Redstate

I'm not an MBA (I learned all that stuff from my father before I was 10 :-) ) but there is something about MBA methods that methinks that the "public policy" folks (wonks) could really learn from to great effect.

The MBA method is the case study. Rathering than just argue "philosophy," let's set up the cases very clearly - what was done, what happened, etc. Then just hang them up on the wall. Try Estonia (see Steve Moore's piece at opinionjournal.com today). And Romania. And Ukraine.

Just hang those all up on the wall and let the lefties try to explain why none of that matters or applies to the U.S. Or why they wonder about the strong interest in "outsourcing" when that's what "the competition" is offering.

Our lefty friends like to wax eloquent about "competition" when it comes to driving down the price of airline tickets or heating fuel. But they don't want to face public policy competition - in other words, they want competition in EVERYONE ELSE'S oeuvre but NOT IN THEIR OWN.

Competition breeds efficiency and innovation. We have that internally between the various states. Let's have it internationally too!!

I spent the last twenty and change years at or near the policy level in government and had more than my fair share of dealing with MBAs. I would place them second only to government lawyers in being unpleasant and unproductive to deal with. Just as with law schools, the only thing the biz schools seem to teach really well is haughty condescention. But to the main point:

The problem with using analytical models from the Biz schools and private sector in the public sector is that no one can agree on what constitutes success in the public sector. In the private sector, success is a profitable, usually growing, business. In the public sector, if something can be done for a profit, the government probably shouldn't be doing it. If a government program is growing, it is likely failing but has popular support. In the private sector, customer loyalty and satifaction are good measures of programmatic success. Since so much of government is ministerial acts or legal and regulatory enforcement, "customer" satisfaction is usually counterindicative of mission performance - "Yes, I was very satisfied with the way the officer tightly cuffed my hands behind my back and pushed my head down as he put me in the car!" Likewise, I can't get a wastewater permit from either UPS or DHL, I have to get it from the DEC, so the use of the word "customer" is meaningless in most of government; I did my best to prohibit its use in my presence when I was still in government. I'll guarantee you that someone who didn't get his permit is not a satified and loyal customer.

This is a major vacuum in serious thinking in this Country. You basically have a choice between private sector models that various, usually Republican, administrations try to force on the public sector, usually without success or academic models that are totally agenda driven, usually socialist agenda driven, and which are advocated without regard for cost or effective use of resources. The academic models are perceived by the public, or at least much of it, because they are popular with the constituencies they serve. We conservatives may rail about how costly and destructive welfare programs are, but the people who receive them like the benefits, and the vast middle, who pay very little in taxes, doesn't really care. The business based models even when effective don't have any constituents, and often many enemies inside the government, so either nobody cares or nobody knows they're effective because of the propaganda spewed by the disaffected 'crats.

I am a firm believer in benchmarks and performance measures in government, but even there, it is very difficult to determine what to measure and how to measure it. I assure you that if you let a 'crat set his measures, he'll meet them with flying colors, but just as bad is the unrealistic measure set by someone else. For example, there was a perception in the Legislature that the unions always won grievance arbitrations. First, that isn't true, but since governments are usually bound by confidentiality statutes, you only hear about it when a fired employee gets his job back. The Leg dictated that one of my measures would be winning percentage in grievance arbitration. Hey, if I know that and have some control over what cases I take, and most people in my position do, I just don't go to arbitration if I think I might lose; I settle the case. That way, I always meet my measure. An effective measure would be arbitration award and litigation cost versus liability and settlement cost, and even that one isn't perfect because sometimes you have a good reason to take on a potential loser.

So, in sum, and before this becomes a book, I agree with you that there ought to be objective processes by which public policy decisions and public programs are evaluated. But until we can authoritatively say what success looks like, we won't know how to measure it.

In Vino Veritas

And this problem applies to the non-profit world as well and has become acute as it has become popular to hire MBA and apply business models - but try measuring 'profit' of a non-profit dedicated to say curing breast cancer.

There are some programs out there that are working on the challenge, joint public policy-MBA schools and busienss consultants recognize the issue and are coming up with ingenius, if not flawed, attempts at measures. But for all the work I've seen, and the money I've made trying to adapt business solutions to non-profit and public sector entities, I still think it is at best a subjective and arguable result.

The only way I think you can go really wrong is if you put full faith behind a model as 'the' answer.

But even so, it's not the point. My point is that we need to take the gloves off American businesses.

The Democrats believe taxes should be higher on productivity. That's because their whole objective is to produce equality, not prosperity.

But that whole project has now gone so far that it's going to cause real pain and real disadvantages for us and our children.

That's why the whole mindset needs to change. Businesses are the ones at an unfair disadvantage, not middle-class or low-income individuals.

Although it's not my point and I could hardly care less, you may want to be doctrinaire about replacing the government revenue from foregone business and capgains taxes.

If so, then raise income tax rates on the middle and lower classes. Not only is there a huge amount of untaxed value there, it's also not economically productive and should be taxed more.

that the Republican party should run on a platform of setting the corporate and capital gains tax rates to zero and offsetting this revenue loss by increasing income taxes on the lower and middle classes because these classes of people are 'not economically productive and should be taxed more'?

Businesses are the ones at an unfair disadvantage, not middle-class or low-income individuals.

What about middle-class or low-income individuals who own businesses? What about middle-class or low-income individuals who work for businesses?

I appreciate your position but you seem to be disconnecting American citizens from American businesses far too much. When you talk about businesses as being disadvantaged that's just a proxy for talking about American citizens, across the board.

... you may want to be doctrinaire about replacing the government revenue from foregone business and capgains taxes. If so, then raise income tax rates on the middle and lower classes

Why is your first suggestion for offsetting a hypothetical revenue loss, to raise taxes, instead of lower spending???

At any rate, people worried about selling this ought to look at results from countries lowering corporate taxes for their ammunitition. Canada is a "local" example of a country lowering their federal corporate tax rate (from 28% to 19%, and perhaps even lower) and here is their rationale:

“If you lower the corporate tax rate, you lower the cost of capital for Canadian companies. Therefore, these companies are induced to spend more on capital equipment. As for foreign investment, we need a big hook to snare investment, including Canadian investment, that might otherwise go south of the border. Finally, it would strengthen Canadian companies against foreign takeover,”

More on Canada's move toward lower corporate tax rates.

People can argue about 20% versus 10% versus 0%, but I have to hope that Republicans can at least make an effective argument for lowering it, period.

I did some research after blackhedd's post yesterday on the dollar, and in 2006 the govt collected $354 billion in corporate income taxes - http://www.cbo.gov/ftpdocs/81xx/doc8116/05-18-TaxRevenues.pdf - I don't have the figures for capital gains taxes.

Interestingly, the cost of compliance for businesses was $148 billion in 2005 - http://www.taxfoundation.org/files/sr138.pdf

Try reading it aloud as if you were giving a stump speech.

We always try to balance fairness against prosperity.

But there comes a time when we can't afford to be fair, if our prosperity suffers too much and our children can't get good enough jobs to pay off their debts.

That time has now come.

As a low level manager at a Fortune 500 company, I definatly see this happening and I've been concerned for quite awhile now. A lot of the services we provide are going to foreign countries and Americans are getting laid off. It impacts the state level also, our company started in California and over the last 6 years we have been closing down sites and laying off employees in California siting the cost of doing business here, and opening up new sites in Arizona, Nevada, and Texas.

