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Tax games people play

Running the IRS is a lousy job...why don't we make it much easier?
Photo by Win McNamee/Getty Images

There are many reasons to support a simplified tax code and in an upcoming article, we'll lay out some specifiics. In the meantime, it’s important to illustrate how our legislators have set up a system which makes it easy fodder for a left-right paradigm portraying people as bogeymen for taking advantage of legal tax breaks or loopholes, some of which are actually discounts on what would otherwise be excessive taxation.

While we may disagree on the way taxes are assessed or collected, there is seemingly no one who doesn’t believe the wealthy can and should ultimately shoulder a larger burden than those of lesser means. It is also generally understood that the less fortunate use a higher percentage of their income on basic necessities so we need to avoid taxes that are regressive.

We seem to focus, however, on wealthy people and businesses who earn money legitimately and legally as if they themselves are criminals, while ignoring the income of those who actually break the law and violently so, including drug dealers and organized crime, none of whom pay any federal taxes. While it is well understood that the less fortunate might not be able to pay taxes and often are receiving government benefits as well, perhaps a more objective look at those who actually do pay is in order, particularly in regard to the road map that’s been set up for them. As it happens, the wealthy have been paying a dramatically higher percentage of the tax burden since 1980 so an objective evaluation of what everyone's "fair share" is in order, along with an even-handed assessment of the ways individuals and companies reduce their tax liability.

Expecting anyone to not take advantage of legal deductions and loopholes in our bloated tax code is like asking them to deliberately avoid buying things on sale and pay full price instead. How many individuals championing higher taxes on the rich and calling for closing loopholes and eliminating deductions have themselves traditionally spent days if not weeks each year taking advantage of every available deduction as well as planning tax-advantaged investments? It is human nature and for better or worse, the American way.

In fact, we’ve made tax exemptions institutional. While the IRS scandal trudges on under the allegation that the agency unfairly scrutinized conservative organizations, one can’t help but wonder why any political advocacy group, conservative or liberal, is eligible for a tax exemption? Isn’t it against the law for houses of worship to weigh on on political issues? That's aside from the entire tax-related industry that lives on its ability to presumably pay them less than you'd otherwise pay Uncle Sam.

Regardless, business has become the most visible target of late and much of the attack represents a fundamental lack of understanding both of taxes and how business works, similar to uniform demands for living wages that don’t do an actual economic analysis using real math. That is not to say that a minimum wage is either good or bad; it is simply to point out that if you are going to argue that a business be forced to raise wages then you must also look at the business model including profit and labor costs to see how it will be affected before making an assessment that it won’t matter.

People who are in business generally understand that all costs of doing business are figured into pricing that's passed on to the consumer. Overhead is the term commonly used to describe ongoing costs in operating a business such as rent and labor. Taxes, of course, are a part as well. When the cost of doing business goes up, a business may make less profit and perhaps it doesn’t matter, unless the owners rely on that profit for their income or in a larger company, it affects shareholder price.

If the profit is adversely affected, something else must be done to compensate: either revenue must go up or other expenses must go down. The primary goal of business is to make a profit and that is not an inherently bad thing as profit is what puts more money back into the economy, allows for expansion that leads to more jobs and pays for dividends to shareholders. Without profit there is no point in running the business at all. It’s one thing to try to maximize profits with no regard for doing damage along the way, i.e. operating a sweatshop or taking no precautions to protect the environment but simply trying to run the most efficient business you can should not be in and of itself somehow considered amoral. It’s hard for some people to believe but there are those who are raised to understand that making money is not just the way to live well but also prevents you from being a burden on others, allows you to take care of your family and give back to the community.

The recent onslaught of corporate inversions has led to a wave of criticism from everyone from Barack Obama calling them “unpatriotic” to Elizabeth Warren, who says such companies are turning their backs on the country by taking advantage of all the good things America has and then “running out on the bill.”

Why do companies look to inversions to boost profits? AP's Stephen Ohlemacher listed some of the reasons, starting with the U.S. having “the highest corporate income tax rate in the industrialized world, at 35%. The U.S. is also the only developed country that taxes corporate profits earned abroad. Foreign profits are subject to U.S. taxes once they are brought to the U.S., though corporations can deduct any foreign taxes paid.”

So essentially, U.S. companies must pay U.S. taxes on foreign earnings, making them less competitive with their foreign counterparts.

This is not to say that no company ever does things we could more accurately describe as "tax dodges." Some of these are certainly questionable in nature, including shifting revenue offshore to achieve a lower tax rate or using such methods as “earnings atripping,” where a foreign parent company "lends" money to the U.S. firm which then deducts the interest payments, or "hopscotching," in which profits are funneled through a foreign parent company that was formed through an inversion so the money can be invested in the U.S. without paying U.S. taxes.

The tax code is full of deductions for every special interest, some of which we view as inherently benevolent. Who doesn’t champion the mortgage deduction, which is little more than a gift for realtors? Do homeowners somehow deserve lower taxes than renters?

Regardless, the way our tax code is set up there are seemingly variations that are necessary and others that simply provide an avenue for abuse. The question is, what to do? Do we want Congress to spend time arguing the tax code line-by-line?

