Tax Reform 2017

      

There is a difference between raising tax rates and raising taxes. An increase in tax rates on the rich or anyone else does not always lead to increased government revenues. Historically, almost the opposite has occurred. Over 50 years ago, President Kennedy lowered tax rates and Federal revenues grew dramatically. President Reagan did the same thing with a similar result after he took office.

Even the much-maligned Bush tax cuts did not reduce Federal revenues. In 2002 the Federal government collected 1 Trillion dollars in income taxes and 1.88 Trillion in total revenues. By 2007 after five years of Bush “tax cuts”, Federal income tax collections went up by 50% to over 1.5 Trillion dollars, and total government receipts exceeded 2.5 Trillion. In 2007 the total federal deficit was a mere 160 Billion dollars, the same it had been in 2002. Only with the recession did income tax revenues go down to 2002 levels although total government receipts stayed higher.

Today, total Federal government revenues are the highest they have ever been. Unfortunately, during the Obama administration massive government spending far outstripped the increased revenues. Even if Congress was to tax those making over $250000 at a rate of 100%, it would not come close to dealing with the massive debt roll accumulated during the Obama administration’s years in office.

Ironically for conservatives, it would appear that reductions in tax rates lead to increased government revenues and only enable more government spending. At the same time, it would appear that raising tax rates would actually lead to less revenue for Washington? Why should this be so?

Lower tax rates would actually grow the economy and produce greater revenues for the Federal government. Most people, including those who should know like politicians and newspaper editors, cannot understand the concept.

But there is another factor. Increasing tax rates only increases tax avoidance strategies both legal and illegal. Increasing tax rates on the rich or anyone else will only encourage more tax avoidance since the potential reward gets greater. If someone’s income is taxed at a 50% rate rather than 25%, the potential reward for deferring, sheltering, or otherwise hiding income has doubled.

No one has ever asked Hillary Clinton or her husband why they felt a need to set up the tax exempt Clinton Foundation for their charitable work in the first place. Many financial planners advise high-end clients to set up foundations for tax purposes. We all know of the Gates foundation and the Buffett foundation. Theoretically, since these foundations pay no taxes, more of their money can be used for the charities they wish to support.

 Even assuming that these people had the best of motives, they must have realized that they could achieve greater results with their money than the Federal government could. Why give the government a third or more of your speaking fees when all the fees could go to the Foundation. Of course, they also could be able to maintain control over the tax exempt funds as opposed to leaving it to government bureaucrats to decide. The funds could go to pet causes.

These foundations also help the ultra-rich to avoid dreaded estate or death taxes. Recently multi-billionaire liberal activist George Soros has transferred about 18 Billion dollars to his own foundation. He will eventually die but no death taxes will be paid since his foundation will live on. When I worked as a financial planner, it was common to refer to the estate tax as a “voluntary” tax, a tax only paid by those too lazy or stupid to take measures to avoid or minimize it. Actually, the estate tax accounts for a very small share of federal revenue since estates under $5 Million are exempt from taxation.

There are other legitimate ways for people to shelter income from taxation. For example, taxable withdrawals from IRAs and other retirement plans can be deferred until age 70, and after that only minimum withdrawals need be taken over one’s lifetime. Raising tax rates only discourages taking money out of IRAs. Lowering tax rates would actually increase taxable withdrawals from IRAs and 401k type plans.

President Trump is also right about lowering the Corporate tax rate. Corporations actually don’t pay taxes. The taxes are figured into the price of what their customers pay in the same way that the real estate taxes paid by landlords come out of the rent paid by tenants. Higher corporate taxes are inevitably passed on to the consumer.

Also, corporate accountants are paid to find ways to create strategies that will minimize corporate tax liability. A higher tax rate will inevitably lead to more and more drastic measures. When states raise corporate tax rates, corporations move to more tax friendly states as General Electric did in Connecticut. We all know that the high Federal Corporate tax rate has led many domestic companies to relocate overseas.

