My first real discomfort with President Obama was five years ago, the summer of 2009, when he commented on what should have been a strictly local issue by saying that the Cambridge, MA, police had “acted stupidly” in their handling of an issue involving a Black Harvard professor mistakenly arrested. Whether they acted stupidly or not was far less important, in my opinion, than the fact that President Obama felt compelled to comment on such a local race-related issue. Just a few weeks after that, the “Cash for Clunkers” effort, an example in my view of government acting stupidly, launched my blogging hobby, and I borrowed the president's phrase for the title, “Government Acting Stupidly.” My opinion has not changed, but I did soon abandon that early blog title for the more positive, “Permanent Fixes.”
Now we have a case of the president accusing corporate managements and boards of acting, not stupidly, but unpatriotically by merging their corporations with overseas companies in a way that allows them to declare a non-US location as their tax headquarters, thereby reducing their total tax liability. He suggests that such companies should opt out of that completely legal opportunity and continue to pay higher taxes and asks Congress to immediately close the “loophole” retroactively. “Loophole,” by the way, is just another word for a law passed by Congress and signed by a president.
The issue made me wonder if President Obama is taking advantage of any “loopholes” to reduce his personal tax liability or is simply declaring all his income and reading the tax payable out of the simple table provided by the IRS. The president’s 2013 income tax return is posted online, so I took a look at it. The “Adjusted Gross Income” from Line 37 is $481,098. Using the IRS tax table for “Married Filing Jointly” indicates a tax due on that income of $138,161, an “effective” tax rate of 28.7%.
Of course none of us take that approach if we have options for reducing our tax bill, and neither did the president. He reported $147,769 in itemized deductions, including state and local taxes, contributions, and mortgage interest, and was able to reduce his tax bill to $100,462, a saving of almost $38,000 and an “effective” tax rate of 20.9%. It is exactly what I would have done and is both legal and patriotic, totally compliant with the unbelievably convoluted and intrusive tax code that has been imposed on us by our government for its own benefit. Because of that tax code, the tax return the president had to file to justify that lower bill totaled 42 pages plus certainly a much larger pile of paper his accountant must keep on hand to justify the 42 pages in case the president is targeted by the IRS under some future administration. A side benefit, or issue, is that it kept him from having to pay his “fair share” relative to single people who cannot file jointly and people who choose not to give their money to organizations granting tax deductions or those who avoid big home mortgages by supporting their local landlord.
The whole thing makes me wonder if it wouldn’t be fairer, simpler, more transparent, less time consuming, less threatening, and less tempting, to eliminate the current tax code and simply tax incomes at a flat 20%. That is about what the president ended up paying anyway after all the calisthenics on what would certainly rank in the top 1% of US incomes. Of course such a simplified system would be far better in every way.
But back to the current issue, corporate leaders acting unpatriotically. Companies likely to try that tax saving move, referred to as “inversions,” are those that are in global businesses with operations and sales around the world. They are in competitive environments and have a fiduciary responsibility to their employees, shareholders, and lenders to do the best they can against their competition. Success is not guaranteed, and when failure occurs, there is much suffering, mostly by employees. As a few glaring examples of recent corporate failures, take a look at Eastman Kodak, Lehman Brothers, and the president’s favorite solar company, Solyndra, which couldn't be kept alive even with federal favoritism.
Here is the big problem we face. The United States has lagged economically beginning with the first big oil crunch in 1974 and the almost simultaneous onset of globalization, automation, and major post-war advances of economies of Japan and Germany and, later, China, India, and Latin America. We are in competition with all those economies, and our losses have, in a large part, been their gains. I suppose that was only fair, but now it is time for us to notch up our efforts a bit by making the United States of America once again the number one business and manufacturing site in the world. A really good way to do that is to eliminate our shamefully complex and mysterious corporate tax code and replace it with a simple flat tax of 15% on all corporate earnings as reported to the public with ZERO exclusions, exemptions, deductions, credits, or other adjustments. Just read the annual report and find the “Net Income before Taxes" line, multiply that by 0.15, and mail a check to the government. We would find companies flocking to the United States as a low cost tax haven with tremendous resources, joyful freedom, and a large workforce continuously boosted and replenished from south of the border.
Congress could begin acting patriotically, focusing on something besides picking and choosing winners and losers and granting favors for votes and contributions, infrastructure perhaps. Patriotism would expand, rapidly replacing our current shame of the stuff going on in Washington DC. Both business activity and tax revenues would soar. And we could get back to work and quit complaining.Tweet