Rubin Is Wrong on Business Tax Policy
A recent commentary on business tax policy by Richard Rubin in the Wall Street Journal had some very glaring errors and suggestive, misleading language.
For instance, Rubin discusses inversions in a way that makes them sound unjust and problematic –calling them a “discrete business-tax problem” that Congress has been unable to properly address. However, this is a patently false statement. Business inversions are perfectly legal, and sometimes the only just remedy for an anti-business climate that unfairly disadvantages American companies abroad by demanding both domestic and foreign tax revenue.
He later goes on to suggest that ultimate question plaguing and dividing Congress is: “Is the U.S. collecting enough money from wealthy individuals?” But when did class warfare become the driving force for government and economic decisions? Why is this the lens by which so many view various policies? Such a question is absolutely ridiculous to even consider. Why is the U.S. in the business of “collecting enough money” from “wealthy individuals?”
Thomas Sowell said it best when he remarked, “I have never understood why it is “greed” to want to keep the money you have earned but not greed to want to take somebody else’s money.” Such a question posited by Rubin is outrageously greedy.
His description of the 1986 IRC reforms was a total mischaracterization. Rubin writes, ”
“Until 1980, when the top individual rate was 70% and the corporate rate was 46%, the two systems were largely separate. Big businesses paid the corporate income tax, then when shareholders got capital gains or dividends, they paid again on the same profits. Small businesses paid as individuals.
The 1986 tax overhaul flipped that calculation, dropping the top individual tax rate to 28% and the corporate rate to 34%. New businesses saw little reason to become traditional C corporations that pay the corporate tax–unless they planned to go public. That has left the corporate tax as the domain of the largest companies. Meanwhile, states liberalized business-formation laws and Congress loosened eligibility rules for S corporations that don’t pay the corporate tax.”
Yet it’s he’s not exactly correct. With the IRC reforms of 1986, Reagan reduced the tax rates to 28% in exchange for getting rid of the tax shelters. As a result, the amount of federal income collected was more at 28% and a clean tax code than at 70% and 91% and tax shelters, because at 28%, it really wasn’t worth the time, cost, and effort to hide money.
Rubin also fails to explain the egregious set up for corporate taxes known as “double taxation.” It is
THE reason why these businesses file as non-corporate entities — so that they can avoid it. Here’s how it works:
Some companies, say a Fortune 500, pay taxes at corporate rates. The highest corporate rate is 35%. Right now, if a corporation pays taxes and reinvests its profits, there is no extra tax. But if it profits are given to the owner, they are taxed again on that amount–- which is knows as double taxation. Those business owners who wish to avoid the double taxation instead pay at individual rates, the highest of which is now 39.6% (which surpasses the corporate tax rate.)
Rubin mocks this set-up, writing “still, many pass-throughs think they are disadvantaged because the top individual rate of 39.6% exceeds the 35% corporate rate.” But they are disadvantaged. Why should businesses be taxed twice, anyway? Trying to circumvent an unfair, heavy handed tax-code on one end results in being penalized by a higher margin at the other end.
We get a further glimpse at what is driving some tax overhaul proposals. Orrin Hatch has suggested eliminating the second layer of “double taxation,” which is somewhat dismissed by Rubin when he points out that some situations might “exempt more income than necessary.” Getting enough revenue, then, is still the key driver at least on the Democrat side. This is reiterated a paragraph later when Rubin reveals that another overhaul proposal, to “deduct capital costs immediately and get a 25% rate” is also unacceptable — because “Democrats won’t tolerate the foregone revenue–and benefit to high-income households–tied to those plans.”
Why is getting enough revenue, and getting it from high-income households, the motivating force behind tax proposals these days? Why are so-called economists and analysts yielding to these class-warfare and fair share litmus tests when pontificating on tax policy? Businesses are the backbone of our country. Policy should focused on growing the economy, not punishing those who are successful. How can we honestly and morally consider taking more money from those taxpayers and business owners who have been able to create wealth and employment successfully — and just give it to the government and politicians who manage to continuously and egregiously squander income?
Rubin’s erroneous analysis was a disappointment to read in the pages of the Wall Street Journal.