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Fighting to end destructive double taxation

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Archive for the ‘Dividends Tax’ Category

Explaining the Perverse Impact of Double Taxation with a Chart

Posted by Dan Mitchell on September 28, 2011

Whether I’m criticizing Warren Buffett’s innumeracy or explaining how to identify illegitimate loopholes, I frequently write about the perverse impact of double taxation.

By this, I mean the tendency of politicians to impose multiple layers of taxation on income that is saved and invested. Examples of this self-destructive practice include the death tax, the capital gains tax, and the second layer of tax of dividends.

Double taxation is particularly foolish since every economic theory – including socialism and Marxism – agrees that capital formation is necessary for long-run growth and higher living standards.

Yet even though this is a critically important issue, I’ve never been satisfied with the way I explain the topic. But perhaps this flowchart makes everything easier to understand (click it for better resolution).

There are a lot of boxes, so it’s not a simple flowchart, but the underlying message hopefully is very clear.

1. We earn income.

2. We then pay tax on that income.

3. We then either consume our after-tax income, or we save and invest it.

4. If we consume our after-tax income, the government largely leaves us alone.

5. If we save and invest our after-tax income, the government penalizes us with as many as four layers of taxation.

You don’t have to be a wild-eyed supply-side economist to conclude that this heavy bias against saving and investment is not a good idea for America’s long-run prosperity.

By the way, Hong Kong’s simple and fair flat tax eliminate all those extra layers of taxation.

That’s the benefit of real tax reform such as a flat tax. You get a low tax rate, but you also get rid of double taxation so that the IRS only gets one bit at the apple.

Posted in Capital Gains Tax, Death Tax, Dividends Tax | Comments Off on Explaining the Perverse Impact of Double Taxation with a Chart

Huntsman Plan Targets Double Taxation

Posted by Brian Garst on August 31, 2011

Another proposed plan by a presidential candidate is tackling the issue of destructive double taxation. Former Utah Governor Jon Huntsman unveiled today his economic plan, titled “Time to Compete: An American Jobs Plan.” From the overview:

Eliminate The Taxes On Capital Gains And Dividends In Order To Eliminate The Double Taxation On Investment. Capital gains and dividend taxes amount to a double-taxation on individuals who choose to invest. Because dollars invested had to first be earned, they have already been subject to the income tax. Taxing these same dollars again when capital gains are realized serves to deter productive and much-needed investment in our economy.

Now if he just throws in the death tax, he can hit the double taxation trifecta.

Posted in Capital Gains Tax, Dividends Tax | Tagged: | Comments Off on Huntsman Plan Targets Double Taxation

Warren Buffett’s Fiscal Innumeracy

Posted by Dan Mitchell on August 15, 2011

Warren Buffett’s at it again. He has a column in the New York Times complaining that he has been coddled by the tax code and that “rich” people should pay higher taxes.

My first instinct is to send Buffett the website where people can voluntarily pay extra money to the federal government. I’ve made this suggestion to guilt-ridden rich people in the past.

But I no longer give that advice. I’m worried he might actually do it. And even though Buffett is wildly misguided about fiscal policy, I know he will invest his money much more wisely than Barack Obama will spend it.

But Buffett goes beyond guilt-ridden rants in favor of higher taxes. He makes specific assertions that are inaccurate.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

His numbers are flawed in two important ways.

1. When Buffett receives dividends and capital gains, it is true that he pays “only” 15 percent of that money on his tax return. But dividends and capital gains are both forms of double taxation. So if he wants honest effective tax rate numbers, he needs to show the 35 percent corporate tax rate.

Moreover, as I noted in a previous post, Buffett completely ignores the impact of the death tax, which will result in the federal government seizing 45 percent of his assets. To be sure, Buffett may be engaging in clever tax planning, so it is hard to know the impact on his effective tax rate, but it will be signficant.

2. Buffett also mischaracterizes the impact of the Social Security payroll tax, which is dedicated for a specific purpose. The law only imposes that tax on income up to about $107,000 per year because the tax is designed so that people “earn” a corresponding retirement benefit (which actually is tilted in favor of low-income workers).

Imposing the tax on multi-millionaire income, however, would mean sending rich people giant checks from Social Security when they retire. But nobody thinks that’s a good idea. Or you could apply the payroll tax to all income and not pay any additional benefits. But this would turn Social Security from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social Security).

If we consider these two factors, Buffett’s effective tax rate almost surely is much higher than the burden on any of the people who work for him.

