Subject: Re: (no subject) well, actually, quite a big subject Comment: Dale, Good to keep the dialog going. I am 'late to the party' as far as your previous summer's discussion goes, but would like to add my " 2 percents " here anyway, and to the Tax Reform Panel as well by so doing. This ended up being a much longer response than I initially expected, so apologies for that at the outset, but, if you can, bear with me. Those of you concerned about nodding off while the roast is in the oven should probably set an alarm on your cell phone in case I put you to sleep. I was at a holiday gathering recently for the birthday of the audio engineer who I have used for the past 20 years of on-again/off-again recording work both in the studio as well as live, out in the field. Musicians and engineers are generally a fairly humane lot, and usually not very rich as a rule, and just before the weekend outing broke up on a Sunday afternoon the topic turned to retirement plans, health benefits, and other topics of keen interest to the self-employed, a group that which musicians and engineers typically belong to when and if they actually can GET work. We were speaking about the issues of medical insurance, the cost of healthcare, and the problem of perpetual cost creep in the healthcare system caused in large part by the vicious cycle of ongoing increases in the cost of medical equipment, procedures, prescription drugs, etc. and the fact that the healthcare insurance industry basically turns around and pays the healthcare invoice by passing on the rise in cost to all of us in the form of ever-rising premiums. Ironic, isn't it, that a significant surge in the cost of healthcare insurance are the insurance premiums which medical practitioners must pay to insurance companies just to stay in business. :( In any event, one audio engineer who has worked most of his life at a fairly well known label in Berkeley suggested that the problem would be solved if we simply had a national healthcare plan like, oh, Sweden. Better yet, that person reasoned, the high cost of healthcare to you and me could simply be solved by "getting the rich to pay for it". Fortunately, as the amicable get-together was in the process of disbanding, we did not have the occasion to get bogged down in an escalating discussion that would only have ended up spoiling the good time that we had all just had. The fundamental problem whenever "let the rich pay for it" is proposed as a solution to a collective social problem (like healthcare or government funding) is that it completely diverts attention from solving the root cause of the problem, and is sort of like assuming that mommy and daddy will always be able to bail you out of a fix or get you that holiday present that you really want and desperately need. There are two big problems with the strategy of seeking to meet shortfalls in complex economic foodchains and public budgets from the rich: the first, as mentioned above, is that it takes the eye off the real problem -- namely, what are the root causes driving the increase in expenses that outstrips the ability to pay in the first place. This response substitutes a diversionary tactic of trying to find someone else to belly up to the bar and pay the tab, or the fine, or the premium, or the tax, instead of tackling the underlying root causes. The second problem with falling back on "let the rich pay for it" is more subtle and insidious, as it likely carries with it an attitude that is detrimental to our long-term survival and well-being: personal responsibility. By taking aim at "the rich", an unspoken justification of that "solution" is that it is only fair to seek to be made whole from "the rich" as "the rich" just happened to be lucky or selfish enough to land in the lap of luxury and in a zero-sum game sense the money which "the rich" have somehow managed to obtain is likely to have been done by taking money away from those who are not "the rich". Furthermore, in the deeper recesses of social reasoning on the part of those who seek relief from those with greater financial resources, this accumulation of wealth or financial success is often viewed as having been accomplished by clever, sneaky, or even unscrupulous practices which are only possible because of the privileged background of the upper class. Now, it is unfortunate that the excesses and ethical crimes of the super-rich only serve to heighten this thinking, but this thinking is fundamentally anti-thetical to the premise of initiative and innovation and hard work that has in fact enabled the modern global economy led (so far) by the USA to achieve the both the creature comforts and the dramatic increase in the extent and duration of our collective happiness, health, and longer life expectancy to even further enjoy the perqs of the modern age. Some might argue that the modern age and its profit-seeking objective function is itself creating the expensive problems from which we collectively suffer, with the flip-side of that coin being the drop in physical and emotional health of the younger generations who have been couch-potatoed into passive imprinting by the marketing machine of conspicuous consumption, the trappings of which include TV media, video games, and a fast-food mentality of instant gratification. That, however, is a topic for