They say that there are only two certainties in life: death and taxes. In a capitalist economy, many regard death as the lesser of those evils. That may be amusing but only in the same disturbing way as the NRA slogan 'gun control is hitting your target.' Given that the hot-button issue of taxes could sway the presidential elections and impact our future, it is critical to examine it more closely and dispel the absurd myths surrounding it. Broadly speaking, there are four big arguments to consider:
Portfolio and passive income should be taxed at lower rates than earnings
This one always leaves me scratching my head. Why should non-active income, such as capital gains, be taxed any differently than the salary of a construction worker, a bartender or a lawyer? Conventional wisdom says that lower tax on portfolio and passive income encourages investments, which then generates jobs. That sounds great but is nonsense. People invest money to make more money -- and regardless of whether those returns are taxed at 15 percent, 20 percent or 35 percent, they still make money. Investment income also has the added benefit of not requiring active work. Granted, double taxation, nations with friendlier tax codes and other factors do complicate the issue, but the U.S. still provides the safest and most attractive arena for investing anywhere in the world.
To boil it down, if we don't offer tax breaks to doctors to show up for surgery or cops to respond to a 911 call, there is no reason to offer it to business people to do what is already in their own best interests. It is blatantly unfair and penalizes anyone whose major source of income is wages.
Businesses should be given tax breaks to encourage hiring
The implicit (and strange) assumption here is that job creators, i.e. businesses, hire more people only if they get tax breaks. Not only is this wrong but anyone who believes it has a poor understanding of economics.
Any efficient business will hire exactly as many people as it needs to serve its customers and generate a desired level of profit -- no more and no less. If there is incremental profit in employing one more worker, the business will automatically do so. The only time that a tax incentive will make a difference is if the business is already running at maximum potential and therefore an external stimulus is necessary. But that creates artificial employment, which makes no business sense and hurts the economy in the long run.
Besides, there is little statistical evidence to support an active correlation between corporate tax rates and job creation, and so the emphasis on this is disproportionate. As I said before, bribing the business community to do business is not only bizarre but a violation of the very principles that drive our capitalist system. Tax breaks to spur investment or job creation, like oil industry subsidies, are not good solutions to difficult problems but lazy ideas that enable politicians to whip up voter frenzy.
The U.S. government could reduce taxes if it stopped spending so much
Reducing spending is a great idea, but in reality neither political party is about to do that. Plus here's a simple fact: America functions because of infrastructure. By 'infrastructure' I don't just mean our roads and railways but the entire fabric of our society, including Social Security and Medicare, public services, the water supply system and basically anything that keeps our nation humming. Since not everything can or should be privatized (look at how the airline industry fared after deregulation), taxes are needed to fund this critical backbone.
While demanding accountability from Congress is important, resenting taxes because they hit our individual pocketbook is myopic. We all benefit from a robust infrastructure. Even the rich are wealthy precisely because of a system that supports vibrant commerce in America, whether it is public schools that ensure a future workforce, the subway system which enables millions of people to get to work inexpensively, or public hospitals that keep people healthy enough to keep working. The irony, of course, is that the same people who complain about big government are happy to enjoy its largesse.
So taxes, unpleasant as they are, are a necessary evil that we need to come to terms with. The alternative would be a wasteland of a crumbling civilization.
It is unfair to increase taxes on the rich
While this argument makes for great political theater that tugs at our innate sense of fairness as Americans, it is based on selective facts and self-serving logic. The truth is that the richer a person, the more likely their income stream is to be diversified and taxed differently than ordinary earnings. Everything from deferred compensation to capital gains to income kept in offshore banks are taxed at lower rates than the 35 percent most people pay, not to mention the many loopholes that enable corporations to save on business taxes. The net result of this game of Three-Card-Monte is that wealthier people often pay lower taxes than the rest of society.
So yes, the rich should be taxed like everyone else but that entails increasing what they pay, not decreasing it. The whole point of a rational system is to ensure that everyone plays by the same rules.
Now that we have dissected the major differences in tax philosophy between the Democrats and Republicans, what will the future hold? That depends mostly on what happens in November, but it also depends on whether we continue to fear taxes more than we fear death. I am not saying that taxes are great but just remember that unlike the grim reaper, the IRS at least lets you pay in installments.
Sanjay Sanghoee is a former investment banker and the author of a financial thriller, MERGER, published by St. Martin's Press in hardcover, paperback and Kindle.
Follow Sanjay Sanghoee on Twitter: www.twitter.com/sanghoee
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He should attend a Finance Team Meeting at any Fortune 500 Company.
Internal Rates of Return specify ROI after Tax................Sanjay is in Fantasyland ?
No wonder so many Jobs are gone, never to return. Cost of Capital determines the final
investment decision, Tax included !