But this entire discussion is a good example of why we should junk the corrupt, punitive, and unfair tax code and replace it with a simple flat tax. With no double taxation and a single, low tax rate, we would know that rich people were paying the right amount, neither too much based on class-warfare tax rates nor too little based on loopholes, deduction, preferences, exemptions, shelters, and credits.

So why doesn’t Buffett endorse this approach? Tim Carney offers a very plausible answer.

For more information about why class-warfare taxes are misguided, this video may be helpful.

Posted in Capital Gains Tax, Death Tax, Dividends Tax | Tagged: , , , , , , , | Comments Off on Warren Buffett’s Fiscal Innumeracy

Time to Get Rid of the Corporate Income Tax?

Posted by Dan Mitchell on February 18, 2011

Here’s a video arguing for the abolition of the corporate income tax. The visuals are good and it touches on key issues such as competitiveness.

I do have one complaint about the video, though it is merely a sin of omission. There is not enough attention paid to the issue of double taxation. Yes, America’s corporate tax rate is very high, but that is just one of the layers of taxation imposed by the internal revenue code. Both the capital gains tax and the tax on dividends result in corporate income being taxed at least two times.

These are points I made in my very first video, which is a good companion to the other video.

There is a good argument, by the way, for keeping the corporate tax and instead getting rid of the extra layers of tax on dividends and capital gains. Either approach would get rid of double taxation, so the economic benefits would be identical. But the compliance costs of taxing income at the corporate level (requiring a relatively small number of tax returns) are much lower than the compliance costs of taxing income at the individual level (requiring the IRS to track down the tens of millions of shareholders).

Indeed, this desire for administrative simplicity is why the flat tax adopts the latter approach (this choice does not exist with a national sales tax since the government collects money when income is spent rather than when it is earned).

But that’s a secondary issue. If there’s a chance to get rid of the corporate income tax, lawmakers should jump at the opportunity.

Posted in Capital Gains Tax, Dividends Tax | Comments Off on Time to Get Rid of the Corporate Income Tax?

President’s Budget Proposes Undoing Tax Deal

Posted by Brian Garst on February 15, 2011

Although he signed the bipartisan agreement in the lame-duck session that staved off major tax increases, the President’s heart was apparently not in it. ATR has produced a list of the tax increases in the President’s proposed budget for fiscal year 2012. Here some of the lowlights:

  • Raising the top marginal income tax rate (at which a majority of small business profits face taxation) from 35% to 39.6%.  This is a $709 billion/10 year tax hike
  • Raising the capital gains and dividends rate from 15% to 20%
  • Raising the death tax rate from 35% to 45% and lowering the death tax exemption amount from $5 million ($10 million for couples) to $3.5 million.  This is a $98 billion/ten year tax hike
  • See here for the full list.

    Posted in Capital Gains Tax, Death Tax, Dividends Tax | Comments Off on President’s Budget Proposes Undoing Tax Deal

    The Good, the Bad, and the Ugly of the Tax Deal

    Posted by Dan Mitchell on December 7, 2010

    Compared to ideal policy, the deal announced last night between congressional Republicans and President Obama is terrible.

    Compared to what I expected to happen, the deal announced last night is pretty good.

    In other words, grading this package depends on your benchmark. This is why reaction has been all over the map, featuring dour assessments from people like Pejman Yousefzadeh and cheerful analysis from folks such as Jennifer Rubin.

    With apologies to Clint Eastwood, let’s review the good, the bad, and the ugly.

    The Good

    The good parts of the agreement is the avoidance of bad things, sort of the political version of the Hippocratic oath – do no harm. Tax rates next year are not going to increase. The main provisions of the 2001 and 2003 tax acts are extended for two years – including the lower tax rates on dividends and capital gains. This is good news for investors, entrepreneurs, small business owners, and other “rich” taxpayers who were targeted by Obama. They get a reprieve before there is a risk of higher tax rates. This probably won’t have a positive effect on economic performance since current policy will continue, but at least it delays anti-growth policy for two years.

    On a lesser note, Obama’s gimmicky and ineffective make-work-pay credit, which was part of the so-called stimulus, will be replaced by a 2-percentage point reduction in the payroll tax. Tax credits generally do not result in lower marginal tax rates on productive behavior, so there is no pro-growth impact.  A lower payroll tax rate, by contrast, improves incentives to work. But don’t expect much positive effect on the economy since the lower rate only lasts for one year. People rarely make permanent decisions on creating jobs and expanding output on the basis of one-year tax breaks.

