Tag: taxes

Ending the Tax Breaks for Real Estate

The release of a snippet of Donald Trump’s tax return from 1995 showing a net operating loss of nearly $1 billion, potentially allowing him to legally avoid paying taxes for an 18 year period, has given us another reason to condemn Donald Trump and the complicated provisions in the tax code pertaining to real estate that allow Trump and others like him to pay much less in taxes than the rest of us. One tax professional told me that there’s no reason for a big real estate concern to ever pay income taxes of any kind to the government if they have an accounting firm that knows what it’s doing.

A few people have expressed a hope that, should Trump lose, Congress would begin to look at some of the various real estate tax loopholes that allow such legal tax evasion. I would wholeheartedly agree with such sentiments, and humbly suggest that the purge begin with the most egregious and expensive real estate tax break of them all–the mortgage interest deduction. 

The MID costs the government $80 billion a year in lost revenue and is one of the most expensive tax breaks in the code. It may also be the least effective–because it’s a deduction (as opposed to a credit, or direct subsidy) that means that only the wealthiest homeowners (the top 30% or so) can actually take the deduction.

Review of Side Effects and Complications: The Economic Consequences of Health-Care Reform

In the latest issue of Cato Journal, I review Casey Mulligan’s book, Side Effects and Complications: The Economic Consequences of Health-Care Reform.

Some ACA supporters claim that, aside from a reduction in the number of uninsured, there is no evidence the ACA is having the effects Mulligan predicts. The responsible ones note that it is difficult to isolate the ACA’s effects, given that it was enacted at the nadir of the Great Recession, that anticipation and implementation of its provisions coincided with the recovery, and that administrative and congressional action have delayed implementation of many of its taxes on labor (the employer mandate, the Cadillac tax). There is ample evidence that, at least beneath the aggregate figures, employers and workers are responding to the ACA’s implicit taxes on labor…

Side Effects and Complications brings transparency to a law whose authors designed it to be opaque.

Have a look (pp. 734-739).

Don’t Get Fooled by Trump

Watching Pete Townshend wailing on his Fender Stratocaster last night at the Verizon Center reminded of what I’d read about Fender’s history. Part of the Fender story regards how the firm got hammered by Japanese competition in the 1970s, but then bounced back by refocusing on quality. So while I was listening to “Won’t Get Fooled Again,” I’m embarrassed to say I was pondering Donald Trump’s misguided statements favoring protectionism.

As president, Trump suggests he’d block imports from China, Mexico, and even Japan. But what Trump does not seem to realize is that import competition makes American companies stronger. To make America great again, we need both import competition and domestic policy reforms, including slashing the corporate tax rate to 15 percent, as Trump is advocating.

Let’s look at a bit of history. American firms Fender and Gibson have long been the dominant electric guitar makers. But both firms were in decline in the 1970s, as quality fell and import competition increased. Leo Fender had sold his guitar company to conglomerate CBS in 1965, and within a few years musicians began noticing substantial drops in product quality. A similar decline happened at Gibson in the 1970s, which was also controlled at the time by an ineffective corporate parent.

Japanese guitar firm Ibanez saw an opportunity. It had expanded into electric guitars in the 1960s with the idea of making cheaper copies of American products. But by the 1970s, the firm realized that it could make higher-quality products than the Americans, but at lower cost. And like Honda and Toyota in automobiles, Ibanez focused on product innovation, while the American firms rested on their laurels. Ibanez’s strategy succeeded, and today it is one of the top guitar firms.

By the 1980s, Gibson was “floundering” and “might well have gone under,” noted an article in Guitar World. And Fender was “all but dead,” according to the company’s official history. But America’s capital markets came to the rescue. Fender was bought out in 1985, and Gibson in 1986, by teams of investors determined to revive the firms’ traditions of quality. Today, Fender and Gibson are back on top of this competitive industry.

