The American Dilemma and How We Can Fix It

Archive for the ‘Taxation’ Category

PARADOIXCALLY SPEAKING

There were probably a number of reasons that Mitt Romney lost the election – the most important being that he received fewer votes than President Obama, plain and simple.

Whether that was due to the fact that 6 million voters were so unimpressed with our choices that they “disappeared”; whether it was that Gov. Romney and the Republican party took the mid-road and failed to interest conservatives in his campaign; or whether it was a function of a well-run and well-executed campaign of demonizing the governor for his being financially successful doesn’t really matter.

I wanted to consider the third of those possibilities in this post – that Governor Romney was perceived as being unable to relate to the needs and concerns of the ordinary citizen because he is wealthy.  And therein lies a paradox.

If you look at the roster of those whom we elect to Congress (and continue to re-elect) you will find a Who’s Who of millionaires.  That doesn’t seem to deter the voters in their districts from returning them to office.  Apparently the voters don’t have the same concern when it comes to a Rep. Nancy Pelosi or Sen. Harry Reid to name just two.  But the list of millionaires in Congress includes multitudes of members affiliated with both major political parties.

While Congress boasts the lowest approval rating in U. S. history, for some reason we hate the institution but we love our own representatives and senators in it.  Of course, that line of thinking leads to our re-electing a collective assembly of people, many of whom are incompetent, self-serving, just plain corrupt and, of course, wealthy.

But let’s move to addressing the issue of the anger over Governor Romney’s accumulated wealth.  Those with a liberal agenda cite this as “prima facie” evidence of his lack of concern for the common man and an outgrowth of his lack of compassion.  He and his kind should be stripped of the income that they are receiving through their paying Federal Income Taxes at a  more “equitable” (i.e. higher) rate.  And, of course, these new found funds should be added to the public dole for those unfortunates who have not demonstrated any ability to succeed on their own.

Raising taxes on the rich is a cornerstone of the Obama plan for restoring fiscal order to our very dis-ordered financial house.  It is the major element causing the stall in negotiations as we hang at the edge of the “fiscal cliff”.   Everyone who has looked at this “solution” agrees that if we were to implement the President’s proposal, it would only raise enough revenue to chip away at 7.5% of our annual budgetary deficit.  But let’s ignore the facts and assume that this would actually eliminate the entire deficit.

If that were the case, then the salvation for our economic mess would be due solely to one group – the wealthy whom the President and the voters excoriated in the recent election.  But if we don’t allow people to become wealthy by dis-incenting people from creating successful businesses, then we will have eliminated the possibility of having any saviors whom we can fleece in the future.

We’ve already started to see an exodus of successful entrepreneurs move to other countries where they receive more favorable tax treatment.  There is no reason to expect that those who were clever enough to make fortunes are not smart enough to protect them from government encroachment and will choose to live in a more welcoming environment.

And when the last of those who are creative have gone, what then will become of those who have been trained to be dependent on the revenue they provided so that they could receive their monthly government-issued stipends?  Will they like rats, suddenly deprived of an adequate food supply, turn on their fellows and devour them?

That is the paradox that may soon be resolved.  I wonder if the answer will be one for which we are prepared.

THE PATCHWORK QUILT

I have a cousin who gathers little scraps of material and assembles them into some of the most wonderful patchwork quilts I have ever seen.  I think she’s made over one hundred of them and each is truly a testament to her dedication and artistry.  She’s never sold one but has entered them in many exhibits and won many prizes.  Quilting is a dying art – perhaps because the materials and the artisan were made in America.

In reading today that Sen. Marco Rubio (R) FL offered a heartfelt proposal to exempt our Olympic medal winners from paying Federal income tax on their prize awards, ($25,000 for gold; $15,000 for silver; $10,000 for bronze), I understand his sense of pride in those Americans who will take home medals.  I also understand his desire to encourage more young people to reach for excellence instead of settling for mediocrity.

