Coyote Blog

From reading various comments on Trump's taxes, it is clear to me that many people do not understand even the basics of corporate accounting and taxes.  I sometimes forget, as the owner of a medium-size business, that everyone does not live and breath this stuff.  The following is meant to illustrate a few concepts I see the most confusion about.  This article is not written to be exculpatory of Trump's tax or business practices -- in fact I did not even read the NY Times article because at this time of year the last thing I need to do is spend time burying myself in someone else's taxes.

We are going to take a very simple example from my world.  Let's imagine my startup company has a piece of land we acquired years and years ago.  Suddenly in the pandemic we have an idea -- we are going to buy 50 Airstream trailers (as if we could actually obtain them in this market, but ignore that) and put them on our land and rent them out.  Let's say in the first year we bought them all on January 1 for $5 million using $5 million of bank debt (banks actually are happy to finance this sort of asset) and they ended up generating a net income (after expenses and interest) of $1 million.

So how do we account for the year?  We know we have a million dollars of operating income, but what do we do about the $5 million in capital spending on the trailers?  By GAAP accounting, capital investments of this sort that have a long service life are not expensed immediately.  They are depreciated over the life of the asset. So if we say these trailers have a 20 year life, we would expense 1/20th or 5% of their cost each year.  For our $5 million investment, that is $250,000 a year in depreciation.  In this case our final income statement for  the year would show $1 million in operating income less $250,000 in depreciation expense for a net income of $750,000.  One might expect that is what we report to the IRS and pay taxes on.

But we live in a more complicated world.  Our Congress loves to express its preferences for how business should operate in the form of changes to the tax code.  For example, Congress prefers we buy electric vehicles and solar panels, so it gives special tax credits for these.  Relevant to our example, Congress strongly prefers that companies reinvest their profits in new capital spending.  It provides incentives for this by allowing accelerated depreciation for capital investment in certain types of assets and equipment.  We can argue about the tax code -- I have not checked this particular example with my CPA -- but it is very likely that current law would allow us to depreciate our $5 million investment in trailers not in 20 years but in one.

So how does this change our example?  Well suddenly, in year one, we still have a million dollars in operating income but $5 million (100%) depreciation expense for taxes.  This means we have a $4 million loss we will report to the IRS.  This loss is carried over and used as a credit in later years.  If we continue to make a million dollars in operating profit a year, this means we will go five years without paying taxes.  The owners, for example if it is an S-corp or LLC with no double taxation of distributions, might be pulling hundreds of thousands of dollars out of the company every year, living the dream, while neither they nor the corporation pay any taxes.

This is what everyone is calling a "loophole" but I think that is a misnomer.  "Loophole" implies people are taking advantage of some drafting error or unanticipated use of an IRS rule.  That happens all the time, but our example is not an unanticipated use.  In our example we are using IRS rules exactly as Congress intended -- the company is being rewarded by Congress for the investment it made in new equipment with a multi-year tax deferral.

Note that this is only a deferral.  Once the five years is up, the company will pay its full taxes on the million dollars (unless it makes more investments with the profits which would allow it to defer more taxes).  Even if the company keeps investing and keeps getting accelerated depreciation, eventually when it sells the business it will have a large tax bill in the form either of depreciation recapture or goodwill in the business.

There are of course many other tax dodges that range from legal but ugly to outright fraudulent.  I don't know what Trump was doing.  But I wanted to show an example of how it is perfectly possible to legally (and I suppose socially responsibly) pay no taxes while generating a lot of income.  The key in this case is to reinvest profits, a behavior Congress has chosen to reward.

Taxes are incredibly powerful things.  Tax something and you will get less of it.  But you might also get more of something you did not expect.  Taxes are the king of generating unintended consequences.  A huge part of human ingenuity (unfortunately) seems to be constantly geared towards evading taxes.  This is one reason I favor completely eliminating the corporate income tax -- way too many otherwise productive resources are marshaled towards managing the consequences of these taxes.

Last weekend I was in Cabo visiting a few friends and practicing my Spanish.  Many of the buildings in town (at least away from the resort areas) look like this:

This is a small retail commercial building with going concerns on the first floor (actually finished pretty nicely) but rebar and stuff sticking up from what looks like an unfinished second floor.   This is just one of many, many buildings that look like this.  My friend, who has run a resort in Cabo for decades, asked me what I thought was going on.  I said I assumed it was some sort of third world thing, perhaps a lack of financing that meant the first floor has to operate to generate cash flow for the second floor.

He answered that yes, there was very little financing for small business and real estate development so that sort of thing did happen.  But what was really going on here is tax management.  Until construction is completed, this structure is taxed as raw land rather than as a valuable commercial building.  It was typical practice to get approved for a two story building in the original plans, then stop construction after completing the first floor (which was all that was wanted anyway) and act like the building is still under construction.  Wala Voila (ed: lol, oops) -- ugly building but hefty tax reduction.

For those of you who want to write this off as a third world phenomenon, I will offer a similar example from personal experience.  Some years ago, because I did not have enough value-destroying investments in my life, I bought some raw land in Hawaii.  It is actually in a gated community, about half-built-out, but if you drive past my land you will likely see a cow on it.  What is a cow doing in a gated community on residential land?  Well, that is the point.  Without the cow, the land gets taxed as residential land.  With the cow, the land gets taxed as ranch land at perhaps a tenth the rate.  The homeowners association helps those of us with raw land to split the cost of the cows.

Update:  Here are the Hawaiian cows, next to one of my neighbor's front gate.  While they are more attractive than the exposed rebar on the building in Cabo, they serve the same purpose.

I would be all for reductions in tax levels, but I don't think that current Federal tax rates are particularly a barrier to growth and prosperity.  A much bigger, and ever-growing barrier to growth is regulation.