How is that penalizing anyone? What percentage of people earning wages actually PAYS income taxes?
No matter how you present it, we can't see the forest for the trees with all the back and forth arguments and it seems middle America foots the bill no matter how you slice it. Meanwhile during the heated arguments, 175 people lose their jobs and scramble to find employment. We can do better.
Aren't many like him around!
An honest man...Hey, Diogenes..!!
3....4...It is always easier to get taxes raised on someone else (the upper 51%) or something you don't like...cigarettes. But it is dangerous to continue to offer free stuff distributed by the government to a larger and larger portion of the population....at the expense of a smaller and smaller portion. But great politics.
Plus you have a balanced budget or a small surplus/deficit per year.
2. Inflation tax is a colloquialism used to describe the affect of inflation, not a tax levied by the government, also you have not given a single reason why capital gains should be taxed at a lower rate than labor.
3. Dividends are taxed twice because the corporation and it's shareholders are 2 different legal entities, which is pretty much why anyone creates a corporation in the 1st place. Also dividends are a voluntary action used to indicate financial strength and to increase it's attractiveness to investors. No one makes a company issue a dividend, so no company who doesn't want to be subjected to double taxation has to be. Lastly, not taxing dividends would make the wealth gap explode, because rich people could just buy a ton of common stock and live off of tax free dividends.
4. Your comparison of a tax on an income producing activity vs. what are basically sales taxes is completely invalid. If a tax is placed on an activity that you do to make money, you're not going to stop doing it because you're making less money. You would probably have more activity to make up the difference, this is the complete opposite of a tax on cigarettes where there is less smoking because it is more expensive to continue smoking.
2. If you own a house for 25 years and sell it for twice what you paid (used to actually happen) and inflation averaged 3%...only slightly above the government's target you would have made nothing but be taxed on the "gain". Yes, as part of the government's love of houses you can exclude some or all of it...but the same applies to a stock.
3. Interest isn't taxed twice...which encourages leverage. So basically a decision on what you want to encourage more debt or more equity.
4. If you charge more for something, or add costs to something (through taxes, tariffs, whatever) you simply will get less of it. Let's say you put a 50% tax on investing in X and 25% on Y one might expect that you will get less investment in X than you otherwise would have.
Certainly infrastructure is important to every citizen. But I don't identify an NFL stadium, a new GSA warehouse or a new bridge to New York City as automatically a necessary part of infrastructure.
And I do not accept that welfare, healthcare and unemployment insurance are part of infrastructure. Some of these expenditures are appropriate. But they cannot be unlimited. Just because someone has a need does not mean that society can afford to pay for that need. We seem to be unwilling to even discuss that these things must have limits.
I also cannot accept the cost of foreign wars as infrastuucture. Operating plants overseas I understand the arguments about protecting trade and trade routes. But if a part of the world becomes unsafe or unstable I will move my business to better location. The US cannot be financially or morally responsible for ensuring the safety of all parts of the globe.
Falure to control goveernment spending will ensure a subdued economy and a lessened way of life. It's simple math. But poltically unpopular to even discuss.
You believe in unlimited spending on entitlements? Wow. Is a million$ a year enough for each person collecting unemployment? Ten million? Since you believe in unlimited spending maybe even that isn't enough.
Whatever money business has is not your business. If it was legally obtained and all taxes paid it is no longer conrollable by government. If you don't like how busnesses obtain their profits then work to change the tax laws. But don't cry when some business entity has shown fiscal responsibility while the government cannot.
Now who is really paying higher taxes??
Watch the Liberals as they really do not understand business. Some Liberals still believe Obama will give them other people's money. Liberals we are BROKE LOOK UO USDEBTCLOCK. ORG
http://my.firedoglake.com/pshakkottai/2012/04/20/misunderstood-deficits/
Rolling Back Bush Tax cuts = 850B over 10 years
All part of a $4 Trillion deficit reduction plan http://www.whitehouse.gov/blog/2011/04/13/president-obama-s-framework-4-trillion-deficit-reduction
What have Republicans got? You think cutting Medicare for everyone, passing the savings on to the rich, and increasing the deficit ala the Ryan Budget is better?
You are completely wrong. Businesses charge the highest prices the market will bear. They do not lower their prices when they get a tax break. That would be voluntarily lowering their profits. Anyone running a business who is not maximizing their profits does not know what they are doing.
You simply do not understand business economics at all.
Ok Mr. Liberal. All Businesses will be taxed. All businesses with increase their product cost just like all businesses increased their cost due to the Obama gasoline increase.
All Business operate on a Per Cent Markup. If their cost is increased, ie. taxes, gasoline, etc. That cost wil be sent on to the consumer . The business will not absorb any new cost. Their Mark up will remain the same percentage. If they absorbed the cost they would make less money and go out of business.
