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Not so sure about that. It is difficult politically but not as difficult as raising tax rates!!!
What is not as difficult as raising rates? Reagan, Bush, Clinton, and Obama have all raised taxes. The far right doesn't want to increase taxes, but that is mostly a talking point as they will also talk about broadening the base and lowering the rates. Their talk about broadening the base may also be talk as they opposed it when Obama recommended the same thing, but that could just be because anything he comes up with will be opposed. Then you have the people on the right that think any kind of taxation is theft, but that's why I said politics aside.
From a practical standpoint you could create a revenue neutral tax change, but getting it passed is another matter because Congress doesn't want to work together or do anything at all.
Quote:
Originally Posted by ncole1
Saying it's a tiny fraction doesn't make a revenue neutral reform into a non-neutral one, so it doesn't change the basic argument. Also, 10% of revenue is not "measly" - it makes the difference between doubling the deficit or not!
Pre Bush/Obama tax cuts, do you think people would have agreed to allow corporations to deduct dividends if the dividends were taxed as ordinary income? Not that this approach is without problems, but we could design a tax neutral policy and even, in theory, get people to go along with it.
According to the GAO, the effective tax rate is 13% (2010 and heavy losses carried forward) and according to other sources the rate is around 25%. If the ETR is 13% and the dividend is taxed at 20% + the 3.8% net investment income tax you are looking at an effective tax rate of 33.7% +/- already. At the $200K level - where the net investment tax kicks in - the marginal rate is already 33%. If we assume the ETR is 25% the ETR on the dividend income jumps to 42.85%. Then there is state tax data that we could also add into the picture.
For 2013:
Deficit: $680 B
Corporate tax rev: $273 B
Total rev: 2.77 T
Allowing dividends to be deducted would reduce the $273 B by some amount but without more information I could not say how much the amount would be.
What is not as difficult as raising rates? Reagan, Bush, Clinton, and Obama have all raised taxes. The far right doesn't want to increase taxes, but that is mostly a talking point as they will also talk about broadening the base and lowering the rates. Their talk about broadening the base may also be talk as they opposed it when Obama recommended the same thing, but that could just be because anything he comes up with will be opposed. Then you have the people on the right that think any kind of taxation is theft, but that's why I said politics aside.
From a practical standpoint you could create a revenue neutral tax change, but getting it passed is another matter because Congress doesn't want to work together or do anything at all.
Pre Bush/Obama tax cuts, do you think people would have agreed to allow corporations to deduct dividends if the dividends were taxed as ordinary income? Not that this approach is without problems, but we could design a tax neutral policy and even, in theory, get people to go along with it.
According to the GAO, the effective tax rate is 13% (2010 and heavy losses carried forward) and according to other sources the rate is around 25%. If the ETR is 13% and the dividend is taxed at 20% + the 3.8% net investment income tax you are looking at an effective tax rate of 33.7% +/- already. At the $200K level - where the net investment tax kicks in - the marginal rate is already 33%. If we assume the ETR is 25% the ETR on the dividend income jumps to 42.85%. Then there is state tax data that we could also add into the picture.
For 2013:
Deficit: $680 B
Corporate tax rev: $273 B
Total rev: 2.77 T
Allowing dividends to be deducted would reduce the $273 B by some amount but without more information I could not say how much the amount would be.
Possibly - at least if the case had been made well.
...No, I'm in favor of either removing interest deduction or adding dividend deduction, but not both...
I think you're on the right track, but I don't think you go far enough.
Essentially all economists agree that the tax structure (and other incentive structures such as subsidies) alters the behavior of most people and most businesses (including corporations). Removing many such structures, including the disparity of tax treatment of interest payments relative to dividend payments, would indeed lead to a more efficient allocation of capital.
[soapbox mode=on]
Corporate income taxation accounts for ~ 11% of total federal receipts, and in recent years accounted for something in the neighborhood of $350 Billion.
When you look at the costs of corporate tax compliance, they are more than you might think. Recent estimates are corporations spend about $300 Billion on compliance. That $300 Billion is not taxes - it is a real expense paid by corporations just to plan their tax positions and to "fill out the tax returns" (metaphorically - it is all electronic, of course).
Think about that: $300 Billion of expense dollars incurred to correctly file the tax returns, which in turn require an incremental $350 Billion of payments to the IRS.