5-10 years ago, in my small business, I spent my free time, and most of our organization's training time, on new business initiatives (e.g. growth into new businesses, new out-warding-facing technologies for customers, etc).  Over the last five years, all of my time and the organization's free bandwidth has been spent on regulatory compliance.  Obamacare alone has sucked up endless hours and hassles -- and continues to do so as we work through arcane reporting requirements.  But changing Federal and state OSHA requirements, changing minimum wage and other labor regulations, and numerous changes to state and local legislation have also consumed an inordinate amount of our time.  We spent over a year in trial and error just trying to work out how to comply with California meal break law, with each successive approach we took challenged in some court case, forcing us to start over.  For next year, we are working to figure out how to comply with the 2015 Obama mandate that all of our salaried managers now have to punch a time clock and get paid hourly.

Greg Mankiw points to a nice talk on this topic by Steven Davis.  For years I have been saying that one effect of all this regulation is to essentially increase the minimum viable size of any business, because of the fixed compliance costs.   A corollary to this rising minimum size hypothesis is that the rate of new business formation is likely dropping, since more and more capital is needed just to overcome the compliance costs before one reaches this rising minimum viable size.  The author has a nice chart on this point, which is actually pretty scary.  This is probably the best single chart I have seen to illustrate the rise of the corporate state:

Postscript:  I had thought that all the difficult years converting all of our employees from full to part time to avoid Obamacare sanctions would be the end of our compliance hassles (no company will write health insurance for us, so our only defense against the mandates and penalties is to make everyone part-time).  But the hassles have not ended.  For every employee, next year we must provide a statement that has a series of codes, by month, for that employee's health care status.  It is so complicated that knowledgeable people are still arguing about what codes we should be using.  Here is a mere taste of the rules:

  A code must be entered for each calendar month January through December, even if the employee was not a full-time employee for one or more of the calendar months. Enter the code identifying the type of health coverage actually offered by the employer (or on behalf of the employer) to the employee, if any. Do not enter a code for any other type of health coverage the employer is treated as having offered (but the employee was not actually offered coverage). For example, do not enter a code for health coverage the employer is treated as having offered (but did not actually offer) under the dependent coverage transition relief, or non-calendar year transition relief, even if the employee is included in the count of full-time employees offered minimum essential coverage for purposes of Form 1094-C, Part III, column (a). If the employee was not actually offered coverage, enter Code 1H (no offer of coverage) on line 14.  For reporting offers of coverage for 2015, an employer relying on the multiemployer arrangement interim guidance should enter code 1H on line 14 for any month for which the employer enters code 2E on line 16 (indicating that the employer was required to contribute to a multiemployer plan on behalf of the employee for that month and therefore is eligible for multiemployer interim rule relief). For a description of the multiemployer arrangement interim guidance, see Offer of health coverage in the Definitions section. For reporting for 2015, Code 1H may be entered without regard to whether the employee was eligible to enroll or enrolled in coverage under the multiemployer plan. For reporting for 2016 and future years, ALE Members relying on the multiemployer arrangement interim guidance may be required to report offers of coverage made through a multiemployer plan in a different manner.

Here are some of the codes:

• 1A. Qualifying Offer: Minimum essential coverage providing minimum value offered to full-time employee with employee contribution for self-only coverage equal to or less than 9.5% mainland single federal poverty line and at least minimum essential coverage offered to spouse and dependent(s).

  This code may be used to report for specific months for which a Qualifying Offer was made, even if the employee did not receive a Qualifying Offer for all 12 months of the calendar year. However, an employer may not use the Alternative Furnishing Method for an employee who did not receive a Qualifying Offer for all 12 calendar months (except in cases in which the employer is eligible for and reports using the Alternative Furnishing Method for 2015 Qualifying Offer Method Transition Relief as described in these instructions).

• 1B. Minimum essential coverage providing minimum value offered to employee only.
• 1C. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) (not spouse).
• 1D. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to spouse (not dependent(s)).
• 1E. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) and spouse.
• 1F. Minimum essential coverage NOT providing minimum value offered to employee; employee and spouse or dependent(s); or employee, spouse and dependents.
• 1G. Offer of coverage to employee who was not a full-time employee for any month of the calendar year (which may include one or more months in which the individual was not an employee) and who enrolled in self-insured coverage for one or more months of the calendar year.
• 1H. No offer of coverage (employee not offered any health coverage or employee offered coverage that is not minimum essential coverage, which may include one or more months in which the individual was not an employee).
• 1I. Qualifying Offer Transition Relief 2015: Employee (and spouse or dependents) received no offer of coverage; received an offer that is not a qualifying offer; or received a qualifying offer for less than 12 months.

The Arizona PIRG has a report that can be summarized as "transit is increasing fast, driving is falling, all of our future investment should be in transit".  The Valley Fever blog has the story:

Arizonans are driving less, and relying more on public transportation, according to a report from the Arizona Public Interest Research Group Education Fund.

The shift is causing the Arizona PIRG Education Fund to recommend that public officials shift funding away from more highway projects, and more toward other transportation options."

"We recommend that transportation officials and elected leaders look at the data today, and not outdated assumptions, to make sure that any highway projects are absolutely necessary," Arizona PIRG Education Fund executive director Diane Brown tells New Times....

In the Phoenix metro area, the light rail opened in late 2008 and is already experiencing ridership numbers that weren't projected to be reached until the year 2020. In 2013, the Valley Metro transit system experienced a record high annual ridership, and between 2007-2013, boardings on Valley Metro transit service jumped from 60 million to more than 75 million - an increase of 25 percent. The Northern Arizona Intergovernmental Public Transportation Authority recently saw its highest monthly ridership in October 2013. And in Yuma, ridership on Yuma County Area Transit has tripled since 2011.

The report suggests that public officials re-allocate their focus and funding, away from building new highways and toward more transportation options.

This is a fantasy.

There is an enormous amount of obfuscation going on here.  The percentage rise of public transit trips is actually the miracle of small numbers -- small changes on an even smaller base.  The point of these charts is to try to say that Arizonans use a lot of transit and we should dump more billions into these projects.  As it turns out, despite all the huge public investment, transit is still a rounding error.