another day. The problem of taxes is really a problem of what we budget and authorize to publicly pay for in the first place, not how to pay for whatever bill we get presented after the fact, (you know, like rental cars, where the $55/day cost mushrooms up to over twice that with all the airport fees, restocking charges, excessive price-per-gallon to re-fill the tank, concession fees, airport access fees, drive-around-the-block charges, XM radio royalties, all manner of insurance costs, and federal, state, local, and discretionary taxes on ALL of the above ! ) Bottom line, I am opposed to any proposed tax "solution" that further increases the already higher tax rates paid by those with higher incomes, and that is not because I may or may not be considered part of "the rich" as opposed to "the poor". The recommendation of your group discussion is excerpted and summarized below: “After some spirited debate, we ended up proposing a new minimum income tax condition that kicks in as a reduction off whatever bracket tax rate is in play above $80k of income and drops to 1% for those under $80k of income (see “skin in the game” comments below*). This would absolutely end the fairness issue now worrisome to some that the rich can use loopholes to escape income tax (example #1, if your W2 shows $200k of income and your incremental tax rate from the tables usually is 40% at that earning point, the minimum income tax would be set at 10 points less or 30% of your W2 income ($60k in this case) regardless of your deductions – this would take the “army of accountants” out of the equation for the rich who can afford that; example #2, if your W2 shows $40k of income and your incremental tar rate from the table usually is 5%, your minimum tax would be $400 regardless of deductions).” This recommendation, apparently designed to raise tax revenues without actually raising tax rates but would do so by imposing a graduated minimum tax that would re-capture otherwise lost tax revenues from sneaky rich folks cheating the system by getting undue deductions, is interesting, but it has a few fundamental problems in my view: (1) it appears to still incorporate the ‘bias’, or at least the assumption, that "the rich" are -- as a statistical and demographic group -- NOT paying their fare share (of their already high taxes, and (2) the minimum tax which you propose appears to be based on gross revenue instead of actual income. There already is one minimum tax, the Alternative Minimum Tax, and that is the absolute worst, most evil tax in the world. AMT was a blatant measure by government spenders to tax people who appear to profit on paper from unrealized capital gains in order to close what the tax collectors perceived as a tax-avoidance loophole in the tax code, but more simply in order to just be able to extract money from people who appeared to have it. AMT was designed to not allow "the rich" to defer income (and therefore defer taxes on deferred income) so that tax revenues could be collected now and not later. As a result of the internet boom and bust, everyone has heard the stories of employees of startups who, unaware of the AMT consequences of simply excercising a stock option, did so when the stock of the dot-com company they were working at was flying high. Even though you have not received one cent of actual income, AMT blithely figures that you now have imputed income which is the difference between the per-share cost of your stock option and the market value of the stock at the time the option is exercised. Example: if you had 10,000 shares of options (designed to incentivize your stake and commitment to the success of your venture) with an option price of $1 per share, and you exercised your options (paid the option price per share to convert the options to actual shares) when the market price of the stock was $101 dollars per share, AMT figures that you just "earned" $100 times 10,000, or 1 million dollars. Come the following April 15, you will owe the IRS 28 % of $1 Million, or $280,000. You will still owe this amount, even if the price of your stock when you manage to sell it and actually receive realized income has fallen on the downside of the bust to, say, $10 a share. You now have stock that is only worth $100,000 if you were to sell it, yet you owe the IRS $280,000. WORSE, because the shares of stock are usually restricted (can't sell them for a period of time if you are a employee of your venture), you have to quit your job in order to sell the stock in order to go into bankruptcy with a slightly smaller tax debt to the government. The problem with the minimum tax scheme which you end up advocating is the simple fact that you appear to base your minimum tax on gross revenue (pre-deduction) and not on actual income (post-expense). A small businessman who is a sole proprietor could well make $500,000 in gross revenues but have expenses and deductions in the amount of $400,000, assuming a healthy 20% margin. As I understand it, your progressive minimum tax scheme would have that sole proprietor pay 30% of $500,000, or $150,000, which is $50,000 more than was actually realized. Due to the unbridled growth in complexity of the federal (and, following suit, states like California and New York) tax codes, I believe: 1. The way to fix tax shortfalls is to first