by | BLOG
In a recent article in the Wall Street Journal, “Why the GOP Has Gone Quiet Over Tax Hikes,” Rahm Emmanuel suggests that the GOP has gone quiet over tax hikes because Biden’s new tax plan is popular. For someone who is supposed to know about economics, however, his ignorance is overwhelming.
Rahm claims that nearly 60% of Americans are bothered by rich people and corporations who don’t “pay their fair share.” But this very concept of “fair share” is just the repetition of a media sound byte not grounded in any reality. The wealthy here in the United States pay more in taxes than in any other developed company in the world, no matter how measured. Rahm specifically omits that from his article. In fact, all of his numbers are misleading or disingenuous. He likewise fails to note that almost half of US households pay virtually no income tax, while in the rest of the world even the lowest earning constituents contribute. Where was that in the article?
Rahm also claims that 66% of Americans think that their tax level they pay is fair, but it bears repeating that since 47% pay zero income tax, you have to assume that 66% includes the 47% who pay nothing. So in actuality, only 19% only think that, which probably includes the next tier of taxpayers — those who pay low (not zero) taxes.
Rahm also claims that Republicans think that Reagan, Bush, and Trump tax cuts yielded little-to-no direct benefit, but in reality, the economies that followed after each of those cuts were healthy and robust. Most recently, it was precisely Trump’s 2017 Jobs Act that brought the economy finally back to life (after Obama’s anemic term), until it was upended by the pandemic and prolonged shutdowns. Moreover, Rahm says that “Trump and Bush both sent the federal government deep into the red,” yet purposely excludes Obama’s excessive deficit spending which was double that of Bush!
Rahm opens his article with the line, “sometimes what people don’t say tells you more than what they do.” Ironically, this is exactly what Rahm does throughout his piece. By selectively omitting anything that doesn’t support his Democrat talking points, he paints an economic picture far different from reality all in the name of “tax fairness.” But that’s not really fair, is it?
by | BLOG
Mark Mill’s had an excellent piece recently in the Wall Street Journal entitled, “Biden’s Not-So-Clean Energy Transition.” In it, he lays out the hidden costs and pitfalls of Biden’s energy plans, a sentiment shared by the International Energy Agency (IEA) 287 page report on clean minerals.
The green and clean energy movement is a perfect example of Bastiat’s “seen and unseen.” Everyone says that clean energy, such as wind and solar, is clean and the cost of energy is zero, so how can you have anything better than that? What is seen are windmills and solar panels but what is unseen is what it takes to get there.
When talking about fossil fuels, opponents often focus on the externalities: they are bad for the environment, they produce large amounts of carbon dioxide, etc. But the externalities of wind and solar power are much bigger. For instance, you need rare earths and critical minerals for solar power, the panels have high replacement and repair costs, you need fossil fuel backup, and so forth. All of these unavoidable costs, however, are not factored in. The lowly windmill is even worse. You need excessive amounts of plastic and cement. They kill large numbers of birds and other animals. They require large tracts of land. The noise, the marine life, the visibilities are all “unseen” factors that are not considered when touting the clean energy “zero cost. But windmill externalities are actually so important and big enough that if we were to ramp up using windmills as a power source past 10%, it would completely change the landscape and maybe even the economy.
Mill’s synopsis is a good summary of the IEA report, showing the geopolitical dangers and the current lack of industries and infrastructures required to make the change to clean energy. Biden and others on the left would do well to brush up on their Bastiat and consider the “unseen” consequences of their energy plan.
by | BLOG
The recent exposé from Pro Publica which published sensitive tax information from wealthy Americans has caused quite a stir. Their justification to disclose “the tax details of the richest Americans” was based on the belief that “the public interest in an informed debate outweighs privacy considerations.” This is simply outrageous. Keeping individual taxpayer data private is the fundamental pillar under which the IRS can even ask individual’s for their personal information. The assertion that the ethics of collectivism is more important than rights of the individual — that others can come along and decide that they have more rights to your private affairs than you do – is just nonsense.