Note that, from their own report, driving vehicle miles per capita are 9175 per person per year.  So lets look at transit.  They exaggerate by showing averages for Phoenix and Tucson, where transit use is higher, not for the whole state like they show vehicle miles.  The total state transit miles per person in the same year, using their numbers, turns out to be as low as 64 (if no one outside of Phoenix or Tucson uses transit) and as high as 110 (if everyone outside of Phoenix and Tucson uses transit at the same rate as in the cities).  The likely number is around 75.

This means that after all these billions and billions of transit spending, transit trips are 0.8% of vehicle trips (75 vs. 9175). That is a rounding error.  You sure wouldn't get that impression from the report.  The Public Interest Research Group has a funny view of "public interest", putting the desired transportation mode of the 0.8% over the desired choice of the 99.2%

Well, you say, I should compare the increase in transit to the decrease in driving.  OK.  Again using their numbers:  Vehicle driving miles went down 348 per capita over the study period.  In the same time, per capital transit miles went up by about 26 in Phoenix and Tucson (likely less in the state as a whole).  So, at best, transit ridership accounts for about 7% of the drop in driving.

This is not nothing, but hardly justifies the enormous increase in transit spending over the last 15 years and the billions and billions in capital investment.

Oh, and by the way, Phoenix Light Rail ridership has cannibalized bus ridership about 1 for 1.  That means all that investment in light rail has just shifted riders to a more expensive, less flexible transit mode.  But that is another story.

I have made this argument before -- your lifetime Medicare taxes cover only about a third of the benefits you will receive.   Social Security taxes are set about right -- to the extent we come up short on Social Security, it is only because a feckless Congress spent all the excess money in the good years and has none left for the lean years.

But Medicare is seriously mis-priced.  I have always argued that this is dangerous, because there is nothing that screws up the economy more than messed up price signals.  In particular, I have argued that a lot of the glowy hazy love of Medicare by Americans is likely due to the fact that it is seriously mis-priced.  Let's price the thing right, and then we can have a real debate about whether it needs reform or is worth it.

A recent study confirms my fear that the mispricing of Medicare is distorting perceptions of its utility.

As debate over the national debt and the federal budget deficit begins to heat up again, an analysis of national polls conducted in 2013 shows that, compared with recent government reports prepared by experts, the public has different views about the need to reduce future Medicare spending to deal with the federal budget deficit. Many experts believe that future Medicare spending will have to be reduced in order to lower the federal budget deficit [1] but polls show little support (10% to 36%) for major reductions in Medicare spending for this purpose. In fact, many Americans feel so strongly that they say they would vote against candidates who favor such reductions. Many experts see Medicare as a major contributor to the federal budget deficit today, but only about one-third (31%) of the public agrees.

This analysis appears as a Special Report in the September 12, 2013, issue of New England Journal of Medicine.

One reason that many Americans believe Medicare does not contribute to the deficit is that the majority thinks Medicare recipients pay or have prepaid the cost of their health care. Medicare beneficiaries on average pay about $1 for every $3 in benefits they receive. [2] However, about two-thirds of the public believe that most Medicare recipients get benefits worth about the same (27%) or less (41%) than what they have paid in payroll taxes during their working lives and in premiums for their current coverage.

Update:  Kevin Drum writes on the same study.  Oddly, he seems to blame the fact that Americans have been trained to expect something for nothing from the government on Conservatives.  I am happy to throw Conservatives under the bus for a lot of things but I think the Left gets a lot of the blame if Americans have been fooled into thinking expensive government freebies aren't really costing them anything.

Taxes are usually the heart of the discussion when people talk about the bad business climate in California.  And certainly their taxes are just insanely high.  But for folks like me, an even bigger barrier is the regulatory environment. We are closing several operations in California at the end of this year mainly because we are just exhausted with the compliance costs and regulatory barriers to expansion.    In Ventura County, for example, we have  a camping operation that has never made money because it is under-scale. We have the capital and desire to expand it, but it has just proven impossible to do so.

A big reason for this is the regulation in California and in Ventura County.    We once had to get something like 7 permits just to remove a dangerous and dilapidated deck.  We added a 500 gallon fuel tank for fueling boats (to eliminate the unsafe practice of driving in and out of town with about 100 5-gallon fuel containers) and it took over 3-years of trekking to multiple county and state offices to get it permitted.  We thus despaired of trying to get a campground expansion approved.   Approximately the same expansion that cost us just under a million dollars in Alabama several years ago was going to cost over $5 million and Ventura County, and the County was still piling on requirements when we gave up.  And this is even before we fart with crazy California break laws and other nuttiness.

I have often told folks that I would love to see a liberal defender of all this regulatory overreach try to construct and open a restaurant in Ventura County.  It would be fascinating to watch.   (All this musing was touched off by this article on underground restaurants that try to sidestep this regulatory cost and mess).  We are a service business and California still has a lot of money, so we still operate in California.  But I continue to wonder why any company, like a manufacturer, remains in California.  Sell there yes, but produce anything you can out of state and ship it in.  Even as a service business we do a bit of this, no longer stick-building anything but having all our buildings, cabins, stores, etc built in Arizona as modular buildings and then shipped to California.  Even our labor force is partially "imported", as we hire folks who live in their RV's to come from all over the country to live and work at our campgrounds.

As I read the other day, if Silicon Valley were not already in California, would anyone in their right mind put it there?

Postscript:  One other story:  California's regulatory environment has caused a real shift in the culture as well.  At one location that we are closing this year, a local attorney has regular dinner meetings with groups of our employees to brainstorm among the group to see if they can come up with something to sue us over.

Pretty entertaining video from down under. Sent by a reader:

Glen Reynolds writes:

The concern is that when people perceive the cost of government to be cheaper than it really is, they will demand ever more government benefits because they either don’t feel the cost directly or believe that others will be paying those costs.”

