The Fetid Swamp Of Tax Reform

Authored by Charles Hugh Smith via OfTwoMinds blog,

The likelihood that either party will ever drain the fetid swamp of corruption that is our tax code is zero, because it's far too profitable for politicos to operate their auction for tax favors.

To understand the U.S. tax code and the endless charade of tax reform, we have to start with four distasteful realities:

1. Ours is not a representational democracy, it's a political auction in which wealth casts the votes that count. Those seeking political influence over issues such as taxation place their bids in the political auction via campaign contributions and lobbying. The winner of the political auction gets favorable treatment, and everyone else ends up subsidizing the gains of the winner.

2. The wealthy pay the vast majority of federal income taxes (as oposed to payroll taxes, i.e. Social Security and Medicare), so tax cuts end up benefiting the wealthy.

High-income Americans pay most income taxes, but enough to be ‘fair’? (Pew Research Center)

In 2014, people with adjusted gross income, or AGI, above $250,000 paid just over half (51.6%) of all individual income taxes, though they accounted for only 2.7% of all returns filed.

By contrast, people with incomes of less than $50,000 accounted for 62.3% of all individual returns filed, but they paid just 5.7% of total taxes.

After all federal taxes are factored in, the U.S. tax system as a whole is progressive. The top 0.1% of families pay the equivalent of 39.2% and the bottom 20% have negative tax rates (that is, they get more money back from the government in the form of refundable tax credits than they pay in taxes).

3. The unseen burden of the tax code is the complexity tax levied on small business, the self-employed and domestic corporations with no access to global tax-avoidance schemes.

4. This complexity is necessary to hide all the special favors won in the political auction. The tax code could be a few pages long: all accounting of income and expenses must conform to accepted accounting rules, and here are the tax rates on net income/earnings.

Any special tax breaks or subsidies would stick out like sore thumbs in a simple tax code, so it's necessary to generate thousands of pages of tax code to create a thicket in which auctioned-off favors can be hidden from public view.

The Tax Foundation explains the three layers of compliance complexity: Title 26 of the U.S. Code, the tax statutes enacted by Congress, run to 2,600 pages. The details are left to the IRS (Internal Revenue Service), which publishes roughly 9,000 pages of regulations.

But wait, there’s more—much more. If you end up in tax court, there’s around 70,000 pages of case law to pore over to make your case.

Playing around with tax brackets skirts the core problem with the U.S. tax system: the entire tax code is little more than a clearing house of political bribes paid for tax breaks and a complexity thicket that requires the services of legions of accountants, tax attorneys, software coders, and specialists in tax avoidance strategies.

This clearing house and complexity thicket are intrinsically unfair, as insiders and the super-wealthy can avoid taxes via political influence and offshore tax havens. This systemic unfairness erodes the social contract’s key compact: that the playing field will be kept more or less level for all participants.

But the U.S. tax system is anything but level. The Institute on Taxation and Economic Policy (ITEP) recently published an analysis of the corporate taxes paid by Fortune 500 companies over the past eight years. Consistently profitable companies paid a federal tax rate of around 21%, considerably lower than the nominal corporate tax rate of 35%. But 18 profitable companies paid no federal taxes over the eight years, and about 50 corporations paid rates of 10% or less.

Immensely profitable corporations such as Apple have mastered the offshore tax avoidance game. Others persuade members of Congress (impolite term: bribe) to include obscure tax breaks tailored to their company in legislation.

So the most successful at gaming the system pay near-zero (saving tens of billions of dollars) while the chumps pay the top rate.

There’s another systemic source of unfairness in the tax code: the gap between the high rates on earned income (wages and salaries) and the much lower rates on unearned income-- what we might characterize as income generated by capital rather than labor: rents, capital gains, speculative gains and so on.

If you manage to earn $500,000 in wages, most of that income is taxed at 33%, and the income above $415,000 is taxed at 39.6%. Meanwhile, the top rate for long-term capital gains is 20%. Over time, that 15% adds up.