In a similar way, people need to understand just how egregious this breach of data is. Pro Publica “obtained the information from an anonymous source who provided us with large amounts of information on the ultrawealthy, everything from the taxes they paid to the income they reported to the profits from their stock trades.” Now, it is a fundamental principle of the IRS that any information given by a taxpayer to the IRS is absolutely confidential to the highest degree. Anyone who peeks at a tax return that is not under their purview typically results in being instantly fired. This is why people typically go after lawyers, accountants, banks, etc., to get copies of someone else’s return — because the IRS will never divulge taxpayer information.
It is outrageous therefore, that this trove of data was leaked, and it is even more outrageous if the source is actually from within the IRS. It is equally bad if the IRS was hacked. No one (except possibly Pro Publica) knows how this information was released. No one person working at the IRS should have had access to this volume of information. The IRS is conducting its own external and internal investigations because it takes taxpayer privacy extremely seriously. If it turns out that the anonymous sources originated within the IRS, this exposé becomes a breach of contract with all American taxpayers.
What’s even more outrageous is that some members of Congress didn’t immediately condemn this publishing of private tax data. Instead, Sen. Elizabeth Warren took the occasion to push her agenda, saying that “ Our tax system is rigged for billionaires who don’t make their fortunes through income, like working families do.″ Likewise, Sen. Ron Wyden, head of the tax-writing Senate Finance Committee, remarked that the information “reveals that the country’s wealthiest, who have profited immensely during the pandemic, have not been paying their fair share of taxes.”
These comments are not only economically and fiscally ignorant, but show an incredible misunderstanding of the basic principles that form our tax system. Elizabeth Warren’s ignorance is legendary. But Wyden, as head of Senate Finance, should be ashamed of himself. The crux of Pro Publica’s argument, that the rich aren’t paying their fair share (gullibly accepted by Warren and Wyden) factor in a statistical fallacy that somehow the calculations of an effective tax rate should factor in the fair market value (FMV) of all assets owned by an individual. This is reckless stupidity.
The fact that the initial response of these Senators was not full of outrage over the exposure of personal tax information is disgusting. They have no respect for their responsibility to protect the American taxpayer. Couple that with their economic ignorance and it is clear that they should resign immediately and disappear from the public square.
by | BLOG
The Tax Cuts and Job Act of 2017 was an important law that made some positive changes to the tax code. It reformed and reduced many regulations, thereby spurring economic growth, and got people to understand the importance of reducing marginal rates. On the corporate side, the large rate reduction (from 35% to 21%), move to territorial taxation, and expensing of equipment were terrific. However, on the individual side, Congress allowed politics to get in the way of real reform, and that is inexcusable.
Without any discussion, Congress eliminated the deduction for miscellaneous itemized deductions. This is truly the only legitimate deduction, and it is absolutely necessary to maintain the integrity of the tax code. It gives people the chance to write off expenses incurred to allow them to earn the income they are taxed on. For instance, under current tax law, a person who earns $100K in a venture but had to pay $30K for legal fees to get it, would be able to pay taxes on only the $70K net that was actually made. With the new change now removing the miscellaneous itemized deduction, the person will have to pay taxes on the full $100K!
Another deduction Congress removed summarily is the moving deduction. Similar to the miscellaneous itemized deduction, this is a real and actual expense that is incurred when moving to get a new job (in order to earn the income that will be taxed.) It was removed from the tax code without discussion, and should not have been.
The casualty loss deduction was also eliminated. This enabled you to deduct a loss that was due to a sudden, unexpected event, such as a fire, hurricane, or robbery. Now, if your house burns down, you can no longer write it off. The exception to this change is if your loss is in a federally-declared disaster area. So if your house burns down, you get no deduction. But if it burns down in a large wildfire that was declared a disaster, you can claim the deduction. This is egregious; the effect on the individual — the loss of a house — is absolutely the same. This deduction elimination is unacceptable.
