Archive for category Taxation
Unintended Consequences
Posted by Tom in Business, Centrally Managed Economy, Economics, Taxation on September 29, 2010
Frequently big government legislation and rule making has unintended consequences. For the most part those are of the left field or right field sort effecting some unthought of outlier that may have adverse consequences. But seldom is proposed legislation likely to have the exact opposite effect as that stated as the reason for its proffered enactment in the first place. Such is the case with the Obama plan to end the tax deferral for foreign subsidiaries of U.S. companies.
Under current law a foreign subsidiary of a U.S. company pays the tax of the host country and defers the difference between that tax and the U.S. tax until the profits which generated that tax are “repatriated,” or brought back to the U.S. So Microsoft earns profits on its operations in Ireland and pays the Irish tax of say 20% but defers the difference between that tax and the 35% U.S. tax until the profits which generated the tax are brought back to the U.S. Note that the 15% difference is paid but at a later date.
U.S. companies must compete internationally with companies of foreign nations. The competition is ferocious; every efficiency counts. Now the U.S. is the only major country that has “extra territorial taxation;” it taxes its citizens and corporations on earnings in other countries. So for example, Microsoft may have invested previously taxed capital in Ireland, employed Irish workers, used Irish technology, and paid Irish taxes on the profits earned in Ireland, and it will still owe the higher U.S. taxes, but only when it repatriates those profits to this country. No other major industrial country taxes those foreign earned profits.
It is an understatement to say that U.S. countries competing internationally are at a disadvantage before they earn a dime. They have two strikes against them before they start to compete, because of the U.S. tax structure . Nations like Germany have no extra-territorial taxation of German companies that compete with U.S. companies on U.S. soil.
So it’s hard to believe that Obama would want to make the situation worse by eliminating the foreign tax deferral and thereby increasing the adverse effect of the unusual extra-territorial taxation of U.S. companies. Monday’s WSJ calls it “The Send Jobs overseas Act.” But that is what our president is proposing under the guise of bringing jobs back to these shores. “…(F)or years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries. I want to change that.”
Add to that the high U.S. tax rate and our companies are at a real disadvantage. Here is the Cato table used in the WSJ article under the heading “Capital Punishment.
| Effective Corporate Tax Rate in 2009 | |
| United States | 35% |
| G-7 average | 28.8 |
| OECD average | 19.5 |
| World average (80 nations) | 18.2 |
| Source: Cato Institute/World Bank—effective rate includes net federal/state rates. |
The direct effect of this legislation will be to for U.S. companies that stay on these shores to lose business to foreign competition. Alternatively, they will move to foreign jurisdictions. In either case jobs will be lost in this country. The article referenced above offers an excellent example in the shipping industry.
Obama does not have anyone experienced in business in his administration. He appears to be anti-business. He loves taxation and big government. He is certainly a statist. It’s hard to argue that he is not a socialist.
I Want Your Money
Posted by Tom in Centrally Managed Economy, Congress, Deficit, Democrats, National Character, National Debt, Politics, Presidency, Taxation on September 29, 2010
Check out this trailer for an upcoming must-see movie. It states the November choices pretty clearly.
One Dynamite Cartoon by John Trever
While aimed at Cuba, it portends the future for the United States.
Ever heard the expression, “the wheels are coming off?”
Taxpayer Tim Has Company
Give the Washington Post credit, it reported the fast and loose attitude of Obama’s staff when it comes to paying the taxes that you and I pay. T.W.Farmam did the investigative reporting, but the LA Times focused on the White House staff, 41 Obama aides owe the IRS $831,000 in back taxes!
So Tim Geithner’s OOPS on taxes, which he blamed on Turbotax, is not an isolated incident. Seems that the governing elite, none of whom have ever worked for a living, are above the rest of us. Yes they can rule us, they can tax us, they can regulate our medical care, they can govern our retirement, but they are exempt from all those rules they foist upon us. THIS IS PROGRESSIVISM, THIS IS OBAMAISM!
Reminds me of George Orwell’s Pig, “all of us are equal, but some of us are more equal than others.” The November elections can’t come too soon; and November 2012 can’t come even sooner!
