Taxes on capital of any kind are an act of repeated taxation, as the income used to accumulate capital is taxed to begin with. And such taxes are destructive of capital, which represents a fundamental engine for productivity and economic growth.
  • Retains the mortgage interest and charitable deductions: Both are based on special interest politics. The former leads to an overallocation of resources to owner-occupied housing. Certainly the latter has redeeming virtues, but it subsidizes activities conferring unique benefits to large donors.
  • Increase in the standard deduction: This means fewer “interested” taxpayers. See the  discussion of the Kevin Williamson article above.
  • We should have just one personal income tax bracket, not three: A flat tax would be simpler and would reduce distortions to productive incentives.
  • Tax relief for child-care costs: More special interest politics. Subsidizing market income relative to home activity, hired child care relative to parental care, and fertility is not an appropriate role for government. To the extent that public aid payments are made, they should not be contingent on how the money is spent.
  • Many details are missing: Almost anything could happen with this tax “plan” when the real negotiations begin, but that’s politics, I suppose.

Mixed Feelings:

  • Descriptions of the changes to treatment of pass-through” income seem confused. There is only one kind of tax applied to the income of pass-through entities like S-corporations, and it is the owner’s individual tax rate. Income from C-corporations, on the other hand, is taxed twice: once at a 15% corporate tax rate under the Trump plan, and a second time when it is paid to investors at an individual tax rate, which now range from 15% to almost 24% for “qualified dividends” (most dividend payments), but are likely to range up to 35% for “ordinary” dividends under the plan. So effectively, double-taxed C-corporate income would be taxed at total rates ranging from 30% to 50% after tallying both the C-corp tax and the individual tax. (This is a simplification: C-corp income paid as dividends would be taxed to the corporation and then immediately to the shareholder at their individual rate, while retained corporate income would be taxed later).

Presumably, the Trump tax plan is to reduce the rate on “pass-through” income to just 15% at the individual level, regardless of other income. (It is not clear how that would effect brackets or the rate of taxation on other components of individual income.) Is that good? Yes, to the extent that lower tax rates allow individuals to keep more of their hard-earned income, and to the extent that such a change would help small businesses. S-corps have always had an advantage in avoiding double taxation, however, and this would not end the differential taxation of S and C income, which is distortionary. It might incent business owners to shift income away from salary payments to profit, however, which would increase the negative impact on tax revenue.

  • Interest deductibility and expensing of capital expenditures are in question. Interest deductibility puts debt funding on an equal footing with equity funding only if the double tax on C-corp income is fully repealed. Immediate expensing of “capex” would certainly provide an investment incentive (as long as “excess” expenses can be carried forward), and for C-corporations, it would certainly bring us closer to elimination of the double-tax on income (the accounting matching principle be damned!).
  • There is no commitment to shrink government, but that’s partly (only partly) a function of having abandoned revenue neutrality. It’s also something that has been promised for the next budget year.
  • The tax reform proposal represents a departure from insistence on revenue neutrality: On the whole, I find this appealing, not because I like deficits better than taxes, but because there may be margins along which tax policy can be improved if unconstrained by neutrality, assuming that the incremental deficits are less damaging to the economy than the gains. The political landscape may dictate that desirable changes in tax policy can be made more easily in this way.

Shikha Dalmia wonders whether a real antidote for “Trumpism” might be embedded within the tax reform proposal. If the reforms are successful in stimulating non-inflationary economic growth, a “big if” on the first count, the popular preoccupations inspired by Trump with immigration policy, the “wall” and protectionism might just fade away. But don’t count on it. On the whole, I think the tax reform proposal has promise, though some of the good parts could vanish before a bill hits Trump’s desk, and some of the bad parts could get worse!