Furthermore, the alimony deduction was thrown out. The alimony deduction is a mechanism that prevents an inequitable tax burden to be created when a married family unit is split into two. It is inequitable and mean-spirited to create a targeted tax burden on people who suffered a family breakup.
While eliminating these important and equitable donations, Congress left in place a number of purely political, social engineering deductions and credits. Congress left in a substantial part of the mortgage deduction, which is really nothing more than a government subsidy to the real estate industry. They left in energy credits, rehabilitation and low income housing credits, and the Alternative Minimum Tax (AMT). It’s disappointing to see Congress talk about simplicity, efficiency, and equitability, and then remove good provisions from the tax code while leaving in parts that are merely political.
by | ARTICLES, BLOG, GOVERNMENT, LAW, TAXES
A good tax system is built on four principles: simplicity, transparency, neutrality, and stability. Serious minded professionals and statesmen have known and pushed for these principles for generations. These principles should be the basis for tax policies created by lawmakers so that our tax system is organized and understandable.
The first principle is simplicity. By this concept, both taxpayers and the IRS deserve to have policies and a system that makes tax compliance and tax enforcement easy and understandable. No one should be obligated to wade through a system that doesn’t make obvious sense.
Next is transparency. A transparent system is one that clearly explains the tax in question, the steps needed to pay it, and the dates by which the tax is due. This should go without saying.
The third concept is neutrality. Neutrality means that no one industry is preferred over another nor any personal behavior given favor. Picking winners and losers in business or activities should not be the function of the tax system.
Finally, stability is key. Consistent tax laws without sunsets or changes from year to year provide predictability and help promote long term planning for taxpayers. If a tax system is fair and equitable, taxpayers should be able to count on it and plan for it into the future, without worrying that politicking and partisanship will create an unfair trap.
I had a recent conversation with Congresswoman Claudia Tenney (NY) on these concepts. At the end of our discussion she had a brilliant realization: that these four principles: simplicity, transparency, neutrality, and stability, not only make for a good tax system, but should be part of ANY legislation. Imagine Congress using these concepts to form the basis of all policies when considering the content of legislation?
by | BIDEN, BLOG, ECONOMY, POTUS, TAXES
The concept of an American President (Biden) going after people making a lot of money displays an absolute lack of familiarity with how people get wealthy. As a CPA, I can attest to the fact that the most common way people accumulate massive wealth is either by a huge amount of hard work (creating a successful business) or selling an asset (an invention, real estate, etc).
Many people who file tax returns with large amounts of income, such as selling a business for $10 million, will have a multi-million capital gains amount. It’s not that the higher income earners have some sort of capital gains loophole, but it’s really that the wealthy have done something well to attain the American Dream. And when they do strike it rich through their effort, part of their wealth is treated as a capital gain and it gives those earners a chance to keep a large part of it. Knowing that there is a low capital gains rate is an extra incentive to work hard and be successful.
Many of my clients are wealthy, and I have experienced time and again that they will come to me and ask the question: if they are successful, can they keep the majority of their money?” This is because they know that the government wants to take more from the highest income earners who have proven their success, while at the same time, the government is quite happy to let them lose on their own on their particular endeavor.
Most in the top echelon get there from a one-time income-producing significant event. To punish such success by imposing a massively high capital gains tax only serves to drive a deeper wedge between the have- and have-nots in an attempt to level the economic playing field. Biden would do well to maintain the lower the capital gains rate and restore a sense of trust with those who work hard, contribute to the economy, and attain the American Dream.
by | ARTICLES, BIDEN, BLOG, ECONOMY, POTUS, TAXES
When Biden was a candidate, one of his proposals was to raise the capital gains tax (which also applies to dividends) to 39.6%. When I wrote about it at the time, it sounded completely outrageous that any serious candidate for President of the United States would willfully consider implementing such a devastating levy. We had already experienced the negative effects of Obama’s 23.8% tax on capital gains which contributed to the sluggish economic recovery during the Obama administration, and his Vice President now wanted to raise the capital gains rate even higher?