In effect, the rich get richer because most of the lower-tax-rate unearned income flows to them.

If we really want to reform federal taxation, we'd do three things:

1. Radically simplify the tax code from thousands of pages to dozens of pages

2. Lower the corporate tax but eliminate all the overseas schemes and scams

3. Increase the tax rate on unearned income above (say) $100,000 annually.

Needless to say, the number of taxpayers with more than $100,000 in unearned income annually is tiny, so the vast majority of taxpayers with capital gains earned from selling a second home, exercising stock options, speculative trading, etc. would still pay the existing low rate.

But those reporting substantial unearned income would pay the same tax rates imposed on labor: up to 39.6% above $415,000 annually.

These charts help us understand that despite its crushing flaws, federal taxation is highly progressive. The bottom 75% pay little to no federal income tax and receive more federal benefits, while the wealthy pay the vast majority of federal income taxes:

These two charts break out who pays most of the taxes:

The likelihood that either party will ever drain the fetid swamp of corruption that is our tax code is zero, because it's far too profitable for politicos to operate their auction for tax favors. This reality unites the Democrats and Republicans in an unholy marriage of corrupting wealth and power.

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Comments

Last of the Mi… Nov 10, 2017 12:37 PM Permalink

There won't be a tax break for anyone but the super rich and maybe corporations. The RINOs (the real swamp) are actively undermining Trump as we speak in order to get a rebound majority in next years' elections with the money shot being impeachment. The republican party is actually sitting in the swamp and setting itself on fire before our very eyes. Secondly the only ones left with the power to get a tax cut will be the elite and corporations and we all know if a break cometh someone has to pay more. It will fall on the remains of what used to be the middle class, that is those at the bottom rung still working and paying taxes along with insurance premiums. That won't be tolerated, they all have to go to the medicaid system for wealth redistribution and asset forfeiture for non payment. To me, the irony of the whole fucking thing is the swamp is in the desert in Arizona! Whodathunkit!

RocketScience Nov 10, 2017 12:04 PM Permalink

My best friend runs a large international corporation. So, we are fishing and tossing back some beers. I ask him if the corporate tax rate were zero, and you had to pay no FICA taxes, would you move your factories back from Asia. He said, "Why would I do that? We are already there. Our customers are there. If we paid taxes I'd fire our accountants. Besides, I can hire six engineers in Asia for every engineer in America." I said, but you still have thousands of employees in America. The executive suite is in America. He said they had they didn't have thousands of American-based employees he said the had a number I will not disclose, but it is between 500 and 1600. He then told me that companies are located whereever the CEO decides he wants them located. He said it is not a democracy. He said, "I don't want to live in Asia, the weather sucks." I asked him, does it not make you feel bad that you fired tens of thousands of Americans. He said, "We used to have American plants, but we could not compete with Asia. If I didn't fire our employees, we'd be out of business because our competition would do exactly what we have done. I don't make the rules, I play by them. Everything we do is perfectly legal. We have lawyers checking everything, and I have to sign documents every quarter that I understand what we are doing, and it is legal. If it isn't legal, I'm personally liable."If you want to fix America you have to fix the tax code so that it no longer makes sense to ship our jobs overseas. There are two ways to do this: 1) mandate they be here for national security, 2) have tariffs. A tariff tax is a much smarter tax than an income tax. An income tax is borne 100% by Americans, while some portion of a tariff tax falls on foreigners. They cannot pass on 100% of the tariff tax. What portion they have to eat depends on the industry. Every dollar of revenue we switch from an income tax (which is the world's dumbest tax) to a tariff tax results in a net tax cut for Americans and a huge boost for American jobs. For example, using algebra one could make a revenue neutral increase in the tariff tax and an offset decrease in the corporate income tax. Since some portion of the tariff tax would be eaten by foreigners, that portion would show up as a net decrease in taxes to Americans. Think of it this way. The tariff has a net increase in American jobs because we run a trade deficit. It hurts them more than it hurts us. As those manufacturing jobs flow back it has a mulitplier effect that wildly increases revenue to the government. In other words, using calculus, a revenue shift from income tax to a tariff tax is not necessary. You can cut income taxes more than you raise tariff taxes and still be revenue neutral. This occurs because a tariff tax is a much a smarter tax than an income tax. Now for the bad news. The large corporations do not pay taxes. Furthermore, I told you above that we are wildly noncompetive with Asia labor costs (six to one). To bring back our corporations the tariff would have to be extremely high, perhaps above 100%. That would cause a world-wide depression. However, a 19% across the board tariff (border adjustment tax) would not cause a worldwide depression as that is the rate Germany and many other countries have. We used to run our country on tariff taxes until the uber liberal Woodrow Wilson passed the income tax in 1913. He also formed the Fed around that same time. Free trade has always been a policy of the left, there is nothing conservative about it. In the 1970s Scoop Jackson Democrats rafted into the Republican Party and now we have Republicans who somehow think free trade is a conservative idea. They also think interventionism is a conservative idea, but that is a discussion for another time. For those who think I am wrong on this subject, be careful. I used to sit in the executive suite of a major corporation. I know how things work in the real world. Free trade is not what you think it is. For one thing, the Asians use young girls to close deals. Hopefully, your wives do not check those "gym" charges on your corporate account. It amusing to be in an Asian five star hotel lobby on Saturday morning. The executives are having breakfast while the kids sleep in upstairs. Our navy is currently undergoing a scandal where Asians bribed admirals using money and girls. This scandal is called "Fat Leonard." Look it up. A super hot 18 year old can be a very enticing little perk. That is your vaunted free trade. They don't teach that in the textbooks, do they?  