Social Security taxes are set at about the right level - the reason we have a problem with the program is that we spent the "trust fund" ages ago on everything but Social Security.  But Medicare is a different story.  Medicare taxes cover just a third of the benefits a participant can expect to eventually receive.  Of course everyone thinks it's a great deal, it's like they are buying Mercedes sedans for $15,000.

Update:  I know there are people who are horrified I would suggest raising a tax, that we should work the spending side or eliminate the program all together or replace it with a hybrid voucher system.  I would like to see any and all of that.  But there is absolutely no momentum for doing so.  Even Paul Ryan only fiddles around the edges in a barely meaningful way, and he is labelled as one step away from Hitler for doing so.

If the government is going to offer an "insurance" program, then the "premiums" need to be priced correctly.  If those "premiums" rise to absurd levels because the government is incompetent at management, then we might have some pressure to replace the program with something else.

If the post office were still charging 15 cents for a stamp, and then burying the resulting deficits in the budget somewhere, there would be a hell of a lot less pressure for reform.

Mike Rizzo writes:

A typical sovereign government can secure funds from three “legitimate” places.*What are these sources?

1. Taxes today.
2. Taxes tomorrow. In other words we can borrow money today in order to build our bridge and then use future tax revenues to pay for the debt tomorrow. By the way, if the government is in the business of actually producing valuable “public goods” then you can easily think of this as value enhancing.
3. Printing money. It’s not generally done this way, but in effect the monetary authorities can monetize the borrowing of a sovereign entity (how they do it is beyond the scope of this post). For simplicity, imagine instead that a central bank prints new bank notes from scratch, hands them to the Treasury, and then the Treasury spends them on goods and services. This is just another form of a tax, again beyond the scope of this post.

So, this is what the government budget identity looks like for “normal” countries:

G = T + the change in debt + the change in base money

I think this is a useful simplification, but I wanted to add a couple other refinements  (refinements by the way he did not neglect in his text, just did not put in the formula).  One other source of funds we have seen in Greece is what I would call Aid, which used to be humanitarian aid (think India in the 1970s) but today tends to be bailout money and debt forgiveness.  So we will write the equation

G = Taxes + ΔDebt  + Money Printing + Aid

But due to the Keynesian orientation of many commenters on the Greek and European situation, it becomes useful to expand the "taxes" term into some sort of base income, which I will just call GDP for simplicity, and some sort of tax rate t.  So then we get:

G = GDP x t + ΔDebt  + Money Printing + Aid

The Greeks can't print money (unless the EU does it for them) and at the moment no one in their right mind will lend to them without guarantees from stronger European countries (e.g. Germany).  If we call EU money printing for Greece or EU loan guarantee programs Aid, we get

G = GDP x t + Aid

As Rizzo noted, aid is drying up and Greek tax revenues are going down rather than up, so basically they are screwed.  The only out seems to be for Greece to exit the Euro and then, once on the drachma again, print money like crazy and inflate their way out of the debt.

But expanding the tax term reveals one more policy alternative that is being suggested.   Keynesians seem to believe there is a path out of this situation in Greece (or if Greece is too far gone, certainly in Italy and Spain) where money from some source  (aid, borrowing, whatever) is spent in the economy by the government in some way that is stimulative, thus increasing GDP and therefore taxes and allowing Greece to increase the money available to the government.  Since Aid is currently only be granted tied to "austerity" programs rather than stimulative spending, they feel Germany et al are following exactly the wrong course.

I am incredibly skeptical of this for two reasons, beyond just my general skepticism of Keynesian stimulus.  First, I have heard something akin to this in my personal experience.  For a short time in my life, during the Internet crazy period, I was brought in by some investors to look at their portfolio of languishing Internet plays (e.g. discountshoelaces.com)* and decide if they should keep pouring money in or shut down.  The plan I got from management was always - always - this stimulus approach.  They suggested that rather than cut back, the investors should give them a bunch of new money to really blow out the marketing effort, which would kick start their growth, etc. etc.

The problem was that they never, ever had a lick of evidence beyond just hope that the next $1 million would suddenly do what the last $10 million failed to do.  So we shut most of these efforts down.  Your first loss is your best loss, as they say.

Similarly, I don't think Keynesians can point to any example in history where this actually worked.   A country is drowning in debt, but suddenly a Hail Mary play of adding a huge chunk more to the debt and spending it on civil service worker salaries suddenly turned the tide.  Seriously, do people honestly think this will work?  Or are they just frustrated because they grew up with an assumption that there is always a public policy answer for everything and there just does not seem to be one here.

I have an emerging hypothesis, not backed by any evidence at this point, that the value of the Keynesian multiplier shifts as debt to total GDP increases.  I am not sure in actual practice it is ever above one, but if it were to be above 1 at 20% debt to GDP, it certainly is not going to be the same at, say, 150%.

Most of you likely remember the state settlements with tobacco companies.  The settlements were set up to pay states a percentage of future tobacco company earnings and sales.  But just like a profligate homeowner borrowing against his paper equity in his home after housing prices increased, governments wanted to spend the money NOW, not over 20 years.  So they borrowed against future settlement payments.  Except that now, given lower smoking rates (incentives work) the settlement payments are less than they were forecast, and states must find a way to make up the difference and pay their creditors.

The tobacco settlement has created funky incentives for state governments form the very beginning.  Formerly adversaries, the settlement effectively made large tobacco companies partners with state governments, and states have had substantial incentives to promote the business of large tobacco companies and sit on their rivals

Big tobacco was supposed to come under harsh punishment for decades of deception when it acceded to a tort settlement seven years ago. Philip Morris, R.J.Reynolds, Lorillard and Brown & Williamson agreed to pay 46 states $206 billion over 25 years. This was their punishment for burying evidence of cigarettes' health risks.

