|I’m not a big tax guy. I find even the Readers Digest version of the rules to be eye-crossing.|
I pay what my accountant and Paychex say I should pay, and I’ve never made enough money to get involved in off-shore tax avoidance schemes, so I’ve stayed off the IRS’ radar.
Some years I’ve crept into the upper brackets, but every year I’ve enjoyed the benefits of living in the United States of America and I consider paying my taxes as paying my dues to live here.
Like most of you, I grit my teeth and roll my eyes when I read that billionaires pay a lower effective income tax rate than the people who clean their offices; or that gigantic corporations reporting billions in profits pay no U.S. income tax.
The Institute on Taxation and Economic Policy (characterized by the NY Times as a “left-leaning group,” wrote in a policy paper that
“91 corporations did not pay federal income taxes on their 2018 U.S. income,” and “Another 56 companies paid effective tax rates between 0 percent and 5 percent on their 2018 income.”
The explanation we hear most often is: I (individual)/we (corporation) pay what the law requires us to pay.
Yeah, I get that, but I also get that lobbying firms in Washington are paid hundreds of thousands of dollars to add or subtract a semi-colon in what the Tax Foundation counts as 2,652 pages of Federal tax statutes.
For example, changing the word “shall” to “may” can save a taxpayer tens of millions of dollars after which that taxpayer can legitimately claim all legally owed taxes have been paid.
I have a long-time ally and acquaintance named Ken Kies who is the managing director of the Federal Policy Group which publishes a twice-daily summary of information around tax policy.
I read it twice a day and understand it about twice a week.
In a note this week, Kies published the following regarding the effective tax rates on the highest earners if current surtaxes proposals are enacted:
Base rate 37%
Plus 5% above $10m
Plus 3% above $25m
Plus 3.8% Medicare tax
“This,” Ken writes, “takes the top individual rate to 48.8%.”
Kies goes on to write:
The total individual rate for people in California (13.3%) and New York City (15%) would be 62.1% and 63.8% respectively.
Jimmy Carter signed a tax bill that put the highest effective Federal rate at 70%. During World War II (and into the Eisenhower Administration) the top marginal rate was 94% applied to any income above $200,000 (about $4.7 million in 2021 dollars).
I’m no accountant, but an effective tax rate above 60% might get me to start looking into the immigration regulations for the Cayman Islands.
I was here in Our Nation’s Capital when the Laffer Curve was the mantra for all of us working on the GOP side of the Congress.
Supply side economist Arthur Laffer posited that the relationship between tax rates and government income is a bell curve where 0% tax rates and 100% tax rates both produce zero government revenue.
But somewhere between those two extremes there is a rate that maximizes incentives to work and make money while providing government the funds necessary to govern.
I just looked up “Arguments against the Laffer Curve” and it seems to come down to: Most people don’t adjust their employment behavior in response to tax rates.
Remember when many conservatives complained that enhanced unemployment benefits during the pre-vaccine COVID-19 period caused people not to look for work?
The enhanced unemployment benefits lapsed in July 2020 and yet, according to the Bureau of Labor Statistics:
“By the last business day of August 2021, there were about 10.44 million job openings in the United States.”
Those at either end of the economic scale are most sensitive to changes in tax rates. Adjustments to tax rates don’t much affect most of us.
Something other than marginal tax rates and enhanced unemployment benefits is driving the labor force and a Nobel Prize in Economics awaits the person or people who can tease it out.
But, as the old saying goes: You can lay every economist in the world end-to-end and they still wouldn’t come to a conclusion.
See you next week.