MEAN BUSINESS RocketScience Nov 10, 2017 3:12 PM Permalink

 How does this affect U.S. competitiveness in foreign trade?  "Because the FairTax is automatically border adjustable, the 17 percent competitive advantage, on average, of foreign producers is eliminated, immediately boosting U.S. competitiveness overseas. American companies doing business internationally are able to sell their goods at lower prices but at similar margins, and this brings jobs to America.In addition, U.S. companies with investments or plants abroad bring home overseas profits without the penalty of paying income taxes, thus resulting in more U.S. capital investment.And at last, imports and domestic production are on a level playing field. Exported goods are not subject to the FairTax, since they are not consumed in the U.S.; but imported goods sold in the U.S. are subject to the FairTax because these products are consumed domestically."FairTax eliminates all forms of Federal income taxes (corporate, individual, payroll, inheritance, gift, capital gains etc.)FairTax is also a House Resolution (H. R. 25) which has been co-sponsored by... VPOTUS Pence.see FairTax.org FAQ How does this affect U.S. competitiveness in foreign trade?

In reply to by RocketScience

hooligan2009 RocketScience Nov 10, 2017 1:18 PM Permalink

you make some good points.whilst around half of S&P500 profits are made outside the US - last i looked in y2k, it may be more or less now - most companies are not in the S&P500, this is why the Russell 2000 outperformed for a while and dived when the detail of the tax bills in both houses were looked at.corporate profits plateaued in us dollar terms in 2012 at 1.6 trillion here:https://tradingeconomics.com/united-states/corporate-profits(click the ten year icon for the dip to 800 billion in profits in 2009, the recovery to 1.6 trillion in 2012, then - the flat line. the total return S&P500 has gone up from 2,000 to 5,000 over the same period of this flat line in profits. https://uk.finance.yahoo.com/quote/%5ESP500TR?ql=1&p=^SP500TRso, no growth in corporate profits but a 150% increase in the S&P500 (which gets half its profits from outside the US).at the same time, corporate income tax has gone up from 360 billion to around 400 billion.this has happened as tax policies passed under the obama regime from 2009 to 2016 have taken effect. the effective corporate income tax rate for ALL american companies, not just the ho's and blow behavior of global corporates under multi-lateral or bi-lateral trade "regimes" that pre-negotiate locked in, inflexible trade deals (tariffs and quotas for given quotas and prices and tax dodges via transfer pricing, profit shifting etc) has swung migthily against US based companies.if the numbers i have extracted are correct, the effective corporate tax rate on ALL american companies has gone from 360 billion tax on 1.6 trillion TO 400 billion tax on 1.6 trillion in profits - an increase from 22.5% effective corporate tax rate to 25%.my guess is that the tax avoidance of american multinationals like AAPL is so pernicious, that not only are profits shielded overseas, but capital is shielded and hidden so that the books are well and truly cooked on non-US subsidiary/associate entities/companies of US corporates - for example, by controlling chip foundries without appearing as owners/part owners - and overpaying for chips so that the overseas company makes the dough and pays for the ho's.so, it is not the "ho's and blow" global corporates that matter so much as it is the american companies that service american consumers.it may be that the US cannot provide the demand for global auto companies, drug companies, MSM content/platofrm companies etc, etc  but the point is, unless something is done to give US service and manufacturing companies some sort of edge, there will be no product development in the US and the US will migrate to the same living standard as, say, the Chinese. maybe China/Asia/India will improve and that won't be so bad - certainly many US cities are