Taxes and tax rates are top of mind today. If you listen to the discussion you might be led to believe everyone that pays federal taxes pays the same rate on the same dollar. You might also believe that all income is treated the same and taxed at the same rate. You might believe tax rates are the primary driver of economic growth , job creation and expansion. You may believe that a successful business person may chose to work less or earn less to avoid paying taxes at a higher percentage rate. You may believe that government should use the tax code to inspire capitalist opportunities or industries. You may believe lower tax rates create jobs or higher tax rate generate more income to the government. We all have our beliefs and those beliefs create the “historical inertia” that drives our tax policy. Tax rates have always been the tool of choice.
I for one do not support the concept of using the tax code to deliver selected results. However many other do. For example, taking mortgage interest deductions against your taxable income reduces your tax burden and probably inspires some home financing which helps lenders. The systems really does not want to promote buying a home with cash or savings. I’m not sure the concept promotes home buying or selling or if it just promotes debt financing of homes. The point is this break does benefit the buyer and the financing companies while promoting debt and investment in property that provides shelter and benefit to the buyer. The cause is noble; the results seem to have a lot of positives, but the direct effect is the Treasury receives less direct tax revenue in exchange for some potential future revenue. Questionable strategy but it is one way we do it in this country.
Some believe tax credits related to home buying/selling may be responsible for keeping the selling market primed but i believe the $500k exclusion of residential capital gain as long as it is invested into a new home of greater value within 24 months is a tax break that did in fact drive-up the selling prices of homes during the go-go decade of the 2000’s. However, we do know that write-offs for things related to residential real estate may be responsible for more durable goods sales , (for example tax credits for energy efficient appliances drive up the need to manufacture and sell more energy efficient appliances). This concept may work or it may just inspire certain spending that may or may not help. I guess it is hard to say that the purchase of something that saves a consumer energy costs forever would be a bad thing. I just argue that for every noble tax credit or write-off there will be another that is just plain silly and does not do anything positive to the system that finances our country.
There are hundreds of tax write-offs in the tax code that I do not agree with. My primary criticism is in too many cases, there is no proof that they actually work for we-the-people. Too often they work for some-the-people but not enough of all-the-folks.
Let me first define “works”. The government should only collect the revenues required to properly and effectively run our country -not one dime more and not one dime less. Remember, this is your country and you would require no less from yourself if you were running this great country – which you are i might add. Therefore, anytime the country decides to take in less revenue by using the tax code, the net goal has to be to ultimately still receive the correct revenue – even if by lowering it in one situation it can create revenue in another situation. The effect must still be the proper collection of the net revenue target required. If the government ends up with surplus, the citizens get a refund. If there is a shortfall and we can’t find specific waste or mismanagement that can be stamped out in real-time, more revenue will be collected. This is a fairly simple construct.
As a result, we have developed a simple progressive tier-based system. You earn x, you pay y. The formula is percentage based and is reasonably understood. If we stopped there we would have a real winner of a tax system. However, we went further and added a system of tax credits, write-offs and completely convoluted targeted tax credits. Now the system is fraught with confusion and intentionally irrational benefit structures. Does any of this makes sense.m it’s like having a great pool party with you friends and someone invites Dennis Rodman and his crew of rave buddies. Yeah, he’s probably fun, different and interesting but he just made your party much more complicated and you know someone is leaving a turd in your pool..
I will only say this to be moderately positive about the plethora of current tax-shelters, credits, loopholes, and write-offs: at least many of them are specific and require an action from the taxpayer FIRST before they can receive the credit or tax deduction the government -defined as “we-the-peeps”. If I had to choose a system I might support the tax credits that are clearly performance based -you do something the specifically works according to the desired goal, (pay your charitable contribution), and we will give you the write-off. Now I do not want to debate the concept of Charitable contributions but many believe that giving money to charity does in fact help many of our most needy citizens and relieves the government of some of the expenses it might have to incur without the existence of non-governmental charities. My point is you only get the write-off if you actually write the check and show proof. Seems relatively performance based to me.
