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Politics : Politics for Pros- moderated -- Ignore unavailable to you. Want to Upgrade?

To: JohnM who wrote (127110)	7/23/2005 10:50:55 PM
From: Ilaine	Read Replies (3) \| Respond to of 793717

But in terms of personal income taxes, I just can't see it. That was the point of the Bonus Question in my first post. Small businesses create the most jobs. And most small businesses are sole proprietorships, not corporations, not partnerships, and not LLCs. So cutting personal taxes cuts tax on the small businesses that are the real engine of the economy. If taxes were cut on, say, S corporations (small corporations) and LLCs, which tend to be small, then small-time entrepreneurs would probably wise up and incorporate. That would have several benefits. First, you could target tax cuts to the small entrepreneurs. Second, you would encourage them to improve their business practices -- operating as a sole proprietorship is risky, and these days, with the ubiquity of legal software at the corner store, anybody can incorporate themself, although they may not make their S corporation election timely, and then they're in a mess. And the incorporation fees would go to the state governments. Win-win-win, on the aggregate. My guess is that the people who are too small to incorporate or form an LLC mostly get paid cash under the table anyway. By the way, cutting business taxes gives the smaller fish an incentive to go legit rather than stay underground. (In case you were wondering, I do have my own small business. As did my father, my mother, both grandmothers, both grandfathers, and a slew of other relatives. My guess is that this is not unusual, my husband's father and mother also had small businesses, as did their parents.)

To: JohnM who wrote (127110)	7/23/2005 11:45:52 PM
From: DMaA	Read Replies (1) \| Respond to of 793717

You wanted to continue a dialog? How did I miss that signal? I expect the 80s tax issues would be an endless discussion between us. I'm not interested in redebating it.

To: JohnM who wrote (127110)	7/24/2005 1:06:29 AM
From: greenspirit	Read Replies (1) \| Respond to of 793717

I believe I can tell you a little story which makes the point. When I was about 16 I worked for a construction company that built in ground pools. During the summer we could basically work as many hours as we wanted. Quite a few of the workers would work only 45 hours because after that you made more than 300 dollars a week and were taxed at a much higher rate. They figured, why work if uncle sam gets more than half the money. I've heard a similar story repeated over the years by people unwilling to work allot of overtime.

To: JohnM who wrote (127110)	7/24/2005 1:35:55 AM
From: wonk	Read Replies (3) \| Respond to of 793717

Moreover, I can see a stronger case for the argument made in terms of corporate taxes, though I suspect I would still not find it convincing. Stay unconvinced. Perhaps a little look at the tax code is useful in regards to domestic corporations with foreign operations. (If you wish to go stark raving mad, take a trip through Subpart F of the IRS Code) Lets say, for example, I have a domestic corporation with a majority or wholly owned subsidiary in another country (a CFC or Controlled Foreign Corporation). That country has a 40% income tax rate. When I bring profits back to the US, I pay ZERO tax (except for AMT) because the code provides for a Foreign Tax Credit, i.e., since the foreign rate was 45% and the US rate is 35%, I’ve already paid enough. To see this, examine the audited financial statements of pretty much any large multinational and study the income tax provision disclosure. I took a quick look at Exxon / Mobil. For 2003, on $237 billion in revenue and $32 billion in Income before Tax, they reported $11 billion in Income Tax expense. But of that $11 billion, only $1.5 billion was actually US income tax paid and another $1.0 billion was deferred. So, on worldwide income before tax, Exxon / Mobil’s paid US Tax Rate was 4.7% and its US rate on paid and deferred income tax was 7.8% (and no, I’m not arguing at this moment that they are undertaxed) sec.gov But the Tax Code goes farther than that. Since I paid more income tax than the US rate, I get to “carryforward” the excess taxes paid as a credit I can use in the future, in this case the 10% differential. This is actually treated as a tax asset according to GAAP (generally accepted accounting principles). Do companies let Tax Assets wither? Heck no. Rather than bringing those profits back to the US, the multinational will look for other foreign investment – in low tax jurisdictions so that the blended rate permits them – if they choose - to bring all the profits home AND use up those banked tax credits. The perversity here is that lowering the US rate incents companies with foreign operations to make more foreign investments rather than domestic ones because their carryforward tax asset is growing even faster. So, in effect, by lowering their rate you’ve both cost the US Treasury and the lost tax revenue went offshore to build some other country’s economic base. And no, I’m not recommending higher corporate taxes because that doesn’t help either. Lowering corporate taxes does promote domestic job growth for companies with only domestic operations but disincents domestic job growth for companies with foreign operations. The real problem is structural and only in the extreme can be helped by tax policy. I’m a domestic US Company. I can produce in the US or overseas. The first thing I’m going to look at is profit margins before I ever even begin considering taxes. For example, I can go foreign and have EBT (earnings before tax) margins of 40% or stay in the US and have 25% EBT margins. Even if the foreign country has an income tax rate of 45% (as compared to the US rate of 35%) I still make more money going foreign. Even if we lowered the US Tax rate to 12%, we’d only just level the playing field. (but lose all kinds of tax revenue from foreign multinationals operating here). Foreign US-1 US-2 Revenue 1.00 1.00 1.00 EBT Margin 40% 25% 25% EBT 0.40 0.25 0.25 Tax Rate 45% 35% 12% Income Tax 0.18 0.09 0.03 Net Income 0.22 0.16 0.22 Of course, if the company had foreign operations already and we lower the tax rate like that, we’d again have the problem described above where companies try to use up their banked credits by investing their profits in other foreign countries. From a public policy perspective, even if we level the playing field through tax policy, overall the country is not necessarily better off. The foreign government(s) still have lots of tax money flowing into their coffers to fund lots of guns, lost of infrastructure and lots of education. We (the U.S.) on the other hand are running on fumes. I have no answers for here. I do know that “taxes bad” or “cutting taxes for business is good ” are just slogans and far too simplistic to help inform decisions which effect the long term prosperity of the USA. Perhaps a starting point is to recognize that businesses owes no duty of loyalty to the United States of America. Citizens do – but not businesses. They’ll maximize profit. And if that means taking the jobs offshore – or keeping profits offshore, they will. Which does absolutely zilch for the country. And before someone starts lobbing “liberal” bombs, I make such recommendations all the time, because it is perfectly legal and economically sound. ww