Tax Reform Myths and Realities

The recently enacted tax reform/tax reduction is possibly the most misinterpreted and misrepresented policy change in the history of policy changes. For example, it has been accused of benefiting only the wealthy and of adding $1.5 trillion to the federal debt. There are numerous reasons to be highly skeptical of both these assertions.

The issue in the tax reform drawing the strongest criticism from Democrats is the reduction of the federal corporate tax rate. Democrats want you to believe that all the benefits of reduced corporate taxes flow to the wealthiest members of the population. Nancy Pelosi claims all the benefits go to “the wealthiest one-percent.” Knee-jerk reactions to reducing corporate taxes are a classic example of ignorance-based hysteria.

To say that cutting corporate taxes benefits only the wealthy is a gross oversimplification of economic reality. A major part of the damage done by the corporate tax is the profound dishonesty it is based on. The corporate tax is a charlatan’s playground.

It’s unfortunate that the misbegotten term “trickle-down economics” was ever invented. It’s been one of the terms used to demean cutting corporate income taxes. In an advanced, complex, free-market economy money flows in many directions. It goes down, up, sideways, backwards, and forwards. Trickle-down is a concept that does much more to obfuscate than illuminate. No reputable economist considers it a useful term.

Much of the opposition to cutting corporate income taxes is based on the popular myth that corporations are capable of paying taxes. Corporations do write checks payable to the IRS but corporations cannot bear the “burden” of a tax any more than cows or horses can bear the burden of a tax.

If you work for a corporation you pay the tax by having a reduced wage or salary. If you purchase goods or services produced and sold by corporations you pay the tax by paying a higher price for those goods and services. If you own shares of corporations you pay the tax through reduced dividends and lower share prices. It’s silly to think that all these people are wealthy.

No one can possibly know how much he is paying in corporate income tax. That’s one of the reasons a corporate income is a bad tax. There’s no way to know if the tax is progressive, regressive, or proportional. The tax is reducing someone’s real income; it’s just hard to know who that someone is. It’s what Milton Friedman used to refer to as, “Don’t tax me, don’t tax thee, tax that fellow behind the tree.” The corporate tax is the best way to pretend there’s someone behind the tree.

It would no doubt surprise Democrats that a study by William C. Randolph of the Congressional Budget Office estimated that “Domestic labor bears slightly more than 70 percent of the burden of the corporate income tax.” Other studies have come to similar conclusions. In other words, most of the payoff of lowered corporate tax rates would accrue to employees. Ideally the corporate income tax should be reduced to zero, but reducing it by two fifths (from 35 percent to 21 percent) is a major step forward and is already generating substantial positive changes.

Assume, for the sake of discussion, that the entire burden of the corporate income tax is borne by corporate owners. Are all of the owners of corporate shares wealthy? Of course not.

Trillions of dollars of corporate stock are owned by pension plans, which are owned by employees in all income levels. If a reduction of the corporate tax results in a higher level of stock prices and increased dividends, millions of Americans will enjoy more prosperous and worry-free retirement years.

All indications so far are that tax reform is stimulating faster economic growth. Even before tax reform became law, the anticipation of it was one of the causes of faster GDP growth, lower unemployment, and a booming stock market. Black and Hispanic unemployment rates are the lowest they’ve been since they’ve been measured.

In a single masterful stroke Trump and his fellow Republicans have increased the net profits of virtually every corporation in America. That is going to set off an economic chain reaction.

How are lower taxes connected to economic growth? When incentives change, behavior changes. If corporate owners benefit from increased after-tax returns they will have increased incentives to invest and grow their companies. They can’t do that without more employees. The demand curve for labor will shift to the right resulting in a higher equilibrium wage.

Some of the liberated corporate profits will be invested in capital, which will also eventually benefit employees. A higher capital/labor ratio increases average productivity and makes labor more valuable. The much discussed wage stagnation could well be coming to an end.

Both parties are self-identifying. Trump’s policy initiatives have increased the transparency of what each party stands for. It’s becoming clear that there is fundamental difference between the goals and objectives of the two parties.

Democrats are making a high-stakes bet that tax reform will not result in greater economic growth. They have put themselves in the awkward position of rooting against a booming economy. If there is robust growth, Democrats will find themselves in a world of hurt.

The difference between the two sides of the tax cut issue is supporters are optimistic and positive, opponents are pessimistic, defeatist, and negative. The Democrats not only do not believe that faster economic growth is possible, they do not want faster economic growth.

If the pace of economic growth increases, which income groups benefit most? It clearly is not just the wealthy. In fact, the benefits from robust economic growth accrue to all income levels. In a sense, wealthy people don’t need economic growth. They’re already wealthy. Robust growth gives more people the opportunity to become wealthy.

Also, contrast the difference between Obama’s Obamacare and Trump’s tax reform. Obamacare was a transfer of power from individuals to government. Cutting taxes is a transfer of power from government to individuals and private businesses. Not surprisingly, Obamacare failed to achieve most of its promises and has never been popular. Obamacare made government bigger, tax cuts make government smaller.

Furthermore, consider the vast differences between the results of this tax reduction and Obama’s trillion dollar “stimulus.” The stimulus never showed up on the economic radar screen. Tax reform is already showing substantial and measurable effects. Walmart has already increased its starting wage to $11 an hour, plans to lower prices, increase dividends, buy back stock, and increase employee training. All that and the tax reform is barely a month old!