We could make the economy much more efficient by eliminating the Corporate Federal Income Tax altogether, and then raise Personal income tax rates enough to make up for that 11% shortfall. That would save the economy somewhere close to $300 Billion of waste.
Corporate tax returns are trade secrets, so few people know for sure what they contain. Indeed, the VP or Taxes knows, as does the CFO, and maybe a half dozen other people inside the corporation. The popular press every now and then publishes an article incorrectly stating that General Electric (for example) paid no federal income taxes for a given year (which is just flat unknowable). Because the tax returns are trade secrets and not public information, there is no way to tell how much GE actually paid; indeed, until the tax year audit is complete -- many years down the line -- even GE doesn't know how much it actually paid for a given tax year. (Note: the IRS audits every major corporation continuously - 52 weeks/year. Many dozens of IRS employees work on-site at major corporations and audit them continuously - eventually, they close the audit for some past year -- perhaps 5 or 6 years ago -- and assess the changes to the corporate taxes due for that year, and then the next day the same IRS employees begin auditing the next sequential year of that corporations' tax return). Or course, the popular press conveniently forgets that there is an AMT for corporations, just as there is for people.
GE's annual federal income tax return is rumored to exceed 25,000 pages each year (from a presentation a GE director of tax compliance gave at a meeting of the TEI - the Tax Executives Institute -- Tax Executives Institute, Inc.). Other major corporations' returns are similarly complex. Think about that -- GE's tax return, if printed, is Twenty Five Thousand Pages!
GE employs ~ 1,400 tax attorneys and tax accountants to both plan and prepare the federal income tax return. Many of these tax attorneys are former IRS tax attorneys, and are experts in very obscure & narrow sections of the Code – indeed, many of them actually wrote the IRS regs for that obscure & narrow field, and so they are indeed the experts.
So think about a world without federal corporate income taxes (there would still be other forms of taxation on corporations, including property taxes, sales taxes, use taxes, FICA, etc etc etc). In a world without federal corporate income taxes:
• The $300 Billion spent on federal corporate income tax compliance would go down dramatically & could be recaptured as productive investment or returned to shareholders as incremental returns
• Countless hundreds of thousands of tax attorneys & tax accountants currently employed by corporations, the Big Four, and major law firms could be redeployed to actual productive work where they, you know, actually contribute to GDP.
• Many tens of thousands of IRS employees (perhaps hundreds of thousands) who are corporate tax lawyers and auditors could be redeployed to focus on other activities.
• And, of course, rates on individuals would have to go up to account for the ~ $350 Billion in tax revenue currently flowing from corporations that instead would flow from private citizens.
This is politically impossible, of course, but fun to think about. In theory, conservatives would like the idea of eliminating the waste and misallocation of capital. In theory, progressives would like the idea of raising federal personal income tax rates to be more progressive – heck, make the top 10% pay all that incremental $350 Billion.
In theory, everyone is better off – except for:
• Currently employed corporate tax professionals, many of whom would lose their jobs; I'm not too worried, as they are talented people who will land on their feet actually contributing to GDP - perhaps in the hospitality or food preparation industries.
• Currently employed IRS corporate tax experts, all of whom would find other similarly meaningful jobs in Treasury.
• Currently employed Washington lobbyists who lobby for special tax treatment for their clients.
• US Senators and US Representatives who might see campaign contributions dry up from those who are used to contributing in hopes of seeking special tax treatment.
• Current high income US citizens who will pay more federal income taxes each year – but note that these same people will also see increases in the value of their investment portfolio because of the elimination of federal corporate income taxes.
Joseph B. Allen argues in the paper, Seeking True Financial Reform: Ending the Debt-Equity
Distinction , that Congress failed to learn from the recent financial crisis the importance of keeping leverage under control.
Allen argues that the economy would be more stable if the tax code were to be reformed to avoid incentivizing companies to use debt financing rather than equity financing. Although there are certainly other frictions and inefficiencies that can cause deviation of market values from Modigliani-Miller, I think the argument is a good one.
I hereby propose that the tax deduction for corporate interest be phased out over the next 20 years.
It is not the tax code that drives the debt engine economy, it is the fractional banking system.