Brain Dead on Taxes
Posted by Tom in Centrally Managed Economy, Economics, Fiscal Policy, Statism, Taxation on September 10, 2010
It’s telling that there is not one businessman in the Obama administration. Obama has no concept of the function of capital in an economy. He doesn’t understand that private competitive capital investment drives productivity, jobs, profits and prosperity. He doesn’t understand Adam Smith’s conclusions that the prosperity driven by capital benefits all citizens; a rising tide lifts all boats, as it were. Given his socialists leanings he really resents this as “trickle down” economics. In fact, trickle down is good—poor people don’t create prosperity and they don’t hire the unemployed.
Thus his tax contradictions on capital are not totally unexpected. Yesterday’s WSJ editorial, Tax Contradictions, points this out well: He promotes a temporary write off of business capital investments for one year which is good as a stimulus even though it borrows from future investment.
“He wants to cut taxes on capital because he says the economy needs the stimulus, even as he wants to raise other taxes on capital that he says won’t hurt growth. Huh?
“Yesterday in Cleveland, Mr. Obama said he still wants tax rates to rise sharply in January on small business profits, dividends, capital gains and high-income earners. These are marginal rate tax increases on the very capital and R&D that his new tax cuts are supposed to nurture. And while the expensing tax breaks would be temporary, the tax increases would be permanent.”
The net effect of this is to discourage capital investment, hiring, and prosperity. But he does have the socialistic pleasure of punishing the successful small businesses.
This is what you get when you have a “community organizer” as president!
Geithner: Transfer Payments Create Wealth!
Posted by Tom in Centrally Managed Economy, Economics, Taxation on August 5, 2010
Larry Kudlow calls it “The Washington War on Investment.” Taxpayer Tim Geithner said that extending tax cuts for the wealthiness Americans would imperil the fragile economic recovery, would harm growth; this because the wealthy save more of their tax breaks than do others.
So, according to Geithner, savings and investment are bad; and the corollary, transfer payments from the government to the unemployed are good. Let’s take a simple case of the dollar in question, the one that winds up as investment or tax. The dollar of tax goes through the government collection machine and comes out at 80 cents, then it goes to the state in need (most of ‘em) so that it can be distributed to the long term unemployed worker or about to be unemployed teacher (bloated administrative bureaucracies don’t get laid off) who receives about 70 cents. He or she spend that 70 cents at the supermarket producing 70 cents of revenue and a penny of profit. The penny of profit nets a half penny of income for the market, half of which as dividends may get invested by the market’s shareholders. Note that none of that dollar went to reducing the deficit and debt that Hussein and Taxpayer Tim loaded on our children and grandchildren.
Alternatively, the dollar not taxed is either saved as Taxpayer Tim would argue or spent. On the save side, that dollar is invested for an economic return. It may go to stocks, bonds, real estate, start-ups, small businesses, etc. But it is invested in expectation of an economic return. It produces, technological advancement, new business, growth, and yes indeed, taxable income! It goes into expected productive investment at best case 100 cents or worst case 92 cents covering transaction costs. So here for growth we have 92 cents versus one-quarter of one cent!
If the dollar is spent instead of invested by the wealthy American, and this is contrary to Taxpayer Tim’s hypothesis, it produces 100 cents of revenue, that is GDP. So here the comparison is 100 cents versus 70 cents for the tax and transfer case. In either case, Hussein Obama and Taxpayer Tim are wrong. And their position will drive this country into ruin.
Larry Kudlow says it better and I recommend a full read of the article: “The great flaw in the thinking of the Democrats is that they are ignorant of the economic power of saving and investment. Saving is a good thing. Stocks, bonds, bank deposits, money-market funds, commercial paper, venture capital, private equity, real estate partnerships — all that saving is channeled into business investment. And whether that capital goes into new start-ups or small businessesor large firms, it finances the kind of new investment in plants and equipment and software and buildings that ultimately creates jobs and family incomes. And that, in turn, spurs consumption.
“But pulling out just one dollar from the private sector and rechanneling it through the government as a transfer to someone else creates nothing. At best it’s a safety net. At worst it may damage private-business activity and actually reduce employment. Without saving there can be no investment. And without investment there can be no enhanced productivity, which is the ultimate source of long-term prosperity and wealth.”
Would that there were there just some modicum of economic intelligence in Hussein Obama’s administration!
Deflation, A Self Fulfilling Prophesy?