Unfortunately, Biden’s plan has been introduced and may be coming to fruition. This week he indeed announced a new 39.6% capital gains rate (43.4% including the Obamacare add-on), which nearly doubles the current effective rate of 20% (23.8% including the Obamacare add-on).
Yet that’s not the worst of it. Some states with a large concentration of wealthy people and high performing businesses, such as California and New York have recently raised taxes, so taxpayers in those localities will pay much more. The absolute worst area would be NYC; after factoring in local taxes as well as the recent state tax increase, high income earners would face a rate of 57%!
Remember, Economics 1a teaches that when you tax something you get less of it. Taxing investments this way guarantees that investment – economic growth and GDP – will decrease.
Furthermore, this increase is outrageous as a matter of equity and fairness. Taxation of dividends and capital gains is a second tax on the same income – having already been taxed at the corporate level. No other major country double taxes this income. That is the reason dividends and capital gains are taxed at a lower level now – and they should be reduced, not doubled.
Furthermore, raising taxes on capital gains does nothing to raise revenue. Because people have discretion as to whether or when to sell assets, higher capital gains rates invariably lead to lower tax collections! Furthermore, it discourages the sale of less productive assets thereby reducing investment opportunities and economic growth. Even President Obama acknowledged that higher capital gains taxes won’t raise revenue – he was forced to admit that his irrational, hypocritical and wrongheaded rationale was to promote “fairness”!
A massive capital gains tax such as the one proposed by Biden will be inequitable, destructive, and clearly detrimental to our economy and the very people Biden states he is intending to help.
by | BLOG, CONSTITUTION, ELECTIONS, GOVERNMENT, POLITICS
There were several dozen proposed amendments to the huge stimulus bill that recently passed Congress. Many of them failed by a slim margin, but the votes were absolutely outrageous. It is worthwhile to remember these votes for 2022, as many of the Senators voted against their own constituents.
Here are some of the most notable ones:
The Cassidy Amendment, 1161: This would have “given some emergency assistance to non-public schools”, but it failed, so all of the $135 billion will go to public school and teachers unions.
The Fischer Amendment: This would have ensured that the “current laws and formulas for funding mass transit remained in place”, but instead it means that $5 billion in earmarked funds will go to New York’s system.
The Cruz Amendment 969: This would have provided “children with an option for in-classroom education instruction if the child’s local public school does not commit to re-opening to 5-day-a-week, in-classroom instruction for the remainder of the current school year and the 2021-2022 school year” but instead it means that the Democrats are still wedded to teachers unions than they are to education.
The Cassidy Amendment, 1162: This would have ensured that “the 2021 Recovery Rebates are not provided to prisoners” but instead the Democrats are giving taxpayer funds to felons.
The Cruz Amendment 968: This would have ensured that “ the 2021 Recovery Rebates are not provided to illegal immigrants” but this also failed.
The Daines Motion to Commit: This action would have supported building the Keystone XL Pipeline but instead means the irrevocable loss of jobs with Biden’s earlier Executive Action halting the project.
When political allegiance to the party line means that you vote against the very people who elected you, you deserve to be thrown out.
by | ARTICLES, BLOG, CONSTITUTION, ECONOMY, GOVERNMENT, HYPOCRISY, LAW
The most recent stimulus package gives money to one segment of the population by taking money from another segment of the population. Since wealth transfers cannot reasonably be inferred as any of the acts allowable by the federal government under the Constitution, the Stimulus Act is blatantly unconstitutional.
