Passing the Tax Burden to Working Americans Via The Pass Through Loophole

Please excuse me while I jump up and down on this keyboard trying to flag attention to one of the most egregious GOP give-aways to the top 1% of American income earners.  It isn’t as though the Pass Through Loophole hasn’t garnered attention, it just doesn’t seem to have broken through the dismal cloud of information and misinformation about the GOP tax plan and into enough sunlight.

“The big one in the tax plan issued last week by the GOP and President Trump involves what’s known opaquely as “pass-through” business income. Even that term might have been too revealing, so the document the Republicans issued described it even more obscurely as a “tax rate structure for small businesses.” That’s also dishonest, however, because the businesses it affects are often nothing like “small.” [LAT]

There’s nothing new about legislative obfuscation of legislative intent — but this one is a major way to ease the burden on the 1% and put more pressure on the working and middle class Americans to make up the difference.   Here’s how it works:

“Pass-through” income is business income that’s reported to the IRS only by individual owners of, or partners in, the business. These businesses can be organized as partnerships, S-corporations, or sole proprietorships. They’re distinguished from C-corporations, which are almost always big businesses with public stockholders; C-corporations pay the corporate income tax, and the shareholders pay personal income tax on their dividends and capital gains.

In other words, if a business is a partnership, S-corporation, or a sole proprietorship it doesn’t pay corporate tax rates.  The income earned is reported by individuals.  Now, here’s how the Republican plan would specifically benefit the top 1%:

Currently, the top marginal individual rate is 39.6%; the new tax proposal would reduce the top rate on pass-through income to 25%. Pass-through income from an S-corporation, by the way, already is exempted from the Affordable Care Act surcharges that raised the top income tax rate on some high-income earners by as much as 4.7 percentage points.

So, if the business is an S-corporation, sole proprietorship, or partnership the tax rate is 25%.   Thus, if Desert Beacon were to become Desert Beacon LLC the income tax reduction would be from a maximum of 39.6% to 25%.   Now, who are those who tend to form the businesses which qualify for the LLC Loophole?

“Pass-through business income is substantially more concentrated among high-earners” than traditional business income, Treasury Department economist Michael Cooper and several colleagues observed in a 2015 paper. They also found that about one-fifth of it went to partners that were hard to identify, and 15% got sucked up into circles of partnership-owning partnerships, complicating IRS analyses.”

I sincerely hope the reader isn’t too surprised that these tax avoidance strategies are practiced mostly by high-earners.   Let’s take a closer look at the summary of that 2015 NBER paper:

Pass-through” businesses like partnerships and S-corporations now generate over half of U.S. business income and account for much of the post-1980 rise in the top- 1% income share. We use administrative tax data from 2011 to identify pass-through business owners and estimate how much tax they pay. We present three findings. (1) Relative to traditional business income, pass-through business income is substantially more concentrated among high-earners. (2) Partnership ownership is opaque: 20% of the income goes to unclassifiable partners, and 15% of the income is earned in circularly owned partnerships. (3) The average federal income tax rate on U.S. pass- through business income is 19%|much lower than the average rate on traditional corporations. If pass-through activity had remained at 1980’s low level, strong but straightforward assumptions imply that the 2011 average U.S. tax rate on total U.S. business income would have been 28% rather than 24%, and tax revenue would have been approximately $100 billion higher. (emphasis added)

Therefore, if someone is trying to pass this off as a “middle class” tax cut, or a “small business” tax cut, the appropriate (and perhaps most polite) response is BALDERDASH.

It should come as no surprise that Kansas, under the spell of Brownback-ism, tried opening the LLC loophole as a way to “create jobs.”  It failed, and failed miserably.  Not only did the state find itself in a terrible revenue position, losing money for schools, transportation, and other government services, but it allowed high-income earners to stash more cash.  Case in point: KU basketball coach Bill Self was avoiding most Kansas income taxes on his $3 million salary by parking most of his earnings in an LLC.  Even some of the tax freeloaders were beginning to feel like tax freeloaders by late Summer 2016.  [see also NYT]

And, no one should suggest the amount of money lost because of the ‘reformed’ Kansas tax structure was negligible:

For fiscal year 2014, which ended on June 30, the state collected $330 million less in taxes than it had forecast, and $700 million less than it had collected in the prior year.  Those are big numbers in a state that spends about $6 billion annually from its general fund, and the revenue weakness led both Moody’s and Standard & Poor’s to cut Kansas’ credit rating this year. [NYT]

The situation hasn’t gotten any better.   There were promises made:

In 2012, Kansas Gov. Sam Brownback signed a bill that, among other things, substantially cut the state’s top tax rate and exempted “pass-through” business income from taxation (President Trump’s tax plan includes a similar loophole). The architects of Brownback’s plan predicted that it would provide an “immediate and lasting boost” to the state’s economy.

And promises not kept. The 2017 numbers are truly remarkable, and not in a good way:

Real GDP growth in Kansas since the fourth quarter of 2012 (Brownback’s cuts took effect in January 2013) has been relatively slow, at 6.1 percent through the third quarter of 2016. That’s about three-fourths of U.S. GDP growth over that same period (8.3 percent). A similar story holds for private employment growth: 5.0 percent in Kansas between December 2012 and March 2017, 9.1 percent in the U.S. overall. [WaPo]

The Kansas Legislature was so disappointed in the Great Brownback Experiment it voted to change the tax law — and the governor vetoed their bill.