Obama’s stimulus added a trillion dollars to the federal debt with nothing to show for it. In selling the stimulus Obama promised that it would all be spent on “shovel ready” projects. A year later he admitted that there were no shovel ready projects.

The outcomes of the 2018 and 2020 elections will be largely determined by the success or failure of tax reform. If voters feel they’re measurably better off Trump and the Republicans will be richly rewarded. The Democrat Party will be left wandering in the wilderness even more than it is now.

Critics of tax reduction also predict that it will increase the nation’s debt by as much as $1.5 trillion over ten years. That estimate assumes that lower taxes and fewer regulations will have no stimulative impact on the economy. However, if it increases the economy’s growth rate by as little as .6 percent, there will be no increase in the national debt. GDP growth has already increased by much more than .6 percent.

Consider the implications of what could well happen. Lower taxes, a healthier economy, more wealth, all accomplished with absolutely no help from the Democrat Party. Optimism wins, pessimism loses. If the tax cuts and reduced regulations continue to stimulate the economy, there is bound to be increased enthusiasm in the future for doing more of the same. That will be a body blow to everything the Democrats stand for.

Victor Davis Hansen recently described this point in history as “The Great Experiment.” Hansen writes we are going to see the outcome of a test between two competing economic and political philosophies: “the unapologetic progressivism under Obama… and the unregretful conservatism under Trump.… We have been given a great gift in seeing two ideologically opposed solutions back to back, and both may end up adjudicating rhetoric through deeds.”

What a wonderful opportunity we’ve been given. Thank you, Donald!

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◼ Tax Reform Myths and Realities January 17, 2018

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

California Gasoline Prices: The Damage Done

Currently the average price of regular gasoline in California is $3.81 per gallon. That is $1.11 above the national average ($2.70). What are the reasons for this 40 percent higher price? There’s a witch’s brew of factors, but in a nutshell it boils down to the fact that California’s Democrat politicians have taken on the responsibility of saving the planet. That, of course, is a quixotic endeavor. Californians are wasting billions of dollars and getting nothing in return.

Individually California consumers spend about sixteen dollars more than necessary each time they fill their gas tanks or about $600 a year on average. Collectively California consumers purchase 14 billion gallons of gasoline each year. In other words, we’re spending $15 billion a year more than what we would if gasoline prices equaled the national average. The benefit-cost ratio of those expenditures is as close to zero as you can get.

Fuel costs are a major budget item for many California businesses. High gasoline and diesel prices have impacts beyond what can be seen at the pump.

One big contributor to the price difference is the “special formulation” for gasoline in California. Think of it as special gasoline for a special state. The formulation is the brainchild of the California Air Resources Board, possibly the most powerful and destructive bureaucracy ever created by a single state.

The special formulation supposedly creates less air pollution than gasoline sold in the other 49 states. Unfortunately, there are only a small number of refineries capable of producing the special formulation. That fact leads to other costly problems. The small number of refineries restricts supply and reduces competitive pressure resulting in higher prices. Whenever a refinery is out of commission prices spike. That happens on a fairly regular basis.

Another culprit in California’s elevated gasoline price is the “California Carbon Tax Law of 2014.” The tax took effect at the beginning of 2015. It mandates that petroleum suppliers buy “pollution permits” for the greenhouse gases generated by the fuel they deliver. At this point, how this complicated law is actually going to play out and how the revenue is to be used is anyone’s guess. At the present time a permit for producing a ton of CO2 is roughly $12.

The law “finds and declares” that “Global warming poses a serious threat to the economic well-being, public health, natural resources, and environment of California. The adverse impacts of global warming include the exacerbation of air quality problems, drought, fires, and an increase in the incidences of infectious diseases, asthma, and other human health problems.” We’re doomed!

The authors of the law could not resist the opportunity for patting themselves on the back: “California has long been a national and international leader on energy conservation efforts through energy efficiency requirements, renewable energy standards, natural resource conservation, and greenhouse gas emission standards for passenger vehicles.” Californians are so lucky to have such wonderful politicians watching out for their well-being.

Will not higher gasoline prices disproportionately impact low income earners? Not to worry. They thought about that already: “It is the intent of the Legislature that revenues collected under this part be rebated to taxpayers, particularly low- and medium-income taxpayers, of other taxes imposed under this code. In that regard, implementation of the carbon tax is intended to be revenue neutral.” Isn’t that clever? Devilish details yet to be determined.

Politicians and environmentalists do not consider high fuel prices to even be a problem. In fact, they applaud them. The state’s Carbon Tax Law is deliberately designed to increase the price of gasoline and diesel fuel for California consumers. The law states, “The prices of fossil fuels in California’s energy markets do not reflect the true cost to society of the combustion of hydrocarbon fuels and the release of carbon dioxide into the environment.” Once again politicians have declared that the price system isn’t working properly and it’s their job to put that right.

Although not unique to California, fuel prices are also made unnecessarily high because of the federal “Renewable Fuels Standard.” That’s the widely criticized law that mandates blending ethanol with gasoline. California’s enthusiasm for that law is above and beyond that of most other states.

The RFS adds insult to injury because ethanol has only about two-thirds as much energy per gallon as compared to gasoline. Consequently, E10 (ten percent ethanol) results in “3 to 4 percent fewer miles per gallon” than with pure gasoline according to Fueleconomy.gov.