Looking for alternate, equivolent jobs in my area has proven difficult.

Taking from the Rich and giving to the poor (and by poor, I hear me) sounds good at face value, but when you consider that the rich will take their business elseware or fail because they are unable to compete with others who do, I find myself without a job and hense worse off than before. As you said, "Money may not buy happiness, but poverty buys nothing".

We sell this as better jobs and job opportunities. Even if you already have a job, it provides more options for lateral and upward movements as the demand for American workers increases.

See, this really isn't so hard.

would you support?

See, you're trying to solve the wrong problem. We shouldn't be debating about how to fund the government. The government is doing pretty d*mn well as things stand.

We should be debating how to make businesses stronger.

In politics, sometimes you have to oversimplify things to get people's attention.

We've gone too far in emphasizing fairness over prosperity, and our children will live poorer lives as a result. Restore the balance!

That's the slogan.

"We shouldn't be debating about how to fund the government...We should be debating how to make businesses (and the US economy) stronger" -blackhedd

late checking RS this morning, busy selling my "Cuomo puts" on MER, WM, C and the rest..
====
"Enlightened statesmen will not always be at the helm." -- James Madison

Assuming a corporate rate of 0, some portion of this would be recouped through personal income taxs, sales taxes, property taxes, and capital gains (If you follow me on this and not Blackhedd) and dividend income.

There is a limited number of things big mean corporations can do with their money:

1. Pass it out as loot to the CEO and his cronies as bonuses or higher pay (this is obviously the "Let's make John Edwards wet his pants" scenario). In this case, some portion of it is going to be directly taxed as income. The rest of the money would be invested or spent, both of which result in increased economic activity, be it building yachts or investing in new companies. Again, increased activity and hiring, more taxpayers. The only scenario under which this doesn't work is if you believe the "rich" will play Uncle Scrooge and store their wealth in a giant money bin so they can swim in it at night.

2. Pay it out as dividends. Dividends are taxable. Alternately, hang onto the cash or buy back stock and drive up the share price. In my world, capital gains are taxable (when realized).

3. Pay higher wages to workers, which is taxable income.

4. Invest in new production, technology, research, product development, etc. This will result in taxable activity (buying new tooling for a factory means more work for factory workers, more employees paying taxes, etc.)

I'm sure there are a few other things corporate America could do with a pile of cash that the government refrained from pilfering, but the 4 above are the main options. I'd guess (and it is only a semi-educated guess) that a pure, static analysis would find that between a quarter and a third of the tax revenue "lost" would be immediately recouped as the money gets pushed into other taxable actions.

A dynamic analysis, of course, would include the incredible explosion in economic growth and prosperity that would follow. Not too difficult to imagine this making up most or all of the rest of the "lost" revenue within a few years, and then surpassing what would have been collected if we'd maintained the corporate income tax.

And don't forget that some of the impact of eliminating corporate taxes would lead to reduced expenditures - lower unemployment payouts, less need for aid to college students, fewer pension plans needing bailouts, etc.

But of course, if we *want* to "pay" for the tax cut, I suspect Senator Coburn and a few others would have a few suggestions on where to start cutting spending...

Unless you have more than 100 shareholders you should already be an S-Corp. This effectively reduces your tax rate to 0 for earnings passed along to shareholders. You pay at your tax rate.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

As I just noticed someone replied, there is no reason you should be double taxed.

Either: change your status to an S corp, which you can elect to do with an IRS form.

Or: Pay yourself all profits from the company. If your C corp makes zero profits, nothing is being double taxed.

I'd suggest talking with an accountant. Or a new one if you have one.

It is doubtful that businesses would "hoard cash in order to drive up share price". To Wall St, hoarding cash is generally a bad sign for the prospects of that business, and having a large cash position on hand would signal to the market that the business didn't have investment opportunities within the company's line of business to spend that cash. Thus, the company's PE ratio would likely decline based upon this signal.

Generally speaking, it is capital expenditures that increase the share price. There are very few actions that businesses can take that cause a statisticly significant increase in the share price, and capital expenditures are the most significant and well-known.

Esp if the price to book drops low.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Since when is taxation on every time people make money, the state of nature?

HTML Help for Red Staters

I don't know about a "state of nature" but I can assure you that favoring some forms of income (capital gains) over other forms of income (wage, salary, rent) is just as economically ineficient as any other sort of policy that favors one form of production/wealth creation over another (think about the ineficiencies in our economy associated with policies that "protect" the sugar industry from "unfair competition.")

Not to mention that, politically speaking, trying to eliminate capital gains entirely is just short of suicidal.

HTML Help for Red Staters

Sure.

You have two income opportunities, one to be paid in wages (taxable) the other in capital gains (untaxable). Assume that in both cases, the income reflects the amount of wealth you create.

Your wage income opportunity is $100,000/yr, but after taxes it's $80,000. Your capital gains income opportunity is $90,000, tax free.

Question: Which income opportunity are you going to pursue? And how much wealth is going to be created as a result of this?

Policies favoring one type of economic activity over another are economically inefficient. There's really no difference in favoring capital gains income over wage income than there is in favoring investment in "green" wind energy over energy from coal. One of the basics of free-market economics is not to rig the market by favoring or disfavoring one activity over another. That applies to income as well. After all, capital gains taxes could just as easily be higher than wage income(and in fact, it has been in the past) if you prefer to favor wage income.

So in other words this is going to be a tiny, tiny, tiny distortion to the system with virtually no real world consequences, in exchange for being a great incentive for investment.

Consider the set of people who have those kinds of options, and you'll see why the tradeoff here is good.

HTML Help for Red Staters

Yes, similar to the tiny, tiny distortion that ag subsidies represent. Or tarrifs on steel. Or the minimum wage. Or wind energy tax credits. Or R&D tax credits for corporations. Or building bridges because the U.S. Senator who represents the area sits on the right committees. Or time-and-a-half for over 40 hours worked in week. Or...

I hope you catch where this is going.

You're ranting incoherently to me. How do any of those compare with something that makes a tiny inefficiency, in exchange for a large nationwide economic benefit?

HTML Help for Red Staters

Follow the Law of Holes: stop digging.

For you to "know" that such-and-such an intervention in the market creates only a tiny inefficiency, you have to know what the inefficiency is. That means you have to know and understand all the possible paths that the capital might otherwise have taken, and the effects — primary and secondary — of each of those flows. In short, you have to be smarter than a market at setting prices. Do not play this game with real money.

Drink Good Coffee. You can sleep when you're dead.

I know it's tiny because it's only going to happen to people who have the choice between standard income and capital gains, and the standard income is higher than the capital gains by the difference between the current income tax rates and the current capital gains rates.

Most people don't have the capital to make anywhere near the amount of money they can make in wages, from capital gains. So we're talking about a very narrow circumstance.

And besides, the fact is that we're already preferentially favoring capital gains over other income. And we seem to have done pretty well that way, haven't we?

So while granted, perfect knowledge of what's going on in our economy is impossible, empirically cutting capital gains rates and creating that incentive has served us well. I think it makes sense to continue on that way.

HTML Help for Red Staters

The fundamental flaw in your premise is that capital gains income is the only type of income available to those who make investments (which, it seems, is what you're after - increased investment).