“Unfortunately, that part of the plan — what Brownback called an economic “shot of adrenaline ” — hasn’t materialized. The state’s budget deficit ballooned to $350 million. And the small-business provision also created new ways for residents to avoid taxes, meaning more lost tax revenue and compliance headaches for the state.” [Time]

Just what we don’t need — lost tax revenue and compliance headaches.  The bottom line of this easy route to the bottom is that:

(1) Claims that pass through exemptions and tax cuts will create new revenue have already prove erroneous.  Witness what happened to Kansas.

(2) The loss of revenue from the pass through exemptions was serious and exacerbated an already tight budget situation.

(3) Claims that the tax ‘reform’ would help small middle class business owners proved elusive — the overwhelming numbers of those who benefited, and will benefit, were high income earners.

This would be a good time to contact Senator Dean Heller (R-NV) to let him know that no one is fooled by changing the name from “pass through” to “tax rate structure for small business;” it’s still a way to shift the burden of maintaining government services from high income earners to middle and working class Americans.   The Senator can be reached at 202-224-6244; 775-686-5770; or 702-388-6605.

Think of the Children! GOP tax plan is hazardous for children

I’m so old I remember when Republicans would bellow “Think of the Children” every time tax proposals were discussed and each time there was a proposal to spend a dime on anything.  Now they have a tax proposal which doesn’t help Nevada’s children — no matter how many times they invoke the Growth Fairy and insinuate the new plan will be better for “working families.”  Not so fast.  Here’s what their tax plan does:

Removes the Personal Exemption: The current tax code allows families a tax exemption of $4,050 per person. For some families, the loss of the personal exemption is recovered through the tax bill’s increase of the standard deduction to $12,000 for single filers and $24,000 for joint (married) filers. However, single parents with more than one child and married couples with three or more children would see their taxable income increase. [CFC]

Okay, so that category of families who will be “helped” doesn’t include single parents with more than one child, or married couples with three or more children…and this is “family friendly?” Thus a single parent can only have one child and benefit from the GOP tax plan, and a married couple can’t have three or more … who’s left?  But wait, there’s another blow to follow:

Insufficiently Increases the Child Tax Credit: The tax bill increases the current Child Tax Credit from $1,000 to $1,600, with an additional $300 credit per parent. The addition of the Family Credit is a marginal improvement over current law, but not for families with children who are working-class or living in poverty, argues Senator Marco Rubio. Because the increases are not refundable, they won’t apply to families living under the poverty threshold, and the $300 parent credits would expire after five years. The proposal to index the refundable portion to inflation is also insufficient, as it uses a less generous estimate and ceases upon reaching $1600. (emphasis added)  [CFC]

That $600 increase looks good until the curtain is pulled back and the proposal doesn’t really apply to children in working class families…which would be most of them.  Notice the magic expiration date, that’s a recurring feature in the GOP plan wherein breaks for individuals and families expire but the breaks for corporations don’t.   However, we’re not through here:

Repeals the Adoption Tax Credit: The adoption tax credit, which is capped at $13,570 per adopted child is a vital support for families and helps alleviate the costs of adoption fees. The Adoption Tax Credit is an important tool for children in the child welfare system to achieve permanency, as it helps defray the expensive process of adoption, especially for children with high needs. In 2014 alone, 74,000 families claimed the credit. [CFC]

Thus much for the old line about supporting adoptions and being “pro-life.” We’ve posted before about average adoption costs, and here the GOP goes again: The Mouth says one thing while the hands do another.

The bottom line is that as far as Nevada families are concerned (1) the personal exemption is inadequate; (2) the child tax credit is insufficient; and (3) the elimination of adoption tax credits is unconscionable.   This really isn’t a great formula for the benefit of Nevada families and their children.

Voters in Nevada District 2 can let Representative Mark Amodei know how they feel about this at: 775-686-5760; 775-777-7705; or 202-225-6155.

Senator Heller can be contacted at: 702-388-6605; 775-686-5770; and 202-224-6244.

Taxscam 101: A Look At Deductions Lost by Individuals and Families (Part 2)

In general, the Republican tax plan makes tax cuts for corporations and businesses permanent while making those for individuals and joint filers temporary.  Further, those closed loopholes are YOURS.  Those special interests are homeowners, students, and employees.  The short version is: The loopholes being closed are those which benefit working Americans and not those which benefit the 1% or corporate America.

Here are a few: (pdf)

Section 1204: Under the provision, the deduction for interest on education loans and the deduction for qualified tuition and related expenses would be repealed. The exclusion for interest on United States savings bonds used to pay qualified higher education expenses, the exclusion for qualified tuition reduction programs, and the exclusion for employer-provided education assistance programs would also be repealed.

One of the ways the tax code can be used to encourage people to do certain things is by giving people a deduction for it — like deductions for the interest paid on student loans.  It really makes no sense to pontificate on the jobs/education mismatch if one isn’t going to help people retrain for new positions.  Nor does it help people wanting to enter STEM jobs to tell them, go ahead but we aren’t going to offer any assistance like a tax deduction for the student loan interest you’re paying.  And you can’t even deduct the interest paid by your US Savings Bonds used to pay educational expenses!

Section 1303: Under the provision, individuals would not be allowed an itemized deduction for State and local income or sales taxes, but would continue to be entitled to a deduction for State and local income or sales taxes paid or accrued in carrying on a trade or business or producing income. Individuals would continue to be allowed to claim an itemized deduction for real property taxes paid up to $10,000.