By the way, the weakness of Fender and Gibson also prompted American entrepreneurs to enter the fray. Randall Smith started guitar amplifier company Mesa Boogie in his California workshop in the late 1960s. Smith told Guitar World that he saw the decline of Fender and Gibson in the 1970s, and he was determined to “avoid that fate and remain dedicated to the instruments and the musicians that play them.” Smith’s company went on to invent an array of new features for guitar amps that have become standard in the industry.

Hartley Peavey has a similar story. As a teenager in Meridian, Mississippi, Peavey began building guitars and amps for his friends, which led to his founding Peavey Electronics in 1965. He wanted to offer consumers better value for money than the gear on the market at the time. Peavey used innovative manufacturing techniques to keep his costs down and to challenge Fender and Gibson with quality guitars at lower prices. Today, Peavey is one of the largest names in amps and guitars, and it ships many of its products worldwide from factories in Mississippi.

In sum, Trump is singing the right song on corporate taxes, but don’t be fooled by his rhetoric on trade.

For more on guitars, see here.


TTIP Could Rein in the Abuse of Tax Incentives to Attract Foreign Investment

I’ve written often about the global competition to attract foreign investment, and have made the point that investment flows to jurisdictions with good policies in place. Globalization of production and the mobility of capital mean that national policies (regulations, tax policy, immigration, trade, energy, education, etc.) are on trial, with net investment inflows rendering the verdicts.

But some countries (and some U.S. states) use tax holidays and other forms of tax forgiveness, in lieu of adopting good policies, to attract investment, which burdens taxpayers and subverts the process of matching investment to its optimal location. These are subsidies – like so many other programs – that distort markets and should be discouraged.

In today’s Cato Online Forum essay, which is associated with the TTIP conference taking place on October 12, Ted Alden from the Council on Foreign Relations puts forward a strong proposal to end this madness via the Transatlantic Trade and Investment Partnership negotiations.

Read it.  Provide feedback.  And please register to attend the conference.


Jared Bernstein Tilts His Tax Facts

Former Obama administration economist, Jared Bernstein, argues for higher taxes in a New York Times op-ed yesterday. His piece begins:

Like it or not, the campaign season is upon us, and that almost certainly means somebody is going to try to buy your vote with a tax cut — even though average federal tax rates are already low in historical terms, our tax code remains tilted in favor of the wealthy, and our children, neighborhoods and infrastructure desperately need public investment.

I tried to use my imagination and think of how a thoughtful and intelligent liberal like Bernstein might conceive of tax policy. But I could not come up with any scenario under which this statement might be considered true: “our tax code remains tilted in favor of the wealthy.”   

The plain fact of the matter is that the federal tax system is highly graduated, or what liberals call “progressive.” Lower-income households pay much smaller shares of their income in taxes than do higher-income households.

In his article, Bernstein uses data from the respected Tax Policy Center (TPC), as I do here. The first table shows TPC estimates of average federal tax rates (total taxes divided by income) for U.S. households (specifically, “tax units”) in five income groups.

Obamacare’s Not-So-Hidden Tax: Thank You for Smoking

Without government interference, insurance markets will naturally charge higher premiums for riskier individuals. For example, life insurance premiums vary considerably based on factors that increase the likelihood of death, such as age, gender, smoking status, and health.

Under Obamacare, many factors that influence healthcare expenditures are excluded from premiums. For example, premiums make no distinction for obesity, likelihood of having a baby, alcoholism or pre-existing conditions. One notable exception is for smokers, where premiums may be up to 50 percent higher than that for non-smokers. I have collected data on premiums for smokers and non-smokers in 35 states, and the data shows large variation in the extent to which smokers are charged more for their choice.

Leon Trotsky on the Weapon of Taxation

“You ought not to forget that the credit system and the tax apparatus remain in the hands of the workers’ state and that this is a very important weapon in the struggle between state industry and private industry….

The pruning knife of taxation is a very important instrument.  With it the workers’ state will be able to clip the young plant of capitalism, lest it thrive too luxuriously.”

–Leon Trotsky, The First 5 Years of the Comintern, Vol 2 (London, New Park, 1945) p. 341