Investments take many form. For example, a small business owner might chose to spend $25,000 on new equipment that will, she figures, increase her pre-tax PROFIT income from her business (which is going to be taxed just the same as wages/salary income) by $2,500/yr (a 10% return on investment, not bad). Let's assume that between FICA and her state and federal income taxes, her marginal tax rate is 40%. So, her after-tax income increase is $1,500.

Now, assume capital gains taxes are eliminated utterly, and she can buy securities that will provide her with a 7% return. The same business owner now has a choice - invest the $25,000 in her business, creating $2,500 in wealth(of which she gets to keep $1,500), or invest it in securities that will create $1,750 in wealth, of which she gets to keep $1,750.

Congratulations, you've just diverted $25,000 from a highly productive use to a less productive use. Now imagine this playing out across millions of small business owners, who now have less incentive to invest in their own business where they will create less wealth, and more incentive to invest in other people's business, where the money will create less wealth. Oh, and by the way, since it's mostly only larger companies that have securities to invest in, you're diverting scarce capital from small businesses to big business.

Oh, and by the way, you've also just driven up interest rates for all businesses. Why? Well, because business has two main sources of raising capital (outside of their own profits) - borrow it, or sell equity. Capital gains opportunities are mostly (but not exclusively) found on the equity, not the bond side, of capital markets. The after-tax return of capital gains has now increased significantly compared to interest income, if you eliminate capital gains taxes. So, if a company decides they want to borrow rather than sell equity (and again, this is more likely to be the case for small businesses compared to big business), they're going to have to pay a higher interest rate in order to attract money.

Are you familiar with the law of unintended consequences? There's a reason why free-market economists like myself tend to shudder at "pro-business" or "pro-investment" policies that advantage one form of economic activity over another.

Why would keep a one-shot $1750 instead of an annual $1500? Your example person isn't very rational.

HTML Help for Red Staters

Ah, no. Mutual funds are set up for recurring capital gains. So it isn't a "one shot" deal. Even if it was, it would make sense.

Year 1: Invest $25,000, earn 7%. End of year funds = $26,750 (orginal $25,000 + $1750 cap gain). So, what are you going to do with this $26,750? Invest the whole sum, or just the original $25,000 again. If you again invest the $25,000 and earn 7% again...

So, no, it is not a "one shot" capital gains opportunity.

If a small business enjoys even minor success you wind up with absurd situations where at the end of the year you have to find ways to burn cash as legitimate expenses. If you don't you have to either distribute it or pay taxes on it, either of which takes it out of the business.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Irregardless of the rationality of a business owner doing what you have suggested -- what do you think happens to that $25,000 invested in securities? Do you think there is a huge "securities mattress" out there where business stashes money? It simply disappears?

When the money -- whether invested by the business owner in her company or in securities-- stays with the business owner, rather than flowing into the black-hole of government, it is preferable to throwing it away in taxes!

he is making is that you are creating a preference for investing in someone elses business - which geenrates capital gains - over invsting in your own business - which generates profit/income.

It's a fair point, do we inherently think that small business owners are less efficient with investment than larger organizations and thus we should encourage people to drive investment towards those larger organizations?

That is EXACTLY my point. The proposal to eliminate capital gains taxes is premised on the idea that investments that produce capital gains (either for your own company or another) are superior to investments that produce other forms of income, such as small busines profits. Our economy would wind up with a surplus of cap-gain seeking investment and a shortage of profit-seeking investment.

As a capital gains opportunity, hasn't the $90,000 required to take advantage of that opportunity already been taxed once?

In the case of a sole proprietorship that becomes a corporation, the dual-taxation argument makes sense, because the owner literally has to pay two sets of taxes before he gets his money.

However in this kind of transaction, I think this concept of multiple taxation starts to fall apart, because you know what? Every dollar in our economy gets taxed multiple times, in that sense.

If I make some money, and use it to buy a car to get a new job, should I not have to pay taxes on the wages from that job, because I already paid taxes on the money I used to invest in the car so that I could take the new opportunity?

HTML Help for Red Staters

Correct. You aren't paying taxes on the money invested, you're paying taxes on the income produced from your investment. If I buy a house for $100,000 and sell it for $150,000, I don't pay capital gains taxes on the whole $150,000, only the $50,000 increase in the assets value.

Capital gains are "double taxed" to the extent that the asset is taxed during the holding period, i.e. the corporate income taxes paid by AT&T plus the capital gains I realize upon selling my AT&T stock is double taxation. If AT&T didn't have to pay income tax, but I had to pay taxes on the cap gain, then the income was only taxed once.

It's a political one. The reason to eliminate taxes on gains in capital assets is explicitly in order to privilege them, precisely because they will produce future growth and income. Anything you tax less, you get more of, and we want more capital.

Assuming that the growth opportunities exist in the first place. Which, on a risk-adjusted basis, they don't in the US. And we can fix that by eliminating taxation on business and investment.

We should be focusing on the best way to sell this to the electorate.

Well, I'm an economist (I'm many things actually, but "economics" is what it says on my degree), so I thought an economic perspective might be useful when discussing introducing economic distortions into the economy.

As for politics, my political advice would be the same: drop the idea of eliminating taxes on capital gains. Eliminating taxes on corporate income is tough enough and open to massive demogogery. Imagine the ads about "not taxing the rich at even the same level as the poor and middle class" if you try to eliminate cap gains taxes.

Besides, as noted, if you tax something we get less of it. Do we want less wage-earners in America? Do we want less salaried workers? We tax sales, do we want less sales? Corporations need to be able to sell bonds too, should we eliminate taxes on interest? How about dividends, I assume we don't want less dividends?

The truth is, we need to tax something to pay for government. I would rather, as many here I suspect, pay for a much smaller government. But we need to tax something to pay for government, and we can either pick and chose who pays taxes and under what circumstances, or we can just keep it simple and not favor one type of economic activity and income over another. Corporations are artificial entities, and it makes little sense to tax them. If we're going to have an income tax (and I'd be OK with not), then we should treat all income equally.

Last message for a while, I'm in the midst of a move. Hope I've offered something worth thinking about.

Corporate earnings are now taxed punitively, so businesses go out of their way to avoid being profitable. That's a distortion in itself, because it causes shareholders to reward growth rather than income.

If business taxes (at a combined 75% or more considering the effect double taxation) go to zero, and capgains go from the current 15% to zero, then by far the larger effect will be from the former and not the latter. The effect is economically healthy on balance.

A small quibble with your analysis of management behavior: the return on cash is now at cyclic lows, and rates are falling all across the yield curve. Businesses that hoard cash will be punished with lower share prices (and in fact will become takeover targets) rather than the other way around.

But again, I want to emphasize my point here. For a change, I'm not trying to do a fine-grained economic analysis. I'm trying to deal a blunt, sledgehammer-blow to the political discourse.

Our children's future is at risk if we don't stop all this progressive nonsense!

You know how I feel about the attention paid to growth, heh.

HTML Help for Red Staters

Your "quibble" is a fine one. I should have said that companies "may" hoard cash. In today's environment, that may nto be a wise move. But to your point on hoarding cash making them a buyout target, it's worth noting that buyout targets typically see their share price... rise.

The larger point I'm trying to make, and that I hope you will take, is that favoring one form of income over others is economically inefficient (and though I hate the way this sounds, pretty unfair). You will have people who's best, most efficient way to produce wealth/income is through wages or salary instead shifting their behavior towards less productive forms of wealth creation because the after-tax income is superior, even though they create less wealth.