Retailers in most states give consumers a choice between straight gasoline and E10. In California you are prohibited from using straight gasoline on streets and highways. Since ethanol does damage to small engines (lawnmowers and chain saws, for example) Californians have been graciously allowed to purchase straight gasoline. Relatively few dealers exist, however, and the price is significantly higher (currently $5.46 per gallon at one local dealer) than for E10. Dealers are heavily fined if they get caught putting pure gasoline into automobiles.

The Renewable Fuels Standard not only increases the price of fuel, it also does additional damage by raising food prices. Because of the ethanol mandates, 40 percent of the nation’s corn production goes to fuel not food. Everyone in the country, not just Californians, is paying more for food because of the RFS.

Still another contributor to the unusually high gasoline prices in the state is the above average gasoline tax. Nationally the average gasoline tax is $.49. The California tax is $.69 per gallon for gasoline and $.79 per gallon for diesel. Are streets and highways better in California than other states? Not noticeably.

Complaints about California’s high gasoline prices are surprisingly rare. Why more Californians don’t complain about how they’re getting soaked by the state’s politicians is a mystery. Maybe this summer as many of them drive through other states on their vacations, more of them will become aware of the totally unnecessary damage being done to their budgets. Maybe they will start screaming and hollering. They certainly have reason to.

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◼ California Gasoline Prices: The Damage Done May 21, 2015

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

The Costly Lie Called the Corporate Income Tax

You now know, or will soon know, what your individual (or joint) tax liability was for last year. However, you’re paying considerably more income taxes than you probably realize. How much more? That’s impossible to say, and that is a major flaw in our tax system. What you don’t know can hurt you and, in fact, is hurting us all in numerous ways.

The revenue collected for 2014 from federal personal income taxes will be roughly $1.4 trillion. The federal corporate income tax will generate an estimated $.32 trillion for the same period. Politicians would like for to believe that corporations bear the burden of that tax.

Economists, however, absolutely agree on one thing regarding corporate taxes—corporations don’t pay them. Corporations write the checks, but that means next to nothing. The tax in no way allows humans to avoid taxes any more than taxing cows would. In this context, corporations are really nothing more than the treasury’s collection agency. The corporate income tax is a public policy lie, pure and simple.

Corporate taxes are paid by some combination of three groups—shareholders in the form of lower returns, customers in the form of higher-priced products (a kind of “value-added tax”), or employees and other input suppliers in the form of reduced wages and prices. The distribution of the tax burden among these groups depends on numerous variables such as competition, elasticity of supply, and elasticity of demand. A study by William C. Randolph of the Congressional Budget Office estimated that “Domestic labor bears slightly more than 70 percent of burden of the corporate income tax.”

We have no idea if the corporate tax burden is progressive, regressive, or proportional. The corporate tax is by far the most opaque of all major tax categories. It is both a stealth tax and, essentially, a random tax. It is public policy flying blind.

The fundamental point is that humans, not corporations, are the ones who experience reductions in their real incomes because of the money collected from what we call the corporate income tax.

This duplicitous tax allows politicians to play the game Milton Friedman described as, “Don’t tax me, don’t tax thee, tax that fellow behind the tree.” The corporate income tax is the world’s biggest tree. The sad reality, however, is there’s no one behind that tree.

We know that for the federal personal income tax the top one percent of taxpayers pay 36 percent of individual income taxes. We haven’t the earthliest idea what the allocation among income groups is for the corporate tax.

The very thing that makes the corporate income tax bad for the economy and bad for rational policy making is the thing that makes it so attractive to politicians. The corporate tax is a demagogue’s Disneyland. As Jonathan Gruber revealed in regard to the passage of Obamacare, in the political world, lack of transparency can be a tremendous advantage. Politicians generally do not like transparency. They’re as afraid of sunlight as vampires are.

Not only do we not know who’s paying corporate income taxes, we also do not know what those taxes are costing the economy. You can be certain that they are costing a lot more than the $.32 trillion received by the treasury.

For the federal government to collect a billion dollars in taxes, it’s not a simple matter of transferring that amount from a checking account in the private sector to a government checking account. “Compliance costs” are a big part of the problem.

A 2013 study by the Mercatus Center at George Mason University found that “Americans face up to $1 trillion annually in hidden tax-compliance costs.” These costs include the fact that “Americans spent more than 6 billion hours (2011) complying with the tax code. This represents an annual workforce of 3.4 million — a population that could be the third largest city in the United States… and larger than the population of 21 states.” The deadweight cost to the economy is equal to over half of the amount collected by the Treasury.

The subjective burden of those billions of hours is multiplied by the fact that virtually everyone positively hates the time they’re forced to spend filing taxes. It is essentially a form of involuntary servitude.

Recently Bloomberg News reported that U.S. corporations are keeping $2.1 trillion of profits overseas. Bloomberg reviewed the securities filings of 304 corporations having both domestic and foreign operations. There isn’t just one reason for doing this, but by far the most obvious is that repatriating those profits would subject the corporations to the U.S. corporate income tax rate of 35 percent.

How much damage is done to the U.S. economy because that enormous amount of money is out of reach? What would be the impact on the U.S. economy if those two trillion dollars were brought to the U.S.? It’s impossible to say with any precision, but it’s reasonable to assume that it would be significantly stimulative.

When profits are sequestered overseas the U.S. treasury doesn’t get a dime of revenue. Our 35 percent corporate income tax generates zero percent revenue on those profits. The world’s highest corporate tax rate generates no tax revenue on that money but it does significant damage to the economy.

