Friedman on Economic Fallacy
The late Dr. Milton Friedman cogently expels one of the most persistent economic fallacies regarding the government, spending, and producing. Take 3 minutes and be enlightened and entertained.
Obama & Wealth Redistribution
While pushing for a Social Security payroll tax extension, Obama wants a 3.25% surtax on millionaires to pay for it. This is wealth redistribution under the guise of “fairness”.
Are you going to cut taxes for the middle class and those who are trying to get into the middle class, or are you going to protect massive tax breaks for millionaires and billionaires?” he said. “Are you going to ask a few hundred thousand people who have done very, very well to do their fair share or are you going to raise taxes for hundreds of millions of people across the country?”
Herman Cain’s Social Security Problem
Though I applaud the refreshing boldness that Mr. Cain had shown by proposing to America an actual plan for tax reform, there are two serious drawbacks to his solution that show his fiscal naivete. Most critics would point to the unsavory proposal of having both a sales and income tax in force at the same time, making it possible for future Congresses to increase rates and turn us into Europe. But it is actually the plan’s impact on Social Security that is most devastating.
Cain’s plan would eliminate the Social Security tax and related withholding, and cover retirement pensions as a true “entitlement” (welfare) system out of general tax revenues. This is not what Social Security was intended to be as established by FDR; that is, a system in which people paid for their own retirement. Once liberal politicians started promising individuals far in excess of what their contributions paid for, with no actuarial consideration nor funding whatsoever, Social Security’s demise became assured.
In order to overcome its crippling insolvency, Social Security must go back to its original intent — a self-funded retirement plan. This could be achieved by taking any of many possible forms, but must include the concept that individuals themselves are paying for their own retirement; ie, they are putting money into a plan which will become their invested retirement fund.
By contributing more deeply to the entitlement problem and making Americans further wedded to the government, Cain’s tax plan is a failure. Such a solution ultimately departs from his avowed conservativism.
Clyburn’s Super Committee Super Failure
Senator James Clyburn’s (D-SC) appearance on Fox News Sunday on November 13 regarding the Super Committee was a disgrace. If he is representative of the Democrats on the committeee, there really is no hope that any meaningful conclusion can be reached by November 23rd. His analysis of tax loopholes and deficit reduction was utterly inaccurate.
In the first instance, Clyburn disagreed with the premise that cutting loopholes results in a tax increase. He clearly doesn’t understand that the loopholes to which he is referring are really the tax deductions that taxpayers take. Such deductions are reasonable to a lot of people because they do have some incentives, but, financially speaking, they are revenue losers and detrimental to growth. Cutting the loopholes (deductions) will increases taxes because people will not be able to reduce their taxable income as much, thereby likely ending up in a higher tax bracket.
Additionally, when confronted by the moderator over his analysis, Clyburn declared that he wants to look for the loopholes for those wealthy taxpayers “that allow you to go down to zero in taxes” .Of course, the truth is that there is no way to do that. For Clyburn to assert such a ridiculous idea on national television shows he has no fiscal acumen.
In perhaps the most egregious comment of the interview, Clyburn insisted with a straight face that the Super Committee can and should consider the $917 billion worth of money that won’t be spent on Iraq and Afghanastan to be a tax cut. When confronted with this absurity, Clyburn justified his remarks by arguing that the money should be counted because it can be “plowed back” into the economy.
How could we ever have expected a serious and substantive meeting of the minds when legislators as oblivious as Clyburn are members of the Super Committee?
The Gift Tax and the Super Committee
There are rumors circulating around the country that the Congressional Super Committee may take action that would immediately repeal the $5 million gift tax exemption by Thanksgiving. This is sending countless tax lawyers and accountants scurrying to complete gift planning that the law tells them they have until December 31, 2012 to complete. The lifetime gift level tax exemption was temporarily increased to $5 million under the 2010 Tax Relief Act for 2011 and 2012. Neither the Obama administration nor Congress have commented on these rumors, causing great concern and uncertainty. An about-face reversal with little notice would be extremely disruptive, unfair, and inequitable.
Regardless of how many or few people this change would affect, the fact that this Congressional committee would have the ability to alter the law midstream on the taxpayers who have been working on their long-term plans is outrageous. Any taxpayer – wealthy or not – should be entitled to be able to rely on their current tax law when making tax decisions, and, if a law might be modified, have ample time to implement necessary changes. The real possibility that the aforementioned law might be changed as of the super committee deadline is unconscionable.
This disruption, just by the speculation that is not being refuted or confirmed, is causing great stress. Most of the taxpayers to be impacted by such a change are the very people who create the jobs in this country. With business people dropping everything to deal with these rumors which could have major effects on their business transition plans, it could also impede job growth.
If there were to be such action taken by the Super Committee, it is likely to do serious harm to the United States economy. But more importantly, it reveals the shallowness of any real commitment to tax equity and transparency. The country seems to be rallying around the concepts contained within the Simpson-Bowles and the Rivlin-Domenici reports, both pushing for greater transparency and comprehensive and reliable tax reform. It would be abhorrent if this ‘new direction’ had, as its first implementation, a huge gotcha moment.
The Buffett Rule, AMT, and Tax Reform
Capital Gains and the Wealthy
The concept of an American President going after people making a lot of money and paying a relatively low tax rate on it is particularly naïve; it displays an absolute lack of familiarity with how people get wealthy. As a CPA, I can attest to the fact that the most common way people accumulate massive wealth is either by a huge amount of hard work (creating a successful business) or selling an asset (an invention, real estate, etc).
