From Where Do Our Federal Dollars Come?

Tax Reform? Maybe…

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Tax Reform is all the rage.  And, now that the fairy-tale land of budget reconciliation has terminated (it ended on 30 September, where items could pass with a simple majority- which means the Vice President could break any ties), our Congress will now get all hyped about lowering the tax burden  (I fear they will offer the rich a tax break, the poor more taxes, the middle class empty promises, and Christmas gifts for big business.  We’ll have to see what they really propose.)

Oh, sure,  you’ve heard that TheDonald, Speaker Ryan, and Senate Majority Leader McConnell have proposed a “tax reform plan”.  One purported to be 9 pages,  but it’s really only 7- since the first page is a cover page and several pages are barely half full.   (In truth, the document contains barely 1700 words to “reform” personal, corporate, and estate taxes.  Yes- all three!)  That document took them 9 months to produce? Yet, there aren’t even dollar amounts assigned to the 3tax brackets. And as I suspected, it’s a method to reduce the taxes of the rich.

GOP Tax Plan
Here’s Page 1 of 9 of the GOP “Tax Reform”

(For example, that purported doubling of the standard deduction from $ 12K to $ 24K?  Well, that’s because they conveniently forget to include the fact that the personal exemption per person has been killed.  So, the standard family of four which (unless you were very rich, which limits the personal exemption levels) of more than $ 16,000 is now gone.  So, the $ 28K deduction to your taxable that existed before will now be reduced to $ 24K.  See what I mean about the tax reduction for the poor and middle class?  Trust me- all the rich itemize. {You are welcome to verify with the IRS data- until TheDonald scrubs that fact from public view.])

But, as opposed to real tax reform- and like this virtual PowerPoint presentation purporting to be a plan,  most of our legislators are looking at ways to lower the tax rate for the rich and corporations by adjusting tax breaks.  And, the report issued by the Urban Institute and the Brookings Institution (discussing the proposed reduction to corporate tax rates)  follow that same sterile thought path, which is why the authors proclaimed that the corporate tax rate can’t drop below 26%.   (But, that oft-claimed 35% maximum tax rate?  Only the smallest businesses pay such a rate, as any perusal of 10K [annual reports] submissions by public companies will demonstrate.)

From Where Do Our Federal Dollars Come?

Over the decades, business tax revenue collected in the USA has atrophied.  If one includes tax revenue from all sources, then business tax revenue has dropped from 35% of all receipts in the mid-1950s to less than 10% now.  Payroll taxes (Social Security and Medicare taxes) provide some 45% of receipts and personal income tax the rest of the collections.  Which means that the tax burden falls more heavily on those at the lower end of the income strata.  Unless and until we augment the collections from businesses, that fact won’t change.

But, instead of trying to adjust tax breaks to pay for any change in tax rates, we need to reconsider how we tax multinational firms.  Because the current system is nothing but a shell game- where companies claim profits were accrued from a dozen folks working in a tax haven and never paying a dime in taxes on that income.  (This is why companies are sitting on piles of cash overseas.)

We need to adopt a tax system that matches our current multi-state tax system for domestic operations.  This multi-state compact has been in place in the USA for decades.  Where each company discerns how much revenue, how many assets, and how much payroll results from each state in the union (or from each state where the company must pay state taxes).  These are then compared to the overall revenue, payroll, and assets in the US and the company pays the state income tax rate multiplied by the average percentage of those three factors.

World wide Tax rates

The OECD (Organization for Economic Cooperation and Development) has already agreed to adopt this program (which they term BEPS [Base Erosion and Profit Shifting]) by the member countries starting next year.   Because they understand that businesses have been shifting profits from one country to another based upon the tax rate they must pay- and not based upon where the profits truly were developed.

Once the Common Market countries have adopted this program (these countries are part of the OECD), the US will need to follow suit, or the various tax treaties we have (a most complicated mess,by the way) will no longer be tenable.   More importantly, if we adopt this program ourselves, companies will no longer be able to pay no taxes to the US Treasury, claiming that some tiny country that provided them a special tax benefit accrues the benefit.  We will no longer have companies harboring their money overseas, since it will now be properly and adequately taxed.

Current and Proposed Corporate Tax Rates
Here are the rates that will work if we adopt a multi-national tax averaging system, as proposed here https://www.adjuvancy.com/wordpress/inequality-american-policy/

Moreover, once we adopt this system, business tax revenues will explode.  Despite the claims of Brookings/Urban above, the tax rate could be dropped to 25%.  (This is a simple calculation using revenues, assets, and payroll of our largest companies that obtain in the US and worldwide.)  As a matter of fact, the tax rate could probably be dropped even further, once these long overdue taxes (on profits sheltered abroad) are collected.

Oh, and for those companies that only operate in the US?   They won’t have any new-fangled computations to effect.  They’ll just enjoy (maybe) lower tax rates.  (I say maybe because so few companies ever pay that oft-quoted 35% marginal rate.)

It’s time for a paradigm shift in the way we examine business taxes.  For the good of the country. Roy A. Ackerman, Ph.D., E.A.

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