If the corporate income tax were repealed entirely, if the $.32 trillion were left in the private economy, what would happen then? There would be more investment and more consumption. More investment would mean more economic growth, more demand for workers. Rising demand for workers would put upward pressure on wages and salaries. More employment and higher incomes means more individual income tax revenue. More investment would increase the capital-labor ratio which would increase labor productivity which would eventually translate to higher wages. Any tax on income is essentially a tax on production. Whenever you tax something you always get less of it.

When investment returns increase, share prices increase. In other words, not only would incomes rise, so too would wealth. Anyone with a 401(k), for example, would see a significant increase in his or her account value.

A 2013 study by the Tax Foundation titled “Growth Dividend from a Lower Corporate Tax Rate” concluded that “When the full economic effects of cutting the corporate income tax rate are taken into account, the federal treasury would collect more in total revenue than it would lose from a lower rate.” The corporate income tax is doing serious damage to the economy and all its participants and it isn’t even benefiting the Treasury (to say nothing to all the state treasuries). We are shooting ourselves in the foot and getting nothing for it.

The Tax Foundation’s study conclusions were opposite to what Congress’s Joint Committee on Taxation (JCT) concluded in a similar report. The contrary conclusions resulted from a simple difference — the JCT used static analysis in making predictions, the Tax Foundation used dynamic analysis. The JCT, in other words, made the absurd assumption that cutting the corporate income tax rate would have zero stimulative impact on the economy. That long-standing methodology used by the JCT has been repeatedly condemned by the Wall Street Journal, among countless others. Requiring the JCT to switch to dynamic analysis in its reports would have profound implications.

The damage done to the U.S. economy by our high corporate income tax rates is magnified by how it compares to the rates in other countries. When state corporate income taxes are included the top rate in the U.S. is 39.1 percent. Only Chad and the United Arab Emirates have higher rates. According to the Tax Foundation, the worldwide average top rate is 22.6 percent. Also, according to the Foundation, “Every region in the world has seen a decline in their average corporate tax rate in the past decade.” The U.S. is suffering from a large and growing disadvantage relative to the rest of the world. Reducing our corporate income tax rates would be beneficial, but only total elimination would allow the avoidance of the enormous compliance costs of the tax.

The fact that most other countries in the world have cut their corporate tax rates shows that it can be done. Other countries have the same kinds of charlatan politicians we have here, but they’ve somehow managed to take steps in the right direction.

If we were ever to eliminate corporate income taxes, one of the greatest benefits would be a major increase in the honesty quotient of our tax system. Wouldn’t it be nice if, for once, we stopped lying to ourselves?

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◼ The Costly Lie Called the Corporate Income Tax April 10, 2015

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

The Real Damage Done by High Tax Rates

President Obama has once again put the question of income tax rates on center stage. As a Wall Street Journal headline put it, “Obama Intensifies Tax Fight.” He is apparently hell-bent on making our income tax structure more progressive.

Raising tax rates on upper-income earners is an appealing idea to many people. The President certainly hopes that it is. The most common argument against the idea is that it would diminish the incentive for business owners to invest, hire, and grow their businesses. Although that is all too true, it’s only one kind of damage done by high marginal tax rates. Even if we were not in a recession, more tax progressivity would still be a bad idea.

It’s well known that taxes reduce economic effort. If you want less of something, tax it. That, by itself, reduces wealth creation and economic growth. Less well recognized, however, is that high tax rates misdirect and misallocate economic activity.

A flatter, less progressive income tax rate schedule is an idea that never seems to go away. Perhaps the earliest argument for a flat tax was in Milton Friedman’s 1962 classic, Capitalism and Freedom. Its latest sighting is in what’s called the “Ryan Budget” authored by Congressman Paul Ryan. The official name for his budget plan is “The Path to Prosperity: Restoring America’s Promise.” His proposal advocates only two federal personal income tax rates — 10 and 25 percent. A notable and similar recommendation was part of President Obama’s own deficit reduction team of Erskine Bowles and former senator Alan Simpson. Their “National Commission on Fiscal Responsibility and Reform” recommended federal rates of 8, 14, and 23 percent. Obama totally ignored the Bowles-Simpson recommendations.

High marginal tax rates reduce wealth creation in more ways than is immediately obvious. High tax rates not only reduce incentives overall, they also alter and rearrange incentives. Most of the damage done by excessively high tax rates is hidden from view and almost impossible to measure precisely. Although hidden, the damage is real and significant.

Our wealth is as much dependent on how efficiently we use resources as it is on the quantity of resources we have. The worst damage done by high tax rates is the way they distort decisions in the economy and result in a misallocation of resources.

Higher taxes increase the effort expended in avoiding taxes. When you increase the reward for avoidance, you will get more avoidance. It will follow as the night the day. More decisions will be determined by tax considerations. The result is a less productive economy.

Investing is a process of choosing among alternatives. A generalization that is true in most cases is that money and effort go to where they are most rewarded (or more precisely, where there is the best risk-reward ratio). Different rates of returns attract or repel investment capital.

An economy functions most efficiently and experiences the highest possible growth when resources move to their highest-valued uses. That is the natural tendency in a free market economy. High tax rates, however, significantly distort this tendency. Too often resources move not to where they create the highest economic value, but to where they result in the most tax avoidance. High tax rates reduce the reward for productive spending and increase the reward for wasteful spending. If the tax minimizing choice is the most economically productive it’s a happy accident, and a rare one.