spend less, not tax more. Those who favor the government bailing the entire society out by guaranteeing jobs to everyone (John Edwards pledge at the Demo Convention), or providing national health care free of charge to all, a la Sweden or Canada, will not find much to like in this approach, most likely. Certainly fair and duly noted to counter that the priorities of how government spends the money it collects can and should be challenged, but let's not leave federal entitlements out of the cross hairs of such a discussion that would likely first bring up defense spending (some would say offense spending) followed quickly (and 'quite rightly', as Donovan intoned) by local vested interest pork-barrel "fat". Also figures that the source of funding in the eyes of those espousing an expanded social safety net / guarantee of well-being is all too often "the rich". 2. As tax revenues are obviously necessary to fund the activities and programs that are the true responsibility of collecitve governance, and as the collection of those revenues ought certainly to be "fair" (volatile scope of definitions, there), I am increasingly coming to the conclusion that throwing out the existing rats nest of progressive income tax code (especially AMT) is in order, to be replaced by a simple flat tax on actual (realized, not unrealized)individual income. 3. The issue of how to treat corporate as opposed to individual taxes is probably where the rubber meets the road with regards to the difficulty of implementing a simple and fair tax plan. The crux of the issue has to do with how to perform the accounting required to compute income in the presence of long-term capital investment and gains on the one hand and the amortization (spreading out) of depreciation and expenses over the useful life of those investments. Although running a business on a cash basis as opposed to an accrual basis is an electable option for tax purposes, few if any businesses above a certain size could operate reasonably on a cash basis given the longer time frames required to fund and finance capital investment and business operations, using a combination of debt instruments (bonds) and investment (issuance of stock). The scandals that plagued the financial system brought on by such fiascos as Enron and MCI have only hardened the resolve of those who view big business, and the excesses and deception of "the rich", to be part of the problem. Let us not forget that is in fact the productivity and power of this free market economy where initiative and innovation is rewarded by success in the marketplace that we have managed to create the relative affluence of 21st century life. Let us also not forget that, for the most part, the perception that those who have managed to become financially successful in this free market economy have by and large not done so because of being born into a privleged world of upper-class aristocracy, but have done so through determination and decades of hard work. The world of upper-class family privilege describes the state of opportunity in the European economies much more readily than it does for the upwardly-mobile culture in the US. Ok, time for me to zip it up and exit the virtual gathering before I get into too much trouble and spoil the good mood of constructive exchange of ideas and dialog ;-) By the way, my perhaps overly-dry and boring discussion about AMT or capitalism notwithstanding, I am not an accountant, nor born into upper-class privilege. I did work hard for decades to achieve whatever modest success I managed to scrape up eventually, and my only real privilege was being born in America to a mother and father who exemplify the best qualities of our collective heritage: social and personal responsibility, consideration of others, and the will and courage to take risks, work hard, and be appreciative of and not shrink from whatever opportunities life gives us. Comments clearly welcome, but my evil twin will most likely field the extreme ones. All the best, -Jeff Braswell p.s. I am adding a few names to the CC in order to expand the group. Not to worry, I am including members of the younger generation and possible liberals in addition to a few "fellow travelers" that I may need to fall back on for support if the crowd gets unruly. For those who I have implicitly "invited" to the table, I offer my condolences -- feel free to slip out the back when refreshments are served. But for your frame of reference I also attach the document which contains the subset of Dale's extended family's group discussion and recommendations on the topic at hand. Additional background: Dale and I went to high school together in Arlington, Virginia, our houses shared a common backyard fence, our parents are both retired career military, and Dale and I were 2 out of the 3 members of that seminal ground-breaking garage band of great reknown around Northern Virginia private parties and frats in the mid-60s known as "The Villagers". Gee... that all probably explains more than I would have cared to disclose ;-) Happily, we have hooked up recently again after all these years as a result of his and Gayle's warm hospitaility in letting my daughter Ariel and I bunk with him at his home while Ariel looked for places to live in Santa Monica in order to pursue a Masters in Public Health at UCLA. |