Big Tax & Spend Party In Obama’s Head

04 Wednesday Feb 2015

Posted by pnoetx in Big Government, Taxes

≈ Leave a comment

Tags

corporate income tax reform, corporate taxes, defense spending, estate taxes, government deficit, government spending, infrastructure, Investors Business Daily, Obama budget, Reason, Sequestration, stepped-up basis, tax inversion, Timothy Taylor

Obamas_budget

President Obama has thoughtfully dangled lots of freebies before the eyes of Americans in his proposed budget under the guise of “middle-class economics.” It’s not clear that the middle class will benefit over the long haul, but this certainly isn’t about forsaking present pleasure for future gain. It’s just about politics. Obama hopes his budget establishes a superior negotiating position with Republicans, and he hopes that the opposition to many of his giveaways will allow Democrats to tar the GOP as hard-hearted. In introducing his proposal, the president derided what he called the “mindless austerity” of the sequestration spending caps (which his budget would exceed by a mere $74 billion), but as Reason notes, the “sequestration process was the White House’s idea in the first place.”

Investor’s Business Daily has this to say in their editorial:

“The era of big government would be back with a vengeance. Obama wants a preposterous 7% spending hike this year for government agencies — with more nanny-state money for schools, early-childhood education, roads and bridges, child care, green energy and corporate welfare for manufacturers.”

All of these priorities are behaviorally non-neutral, heavily cross-subsidized and of questionable value, at best. Of course, everybody wants a high-speed rail line as long as the fare is heavily subsidized. Beyond that yearning, the poor state of American transportation infrastructure is something of a myth. Just as stupefying is the proposed increase in defense spending, which will end up as the most popular provision among hawks in Congress. From Reason:

“President Obama’s budget requests $561 billion for defense spending, which includes the biggest baseline Pentagon budget ever. Sequestration caps for military were already loosened from initial levels in a budget deal made in 2013. And the Pentagon has managed to keep spending freely on boondoggles like the Joint Strike Fighter—a $400 billion futuristic fighter that has serious trouble with basic functionality, like flying—and a program to build new nuclear bombers and subs expected to cost about $350 billion. This is not a picture of a fighting force that is desperately starving for cash.”

On the revenue side, the Obama budget would increase taxes by $1.6 trillion over 10 years. Some of the details are discussed here, including $200 billion in corporate tax reform. As explained by Timothy Taylor, the so-called reform is a hodge-podge of 67 different provisions. For the 2017 budget year, these would add revenue of about $19 billion, but when Taylor totals the top ten provision, those come to $49 billion. The $30 billion difference consists of various items such as “simplification and tax relief for small business,” which might represent sensible changes, and “incentives for manufacturing, research, and clean energy.” Those are tax breaks and subsidies. From Taylor: “Clearly, the temptation to redistribute the “special deductions, credits, and other tax preferences,” rather than ending them, remains strong.”

The current 35% U.S. corporate income tax rate is the highest in the industrialized world. The idea of corporate tax reform is to reduce the tax rate in exchange for eliminating various deductions, which is laudable in itself. Unfortunately, the Obama plan also proposes a tax on corporate profits earned and held abroad (not repatriated). Taylor explains the rub:

“Here, I’ll juse [sic] make the point that the U.S. is unique among the major economies in that it claims the right to tax the profits of U.S. corporations wherever in the world they are earned. Other countries only tax profits earned within their borders. Of course, this is one reason why U.S. companies sometimes seek to merge with a foreign firm and transfer their official ownership abroad. A foreign-controlled domestic company in the United States is taxed only on its U.S. profits; in contrast, if a company with the same structure is a U.S.-controlled firm, then the U.S. government claims the right to tax its foreign profits as well. This is a real issue for US corporate tax reform in a globalizing economy, and the approach in this budget document bascially just doubles down on going after revenue from abroad.”

Other tax increases proposed by Obama include an increase in the rate on dividends (already double-taxed) and capital gains (with its implicit inflation tax on wealth), capital gains taxation of assets at death (elimination of stepped-up basis), higher estate taxes, limits on itemized deductions, and several others. All of these complexities in the tax code could be eliminated entirely with real tax reform and simplification, but that would prevent the president’s beneficent “middle-class economics,” more appropriately called middle-class pandering. Higher taxes undermine economic growth: first, by reducing disposable income and spending, the traditional Keynesian explanation; second, and more fundamentally, by reducing incentives to work, invest and take risks that increase the economy’s productive potential over time. When it all plays out, a budget with a $1.6 trillion increase in taxes, no matter where the direct burden falls, will not help the middle class.