worse than many chinese/asian/indian cities already in terms of quality of services and standard of housing/living.i see nothing wrong in trying to reverse that trend of decline for the US, to at least catch the tigers by the tail. your friend is taking the easy option of putting shreholders first (probably asian/japanese/european/chinese shareholders anyway right?) - but then he is saying "i am a global citizen engaged in international tax and labor arbitrage first - and an american a distant second".MAGA is about changing from "ho's and blow" rewards for dogging the US.what you and your friend say makes perfect sense if yu don't have any affection, loyalty or belief in the US - and that is part of the free choice that the US has given to you and your friend.

In reply to by RocketScience

Drop-Hammer RocketScience Nov 10, 2017 12:52 PM Permalink

Excellent points.  I love President Trump and Co., but the current system was set up in collusion with our corrupt politicos and our jew-infested government's complete cooperation.  It is wishful thinking on our part that we will turn back the clock.  The kikes performed their march through our institutions too well.  The Christ-killers understood that capital (human, raw material, value added, plants/tooling) could all be exported to Third-World countries to take advantage of their slave labor, no taxes, no environmental laws/requirements, no worker benefits (vacation/healthcare/retirement), no unemployment insurance, no workman's comp payments, etc.  Their only requirement was to grease the local strongman's palms once a quarter and give up our intellectual property to the locals in places like China.  Again, this was a deliberate effort to gut/strip America's wealth and export it so that jew 'share-holders' could add more shekels to their bank accounts (don't forget Israel's cut).  No, our jobs/factories are not coming back to the U.S.  Give our companies/corporations tax cuts, and they will simply pocket the benefit.  The crafty ones will announce moving a factory or two to the U.S. where the states will trip over each other to give them tax incentives.  They will get the good press/publicity and wait it out until President Trump is out of office.  The next douche libtard Dummycrat who is elected will turbocharge the export process again.  Sad, but true.  

In reply to by RocketScience

redmudhooch Nov 10, 2017 11:40 AM Permalink

Want to see what our "leaders" are working hard on? For you, the Americans that elect them? Affordable Healthcare? Tax Cut? Mass Immigration, jobs, better wages?Nah, they're too busy kissing Israels ass to give a fuck about you. Two Key words here: "Unanimously Passed"Israel-dominated U.S. Congress passes four more anti-Iran billshttps://israelpalestinenews.org/israel-dominated-u-s-congress-passes-fo… House passed four bills today and Wednesday taking aim at Iran’s ballistic missile program and its support for Hezbollah, the Lebanese Shiite paramilitary group fighting alongside Iranian forces on behalf of the Bashar al-Assad regime in Syria. In addition, Iran hawks in Congress continue to press the Donald Trump administration to ban US aircraft sales to Iran and designate the Islamic Revolutionary Guard Corps (IRGC) as a foreign terrorist organization.The House also unanimously passed legislation from Rep. Mike Gallagher, R-Wis., to impose overlapping sanctions on foreign states and individuals for providing support to Hezbollah.They’re giving the money to Hezbollah to kill individuals and fund terrorism around the world,” House Majority Leader Kevin McCarthy, R-Calif.A resolution offered by Rep. Ted Deutch, R-Fla., to urge the European Union to designate the political wing of Hezbollah as a terrorist organization passed the House unanimously. House Homeland Security Committee Chairman Michael McCaul, R-Texas, continues to push for adoption of his bill urging the State Department to designate the IRGC as a foreign terrorist organization. Sen. Ted Cruz, R-Texas, has a companion bill in the Senate.