Brief example: Assume that I could make $100,000/yr as wage income as a skilled carpenter working in housing construction. Alternately, I could earn $90,000/yr buying old houses, rehabbing them, and selling them. The difference? The $90,000 in income from rehabbing houses is tax-free, while I have to pay income tax on the $100,000 I earn as a carpenter. If my tax rate is over 10%, I'm going to go into the house rehabbing business, where I'll create less wealth for society but have more after-tax income.

Hope this explains where I'm coming from.

...and the corporation makes $90,000, it will pay the Feds 35% plus the state and local whack. That leaves maybe $45,000 to pay to you, the owner of the corporation, as a dividend. Whereupon you'll pay income taxes on the dividend, leaving you with maybe $22,500 if your other income puts you in a high bracket. Why do it in the first place?

And in the meantime, if you rehab a house, you'll still need to pay the carpenter his $100K because that's a necessary part of rehabbing the house, so by going into business you haven't eliminated the opportunity for a carpenter.

A business becomes a takeover target when its management runs out of good ideas for growing and putting capital to use. Hoarding cash is a sure sign of this. At that point, the value of the company becomes a function of the value of its existing cash flows, and of competition among potential acquirers (if any).

Obviously this analysis interacts with the systemic cost of capital and of the available growth opportunities, both of which are no longer restricted by national borders to any great extent.

"If you set up a C corporation to buy and rehab houses and the corporation makes $90,000, it will pay the Feds 35% plus the state and local whack. That leaves maybe $45,000 to pay to you, the owner of the corporation, as a dividend. Whereupon you'll pay income taxes on the dividend, leaving you with maybe $22,500 if your other income puts you in a high bracket. Why do it in the first place?"

Not a realistic example at all. The layers of taxes you describe are a worst possible case by someone trying to see how much they could pay in taxes. Either:
Pay yourself the 90k your corporation made (or whatever was left in profits). Business tax? Zero. You just pay personal taxes on the income.

Form an S corp (or change your C to S with a 1 page form), or LLC. All net profits after expenses flow to the owner as personal income. Business tax? Zero.

I was responding to his example.

He posits that, in the absence of a business income tax, a carpenter will forgo his ordinary income in preference to business income. He ignores that, whether C or S corp, the income to the business will have to flow out before the carpenter-turned-mogul can consume any of it, and therefore there is no opportunity for tax evasion.

A C corporation is allowed to retain earnings beyond a given tax year (an S corp is not). The reason any business would want to do this is because it has a use for the money. Either it can generate a return on it from organic growth that is greater than the risk-free rate, or (assuming it's small enough to afford the luxury of long-term planning) it can invest in R&D or other things that can produce future income.

A C corporation that does not have particularly good uses for retained earnings will either pay them out as dividends (a disastrous idea, given today's double taxation), or it will throw money at bad ideas (nearly as disastrous) or it will sit on cash (which will eventually induce someone else to buy out the company and fire the management). Or it will manage in such a way as to be less successful than it could otherwise be (this is the preferred course of very large businesses, or businesses in mature industries).

If we end the business income tax, then retained earnings become a substantially more privileged source of growth capital for business.

It's entirely true that this would leave the government in the position of needing to grow its own revenue, but remember my whole point here is about balance. We need more business growth, not less. The government has been doing fine, and it can stand a few lean years.

I understand your point. I would imagine that in practice that market efficiencies would render it largely moot though. Taking your case, wouldn't all carpenters chose to make the capital gains income, which would bid up the price of homes to the point that it was largely a wash between the two choices? I'm ignoring the point that the guy rehabbing houses should probably be compensated at a higher rate as he is taking more risk than a salaried employee.

3. Cutting corporate income taxes to 0 is going to be a REALLY tough sell. There are a significant number of people who hate
Walmart for providing cheap goods to the masses. These same people will irrationally claim that helping businesses grow (which provides jobs) will be "unfair to the little guy". I really don't have a good selling point for this. If they don't understand how cutting taxes increases growth and benefits everyone, I don't know how to convert them.

But really the roadblock for people who want to start their own businesses and never work at Wal-Mart again is the fact that their corporate income as a small business is going to get taxed twice. In that case they *might as well* work for Wal-Mart, in fact in terms of taxes they'd be better off!

If the idea is to get entrepreneurs over the survival threshhold, the most important thing to do is tax only the *personal income* and leave their small, fledgling businesses *alone* -- they're going to have enough trouble competing with the enormous buying power of the Wal-Marts of the world.

Focus this on small businesses....

Maybe we can sell it by easing into it. It's a LOT easier to sell a tax cut for Kowalski and Co. than it is for the EVIL Walmart or Exxon.

I hate to propose a progressive tax scale (because I think they are by definition unfair), but it might be an easier sell in the first go around. 0% tax on businesses with income under $1 million, 5% up to $10 million, etc. with a top rate that's still below our current top rates.

It'll give help for the small fledglings and give us a proof of concept as well. But most important, I could SELL it to the masses.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

Selling it to the people won't be the hardest part. Try selling it to the politicians and government at large. Now there is a challenge.

absentee

They'll go whichever way they think will get them elected. If you make the idea popular enough, the politicians will at least nominally support it.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

That's a good theory, but how many times have you seen something with popular support die in Congress? And you can assume from the get-go that you won't have overwhelming support for this no matter how well you sell it. The kossak types will never come on board, ever, no matter how well you document it. They're socialists and that's the end of it for them.

You have to sell the politicians on the idea itself, not just the popularity. Until I see them making real efforts to cut spending and eliminate pork, I'm not going to have high hopes they'll be on board here.

absentee

I'm not sure that it will make sense to the masses - but it is impossible for a business to pay taxes, as a business is just an entity that passes all its expenses along to people in the end. Thus, only PEOPLE can pay taxes. A business has 3 ways that it can pass the expense of taxes on - increasing the cost to the end consumer of a product or service, decreasing the pay of its employees, or passing along a lower profit to its shareholders. In practice, it's most likely that the two former options will be chosen, which screw the little guy the most - although all three screw the little guy directly, provided he is a member of the investor class.

Numbers 1 & 2 in your list is an easy sell, in my opinion. To number 1, I would add that it will also encourage foreign companies to locate in the US, increasing the amount of jobs available and resulting in more competition for quality workers, raising wages. To number 2, I would add the rhetorical question(which is applicable to just about any tax cut), "would you rather see your pocketbook and the company you work for grow, or would you rather see government grow?"

Number 3 - a bit tougher, as it requires people to realize that businesses DO NOT pay taxes... Perhaps an angle could be - "politicians know that businesses don't pay taxes, and to raise the tax revenue, instead of taxing you directly and costing them votes, they sneakily decided to tax business, which really is a tax on you." The key is getting people to realize that their standard of living will go up through a combination of higher wages, lower prices, and better returns on their investments.

There are all kinds of benefits for the corporate rate to be zero, and anyone can rattle off a list of at least a few. Once people realize that businesses, in fact, cannot pay taxes, what's the reasoning for not cutting them to zero - "I like the government using sneaky taxes and want to screw myself so long as it hurts Walmart(even though it really doesn't)"?

HTML Help for Red Staters

Small business often turns into big business.

More importantly, "American" business is owned by and employs American citizens. Are American citizens in the nexus of "small business" somehow more worthy of reduced tax burdens and increased competitiveness than the citizens in the nexus of "big business"?

But...