I even understand President Obama’s endorsement of this proposal as, surely, no right-thinking (or even left-thinking) American is likely to oppose it – and we know what motivates the President’s thinking on most matters of public policy – the polls.

I like and admire Senator Rubio a great deal.  I think he is one of the few bright lights of any political affiliation in America today.  We need more people like him if we are to move forward and pull ourselves out of the mire in which we have willingly ensnared ourselves through our apathy as voters.  But I think that, in this matter, Senator Rubio is wrong.

We have a tax code (IRC) that is 62,000 pages long.  And it got that way because we started creating special exemptions, tax credits and rules for specific interest groups.  They might have been farmers or hedge fund managers or pharmaceutical companies and now, perhaps, Olympic medal winners.  That is why this Byzantine piece of legislation needs to be replaced with something that is actually functional and understandable.

Now into the fray over Gov. Romney’s tax returns enter Sen. Majority Leader Harry (I’ve-never-had-an-original-idea-or-a-job-not-paid-for-by-the-public-dole) Reid (D) NV with his allegations that the man hasn’t paid taxes for ten years and he has proof.  That’s interesting since I just wrote a post on this subject, reviewed the Governor’s 2011 return which is posted on line and saw that he, in fact, did pay taxes – a lot of taxes – if you consider a couple of million to be a lot.

So on the face of it, the Senator’s statement is obviously untruthful – and it took President Obama little time at all to distance himself from the remark.  But let’s assume, just for fun, that he was referring to the ten years ending in 2010 and that he is correct.

Well, there are only two explanations why this could be:

One, Governor Romney “cheated” and filed fraudulent returns for ten years.  My question is that if that is true, why didn’t anyone among the 100,000 plus employees in the IRS pick up on that and send him a “Notice of Deficiency.”  I mean, after all, that’s why we pay them, isn’t it?

Two, Governor Romney filed his returns correctly according to the IRC to which, in his 29 years in Congress, Sen. Reid helped add further exemptions, exclusions and special interest credits.

So assuming scenario two, who is at fault?  Is it Governor Romney for obeying the law?  Or is it the simpletons and self-serving members of the Congressional Aristocracy who enabled him and many others to do so?

Patchwork quilts are a work of art, but not when it comes to preparing an equitable tax code.

SIZE MATTERS

If you start your own business or work for one that someone else just began, the importance of individual accountability moves out of classroom theory into real world fact.  When you’re doing the work, paying the bills, trying to develop new customers, your life is literally on the line.  And if you have one or two employees helping you it is pretty obvious who is pulling his weight and who is not.

Things go well and a few years later you’ve been able to add a few more employees, and then yet more.  All of a sudden it’s harder for you to monitor how your employees are meeting their goals – and it is easier for them to shirk some of their responsibilities because a larger staff means greater anonymity.  This is a case where size really does matter.

Speaking from experience, the larger the staff size grows arithmetically, the number the problems increase geometrically.   So how do we address this issue?

The normal procedure is that we move from being a hands on supervisor and we start developing policies and procedures.  We take from our experience and write down ways that can enhance the good ones and we look to avoid repeating those that led to poor results.

Then we start to build an infrastructure of employees whom we trust to be able to oversee certain parts of our business to which we cannot devote our full attention.  The successful business owner/manager will, as part of this process develop ways to measure how effectively his employees, both supervisors and those she supervises are doing.

Accountability is essential in this process.

But what if you have an organization that does not have accountability?  What if your employees get paid their regular check whether they do an exceptional or poor job in performing their duties?  In private industry you ultimately have a company that is going to lose market share and if the problem grows large enough, you have a company that ceases to exist.

In government you have the IRS.

A recent story in Yahoo News describes how a huge organization like the IRS can let Billions of dollars get refunded through an identity theft scheme.  Apparently, this is not all that complicated to concoct as their estimate is that 1.5 million fraudulent claims for refunds are going to be processed by that agency.  The story suggests that the IRS may have paid out more than $5 Billion in fraudulent refund requests in 2011 alone.