High rates make avoiding the tax an option with a very high rate of return. The higher the tax rate the greater the effort expended to avoid them, the greater the misdirection of economic decisions, and the greater the loss to economy and all its participants. High tax rates result in “overinvestment” in tax avoidance. Overinvestment in one activity means reduced investment elsewhere.

High tax rates also reduce the price or “opportunity cost” of leisure. You could define leisure as wealth non-creation. There’s nothing inherently wrong with choosing more leisure, but it does cost something in terms of output. The higher the tax rate, the lower the price of leisure. More leisure means less wealth creation. High tax rates are equivalent to a subsidy for leisure. Is that really something we want to do? Have we made a policy choice that people work too hard?

ONE CLEAR EXAMPLE of taxes distorting economic choices is the tax on capital gains. The capital gains tax is due only when the gains are “realized.” In other words, only when the appreciated asset someone owns is sold. In most cases the choice to sell something is controlled by the owner. The capital gains tax is the closest thing we have to a voluntary tax, at least in regard to timing.

The voluntary characteristic of the tax on capital gains is why such taxes are especially sensitive to changes in rates. Even more than is the case with other taxes, revenue from changes often move contrary to the changes in rates. Capital gains taxes are the easiest tax to avoid or at least to postpone. In the past whenever capital gains taxes have been reduced there is invariably an increase in the turnover rate of investments and, therefore, many more “realized” gains and increased tax revenue.

There are millions of assets people would like to sell but don’t because they do not want to trigger the tax. Among other things, this prevents people from diversifying their investments as much as they would prefer. Many people have most of their wealth concentrated in one or two assets. Diversification is far and away the most effective way to reduce risk. Consequently, the tax on capital gains results in people bearing an undesired amount of risk.

When tax rates are raised there is almost never a proportional increase in government revenue. Why not? To understand why, it helps to remember that ours is mostly a voluntary exchange economy. Although taxes are not voluntary, the economic transactions you enter into are.

Taxpayers in the top brackets have the most flexibility in how they arrange their incomes, where they reside, and how they invest. This week we learned that the billionaire Denise Rich has renounced her U.S. citizenship in order to avoid U.S. income and estate taxes. In May, Facebook co-founder Eduardo Saverin renounced his citizenship for what many consider the same reasons. Now, rather than getting, for example, 35 percent of these peoples’ incomes and estates, our federal and state treasuries will get zero. California and New York, two states with top income tax rates over ten percent, have experienced out-migration of upper income residents in recent years.

A friend of mine is a chemical engineer for a large biotech firm. For several years he spent much of his time in Singapore overseeing the construction of a major new research and production facility there. When I asked him why the decision was made to build it there rather than the U.S., he answered even before I finished my question: “Taxes.”

Over-investment in tax avoidance is magnified in an environment of tax complexity. Every serious proposal for a flatter income tax schedule has also included tax simplification and the elimination of tax loopholes. Lower rates and a broader base — you can’t have one without the other. It was such a combination that was central to the tax reform President Reagan successfully passed in 1986. Reagan reduced the top income tax bracket from 70 percent to 28 percent. What followed was an extended period of robust economic growth.

A flatter tax rate schedule would increase productivity and economic efficiency. We would all be better off, not just “millionaires and billionaires.” President Obama, however, is far more focused on punishing the rich than he is in growing the economy.

Obama wants the top federal tax bracket to increase from 35 percent to 39.6 percent, the capital gains rate to increase from 15 percent to 20 percent, and the estate tax rate to increase from 35 percent to 45 percent. Buried in Obamacare’s 2,500 plus pages is a totally new 3.8 percent tax on all “unearned income,” which includes interest and dividends from investments, income from rental property, and the sale of single family homes. In other words, if Obama gets his way the top marginal rate will increase from 35 percent to 43.4 percent. That would have a poisonous impact on the economy.

Mitt Romney, on the other hand, wants a top income tax rate of 28 percent, the capital gains rate to be zero for incomes below $200,000, complete repeal of the estate tax, and a complete repeal of Obamacare .

The battle lines have been drawn. May lower rates and the economy be the victors!

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◼ The Real Damage Done by High Tax Rates July 13, 2012

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Warren Buffett’s Empty Words

It’s the time of year when our tax preparers tell us how much we owe the government. Here’s what might be a revelation to any high-income liberal who thinks his or her tax rate is too low — the amount of taxes your CPA tells you that you owe is a minimum not a maximum.

Warren Buffett is President Obama’s favorite tax policy spokesman. It’s not, however, because of Mr. Buffet’s actions. It’s only because of his words. Like a broken record, the President has used Buffett’s words time and again as his primary argument for raising taxes on “millionaires and billionaires” and on “the most fortunate among us.” Obama claims, “That’s not class warfare, that’s just common sense.” In a recent fund raising letter the President asked, “Do you think it is fair that Warren Buffett’s secretary pays a higher tax rate than Warren Buffett? I don’t and neither does Mr. Buffett.”

In an interview with Christiane Amanpour Buffett said, “I think people at the high end, people like myself, should be paying a lot more in taxes. We have it better than we’ve ever had it.” In testimony before Congress Mr. Buffett said, “The rich are coddled by Congress as if they were spotted owls or some other endangered species.”

Buffett’s specific indictment of the tax system is that he, a billionaire with an annual income in the millions, pays a lower tax rate (about 17 percent) than the 20 people in his office who pay, according to Buffett, an average rate of 36 percent. (The 36 percent number makes me wonder about his credibility.)

