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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