If a company provide health insurance for its workers, the company can write that off. If some families pay for college education, they can write it off. If you do exploratory energy research, some can get tax credits. It appears our country does practice the concept of tax cause and revenue effect/affect. We have designed a tax policy to cause people to act in a way that will effect/affect tax revenue collection. There are many examples but my point is you actually have to do it FIRST to get the reduction in your tax bill LATER. This is true in almost every instance of the tax code except in the justification of corporate and individual tax rate and their direct correlation to job creation in exchange for those cuts.
Let me explain.
If the notion of cutting income and wage-based taxes is for the specific goal of ACCELERATING CONSUMER SPENDING IN THE ECONOMY, and if the tried and true concept of using the tax code for cause and effect were being honestly practiced, then a consumer would be required to produce receipts of purchases when they file their taxes and they can receive their rebate. Now some will say this is too cumbersome and way too much work for consumers and the system. They might also add that many lower wage earners may not earn enough to even file a tax return so this can’t work. Therefore the preferred system is to simply give everyone a tax break and spending will magically occur. Frankly this may work or it may not but the truth is I do not know how to prove it does or does not but many economists say tax cuts for moderate income folks leads to very direct spending into the economy. I will take them at their word because their science bears the facts. Added direct consumer and business spending does help the economy and flows back into the treasury.
On the other hand, if lowering income taxes or Capital based taxes is for the specific goal of CREATING MILLIONS OF NEW JOBS, the facts do not bear this out. We will discuss the last 4 decades for proof of this but the reason the tax cuts specifically for job creation can’t work is because in practice, the tax cut comes FIRST and the jobs come SECOND. The quandary is therefore: what happens to the Treasury if the jobs do NOT come? In other words, what happens if the tax policy does not WORK? The answer is simple a huge deficit is going to be created unless you have a way to go and get your money back from the people that failed to fulfill their end of the bargain. Remember if the specific case for specific tax cuts was for net new ob creation, if you only received your tax cut, write-off or credit AFTER you showed proof of your wonderful net new job creation, the tax cut would be defined as WORKING. Yet if this specific tax cut is given before the first net mew job is created – which is basically the absolute opposite of almost all of the current existing cuts, rebates, write-offs written into our complicated tax code – and the jobs so not eventuate, this specific tax cut for net new job creation would be labeled a most dismal failure.
From the period 1/30/2000 to 12/31/2010, the US created zero net new jobs. The tax cut that was passed in the first quarter of 2000 was touted as the best way to produce millions of net new jobs and return a surplus to the citizens. Check the news reporting at the time if you do not believe me.
Yes, lowering taxes so people have more of their own money to spend or invest as they please is a great idea. As I said, I do not believe in any write-offs or exemptions because people should be free to legally invest and spend as they please. The tax code should be tiered and flattened with provisions for the rebating of surpluses and the increase of collection if the system has revenue shortfalls. However, I lost that fight so my position is that there should be no tax break or tax cut given or allowed until the taxpayer proactively performs the action for which the tax cut, rebate or deduction was originally designed to accomplish.
So, if we are going to lower taxes for the specific goal of creating millions of net new jobs, once the jobs are created, taxes should/will get lowered. We can no longer give the reward before we receive the benefit. This is a performance based model practiced in the private-sector every day. You are rewarded for your performance. If the concept of paying taxes higher taxes is a burden, paying lower taxes is a reward that we all are happy to receive. But the country can not forgo the revenue before you have met your job creation performance goal. Let’s keep in mind this fact: employees pay taxes and use fewer social services. It makes complete sense that we-the-people should reward the people that created the millions of new jobs because their great work will help lower government spending, create new consumers and grow our economy. Hell, give them a beer as well for creating all of those jobs. But give them the tax cut and the beer AFTER they meet the stated performance goal of actually creating the millions of net new jobs.