When people are motivated they will always find ways to “game” the system.  Sadly, that is the nature of some of us and probably always will be.  I do not expect that the IRS, any other government agency or even for-profit corporations will be able to detect and catch all fraud.  But look at these examples of how egregious some of these refund requests were.  Even a novice bookkeeper should have caught some of these.

“In one example, investigators found a single address in Lansing, Mich., that was used to file 2,137 separate tax returns. The IRS issued more than $3.3 million in refunds to that address. Three addresses in Florida, the epicenter of the identity theft crisis, filed more than 500 returns totaling more than $1 million in refunds for each address.”

“In another troubling scenario, hundreds of refunds were deposited into the same bank account — a red flag for investigators searching for ID thieves who may be filing for refunds for multiple people. In one instance, the IRS deposited 590 refunds totaling more than $900,000 into one account.”

“We found multiple reasons for the IRS’s inability to detect billions of dollars in fraud,” J. Russell George, the Treasury Department’s inspector general for tax administration, said in a statement. “At a time when every dollar counts, these results are extremely troubling.”

For a real life look at how inefficiency runs rampant within this tax collection agency, I refer you to an earlier post.  Everything described in that post happened exactly as I described, (because I am not sufficiently creative to make any of it up).

https://juwannadoright.wordpress.com/2011/12/08/my-morning-at-the-irs/

This story gives new meaning to the old phrase, “Hi, I’m with the IRS and I’m here to help you.”  From the size and amount of the fraudulent refunds being issued, I guess they are fulfilling their mission – at your expense and mine.

I DID THE MATH

And the answer is 92,690.  I checked my calculations several times and I am certain this is correct.

You may ask, “What was the question?”  So here it is:

“What is the grand total of all the numbered IRS forms which Mitt Romney and his wife Ann had to include in their 2011 Individual Income Tax Return in order to comply with the Internal Revenue Code for filing?”

Yes the Romneys, with the assistance of Price Waterhouse Coopers had to file fifteen separate forms, each bearing its special IRS identification number and if you add the numbers on the forms up you get 92,690.  (In addition there was an alphabet soup of other forms included).  The total number of pages for this return was 104.

I have to admit that my favorite was Form 8082.  It is entitled, “Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR).”  What in the name of all that is holy does that even mean?  Was this form invented by a psychopath whose real goal in life is to confuse us with his mind games?

But back to our subject …

While this number of pages might not have been sufficient to call for the downing of one of the ancient redwoods in the Pacific Northwest, I suspect the axe fell on at least one small birch or elm to provide the sacrifice and the paper to complete the return.

If you choose to review the return you will find out something we already knew.  Mr. and Mrs. Romney are successful people – at least as far as we measure success by the amount of money a person earns.  They reported an Adjusted Gross Income of $20,908,000 for year 2011 and paid Federal Income Tax in the amount of $3,227,000 on that.

I can hear the groans from the left of the auditorium.  That is only 15.4% of their income paid in tax.  That doesn’t seem fair when the average taxpayer pays at a higher effective tax rate.  Much could be said in favor of that point of view.  A flat tax would make it “fair” in an absolute sense for each of us.  We would all pay the same rate.

However, the problem with that is that paying 15% of your income as a minimum wage earner has a far more dramatic effect on your ability to live than it does for a person who earns millions per year.  (And I think we would get a lot of flak from CPA firms like Price Waterhouse Coopers, not to mention all the folks at IRS who suddenly would be out of a job).

There is one other item in the Romneys’ return that I would like to point out to my readers.  They voluntarily donated $4,020,680 to charity.  Their $3 Million payment in tax was compulsory.  Their donation of $4 Million was voluntary.  If you consider both of these in toto as a “payment to American society” – the percentage of their income which they handed over to others represents 34.6% of their income.