How about we cut spending to make up any differences in tax revenues?

Yes, yes, a thousand times, yes.

99% of independent enterprises have fewer than 500 workers - http://usinfo.state.gov/products/pubs/oecon/chap4.htm

I doubt any business wants to shift workers overseas, as it would be much easier to manage the workers directly rather than 1000s of miles away. However, outsourcing has to happen and helps US citizens - we are in a global economy, and business is forced to compete with numerous competitors around the globe. We can either embrace the lower costs for goods and services that outsourcing results in, or we can try and setup some huge bureaucracy to insulate us from the real world. Try and figure out a scenario on how you're going to keep Johnny Wagonwheelmaker from losing his job in the US if there's a global market in wagon wheels. Would it entail tariffs? Tax breaks or loopholes for wagon wheel firms?

Big business becomes insulated from competition because of business taxes, and you may be surprised how many big businesses give to Democrats. Big business has the people to exploit the tax code, but the small business is unlikely to, and this keeps small business down. As a small business owner myself, I can attest to the fact that a majority of my firm's expenses are spent on accountants and lawyers trying to comply with the rules and regulations of both the marketplace and the tax code, and these costs dwarf the product development expenses(which should be our largest expense, given that it is a software firm).

The freebie accrues to the American people, not the business, the business is just an entity.

If we can get you behind eliminating corporate taxes, there's hope for the country after all....

But the direct answer to your question is:
This isn't about maximizing government revenues. It's aboujt growing our economy and encouraging a return of US based manufacturing.

I suspect that most of the "lost" revenue from corporate taxes would be made up by increases in overall income tax receipts due to a boom in overall employment income. But I really don't care if the government makes a dime in return or not. Eliminating business income tax would be a boon for our country, a boon for employment, a boon for manufacturing, a boon for.... well everyone. If it resulted in $350 billion less revenue for the federal government it's worth every penny. Far more return on investment than any government run program we could spend the money on instead.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

I am not a dogmatic Liberal. Just because some established "Liberal" claims some policy is a Liberal policy doesn't mean I have to. And, IMO, open and efficient markets are a liberal position.

Having said I can't say I care much for you reasoning because it can be used regarding ANY tax. The government still has to pay their bills. So either we choose to increase other taxes, and I don't believe that Blackhedd's suggestion of raising bottom half earners taxes will even come close to offsetting the tax revenue loss.

Of course we could just put it on the tab. But it seems to me that Federal deficit spending is contributing to our current woes. And considering that in 10 years time the government will no longer be able to hide deficit spending behind FICA surpluses, I think it would be imprudent to look for ways to cut more revenues.

This has always been my problem with the Conservative on taxes. You guys think that all taxes should be cut. One week it's income taxes, the next week it's corporate taxes, the next week it's estate taxes. The problem is that we still need to pay for stuff and until both sides can come up with real spending cuts, and I don't see that happening anytime soon, tax cuts are a double edged sword.

So as I said, I'm all for a corporate tax rate cut. But I want to hear how that revenue loss will be mitigated.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

To a certain degree, the tax revenues that may be lost will mitigate itself through taxes on the resultant higher wages, more economic activity, less need for welfare programs due to higher employment, etc.

However, to the extent that tax revenues MAY be lost, how about just cutting spending? Revenues aren't the problem, wateful spending is.

If you have a plan for cutting spending that has a shot in heck of passing Congress I'm all ears.

But I don't see any Congresscritters who are seriously suggesting spending cuts*.

We can't keep wishing that Federal spending will get in check on its own. It requires people to experience some pain. It requires people to accept cuts in services they may feel important. I see political will for that.

* - Ron Paul is not a serious person.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

Congress has a way of spending all the tax money raised and then some. The more you give them the more ways they find to spend it and then some.

Maybe shutting off the tap will slow them down a bit. You can't stop a drunk from drinking, but you can slow him down if you close the bar a little early.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

has never worked. It just raises the Federal debt because the Congresscritters are more than willing to engage in borrow and spend. Heck it's politically easier to do that than tax and spend.

The only way that will eventually work is we start to impact our credit worthiness. But that is a high price to pay to make a point.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

Feeding it just seems to increase it's appettite. The federal deficit will increase either way.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

We had a surplus in 2000. And we could achieve a surplus again.

However we need to realize that we are limited in our spending.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

some middle class tax cuts during the Clinton years. It didn't seem to harm the surplus at that time.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

I certainly would not try to suggest that all tax cuts are bad. Sometimes they can be very good. And sometimes they can be harmless.

Without looking at the tax cuts you are referring to I can't really say what impact they had.

Somehow I suspect they didn't cut revenues by nearly 400 billion annually though.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

...that I know is that it resulted from the final stages of the stock market bubble, which was exacerbated by gushers of money-creation by the Federal Reserve as they tried to contain the effects of the financial crises of 1997 ("Asian flu") and 1998 ("Long-Term").

The stock market peaked in the spring of 2000. GW Bush came to the White House with everyone from Alan Greenspan on down expecting to have to deal with a huge surplus. But when tax season rolled the following April, it became apparent that there would be a large deficit instead.

Some people also give credit to the spending restraint shown for a brief and shining moment by Republican Congresses in the mid-Nineties.

How would we do that now? The Fed could create all the money in the world now, and it probably wouldn't generate another stock market bubble. We know that trick already. And besides, we're in a credit-induced recession now.

The Clintons were also busy mothballing the military, which is what Democrats mean anytime they talk about 'downsizing the government'.

Stare decisis is fo' suckas -- Feddie

It seems everyone and their brother is blaming the Fed these days for our woes. They all think the Fed was wrong to keep rates so low for so long.

Do you agree with this argument? It seems a little too pat for me. I'm sure it has contributed to it but has credit really exceeded production to point that these rates are the catalyst for what appears to be a recession of some degree in the not so distant future.

A friend of mine is a trader with GFT and he is very bearish about the dollar. Personally I think he is way too pessimistic but he doesn't paint a pretty picture. He claims that January is going to be a bloodbath.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

And just ignore me if this was a private conversation.....

I don't think the fed did it, and I'm pretty sure there's no single simple 'he did it' answer. I start with the original political forces that led to loosening up of credit standards, but hey, what do I know?

I think the fed for many months has been trying to walk an impossible tightwire (and pulling it off as well as possible) trying to stave off competing bad things. The dollar has been the inevitable consequence, because no external pressure can artificially replace legitimate market forces forever.

Something has to give.

Stare decisis is fo' suckas -- Feddie

Don't worry, I wouldn't cite Ron Paul for anything, except as an example of a non-serious person.

You are correct that it's almost impossible to kill spending once it has started, and that is a huge problem - too many people have their own little special interest that they feel the need to force us all to pay for(through govt) and politicians are all too happy to comply. If we could just hold spending constant, even if it is adjusted for inflation, the increase in growth, spurred by cutting business taxes to 0, should take care of the revenue side of equation relatively quickly.

I support PayGo is because any spending increases must be accompanied with a revenue-neutralizing cut or tax increase. Now they may lead to more taxes but at least those tax hikes can be laid at the feet of the Congresscritters that approved them.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

I think the idea of Pay-Go is great, but I think that in practice it has about no chance of taking hold, it simply goes too much against politicians' instincts of wanting it both ways... There has to be a way to attract good people to run for office, and get them to stay good people once they're in DC.