Therefore I posit using tax cuts to create jobs only works if they are given AFTER the jobs are created otherwise it is simply a massive revenue shift in the Treasury which only adds to the deficit and leads to future tax increases while creating system-wide service cuts which will themselves lead to firing people and creating even more unemployment. No one would purposely design an tax plan with these intended consequences would they?? You know the answer.
What do we really want?
You may believe a lot of things but perhaps the question should be this: “What do you want this country to do and how do you pay for it in a way that is sound, reasonable, sustainable and flexible enough to modify in the event of great need?
For the sake of argument I will focus the tax discussion on two items:
Do tax rates affect net new job creation?
What are the net taxes paid on selected income?
Taxes are paid on your adjusted income not your gross income/wages.
Lets’s start with what income taxes are paid on. Taxes are paid on net income not gross income. A person with gross earnings of $250,000 at a tax rate of 35% does not pay 35% of $250,000 on their tax return They deduct (adjust for) things like mortgage interest, education, children, charitable contributions, investment losses, carried interest, healthcare premiums, and many other allowable tax deductions from their gross earnings of $250,000. Once deducted you arrive at your net adjusted income also known ad net taxable income. They pay their specific tax rate (let’s say 35%) on that amount. You can go to the IRS website for your specific rate but I assure you that your taxes are not based on your gross earnings, they are based on you net or adjusted earnings. Therefore in order to be a taxpayer paying at the 35% tax rate on $250,000 in net taxable income or adjusted earnings, you are more than likely earning closer to $325,000 in gross earnings. Close to $28,000 per month in gross income or nearly $170.00 per hour.
Conclusion: the more tax deductions you can qualify for, the lower your adjusted net taxable income will be -regardless of the tax rate. Those of us at the higher gross earning level use the heck out of every possible deduction including trying to add more and more of them as often as possible. Tax credits and loopholes are like crack, once you have hit it you can’t seem to ever stop and you will fight like hell to stop anyone from taking away your drug of choice.
Job creation and tax rates.
No reasonable business person wants to pay taxes if they can be legally and ethically avoided. Every business person would love to see their taxes lowered. Every business person wants a level playing field to compete in so whatever the tax rate is, as long as every similar competitor pays at the same rate, no single business can be uniquely harmed. These concepts are universally accepted by US capitalists.
However, I must also make it clear that it is not the responsibility of a capitalist to create one job. If you can make a profit with no employees, go for it. If you need an additional employee in order to satisfy a need that creates more net profit or earns a client, you will hire that employee in the blink of an eye. Yet it is clear that we need job creation in our country because although businesses pay taxes, employees of businesses in the private sector as well as employees in the public sector pay a large portion of overall tax receipts. We need jobs in this country. Therefore we need businesses to be successful enough to need employees. As a result, we use the tax code to sometimes incentivize employee hiring and retention.
So, yes, we do place a sometimes unreasonable expectation on employers to retain and create jobs specifically in the United States. US jobs create a diverse mix of tax revenue for the country.
First and foremost let me dispel a wild rumor. RUMOR: If you raise taxes on income by 3 points, business people will purposefully stop working, stop spending, stop innovating and/or stop trying to earn money. This is a stupid rumor and a even more ridiculous statement. The United States is the safest and most dynamic economy in the world -representing more opportunity to earn money for any entrepreneur.. In this country, business people and driven professionals who want to make as much gross revenue as possible regardless of the tax rate, have been able to thrive for a century. As long as the rate is based on a percentage of net taxable income then 20% of $200k is better than 15% of $100k. Who in their right mind would refuse the opportunity to earn $200k, even if the tax rate is higher than at $100k? Business people will do their best to earn as much gross income as possible. This logic works the same if the revenue number is $500k at 35% or 40% at $500k, yes $250k of the $500k is taxed at 5% more ( the first $250k is taxed at the lower rate) and we would rather have the extra $12,500, we are not somehow going to forgo the opportunity to earn and gross the $250k in taxable income. The point is no one is going to stop trying to gross $500k if they can – regardless of the tax rate. Hell, we all are driven by the opportunity and tax rate does not destroy the opportunity to generate income in this great country.