Posted by Tom in Business, Centrally Managed Economy, Deficit, Fed, Financial Policy, Monetary Policy, National Debt, Nationalized Health Care, Taxation on August 3, 2010
When Bill Gross, the bond guru manager of Pimco Total Return Fund, says “it’s happening,” he brings credibility to the deflation first scenario, that is deflation before inflation. According to yesterday’s WSJ article many fund managers are loading up on US Government bonds and hedging stocks. Others expect the Fed to come to the rescue. The Fed has limited options since it has interest rates near zero. According to another WSJ report these options are “unorthodox!” As the Fed mulls these, it may spook investors and highlight the weakness in the economy. So when the Fed is playing offense in trying to reflate the economy, savvy investors might conclude as Gross did that it’s time to play defense. Typically these “unorthodox” measures mean increasing the money supply by buying bank assets good and bad, bonds and mortgage backed securities. Problem is that there are not too many bullets left in the Fed’s arsenal.
To cap matters off, vis a vis the “self fulfilling prophesy,” today’s WSJ leads the front page with “Fed Mulls Symbolic Shift” that is using cash from maturities to buy additional assets instead of letting its portfolio shrink to a stable economy level. The Fed’s $2.3 Trillion portfolio has nearly tripled in size since 2007!
So, what to do? If prices are going to be lower tomorrow, why buy today? And this, ad infinitum! Couple this with Hussein Obama’s proposed tax increases, the pile on of entitlement deficits from Obamacare, and the great uncertainty posed by the regulatory bureaucracy, and you get a bleak picture.
Hope I’m wrong!
Incentives Work
So do disincentives. The truism is well illustrated in Art Laffer’s WSJ article, Tax Hikes and the 2011 Economic Collapse. In it he uses history to illustrate the adverse effect of our upcoming tax changes.
“Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.”
“The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet.”
The article is too important not to read and understand in its entirety.
Posted from Golfito, Costa Rica.
Philosophical Ramblings
Posted by Tom in Constitution, Individual Freedom, Law, Morality & Religion in the Public Square, National Character, Taxation, Welfare on April 22, 2010
Saw one of my favorite Docs today and told him of the dismal projections for our country discussed at this week’s Reno Hayek Symposium Dinner, the current and future deficits, the debt, the unfunded liabilities and on top of all this the Omamacare sludge hammer. We both pondered the “no way out-no apparent solution” future. The concern here is for our children and grandchildren. And, its not that they can’t be better, be more independent than we, but that we are saddling them with unimaginable debt burdens so bad that they can’t be overcome no matter how strong they are.
We then discussed the untenable tax burden necessary to barely maintain but not reduce these entitlements, their corresponding debt and merely the interest cost necessary to maintain both. This is not a tax the rich issue, the rich will no longer be here or anywhere for that matter. This is a gigantic burden on the middle class; the less-than-middle class pay no taxes, and in fact have payments going to them. The anticipated 20% VAT tax atop the increased income tax and estate tax will not come close to solving the problem. In fact this tax on consumption will merely accelerate the downward spiral in our consumption based economy. This because consumers will be further forced to hunker down, down to a subsistance existence.
We pondered the all-but-impossible solution of reducing entitlements arguing its necessity but also its political impossibility. Then we broached the real issue, equality.
This, discussed initially in medical services. Should we all be entitled to the best, the Mayo clinic, the latest technology? Or should only those who can afford the best be able to buy it? In Europe it is the entitlement scenario, but the best becomes the non-best. This because the best requires capital investment at risk for long duration and problematic results. My Doc pointed out that med-tech investment is down! In Central America medical treatment and services are pretty good and the tech used is state-of-art but only for those who can afford it. The lower classes are relagated to a lower level of care above first aid but not the best available.
What as a society do we want for our society? What as a society can we afford for our society?
I think it gets down to two issues: the proper role of government and the moral responsibility of the individual. Government must defend our shores first and formost. It must enforce criminal laws protecting person and property. It must maintain a system of civil justice resolving disputes between citizens. And given our republic structure it must resolve issues between states. Finally it must provide for its continuance, succession and amendment. Our founding fathers pretty well set this out initially in the Declaration of Independence and later in the Constitution.
I think the proper role of the individual is to provide for himself and his family; that is food, shelter, education and protection. Beyond that the individual must be a contributing member of society helping his fellow man in need. This frequently through synagogue, temple or church and also through voluntary community societies. The individual must also be a responsible citizen, voting, volunteering, and participating in government offices when elected or appointed.