But the much-maligned tobacco giants have subtly and shrewdly turned their penance into a windfall. Using that tort settlement, the big brands have hampered tiny cut-rate rivals and raised prices with near impunity. Since the case was settled, the big four have nearly doubled wholesale cigarette prices from a national average of $1.25 a pack (not counting excise taxes) in 1998 to $2.10 now. And they have a potent partner in this scheme: state governments, which have become addicted to tort-settlement payments, now running at $6 billion a year. A key feature of the Big Tobacco-and-state-government cartel: rules that levy tort-settlement costs on upstart cigarette companies, companies that were not even in existence when the tort was being committed.

I commented here:

The government has found over time that it is able to sell higher taxes to the voters on certain items if they can portray those items as representing some socially unwanted behavior. These are often called "sin" taxes. The justification for the tax in its beginning is as much about behavior control as revenue generation.  Taxes on cigarettes, alcoholic beverages and even gasoline and plastic grocery bags have all been justified in part by the logic that higher taxes will reduce consumption.

However, a funny thing happens on the way to the treasury.  Over time, government becomes dependent on the revenue from these taxes.  The government begins to suffer when the taxes have their original effect — ie reducing consumption — because then tax revenues drop.  The government ultimately finds itself in the odd position of resisting consumption drops or restructuring the tax so it no longer incentivizes reduced consumption so that it can protect its tax revenue collections.

If Medicare is really an insurance program, than as I wrote last week, the premiums are absurdly low.  And this isn't even a rich-poor transfer issue - the premiums are too low for everyone.  See the bar chart about halfway down on this page at the NY Times.  Here is a screenshot:

Take Social Security first.  Taxes come fairly close to covering benefits, with some rich-poor redistribution.  These numbers look sensible (leaving aside implied annual returns on investment and whether the government should be running a forced retirement program at all) -- the main reason social security is bankrupts is that in the years when premiums exceeded benefits, Congress raided and spent the funds on unrelated things.

Medicare, though, is a huge problem.  Even for high income folks, premiums cover only 43% of the expected benefits (I am not sure how they treat present values and such, but again lets leave that aside, I don't think it affects the underlying point).  Assuming we end up with some rich-poor transfer, it looks to me that premiums are low by a factor of three.

Everyone seems to think Medicare is a great deal.  Of course it feels that way -- premiums are only covering a third of the costs.  There is no way we can have intelligent debate on these programs when the price signals are corrupted.  Its time to triple Medicare premiums.

Bruce McQuain has a roundup.    Here is the list from the American via Q&O:

1. The top income rate would be raised to 39.6 percent vs. 35 percent today.

2. Under the “Buffett rule,” no household making over $1 million annually would pay less than 30 percent of their income in taxes.

3. Between now the end of a second Obama term, Obama proposes $707 billion in “net deficit reduction proposals.” Of that amount, only 16 percent is spending cuts.

4. The majority of small business profits would be taxed at 39.6 percent vs. 35 percent today.

5. The capital gains rate would rise to 25.0 percent (including the Obamacare surtax and deduction phase out) from 15 percent today.

6. The double-tax on corporate profits (including dividends) would increase to 64 percent based on the statutory corporate tax rate (58 percent using the effective tax rate), easily the highest among advanced economies.

7. The double tax on corporate profits (including capital gains) would increase to 51 percent (44 percent using the effective tax rate), also among the highest among advanced economies.

I think they may be under-estimating the double taxation of corporate income as the Buffett rule would increase the capital gains and dividends tax to 30% for wealthy individuals who rely mostly on these as a source of income.

Given that his own party would not pass most of this stuff last year, it is impossible to believe they will pass it in an election year.

You decide  (origins and data for chart here)

I am generally opposed to tax increases because they never seem be matched to spending cuts -- the tax increases are passed but Congress finds ways to gut the spending cuts.  But I would accept this proposal in a heartbeat:  Return to both Clinton era tax and spending levels.  There, that's my super committee proposal.   Taxes and spending both targeted at 19% of GDP.    Problem solved.

First, the background.  Veronique de Rugy writes something that is undeniably true, though the Left has played semantic games with words like "trust fund" and "lockbox" for years to try to "shelter" the public from this reality:

In practice, [] the trust fund and interest payments it receives are simply accounting fiction. For years, the federal government has been borrowing the Social Security Trust Fund assets for its daily spending. The fund has nothing left in it except IOUs from the federal government. In fact, even the interest is paid in IOUs.

Hence, the only way Social Security will not go into the red this year and in future years is if the federal government pays back Social Security. But since the money has long ago been consumed, it must borrow money from the public or raise taxes to pay its Social Security debts.

In response, Kevin Drum whips out this absolutely stunning statement:

Back in 1983, we made a deal. The deal was this: for 30 years poor people would overpay their taxes, building up the trust fund and helping lower the taxes of the rich. For the next 30 years, rich people would overpay their taxes, drawing down the trust fund and helping lower the taxes of the poor.¹

Well, the first 30 years are about up. And now the rich are complaining about the deal that Alan Greenspan cut back in 1983. As it happens, I agree that it was a bad deal. If it were up to me, I'd fund Social Security out of current taxes and leave it at that. But it doesn't matter. Once the deal is made, you can't stop halfway through and toss it out. The rich got their subsidy for 30 years, and soon it's going to be time to raise their taxes and use it to subsidize the poor. Any other option would be an unconscionable fraud.

I really had a WTF moment when reading this.  Its hard to know where to start, so here are some reactions in semi-random order:

• For those of you over 40, do you remember such a deal?  No, you don't, because there never was one.  What happened was that Congress decided to sweep the Social Security surplus into the deficit calculation in order to disguise the magnitude of unsustainable spending, to help prevent the kind of electoral backlash we may well see later this year.  This is Soviet-style history making.
• Here is a thought problem: Picture Tip O'Neil, Speaker of the Democrat dominated House of Representatives at the time, publicly signing on to a deal that the poor would pay higher taxes for 30 years to give the rich a tax break.  It is a total joke to even consider.   The absurdity of such a notion is mind-boggling.
• It took me a while to parse this and figure out what he was even talking about.   For example, there was never a tax increase to the poor during the 1980's, so what does he mean that the poor would pay more for 30 years?  The only way this can even be the correct view of the world is if one makes two assumptions:
  1. Everything Congress chooses to spend money on is perfectly, morally justifiable and therefore spending levels are a fact of nature beyond our ability to challenge or question
  2. Rich people have the moral obligation to pay for all incremental government programs, and all budget gaps will be closed by new taxes on rich people.  Taxes on rich people, as a corollary, are never too high.