Yes, no one wants to pay any taxes if they can legally or ethically avoid paying them. Everyone would prefer to pay a lower rate versus a higher rate. But it is untrue that a rate increase on Capital gain, Dividend income or Corporate/Individual will damage job creation. Here is my proof:
Job creation in the decade of the 70’s produced 14M net new jobs with tax rates higher than they are today or were for the decade of the 2000’s. This is no fluke because 15M jobs were created in the decade of the 80’s with tax rates lower than the 70’s and lower than the 90’s but still higher than the 2000’s. Yet 24M net new jobs were created in the decade of the 90’s with tax rates specifically increased over the 80’s and higher than the decade of the 2000’s.
What then is the job creation statistic in the decade of the 2000’s with all tax rates reduced below the 90’s? Zero, zilch, 0 net new jobs created in the entire decade. Lower rates did not produce any net new jobs for an entire decade even with the largest income and capital rate cuts.
Some may say things are very different in his decade. It may be more accurate to state that although each decade is unique in many ways, they tend to be more similar than dissimilar. There were wars in all 4 decades. There was international turmoil in every decade. Debt and spending increased in each decade but actually was lowered for the last two years of the 90’s. Euro is new, free trade has grown, outsourcing and off-shoring may be different but domestic conflict still exists.
What is different is the economic performance results in the decade of the 2000’s. Based on the premise that lower taxes will lead to more US jobs, the tax cuts of the 2000’s failed miserably. If measured by job creation, the country got a bum deal. When taxes were lowered in 2000, the logic was stated publicly over and over: “the country has a surplus which means the government is taking too much of your money and keeping money from flowing in the private sector. Once we lower tax rates, we will unleash our employers to spend more of their own money and create millions more new jobs”. “Cut taxes now and the government will receive even more tax revenue from the explosion in job creation”. Keep in mind, this is coming off of 30 years with over 1.3 million jobs created each year. The country took the supporters of the largest tax cut in US history at their word; lower taxes and create even more jobs than were created in the prior 3 decades. The country was duped. Some of us won with the tax cuts because we kept more of our cash but the workers in the country clearly lost as evidenced by the anemic wage growth at the bottom and middle incomes, growth in debt for the country and the people, and high unemployment.
Now let’s analyze the actual climate for business investment in the decade of 2000. Interest rates ?Lowest in 3 decades. Inflation? Lowest in 3 decades. Free Trade agreements? Most in 3 decades. Wage inflation? Lowest in 3 decades. Capital Gain/Dividend Income/Corporate/Individual tax rates? Lowest in 30 years. Union membership? Lowest in 30 years. National Energy Production? Highest in 40 years. Export economy? Booming. Loan rates? Lowest in 30 years. Individual savings rates? Highest in 30 years. Number of billionaires and millionaires? Most ever. Income growth for those under $75k in income? Declining. Income growth for those over $250k in income? Highest ever and growing. Crime? Lowest in 30 years.
This national climate for businesses should be perfect for job creation and investment in innovation. Our country should be positioned for massive economic opportunity for all Americans yet what have seen instead is massive job stagnation and reductions in revenue to the Treasury as a result.
Something has to change because if tax cuts have not delivered increased hiring or more revenue to the country, those tax cuts have failed to achieve their stated purposes and will be ending. Here is the core reason: we are now cutting vital social services, national defense, cops, teachers, and important national infrastructure which is harming our country and our citizens. We no longer have a surplus and we did not get the net new jobs. How do we make up for the massive failure of net new job creation while at the same time running up debt in the decade of 2000? What do we do now?
Now we will go back and try what worked in the 90’s. Rates will return to 90’s levels and we will explore opportunities to lower the long-term debt, reduce unnecessary spending without creating a new unemployment crisis, means-test social security and Medicare, invest heavily in education, negotiate favorable export terms and free-trade agreements, invest in natural gas as our primary vehicle fuel option, and invest in innovation.
All I can say is if history is a good indicator of future performance, I would like to give the country a chance to 2Peat the 90’s economic performance.