Category Archives: Taxes

Proper Use of the Tax Code


I’m continuing to weed through my archived stack – came across this one regarding the tax code.

I’ve always been suspicious of those folks who try and use the tax code too achieve some sort of social change.  For example, we can raise taxes on the wealthier folks and then lower taxes on the less wealthier in an attempt to more evenly distribute wealth.

I think that’s bad policy – for two reasons.  One, we’ll never get it right, two, the whole process is wide open to corruption and three (okay – three), it is simply not okay for people to vote to steal money from one man to give to another.

Turns out I am not alone in my thinking:

President Obama believes the federal tax code should bolster the middle class and make the rich pay their fair share. I have a different view: The tax code should make no attempt to differentiate rich from middle-income taxpayers, nor should it attempt to redistribute wealth to middle-income taxpayers.

Right – exactly.  But can the government do anything?

Yes – undo what it’s already done!

Big banks, for example, earn undeserved profits because they are protected by too-big-to-fail policies along with myriad regulations that limit competition in financial services. Doctors and lawyers, too, make higher incomes than their talents alone would warrant because government licensing restricts entry and competition. Scientists and engineers earn excessive incomes because our misguided restrictions on high-skill immigration (the H1-B visa quota) exclude talented foreigners.

Sugar barons get rich because of government-imposed import quotas. Ethanol producers cash in because the government mandates the use of their product. The military industrial complex profits from government-facilitated sales to authoritarian regimes around the world.

In short, instead of making the tax code more complicated by implementing more redistribution, the president and Congress should stop redistributing wealth altogether. Then we can have a truly simplified tax code.


Private Savings Accounts: Great Idea

Great Idea

Private Retirement Accounts

As recently as 2005-2006 the subject of private savings or retirement accounts was discussed:

WASHINGTON, March 3 – President Bush dismissed the notion Thursday that his campaign to create private accounts in Social Security was in serious trouble, asserting he was still “at the early stages of the process.”

Vowing to push ahead and acknowledging that “I’ve got a lot more work to do,” Mr. Bush said he was open to ideas from both parties and tried again to allay the fears widespread in his own party that Social Security was “the third rail of politics.”

And just as then president Bush was pushing for the creation of these private funds – democrats were voicing their objection:

They said they would work with Mr. Bush on Social Security only if he would “publicly and unambiguously announce” that he rejected his proposal for private investment accounts financed by payroll tax revenues.

“Such a statement would eliminate a serious obstacle to the kind of bipartisan process that Democrats are seeking to deal with Social Security’s long-term challenges,” Democrats said in a letter that was circulated for senators’ signatures Thursday night and quickly acquired 42.

So – might we have a way forward?

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Change In North Carolina Tax Code


North Carolina is undergoing some changes in the way we tax ourselves.  For more than 100 years the state has been dominated by democrats in the senate, house and governor’s mansion.  That changed in 2010 when both the house and senate flipped red but a democrat, Bev Purdue, was still the  governor.

In 2012 Pat McCrory won the governor race and the trifecta is complete; republicans control all three major law making bodies.

It should not be a surprise that this change in leadership is going to bring about changes in laws – tax collection being one of them.  And starting January 1, NC is seeing some changes:

Republicans insist the new tax law will help the state to attract new businesses and create jobs by lowering income tax rates that have been the highest among Southeastern states. They’ve emphasized the new lower flat rate of 5.8 percent for personal income tax — compared to the outgoing three-tiered system of 6, 7 and almost 7.8 percent — and noted more than 40 credits, exemptions and deductions ultimately will expire or be repealed.

The income tax has been reduced; we’ve been one of the highest taxed states in the south for years.  There is some who argue that jobs aren’t impacted by higher or lower income taxes – people go where the work is.  However, there is some calculus for people who are able to control where they live.

Also gone?  Certain exemptions:

Owners of many types of businesses lose a deduction on their first $50,000 of income, while home-related deductions on mortgage interest and property taxes are capped at $20,000 combined. A credit for child care expenses and deductions on certain kinds of pension income are gone.

Also gone – and most likely the most contentious of the list – is the earned-income tax credit:

Also set to expire on Jan. 1 is the earned-income tax credit, which gives payments to some of the working poor even if they owe no taxes. The credit’s elimination means some low-income families might have to pay a small tax bill again.

And my favorite change is the corporate rates:

The corporate tax rate, meanwhile, will decline from 6.9 percent to 6 percent in 2014. Both personal and corporate income tax rates fall further in 2015.