The fractional banking system borrows every dollar into existence at interest ensuring that every dollar is worth less that it's supposed value at the very instance it is created.
That means every dollar earned by business or earned by workers is loosing value the longer they hold onto it. There is therefore no incentive whatsoever to save, and every incentive to purchase goods even before you have the money to pay for them because you will be paying with depreciating cash value.
Until the fractional banking system is dealt with, inflation and the incentive for debt purchase will continue regardless of tax policy.
Once you acknowledge the fact that Congress is Congress then you must acquiesce the simple fact that this entire discussion is merely academic.
That's funny.
Quote:
Originally Posted by ncole1
I doubt the average shareholder is as averse to earnings reinvestment as you make them out to be, otherwise the company wouldn't be reinvesting its earnings.
Exactly how are you defining "reinvestment"?
I recall 5 or 6 different methods of calculating it.
Quote:
Originally Posted by ncole1
Please explain how you justify the differing tax treatment.
You're talking apples and Bradley M2 CFVs.
Quote:
Originally Posted by Mircea
Stock-holders have a stake in the corporation, bond-holders do not.
Again, aside from the obvious differences, that's the easiest way I can explain it without giving you a lesson in Political Science, Medieval History, British Colonialism, the 1st Amendment, Religion, Case Law, or the Civil War.
If you want a justification, then ask Congress.
What Congress was in 1936? Whichever one was in session, look at the Congressional Record and study the legislative history of the Internal Revenue Code of 1936.
That's when the change was made.
There is no Economic Law, but there is an Economic Theory called Free Cash Flow Theory.
I'd have to give you a history lesson in government and business.
Do you understand that prior to the Great Depression, the relationship between government and business was totally antagonistic? That's putting it mildly. From the start of the FDR Administration, the relationship between government and business changed to one of cooperation. Government and business became quite cozy. So much so, that Eisenhower warned everyone.
Now, let's connect the dots: government and business -- Free Cash Flow Theory -- 1936.
Would it surprise you to know that "double-taxation" is in the best interest of corporations?
That's effectively Free Cash Flow Theory in a nutshell.
The last "dot" to connect would be your comment on "earnings reinvestment."
Quote:
Originally Posted by ncole1
And your point is?
EBIT is EVIL.
Don't you remember the "dotcom crash"?
EBIT was the primary cause of the dotcom crash.
Cash Flow rules.
Quote:
Originally Posted by ncole1
Are you assuming that the shareholders that sold the stock back to the company won't reinvest their capital elsewhere? If they do then that should roughly balance out the macroeconomic effects.
Depends on why they sold it. A lot of people are reinvesting their money elsewhere--- outside of the US.
How's that for "macro"?
Quote:
Originally Posted by ncole1
I think this is based on some misguided notions about the usage of money but I won't discuss it here since it would derail the thread.
Right.... I should be financially responsible for someone's $80,000 Dream Wedding.
Why?
Quote:
Originally Posted by ncole1
Again, this could be remedied by lowering overall tax rates.
Quote:
Originally Posted by Mircea
I'm not opposed to lower tax rates, but there must be a better reason that.
Quote:
Originally Posted by ncole1
Does not compute!
Taxes come in two flavors: 1) Opportunity Costs and 2) Robbing-Peter-to-Pay-Paul-with-Shylock-Getting-a-10%-Cut Money Re-Distribution Schemes
Or, you can just pay $2,000 in property taxes annually.
That's the Opportunity Cost.
No public schools? Fine. You can hire a tutor. Lets see....a Liberal "I'll-major-in-The Contribution of Transvestite Lesbian Dwarves to Technology in the Frankish Empire During the Reign of Charlemagne -and-if-I-can't-get-a-job-I'll-teach-I'm-Entitled-the-World-Owes-Me"
$250/hour * 1 child * 8 hours * 40 weeks = $80,000 per child per year.
Or, you can just pay $2,000 in property taxes annually.
You can spend 90 days annually performing compulsory military service or pay taxes.
After your 90 days of compulsory military service, you can spend 30 days performing your choice of the following compulsory duties: court bailiff, county jail guard, State prison guard, or federal penitentiary guard.
And, no, you don't get paid, and you're responsible for providing your own food and medical care.
