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.
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.
The Iowa House of Representatives should definitely not pass HF 230 – to extend the school infrastructure sales tax for another 21 years – to 2050!
In 1998, we were told that the 1% local option tax for school infrastructure would be temporary – for 10 years. In 2008 the temporary tax was changed from a local option to a state-wide sales tax, and was extended for another 22 years – to expire in 2029. Even though we still have 12 years left of the tax, school districts are pressuring the legislature to extend the tax for an additional 21 years!
Why would they want to do this? Because years ago, they borrowed against the future taxes and have already spent the taxes that will be collected during the remaining 12 years. If the tax is extended again, you can bet that some school districts will again quickly borrow against the future taxes and spend the money decades before the taxes are collected.
Do we really need this much money for school infrastructure. Some school districts might need the money, but it appears that many school districts are flush with money and already have excellent facilities. We really should wait until 2029, then allow local school districts have their own local option tax if the local taxpayers believe there is still a need.
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.)
Link to Register article:
The Register still has it wrong. (“Churches cross line with political endorsements”, 4/9/2015 – see link below.) Churches with ministers who advocate for specific candidates should be allowed to be tax exempt. But donors who contribute to them should not get a charitable tax deduction.
There are two types of tax-exempt organizations. First, there are the Charitable, Religious and Educational organizations, (tax code 501c3 organizations), that pay no income taxes, (and often don’t pay other taxes), plus donors get a charitable tax deduction on their income taxes for the amount of their contribution. Second, there are all other tax-exempt organizations that pay no income taxes, (and often don’t pay other taxes), but donors do NOT get a charitable deduction. They are properly classified as tax exempt, since they are organized to not make any kind of profit, but their activities are not charitable, so no charitable tax deduction is given.
There are many tax exempt organizations that do not make any profit, but that are not charitable and whose donors don’t get a tax deduction. They include Rotary clubs, political parties, country clubs, political issue organizations, chambers of commerce, special interest clubs, etc. None of them try to make any profit, but they are not charitable.
To the extent that any not-for-profit organization advocates for or against specific candidates, that organization is not doing charitable work. It is doing political work. Under the principle of equal treatment under the law, donors to churches that advocate for specific candidates should not get a charitable tax deduction. If a church wants its donors to receive a charitable tax deduction for contributions made, then the minister should not advocate for candidates from the pulpit, or through any other communication from the church.
Link to Register editorial: http://www.desmoinesregister.com/story/opinion/editorials/caucus/2015/04/08/rgisters-editorial-churches-cross-line-political-endorsements/25500433/