Unlike the income tax, the corporate rate does influence the decisions of businesses to move to North Carolina.  And, for those that are already here, it frees that money for growth and investment.

Generally, an easier and cleaner tax code is better.  Lower taxes, not higher, are better for growth and prosperity.  In general, I like the changes.  And yes, I know that some folks, likely those of lower incomes, are going to pay more than they previously did, however, I think it’s important that we don’t use the tax system as a redistribution machine – I don’t like negative tax rates.


Taxation: How They Roll In France


And I thought that I had it bad when I discovered I paid a higher effective tax rate than Obama:

More than 8,000 French households’ tax bills topped 100 percent of their income in 2012, according to a French newspaper report.


North Carolina Republicans: Tax Reform


North Carolina is dominated by republicans at the state level.  Such domination can be dangerous.  However, it can also make for change that has been decades in coming.

Tax reform is just that change.

Right now North Carolina has a very high corporate tax rate compared to other southern states.  Additionally, the state income tax is also higher than our neighbors.  The thinking is that we would be able to attract more businesses to North Carolina if only our tax structure was more competitive.  I agree.  However, while businesses do look at the corporate tax, I’m not sure how much they look at individual income taxes.

It is with this mix of taxes that the republicans in Raleigh are looking at tax reform:

RALEIGH — A far-reaching plan proposed by Republicans in the state Senate would slow government spending and affect the wallet of every North Carolinian as it slashes income tax rates and raises the cost of food, prescription drugs and more than 100 tax-exempt services.

Senate leader Phil Berger outlined the forthcoming legislation Tuesday, calling it a $1 billion tax cut that is the largest in state history.

“This is a huge change in the way North Carolina taxes its citizens, the way North Carolina generates its revenue to fund services that government provides,” said Berger, an Eden Republican and the Senate president pro tem.

It shifts the tax burden to consumption rather than income, a move that will disproportionately affect low-income taxpayers and families. A married couple with two children making $30,000 a year would pay an estimated $1,000 more in taxes each year, according to a calculator on a political website designed to support the plan. By contrast, a single taxpayer making $200,000 would get a $6,000 break.

Under the proposal: The state’s 7.75 percent personal income tax rate for the top bracket would gradually drop to 4.5 percent over three years, and likewise the 6.9 percent corporate income tax would fall to 6 percent. The estate tax, paid by only the wealthiest taxpayers in 2010, would be eliminated, and the business franchise tax would see a 10 percent reduction.

To offset the cuts, the state would apply a lower sales tax at 6.5 percent to roughly 130 services that are currently exempted, or essentially any service taxed by at least one state.

In short, the idea is to reduce the corporate tax -GREAT idea- reduce the income tax -perhaps a good idea- and lower the sales tax BUT widen the base of that lower sales tax.

In discussing the new structure, I think that the republicans are going to have to be honest and admit that it is what it is, a shift of taxes and a effective increase on the folks who make less money than the wealthy.  It still might not be a bad idea, but it has to be recognized for what it is.

Personally, I would like to see a plan that is closer to revenue neutral for those who would be most negatively impacted.  And this is where it can get tricky.  For example, for those of us who are most poor, we would indeed be faced with a sales tax on food.  However, we have to acknowledge that the money for that food is likely to have been supplemented by government to begin with.

Is taxing food stamps really taxing those that use them?  Perhaps in a way, but not in the way that we generally use the term tax.  What it would do is reduce the amount of food that would otherwise fit in the basket, but it would not be taxing the income of that individual purchasing the food.

The next idea would be that while the tax burden is certainly shifting, and no one should deny that, is it shifting into a more equitable position?  After all, this is more of a “Flat Tax” solution than the traditional income tax only solution.  In fact, other states are even more reliant on sales tax than income tax; think Washington state and Florida.

Regardless of what actually is passed into law, this is certainly an interesting conversation.

Taxation And The Laffer Curve

This has been on my stack for some time.  I came across a story after reading a post by Dan Mitchell of CATO:

CIGARETTE-smuggling continues to soar in Ireland, with new Department of Finance figures showing that tobacco excise tax receipts are falling dramatically short of targets, even though taxes have increased and the number of people smoking has remained constant at 29 per cent of the population.

I especially enjoyed the assumed fact that economic gain made by the voluntary trade in an open a free market somehow first belongs to the government:

What Fianna Fail TD Niall Collins called “Premiership-style criminality” is behind the latest upsurge in smuggling, which is costing the state hundreds of millions in lost revenue.

Not one pause at the idea that the profits realized by selling tobacco from those who have it to those that want it should first be the property of the sellers.