This will be a shorter letter, in keeping with the need for holiday fun and relaxation. However, last week’s letter with my thoughts on what Trump should do generated more responses than any other letter had in the last 17 years. As you might suspect, with a topic so controversial, not everyone agreed with me. But there were many good questions and comments and some thoughtful disagreements, so I want to address a few of those. And I will specifically go into why I seemingly deviate from core conservative principles regarding taxes. It’s all about debt and the consequences of debt – that’s the overriding factor for me. And I’ll try to make the case that there are times when we just have to make hard, even philosophically unpalatable, choices.
Some comments I will excerpt; others I will characterize in general terms; and where appropriate I’ll copy and paste whole comments. So let’s jump in.
Allen Jones · Univ. of Arkansas
Please explain further corporate tax rate of 15% on income above $100,000 with "no deductions period." Sounds like a 15% tax on sales. What do you mean no deductions? Are operating expenses deductions?
Allen, this was probably the most-asked question, and since you asked it most concisely, you get the recognition for it.
No, this is not a sales tax. It is a 15% tax on corporate income. That is normal GAAP accounting income. There are something like 3,400+ different, legal, congressionally mandated corporate tax loopholes and deductions. (I can’t find the exact number right now.) Many of those tax loopholes apply to only one company or one very small industry and are favors from a Congressman or Senator to their main constituents. So when I say no deductions, I mean get rid of every one of those loopholes. I know, I know – I will be goring practically every business’s ox in some way or other. And that’s the problem: Too many people think their industry deserves some breaks and one little loophole is not that big a deal, and the next thing you know there are 3400 of these puppies. And then you find General Electric paying less income tax than I do while making multiple billions of dollars a year.
I might be run out of Texas, because this would likely mean axing the oil depletion allowance, too. Normal depreciation would still apply. For those who are worried about R&D expenses, I would allow accelerated depreciation on R&D, because those are truly expenses, at least in my mind. But the point here is to have as few loopholes as possible (with the only exceptions to be those that clearly, directly create jobs). I will readily admit to not being an accounting expert, but I have looked at a few balance sheets. Corporations would have to pay taxes on what they report to their shareholders or their bankers or even to themselves. Fifteen percent is not that big of a deal in the grand scheme of things. It is actually slightly lower than the current effective rate (depending on which source you go to). I think that under this plan we would actually take in more taxes because we would see corporations come from around the world and domicile here in the United States. And businesses would not go to such drastic lengths to avoid reporting income, so total corporate taxes would increase.
Glen Travers -· London, United Kingdom
VAT is a drag on growth – look at UK and EU – as well as difficult for the unhappiest group in all our economies. This insidious tax is an admission of failure by politicians who promise reductions in income tax in return for proposing a “fairer” direct tax instead of controlling populist unaffordable promises.
Glen, I totally agree with you: a VAT will be a drag on growth. There was a lot of pushback from many readers on the concept of the VAT. So let’s use your question as a springboard into the subject.
First, if you asked me 10 years ago if I would ever even think about a VAT in the US, I would’ve said, “Not no, but hell no. Double hell no!” We were still at a point in 2006 where we could have brought the budget under control, got our hands around the entitlement problems, flatlined spending along the lines of Clinton/Gingrich, and dealt with both the deficit and the debt.