The recent stimulus checks from the federal government are a pure, vote buying giveaway. Neither need nor negative impact from Covid are factors in getting these payments. While some people have experienced financial difficulties over the past year, the majority of workers are doing okay or better than they were pre-COVID. Because the economy is in a strong growth spurt, there is really no need for a general stimulus at this point. (It would be reasonable to help those impacted by covid, but this is only a very small portion of the recipients). Yet these stimulus checks are being provided to all taxpayers who earn under the government-defined income threshold ($150,000 married, $75,000 single).
Now in order to pay for the stimulus, Biden is increasing taxes on the wealthy — which includes taxpayers who were above the arbitrary line and therefore ineligible to receive a check. There couldn’t be a more direct relationship of taking money from one group and giving it to another.
This very act is a constitutional violation as the Constitution does not allow for wealth transfer.
by | BLOG, CONSTITUTION, ECONOMY, FREEDOM, GOVERNMENT, HYPOCRISY, POLITICS, TAXES
On February 2nd Senator Elizabeth Warren announced that she will join the Senate Finance Committee, the committee tasked with writing this country’s tax laws. She stated, “I’m very pleased to join the Finance Committee, where I’ll continue to fight on behalf of working families and press giant corporations, the wealthy, and the well-connected to finally pay their fair share in taxes.”
Warren has often advocated for a wealth tax in the past, especially during her campaign last year for the Democratic presidential nomination. But now she is actually in a position to make proposed legislation happen. In fact, she’s promised that it will be her “first order of business.” This is wrongheaded on many levels, including fairness, constitutionality, impossibility of implementation, history of failure, negative effect on the economy, and morality.
Fairness: Senator Warren has always maintained that corporations and the wealthy are not paying their “fair share”. She has never addressed the question of what that “fair share” might be. That is not surprising, since corporations and the wealthy in the US pay a far higher share of the tax burden than is paid in virtually every other country in the developed world – and by a wide margin. This results not from very high rates, but rather from the fact that our poor and middle class – almost 50% of our population – pay almost no income tax. According to the Tax Foundation’s 2021 data analysis, in 2018 (the most recent figures available),“the top 50 percent of all taxpayers paid 97.1 percent of all individual income taxes, while the bottom 50 percent paid the remaining 2.9 percent.” Additionally, “The top 1 percent paid a greater share of individual income taxes (40.1 percent) than the bottom 90 percent combined (28.6 percent).” To add a wealth tax on top of the already extremely progressive tax system would be anything but fair.
The grotesque unfairness of a wealth tax is even more evident when it is actually calculated. This can be seen by the following example: Assume that an investor with $100M net worth in the present low interest environment (and because not all of his wealth is appreciating assets) has an average rate of return of 4%. His income therefore is $4 million. The investor would pay an income tax rate of about 45% total combined federal/state/local taxes which would be $1.8 million in taxes. Now consider a 2% wealth tax tacked on, which would be an additional $2 million. This would mean the investor would pay a total of $3.8 in taxes and he would have an effective tax rate of 95%. What’s even more sobering is that if he earns less than 4%, or if his tax rate was more than 45% (which it will be with Biden’s plans), then the investor’s taxes would be in excess of 100%.
Constitutionality: Our Constitution provides in Article 1, Section 9, Clause 4 that: “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”
Both our income tax and a wealth tax would run afoul of this provision. To make the income tax constitutional we had to add the 16th Amendment. But no such amendment exists for the wealth tax. It may be that wealth tax proponents would argue that this tax is somehow taxing income potential using wealth as a proxy. But no Supreme Court, other than an off-the-charts progressive one, would approve of such strained logic. In fact, there’s currently a case before the Ninth Circuit Court of Appeals challenging Trump’s Mandatory Deemed Repatriation Tax on the ground that it is, in fact, an unconstitutional wealth tax.
Implementation: Taxing someone’s wealth requires determining the fair market value (“fmv”) of his or her assets, and then (presumably since no details are currently available) subtracting all liabilities. For anyone of considerable wealth, this would be an extraordinarily expensive, time consuming, and complicated effort. Even for assets that might have a publicly available market for valuation, it isn’t that simple. Consider volume. If someone has a substantial amount of something, you normally would apply a discount, since selling large volumes of assets can upset the market and reduce the overall value of an item.