Many people who file tax returns with large amounts of income, such as selling a business for $10 million, will have a multi-million capital gains amount. It’s not that the higher income earners have some sort of capital gains loophole, but it’s really that the wealthy have done something well to attain the American Dream. And when they do strike it rich through their effort, part of their wealth is treated as a capital gain and it gives those earners a chance to keep a part of it. Knowing that there is a low capital gains rate is an extra incentive to work hard and be successful.
Many of my clients are wealthy, and I have experienced time and again that they will come to me and ask the question: if they are successful, can they keep the majority of their money?”. This is because they know that government wants to take more from the highest income earners who have proven their success, while at the same time, the government is quite happy to let them lose on their own on their particular endeavor.
Most in the top echelon get there from a one-time income-producing significant event. To punish such success by raising the capital gains tax only serves to drive a deeper wedge between the have- and have-nots in an attempt to level the economic playing field.
Occupiers and Crony Capitalism
The most irksome thing about the Occupy Wall Street (OWS) movement is the phony crony capitalist fever going on. The truth of the matter is that, if OWS individuals were honestly seeking to engage and change, and really understood how capitalism works, they’d be for capitalism and against Obama.
The very act of bailouts is anti-free market. It is the opposite of capitalism.
Those companies who received bailouts abused their free market capitalist competitors by cozying up to the government and getting politically motivated handouts. These bailouts were substantially shared by the very unions that were substantially responsible for the companies going bankrupt in the first place. The only thing to enable the cronyism was Obama, who decided to not allow capitalism to work by letting the losers lose — which would have been more beneficial for everyone, except those cronyists.
Those Occupiers who are against capitalism and the bailouts simultaneously clearly don’t understand the difference; it shows naivete on the part of the OWS movement. Their fiscal ignorance undermines their cause and promote a crony socialist agenda.
AMT: Is it Necessary?
The Alternative Minimum Tax (“AMT”) presents hardships to the practitioner as well as the taxpayer who prepares his own return by, as its name implies, imposing a second tax calculation mechanism on taxpayers. It serves virtually no useful purpose, other than the raising of an ever-increasing amount of tax revenue. But it has become very clear in recent years that this AMT tax revenue is not coming from just the taxpayers who were the intended targets of this tax.
The AMT was instituted in its present form when the prior “add on” Minimum Tax was transformed into the AMT in the early 1980’s. Its stated purpose was to require that all taxpayers paid at least a fair share of tax. It was to do this by identifying “loophole” type deductions, also known as “preferences”. There would then be an alternative calculation using lower tax rates applied against this taxable income as increased by the preferences. Whichever of the taxes is higher is the one the taxpayer must pay.
However the AMT was seriously flawed from the outset. Instead of focusing on these loophole type preferences (which would have limited the tax to a very small number of tax law “abusers”), the law that was passed included items that were not loopholes at all. A convoluted formula compares the differences between income and deductions to determine who falls under the guidelines.
A very substantial majority of all AMT paid by taxpayers results from the following four factors:
- Treating state and local taxes as a preference
- Treating miscellaneous deductions as a preference
- Not modifying the rate to correspond to changes in the regular income tax rates.
- Allowing lower exemptions than the regular tax.
Each of these, however, can be quickly shown as inappropriate factors with which to base a tax system intended to just make sure everyone pays a “fair share” of tax.
- State and local taxes are hardly a loophole. The taxes exacted by state and local governments are hardly “voluntarily” paid by taxpayers in an attempt to avoid paying federal taxes.
- Miscellaneous deductions is the category of deductions that consists primarily of expenses incurred to earn income that is subject to tax. It includes unreimbursed employee expenses, investment expenses, etc. This is the most basic and important deduction needed to have a truly fair income tax system. For example, if an individual pays a lawyer a fee for collecting back wages, the legal fee is a miscellaneous deduction. If an individual pays the lawyer $300 for collecting $1000 of back pay, netting $700, the AMT would tax the individual on the full $1000.
- The AMT rate is generally 28%. This was its rate when regular tax rates were 39.6%. Regular tax rates have dropped to 35% currently, but the AMT rate remains at 28%.
- The exemption available under the AMT tax system is a fixed dollar amount which, unlike exemptions and standard deductions under the regular tax system, is not indexed for inflation. Furthermore, it is phased out entirely over certain income levels. And each year Congress has to approve an annual “patch”, which raises the threshold for inflation, in order to raise the exemption limits of the tax so that less wealthy taxpayers won’t be subject to the AMT.
It must be noted that the annual AMT patch is not a tax cut at all, but merely the avoidance of a massive tax increase on millions of middle-income taxpayers’ families. Congress likes to point to the patch as some major revenue loss, had the AMT been applied to those families, as an excuse to raise to raise taxes in order to offset this “potential missing tax revenue”.
The AMT in its present form has no place in tax law. The AMT does not serve the purpose for which it was intended and functions in a most inequitable manner while adding enormous compliance burdens. It should therefore be changed to eliminate the adjustments for state and local taxes and miscellaneous deductions, update its rates, and modify its exemption, or else be eliminated completely.
TEA or OWS?
Tom Palmer, a senior fellow at the Cato Institute, penned the following piece over at Policymic. Tom rightly gets to the heart of the matter in his summation at the end of the essay.
“Government debts and printing-press money will harm future generations. It’s unfair. It’s immoral. And it’s going to be solved not by occupying Phoenix, or Wall Street, or Atlanta, but by demanding that spendthrift politicians stop the bailouts and the cronyism, put the brakes on spending, and pay attention to a truly radical concept: arithmetic. Those are sound Tea Party values.”
Should Americans Support the Tea Party or Occupy Wall Street?