What General Electric has in common with the guy who runs Obama’s IRS: not paying taxes. That New York Times report on G.E.’s remarkable ability to avoid paying U.S. taxes has been getting a lot of attention today, but there was one paragraph that reminded me of why I’m a flat-tax guy:
G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.
As government extends its reach over every aspect of the economy, this sort of corporatism will only become more deeply entrenched in fields like health care and energy. What G.E. has done with taxes, the insurance giants will do (and have done) with Obamacare. Everything looks like ethanol.
But I’ll take a little bit of issue with Ezra Klein’s response:
So patriotic! It really explains why President Obama tapped Jeffrey Immelt, GE’s CEO, to lead the President’s Council on Jobs and Competitiveness. If this isn’t the sort of corporate behavior America needs more of, what is?
I’m sort of creeped out by this particular usage of the word “patriotic,” as though the alternative to the profit-maximizing corporation were the Great People’s Patriotic General Electric Corporation. (I also intensely dislike the proposition that paying taxes is an expression of patriotism, as though the state were the nation.) But I’ll say this: Yes, this is exactly the sort of corporate behavior America needs more of, inasmuch as our corporate-tax regime is kind of dumb, and also kind of corrupt, and one way of cleaning that up is to abolish it.
In spite of our having the second-highest nominal corporate-income tax rate in the developed world (Hello, Japan!), the rates actually paid by businesses vary wildly according to their political clout. Progressives look at that and see the evidence of businesses’ having undue influence on Washington; I look at that and see evidence of Washington’s undue influence on business. But it’s a two-way street, and the end product smells the same.
There are many arguments for a flat tax: Compliance costs are lower, it’s easier to understand, it doesn’t create a divide-and-conquer dynamic with regard to the tax brackets, it aligns taxpayers’ incentives, etc. But there’s a practical moral argument, too: The tax code is corrupt. Using the tax code as a cookie jar full of special favors for friends and supporters is corrupt. It does not matter that it’s legal, it is immoral. The purpose of taxes is to raise revenue for the government, not to repay political favors or to bribe voters with their own money. I do not think our tax system probably is really salvageable: Obamacare is not the only thing that should be repealed and replaced.
While everybody else was filling out their college-basketball brackets, I was working on my fantasy federal budget (I know, I know, I’m a lot of fun on dates), which is not yet complete, but which I will share when it is. (I’m planning a fantasy-budget reader contest.) My revenue side assumed a true flat tax on all forms of personal income — salaries, benefits, bonuses, dividends, inheritances, capital gains, etc. — and, once I’d trimmed the federal government back as small as I think we could realistically get it, figured that I could fund it with a flat rate of about 20 percent, and no corporate income tax. (I think this might be good for investment.)
The upside of the fiscal crisis that our country insists on marching toward is that it will give us the opportunity to enact radical reform of some of our most important institutions, and the tax code should be high on the list. A federal/state/local system that produces a $3.2 billion tax benefit for G.E. but taxes the pants off of poor people to fund useless schools that do their children very little good (and a great measure of harm, in many cases) is an unbearable burden. It has to go.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.
Very sad that GE has devolved from the corporation that hired Ronald Reagan to give speeches about free enterprise to more like the villanous corporations in an Ayn Rand novel.
And while I agree with KW about most of our tax system's flaws, I'm not sure "taxing the pants off poor people" is one of them. I'd be surprised if they're paying more than his proposed 20% flat rate now.
Reply to this commentLinkReport AbuseThink about a guy working in a very low-wage job in, say, Philadelphia. He pays a 12 percent payroll tax (despite the "employer pays half" myth), city and state income taxes, etc. The city sales tax is basically another 8 percent income tax on him, because he consumes all of his income. While middle-class homeowners in the suburbs get a tax subsidy through the mortgage-interest deduction, he's paying his landlord's commercial-rate property tax through his rent, etc. People with zero income of course pay no taxes, and lots of poor people consume more in benefits than they pay in taxes (obviously), but just because they pay no federal income tax doesn't mean that they aren't getting taxed, and taxed heavily.
Reply to this commentLinkReport AbuseI agree the poor can face very high effective marginal tax rates. Improving that is difficult for arithmetic reasons. If a poor person is getting the EITC, food stamps, rent subsidies, etc. then what are the options as he earns more? If you phase out the benefits rapidly it's a high effective marginal tax rate with all the associated disincentives. If you phase them out slowly to keep the effective rate down then you have people at three or four times the poverty rate still receiving benefits. I'll defer to you on the actual numbers.
Reply to this commentLinkReport AbuseBut it seems to me that, for example, the schools being useless is a much bigger problem for the poor than how much they pay in taxes to fund them.
O/U - 100K pages for US Tax Code, before it's fixed. I'm going with the Over. There's like 5 people in the country talking about it. It's as if most people are good with the status quo.