Buffett apparently has not the slightest clue as to how much of a phony he’s proving himself to be and the chasm between his words and deeds. In regard to Buffett’s famous protestations, New Jersey governor Chris Christie recently made the following recommendation:

He should just write a check and just shut up. Really. And just contribute. I’m tired of hearing about it. If he wants to give the government more money, he’s got the ability to write a check. Go ahead and write it.

Governor Christie, of course, has it exactly right.

President Obama claims that he is not against wealth, per se. He says, however, “After some point, you’ve got enough.” Presumably he thinks Buffett is well beyond that point. Consequently, if Buffett paid two or three times the tax he’s now paying, it would be with money he doesn’t really “need.” If Obama’s right, Buffett wouldn’t feel a thing.

If you think you’re not paying sufficient taxes, there’s something you can easily do about it. This is a problem that readily lends itself to individual direct action. Beyond the legal minimum we’re free to determine our own tax brackets. If anyone actually believed that the government’s having more money would benefit society then he might happily pay more taxes.

Have you ever heard of anyone who protests that his tax rate is too low volunteering to pay more? Why not? Is there any clearer example of hypocrisy?

Actions speak louder than words. Judging from their actions, liberals have the same opinion as everyone else — government is the least effective way to get anything done. Even liberals recognize that they as individuals can spend or invest their own money or contribute it to private charities with vastly better results than sending it to Washington, D.C. Have you ever read an obituary that ended with, “In lieu of flowers, please send a contribution to the federal government?”

One easy way to raise your own taxes is by opting out of some of your deductions. How often does that happen?

It would be interesting to know what Warren Buffet would say to the question of why he doesn’t just voluntarily pay more taxes?

Mr. Buffett, why do you want other people to be forced to do something you are unwilling to do voluntarily? Talk is cheap. Put your money where your mouth is. Buffett is apparently unaware that he is making it crystal clear he is a complete phony. If he voluntarily paid more taxes he could quickly go from being a phony to being an inspiration. Show some leadership. Go from having no credibility to having tons of it. Why is it necessary to wait until your fellow millionaires and billionaires are forced to join you?

Buffet could argue that one taxpayer can’t make that much difference. Whether or not that’s true, however, isn’t contingent on what other taxpayers are doing. As Milton Friedman wrote in Free to Choose, “This contention that compulsion would change matters is wrong — even if everyone else did the same, his specific contribution… would still be a drop in the ocean. His individual contribution would still be just as large if he were the only contributor as if he were one of many.”

Of course, for liberals compulsion is a good thing. It’s been said that a liberal doesn’t care what you do so long as it’s compulsory.

In some instances liberals do believe in the effectiveness of individual, voluntary action. I’ve had conversations with Prius owners who admit that whether or not they drive a hybrid will make not the slightest difference in regard to climate change. They will say things such as, “Well, we can’t just do nothing,” or, “We have to start somewhere.” They say it’s important to set an example. Of course, the Prius’s distinctive shape assures that everyone will recognize that they’re setting an example and helps spread the guilt contagion.

Conservatives have no reason to feel conflicted about paying the absolute minimum tax required. Conservatives think almost everyone’s taxes are too high including millionaires’ and billionaires’. There’s no conflict between their policy views and their personal behavior. They have no reason to feel guilty. They think the government already gets too much of our money and does more harm than good with what it already has. On April 15, when I send my checks to the IRS and the California Franchise Tax Board, you can bet I will be sending the legal minimums. And my conscience will be clear.

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◼ Warren Buffett’s Empty Words

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Lessons From the Lame-Duck Tax Rates Battle

n the recent debate about ending or prolonging the Bush tax rates, the Democrats subtly staked out a new fiscal doctrine — not increasing tax rates costs the government money and increases the deficit.

What we heard ad nauseam from President Obama and congressional Democrats was that keeping the Bush rates in effect for those earning more than $250,000 will “cost” the government $700 billion in lost revenue over the next ten years and increase the federal debt by the same amount. That supposedly is the difference in revenue generated by the top income Bush rate (35 percent) relative to the Clinton era top rate of 39.6 percent.

The Bush tax rates had been in effect for seven years and represent what had become the status quo. Although they were originally passed with an expiration date, that hardly makes them unique in any meaningful sense. Since tax rates have been increased and decreased numerous times in the past, no one could assume they are ever permanent, whether they have built-in expiration dates or not.

The top rate decreased under President Reagan (from 70 percent to 28 percent), increased to 31 percent under President G.H.W. Bush, increased to 39.6 percent under President Clinton, and decreased to 35 percent under George W. Bush.

If we are going to calculate revenue lost when tax rates are not increased by 4.6 percent, why stop there? Following the Democrat logic, it “costs” the government money whenever taxpayers are allowed to keep any of their earnings. Accordingly, any tax rates below 100 percent on everyone are costing the government money and adding to the national debt.

This Democrat position reveals a profound difference in fundamental beliefs between liberals and conservatives. For liberals, the basic premise is that all wealth is, or should be, the property of government or the collective. That’s their starting point.

The basic conservative belief is that wealth belongs to those who created it. Conservatives believe tax increases damage the economy. Conservatives are much more concerned about the health of the overall economy than they are about the well-being of the government.

The Democrats desperately need to believe that all wealth rightfully belongs to the government. They have a bottomless pit of wonderful things they want to spend the money on. Their avarice defines their ethic. Big-government Democrats have a desperate need for money. Wealthy people have money. Ergo, go get it!

