Don’t exempt retirement income from Iowa Income Tax.

Iowa Governor Reynolds made some bold tax proposals in her State of the State address. In addition to a flat tax of 4% on all taxable income, she has proposed that retirement income such as pensions, IRAs, and 401ks be exempt from income tax. She also proposes to exempt cash rent payments received by farmers who are retired.

Social Security income is already exempt in Iowa even though many retired Iowans have higher than average wealth and income. Also, the average farmer is significantly more wealthy than the average Iowan. Farmers also have social security and can have IRAs and/or other retirement income just like everyone else. For some farmers, their cash rent received during retirement could exceed $100,000 per year, just like non-farmer wealthy retired people can have high incomes. There is no good reason why everyone’s retirement income should be tax-exempt.

If any group should have part of their income be exempt from tax, it is those Iowans who have the lowest incomes. It would be better to increase the standard exemption for everyone than to exempt retirement income. That way, the tax relief would go to those who need it most, regardless of age.

Open letter to our federal legislators – please try to balance costs and benefits during this pandemic!

An open letter to our federal representatives  (I emailed this to my three federal representatives:

As you consider how much the federal government should spend in response to the current pandemic, please consider the following:

One trillion dollars equals about $3,000 per person for every man, woman, and child in the U.S., or about $12,000 per family of four!  Please be careful not to spend our tax money on anything that is not needed and not directly caused by the pandemic.  Specifically, there should be no money spent on the following:

• Seniors and others on Medicare, disability, pensions, and other fixed incomes – they will continue to be paid.
• People who have had no reported W-2 earnings during the past year – since they have been getting by on unearned income
• People who have household earnings around or over $75,000 per year – they qualify for unemployment benefits.

Don’t give grants, but make low-interest rate loans available.  We can decide later whether or not to forgive any loans.  Don’t allow unrelated “riders” on any pandemic response bill.  For example, don’t’ forgive student loans, don’t add any permanent employer mandates such as child care, sick pay, paid family leave, etc.  Watch out for and deny other special-interest legislation trying to take advantage of this crisis.

Please try to balance costs versus benefits.  We have lived normally with the flu killing tens of thousands of U.S. citizens every year.  I am a senior – age 66 – and I don’t need any bailout.

Is getting rid of a special interest loophole the same as raising taxes? When general tax rates are being reduced?

The title to an essay by  A.J. Spiker’s recently published in the Des Moines Register was, “Republicans must ignore pleas to raise our taxes”. (11/262017 – see link below.)  The essay advocated for not raising tax rates on carried interest income – bonuses earned by hedge fund managers and real estate development managers. He urged our Senators to make sure the tax bill did not get rid of the special low capital gains tax rate for carried interest.  Regular people who earn the same type of bonuses pay taxes at ordinary Earned Income tax rates.  For years, carried interest has been tax at this lower special rate and those who benefit from it simply don’t want to lose it.  (The same seems to be true for people in every special interest group that gets politically favored tax breaks.  The ask our elected representatives to get rid of all the special tax breaks… except for mine…  which is vitally important to job creation!)

I thought that a stated goal for tax reform is to simplify our 70,000+ page the tax code.  In large part, this means getting rid of the many many special interest tax breaks, and then lowering the tax rates for all.  If certain individuals lose their precious special interest tax breaks and actually have to pay more in taxes, so be it.  They should feel lucky for what they got in the past.  This is part of “draining the swam” that our President has called for.  I urge our elected federal representatives to resist the tremendous pressure that they are under from those who received the tax breaks and their lobbyists, and proceed to get rid of the carried interest and many other special interest tax breaks, and lower general tax rates for all.

Link: https://www.desmoinesregister.com/story/opinion/columnists/iowa-view/2017/11/24/gop-must-ignore-pleas-raise-taxes-carried-interest-capital-gains/887643001/

Trump’s proposed tax rate for “pass-through” businesses is unfair

President Trump has proposed a maximum 25% tax rate on income that individuals receive from “pass through entities”.  Pass through entities are businesses that don’t pay corporate income taxes, but rather pass their net income each year through to the owners to be taxed as part of the owners’ individual tax return.  These pass through entities include S-Corporations, partnerships, limited liability companies (LLCs), and sole proprietorships.  Currently, income from pass through entities is taxed at the same rate as any other ordinary income – up to a maximum rate of 39.5%.  (President Trump’s proposal for ordinary income for most taxpayers is a maximum tax rate of 35%.)  He justifies the lower tax rate for pass through entities because, he says, these pass through businesses are the job creators.

This begs at least two questions:  Do pass through entities really create more jobs than non-pass through entities?  Even if so, why should the income of an employer be taxed at a lower rate than an employee if they earn the same amount?  Tax fairness would dictate that two people with the same income would pay the same amount of tax, regardless of source.