adr Nov 10, 2017 11:39 AM Permalink

The problem is once you hit $68,000 in combined income, you don't actually get much more after taxes until you get above $90k. I remember when I got a $500 a month pay raise and my extra take home was $150, WOW! If you are making $68k you are ineligible for every government assistance program, and therefore would be better off taking a $20k pay cut to get back on the available programs. With health insurance alone you'd be saving money. If you add up energy credits, insurance credits, and everything else you are far better off making $48k combined than $75k.Our current tax system punishes work and rewards the scam of welfare at both ends. Earned income should never be taxed. Capital gains should be taxed at 40%. It won't destroy Wall St, anything in the positive is free money and no labor was expended to earn it. The CEO selling shares would still take the free cash even if it were taxed at 90%. Capital gains adds zero productivity to the economy as it only flows to the pocketbooks of the wealthy.The corporate tax code was made to destroy small business and build the megacap that pays virtually no tax. A guy was defending Apple's Double Irish tax scam, saying that if Apple has legitimate business in Ireland it shouldn't be taxed at the US tax rate. I conceded that yes, if the money was earned on Irish soil through legitimate sales in the country, then yes. However Apple doesn't have a headquarters or business on the little tiny island, just a fictitious address where they funnel all of their overseas sales, and perhaps most of their US sales as well, so that they can have the tax postponed indefinitely.I said it would be like saying that you lived on a tiny island in the pacific, even though you have no house there and said that all of your income was generated there, even though you worked and lived in the USA the entire time and therefore your income wasn't taxable. Of course with the USA it wouldn't matter since all foreign earned income is taxable in the US for citizens anyway.

Gophamet Nov 10, 2017 11:26 AM Permalink

Start by cutting the pay and benefits  for those in Washington whose only contribution is scenting their chairs with feces. Non performance is grounds for removal and these fucking jokers couldn't light a fire with a can of gas and a truckload of blue tipped matches!

Retarded Idiot Nov 10, 2017 11:10 AM Permalink

This is no tax cut to anyone. To cut taxes you have to cut government. It's just another redistribution of income. Corporations don't pay taxes, their consumers do. The rate to corporations is meaningless. Do you think any company will lower prices due to a tax cut? They will just keep it as profit. While all of us in the middle get screwed again. Remember, the "Elite" onlt need us for two things. 1. Our money. 2. Our vote, only when necessary. Burn it down.

hooligan2009 Nov 10, 2017 10:47 AM Permalink

that bar chart of taxes v benefits is a YUUUUGGGE tell on how screwed up the tax system is. Although it doesn't tell the whole picture (state taxes paid, sales taxes etc) what is clear is that the top 25% income group pays 97% of income taxes.this is borne out by the barchart of the quintile distribution of taxes and benefits, the effective tax rate for around 75% (mid-point of the fourth quintile) IS ZERO - nobody pays any net taxes in the bottom 90 million of 125 million households.(number of households = 125 m approx from here: https://www.statista.com/statistics/183635/number-of-households-in-the-… )so, here are two questions.1. how many libtard demonRat socialists are in the top 25% income group?2. what is the point of the taxes and benefit sytem AT ALL  to the bottom 60% of households?it is stunning that anyone earning under 50,000 is a net receiver of taxes, requring federal support. this is totally fucked.what should be happening is that each quintile pays a fair share of the federal budget, less any corporate and other federal taxes earned. by the way, share buy backs should be taxed at the corporate tax rate - otherwise the corporation becomes owend by its management, not by its shareholders.actually the 5th (top) household incime quintile pays 375 billion in net taxes and the bottom quintile receives 350 billion in benefits.