This provision doesn’t hit Nevada (with no income taxes) all that hard, but it does hurt states that do have an income tax — like the other 43 of them.  Notice the phrase “or producing income?”  if your tax liabilities come from (1) carrying on a trade, or (2) running a business, or (3) producing income — you get to deduct them.   Now, what produces “income” without trade or business activities?  If you guessed “investments” you’d be correct.

Section 1304: Under the provision, the deduction for personal casualty losses would generally be repealed. The provision would be effective for tax years beginning after 2017. The deduction for personal casualty losses associated with special disaster relief legislation would not be affected.

We’ve highlighted this one previously, and no matter how you cut it, unless Congress votes to declare your area a national disaster (like Texas after Hurricane Harvey) your personal casualty losses aren’t deductible.  Thus, if everything you own is pretty much gone after the earthquake, wildland fire, blizzard, or whatever… unless you get the Special Nod from Congress, YOYO.

Section 1307: Under the provision, an individual would not be allowed an itemized deduction for tax preparation expenses. The provision would be effective for tax years beginning after 2017.

Remember the Republicans are touting this bill as a Job Creator — a notion as fictional as the “job creators” who sit around exchanging hybrid and artificial financial products — but consider for a moment the jobs this section eliminates.  About 43% of Americans file their taxes from home (using some tax software or the plastic brains calculator and some pencil sharpening) the rest use a tax preparation service — an industry sector with about 109,000 firms in 2012, and a 2% growth rate to 2015.  Further, “The vast majority of tax preparers are small businesses – 37% are run by a single person, while 53% employ less than ten people.”   And, yet we hear the Republicans claim to be all about “small businesses.”  The big accounting firms are going to do quite well under the GOP plan, those Mom & Pop bookkeeping services or small local accounting firms/franchises are the ones to worry about.

Section 1308: Current law: Under current law, a taxpayer may claim an itemized deduction for out-of-pocket medical expenses of the taxpayer, a spouse, or a dependent. This deduction is allowed only to the extent the expenses exceed ten percent of the taxpayer’s adjusted gross income. Provision: Under the provision, the itemized deduction for medical expenses would be repealed. The provision would be effective for tax years beginning after 2017.

Again, this one! Of all the egregious provisions in the Republican plan this has to be the very worst.

Section 1310: Under current law, a taxpayer may claim a deduction for moving expenses incurred in connection with starting a new job, regardless of whether or not the taxpayer itemizes his deductions. To qualify, the new workplace generally must be at least 50 miles farther from the former residence than the former place of work or, if the taxpayer had no former workplace, at least 50 miles from the former residence.
Provision: Under the provision, the deduction for moving expenses would be repealed. The provision would be effective for tax years beginning after 2017.

And this one again. Notice it’s all on the individual employee — the JCT expects this will put about $10.6 billion in the Treasury from 2018 to 2027. ($1.06 billion each year)  For about a billion bucks a person could buy a couple of Airbus 380s.  Not exactly a major revenue stream for the government in comparison to what employees would face in a major career move or reassignment.

Why are we discussing these items? Because the Republicans want a plan of which 80% of the benefits go to the top 1% of the population.  But, how about those ads on TV about how much money we’ll get back to put in our own pockets?  A bit of unsolicited advice: (1) the numbers are fudgy — too much of it depends on the Growth Fairy waving her magic wand; (2) the numbers are fudgy — the studies from which the numbers are selected aren’t very well tested; and (3) the numbers are fudgy — the numbers actually show us that what the Republicans are proposing is a deficit financed tax cut.  And, here we we’re thinking they were “deficit hawks” and all for “fiscal responsibility” and “lower national indebtedness.”  Maybe not. so. much.

Taxscam 101 Part One — Satisfy the 1% and Soak the Rest of Us

I think it’s safe to assume that Representative Mark Amodei (R-NV2) will be supporting the House Republican version of the Tax Cut Cut Cut… the last three words indicating what will happen for corporations, not what average Nevada income earners can expect from the proposal.  USA Today has a preliminary summation of some deductions INDIVIDUALS and FAMILIES won’t be able to use, that increase in the standard deduction is supposed to make up for this?   USA Today’s points are listed below, in red font.

Adoption: A tax credit worth up to $13,750 per child would end.  It’s a little hard to explain this one, given the GOP “pro-life” stance. It’s even harder to understand when the average cost for an adoption (2012-2013) was $39,996 using an adoption agency and $34,093 for an “independent” adoption. [AmAdopt]  Eliminating the tax credit to alleviate the impact of these expenses seems a strange way of encouraging couples to adopt children in need of permanent homes.

Alimony: To eliminate what Ways and Means Committee documents referred to as a “divorce subsidy,” alimony would no longer be deductible by the payor for decrees issued after 2017. Payments would be excluded from the recipient’s income.  I’m not at all certain that rebranding alimony as a “divorce subsidy” encourages support for single parents? This would also seem to make it all the more difficult for a parent to make child support payments?

Classroom costs: Teachers could no longer write off the cost of supplies they buy.  The reality is that not so long ago school districts kept supplies from pencils to facial tissues on hand; today these items (along with hand sanitizer) end up on lists of items parents are expected to purchase when the school year begins.  What isn’t subsidized by parents whose children are enrolled in cash strapped districts is usually purchased by teachers, to the tune of an average of $500 per teacher per year, with some teachers spending much more. [CNN money]  It’s been reasonably obvious Republicans aren’t great friends of public school teachers — but this suggestion is a direct slap at teacher’s own bank accounts.