Taking my money to give to Joe-turd-the-rag-man so he can pay his $180/month cable with premium sports channel package is robbery. Taking my money to give to Sally-spread-your-legs so she can pay $80 for a $750 apartment so she can do The Nasty is robbery.
Anyway, not all taxes are necessary.
Lowering taxes for the sake of lowering taxes is meaningless, when governments at all levels spend like drunken sailors. Lower taxes must be accompanied by reductions in government spending.
Take a look at Future Value/Future Payments and the like. Paying 2% less now in order to pay 4% more in the Future is kind of stupid.
Quote:
Originally Posted by ncole1
And this is reason to make interest deductible how exactly?
I'm big time into "user pays."
Sometimes, what appears to be Opportunity Costs really aren't. Two excellent examples are the National Labor Relations Board and the SEC.
If it would be up to me, not one penny of tax money would ever be spent on the NLRB or SEC. Union members can pay 100% of costs of the NLRB and the enforcement of all union labor laws. Stock Markets are not necessary for any economy to run well, or even run at all. Stock-holders should fund 100% of the costs of the SEC and all other State and federal agencies involved in the enforcement of regulations to protect stock-holders.
Look, every group spends every waking moment coming up with any number of novel ideas to avoid being taxed.
You're nothing but the 429 Billionth re-incarnation of Vishnu in the last 100 years.
My income is taxed, and then I'm taxed again when I pay sales taxes. Shouldn't I be able to deduct sales taxes from my income (at one time you could)?
...
My income is taxed, and then I'm taxed again when I pay sales taxes. Shouldn't I be able to deduct sales taxes from my income (at one time you could)?...
Actually, you still can under certain circumstances.
Let's say you're a resident of a state that does not impose a state income tax -- Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming.
You can then deduct sales tax paid from your federal income tax -- although if your income is too high, it is phased out.
It is not the tax code that drives the debt engine economy, it is the fractional banking system.
The fractional banking system borrows every dollar into existence at interest ensuring that every dollar is worth less that it's supposed value at the very instance it is created.
That means every dollar earned by business or earned by workers is loosing value the longer they hold onto it. There is therefore no incentive whatsoever to save, and every incentive to purchase goods even before you have the money to pay for them because you will be paying with depreciating cash value.
Until the fractional banking system is dealt with, inflation and the incentive for debt purchase will continue regardless of tax policy.
This is a "supply side only" view of the credit markets. In order for credit to be used, there has to be both a lender and a borrower; the has to be both supply and demand for credit.
The fractional reserve banking system creates supply - and the incentives for debt (including tax incentives) contribute to the demand for credit.
I recall 5 or 6 different methods of calculating it.
You're overthinking this. Corporate reinvestment is simply the alternative to dividends - usually, but not always, when the corporation is funding new capital projects.
Quote:
Originally Posted by Mircea
You're talking apples and Bradley M2 CFVs.
Again, aside from the obvious differences, that's the easiest way I can explain it without giving you a lesson in Political Science, Medieval History, British Colonialism, the 1st Amendment, Religion, Case Law, or the Civil War.
If you want a justification, then ask Congress.
What Congress was in 1936? Whichever one was in session, look at the Congressional Record and study the legislative history of the Internal Revenue Code of 1936.
That's when the change was made.
There is no Economic Law, but there is an Economic Theory called Free Cash Flow Theory.
I'd have to give you a history lesson in government and business.
Do you understand that prior to the Great Depression, the relationship between government and business was totally antagonistic? That's putting it mildly. From the start of the FDR Administration, the relationship between government and business changed to one of cooperation. Government and business became quite cozy. So much so, that Eisenhower warned everyone.
Now, let's connect the dots: government and business -- Free Cash Flow Theory -- 1936.
How does any of this address any of the points I made?
Quote:
Originally Posted by Mircea
Would it surprise you to know that "double-taxation" is in the best interest of corporations?
That's effectively Free Cash Flow Theory in a nutshell.
The last "dot" to connect would be your comment on "earnings reinvestment."
EBIT is EVIL.
Don't you remember the "dotcom crash"?
EBIT was the primary cause of the dotcom crash.
Cash Flow rules.
Huh? The dot-com craze was occurring because investors had incredibly unrealistic ideas about the future of online domains, websites, and businesses. Not because they used EBIT as their measuring stick for a company's profitability as opposed to some other metric.