Finally, the Obama budget includes optimistic assumptions about economic growth. Even under that outlook, the budget deficit is expected to rise from  $474 billion in 2016 to $687 billion in 2025. The debt will keep expanding, absorbing private saving, leaving a smaller pool of capital available for private investment.

The president’s efforts to grow the state apparatus continue with this budget proposal. It might be “toast” as a package, but the political bidding war continues. Much depends on the ability of Americans to resist the goodies dangled before them by the White House candyman. That much is required to reverse the ongoing slide into dependency on the state.

A Dumb Tax Code Tests Loyalty

07 Thursday Aug 2014

Posted by pnoetx in Uncategorized

≈ 1 Comment

Tags

Corporate Form, corporate taxes, fascism, IRS, J.D. Tuccille, Jonathan Alter, regulation, tax inversion, TaxProf

taxes

The complex and punitive tax treatment of U.S. corporate income creates incentives for firms to seek relief through various maneuvers. According to the TaxProf Blog, quoting KPMG, the U.S. corporate tax rate is the highest among industrialized countries and the second highest in the world. U.S. corporations are taxed on profits earned overseas, which is disadvantageous relative to so-called “territorial” tax systems. Corporate income is taxed twice, as well: once as corporate income and again when income is paid to shareholders, though often at a favorable “qualified dividend” rate (and double taxation of dividends is not uncommon internationally). Of course, there are myriad provisions in the tax code that reduce the severity of the corporate tax bite by providing deductions (some of which are mentioned at the first link). But the code is quite complex and it creates unnecessary compliance costs; on balance, it provides compelling reasons for corporations to attempt to shift income overseas to obtain more favorable treatment. A growing number of firms have engaged in so-called corporate “tax inversions,” which involve shifting ownership to an overseas corporate parent. This is said to represent a threat to the U.S. tax base, and it has recently captured the attention of the media.

What should be done about this trend? The first link above, from the TaxProf, discusses two options: “… a general reform of the U.S. corporate tax and specific provisions to deal with tax-motivated international mergers.” The first option would involve a vastly simpler tax code, with fewer and less generous deductions and lower tax rates. That change would be desirable if only to reduce compliance costs, but it could also be used to make the U.S. tax code more competitive internationally. A strong case can be made for eliminating the corporate income tax entirely, based on the likely favorable impact on employment, wages and international competitiveness that it would engender.

The second option mentioned in connection with reducing tax inversions involves more targeted measures which do nothing to reduce the complexity of the tax code. Apparently, the Treasury is investigating a “long list” of alternative administrative actions to discourage inversions. Again, from the TaxProf:

The President’s FY2015 budget proposes to treat all mergers as U.S. firms if the U.S. firm’s shareholders have 50% or more ownership of the combined firm or maintains management and control in the United States. Similar legislation has also been introduced in the 113th Congress.

Public attention may have discouraged Walgreens from pursuing an inversion, and the Obama administration is clearly “jawboning” in an effort to stop the activity.

Finally, Jonathan Alter wants U.S. corporations to take “loyalty oaths” to prevent them from seeking out inversion opportunities. This proposal is certainly “creepy,” as noted by J.D. Tuccille in Reason Magazine. Loyalty oaths? Seriously? From Tuccille:

… this whole “economic patriotism” crusade starts at a bad place and spirals down into a cesspool. So, if that’s the model you work from…

To make it clear where this all goes, the National Recovery Administration once boasted, “The Fascist Principles are very similar to those we have been evolving here in America.” Its head, Hugh Johnson, noted about the adoption or rejection of the blue eagle symbol and its code, “Those who are not with us are against us.”

Where else might this go? Will “buy American” form the basis of a loyalty oath of some kind? What tax consequences might await violators? What other forms of cooperation with intrusive authorities might be enforced in this way? David Harsanyi has some interesting thoughts on the question of “properly channeled nationalism”:

It’s worth remembering that when Alter proposes that Obama discipline companies that have done nothing illegal or illegitimate, he’s simply taking Obama’s “economic patriotism” to its next logical step. He wants the administration to threaten the close “easy access to American markets” companies enjoy. And really, haven’t we all suffered enough with all this unhindered access to affordable goods, exotic merchandise and cool gadgets? Samsung. Honda. Toyota. Nestle. GlaxoSmithKline. Do you believe shoppers concern themselves with the fact that Food Lion is subsidiary of a Belgium company? I suspect that most Americans, in their everyday lives, don’t care where their favorite companies are situated, because intuitively they understand the benefits of trade.