    Another bit of good news is that the death tax will be 35 percent for two years, rather than 55 percent, as would have happened without an agreement, or 45 percent, which is what I thought was going to happen. Last but not least, there is a one-year provision allowing businesses to ”expense” new investment rather than have it taxed, which perversely happens to some degree under current law.

    The Bad

    The burden of government spending is going to increase. Unemployment benefits are extended for 13 months. And there is no effort to reduce spending elsewhere to “pay for” this new budgetary burden. A rising burden of federal spending is America’s main fiscal problem, and this agreement exacerbates that challenge.

    But the fiscal cost is probably trivial compared to the human cost. Academic research is quite thorough on this issue, and it shows that paying people to remain out of work has a significantly negative impact on employment rates. This means many people will remain trapped in joblessness, with potentially horrible long-term consequences on their work histories and habits.

    The agreement reinstates a death tax. For all of this year, there has not been a punitive and immoral tax imposed on people simply because they die. So even though I listed the 35 percent death tax in the deal in the “good news” section of this analysis because it could have been worse, it also belongs in the “bad news” section because there is no justification for this class-warfare levy.

    The Ugly

    As happens so often when politicians make decisions, the deal includes all sorts of special-interest provisions. There are various special provisions for politcally powerful constituencies. As a long-time fan of a simple and non-corrupt flat tax, it is painful for me to see this kind of deal.

    Moreover, the temporary nature of the package is disappointing. There will be very little economic boost from this deal. As mentioned above, people generally don’t increase output in response to short-term provisions. I worry that this will undermine the case for lower tax rates since observers may conclude that they don’t have much positive effect.

    To conclude, I’m not sure if this is good, bad, or ugly, but we get to do this all over again in 2012.

    Posted in Capital Gains Tax, Death Tax, Dividends Tax, Economic Growth, Government Spending, Legislation | Tagged: , , , , , , | Comments Off on The Good, the Bad, and the Ugly of the Tax Deal

    What to Expect from Expiring Tax Cuts

    Posted by Heather Edwards on November 17, 2010

    There’s a lot of talk about getting rid of tax breaks for the wealthy.  But the reality is that on January 1st, when the Bush era tax cuts expire, the “wealthy” – business owners, investors and executives – are not the only ones who will be affected.

    For a clear and concise explanation of what will happen when the tax cuts expire in a few weeks, see here.

    Posted in Capital Gains Tax, Death Tax, Dividends Tax | Comments Off on What to Expect from Expiring Tax Cuts

    Fox Business Video: Investors Worried Over Capital Gains and Dividends Tax Hikes

    Posted by Brian Garst on September 20, 2010

    Fox Business reports on anxiety over tax rates, and includes an interview with Mark Bloomfield, President & CEO of the American Council for Capital Formation and member of the Working Group:

    Posted in Capital Gains Tax, Dividends Tax | Tagged: | Comments Off on Fox Business Video: Investors Worried Over Capital Gains and Dividends Tax Hikes

    Double Taxation in the News

    Posted by Brian Garst on September 3, 2010

    Here are some of the articles, op-eds and blogs recently mentioning double taxation issues:

    Posted in Capital Gains Tax, Death Tax, Dividends Tax | Comments Off on Double Taxation in the News

    Heed the Lessons of the 1930’s

    Posted by Brian Garst on August 27, 2010

    Economics professors Thomas Cooley and Lee Ohanian have found a significant parallel between the pending tax hikes and the 1930’s under FDR.  Roosevelt’s rate hikes on capital gains and dividends did considerable damage to the economy before being rescinded.  This lesson needs to be heeded:

    …[I]n 1936, the Roosevelt administration pushed through a tax on corporate profits that were not distributed to shareholders. The sliding scale tax began at 7% if a company retained 1% of its net income, and went to 27% if a company retained 70% of net income. This tax significantly raised the cost of investment, as most investment is financed with a corporation’s own retained earnings.

    The tax rate on dividends also rose to 15.98% in 1932 from 10.14% in 1929, and then doubled again by 1936. Research conducted last year by Ellen McGratten of the Federal Reserve Bank of Minneapolis suggests that these increases in capital income taxation can account for much of the 26% decline in business fixed investment that occurred in 1937-1938.

    …FDR eventually abandoned the excess profits tax and decreased the tax rate on dividends, but only after they significantly damaged an already weak economy.

    There is no reason why history must repeat itself.  The capital gains and dividends taxes should not be raised – they should be eliminated.

    Posted in Capital Gains Tax, Dividends Tax, Economic Growth | Tagged: , , , | Comments Off on Heed the Lessons of the 1930’s