hooligan2009 LawsofPhysics Nov 10, 2017 11:26 AM Permalink

yep.. maybe 3d printing and nuclear fission will provide an answer to a "golden age" - except for food production and waste disposal.the charts ignore all payroll taxes?it ignores state and federal corporate tax rates as well?https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States#/media… effective corporate tax rate has dropped from 50% to 20% in the last 60 yearshttps://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States#/media… corporate tax receipts are running at around 400 billion a year - doubling in the last 20 yearshttps://fred.stlouisfed.org/series/FCTAXthis year should be a record? maybe half a trillion? assuming any corporate isnt using base erosion and profit shifting to a greater extent than usualanyway, what i posted yesrday remains an idea."here's a postcard tax bill - just twelve words "flat rate 20% tax for all - individuals get first 15,000 tax free" now, why is that any worse than all this bullshit legislation? no deductions, for corporations or individuals, that's it"

In reply to by LawsofPhysics

Ghordius Nov 10, 2017 10:17 AM Permalink

"The likelihood that either party will ever drain the fetid swamp of corruption that is our tax code is zero, because it's far too profitable for politicos to operate their auction for tax favors. This reality unites the Democrats and Republicans in an unholy marriage of corrupting wealth and power."ehm... it's a result of a duopoly. which is the result of many things, but all based on an electoral system from two centuries ago, based on the premise that there are no "factions" (as Washington hoped) which morphed very fast into "to the victor, the spoils", aka "winner takes all"give third, fourth and fifth parties a chance to gain/share power, and see how fast some of the swamp drains, all of itself. some, mind. but enough for the difference, for what mattersbut... you need to have some spirit to that. the same spirit that led many Americans to propose constitutional amendments... last seen in the XXth century

Arrest Hillary Nov 10, 2017 10:16 AM Permalink

AMT .... Alternative Maximum Tax .... 10% .... as Libertarians, we must put forth a plan, an ideal .... that achieves our goal of maximizing human freedom .... (and mocks the stupid socialist idea of Alternative Minimum Tax) ?

pound the vix Nov 10, 2017 10:07 AM Permalink

I dont understand what you are arguing.  You say the rich are scamming the system, yet the charts show the rich are paying all the tax.  Pretty bad scammers if each time they work the system they pay a higher share of the country's tax

Kidbuck pound the vix Nov 10, 2017 11:11 AM Permalink

The very idea of taxes based on income is insulting to any man with pride and self esteem. Only fucking weak willed envious losers want another man to pay their way. I pay the same for a quart of milk or a certain house as a rich man will. Government services should be priced the same way. The present progressive income tax is pure socialism and only losers and inferior men want socialism.

In reply to by pound the vix

red1chief Nov 10, 2017 10:01 AM Permalink

True, the rich pay more taxes. But those taxes also buy government subsidies and protection of their oligarchic markets. I'd say give them their tax cuts but cut the government subsidies for them, but both will never happen. Guess which one will? Socialism for me, capitalism for you!

LawsofPhysics Nov 10, 2017 9:58 AM Permalink

With every single central bank directly monetizing government debt and deficits, WHY THE FUCK IS ANYONE PAYING TAXES IN THE FIRST PLACE?Banks need to be just banks again!!!!!!!!!!"Full Faith  and Credit"Now, jump you fuckers!!!

Lumberjack A. Boaty Nov 10, 2017 10:13 AM Permalink

If you pay or receive alimony, the new tax reform may be problematic.

Is tax reform the final straw for alimony?

http://mobile.reuters.com/article/amp/idUSKBN1D92J3

The tax deduction for alimony was on the chopping block, eliminating the break for the spouse who pays alimony, and the tax hit for the one who receives it.

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I would also wonder about how child support may be affected?

In reply to by A. Boaty