True North lost in taxation politics

At least the Democrats are consistent. President Obama is targeting the one per cent of the nation’s taxpayers in his campaign for a second term, and as of last week the party’s contenders for Wisconsin governor in the June 5 recall election are sounding the same theme of making the rich pay more.

The case can certainly be made for a minimum tax that makes the millionaire earners pay the percentage the average Joe pays. Proposing that move in the name of equity will sound good, even though it doesn’t raise a lot of dough for either treasury. That revenue ineffectiveness is Problem One with that piece of political rhetoric. Nailing the rich won’t balance the budgets.

Problem Two is that the top earners already pay a huge share of the nation’s taxes at the federal level and in states like Wisconsin. Both income taxes are very progressive.

At the federal level, the households with incomes over $200,000, about 3% of payers, paid 68% of the total in 2010. Those below $50,000, about two-thirds of the payers, paid only 8.5%.

At the Wisconsin level, the top bracket of 7.75%, which was raised one point by Democrats in 2009, ranks 11th highest among the 41 states that levy an income tax. Filers with incomes above $100,000, about 10% of total, paid 73% of total personal income taxes.

So, the question arises, how much more progressivity is “fair.”

When all taxes are thrown in, households with incomes of more than $250,000 are paying more than half their income to the federal, state and local governments. Isn’t half enough?

The Warren Buffets and Mitt Romneys of the world aren’t paying their fair share, for sure, because most of their income comes in the form of capital gains or dividends, both now taxed at the 15% rate at the federal level. Than can be fixed by setting the alternative minimum tax at a higher level for people making a million dollars a year, as the President propounds on the campaign trail.

But, Problem Three then comes into play. That is that the political debate is losing what is called “True North” in business strategic planning. True North means setting the organization’s top goals and then working from there, so that all strategies, tactics and activities align in reaching those goals. True North in the United States today is job creation, and dinking around with the tax code distracts from that cause. Indeed, ham-handed changes for political sound bite purposes can do a lot of harm to job creators.

The job creators are entrepreneurs and their investors. So, it makes nothing but common sense to let the entrepreneurs and their financial backers stay at the 15% capital gains rate. Go ahead and raise the rate on investors in public companies if it needs to be part of a deficit and debt reduction package. Put in flat tax of 25% at the federal level for higher earners and lesser flat rates for lower earners. Then Warren Buffet will pay at least the same rates as his secretary, or higher. Eliminate capital gains treatments for people involved in transactions, like the managers of buy-out funds like Mitt Romney was.

Not so incidentally, President Obama and his wife paid 20.5% in 2011 on an income of $788,000, probably a lower percentage than Buffet’s secretary as well. The flat tax or higher minimum tax should apply to the prez, too. (He could voluntarily pay the difference if he feels so strongly about a 30% rate for million-dollarm earners — or near-million dollar earners.)

But leave people launching new companies alone. They are the nation’s heroes. They are doing patriotic work.

Problem Four is that high rates drive out high earners and people with high net worths. Wisconsin does a great job of that. For comparison sake, Minnesota has 21.4% of households with incomes of $100,000 or more, while Wisconsin has only 16.3%. The point is that unreasonably high rates backfire when it comes to raising tax revenue. People move. The missing high earners are paying taxes in other states. (I know dozens of people who have moved from Wisconsin for tax purposes.)

Another part of the political debate over the next six months has to be about Problem Five, the changing rankings of corporate income taxes that have left with the United States with the highest stated rate in the world at 34%. Other countries have dropped their corporate rates sharply, ranging from 12-20% on the other side of the Atlantic. And, unlike most countries, most states here slap an additional corporate tax on top of the federal. In Wisconsin, it’s 7.9%. Not many corporations pay the full 34%, because there are many forms of credits and deductions, but the U.S. still high and therefore loses competitiveness.

It would be entirely appropriate, though, to apply the minimum tax concept to corporations, as well as to individuals. The armies of tax lawyers and accountants at the big corporations find and lobby for every deduction and exemption known to man. Some big corporations, very profitable corporations, legally pay zip or next to zip, while the smaller firms pay full rates. That’s just not right. Either get rid of the corporate tax for all companies — or even the playing field.

Mature companies don’t create a lot of net new jobs, but they maintain the job base and the supply chains that entrepreneurs sell into. We need them to want to expand here. Besides, most economists agree that most corporate tax gets passed on to individuals in the prices of products and services. The major action on tax revenue is always at the individual level.
Republicans aren’t doing enough for entrepreneurs, but the Democrats don’t seem to under their impact on the job base at all. At least, the Democrats in Wisconsin are not saying so on the campaign trail as they lump the innovators with the wealthy. All four governor candidates assailed “trickle-down” economics.