One of the allegations leveled against candidate-presumptive Romney is that as a wealthy man he has no concern for the ordinary person.  The amount of his and his wife’s charitable donations suggest otherwise.

I did the math.  Feel free to check my figures.

A MAN OF FEW WORDS

There was a man from Vermont named Calvin Coolidge who became the 30th President of the United States.  He was dubbed, “Silent Cal” because of his terse conversational style.  I have just finished reading Claude M. Fuess’ excellent biography.  We would do well today to emulate much of what President Coolidge espoused and did during his time in office.

Coolidge rose through the ranks to become the Governor of Massachusetts.  He came to the nation’s attention when in 1919 the Boston Police went on strike.  Boston’s Police Commissioner, Edwin Curtis had threatened to suspend any officers who organized in a union.  He ultimately carried out his promise.  As a consequence, three quarters of the force walked off the job.

Samuel Gompers then the President of the AFL stated that the Commissioner acted inappropriately in denying the Boston Police’s right to form a union.  Several days of rioting and lawlessness ensued in the absence of law enforcement.  Coolidge responded to Gompers via telegram:

“Your assertion that the Commissioner was wrong cannot justify the wrong of leaving the city unguarded.  That furnished the opportunity, the criminal element furnished the action.  There is no right to strike against the public safety by anyone, anywhere, any time.”

As Governor, Coolidge signed into law a reduction in the number of hours that women and children were allowed to work; presented the State Legislature with a balanced budget by trimming expenses without raising taxes and vetoed a bill that would have provided state legislators a fifty percent pay increase.  He also vetoed a bill that would have allowed beverages with low levels of alcohol to have been sold in the state, although he personally opposed Prohibition:

“Opinions and instructions do not outmatch the Constitution…”

In 1920 Coolidge was surprisingly nominated to be Vice-President on the ticket headed by Warren G. Harding.  Harding’s administration was plagued with scandal and it was largely through Coolidge’s efforts and reputation that faith was restored in the White House when President Harding passed away suddenly in 1923 and Coolidge succeeded him.

Coolidge was nominated the Republican candidate for President at that party’s convention in 1924.  Despite the sorrow he experienced because of the unexpected death of his younger son, he conducted his re-election campaign in a dignified manner, without speaking poorly of his opponents, preferring to express his opinion on his theory of how government should be conducted.

The Coolidge administration, guided by its Treasury Secretary, Andrew Mellon, the third highest taxpayer in the country after John D. Rockefeller and Henry Ford, lowered the rate of Federal taxation while reducing spending so that by the end of his first elected term in office, one quarter of the national debt was retired.  The only Americans who paid income taxes as a result of their policies were the top two percent of income earners.

Coolidge was adamant in his support of equal civil rights for all Americans and signed into law the “Indian Citizenship Act” granting all Native Americans full citizenship.

“Our Constitution guarantees equal rights to all our citizens, without discrimination on account of race or color.  I have taken my oath to support that Constitution.”

Perhaps the most often repeated, if perhaps apocryphal exchange, which highlighted Coolidge’s moniker as “Silent Cal” was reported to have occurred between the President and writer, satirist, Dorothy Parker.

Parker was supposedly seated next to the President and said,

“I have a bet with a friend that I can get you to say more than two words.”

Coolidge reportedly turned to her and said,

“You lose.”

Perhaps the essence of Coolidge’s view on the office to which he had been elected was best expressed in his statement:

“The words of a President have an enormous weight and ought not to be used indiscriminately.”

As this man of few words believed, less is more.  Words for all of us to remember.

THE GREAT SHAM-WOW!

Now that both Western and Eastern Orthodox Easter have been celebrated, it is time to come back from my sabbatical and turn my attention from the sacred to the profane.  Fortunately, this two week hiatus has provided ample material to consider – the most obvious being yesterday’s Senate vote on “the Buffett Rule”.