How about tying Congressional pay to real growth in GDP? Say give them $500,000 for each 1% the economy grows in real terms over some threshold. You might spend a couple billion in paying Congress in a good year, but it would be a small price to pay for the hundreds of billions or trillions that the economy would benefit by.

Given congressmen a huge raise/bonus for something they have little control over doesn't sound like a good idea to me. I think we need to move to random district drawing (literally random, a computer could do) and accept that reelction is the best incentive we've got.

I believe they have more control than one might think and there needs to be a way of aligning the people's interest with the politicians.

How about instead of a random district drawing, just pick our representatives by a random drawing - something like the Buckley line(at least I think it was him) about rather being governed by the first 535 names in the phone book than the ivy league faculty...

it aligns the congressman with the interest of their constituients - far more effectively and directly than tying them to a braod measure like GDP growth.

about how the Venetian ruler was appointed. Apparently it was a multi-round process in which the initial balloters were randomly drawn.

Here ya go. This month's Atlantic primary sources....

Old doges can teach modern political scientists new tricks, according to a paper by two computer scientists who analyzed the long and cumbersome— but ultimately very effective—means by which the Venetian Republic elected its sovereign-for-life. From 1268 to the fall of the republic, in 1797, Venice’s council of oligarchs took 10 rounds to choose each doge, with the first nine rounds determining the electors for the next round and the final round picking a winner. Five of the first eight rounds were decided not by election but by the drawing of lots. This injection of randomness into the process, the authors argue, conferred considerable advantages over proportional-representation or simple-majority systems, and may explain the republic’s great durability. The element of uncertainty forced electors to weigh minority opinions with special care; it also encouraged compromise and guarded against corruption. Moreover, by accepting an arduous selection process (which in the days before probability theory must have seemed highly arbitrary), Venice’s oligarchs demonstrated to the people their collective commitment to the republic.

http://www.theatlantic.com/doc/200712/primarysources

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

Now that's an interesting way to choose your governance - I love it!

Regarding elections to the previous commentor - they rightfully should fix things if people aren't happy, and likely did a better job in the past, but now we've gotten to the point where more people are on the government dole than are not. Thus, the system intended by the framers has become bastardized to the point where (some, perhaps a majority of)people will vote for the representitive more likely to screw the other 434 districts, even though it isn't going to maximize the benefits to everyone. Perhaps the game theory post author of a few days back can shed some light on the principle involved here?

My point in throwing the compensation idea out there is that there has to be a better way of aligning everyone's interests. I know it's probably a pipe dream to change anything the way I suggested, but there has to be a way to get the best and the brightest out there fixing government.

I think it would be reasonable to provide, like many businesses do, an incentive for those who work in government to suggest ways to save money and then pay out a percentage of the savings to the employee who suggested it.

"...open and efficient markets are a liberal position."

I can but that they are a classical liberal position, but I do not see them as a modern liberal position.

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

Typo change but to buy.

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

But I view myself more as a Liberal in the classic sense.

I do not believe in defending sacred cows. I believe in coming up with ways to improve society. If a traditionally Conservative idea can solve a problem, great. If a traditionally Liberal idea can, that's great as well.

That's also why I am unphased by terms such as "Socialist". I care about solutions not labels.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

I get a vibe from you that suggests you believe that most anything that ails us has some kind of solution out there -- and that, moreover, these solutions can be had by making good policy.

Yeah, let's forget labels for a second. I don't think they're unimportant. But they're at least irrelevant to this point.

Humans are imperfect and, thus, so are human institutions. I've never bought into the enlightenment philosophy that man can overcome anything (even his own nature, if need be). Sometimes -- a lot of times -- these "solutions" we come up with are hardly worth what we have to give up to implement them. And, even then, they don't typically solve a whole lot.

So we're typically left only to judge how noble the intentions were -- while we watch (for instance) Medicare, Social Security, and Medicaid singlehandedly blast our public fiscal condition into oblivion. But, hey, at least we did so while providing income and healthcare for retirees, right?

Can you honestly read the headlines out of UK and Canada regarding healthcare and conclude that they've cracked that nut? That they've found the end of the rainbow and forged a path for the rest of us to follow?

Or is it more realistic to think that something like healthcare policy is more of a Hobson's Choice where you have to decide which imperfections you're more willing to shoulder?

Starting about 1965, the federal government took notice that public education was producing less than desirable results. The federal government had, for some 180 years prior, basically stayed out of the regulation of public education. But under the guise of the anti-poverty initiatives, Congress passed the Elementary and Secondary Education Act. A little over a decade later, the Department of Education was created.

Has public education been improved by these things (along with Head Start, NCLB, and all the various other federal "solutions" to poor public education)? I suppose you couldn't fairly say that it's been harmed by it. But we've spent a lot of money on....well, I'm not sure what we've spent it on.

But it doesn't really matter, does it? It doesn't matter that our federal initiatives to improve public education have failed. It just matters that we cared enough to try to fix them -- and that we try, try again.

Suffice it to say, problems like this just don't really exist in the private sector. Because, there, if you fail, you cease to exist and somebody else will satisfy the needs of paying customers. But the failure of a business rarely hurts the consumers -- they're actually helped by it.

We get in a harrumph about school voucher programs because they threaten to take money away from troubled schools. Well, yeah, that's kinda the idea. What other kind of institution gets more money for performing poorly? I know that I don't in my business -- though I wish I did, it would make profitability so much easier.

But the bottom line is: I think there are problems we have, just because we're such imperfect creatures living in an imperfect world, that just aren't going to be solved. We may wish to trade one set of problems for another in those cases. But let's not fool ourselves into thinking that there's nothing we can't overcome.

It would be great if we have great, high-quality, low-cost healthcare for every man, woman, and child. But we'll never get to such a place.

Some of the points I agree with.

First off I don't believe in change for the sake of change. And I don't believe in implementing something simply because the intentions are noble.

But I can also see the positive side of policies that many here disdain. Social Security, for all its flaws, has been a net positive service for this country. It has aided millions of people that would likely have been destitute with out that program. It may not be the most efficient solution but it is a functional one. And had Social Security not started off being required to pay benefits to a bunch of people that never dropped a dime into it, it would be an immeasurably better program.

Health care is an extremely difficult problem because it is hideously expensive and generally insulated from free market pressures(while cost is generally reflective of supply and demand, both demand and supply are largely inelastic especially demand).

I think school vouchers are a FINE idea PROVIDED that the program is carried out in good faith and not intended as an end around to take down the public education system at the knees. And until our public schools stop being paid for primarily through property taxes, I don't see how a federal voucher system has any merit.

I don't believe that perfect solutions exist for anything. However that doesn't mean we can't flawed, but superior, solutions to what we have today.

There are those who look at things the way they are, and ask why ... I dream of things that never were and ask why not. - Robert Kennedy

.

"This is because they are afraid to lose the wealth; they are afraid to lose the power; they are afraid of the discussion."
QFE

absentee

I'm pretty sure people have already tried that, since getting taxed once is still better than twice, so avoiding the income tax would be something worth doing.

HTML Help for Red Staters

You are better off going with a sole proprietorship, partnership, or subchapter S, paying taxes on it only once (on your personal return) and never having to pay taxes on it again while maintaining free use of your money. There's no advantage to funneling them through a corporate entity right now.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

I'm proposing to eliminate the corporate income tax. You're saying that a clever individual might capitalize a corporation and have the corporation invest the money, accrue the proceeds and leave them in the corporation forever.