One other thing Blackbird. Obama has no other people's money to give you. America is broke. We owe SEVEN Times more than we take in. Now look up usdebtclock.org and see for yourself.
National Debt $15.6 Trillion dolars,
Tax Revenue $2.26 Trillion -
Our spending is $3.58 Trillion.
We owe SEVEN Times more that we take in.
We have 313 Million People, 113 million tax payers.
Debt per Citizen is $182,774 Dollars. Debt per Family is $690,971.
46.8 Million people on food stamps
watch this guy try to argue with facts. LOL>
Next cut ridiculous spending - Overseas wars we should not be involved in, "prohibitionist" policies like the drug war which failed miserably & cost billions, too many laws that add massive amount of cost to everything we do (Check out some of Stossel's segments), etc
Passive income, ie: capital gains, is already taxed prior to distribution. So, while the investor may pay 15% on that dividend it is in addition to whatever rate the corporate entity paid, for example 21% as in the case of Exxon.
Thus, the true tax on that same dollar is floating somewhere around 39% when you consider the compounding multiplying effect.
If a company makes $1,000 in a year and you own 1% of the company, then you own 1% of those profits as well, or $10. The company pays 20% or $2 in taxes, your profit is reduced to $8 out of the original $10. If that $8 is retained (kept with the company) then it does not get taxed and further unless it is used to make more money, however when it gets distributed to you personally, then you pay another 15% or $1.20 on your $8 dividend, leaving with you $6.80, thus you have paid 32% in taxes on that money.
Please tell me how that "doesn't count".
Because the salary paid to them is tax deductible to the Business. The capital gain is paid from after tax earning of the business. Tax them equally ?? Sure !!! BUT also treat the expense equally.
Tax breaks are an indirect recognition that the tax cost is to high. Do away with ALL breaks and deductions. Simplify the coide.
It is also worth noting that a business NEVER pays tax. they simply treat it as another cost and pass it right along with an appropriate mark up to the end user. Business taxes are simply a manner that is used to hide cost of government.
Everything from deferred compensation to capital gains to income kept in offshore banks are taxed at lower rates than the 35 percent most people pay, .... wealthier people often pay lower taxes than the rest of society.
The ONLY income streams normally taxed at less than ordinary income are those that are not a tax deductible expense item to the business -- See one above
Reducing spending is a great idea, but in reality neither political party is about to do that.
Then we need a third party that will
We are classed as a small business -- We have a profit goal and ALL expenses effect that profit and are bundled and charged, INCLUDING all taxes. EVERY business person I know treats tax as an expense and passes it if not directly then indirectly via bundle right to the buyer.
Even the owner op does this at some point lest they wind up working for uncle (a prety common refrain).
I'm a middle class man trying to support a middle class family. I make just over $52,000 a year as a police officer. Last year my total payroll deductions totaled over $16,000, most of which was FICA taxes ($6000 of which was income tax). But on top of all that I had property tax, sales tax, cell phone bill tax, water bill tax, tolls for the supposedly publicly funded road I use, mortgage payment, car payment, vet bill taxes, credit card payment, student loan payment (fat lot of good that master's degree does me), fees for going to the park near my house (that used to be free, and was about the only entertainment I can afford for my family), pension contributions, union fees, electric bill tax, yearly assessments for road repair (again, for those supposedly publicly funded roads I use).
I could go on, but somehow I think you'd still try and convince me that I'm not paying too much of my salary in taxes.
As for the water bill (purchase, not tax), mortgage, car, vet, credit card, student loan, those are lifestyle choices that you made, not taxes. If you paid for a master's degree that you believe is "worthless", you have a bone to pick with the college, not with the tax system. Do you deserve "relief" based on that?
As for FICA and pension contributions, those are investments, not expenses. You may well need that FICA after retirement (do your parents collect it now?) Pensions are accumulating for you tax free.
Tolls, road repair assessments and those park fees are due to those "publicly funded" things being "de-funded" to support low taxes for the wealthy. If you are unhappy with paying those fees, look to folks, like both Mr. Rmoney and Mr. Obama who pay a lower share of their income into the pool than you do.
I am a police officer.
My water bill does have a tax on it.
"As for the water bill (purchase, not tax), mortgage, car, vet, credit card, student loan, those are lifestyle choices that you made, not taxes."
Yeah, having a place to live and a car to drive to work is are lifestyle choices. Good grief.
And the reason I included all the other stuff is to demonstrate that in addition to the many taxes I pay, there are other necessities that I have to pay for too.
You completely and obviously missed the point of my post.
Just how much more do you think I should be paying in taxes? 50% of my earning? 60%?
Does it ever end for you?