College boosters: Sports fans would no longer be able to deduct 80% of the cost of donations to colleges if they are made only to become eligible to buy seats for games or get preferences such as prime parking spots.  The University of Minnesota isn’t sure what will happen to its program in light of this proposal, and universities in Nevada probably aren’t either.   UNLV and UNR both use booster donations to support their athletic scholarship funds. Perhaps lost in this controversial proposal is the notion that scholarship funds are, in most cases, not limited to a particular program but also support our “Olympic Sports.”  Donors to UNR and UNLV athletic funds might want to ask Representative Amodei why he might be in favor of this Republican plan.

Disaster losses: Currently, losses from theft or events such as flood, fire or tornado that exceed 10% of adjusted gross income are deductible. The bill would repeal that deduction, with one exception — disasters given special treatment by a prior act of Congress. A law enacted Sept. 29 increased the deduction for losses caused by Hurricanes Harvey, Irma and Maria, and it was sponsored by Rep. Kevin Brady, R-Texas. Brady, the chairman of the Ways and Means Committee, is also sponsoring the tax overhaul.  How interesting — the plan doesn’t affect those battered by “Harvey” in Texas — but Florida, Puerto Rico, and others it’s YOYO time as far as the Republicans are concerned.  Since when do we, as a nation, not give people a break when they’ve lost everything, or nearly everything in a natural disaster?

Employee achievement awards: Complicated rules that allowed some cash awards from employers to be tax-free to the worker would become taxable.  Another interesting point — corporations can expect a big tax cuts, but employees earning cash awards from those corporations would be required to pay taxes on these kinds of achievement awards.

Employer-provided housing: Rules allowing for some workers to get housing and meals tax-free from their employers would face a new cap of $50,000, and benefits would be phased out for those earning more than $120,000.  So, if the employer has you (and perhaps your family) parked in “West Moose Bay” where groceries have to be flown in, and “housing” is only provided by the corporation — the subsidy is taxable?  And we haven’t even mentioned that Section 1310 eliminates moving expenses. (pdf)

Home sale gains: Right now, the gain on the sale of a home is not taxable if it is under $500,000 for joint filers as long as the home was the owner’s primary residence for two of the previous five years. New rules would require a home to be the primary home for five of the past eight years to qualify, and the income exclusion would be phased out for taxpayers with incomes over $500,000.  I suppose we can kiss the Bush Administration’s emphasis on home ownership goodbye? Little wonder there’s opposition to this proposal from the housing industry — and from those who construct homes as well. There’s more from USA Today on the topic of housing at this link.

Major medical costs: The decision to eliminate the deduction for medical expenses exceeding 7.5% of adjusted gross income was one of the bill’s “tough calls,” Brady said Friday. “The call is this: Do we want a tax code that has special provisions that you may need once in your life, or do we want a tax code that lowers rates every year of your life?” he said.  This may take the prize for lame explanations — ever.  Consider for a moment the victims of the Las Vegas shooting, some of whom will be facing major medical expenses exceeding 7.5% of their AGI — not just now but for years to come.  The idea that we should eliminate affordable comprehensive health insurance is bad enough, but this notion is downright heinous.  And, this from those who want to cut Medicare and Medicaid?

And this isn’t all — there are more atrocities in the USA Today article, and more specifics in the Ways and Means Committee summary of the bill.  (pdf)

Not to put too fine a point to it, but this bill, which will most likely be supported by Representative Amodei, could have been drafted by accountants and tax lawyers for major corporations and the top 1% of American income owners — to be paid for by those who are working in everyday jobs, who have to move to find employment, who are adoptive parents, who are victims of natural disasters, who are facing major medical expenses…

Everything Old Is New Again: GOP Tax Plan Misses Most Of The Nevada Middle

I think we’re going to have to agree that Republicans will call anything a “middle class tax cut” because it sounds good — not necessarily because the tax cuts are primarily for the benefit of middle income people.  Right off the bat, we have to take some care with what constitutes “middle class” and for this one of the best calculators is provided by Pew Research.

For example, a single person earning $65,000 pretax income living in the Reno area is definitely in the “middle,” like 53% of the income earners in that metropolitan region.  A household of four, in which the annual income is $142,000 is in the same middle position.  However, if we enter an annual income of $250,000 for a family of four in the Reno area, then the calculation is that the family is in the upper income tier, along with about 17% of other Reno area residents.   The status is about the same for this hypothetical family living in the Las Vegas area, only the income is comparable to 15% of the population.  Thus when the GOP discusses incomes above $200,000 as “middle class” they’re out of the calculation range — which maximizes closer to $150,000.

We should note that the middle bracket of the proposed tax plan is at a 25% rate for incomes between $45,000 and $200,000.  This modification allows the inclusion of those who would otherwise be classified as Upper income in Nevada metropolitan areas (those with incomes above $150,000) into the Middle range.  10.2% of Nevada income tax filers in 2015 reported incomes between $100,000 and $200,000.  Only 2.48% of Nevada filers reported incomes between $200,000 and $500,000.  The air gets thinner in the upper reaches:  0.43% reported incomes between $500,000 and $1 million; only 0.26% reported incomes in excess of $1 million.  (The median household income in Nevada is $51,847 and the per capita income is $26,541.)

In addition to artificially inflating the “middle class,” the Republicans have gift wrapped  their Wish List From Christmas Past — ending the estate tax, and eliminating the Alternative Minimum Tax — neither of which have a single thing to do with being in the Great American Middle.