Too many times already, I have heard statements implying disloyalty after daring to criticize the president’s initiatives. That’s a very bad sign. The U.S. achieved greatness in large part because it offered basic freedoms in personal, social and economic life. Decisions about what and with whom to do business, though not completely free of government interference, must be a person’s own, even in voluntary association with others (as in the corporate form). People should be free to transfer their assets abroad or to sell their assets to anyone, regardless of domicile. If this is a desirable place to live and do business, such freedoms should never be a source of concern. In fact, with a tax code that is simpler and more competitive, it could never be anything but a source of strength.

Follow Sacred Cow Chips on WordPress.com

Recent Posts

  • Let’s Suppress Fraudulent Votes
  • Fiscal Foolishness a Costly Salve For Midterm Jitters
  • Relax: Natural Variability Causes Heatwaves
  • The Vampiric Nature of “Stakeholder” Capitalism
  • Fueled, Ignored, Misdiagnosed in DC, Inflation Broadens

Archives

  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014

Blogs I Follow

  • Passive Income Kickstart
  • OnlyFinance.net
  • TLC Cholesterol
  • Nintil
  • kendunning.net
  • DCWhispers.com
  • Hoong-Wai in the UK
  • Marginal REVOLUTION
  • CBS St. Louis
  • Watts Up With That?
  • Aussie Nationalist Blog
  • American Elephants
  • The View from Alexandria
  • The Gymnasium
  • A Force for Good
  • ARLIN REPORT...................walking this path together
  • Notes On Liberty
  • troymo
  • SUNDAY BLOG Stephanie Sievers
  • Miss Lou Acquiring Lore
  • Your Well Wisher Program
  • Objectivism In Depth
  • RobotEnomics
  • Orderstatistic
  • Paradigm Library

Blog at WordPress.com.

Passive Income Kickstart

OnlyFinance.net

Financial Matters!

TLC Cholesterol

Nintil

To estimate, compare, distinguish, discuss, and trace to its principal sources everything

kendunning.net

The future is ours to create.

DCWhispers.com

Hoong-Wai in the UK

A Commonwealth immigrant's perspective on the UK's public arena.

Marginal REVOLUTION

Small Steps Toward A Much Better World

CBS St. Louis

News, Sports, Weather, Traffic and St. Louis' Top Spots

Watts Up With That?

The world's most viewed site on global warming and climate change

Aussie Nationalist Blog

Commentary from a Paleoconservative and Nationalist perspective

American Elephants

Defending Life, Liberty and the Pursuit of Happiness

The View from Alexandria

In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun

The Gymnasium

A place for reason, politics, economics, and faith steeped in the classical liberal tradition

A Force for Good

How economics, morality, and markets combine

ARLIN REPORT...................walking this path together

PERSPECTIVE FROM AN AGING SENIOR CITIZEN

Notes On Liberty

Spontaneous thoughts on a humble creed

troymo

SUNDAY BLOG Stephanie Sievers

Escaping the everyday life with photographs from my travels

Miss Lou Acquiring Lore

Gallery of Life...

Your Well Wisher Program

Attempt to solve commonly known problems…

Objectivism In Depth

Exploring Ayn Rand's revolutionary philosophy.

RobotEnomics

(A)n (I)ntelligent Future

Orderstatistic

Economics, chess and anything else on my mind.

Paradigm Library

OODA Looping

  • Follow Following
    • Sacred Cow Chips
    • Join 120 other followers
    • Already have a WordPress.com account? Log in now.
    • Sacred Cow Chips
    • Customize
    • Follow Following
    • Sign up
    • Log in
    • Report this content
    • View site in Reader
    • Manage subscriptions
    • Collapse this bar
 

Loading Comments...