Of course, this tidbit of proposed legislation had no chance of passage but provides the President, always the consummate campaigner, an opportunity to point to how the GOP is the party that protects the rich – while he as a Dem is on the side of the little guy.  President Obama made this point in a speech in Florida in which he descried the fact that he pays a lower effective tax rate than his secretary and that raising the tax rate on the rich will put our budget in balance and we will finally all again start living the “American Dream.”

Sadly, the facts suggest something quite different  – so either the President is simply very poor at math or is just misinformed.  In either case, it makes the thoughtful person wonder why they would vote for him this November – at least if that person has an IQ that is higher than your average kumquat.  So, for your review and consideration here are the facts about this proposal – and a brief review of how tax equity really works.  Since this is “Tax Return Filing” day I thought this would be an appropriate subject.

First, “the rule” is intended to get the super wealthy (those individuals earning one million or more a year) to pay a higher percentage of their income in taxes.  This should have broad appeal since most of us who are reading this (or for that matter writing it) don’t fall into that category.  Most of us probably don’t even know anyone who fits into that income level – except perhaps for our tightwad Uncle Percival who has terrible halitosis and won’t even leave an honorable mention of us in his will.  So what could be better than to have these wealthy people balance our budget – rather than taking the money out of our own pockets?

Well, according to all reliable sources, including the independent CBO, implementing this rule will actually raise approximately $47 Billion – over a period of ten years.  According to President Obama, during that same time period, the national debt will increase by $600 Billion.  Assuming that the President’s rosy projection is correct, that leaves a shortfall in revenue of a little over $550 Billion.  (I say rosy because during President Obama’s short three year reign, the deficit has increased by nearly $5 Trillion).

So while implementing “the Buffett rule” might be a step in the right direction, it obviously will not resolve our budget and deficit problems.  The only way that can happen is through a reduction in spending (something the Dems bitterly oppose) or increase taxes on a broader base (something the GOP abhors).  Throughout the history of the world, governments have always taken the path of least resistance – and rather than make hard choices like curbing perks for lawmakers and their supporters – have always chosen to heap additional and inventive new forms of taxation on the rest of us.  Let’s take a quick peek back into tax history in the United States.

This is not the first time that the question of tax inequity has surfaced.  In 1969 the Congress was outraged that certain high net worth individuals were paying little or no taxes.  They had primarily invested their assets in tax free municipal bonds issued by the states and various municipalities – the interest on those investments being exempt from Federal Income Tax.

The hue and cry of “tax equity and fairness” was heard in he halls of the Capitol Building and the Congress passed a change in the tax code so that these people had to pay something into the coffers of the Treasury to benefit the common good.  This change in the tax code was known as the AMT (the Alternative Minimum Tax) – and you may be startled to learn that the number of taxpayers who were actually affected by this was a mere one hundred fifteen people in the entire country.  Compare that to the number covered by “the Buffett rule” – estimated to affect over a million taxpayers initially.

Now here’s the tax history lesson.  The AMT which initially was applied to a mere handful of people now affects over thirty-two million taxpayers.  You see, once government gets a hold on a bad idea, there is no limit to how far they can and will extend it.

The GOP has “trickle-down economics”.  This is a theory which may or may not work.  But the history of taxation in this country is clear.  The Dems have “trickle-down taxation” which, using the AMT as an example, clearly does work.  So before you get on the “soak the rich” bandwagon, consider that you may well be the next in line for tax increases.

Until we get true leadership and honesty both in the White House and in the Congress we will continue to stumble along – putting a bandage here and tying a tourniquet there to try to staunch a gaping wound and a gushing flow of budgetary blood.  But until that happens, perhaps both Mr. Buffett and President Obama can show us real integrity by voluntarily sending the IRS a check for the difference in the amount of their effective tax rates and those of their secretaries.  If they were to do that I would take off my hat and say, “Wow!”

Otherwise, it’s hard for me to look at their statements as little more than a sham.

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