Nevada has no estate tax, and the federal inheritance tax is on estates in excess of $5.4 million, or $10.9 million per family.  There are approximately 30 estates in Nevada liable for the federal estate tax (2016). [cbpp]  Avoidance of liability for federal estate taxes isn’t a common topic of conversation in Nevada’s 1,016,709 households.   Under the GOP plan the estate maximum would increase to $11.9 million and the tax would be eliminated by 2024. [NPR]

The Alternative Minimum Tax is supposed to insure that higher income households pay something into the federal coffers along with the rest of us:

“Taxpayers pay the higher of either their tax calculated under regular income tax rules or their tax calculated under the alternative minimum tax (AMT) rules. Because the 39.6 percent top rate under the regular income tax is higher than the 28 percent top statutory AMT rate, households with very high incomes who do not attempt to shelter much income typically pay based on the regular income tax system. Households that are not at the very top but still have relatively high incomes face somewhat lower statutory tax rates under the regular tax and are therefore more likely to pay the AMT.” [TPC]

Again, we’re not speaking of The Great American Middle — we’re speaking of those in upper income brackets, whether there are four brackets or seven.   Pro-tip:  If your family has spent time discussing the Alternative Minimum Tax and the Estate Tax — you’re not in the Middle of those 1,016,709 Nevada families.

There’s one other major feature of the Republican tax plan which has precious little to do with Nevada’s middle class — the Pass Through, explained as follows by the Washington Post:

“Pass through” companies. Some wealthy Americans who run businesses structured as sole proprietorships, partnerships or LLCs would get a sizable discount on their taxes. Under the GOP bill, these “pass through” companies would pay a tax rate of only 25 percent on 30 percent of their business income, a big reduction from the 39.6 percent rate some pay now. The bill tries to prevent “service firms” like law firms and accounting firms from being able to pay the lower 25 percent rate, but a good tax lawyer can probably make the case for these firms to qualify. Also, on the campaign trail, Trump said that hedge funds were “getting away with murder” on their taxes and that he would take away carried interest, the popular opening in the tax code these Wall Street titans use. But the bill does not change or eliminate carried interest, which is also used by some real estate developers.”

S’cuse me while I run to my attorney and figure out a way to incorporate myself into a lovely little LLC and thus avoid tax rates paid by “ordinary” people — or, I would if I weren’t an ‘ordinary’ person.  And, we still haven’t toted up the lost deductions — home mortgage interest on loans over $500,000, interest on student loans, tax incentives for hiring veterans and disabled people…  Yes, this does get worse.  Stay tuned.

Tax Cuts, Wages, and Promises, Promises, Promises

That Blue Line on the chart is FRED’s report of gross domestic income, in terms of compensation for employees (wages and salaries) from 1980 to the present.  One of the things to notice is that it keeps rising.  We can explain part of this by taking inflation into account, and some of the bumps and blips by noting that the shaded gray sections represent recessions.  But, it just keeps going up except for the Great Recession brought to us in the wake of the Housing Bubble/Wall Street Casino Crash, compliments of the Wall Street Casino.

Indeed, notice that increase in employees wages and salaries between 1990 and 2000, when the top marginal tax rate increased from 31% to 39.6%, the blue line keeps going upward.   If nothing else, the graphic above illustrates that anyone trying to convince us that increases or decreases in the top marginal rate for income tax payers correlate to increases or decreases in wage and salary compensation trends hasn’t been paying attention.

The Corporate Tax Wrinkle 

Okay, if one can’t make the case that tax cuts for the wealthy won’t “increase” the money in the pockets of middle income Americans, then there’s the Corporate Tax Wrinkle.  Thus, the White House is trying this line:

“The Council of Economic Advisers report argues that high corporate taxes hurt workers in the form of smaller paychecks and that worker incomes rise sharply when corporate rates fall. It points to “the deteriorating relationship between wages of American workers and U.S. corporate profits” and says, essentially, that high corporate taxes have encouraged companies to shift capital abroad rather than flow profits to workers through pay increases.”

Here’s the first problem — this statement assumes that high corporate taxes cause companies to “shift capital abroad.”  This conveniently ignores some other reasons corporations seek to invest overseas.  Let’s make a quick list: (1) There’s good old fashioned market seeking.  In this case the company is looking for new customers for its goods or services, and it may be that the domestic market is fairly well saturated so looking abroad makes perfect sense.  This is especially true for technology firms which often find that the smallest market needed to drive development is larger than some of the largest national markets.  (2)  Resource seeking.  Labor costs may be cheaper in another foreign market, or there may be quicker access to natural resources in a foreign location.  (3) Strategy.  Imagine that a corporation is looking to improve its distribution network, or to take advantage of new technologies; a company might decide to partner with a foreign corporation which specializes in some specific phase of production.  And then there are (4) Efficiency elements.  We can insert some common elements into this category like trade agreements which give an advantage to plant or service locations because of tariff agreements, or there could be currency exchange rate considerations involved.

Therefore, we can quickly see that the corporate tax environment is a part of the decision making process about shifting capital overseas, but it certainly isn’t the only factor, and it may not even be the most important one.  What the White House Wrinkle demands is that we believe if Congress reduces corporate taxes this will offset all the other other reasons a corporation may want to shift some of its operations overseas.  Frankly, this really isn’t rational.

And, then there’s the second problem —  hoarding.

“The cash held overseas by US firms has continued to grow at a rapid pace, rising to almost $2.5tn in 2015. The substantial tax bill most firms would face if they attempted to bring this cash home, however, means that it is still very unlikely to ever be repatriated under the current system.”