The Democrats, as embodied by President Obama and Senator Warren, seem to want to vilify wealthy individuals and companies as a matter of course, rather than addressing the issue with the tax code as a whole. This tends to portray anyone trying to save money on taxes as evil and selfish without looking specifically at individual policies and without addressing the very notion that our tax code is insane.

How insane is it? If copied into Microsoft Word, the tax code alone would be around 11,000 pages long and if you add in regulations, annotations to court cases, revenue rulings, explanatory material and other various and sundry IRS memoranda, you come up in excess of 72,000 pages.

Holy War and Peace, Batman! ( x 5 )

While private citizens have generated ideas for alternatives which may need some tweaking such as The Fair Tax, the government has come up with little more than partisan finger-pointing and rhetoric. Why this should be a surprise to anyone is a mystery, considering they’re the ones responsible for this abomination to begin with.

Republicans have not come up with a great number of ideas either and are admittedly averse to simply eliminating deductions or loopholes that effectively raise taxes, as they see that as doing nothing more than making American companies less competitive without solving the bigger problem. Some do at least recognize that even where they might agree, such as in regard to stripping, they seem to understand that cherry-picking one provision or another doesn’t solve the larger problem. Ohlemacher added to his rundown, “Key Republicans say the only way to adequately address inversions is to overhaul the tax code, making it more attractive for businesses to locate in the U.S. ‘Anything short of that and you're not going to be able to do it,’ said Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee.”

Admittedly, there are special interests working against reform. Certainly if we eliminated the need for CPAs and tax attorneys, some professionals would need to find another way to make a living. Ending tax manipulation is necessary to reduce the influence of special interests but also to stop the misinformation campaign used to promote ideology rather than true understanding.

One notable example is the Koch Brothers, whose lobbying activities on behalf of fiscally conservative causes have made them the left’s most popular whipping boys despite Libertarian stances on issues such as gay marriage and defense spending. While most agree there is a need to get money out of politics, whether it is the Kochs or George Soros or unions or Super PACs, looking at specific issues can provide a better understanding of why the system is flawed and how it provides fodder for ideological attacks.

Last Friday, Nation of Change ran an opinion piece entitled “Charles Koch Personally Founded Group Protecting Oil Industry Handouts, Documents Reveal." Unfortunately, it appears that Lee Fang, an “investigative researcher” for Nation of Change (Progressive Journalism for Positive Action) and other left-leaning blogs such as ThinkProgress, didn’t bother to do any actual investigative research when evaluating the tax laws he refers to as “handouts.”

Fang asserts that Koch has funded efforts to protect “special tax breaks that benefit fossil fuel producers.” That is technically correct; however, a study by Joseph R. Mason of Louisiana State University, gives a detailed description of the specific law and asserts it’s repeal will have a far reaching effect and paints an entirely different picture:

“Section 199 was enacted by President Bush in 2004 to provide taxpayers benefits for production activities in the United States. Under the provision, labor intensive corporations are particularly favored by being able to deduct a percentage of domestic production activity each year. The repeal would apply solely to oil and gas firms.

Dual capacity credit, on the other hand, allows companies to deduct taxes on incomes from abroad, offsetting relatively high U.S. taxes on foreign incomes, hence,...a way for American firms to compete efficiently against foreign competitors.

In repealing the dual capacity credit, however, the current administration would effectively double-tax firms conducting business in many foreign countries. Although the change applies to all corporations, the energy sector will be put at a strong disadvantage when competing against state-run oil and gas companies in such countries as China, Russia and Venezuela."

Incidentally, Nation of Change is a 501(c)3 nonprofit which operates...wait for free.

Of course, Mr. Fang probably isn’t really interested in talking about tax policy and conveniently, most of his readers aren’t likely to click through the links to find out what the law actually entails. Instead, he’ll simply say that Charles Koch pays to advocate for handouts for fossil fuels...and the beat goes on.

While they may mention tax overhaul, the GOP will likely be hard pressed on some of their own sacred cows, such as faith-based organizations, when even that area is full of organizations such as the Brother Nathaneal Foundation, home of one of America’s most vehement anti-Semites and Preaching for Politics, where “Pastor” Michael V. Wilson advocates for outlawing homosexuality and sentencing gays to 10 years in prison, two guys that have no right to have their bigotry subsidized by the taxpayer.

It’s time for Americans to stop parroting the left-right paradigm of higher or lower taxes and start from the ground up with a simple consumption tax for anyone who buys stuff...that is, anyone who buys stuff. That could easily include a small transaction tax on investments (which only affects the top half of earners) and a prebate so the less fortunate would not be paying taxes on basic necessities. The broader the tax, the lower it could be and most importantly, there would be no deductions or loopholes to speak of and the underground economy would be forced to contribute. Furthermore, tax cuts or tax hikes could be a fraction of a percent over the entire tax base if needed without drastic economic effects and by nature of it being a voluntary tax (no one is required to buy anything), it also eliminates the actions of the IRS being perceived as forcible confiscation of private property.

Overall, the results could be...simply wonderful.

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