Terrific! No problem. The equivalent to that already exists today. It's called a Roth IRA. The only difference is that the Roth is limited to a certain amount of contributions per year, whereas your idea would be unlimited. All the better.

Don't forget that a corporation can't consume anything. You have to distribute funds out of a corporation before the owners of the company can consume them. At that point, there's a personal income tax liability.

Corporate expenditures - which might not happen without corporate tax. In other words, the corporation can spend whatever it wants, including buying me clothes and toasters, but it can't currently consider it all business expense for tax purposes. If you don't audit tax filings, you don't know whether the expenditures are truly 'business expenditures' or 'consumption'.

The only difference is that the Roth is limited to a certain amount of contributions per year

It is actually more comparable to a traditional deductible IRA or 401(k) than it is to a Roth, since you pay taxes up front in the case of a Roth. In any case, we don't allow people to make unlimited contributions to a Roth IRA, a traditional IRA, a 401(k), a 403(b), a Roth 401(k), or any other kind of tax deferred (or otherwise tax advantaged) savings vehicle.

People would put millions of dollars into a Roth if they could. We limit them to a skimpy few thou a year. This is because we don't want to deny the government too much of that sweet revenue down the road. We also force seniors to withdraw money from their traditional IRAs because we want the revenue from the taxes they are forced to pay when they withdraw.

Leaving a whole bunch of untaxed money on the table is not really something the government is very big on... so this is a huge problem that will result in this plan having some very nasty consequences if it were to somehow pass. The Democrats will find a way to solve the problem, and it will be very ugly. Remember how the AMT started... and that was intended to fix a much smaller and easier to fix problem.

As far as corporations not being able to consume anything, they certainly can. The hard part is justifying those expenses in a way that the IRS will believe they are business expenses, and not compensation. But it can be and certainly is done.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

My mistake, you're right on the Roth and traditional question.

At the end of the day, what I'm really saying here is that the government simply should not have all that sweet revenue. It's one thing to more heavily tax personal income, but I contend that it's far more damaging economically to tax productivity (in the form of business income and capital gains).

My argument won't make any sense to anyone who takes the view that the shareholders of corporations are separate and distinct from everyone else. In other words, if you don't understand or accept that everyone benefits from a larger, more dynamic and growing economy.

In Reagan's day, this was called "trickle-down" economics and was derided by every Democrat and every liberal from that day until now.

But in going the other direction ("soak the rich"), the chickens are coming home to roost. We're now at the point of seriously damaging the ability of our economy to generate prosperity and to compete with far more dynamic economies elsewhere.

But the counterarguments here have taken one of two forms: either the government will never allow us to take away their gravy, or the government shouldn't allow us to take away their gravy. You seem to be straddling the fence.

Personal expenditures disguised as business expenses: that's fraud, and straightforward theft of shareholder property. That it's against the law is the least of my problems with it. As a director of several corporations, I see all different kinds of red when managers get into sh*t like that.

It's illustrative that you're taking the govt's side in this

I'm all for denying the government revenue, but I'm not for creating big loopholes in the tax code to do so. I'd much prefer simply cutting rates across the board. If there was a way to eliminate corporate taxes without the loophole (and the subsequent "WE MUST CLOSE THAT LOOPHOLE" solutions that will inevitably come after), I'd be all for it. This crap is why I hate basing taxation on income at all.

Personal expenditures disguised as business expenses: that's fraud, and straightforward theft of shareholder property.

In a publicly held corporation, sure. Not so much in a privately held corporation being used as a tax shelter. In that case all the shareholders can agree that the corporation needs a fleet of Gulfstreams. Furthermore, the shareholders can agree to reimburse the corporation the full commercial fare for any personal trips they take on their fleet of Gulfstream. The shareholders can decide to purchase some fancy paintings at auction and let the corporation "store" them on the walls of their homes. The shareholders can decide to have the corporation buy penthouse apartments in Manhattan then rent it out to the shareholders for below market rates. There's certainly some gray here, but it isn't fraud and it is doubtful anyone would be called on this stuff unless it was totally egregious.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

...then there are other ways to do it than with a sham corporation. If you're trying to shelter real income by leaving it in a corporation as retained earnings, and then consuming it for the benefit of the shareholders, I think there are built-in limits.

What do most people have to spend their money on? Food, shelter, clothing, medical services for the kids, etc. Buying paintings and leaving them on the wall in your corporate office doesn't do much to further those goals. At some point, the money has to come out of the corporation.

I've purchased Manhattan apartments for the use of executives before, but only in cases when we hired guys that lived in other cities and had to commute weekly.

As far as art is concerned: I personally know some highly rapacious shareholders who forced a household-name corporation to divest a marvelous collection of Impressionist masters (which I also saw with my own eyes, and was incredible).

Many (perhaps most) large corporations live in a permanent state of tax audit, and that's not going to change, even if the corporate income tax goes away. I think you're overplaying the potential for abuse.

What I'm concerned about are the small corporations set up for the purpose of sheltering income. Other small, privately held corporations that will certainly get involved in this as well. There's far too much money to be saved NOT to do it.

That is a huge cause for concern, not only because of the impact on revenue (the government will certainly make up for the lost revenue elsewhere), but also because of the impact the attempts to fix that loophole will have. Those "fixes" will likely affect all corporations and they are likely to be extremely ugly. And there's going to be no alternative because there isn't a non-ugly fix for this problem, aside from abolishing the income tax altogether.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

...tried and failed to get away with. Something tells me the IRS isn't going to have any trouble policing this kind of activity.

But your concern seems to be that there will be a public outcry against people who shelter income by leaving it in small, closely-held corporations as retained earnings and then fraudulently consuming it in the form of luxury goods and other nonproductive purchases.

I say: if you can create a micro-business that throws off so much extra income that you can afford to burn it down like that, more power to you.

there would still be plenty of poor people, they would just import more.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

I saw research the other day that showed that people are willing to give up material goods of their own if it means that they can make other people who are more prosperous give up more.

This is pretty much the founding principle of the party right here.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

I was under the impression that S-Corp profits are pass-through tax liability just like an LLC? It wouldn't have any more benefit than we are seeing now.

And I hate to sound naive on this, but I am a small business owner so this stuff always interests me. But how would this plan not give full fledged corporations an advantage on a small business (LLC or S-Corp)? One has to pay taxes on the company profits while the other doesn't.

Subchapter S pass through earnings. As for small businesses, the smart ones would reorganize as a normal corporation. It's not that expensive or difficult to do, and if there was no tax filing requirement, you don't have the nightmare tax forms to deal with.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

I'm going to connect a few dots that you may not have intended so correct me if necessary.

You're saying that large corporations (which are almost always C corporations) are now disadvantaged vis-a-vis S corporations and LLCs because of their tax treatment. And this is the reason why it's possible for there to be so many small businesses.

So if we eliminated the corporate income tax, the general tendency would be to make large corporations more competitive and thus crowd out the little guys. Right?

There actually may be something to that. I don't quite buy it because there are several other important drivers for small-business formation. But roughly half the employees in the US work for Fortune 500 companies.

It's right to be interested in the unintended consequences of what I'm proposing. But I have to remind you of the bigger picture: we face a burning fire of growing sclerosis and uncompetitiveness that will impact our children's lives in very painful ways. And the government is to blame for a big part of it.