They don’t get that there are all kinds of wealthy people and all kinds of ways to make a buck. Some are born on third base. Some get rich by entertaining or playing ball. Some get rich by playing with other people’s money; they do transactions. Some earn advanced degrees and earn professional salaries. Some write books like the president. But some create new products or processes or business models and start companies that reinvent the economy. They don’t trickle, they rain value on citizens.

They are where True North lies for job creation in the U.S. economy.

Finally, a tax code that points to True North could unite the country. The Democratic campaign theme on taxes is about dividing the country, an adoption of the Rovian wedge politics mastered on the other side of the aisle.

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  • Jhinwb

    it’s hard to define progressive taxation. most people spouting statistics to support their view they are paying too much taxes fail to mention the PROPORTION of  income lower end earners pay in sales taxes. they fail to include the burden of social security and medicare taxes which are progressively less for high earners. it is ironic that the social security fund is in jeopardy much because it was loaned out to the treasury to pay for less taxes for corporations and wealthy.  somehow we’ve got to realize this country is rich enough to raise everyone up, and when someone is better off that doesn’t mean i’m worse off, no then i’m better off too. i am totally upset to hear people talk resentfully of any taxes as “redistribution of wealth.” sure, i hate taxes and know it’s not how much we take in (it’s sufficient), but how we spend it. i am in the top %15 income, but do not resent paying taxes nor feel i somehow have to fight for my fair share. i was born an american, that has always been wealth enough, and if we do it right being an american will always be wealth achieved.

    • Anonymous

      I don’t resent paying 50% in taxes all-in, but I still believe that our tax structure has to be strategically targeted to job creation. That was my point about True North.

      • Jhinwb

        i’m sure you don’t resent paying taxes, john, you’re not like many others. i just wonder how flat we can make income taxes or fair if we keep changing to “strategically target” for anyone’s particular benefit. arguments for both sides.

  • Jim Lenfestey

    John – the distinctions you describe among ways to make $$$ are very useful for taxation planners in Wisconsin, Minnesota where I live and on the federal level.  I am passing on these comments to my Democratic friends in Minnesota. Why not the  Republicans?  Because they have become so ideologically, pathologically tax adverse, not willing to raise ANY tax at any time.  Yes, we should lower corporate taxes in US, and maintain the entrepreneurial engine, but then capture the other taxes you suggest – wound that there were Republicans who would listen.  

    • Anonymous

      Jim, The essential message to both parties is that not all taxes are created equal when it comes to improving the economy in a global world.

  • A few points:

    –  While I think we need a more efficient tax system I can’t help but notice you are ok with increasing taxes on people other than yourself.  You make clear that small business people be spared from this and you are a small business person.  That’s the problem with the current environment.  People assume someone other than themselves can pay.

    –  Minnesota has higher marginal tax rates than we do in Wisconsin, so I’m not sure that bolsters your point about people having more money there.  

    –  The key to all of this is that we need two things to happen.  The first is the government must become better stewards of the taxpayer’s dollar.  The spending has gotten out of control (and it has been for some time) and it’s probably no coincidence that the state’s with the highest tax rates seem to be the ones with the biggest budget messes.  The other thing that needs to happen is some economic growth.  Raising taxes on people will not help that process.

    • Anonymous

      Take your points entirely. I do pay a rate a whole higher than either candidate for prez. And i stand by my point on business starters. How much more than 50 percent do you want?

      • I don’t think we should be raising taxes on anyone.  Romney is paying a lower rate than you because most of his income is coming from dividends which are already taxed at the corporate level and in part because he gives a pretty high % of his income to charity which is fully deductible and not subject to the AMT.  

        My issue is that it seems we are at a point where most people think that someone else who has more than they do should be paying.  My rate as a business owner is higher than Romney’s as well, but he’s also paying a ton more in taxes than I do.  In short, he’s paying his fair share.

        • Anonymous

          To your point, a flat ax with several tiers would come across to the American people as more fair, I think. Have you seen any polling on a flat tax?

      • One other quick thing.  How are you paying 50%?.  Surely that isn’t your effective rate and it’s impossible for it to even be your marginal rate.  Assuming you are a WI resident the highest marginal rates are 42.75% or 45.65% if you throw in Medicare.  Most people’s effective rates after deductions are much less than that.

        • Anonymous

          I’m adding in everything: about 15% on the first $108,000 of salary for FICA; 5.55% sales tax (in my part of Wisconsin) on an estimated half of income at $250,000; property taxes, 7.75% state tax (offset by its deductibility at the federal level), and the 35% federal rate. Deductions, of course, cut that back. But coming at people in that bracket, if the Bush tax cuts expire at yearend, is a federal rate of 39.6% and an additional 3.8% tax on investment earnings in 2014 under the new health care law. Net it all out and you’re pretty close to the 50% rate, plus or minus. The exception would be people whose income comes more from dividends and capital gains than from “earned income,” like Mitt Romney.