Quote:
Originally Posted by Mircea
Depends on why they sold it. A lot of people are reinvesting their money elsewhere--- outside of the US.
How's that for "macro"?
It goes both ways, some dollars get offshored and other dollars get onshored. Corporations declaring dividends doesn't automatically make it happen in a case where it otherwise wouldn't. If an investor wants to move offshore/onshore, they'll do it whether dividends are reinvested or not, although seeking to defer capital gains taxes may slow them down if their method would involve selling shares.
Quote:
Originally Posted by Mircea
Right.... I should be financially responsible for someone's $80,000 Dream Wedding.
Why?
Taxes come in two flavors: 1) Opportunity Costs and 2) Robbing-Peter-to-Pay-Paul-with-Shylock-Getting-a-10%-Cut Money Re-Distribution Schemes
Or, you can just pay $2,000 in property taxes annually.
That's the Opportunity Cost.
No public schools? Fine. You can hire a tutor. Lets see....a Liberal "I'll-major-in-The Contribution of Transvestite Lesbian Dwarves to Technology in the Frankish Empire During the Reign of Charlemagne -and-if-I-can't-get-a-job-I'll-teach-I'm-Entitled-the-World-Owes-Me"
$250/hour * 1 child * 8 hours * 40 weeks = $80,000 per child per year.
Or, you can just pay $2,000 in property taxes annually.
You can spend 90 days annually performing compulsory military service or pay taxes.
After your 90 days of compulsory military service, you can spend 30 days performing your choice of the following compulsory duties: court bailiff, county jail guard, State prison guard, or federal penitentiary guard.
And, no, you don't get paid, and you're responsible for providing your own food and medical care.
Taking my money to give to Joe-turd-the-rag-man so he can pay his $180/month cable with premium sports channel package is robbery. Taking my money to give to Sally-spread-your-legs so she can pay $80 for a $750 apartment so she can do The Nasty is robbery.
Anyway, not all taxes are necessary.
Lowering taxes for the sake of lowering taxes is meaningless, when governments at all levels spend like drunken sailors. Lower taxes must be accompanied by reductions in government spending.
Take a look at Future Value/Future Payments and the like. Paying 2% less now in order to pay 4% more in the Future is kind of stupid.
I agree. Congress has been inept at balancing the budget for some time now.
Quote:
Originally Posted by Mircea
I'm big time into "user pays."
Sometimes, what appears to be Opportunity Costs really aren't. Two excellent examples are the National Labor Relations Board and the SEC.
If it would be up to me, not one penny of tax money would ever be spent on the NLRB or SEC. Union members can pay 100% of costs of the NLRB and the enforcement of all union labor laws. Stock Markets are not necessary for any economy to run well, or even run at all. Stock-holders should fund 100% of the costs of the SEC and all other State and federal agencies involved in the enforcement of regulations to protect stock-holders.
Look, every group spends every waking moment coming up with any number of novel ideas to avoid being taxed.
You're nothing but the 429 Billionth re-incarnation of Vishnu in the last 100 years.
My income is taxed, and then I'm taxed again when I pay sales taxes. Shouldn't I be able to deduct sales taxes from my income (at one time you could)?
Adversely....
Mircea
Not all that relevant to the issue of the tax preference of corporate debt.
This is a "supply side only" view of the credit markets. In order for credit to be used, there has to be both a lender and a borrower; the has to be both supply and demand for credit.
The fractional reserve banking system creates supply - and the incentives for debt (including tax incentives) contribute to the demand for credit.
Demand for credit is driven mostly by inflation, with only a minimal driving force being tax incentives.
It is inflation that provides a disincentive to save, and drives the economic culture of debt.
This is easily proven by any recession in which deflation occurs, credit purchases immediately fall off a cliff, despite no changes in tax policy.
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What is not as difficult as raising rates? Reagan, Bush, Clinton, and Obama have all raised taxes. The far right doesn't want to increase taxes, but that is mostly a talking point as they will also talk about broadening the base and lowering the rates. Their talk about broadening the base may also be talk as they opposed it when Obama recommended the same thing, but that could just be because anything he comes up with will be opposed. Then you have the people on the right that think any kind of taxation is theft, but that's why I said politics aside.