Gee, if we could “repatriate” all this money imagine the increase in wages!  Not. So. Fast. The firms stashing the most cash overseas are Apple, Microsoft, Cisco, Alphabet (Google), and Oracle. [MW]  Right off the bat we notice that these are all tech firms, and as mentioned above tech firms are constantly market and resource seeking — while a repatriation scheme may bring some of the cash home, there’s still a reason the firms may want to keep capital available for foreign operations; it wouldn’t matter what domestic tax system was in place.

Another point that should be made more often is that this money isn’t “trapped” overseas.   Where are these “deferred profits?”

“A 2010 survey of 27 large U.S. multinationals found nearly half of their “overseas” tax-deferred profits were invested in U.S. assets, including U.S. dollars deposited in U.S. banks or invested in U.S. Treasury bonds or other U.S. government securities, securities and bonds issued by U.S. corporations, and U.S. mutual funds and stocks.”

What’s “trapped” are the tax payments due on the funds — not the funds themselves, 50% of which are already happily running along in the corporate revenue streams or “reinvested” in U.S. assets.   And if we could “bring home”  (or get out of the bank) the other half would this mean higher wages?  Remember, we tried this once before:

“In 2004, lawmakers allowed multinationals to repatriate more than $300 billion in profits at a greatly reduced tax rate. But independent studies largely conclude that firms used those profits to pay cash to shareholders, not to invest or create U.S. jobs. In fact, many firms laid off large numbers of U.S. workers even while reaping multi-billion-dollar tax cuts. Today, offshore profits are concentrated in a few large multinationals that have recently made record cash payouts to shareholders by buying back stock, showing that they already have enough cash on hand to make whatever investments they project would be profitable. Repatriated profits would likely similarly be paid out to shareholders, not invested.”

Who are those “buyback monsters” who’ve been demonstrating they already have enough cash on hand to make any investments they think might create even more profits?   Apple is one, then there’s Exxon Mobil, IBM, General Electric, Pfizer, and McDonald’s. [CNBC]  If Apple is one of the ‘monsters,’ then why would anyone believe that allowing the tech giant to “repatriate” more money at reduced tax rates would make them do anything other than what they’ve been doing — using the capital to buyback stock?  McDonald’s?  If they have enough cash on hand to indulge in financial engineering to increase their stock prices, what would make anyone believe they’d change midstream and start advocating for raising the minimum wage?

Mythological Means

It’s really hard to imagine where that $4,000 pay raise is supposed to come from if corporations are given more tax breaks.  There’s a question of the provenance of that $4,000 number in the first place, and in the second place it’s a dubious estimate at best.  We should also notice that the claim isn’t being framed in context; there may be some gains for employees BUT they are long term, certainly not short-term or annual gains. [FC]

“It’s important to note that any gain to workers would only come in the long term — over several years. Furthermore, most households would not see a gain as large as the “average” or mean figure, which is pulled up by very high incomes of a relative few. In 2016, the average household income was $83,143 as we’ve already noted, but the median or midpoint for household income was $59,039, meaning that half of all households received less.”  [FC]

This is another version of the old story:  The Sultan of Brunei walks into a room with nine members of the Little Sisters of the Poor and the average (mean) wage skyrockets.  Take that $4,000 figure with a couple of boxes of Morton’s Salt.

The Bottom Line 

So, what do we know?  We know that there’s no direct correlation between low top marginal rates for individual filers and wage increases.  We know that corporations make decisions about off shore operations for a variety of reasons, taxes being only part of the equation.  We know that corporations have several options for investing cash (foreign or domestic) only one of which — seemingly the least likely — is to pay increased wages and salaries.  We know that corporations use “financial engineering” to increase their stock value, or increase dividends to their shareholders.  We know that even accepting the 20-25% labor liability for corporate taxation the returns to labor are long (not short or annual) term benefits of little value in terms of household budgeting; it’s NOT like having any useful amount of “cash in your pocket.”

In short, we probably know what we’ve suspected all along.  The current Republican version of “tax reform” is simply a gift to corporations, extremely wealthy persons, and a nice gesture from the Haves to the Have Mores.

And for this we are to accept cuts in Medicare to the tune of $472.9 billion over the next ten years, between $1 and $1.5 trillion in cuts to Medicaid, cuts to food assistance programs, cuts to low income heating assistance programs, cuts to children’s health insurance, cuts to education, small business support, and Meals on Wheels….

New Bull, Same Old Product: The Latest Incarnation of GOP Tax Cuts

For some reason, probably known but to the major donors of the Republican Party, “we” need a tax cut.  The rationale for this exercise echos the ubiquitous adolescent argument for automobile ownership — I need the car to go to work, I need to work to pay for the car.   In this instance, it’s argued that we need the tax cut to promote growth, and the growth to pay for the tax cut.  It’s the same old southbound product of a northbound male bovine we’ve heard so many times before.

Even the GOP assertions connect to this circuitous argument.  A tax cut, we are told, will promote economic growth — and Everyone will win.  Unfortunately, there’s no unanimous jury decision on this question.  First, there are some common methodological problems with altogether too many academic studies purporting to answer the question definitively.  Secondly, there are further issues intrinsic to discussion about how the tax cuts are to be offset.  Not all tax cut/reform proposals are created equal.

“The results suggest that not all tax changes will have the same impact on growth. Reforms that improve incentives, reduce existing subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the long-term size of the economy, but may also create trade-offs between equity and efficiency.” [Gale, Brookings]

Therefore, if we step back and adopt the centrist conclusions of the Gale-Samwick Study quoted above, there appear to be some boxes to be checked off if the goal is to encourage long term economic growth, and one of those boxes calls for the avoidance of deficit financed tax cuts.

