Tuesday, April 15, 2008

Tax Day Ramblings

Readers Journal has been updated. Check out 15 fascinating thought-provoking new comments and a new essay, On Capital Traps I don't know about you, but I wrote some tax payment checks yesterday.

I'd like to complain about having to pay $980 more (above and beyond my estimated tax payments) to the U.S. Treasury and the Golden State, but I don't have any sympathy for myself--all it means is I underpaid.

My total Federal tax was not giant--and of course, neither was my income, net, gross, net-net, however you want to figure it. But that's the trade-off, isn't it? You make more money, you pay more taxes--or you can cheat, or move to a no-tax nation. That's the trade-off; If you prefer to live in France or Denmark, you'll pay even more taxes.

The people I have sympathy for are the salaried or self-employed folks who earn more than $160,000. They're the ones paying most of the taxes--not the corporations, and certainly not the lower-income wage-earners--42 million out of 130 million filers pay zero Federal tax.

Source: Summary of Latest Federal Individual Income Tax Data:
The top-earning 25 percent of taxpayers (Adjusted Gross Income over $62,068) earned 67.5 percent of the nation's income, but they paid more than four out of every five dollars collected by the federal income tax (86 percent). In 2005, the top 1 percent of tax returns paid 39.4 percent of all federal individual income taxes and earned 21.2 percent of adjusted gross income. I'd have to nearly triple my adjusted gross income to reach the top 25%, so my hat goes off to those paying most of the nation's income taxes.

I am not so sure about the wisdom of letting 32% of all income-earners pay nothing. Yes, they're low income or have many dependents or large deductions, but when a third of the people pay nothing in taxes, I wonder if their perspective on the coming budget deficits isn't a wee bit skewed.

Let's be direct: if you pay nothing, you're not focused on how much you're paying, but on how much you're getting in Federal benefits/credits, etc. A third of the nation, regardless of their political beliefs, will vote to raise taxes or borrow from our children and their kids rather than cut benefits out of a very powerful self-interest.

Add in the millions who pay little or no taxes but who receive Social Security and Medicare benefits, and you're up to about half of all potential voters with a distinct self-interest in doing anything but cutting benefits.

I'm not sure that's healthy for the Republic. Maybe we'd have better collective judgment if everyone with income (yes, even tax-free municipal bonds) paid some Federal tax-- including any business with operations here in the U.S.

But it seems that even as corporations have reaped record profits for the past 7 years, their share of the nation's tax burden has plummeted: THE DECLINE OF CORPORATE INCOME TAX REVENUES:

Treasury Department figures show that actual corporate income tax revenues fell to $132 billion in 2003, down 36 percent from $207 billion in 2000. Corporate revenues represented only 7.4 percent of all federal tax receipts in 2003. With the exception of 1983, this represents the lowest level on record (these data go back to 1934).

Although taxes paid by corporations, measured as a share of the economy, rose modestly during the boom years of the 1990s, they remained sharply lower even in the boom years than in previous decades. According to OMB historical data, corporate taxes averaged 2 percent of GDP in the 1990s. That represented only about two-fifths of their share of GDP in the 1950s, half of their share in the 1960s, and three-quarters of their share in the 1970s.

The share that corporate tax revenues comprise of total federal tax revenues also has collapsed, falling from an average of 28 percent of federal revenues in the 1950s and 21 percent in the 1960s to an average of about 10 percent since the 1980s.

No precise estimate exists of the amount of income that corporations shelter from income tax. As noted, the Joint Committee on Taxation believes that the amount of corporate tax shelter activity cannot be measured with existing data.

Beyond this evidence, another sign that corporate tax sheltering is on the rise is the divergence between the "book" income that corporations report to their shareholders and the income that these corporations report to the IRS for tax purposes. A number of studies conducted in recent years have identified very large gaps between 'book' and 'tax' income, including a 1999 Treasury Department analysis that concluded that tax shelter activity was one of the factors causing this divergence.

A more recent National Bureau of Economic Research study reached similar conclusions. It found that this gap has grown and that in 1998, some $154 billion — or more than half of the gap between “book” and "tax" income for that year — could not be explained by the traditional accounting differences. The author concluded that "the large unexplained gaps between tax and book income that have arisen during the late 1990s are at least partly associated with increased sheltering activity."

So our problem as taxpayers seems to be a distinct lack of offshore tax shelters. Being a foreign corporation is also a huge plus, it seems: Most US firms paid no income taxes in '90s:

An estimated 94 percent of US corporations reported tax liabilities amounting to less than 5 percent of their total income in 2000. The corporate income tax rate is ostensibly 35 percent, but companies are able to reduce their effective burden by claiming various deductions and credits.

Foreign-owned companies fared better in some respects than their US-based competitors. The report found that 71 percent of foreign-controlled corporations paid no taxes on their US income, while 89 percent had liabilities of less than 5 percent of their income. A corporation is a legal entity, but it has no conscience, sense of duty or ethics. Cheating via bogus tax shelters goes hand in glove, it seems, with preparing a P&L statement, and all those wonderful Japanese and European firms which make billions here in the U.S. seem not to be hindered by an obligation to contribute any taxes to the source of their Midas-like wealth.

There is an excuse for all this, of course; "globalization." We pay taxes in Japan or Germany or Bermuda (heh-heh)--or maybe not, but it's globalization, pal; we're just here to make the big profits. Taxes are for the workers and consumers to pay. You're lucky we're here at all, buddy.

Four cheers for globalization's secondary benefits, like tax-free zones for corporations.

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