Given these assumptions, then the "Deal" sort of kind of makes sense.  By the progressive "logic" of these two assumptions, social security taxes in an alternate world would have been reduced during the surplus and the general budget deficit would have been filled not with social security surpluses but higher taxes on the rich.

• The previous logic depends on treating social security taxes as unfairly regressive taxes as part of an income transfer / welfare program.  If you treat them as premiums in an insurance program, the retroactive logic trying to cast this as a "deal" in 1983 doesn't work.  Interestingly, many on the left in other forums have argued against calling social security taxes anything but insurance premiums, including....Kevin Drum

The men in my family of my father's generation returned home after serving their country and got jobs in the local steel mills, as had their fathers and their grandfathers. In exchange for their brawn, sweat, and expertise, the steel mills promised these men certain benefits. In exchange for Social Security taxes withheld from their already modest paychecks, the government promised these men certain benefits as well.

"¦.These were church-attending, flag-waving, football-loving, honest family men. They are rightfully proud of providing homes and educations for their children and instilling the sorts of values and manners that serve them well as adults. And if I have to move heaven and earth, now that they've retired, the Republican party is NOT going to redefine them as welfare recipients.

• Note by the way, that if this really is an insurance program, any private insurer or private pension fund managers in America would be in jail had they done what our trustworthy federal government did.  In effect, they spent other people's pension money on current operations.

If we want to describe the last 30 year history of Social Security surpluses as a deal, here is what the actual deal was without ex post facto varnish:  Congress in the eighties said that they were going to spend that surplus money now to get themselves re-elected, and some other Congress 30 years hence would have to figure out how to deal with the bare cupboard.   That was the deal.  It was a simple screw you to future generations.

Drum, given his progressive assumptions, fantasizes a deal based on his assumption that the only way to fill in the hole is with higher taxes on the rich, because his mind is incapable of wrapping itself around any other alternatives (see the two assumptions above).

But it is worth noting that the surplus was in the main handed away by the Democrats to the poor and middle class through new entitlement spending.  Its hard to figure how a series of actions that took seniors pensions and frittered it away in a variety of programs that at best helped the poor and in reality probably helped no one but government bureaucrats somehow obligates the rich to pay 30 years of new taxes to clean the whole mess up.

From Chicago Sun-Times

In one of the largest Statehouse rallies ever, thousands of unionized government workers and social-service advocates rallied for an income-tax hike that could avert billions of dollars in crippling budget cuts.Three hundred busloads of people, mostly from AFSCME Council 31, SEIU, the Illinois Education Association and the Illinois Federation of Teachers, converged outside the Capitol while lawmakers were in session.

On several occasions during the late-morning rally, protesters turned away from the stage across from the Capitol to face the ornate seat of state government and chant, "Raise our taxes!" and "Save Our state!"

James King here in Arizona thinks the new "I didn't pay enough" law here is dumb.

Feel like voluntarily ponyin' up some of your hard-earned cash to help legislators dig themselves out of the budget crisis they created? Of course you don't, but that didn't stop legislators from taking time out of their day to pass a bill that asks taxpayers to do exactly that.

The "I-didn't-pay-enough fund" is the creation of numb Skull Valley Representative Judy Burges. It asks taxpayers to voluntarily donate money to the state government to help chip away at the state's $2.6 billion budget shortfall.

What he doesn't readlize is that it is aimed directly at the folks that are protesting in the example above.   Want to pay higher taxes, then send in a check!  But don't make the rest of us do so.

It's hard to imagine a more naked example of rent-seeking than this one

A group representing Arizona hospitals is pursuing a ballot initiative that would tax the state's high-income earners to help pay the health-care tab for the state's neediest kids and adults.

The Arizona Hospital and Healthcare Association expects to file paperwork for the initiative later this week, aiming for a place on the November ballot.

It asks voters to raise the state income-tax rate 1 percentage point on income exceeding $150,000 per individual and $300,000 per couple.

The association estimates the initiative would raise more than $140 million each year to pay for health insurance for low-income children and adults, graduate-school medical education and reimbursement to hospitals that care for the poor.

In other words, the government will take the money and hand it over to hospitals to do the things they are already doing.  I could put together a heartwarming story too for my industry -- we think there should be a 1% tax on all Arizona residents for kids to visit parks and campgrounds to fight childhood obesity and improve their connection with nature -- but you don't see me rent-seeking like this.

My gut feel, though I have no direct evidence, is that this is being rushed through to beat the deadline on Obamacare implentation -- my guess being that this will be somehow moot once that program is in place so the hospitals want to get their licks in before anyone really figures out the new health care law.  Once the tax and program is in place, it will be virtually impossible to kill, even if it is irrelevent post-Obamacare.  Anyone have knowlege about this one way or the other?

I love it when Mark Perry rewrites trade stories

"U.S. Steel Unions Score American Consumers Dealt Yet Another Huge Victory Loss As China They Are Slammed With New Steel Tariffs Taxes"

One has to envy pity the insignificant amount of pull U.S. steel workers consumers and steel-using companies have. The majority of U.S.-China trade agitation is caused by imposes signifcant costs on this one relatively tiny huge part of the U.S. economy.

Forcing people to pay money or pay a fine on their tax return to buy a product they currently don't buy is a tax.  Particularly when that product will likely be over-priced to the young and healthy not buying it today to subsidize the older folks.