We are cautioned by Republican advocates that there are only two ways to reduce a federal deficit, either raise taxes or reduce spending.  The last iteration of a Republican tax cut, was not only deficit financed but the deficit was enhanced by the spending associated with the wars in Afghanistan and Iraq.  Since raising revenue by increasing taxation is anathema to Republican orthodoxy then there must be a reduction in spending.  Enter the proposals from the current Republicans to reduce Medicare spending by $472.9 billion over the next decade, and a further reduction of $1 to $1.5 trillion in cuts to the Medicaid program.

The current FY 2018 budget makes some assumptions which may be quickly frustrated. For example, the budget assumes no further military conflicts — the military expenditures assume readiness costs, not military operations; and, cuts to domestic expenditures  to a level not seen since the Hoover Administration.

If this sounds like the same old prescriptions from GOP decades past, there’s a reason for it which becomes obvious when the framework is examined.  What we have herein is NOT a new proposal for tax reform, but a recycling of ideas included in every recent Republican tax plan.

Cut the corporate tax rate from 35% to 20%.  As noted previously in this site,  there are several options available to corporations, none of which have anything to do with increasing employment or raising wages — share buybacks, dividend payments, mergers and acquisitions, corporate bonuses, management compensation, etc.  The GOP argument rests on the fluid assumption that corporations will reward the nation with more plant expansion, research and development, and rising wages — without a scintilla of proof this will actually happen.

The 25% (15%) pass through rate.  This purports to be a bonus for small businesses.  In the real world most small businesses are already paying this rate or rates even lower.  Consider the following evaluation of the Pass Through business:

“Finally, the top statutory rates and average effective rates mask substantial differences in what individual business owners pay in taxes. Most businesses are small, earn relatively modest income, and thus face relatively low bracket rates. As a result, more than 85 percent of pass-through businesses in 2014 faced a top rate of 25 percent or less; only 3 percent faced a marginal rate greater than 30 percent (Figure 6).^[10] However, a much larger share of pass-through income does face high marginal income tax rates. Almost half of pass-through income in 2014 came from businesses with a top rate of at least 35 percent.  In other words, a small number of large pass-throughs are responsible for the vast majority of the sector’s tax burden.”  (emphasis added)

Consumer Warning: Beware of muddled conflation of pass through taxation with income from pass through businesses.  85% of small businesses are already paying low pass through rates, and the income is coming from a small number of very wealthy pass through businesses.  It doesn’t take too much imagination to figure out these are lobby shops, law firms, and other wealthy operations which bear little resemblance to small law offices and other independent businesses.

The Death Tax is Coming, The Death Tax is Coming.  I have no reason to believe that there won’t be one more “small business owner,” or one more family farmer, hauled into camera range at a GOP function who will have some tale of woe about inheritance taxation — or as I prefer to call it: The Paris Hilton Legacy Protection Act.   99.8% of all Americans don’t have to pay the estate tax, and such taxes as are paid are 40% of the excess above $5.45 million.   One other point might be made at this point, it’s not the heirs who pay the estate taxation if any is due — it’s the estate, via the executors.  But the major number here is 99.8%, the 99.8% of Americans who will see absolutely no benefit from this “tax cut” at all.

Eliminating the Alternative Minimum Tax, “which is intended to ensure that higher-income people who take large amounts of deductions and other tax breaks pay at least a minimum level of tax.”   Now, gee, if I could just see a certain President’s tax returns I could tell if he were liable for the AMT?  If I could be reassured that high profile NYC real estate developers, who take a spectacular range of deductions, might have to pay the Alternative Minimum Tax so they aren’t dodging their contributions almost entirely?  However, it’s been since May 20, 2014 since a certain presidential candidate said that if he decided to run for high office he’d release his tax returns — some 1,313 days ago…

In short, there’s nothing new here. It’s the same old south bound produce of a north bound bull.  Repackaged, with a new face in the Oval Office, and I remain convinced that two of our Congressional representatives, Senator Dean Heller and Representative Mark Amodei, will happily twist themselves into rhetorical knots trying to explain how cutting Medicare and Medicaid will benefit middle income Nevadans by pleasing the millionaires and billionaires among us.

Real Nevadans Real Numbers Real Income

The big push of the week appears to be that the Republicans have in mind a “middle class tax cut.”  Notice please that we’re not getting all that much in the way of “tax reform” but we are poised to get a deficit financed tax cut.  And, that WE part doesn’t actually include all that many people who file tax returns from Nevada.

Nevada by the Numbers:  2,940,058 Nevadans filed tax returns in 2015 (the last year for which statistics are available from the IRS.) 655,530 were individual tax returns and 440,130 were filed as joint returns.  There were 233,730 filed as Head of Household. 713,530 filers used paid preparers.  The number in that last category ranges from those who have extremely complicated filings to those of us who simply find it convenient to have someone else fill in the forms, or those who take advantage of tax prep companies who offer free filing services to those who don’t actually owe taxes or have small refunds due from the taxes they’ve already paid.

When we look at the adjusted gross incomes reported by Nevadans it may be useful to put the numbers in some context.  For example, the median income in Nevada is $51,847 and the per capita income is $26,541. The median value of a housing unit owned by the occupant is $173,700 and the median selected mortgage cost is $1,442 per month.  The median gross rent is reported as $973.00.  This gives us a preliminary picture of the 1,016,709 households in Nevada, and our population of 2,940,058.