But not everything has a value that can be determined easily. Investment in a closely held business, or real estate, or even paintings are examples of assets that are not susceptible to easy valuation on an annual basis, making it not very economically feasible to try to do so. Additionally, valuation can be determined in any number of ways — such as appraisals, discount rates, and reductions in the lack of marketability– so that valuations may be varied.
Another factor that makes valuations difficult are contingencies. For example, many assets have contingencies backed up with guarantees, and it’s difficult to value those contingencies. Finally, there is a question of liquidity/ability to liquidate or pay. Most people who have extraordinary assets like that often don’t have sufficient income or liquid assets to pay a wealth tax on them. Since many assets are not easily marketable, there could be a liquidity crunch.
Of course, a wealth tax would add even more burdensome complexity to the already byzantine tax code. The IRS would have to substantially increase its number of agents and its budget just to have the manpower to devote to compliance and enforcement. Given the IRS’s history of being discriminatory and incompetent, this is not a good thing.
Failure: It should also be noted that the wealth tax has already been tried — and failed — repeatedly. At one point, 15 European countries had a wealth tax. To date, all but four nations have since repealed it because it was ineffective in accomplishing its goals and was extraordinarily complicated and expensive to administer. Additionally, the wealth tax induced capital flight and asset hiding. For instance, in 2017 France decided to abandon its wealth tax after it caused the loss of “10,000 people with about 35 billion euros ($41 billion) in capital abroad” over a 15 year period according to the Prime Minister. Likewise, Switzerland — one of the four remaining wealth tax countries — experienced substantial tax evasion, noting that a mere “.1% wealth tax lowers reported wealth by 3.4%” according to a study by the National Bureau of Economic Research. As Switzerland has a wealth tax rate of 1%, that amounts to 34.5% in unreported assets.
Effect on the Economy: The growth of our economy is dependent on putting capital to productive use. Every time a corporation reinvests its retained earnings, or an individual puts his wealth to work by investing in an ongoing or new venture, the economy grows. This growth results in new purchases of equipment, facilities, hiring of employees, research and development, etc. Conversely, when capital is removed from the economy, such as by requiring the payment of a wealth tax, the economy shrinks. In fact, the wealth tax is a form of double taxation. Wealthy Americans already pay taxes on their income; under a wealth tax, they would then be taxed again for keeping that income in various assets. This not only punishes success, but discourages investment and savings.
Though progressives may argue that the capital taken out of circulation will be used to redistribute income to those who will spur the economy by consuming those funds, we revert back to Economics 101 – consumption has a much smaller effect on the economy than investment.
Morality: There is no moral justification to take something from someone just because they have it, even if they have a lot of it. One is reminded of the great scholar Thomas Sowell, who understands this quite well: “Since this is an era when many people are concerned about ‘fairness’ and ‘social justice,’ what is your ‘fair share’ of what someone else has worked for?” The wealthy in this country are an extraordinarily charitable group. But it should be their choice as to how charitable they wish to be with their hard-earned assets.
Senator Warren has argued that a real benefit of this tax is that it will only affect a relatively small number of people. This reveals what this tax really is – an attempt to foment class warfare by giving a large number of people (read: voters) a benefit through confiscating substantial amounts of money from a small group.
A wealth tax will certainly not bring in the revenue expected by the progressives – who relish the thought of punishing wealthy Americans in order to throw more money at their failed policies. Wealth redistribution is inherently the antithesis of the American Dream. Bastiat was right. No matter how you spin it, explain it, try to justify it, a wealth tax is simply “legal plunder.” Perhaps Senator Warren is being disingenuous (since the wealth tax would never be passed) but she will nevertheless score political capital among her constituents who do not know any better. She is taking advantage of the lack of economic knowledge among people who don’t understand the complexity and stupidity of a wealth tax.