A point you could make clearer, or bolded, is that business factors in any additional costs from outside into the product price. They don't just open their wallets and say 'oh we'll just make less'. It's passed on to end-users. There may be a prohibitive level of price increase of a product, which would play a part in the Laffer Curve.
It's like FPL (eliectric ultility) here in Florida trying to get the incestuous PSC to allow surcharges to cover the cost of hurricane repairs in the mid decade. A few hundred million dollar charge is something they wouldn't eat even though it was in the course of normal business. Profitable business not concerned about risk, sound familiar? If it can be passed on to customers, it will be.
This report on GE doesn't add the MSNBC in-kind contributions since '07. Oh wait, my mistake, they are exempt from reality.
Reply to this commentLinkReport AbuseAt some point, we will all have to face the fact that we cannot have true tax reform without a constitutional amendment to enforce it. A flat tax cannot stay flat unless an amendment says that (1) all corporations shall be taxed the same, and (2) there shall be only a single tax rate. Otherwise, corporations will bribe (excuse me, lobby and then donate money to) congressmen to change the tax code to favor their corporation or their industry. It cannot be avoided short of a constitutional amendment.
Reply to this commentLinkReport AbuseVERY YES!
Some ancient lawmaker (Cicero, maybe?) once said that any legal code that was too complex for the average citizen to understand it was actually immoral. I've been saying that myself for years. The more laws that get created the more likely it is that someone will unwittingly break them, which gives a powerful club for the state to wield over its citizens. It allows a political vendetta to be prosecuted through the courts; merely by making an accusation the target is put through the wringer, and there's a very good chance that something can be found. Those who control the apparatus of government and the courts can decide who is guilty and who is innocent based on their whim. Hayek had a whole chapter on that in TRtS.
The tax code is just an extension of that. I got laid off a year ago and I'm starting up my own business. I haven't paid an accountant to do my taxes for me, and I'm terrified that I'll get audited. I opted to do everything mostly on my own, but I just have no way to know if there's something I've done wrong.
The whole system of laws, taxes, regulations, and entitlements is so complex and interwoven that I'm pretty sure any real reform is hopeless. It's a sin to despair, and I don't want to wish for a total collapse so we can start over fresh. But I'm afraid that we're facing a crisis that will make the Great Depression look like a picnic.
Reply to this commentLinkReport AbuseI just finished preparing the tax return for a formerly wealthy client who is now working at Wal-Mart. She is a single mom with one dependant daughter. Her Wal-Mart salary came to $ 15,231. Her SSN/Medicare withholding was $ 1,165 and her employer's matching portion would be the same $ 1,165. Even if you consider both those portions to be her real tax at $ 2330....her income taxes still came to zero, her Making Work Pay credit was $ 400, her Earned Income Credit was $ 3,050 and the additional Child Tax Credit was $ 1000. She is receiving a refund of $ 4,450. Her income tax is zero and her total SSN/Medicare is $ 2,330. With my Bus/Econ math that comes to a net refund and negative tax of $ 2120. I fail to see how the poor are getting their pants taxed off. BTW, her Colorado state income taxes were also zero.
Reply to this commentLinkReport AbuseMr. Williamson, please answer these questions one by one:
If a grocery store has gross receipts of $1 million and business expenses of $900,000, do you tax the revenues, or the profits?
If a clothing store has gross receipts of $1 million and business expenses of $500,000, do you tax the revenues, or the profits?
If you tax the profits, what's a business expense? How about depreciation? Do you allow it? How about the oil depletion allowance, if you're an oil well and not a furniture store? How about profits earned abroad by a wholly owned subsidiary and not repatriated, but instead simply loaned back to the parent at a fair rate of interest? (Uh oh, we've already arrived at the wickedly complicated Subpart F!)
Reply to this commentLinkReport AbuseSo tell me where "taxes" falls on any business's balance sheet.
Let's try to make it logically clear: no business has EVER paid taxes. Period.
G.E. didn't pay taxes? Good. I hope they passed along the savings to their customers. If they didn't, that's their choice. I don't have to shop there unless I want to. Yet.
Reply to this commentLinkReport AbuseI would not require corporations to pay income taxes (oxymoron). Corporate income taxes should be zero. The entire federal corporate income tax code should be scraped. Corporations would then focus on maximizing productivity.
Reply to this commentLinkReport AbuseKevin:
Reply to this commentLinkReport AbuseWhen one congress critter, Rangel, can bestow this kind on tax credit on GE [that's what I read somewhere] or the IRS can give GM an exception so it can retain a $20 Billion tax loss carryover, there is a serious lack of internal control in our fed govt's revenue cycle.
One simple way to reduce the size and complexity of the tax code would be to require that the President, the Cabinet, and all Federal and State senators and representatives be required to PERSONALLY complete their income taxes using pencil and paper, without even allowing a calculator. No accountants, no tax lawyers, no computers and no software.