The Democrats implicitly assumed that, for those earning more than $250,000, the Clinton era tax rates are “the way it’s spozed to be.” They projected federal tax receipts under the assumption that those rates would be reinstated. In anticipation of that revenue, they spent the money. In fact, they spent a lot more than that. As usual, the Democrats created their own problem by spending revenue before it existed. They literally could not wait to get their hands on your money. Republicans, of course, were not innocent bystanders in this shameful behavior.

One interesting inconsistency the Democrats maneuvered themselves into was their less than total rejection of the Bush tax rates. The rate structure they wanted was a Bush/Clinton hybrid, what you could call a political Prius, or maybe a genetically modified rate structure. They wanted the Bush rates for incomes up to $250,000, and the Clinton rates thereafter.

The Democrats have maintained for years that there was absolutely nothing good about anything George W. Bush did while he was in office. We were told that the only people he cared about were his rich cronies. Apparently that was not the whole story.

Something else revealed in the tax rate debate is that many on the left, including some in Congress and the administration, despise anyone earning high incomes. You can almost see their eyes bulging when they say “tax cuts for millionaires and billionaires.” The left want these people not just to provide additional revenue, they want them punished. They apparently consider upper income tax rates as more of a fine than a tax. Exactly what millionaires and billionaires are guilty of is never specified.

Democrat politicians will rarely admit what they really want top income tax to be. It would be great if they could be up front about how much progressivity they want in their heart of hearts. They don’t want to tell us that, of course, because they are well aware of how politically devastating it would be.

One exception is Robert Reich, the former Secretary of Labor under President Clinton. In a recent column he advocated a top rate of 70 percent. He did not specify how much it’s costing the government not to have a 70 percent top rate.

The expiration or retention of the Bush tax rates has not been permanently resolved. The rates have been extended for two years only. This brief extension adds to the climate of uncertainty that is one of the biggest obstacles to economic recovery. Furthermore, in two years or less we will again be treated to a new round of class warfare.

Republicans were able to buy time for the full range of the Bush tax rates, but they had to hold the country’s entire middle class hostage to do so (according to President Obama). They need to be well prepared for what we know will happen two years from now. If the economy is recovering by then, they will not be able to use the argument that you can’t increase taxes in a recession. There are numerous reasons why raising taxes is a bad idea and the Republicans better be ready to articulate them.

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◼ Lessons From the Lame-Duck Tax Rates Battle January 6, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Don't Blame Reagan

Today's California seems to hate the private sector. And vice versa.

◼ Don't Blame Reagan - Ron Ross/North Coast Journal

We can all agree that California is a fiscal mess. As I have traveled around the country over the past few months, people I talk with seem to essentially view our state with a sense of pity. They ask, "What are you guys going to do out there?"

The fact that this state, with all its natural beauty, delightful climate and creative population, has gotten itself into such dire straits raises the obvious question -- why? How, exactly, did this come to pass?

Two Bay Guardian journalists, Steven Jones and Tim Redmond, present the rather implausible hypothesis that the true sources of our problems are rooted in the long-ago administration of Ronald Reagan and the free market philosophy that he espoused. More specifically, they blame the 1978 passage of Proposition 13, which limited property tax increases in the state. Attributing our problems to Prop 13 is an argument I've seen presented many times over the past few years.

Jones and Redmond assert that "opposition to taxes is now deeply embedded in the California electorate." Their lament, essentially, is that we are in this predicament because taxes aren't high enough. Granted, primarily because of Prop 13, California's property tax rate is below the national average. That, however, is only part of the picture.

California has the highest state income tax rates and the highest sales tax rates in the nation. We are first out of 50 in those rather dubious achievements. (Our top income tax rate, 10.55 percent, is almost twice the average of the other 49 states.) I shudder to think how high our tax rates would be if the electorate were not under the spells of Ronald Reagan, Howard Jarvis (described by the authors as "a Republican landlord lobbyist") and Milton Friedman. In spite of Prop 13, state government expenditures have increased more than 7 percent per year since its passage.

Jones and Redmond seem to believe that advocacy of free market economics and opposition to government growth started in California 40 years ago. They also believe that California is such a trendsetter that the philosophy contaminated the rest of the country, and the whole world as well.

Argument for the benefits of free market economics has been around for well over 200 years and was first elaborated by a Scotsman, Adam Smith, with the publication of "The Wealth of Nations" in 1776. The most famous tax revolt, the Boston Tea Party, occurred in 1773.

It apparently doesn't occur to the authors that the kinds of liberal and progressive policies they advocate might have played in California's decline. Because they refuse to look inward or take any accountability, they can only conjure up strained explanations as to why someone else must be to blame. All the state's problems are caused by the ghosts of three dead white guys (Reagan, Jarvis and Friedman).

California's fundamental problem is its anemic economic growth rate. Our state has the fourth highest unemployment rate (12.2 percent) and the second highest home foreclosure rate. Is California in such relatively bad shape because its citizens are not taxed enough? That doesn't make sense.

The opposite is much closer to the truth. Because of high taxes and irrationally burdensome regulations, California is near the top of the list in regard to hostility toward business. According to a ranking by the Small Business and Entrepreneurship Council, only New Jersey has a more business-unfriendly environment. Californians can, if they choose, burden businesses with ever more demands and regulations. They pay a high price, however. Choices have consequences. Intel Corporation, the chip manufacturer that started in California, announced earlier this year that it would be investing $7 billion in new manufacturing facilities over the next two years -- in Oregon, Arizona and New Mexico. There's a pattern there. Are they avoiding California because our taxes are too low?