Regarding job creation, it is important to know that pass through entities are not just manufacturers, wholesalers or retailers, who may or may not be job creators.  They are also professionals such as doctors, lawyers, accountants. Most hedge funds and private equity funds are pass through entities.  About 95% of all businesses are pass through entities.  Of those, about 99% have revenues of less than $10 million.  The 1% of pass through entities with revenues of more than $10 million earn about 83% of all profits!  So, some pass through entities are very large, and many owners of pass through entities have very high incomes.  Is it fair for business owners to pay at a 25% rate while regular workers with the same income pay at a 35% rate?  I don’t think so.

I expect to write several blog posts on President Trump’s tax proposal.  The idea of reducing tax rates is a good one – especially if the total plan is revenue neutral and doesn’t increase our $20 Trillion debt.  This means that tax reform that reduces rates must also reduce special tax breaks for politically favored groups and/or reduce spending.  I hope that Congress, which controls all tax legislation, will not “bet on the come” – that is assume future tax revenue will increase due to future growth in the economy.  Our government uses a 10 year look forward to determine the deficit/surplus effect of any change in taxing or spending.  In recent decades, it seems that all tax and spending changes have significant costs up front with the promise of savings toward the end the the 10 year period.  Let’s not keep doing that.

Source: https://www.brookings.edu/research/9-facts-about-pass-through-businesses/

Churches should not be allowed to advocate for or against candidates

I agree with The Des Moines Register editorial that the law that bans churches from endorsing specific candidates, (the Johnson Amendment), should not be repealed.  (See link below.)

Once again though, you did not make clear the difference between all tax-exempt organizations and special 501c3 organizations.  Virtually all political parties, candidate campaign committees, and special interest organizations are tax exempt – they don’t pay income taxes.  But, people who donate money to these various political organizations do not get to deduct their contributions as a “charitable” deduction on their income taxes.

On the other hand, charities, churches and educational organizations are tax exempt under a special tax code section: 501c3.  People who donate money to 501c3 organizations get a charitable tax deduction for the amount of their contribution when computing their income taxes .

Churches, and church officials can advocate all they want about issues without violating the rules for 501c3 organizations.  What they cannot do is advocate for or against any specific candidate.  If they do advocate for or against specific candidates then they should be treated just like any other political organization: their donors should not get a charitable tax deduction for their contributions.  That is what the Johnson Amendment is all about, and it should not be repealed.

Link: http://www.desmoinesregister.com/story/opinion/editorials/2017/02/10/editorial-dont-eliminate-ban-politically-active-churches/97750512/

 

Corporate tax inversion is not cheating

The Register, today 11/27/2015, called corporations “tax cheats” when they try to avoid taxes by changing their “tax home” to a different country with lower rates.

These companies are not cheating. They are playing by the rules. This is what happens when the U.S. has the highest corporate tax rates in the world. We (the U.S.) don’t only tax U.S. based corporations on income earned in the U.S., we also tax them on income earned outside the U.S. – minus a credit for foreign taxes paid.  (That way, we make sure they pay the full U.S. rate on all income.)

This competition among countries to keep corporate income tax rates low is very much like competition among states to keep individual income taxes low. How many Iowans, who earned their wealth while living in Iowa, now live more than half of the year in Florida, South Dakota, or Texas, etc., because those states have no individual income tax? These people are not cheaters. They are following the laws. Tax competition among both states and countries is a good thing – it helps keep a check against ever increasing taxes and spending by governments.

 

Link to Register article:

http://www.desmoinesregister.com/story/opinion/editorials/2015/11/26/editorial-stop-rewarding-tax-cheats-taxpayer-funded-services/76341606/

Don’t demonize Walgreens.

Don’t demonize Walgreens for taking action to legally lower its U.S. federal income taxes.  The Des Moines Register and President Obama are wrong when they say that taking advantage of this legal tax break is unpatriotic.  As the Register reported, Walgreens can save $4 billion in federal taxes over the next 5 years by changing its corporate headquarters to Switzerland.  (See Register article: “Walgreens turns back on taxpayers” 8/3/2014)

The Register asked: “How much profit does a company need?”  “How much is enough?”  They went on to list all of the benefits that Walgreens receives by operating in the U.S. They tried to shame Walgreens for their proposed action, and effectively called for a boycott of Walgreens in protest.

The Register gave lip service to the fact that the U.S. has very high corporate tax rates compared to most other modern countries, and that tax reform is needed to close loopholes and bring down rates.  That should have been the primary message of the editorial, that we need to close loopholes and lower rates, not that Walgreens might take advantage of one.