Then require that every one of them be audited every year.
Reply to this commentLinkReport AbuseYes, General Electric has gamed the system with the help of the Obama Administration. However, the solution is not to beat up GE, but to eliminate ALL corporate income taxes.
Corporate income tax is not paid by corporations but by the consumers of its goods and services. Eliminating corporate income taxes or having a much lower tax rate of perhaps 15% would result in an explosion of corporate growth, competitiveness on an international basis and an immediate increase in jobs for American citizens.
Let's combine low or nonexistent income taxes for corporations with a cut in Federal Government spending of AT LEAST 500 Billion dollars today. There are several plans by Conservative Republicans to do this.
Let's act now and stop playing games with the Economic IDIOTS in Congress and the White House.
Reply to this commentLinkReport AbuseOur tax system is corrupt because our politics are corrupt. Our politics are corrupt because we are corrupt (at least in part). Any tax system would work if we controlled spending, but I could go along with some version of a flat tax -- even better a transaction tax that replaced ALL other taxes at the federal level (we have to remember the states and local governments). But there can be no exemptions, and spending, and debt, must be capped.
Reply to this commentLinkReport AbuseI agree that government's corruptibility by special interests provides a strong argument for a flat tax.
IMHO it also provides a strong argument for across-the-board, percentage spending cuts.
A flat tax and across-the-board cuts might not be what an altruistic superior being would prescribe for the USA, but they are far better than our current system. Unfortunately, I question whether the current system is capable of enacting across-the-board policies, let alone anything better than such policies (if something better exists).
Reply to this commentLinkReport AbuseActually, figuring one's taxes is easy. It's figuring the taxable income that is the first problem, which is why I want to first see tax simplification before I worry about flat taxes. We are operating under an Animal Farm-esque philosophy of "all income is equal, but some income is more equal than others." That's the flag under which fly the impenetrable complexities of the current code.
The greater portion of the tax code lies as an effort to define "income", and then to define a politically advantaged playing field. "Such-and-such a source is taxable, unless..."; "such-and-such a source, when factored thusly, is taxable unless..."; "use the greater (or lesser) amount of such-and-such a comparison"; etc.
The first problem, then, comes from the unequal treatment of incomes under the income tax code. People will put up with ill treatment a good deal longer than they will put up with unequal treatment. This is even recognized in the Declaration of Independence, that we will suffer a long course of abuse while it is still bearable. The codified inequalities are not quite unbearable, but are hotly aggravating. Just simplifying the code to the part that income is income is income will make the next step, the flat tax, so much simpler.
Reply to this commentLinkReport AbuseAll of the flat tax proposals I've seen suggested have a single deduction of some sizeable amount. Usually this deduction is in the $20,000-$30,000 range, and could be taken by all taxpayers. The percentage rate would be applied on the amount left after deduction. If the deduction was $20,000, someone could earn up to that amount without paying income tax. If the rate was 20%, someone earning $21,000 would pay $200 in income tax. If someone earned $1,020,000 in a year, they would pay $200,000 in income tax. Granted, adding in the deduction makes the tax more "progressive", but it still only approaches the maximum rate, never exceeds it. It seems like this would be a good compromise that could sell the flat tax idea to moderates and leftists who want to maximize the taxes paid by "the rich" while still maintaining fairness and equality for all income earners.
Reply to this commentLinkReport AbuseOn "Patriotism" -- I think Ezra Klein is dead on. GE is not just an innocent bystander saying, "Oh, look, our tax system is corrupt but my duty is to my shareholders so I'm going to take every deduction I can find." GE is, in fact, one of the primary forces corrupting the system -- waging a multimillion dollar campaign to bend tax law to its will, to customize the tax system via "legal" bribes to people like Charlie Rangel and others. GE is also one of the chief architects of the government-corporate revolving door that rewards corrupt public officials with lucrative private-sector jobs as reward for their corruption.
So, yeah, weakening the country in a way that can only be described as immoral if not illegal -- that is just not patriotic.
Reply to this commentLinkReport AbuseI'd prefer to replace the income tax with a business revenue tax. It's much harder to hide gross receipts and the math is easy. No income tax whatsoever. Replace the capital gains tax (on net profit) with a tax on gross capital transactions, an extremely low rate on a much higher base number. Would stock market activity slow to a crawl? Yes it would, you'd see actual investment instead of speculation and churn. I'd happily pay a gross transaction tax on a security purchase in exchange for no tax on my dividends or other income.
Reply to this commentLinkReport AbuseI am looking forward to your fantasy budget brackets. I'm curious as to why the budget can't be cut to the point that income taxes can't be eliminated altogether. How much do the national defense and entitlement obligations for those over 45 really cost?
As for the current post: I don't see any justification for any taxes on any corporate or small business earnings-it just gets passed along. Just raise the sales tax price and make things more transparent, says I.
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