The Baucus Health Care bill follows in the tradition of many other pieces of recent legislation in raising taxes in ways such that Congress can claim that it didn't actually raise taxes.  Here are four such taxes in the Baucus Bill  (note that no one that I know of has read any actual legislative language, so this is based on the press releases by the bill's authors.  Actual bill language can only be worse).

Employer Penalty is a Tax: In a step right out of Goldilocks, the Baucus bill will impose "penalties" on employers with no employee health care plan as well as on employers who have plans that are "too rich."  Never mind the insanity of the government micromanaging how an employer chooses to structure his compensation package to employees.  These "penalties" are structured as percentages of wages -- the one for having no health care plan was 8% of wages in the last bill.  This is a direct tax on employment, making hiring people more expensive (effectively the same magnitude as doubling the Social Security tax).  So how does this effect the average person?  Think of it this way, for the same wage, you job will be more expensive to a company that it was before the bill, making it less likely you will get hired at that wage.

Insurance Mandate as a Tax: The mandate that everyone must have insurance is a tax on the young and the healthy, as I explained previously:

People focus too much on the penalty itself being a new tax.  But the new tax is actually the requirement that individuals buy a product (in this case a health insurance policy) that they feel has no value (or else they would purchase it of their own free will today).  The government stopped pretending long ago that these younger middle class families will get much value from such a policy.  In fact, if they did get value commensurate with the premiums they will be paying, the mandate would not be achieving its purpose.  The whole point is that healthy people pay more into the insurnace system than they get back to support sick people.  If that payment is mandatory, then it is a tax, even if it is called an "insurance mandate" instead.

In fact, this is made all the more clear when politicians also suggest that cheaper high deductible health insurance plans be banned, as they were in Massachusetts.  Again, the whole point is to get young healthy people to overpay for insurance, and allowing them to buy sensible, cheaper, high deductible insurance defeats the whole purpose.

In fact, the bill's supporters have explicitly discussed requirements that insurance companies raise the price of insurance to the young and healthy to help reduce premiums for the old and, er, politically more active.  This is a redistributive tax, hidden within an insurance rate structure that will be heavily regulated by Congress.  Though don't expect Congress to admit this when young folks start to complain, they will say "blame the insurance companies."  Which is the whole beauty of such a hidden tax.

Corporate Taxes as Consumer Taxes: The plan would place new excise taxes on insurance companies, drug companies, and medical device providers.  But these taxes, particularly in the low margin insurance businesses (Yeah, I know if you only listened to Obama, you would never realize they were low margin but they are) just get passed onto consumers in the form of higher prices.  Congress knows this, but pretends it doesn't happen, so it can tell the economically ignorant that it hasn't raised taxes on consumers, and that rising prices are all the fault of the evil insurance companies blah blah, you know the drill.

Price Controls as a Tax: A large part of the Baucus Medicare savings is instituting price controls on doctors and other medical suppliers --  basically cutting their reimbursement rates.  This, by the way, just confirms what we all have known, that Obama and the Democrats don't have some mysterious win-win way to cut medical costs.  The only levers they have are 1. Price Controls and 2. Denying care.

There is absolutely no difference to a doctor between price controls and a tax.  A cut in the reimbursement rate from $50 to $40 is the same as having a 20% tax put on his $50 reimbursement.  Again, price controls in this context are just a way of hiding a tax.

And this might be the most dangerous tax of all, as such price controls always, by the immutable laws of economics accepted by monetarists and Keynsians alike, reduce available supply.  Doctors, for example, are going to be less willing to stay in the medical profession.  The result is inevitably shortages and long waits, something that should surprise absolutely no one as shortages and queuing are endemic in every government health care system in the world, starting with liberal darling Canada, whose citizens get medical treatment quickly only by crossing the border into the US.

The entire Pacific coast is vying to become the next rust belt.  Only the nice climate and beautiful scenery will keep anyone there.

The Labor Department reported yesterday that Oregon's unemployment rate soared to 12.4% in May, the nation's second highest after Michigan's 14.1%. What to do? If you're the geniuses in the state legislature in Salem, you naturally raise taxes.

Last week the legislature approved a $2 billion tax hike on personal income and small businesses that haven't already left the state. The highest tax rate on income above $500,000 would climb to 11% -- up from an already high 9%. Oregon will soon boast the second highest income tax rate in the nation, moving ahead of California (10.55%), and only slightly behind New York City (12.6%). Corporations will pay a 7.9% tax on gross receipts, up from 6.6%.

To be fair, Oregon does not really have a sales tax, so it is hard to compare apples and oranges on taxes.  But missing from the article is another factor in their unemployment, and the reason our company ultimately had to leave the state:  Oregon has the second highest minimum wage in the country (just behind Washington State and just ahead of California), and it is getting higher every year as it is automatically indexed to something or other that seems to be rising faster than inflation.

Via Matt Welch, in response to a Paul Krugman editorial lamenting that California's fiscal problems are all due to prop 13.

Here is where the traditional liberal argument loses me. The California budget "emergency" isn't a tax problem, it's a spending problem. State spending in the past two decades, as this Reason Foundation report [PDF] spells out, has increased 5.37 percent a year (and nearly 7 percent for the past decade), compared to a population-plus-inflation growth rate of 4.38 percent. If the budget growth rate had been limited to the population-inflation growth rate, the state would be sitting on a $15 billion surplus right now. Surely enough to dip into during a real emergency. What's more, despite this alleged tax straightjacket, Californians manage to still pay 21.9 percent in state and local taxes, compared to 14.5 percent for Texas.

In 1933 and 1934, America was on a trajectory to recover from the Depression.  But, before recovering, the economy was to nose dive again, and never really did recover until the next decade.  Historians and economists argue endlessly about this, but I am convinced that the arbitrary and capricious meddling in the economy by the Roosevelt administration caused many folks who would have started investing and bargain hunting with their capital to sit on the sidelines.  The National Industrial Recovery Act (thankfully killed by a mercifully non-packed Supreme Court) was just the most egregious example of the US government making it impossible to evaluate long-term business proposals because the basic foundations of the rule of law were shifting so much.