Many companies and other taxpayers pay substantially lower their taxes by taking advantage of loopholes:  Oil and other natural resource extraction industries have their depletion allowance; hedge fund managers have their “carried interest” bonuses payments.  There are many many types of tax credits and deductions that benefit only politically favored businesses.  Many unfair loopholes go to very wealthy and profitable companies and individuals.  How does Warren Buffet pay less than 20% in federal income taxes?  Loopholes.  Why do some of the largest, wealthiest, most profitable research based companies in Iowa pay no income tax?  Loopholes.  Are all of these people and companies unpatriotic because they don’t pay more taxes than required by law?

In this case, the problem is not Walgreens or the specific loophole.  It is the high corporate income tax rates in the U.S.  The U.S. needs to significantly lower its corporate income tax rates.  Otherwise, over time, companies will actually move their headquarters to lower tax countries.  Given the inherent unfairness of special interest loopholes, and given the unconscionably high U.S. federal debt, it seems obvious that we should close as many of these loopholes as possible, and lower tax rates at the same time in a revenue neutral way.

Full disclosure:  I am a Walgreens stockholder.

Link to Register editorial:  http://www.desmoinesregister.com/story/opinion/editorials/2014/08/03/editorial-walgreens-turns-back-taxpayers/13531911/

The new welfare dependent class – businesses

If seems as if all businesses now require some type of welfare program.  The definition of economic development is grants or loans or special tax breaks given by our government to businesses.  Banks get their welfare indirectly – from loan guarantees from many government programs.  Of course our farmers must be protected from losses by government – through crop insurance subsidies that not only cover natural disasters, but actually protect against price declines.  All types of energy companies receive special tax credits or tax breaks.  The biggest manufacturers in Iowa receive large tax credits for research.  Now, Mediacom and John Deere want a grant of $800,000 from the federal government to help bring high speed internet to farmers who buy high-tech, internet connected tractors that cost hundreds of thousands of dollars.  We should say no!  We need to reverse the trend of expecting taxpayers to fund all types of economic development.  Just as with with individuals and families, welfare for businesses create dependency.  Our economy will continue to grow sluggishly as long as we look to government to manage our economic development.

Means test veterans tax benefit

A bill is quickly moving through the Iowa Legislature that would exempt veterans pension benefits from Iowa Income Tax.  I appreciate the service and sacrifice that veterans have given to our country, but such a benefit should only be given to those veterans who are in need.  Some veterans are millionaires.  We don’t need to exempt their income from Iowa Income tax.  The current bill should be amended to exempt pension payments received only for those veterans whose Adjusted Gross Income is less than $50,000 for individuals and $75,000 for married couples.  Those with incomes above those levels can afford and should help to pay for services provided to Iowans by the State of Iowa..

Income inequality is not the problem.

Income inequality is not a problem in and of itself.  As long a people earn their income through honest, peaceful and voluntary exchange, then there is no moral reason for our government to redistribute that wealth.  What is a problem is when government places its thumb on the scale and unfairly helps the rich to get richer, or hurts the poor and makes them poorer.  To the extent that a person gains wealth by unequal preferential treatment by government, it is morally correct for government to use its force to take away that wealth.

One good example of the many unfair government policies that wrongly favor the rich is the special low income tax rate on “carried interest” income earned by hedge fund managers.  They call it carried interest, but it is nothing more than a bonus based on performance.   In any other situation, this type of income is taxed at regular income tax rates. Somehow, hedge fund managers have sold politicians on the idea that carried interest is a special kind of income that should be taxed at lower rates.  Another example is the Oil Depletion Allowance for oil companies.  Another is farm subsidies for rich farmers.  We do not need to raise tax rates on ordinary income, we do need to do away with the unfair preferences, tax breaks, and subsidies that go mostly to the wealthy.

A good example of government policy that hurts poor people is that of keeping interest rates low in order to prop up housing prices.  If housing prices had been allowed to fall to their free market levels, housing would be much more affordable for poor people.  Instead, our government tries to fix the problem that it helped to create (unaffordable housing) by giving rent subsidies to the poor – creating more dependency on government, but not fixing the underlying causes of the problem.

To misquote Walter Scott, “Oh what a tangled web we weave when first we practice to use our government to achieve social goals.”  The solution to many of our economic problems today is to reduce the size and scope of our government.  Many unfair crony capitalist subsidies and tax breaks exist because our government has expanded far beyond its Constitutionally limited powers.  The primary just powers of government are to protect our lives, liberty and property; and to resolve disputes.  The scope and powers of our current federal government are clearly way beyond the limited government that our founding fathers created.  Lets start by closing unfair tax breaks and lowering spending to match.