Inevitably, increases in tax rates never produce the expected tax revenues. Just look at the state of Connecticut. Two years after his election Democrat Governor Dannell Malloy, and an overwhelmingly Democrat legislature pushed through the largest tax increase in State history. The expected revenues failed to materialize, and the Governor had to raise taxes again to balance his budget. After this second Malloy tax increase, Connecticut is still billions in debt. No wonder the Governor has declined to run again.

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Predators

     

On our ride to JFK airport on a Sunday afternoon two weeks ago to begin our visit to Italy, we encountered more than the usual traffic. First, there was a tremendous backup at the Whitestone Bridge toll plaza because a new system had been put in place to eliminate congestion. Now there was no longer any need to stop or slow down. You just had to keep moving and overhead cameras would record your passage and add the toll to your EX Pass bill or bill you at home. However, on this first day of operation many drivers did not know what to do and the traffic backed up for miles.

Finally, we got through and proceeded onto the heavily congested Van Wyck Expressway.  At least the traffic was moving. But at one point a group of about 50 motorcyclists driving all sorts of two and three wheeled vehicles entered the highway and proceeded to drive in an extremely dangerous and provocative manner. They drove in and out of lanes, or through cars, and many even did “wheelies.” These riders were not middle-aged and overweight Hell’s Angels but mainly young black men.

It was a frightening experience but our experienced limo driver kept his distance from the reckless riders. No police were in sight although I suppose many drivers used their phones to call 911. Fortunately, the gang departed on the next exit and we made it to JFK in time to catch our flight. It was my first experience with these urban street riders but when we returned home a quick google search indicated that what we experienced was becoming common and even violent.

These riders seem to be the beginning of an American ISIS. We worry about isolated acts of terrorism but in the years to come I wonder if urban gangs will see the potential to control parts of American cities. Already, they control or intimidated neighborhoods in places like nearby Bridgeport or notorious Chicago.

Speaking about predators, the day after we arrived in Italy we heard about the terrible shooting in Las Vegas. In this case the predator was a white, 64-year-old accountant who used a small arsenal of high tech weapons to gun down concert goers from a thirty second story hotel window. It seems that predators come in all shapes and sizes.  Authorities are still trying to determine the motive of the deceased assassin.

Finally, during our stay in Italy the local news was full of the charges of sexual predation levelled against Harvey Weinstein, the head of one of Hollywood’s biggest and most profitable movie companies. Weinstein has been charged with preying on young actresses for years and some of his victims are now famous stars. In addition, many claim that they knew that Weinstein was a predator but kept it to themselves for various reasons.  Moreover, many in Hollywood now claim that Weinstein’s behavior has been the norm in Hollywood for years despite the movie industry’s long time support for women’s rights.

It turns out that Hollywood is one of the centers of sexism in this country. It also seems obvious that Hollywood is also one of the centers of violence in this country. While Hollywood moguls and stars support liberal causes like gun control, they continually make movies that are full of graphic gun violence. 

Where do reckless motorcycle riders get their ideas? How did a 64-year-old accountant dream up his shooting scheme? Just the other day I read a story about plastic guns that could not be detected by airport scanners. Such a gun was used by an assassin long ago in a film with Clint Eastwood about an attempt to murder a President. Predatory violence and sexual behavior has long been featured and applauded in the movie industry. It is all well and good to talk about gun control but no one has ever found a way to get guns out of the hands of street gangs, or prevent a solitary madman from preying on innocent people.

But Hollywood could take steps to clean up its own act. Critics today bemoan the Hollywood production code of the 1930s that sought to limit excessive sex and violence in movies. Turner Classic Movies likes to feature these pre-code films but most of them are so poorly made that they are virtually unwatchable. The other day TCM featured Madam Satan, a movie that I defy anyone to watch for more than five minutes.

Only with the restraint imposed on Hollywood by the censorship of the Production Code did the “Golden Age” of film really begin. Instead of relying on blatant sex and violence, movie-makers had to employ all their skills to produce classics like Gone With the Wind, Stagecoach, Casablanca, and The Maltese Falcon. They even created a whole new film style that today is known as film noir that dealt with serious and even dark issues in a powerful, effective, and adult way.

It is time for Hollywood and the whole entertainment industry not only to out and condemn its sexual predators, but also to cease to feature and often glorify predatory sex and violence in films and TV shows.

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