What of equality? What of entitlements? We are not “all created equal” nor has history shown us to be “endowed by our Creator, with certain unalienable rights” of life, liberty and the pursuit of happiness. The closest we come is to expect “equality of opportunity” despite our limitations. “Equality of result” is never attainable. Nor are we “entitled” to be equal. We struggle to do our best for ourselves, our families and our society. But we are not entitled to nor should we be guaranteed the same as everyone else.
This realization gives us the opportunity to help others, to be charitable, to do moral good. Including providing charitable hospitals and medical care, to get back to the earlier example. Here the government has no role; it is the exclusive role of the individual with other individuals alongside.
So, to prevent or at least mitigate the greatest intergenerational immorality in our history, we must limit entitlements, reducing and means restricting social security, medicare, medicaid and Obamacare. Keep in mind our grandkids have no voice, they are innocent of our current theft of their future. Our parents, the greatest generation, left us a better future but perhaps one too soft. Will we do worse by our children and grandchildren?
Tax Season–Players Suckers–Spectators Vote
Mark Steyn’s NRO post today, Tax Season, analogizes tax season to baseball season which, for most of us, is a spectator sport. Yeah, that’s right, we pay at the gate and again for the peanuts and crackerjacks while the guys on the field play and get paid. That’s the opposite of Mark’s analogy. During tax season, the taxpaying-players pay, and the spectators in the stands get in free and enjoy free peanuts and crackerjacks. No wonder they don’t care if they “never get back. Cause it’s root, root for the” Obama team. “If they don’t win, it’s a shame.” Here my choice of Jack Norworth’s 1908 baseball standard as an analogy breaks down. It’s highly improbable, almost impossible that “they” won’t win. Why? Cause like baseball now, the spectators will shortly outnumber the taxpaying players. Thus, the point of Mark’s article.
“And yet for an increasing number of Americans, tax season is like baseball season: It’s a spectator sport. According to the Tax Policy Center, for the year 2009, 47 percent of U.S. households will pay no federal income tax. Obviously, many of them pay other kinds of taxes — state tax, property tax, cigarette tax. But at a time of massive increases in federal spending, half the country is effectively making no contribution to it, whether it’s national defense or vital stimulus funding to pump monkeys in North Carolina full of cocaine (true, seriously, but don’t ask me why). Half a decade back, it was just under 40 percent who paid no federal income tax; now it’s just under 50 percent. By 2012, America could be holding the first federal election in which a majority of the population will be able to vote themselves more government lollipops paid for by the ever shrinking minority of the population still dumb enough to be net contributors to the federal treasury. In less than a quarter-millennium, the American Revolution will have evolved from “No taxation without representation” to representation without taxation. We have bigger government, bigger bureaucracy, bigger spending, bigger deficits, and bigger debt, and yet an ever smaller proportion of citizens paying for it.”
“The top 5 percent of taxpayers contribute 60 percent of revenue. The top 10 percent provide 75 percent. Another 40-odd percent make up the rest. And half are exempt. This isn’t redistribution — a “leveling” to address the “maldistribution” of income, as Sen. Max Baucus (D., Kleptocristan) put it the other day. It isn’t even “spreading the wealth around,” as then-senator Obama put it in an unfortunate off-the-prompter moment during the 2008 campaign. Rather, it’s an assault on the moral legitimacy of the system. If you accept the principle of a tax on income, it might seem reasonable to exclude the very poor from having to contribute to it. But in no meaningful sense of the term can half the country be considered “poor.”
Two Points: One, if you don’t pay for it, you don’t appreciate it. The dole, the negative tax, the entitlements exacerbate an entitlement/dependency mentality that only wants and demands more and really doesn’t appreciate what is given with any contribution!
Two: The percentage of taxpayers supporting the system will decline and decline more, until it wakes up and leaves. We have reached the “tipping point” in social security with more going out than coming in. Medicare is worse, as is Medicaid, the states unfunded liabilities and government debt, deficits and unfunded liabilities follow in order.
That the idiot we have as president, Obama, with his leftist minions, Pelosi and Reid, and the Democratic congress have added Obamacare as another gigantic entitlement to this unsustainable pyramid is immoral now and all the more so later. Obama has proven himself anti-life as that term applies to live birth abortions; he has now done so as to our precious grandchildren now living.
The sad truth that Mark Steyn makes is that there are going to be more voters voting themselves free “peanuts and crackerjacks” than taxpayers paying for everything!