I don't want to see the value of the dollar collapse more every day. The only way to bring it back it to start making goods and services that people want to buy.

I agree with your ideas, I just think that something should also have to be done to help out small businesses too. And my argument isn't trying to portray the "big bad business putting down the small guys", it's just about fairness. I don't think the 500 store chain of coffee shops should be taxed 0% while the husband and wife coffee shop is taxed at over 30%.

My solution would be creating a different type of corporation (or just changing some of the rules on an S-Corp). Allow them to not be taxed on corporate profits, but also give them some of the flexibility and ease that they need.

We both want the same thing. I just think it's important not to overlook the two guys working out of their own garage. They may just end up becoming the next Google.

Ok, I like this a lot. Here's the modification that we make for S-corporations and LLCs:

Allow them to accrue retained earnings, just as C corporations do.

This would solve the biggest disaster that you face when you're trying to grow up a micro- or a nano-business. Under current rules, you're forced to dump all of your profits out of the company on December 31 so you can be taxed on them.

But what if you wanted to use that money to hire some additional workers? You're screwed, and by extension, so are the people you might have hired, and the government, which won't get to tax the earnings of the people you don't hire.

And don't forget the original feature of my proposal: there are no corporate income taxes either, so retained earnings for either S or C corporations are not taxed.

As a side effect (whether good or bad I don't know), these proposals together will eliminate many of the differences between S and C corporations. We'll certainly want to keep the lighter reporting and audit requirements on S corporations.

You're not forced to dump your profits so you can be taxed on them. You don't need to pull money out of the S corp. But at the end of the year you have $100k net profit, you will have $100k of profit to show on your tax returns. Doesn't mean you need to pay yourself that $100k and take it out.

from the US is booming to places like South America, while inbound is in the tank. (Suspect the China traffic is not affected, but they did not mention that.)

The weaker dollar is definitely having a rapid, positive impact on our current-account balance. Now just imagine what would happen if Americans actually started producing more and better goods and services for export, as a result of more business-friendly government policy.

America has the most efficient manufacturing in the world, by quite a large margin. I've carefully avoided our production mix on this thread (although others have not), because I'm not sure that we have comparative advantage in manufacturing per se.

But I have no question whatsoever that all sectors of the private economy would benefit if we shoved the government's boot off its neck.

which is a little frightening.

On paper I love the idea of the Fair Tax. But my question is this. How do you stop companies from finding ways to re-classify everything they sell as used instead of new?

Is if someone pays the tax on it and someone actually uses it for a reason not related to tax avoidance.

It's a basic principle of tax enforcement that everything you do must be done for a legitimate business purpose and "so I can minimize my tax bill" does not qualify as a valid one. This is all up to the IRS's discretion and they will go back and retroactively make tax shelters illegal and nail anyone who used them in the past when they find that one is abusive.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

If I own a car dealership, why can't I have my brother buy the cars, sell it to me for a low price, I'll use the cars for a couple days, then sell it as used? How is the government going to make judgements on whether something is used for tax avoidance or simply because I'm a big car aficianado who likes to buy a new car every week?

In that instance why does the government care? It seems they would still get their sales tax money on your brother's sale to you.

If you are buying cars retail for less than you are selling them after they have been "used", there's some pretty obvious tax avoidance going on there. There are much, much more complicated and sneakier tax avoidance scams being busted by the IRS all the time. This would just be blatant.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

How does the IRS ever know that i sold it used for more than I bought it? Are we requiring filing of all used sales as well?

You are right, there are far sneakeir schemes out there and no one should be naive enough to think that when the same ingenuity is applied to any new tax system they won't find sneaky schemes again - the difference here is you have reduced the number of parties reporting, greatly increasing the oppurtunity to get away with said schemes.

You are invulnerable to audits. He's not off the hook and could still be pretty easily busted by a friend, employee, customer, or just about anybody else. The methods are the same as the ones they use to bust people who don't pay taxes on their unreported income.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

Busted for what though? Is there any law against buying a new car everyday and selling it the next?

Participating in bogus transactions to avoid taxes. Whether a transaction is bogus is up to the IRS to decide. It isn't even a tough call in this case. I already explained how he would get busted for it.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

FYI: In PA it is illegal to sell more than three automobiles in the same year without a dealer’s license

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

It doesn't have to be less. My brother buys a car from Ford for $10,000. He sells it to me for $10,500. I drive it around for a day and then sell it on my lot for $16,000. My car is going to be very similar to that car on the "new car lot" that is selling for the same price. The difference is that my "used car dealership" doesn't require you to pay a huge tax.

Is our government going to really enforce every new and used car sale and try to determine intent? This little scheme is quite simple, real businesses will be much more savvy. Just seems like there are quite a few ways to game the system, and those that actually play by the rules will be the ones that are hurt.

In your hypothetical he sells a "used" car for $5500 more than he paid for it brand new. He paid $5500 less than the fair market value for the vehicle. That's a huge red flag right there. If he sold it for what he paid for it (to avoid the red flag), he would gain nothing on the transaction.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

I sold my "used" home for more than I paid for it brand new. Would this throw up red flags as well? Is the government going to go around policing every sale that is made that doesn't match market value? Seems like an impossible task.

Fair Market Value is already relied on extensively throughout the current tax code. There are a whole lot of times you have to value something and that value has to be accurate or it will have tax implications. So the IRS already polices that.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

How easy fair market value is (and now they have to use a lot more of it under fas 157). If that is the basis of tax accounting under the fair tax you are not simplifying anything.

The IRS already deals with this issue. Not that it is super easy to figure in all cases... though in the case of the hypothetical, it certainly would be easy to figure.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

of the fair tax in elimination of the IRS, simplification of taxe filing and reduced audit costs - yet it seems when you get into the details none of those promises will be met.

HTML Help for Red Staters

If it does go somewhere it is going to be replaced with another agency with a different name. It could probably be downsized, though, since it will have far fewer returns to go through and far fewer filers to audit.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

sturner, that is a good question and I'm not the one to answer it, but that won't stop me from expressing an opinion. Before I wised up and quit the law business, I was a tax lawyer. I spent a good deal of time fighting over what was and was not income under the Code. And right now I am engaged in an attempt to save a manufacturing client $1 million in a local tax matter and we are fighting over what is and what is not inventory. I don't belive the new versus used question could possibly be more complicated than either of the aforementioned.

Also, the money under the Fair Tax, as I understand it, would be collected at the point of retail sale. The states already have efficient retail sales tax collection system. Sales taxes are the one tax in my state the government is really good at collecting.

If your point related to graft, I agree the Fair Tax would be open to graft, but no more so than the current system and probably less.

No way am I signing on to something that creates a government department to send a check to every single America every month/quarter. Don't think it can be demagogued? Let's make it means tested. Let's raise the amount given to help the "poor" no the "poor and the middle class no, the "poor, middle and lower upper middle class." There can be millions of ways to tinker with it just like the current code.

___________________________________
Two thirds of the world is covered by water,
the other third is covered by Champ Bailey.

Darin, I am no fan of “progressive taxes.” In fact my least favorite aspect of the FairTax, is the prebate. The prebate is a necessary evil in the current political world. The prebate is a necessary evil because serious tax reform will require the support of Conservatives, RINO’s, independents, and perhaps some d’s. Any attempt at serious tax reform without a “progressive” component will fail to garner the necessary support of RINO’s, and independents, and thus fail to be enacted.

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---