Everything but…

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Everybody’s talking about it and no one is doing a darn thing about it. No, it’s not the weather. It is our tax system.

To be honest, before we can make any changes to our individual tax system, we must overhaul our corporate system. Not the least reason is that over the past 25 years or so, corporate taxes have dropped from providing 30+% of our governmental revenue to 10%. Once you recognize ize that little tidbit, it shouldn’t be too hard to understand why there are insufficient funds to repair and maintain our infrastructure.

From Where Do Our Federal Dollars Come?

Obviously, we need to fix the corporate tax system. And, while even more people lament the inversions, the mergers where an American firm merges into a smaller foreign entity to reduce its tax burden, no one really acts. Nor does anyone call these corporate entities on their lies-that they are escaping the 35% tax rate. The majority of firms in the US that pay the purported 35% tax rate are smaller firms, and of them- it’s primarily the professional firms. And even they (the smaller firms) have found ways to avoid paying this tax rate.

You see, one of the big changes to the tax code changes effected under Reagan was the promotion of pass-through entities. Instead of forming (and operating) ‘C’ corporations, most of the firms started after these changes operate as ‘S’ entities. [Back when these changes were implemented the designations meant Corporations (C) and Small business entities (S).] Not to mention, the development of a newer entity, the Limited Liability Corporation (LLC entity), that despite ‘corporation’ being part of its name, operates as a partnership (of sorts) or as an  ‘S’ entity.

In 1986, the maximum tax rates changed from 46% and 70% down to 34% and 28%, respectively for corporations and individuals. (Note that the PPACA [Obamacare] program has raised the maximum individual rate up to 39.6%.) To avoid double taxation (corporations are taxed on their profits, investors are taxed on the profit dividends paid by corporations to them), nowadays only those entities that are -or plan to- go public form the bulk of the C corporations. The other new businesses all form the pass-through types, where profits are assumed to flow directly to the stockholders or partners in the business, who pay taxes on those profits at their individual income tax rates.

How has this changed the tax equation? By 2011, 54% of the profits generated by businesses accrue to pass=through entities. Before the Reagan tax changes, only 28% of the income was so generated.

Moreover, there has been a shift in who is involved. 35 years ago, it was the lifestyle and mom-and-pop businesses that operated as pass-through entities. Now, it’s hedge funds, large (multi-state) law firms, global accounting and consulting firms, etc. And, this change has been why it’s the 1% who garner 2/3 of the pass-through profits.

Proposed Corporate Tax system

 

So, you see the problem. And, the proposal I have been promoting has hit some glitches. First, in the US, there was a change in the Ways and Means Committee. (That’s long before the change of Paul Ryan moving from that chair to become the Speaker of the House.) And, then the OECD (Organization for Economic Cooperation and Development) presented the same concept for the world to adopt…on the day of the Paris bombings.

Yup. That idea is pretty much shelved.

I can only hope that the current Presidential Sweepstakes (it does seem akin to the Publisher’s Clearing House events, no?) will make someone pick up this idea and run with it.

Because my idea makes economic sense, it rewards each nation of the world for its contribution to a given company’s profits and revenue, and removes the ability of a business to shelter profits illegally (or pseudo-legally) in tax havens.

I can only hope each of us brings up this issue and solution to each candidate we meet this primary season.

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