I fear we are facing a similar danger.   Everything continues to tell me that had we taken our medicine late last year, we would be entering a recovery over the next few months.  However, the Obama administrations economic interventions have gotten so egregious that there is a real danger investors are going to sit on the sidelines with their capital.  Who knows when your industry will get targeted with compensation restrictions, or higher taxes, or even forced changes in ownership?  Who could possibly feel comfortable making 20-year investments in this environment?  Dale Franks quotes Thomas Cooley:

Many investors are sitting on the sidelines, as is much money. Why? Because it is impossible to know what the rules of the game are. And that's because the administration and the Congress keep changing the rules in capricious ways in pursuit of larger political objectives.

Postscript: There is legislation pending in Congress to restrict the ability of lenders  (e.g. credit card issuers) from changing rates on existing debt.  They ask if it is fair for someone who took on a debt thinking it would be at 15% to suddenly find it is at 25%.  But how are tax increases any different.  I make 10-20 year investments in my company, and the expected tax rate is a hugely important assumption in whether it makes any sense for me to put my capital in a particular venture.   How is a large increase in taxes on returns from my past investments any different than changing the interest rate on an existing debt?

I have warned for years about government health care being a Trojan horse for government micro-management of personal behaviors.  If government is paying the health care bills, then anything individual action or choice that can conceivably be linked to health are open to regulation.  The latest episode:

Note in particular their emphasis on "health-related excise taxes." Those discussions are happening in Congress and the administration, too. It's really looking like tobacco, alcohol, and sugared sodas are likely to get a bit more expensive after health reform. Polling around these policies is proving them more popular than most wonks expected, and they have the secondary benefit of being dual-purpose: They raise money and make Americans healthier.

The fascism of good intentions is on its way.

I see a lot of news stories about Obama supporters scratching their heads at why Obama did not get more respect from other nations.  Why do these countries continue to heap scorn on the US as the US contributes more and more to international efforts?

Here is a hint:

1. These other countries share President Obama's attitudes about the rich
2. As far as the rest of the world is concerned, the US is rich

The rich in this country pay for most of the programs Obama takes credit for.  When folks say that Obama "cares", he does so with the money of America's rich.  In return, he heaps nothing but scorn on the rich, blaming them for any economic problems that may exist and criticizing them for not paying enough taxes.

Mr. President, the other countries of the world treat you and this country exactly like you treat the rich, and for the same reasons.  If that frustrates you, look to your own values first.

We have taken over a demolished campground near Guntersville, AL  (Honeycomb, if anyone is familiar with the area) and are currently in the process of rebuilding it and opening it to the public.  We have not previously done business in Alabama, so here is what we have had to do so far to be legal:

1.  Identified and retained an attorney in the state to act as our registered agent (required for in-state process service)

2.  Registered as a "foreign corporation"  (foreign meaning we are from another state) with the Secretary of State

3.  Registered with the state for a Corporate income tax number

4.  Registered with the state for a business privilege tax number  (Nothing sets me off faster than when I get the pious "doing business in our state is a privilege" spiel from a state.  What an awful theory of government and individual rights that statement represents!)  The privilege tax (which is in some sates, like AZ, a euphemism for sales tax)  seems to be a second income tax in AL, calculated on a slightly different basis. (Update: apparently the first year's taxes must be paid in advance, at the time one starts business in the state).

5.  Registered with the state (yes, with another ID number) to collect sales taxes

6.  Registered with the state to collect lodging taxes  (By the way, spent a couple of hours with the code trying to figure out what these taxes apply to and what they don't, as this varies by state.  Also, the tax rate tables are a complicated mess, and can vary for two locations located a few yards from each other).

7. Registered with the County (yes, with another ID number) to collect county sales tax.  Actually, they outsource this collection to a private company called "Revenue Discovery Systems" which is a nice Orwellian name for a private tax collector.  Is tax farming coming back in vogue?

8.  Registered with the County to collect county lodging tax.   (sigh, we are going to have to file multiple reports each month to report all of our transaction taxes - some states actually have unified reporting and payment).

9.  No city taxes, it turns out, because we are just outside of any incorporated areas.  Thank goodness for small favors

10.  Registered for state unemployment taxes  (yes, with another ID number).  This was one of those circularities that really drive you crazy.  I can't pay people until ADP has the state set up for us in the payroll system, but they need an unemployment number that the state refuses to provide until we have issued at least $1500 in state payroll checks.  Arrrgghhh.  Fortunately (?) ADP will go ahead and start issuing the checks without a number, but there is a $50 per month fee for doing so.

11.  Registered for state income tax withholding (yes, with another ID number).  Again, need this to pay people legally

12.  Don't know yet if there is County withholding.  There are county income taxes in some places.

Expect in these forms to fill out the exact same data over, and over, and over again.  The state will maintain corporate records in about 6-8 parallel data bases and corporations are responsible for keeping every one of these data bases correct.

What I have not done yet, but know from experience I will have to do

1.  Obtain county occupancy permits or licenses

2.  Obtain county and/or state health inspections

3.  Obtain Coast Guard inspections of the docks

4.  Register with the state and/or county to pay personal property taxes

5.  Get miscellaneous bizarre licenses that are absolutely unpredictable and impossible to discover until we are in violation, like the egg merchant license in KY and CO.

I thought for about 3 microseconds about selling beer and wine in our store, but I am sick and tired of the intrusive, picky, petty, and time-consuming liquor licensing processes in most states, and the income we make from alcohol sales simply doesn't measure up to the hassle.

Postscript: I try to remember that we should actually be thankful for this mess.  Though it represents almost 20 hours of my personal time to set up, and hours of time each month  filling out forms and reports, not to mention thousands of dollars a year to ADP to help manage, this mess is still orders of magnitude better than what an entrepeneur would face in France or Germany.