Paying Your Share
I have been lately using what I will call a Donald Trump tax trick. I lost a bundle a few years ago on a perfectly valid attempt to launch a business with my son. Many of my friends attended Winter Wonderland on Staten Island so they know I spent a lot of money making that extravaganza work in one sense (the attraction was well-attended) and not work in another (for various reasons I will not go into here, it was not profitable and did, indeed lose a good deal of money). No harm, no foul, sometimes things don’t work as expected and this one did not. That loss was an ordinary versus capital loss and since it was done through an LLC, its losses pass through to me as an individual taxpayer. It was a magnitude of loss that it has offset some or much of my tax obligation for a few years (losses like this can be rolled forward until they are fully utilized). This past year (2020), I had more consulting income (1099 income) than expected thanks mostly to my expert witness work. I figured that I would have enough tax loss carry-forward to cover it, so I didn’t pay any estimated tax. This was all in concert with and concurrence with my tax accountant. But given that 2020 saw me shifting my residence from New York to California, we zero-based the returns when I filed them and I was surprised to see that I had a tax liability to pay. It was not huge, but it was also not pocket change. When I probe the return with my new tax accountant, I saw that the culprit was the minimum self-employment tax, which is basically a substitute from the FICA deductions for Social Security and Medicare that one pays when on a payroll. The California return was a little more complicated, but also suffered from some of the same.
After working over the numbers as best I could, I just resigned myself to pay my taxes owed and did just that. I have always felt that paying taxes is a good and proper thing. Firs t of all, it generally means that you earned money, which is a good thing. Secondly, it means that you are paying your fair share to keep this country and my state of residence in business so that I can continue to make money and have all the services that are required to live the good life in these United States. As much as I make sure I am paying only what I must pay, I never begrudge that payment, and believe me, since much of my income over the years has been in the category of earned income, I have paid plenty.
The IRS never bothers to send you a lifetime record of all that you have paid, but I suppose I could go back and figure it out. Social Security does that and I certainly see and agree with the amounts I and my employers have paid into both Social Security and Medicare. The Social Security numbers give quite well with the monthly benefit checks I currently receive, but Medicare is another matter altogether. Because those % payments were taken against total income and not the capped income that Social Security uses, the amounts are staggering (about $1.8 million) which, unless I am very medically unfortunate, I will never use. Indeed, if you future value those amounts on a time value of money basis, they are probably more like $4 million or more depending on the compounding rate you select. Now, to begin with, this is a collective insurance program so the fact that I don’t need all of that does not absolve me of having to have paid it. The lucky ones are supposed to pay for the unlucky ones. But also, this is a progressive system and I am just fine with paying a disproportionate amount to help cover those less financially fortunate than me. Liberals can’t refute their liberalness when it suits them.
But now on to my theme that got me going on taxes today. The global efforts that have been signed by the Group of 20 recently and that President Biden is pushing now here to comply with that is for a 15% corporate minimum taxation rate. Let’s review the bidding on that. Let me start by reminding you that 55 profitable corporations paid no federal taxes at all in 2020. Now let’s look at the big boys and how they fared. Companies like Apple, J&J, Microsoft, Cisco, Visa, Home Depot and Walmart pretty much paid over the 15% all of the last three years. Bravo on a relativistic basis. Amazon, Google (Alphabet), Verizon, Morgan Stanley, JP Morgan, and Comcast did not repeatedly. Meanwhile, PepsiCo, P&G, Coca-Cola and Facebook (the new Meta) straddles by not doing so at least once in three years. In 2020, the average American paid 22.4% (note that that’s slightly below the OECD average, which is probably heavily influenced by the U.S. rate) of their income to the federal Government in taxes. The average corporate effective tax rate was 21%. This is simply wrong thinking…and I am as pro-business as anyone.
This year’s tax returns with my minimum tax levels for self-employment brought this issue home for me. I am retired and receiving Social Security checks monthly. I have also explained that my Medicare is grossly over-funded. But none of that mattered when it cam to the minimum tax imposed on me to cover the equivalent of my personal FICA payments. I can accept that as a progressive portion of the taxation rubric. But I absolutely believe that a minimum corporate tax of 15% is the right thing to do for the country. Conservative think tanks have been advocating (as has Steve Forbes) for a flat 15% tax rate for all across the board. Of course there are many drawbacks to that from a progressive standpoint because it unduly penalizes the low income folks who would otherwise pay much less. That could always be addressed and the idea of cutting through the tax complication nonsense we all suffer is certainly worth a little bit of pain, but I like the minimum tax idea even better. In fact, I would propose that in addition to a minimum 15% tax on all corporations, I would suggest a minimum 15% tax on all individuals who earn over a certain level (say, $200,000, which represents about the top 4% of households). My proposal would be that Los carryforwards would still be allowable for both individuals and corporations, but they could only be used when income dropped below certain thresholds that would need to be set.
I am not economist or economic researcher enough to play out this and other proposals mathematically with US Census bureau and Treasury Department data, but intuitively I believe there is simply too much free lunch to those who can afford to pay taxes imbedded in our tax system. The network of tax accountants and attorneys (not to mention IRS agents) are not exactly doing the most productive work for the economy as it stands now. Imagine if we could redeploy that effort in other ways with a simpler and more fair taxation system. With the G20 getting onboard with this minimum 15% corporate tax idea, we are also eliminating the use of taxes as an economic incentive for corporate domicile and that means that the world is more or less united in the belief that this is a fair proposal for our world overall. All everyone wants is for everyone to be held accountable for paying their share.