Jones and Redmond recognize the negative effects of the kinds of policies they espouse. "Certainly, turning over more public resources to free market capitalists, cutting taxes and slashing government regulation will spur private sector economic growth, just as advocates claim. But that growth has a cost. The wealth won't be shared by everyone." Their argument essentially says there's no point in creating wealth if it's not equally distributed.

In other words, if the beneficial impacts of some policy are not equally shared by everyone, they must be rejected. Such a standard creates an absolutely impossible hurdle for any human action. For Redmond and Jones, income equality is more important than economic growth. I have never understood those kinds of priorities. The damage done by unemployment is a real and unrecoverable loss. Ironically, it also hurts government revenues and, in the end, those citizens who depend on government-funded programs. If Redmond and Jones really want more money flowing into state coffers they should be welcoming policies that encourage economic vitality.

Jones and Redmond regret that corporations don't pay as much taxes as they should, partly because of Prop 13. The fantasy that corporations are capable of paying taxes is one of the most naïve beliefs of the left. In the real world, the world all of us actually live in, only humans are capable of paying taxes. Corporations are only intermediaries. They can write the checks to the IRS or the Franchise Tax Board, but they can't bear the "burden" of taxes any more than cows or real estate can.

Corporations connect with humans in three ways -- owners, employees and customers. The burden of corporate taxes falls on some combination of those three groups. Corporate taxes result in some combination of reduced profits for shareholders, higher prices for customers and lower wages for employees. The actual distribution of the effects varies from industry to industry, case to case. The conclusion of most recent research indicates that the principal burden falls on the employees of corporations. If your objective is to soak the rich, the corporate tax is an extremely crude and counterproductive means for doing so. Many on the left despise corporations and have no interest in actually analyzing their policies, so the corporate tax is one of their favorite weapons of choice.

California will survive and we will muddle through somehow. Unfortunately, we are squandering our vast potential by misreading the fundamental sources of our chronic problems.

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This article originally ran in the North Coast Journal. October 29, 2009

FISCAL FITNESS: Should the rich pay more?

Major tax reform is rapidly gaining momentum. According to Business Week magazine, "The campaign has struck such a populist chord that a massive restructuring of the tax laws seems inevitable."

The tax reform debate is bound to be heated and contentious. Deciding who should pay and how much taxes is one of the most basic of all public policy issues. It is also a topic fraught with dilemmas.

Should the wealthy pay more taxes than others? Most people would say yes, but how much more? And one question rarely even considered, Why should they pay more?

Another way of looking at the issue is to ask, "How much should each of us pay for government?" In a market economy, everyone is charged essentially the same price for the same item. Such a system is almost universally considered fair and generates relatively few ethical arguments.

The amount we pay for most goods and services is in proportion to how much we use. With most items it's a matter of quid pro quo, this for that. There's a close connection between benefits received and price paid.

When we cannot rely on simple exchange, we find ourselves in a bind. There are significant problems inherent in every other known alternative.

The way we pay for most government services isn't nearly as elegant as ordinary exchange. Even though most citizens receive roughly the same benefit from government activities, the amount of taxes paid varies widely from person to person. (Gasoline taxes are one exception, since we pay in proportion to how much we use the roads and highways.)

When paying for government services, different people are charged different prices. In contrast, when you ask about the price of a new car, the salesman doesn't ask, "What is your income?" The price of any given car is not adjusted according to the buyer's income.

If all prices were adjusted according to the buyer's income, income differences would be effectively cancelled out. Making more money wouldn't do you any good because the price you paid for everything would just go up proportionately.

One major gap in the tax burden debate is this: In seeking a meaningful answer to the question to who should pay how much tax, shouldn't we consider how a person acquired the money he has?

In our economy, most people acquire their incomes by producing goods and services. The act of earning the money results from your making a contribution to society. What you produce adds to society's well being.

Bill Gates, the founder of Microsoft Corp., is reportedly worth $10 billion. He has, however, improved the efficiency of the economy several times more than $10 billion. His accomplishments are just the most dramatic example of what most of the other participants in the economy do day in and day out.

Of course, people do not become wealthy in isolation. Gates would not be a billionaire if he operated within an underdeveloped country. Is his paying higher taxes a way for him to pay back the economic environment that has been so good for him? Sounds good, but does it really make sense?

Usually discussions about the tax burden boil down to this: Mr. X should pay more taxes than Mr. Y because Mr. X has more money than Mr. Y. A difference, however, in and of itself, justifies nothing. To put it mildly, that's a morally lazy argument. There needs to be more to it than that.

When explaining why he robbed banks, the infamous Willie Sutton reportedly said, "That's where the money is." Much of the rationale for distributing the tax burden is not much more legitimate or sophisticated than Sutton's comment.

If we do decide that people with more money should pay more taxes, that still does not tell us how much more they should pay. It doesn't take a progressive tax (higher percentages for higher tax brackets) to get the rich to pay more than others. A proportional tax of 10 percent results in someone with 10 times the income as someone else to pay 10 times the taxes.

What's fair? Should a person with 10 times the income pay 20 times more taxes? Thirty times?

These are some to the questions we will need to answer as tax reform takes shape. Whether we move to a flat tax, a value-added tax or a national sales tax, we face tough issues concerning fairness, efficiency and incentives.

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◼ FISCAL FITNESS: Should the rich pay more? - North Coast Journal July 1995

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.