1,350,730 Nevadans filed income tax returns in 2015.   27.21% of the Nevada filers reported adjusted gross income between $25,000 and $50,000.  13.5% of filers reported AGI between $50,000 and $75,000. 8.15% reported AGI between $75,000 and $100,000.  Another 10.22% reported an AGI between $100,000 and $200,000.  From this point on the percentage of filers by category drops, those reporting AGI between $200,000 and $500,000 were 2.48% of the filers; those reporting AGI between $500,000 and $1 million were 0.43%, and those reporting over $1 million AGI made up 0.26%.

The current (2017) tax brackets and explanations can be found compliments of the Tax Foundation in a convenient table form for single and joint filers. To make a long story a bit shorter, a person would have to have an AGI (adjusted gross income) of at least $191,650 if filing a single return to hit the 33% bracket, and $233,350 if filing a joint return.

The numbers indicate that 48.95% of those filing Federal income tax returns from Nevada are reporting below $100,000 in annual adjusted gross income.  Some of the 138,000 Nevada filings between $100,000 and $200,000 AGI may have been included in the bracket in which there is a $18,735.75 liability plus 28% of an excess over $91,900.  Fewer still would be in the 33% bracket with a liability of $46,643.75 plus 33% over $191,650.  Indeed, only 3.17% of Nevada returns reported AGI over $200,000 annually (35% and 39.6% brackets.)

Where’s the middle? Numbers are objective and instructive, but tax policy can get pretty emotional.   By the numbers a person earning about $52,000 per year in this state is in the “middle.”  Pew Research provides one of the more commonly accepted definitions of Middle Class, “2/3rds to 2 times the national median income for household size.”  In current parlance this would be in a range of $46,960 to $140,900.  If we compare this to the Nevadans filing tax returns in 2015 then 21.74% are in the $50,000 to $100,000 AGI range; some others will be in the $100,000 to $200,000 AGI range (10.22%.) Undifferentiated reporting with two sets of categorization make this a difficult call without being able to drill down into that latter classification of filers)  However, what these numbers do tell us is that to be considered a Middle Class Tax Cut the benefits should accrue to those earning between $46,960 (a little below the Nevada median earnings) and $140,900.

So, how does the current edition of the Republican tax plan fit into “the Middle.”

“Despite repeated promises from Republican lawmakers that the plan is designed to provide relief to the middle class, nearly 30 percent of taxpayers with incomes between $50,000 and $150,000 would see a tax increase, according to the study by the Urban-Brookings Tax Policy Center. The majority of households that made between $150,000 and $300,000 would see a tax increase.” [WaPo]

The report from which the Washington Post article is derived is more specific.

“In 2018, the average tax bill for all income groups would decline. Taxpayers in the bottom 95 percent of the income distribution would see average after-tax incomes increase between 0.5 and 1.2 percent. Taxpayers in the top 1 percent (incomes above $730,000), would receive about 50 percent of the total tax benefit; their after-tax income would increase an average of 8.5 percent. Between 2018 and 2027, the average tax cut as a share of after-tax income would fall for all income groups other than the top 1 percent. In 2027, taxpayers between the 80th and 95th percentiles of income (between about $150,000 and $300,000) would experience a slight tax increase on average.”

There’s something about an analysis from the Tax Foundation reporting that 50% of the total tax benefit going to the top 1% that doesn’t sound precisely like a “middle class tax break.”  In short, the analysis makes it seem much more likely that the plan would be far more beneficial for the Nevada income earners who report AGIs over $500,000 per year, a total of 9,290 filers out of 1,350,730 who filed tax returns.  This really isn’t a “middle class tax cut.” At least not in terms of the real Nevadans, who report their real incomes.

Senator Heller’s Second Shot at Slashing Medicare and Medicaid

“This morning, the Senate Budget Committee will consider a resolution that instructs lawmakers to find ways to reduce Medicaid spending by $1 trillion (and Medicare spending by $473 billion) over the next decade, according to supporting documentation that Democrats are publicizing.” [WaPo]

Here’s the strategy: “A fast-track “reconciliation” process that would allow for tax cuts costing $1.5 trillion over ten years that require only a simple majority to pass.  The $1.5 trillion cost would not have to be offset by closing tax loopholes or ending unproductive tax breaks, and thus would add to the nation’s deficits, which are already growing as the baby boomers retire.  In addition, the resolution would allow the Senate Finance Committee to cut critical programs under its jurisdiction, including Medicaid, Medicare, and basic assistance for poor seniors and people with disabilities, and then use those savings to make the tax cuts even larger (so that the net cost of the tax cuts and the budget cuts combined equaled $1.5 trillion).  The reconciliation process is the same process that Congress tried to use to repeal the ACA and requires only a simple majority to enact law.”  [CBPP] (emphasis added)

And, there we have it: (1) If it’s a Republican budget, then adding to the federal deficit doesn’t matter; (2) in order to provide for tax cuts to the top 1% of income earners in the United States, the Committee can slash funding for Medicaid, Medicare, basic assistance for senior citizens, and people with disabilities.

The trick is that the Senate Republicans have to pass a “budget” slashing spending for those aforementioned Medicare and Medicaid beneficiaries, elderly people in poverty, and disabled people, in order to create ‘space’ for the “reforms” in their tax legislation.  The buck slashing needs to stop here.

Please contact Senator Dean Heller, and let him know that these are not Nevada priorities.

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