Obama claimed that one cannot replace a loss of revenue from taxes of $5 trillion due to a reduction of tax rates such as Romney plans simply by closing loopholes. He is probably right, but what was not entirely adequately discussed is that Romney's understanding of the economy allows him to change many policies which will allow the economy to grow much more rapidly than it has or will in the future under Obama policies.
Democrats have a habit of making tax projections which ignore the benefit of growth. But, it is absolutely a critical component of rational tax policy. Tax revenues are a function of the tax rate, the amount the tax is applied to, and the frequency with which the tax rate is applied. Lowering the tax rate will bring in less money on a given transaction amount each time the tax is collected. However, lower rates allow greater growth of the economy, which means that the amount on which the tax is levied increases and the frequency of application in many cases also increases. The interaction of these three factors affecting the tax revenue is not nearly as simple as the common consideration of only the tax rate.
It was not made clear in the debate, but all of the numbers on tax revenue were apparently based on the next ten years of tax revenue. We have a $15 trillion GDP now. Under Obama, whose policies presently are allowing a government-claimed growth rate of only 1.6% so far this year which does not adequately adjust for price increases due to an understated government adjustment for the Consumer Price Index. The real real GDP growth is probably not even 1%, despite the fact that with a population growing at about 1% a year, a 1% growth rate in GDP is a give-me.
A combination of lower tax rates for business owners and for corporations will allow them to grow more and increase the GDP more. Lowering the rate for corporations, which is the opposite of what Obama has done despite his claim he wants to reduce corporate taxes, will allow multi-national corporations to bring home many profits they have made outside the US. Lower business tax rates will allow many companies to invest more in equipment, facilities, R&D, and training employees which will allow them to grow more rapidly. Allowing a much greater freedom to realize our huge fossil fuel resources will add considerable growth to our economy. Bringing down electricity costs by not forcing power companies to use expensive and unreliable wind, solar, and biomass energy will allow increased growth. Eliminating the requirement to use ethanol in gasoline would save a great deal of money and allow that to go to growth. Sensible relief from some of the excessive regulations of the EPA, the FDA, the SEC, the NRLB, and a host of other regulatory agencies will allow more growth. Repealing ObamaUncaringTax and Dodd-Frank will allow greater growth of the economy. The opportunities to improve GDP growth are many, but Obama has been and will continue to be on a stagnation path.
Let us look at the difference in the size of the economy over ten years at the Obama growth rate of 1% and at a reasonably attainable 4% growth rate which a President knowledgeable about the economy and business could manage. Here is the economy or GDP in trillions of dollars at the Obama growth rate:
2012, $15.00 trillion
2013, $15.15
2014, $15.3015
2015, $15.454515
2016, $15.609060
2017, $15.765151
2018, $15.922802
2019, $16.082030
2020, $16.242851
2021, $16.405279
2022, $16.569332
The cumulative 10 years of GDP to be taxed from 2013 through 2022 is then $158.50252 trillion. With a doable Romney growth rate of 4%, the growth of GDP looks like this:
2012, $15.00 trillion
2013, $15.60
2014, $16.224
2015, $16.87296
2016, $17.54788
2017, $18.249794
2018, $18.979785
2019, $19.738977
2020, $20.528536
2021, $21.349677
2022, $22.203664
The cumulative 10 years of GDP under the Romney growth rate of 4% is $187.29527 trillion. This is a cumulative $28.79275 advantage in a dynamic, growth economy. This is 1.9195 times our present GDP, from which the government has tax revenues of about $2.4686 trillion. If Romney were to reduce the effective tax rate by 20%, then the tax take on $15 billion would be $1.9749 trillion. So, the increased growth over 10 years at a 20% lower tax rate would add (1.9195)($1.9749 trillion) = $3.7908 trillion. This is most of the $5 trillion that Obama says Romney cannot make up by eliminating deductions. This does not even take into account the added tax revenues due to a higher frequency of application of some taxes. So, ignoring that additional tax revenue, reductions in tax deductions over ten years only need to recover $1.2092 trillion. That should be easy to do without changing the deductions of the middle class, as Romney claims he can do.
The difference in tax revenues for a healthy and growing economy compared to those of a stagnant economy such as we have now under Obama is huge. Given the future liabilities of Medicare and Social Security, not to mention paying interest on the national debt at a higher interest rate than the historically low rates now being paid, this much higher rate of growth is critical.
Showing posts with label tax rates. Show all posts
Showing posts with label tax rates. Show all posts
04 October 2012
22 August 2012
More Obama Misdirection in Campaign Ad
This last weekend, I saw an Obama ad actually endorsed by him that sought to push Romney to release more tax returns and made the claim that Romney "paid only 14% in taxes -- probably less than you." I believe this was a fallacious and misleading claim, but PolitiFact.com ruled it true by ignoring the context of the ad with a giant switcheroo.
The Obama ad is a discussion of Romney's tax returns, which report on his income taxes. One naturally assumes that the final statement by Obama that Romney probably paid less in taxes than you means that he probably paid less than you in income taxes. So, let us discuss the truth of Obama's claim based on income taxes reported on the income tax forms Obama is demanding Romney add to those already released.
I was stunned because most Americans who pay any attention to politics, government, and the economy are well aware that about 46 - 48% of Americans pay no income tax at all. Immediately this would make one think it is unlikely that half of Americans are paying 14% in taxes on their Adjusted Gross Income (AGI). In fact in 2011, Romney paid a 15.37% average effective tax rate on his AGI and he claims he paid 13% or more in every one of the last ten years. This contradicts Biden's claim that he often paid no taxes in this period of time. Apparently, Biden's unnamed source was rather impeachable, as is Biden's intellect.
The median household income in 2010 was $47,022. According to Table 3.4 of an IRS study of 2010 Individual Income Tax Returns, broken down by tax brackets, one can estimate an upper bound on the average effective tax rate on AGI for a taxpayer with median income. 142.89 million individual tax returns were filed in 2010, we can examine when we reach half this number of tax returns (71,446,026 returns) as we work down the column in the table of tax returns by margin tax rate. Including all returns with a marginal tax rate of 10% or less, we have accounted for 63,744,030 returns. The next group in the table is 42,321,591 returns in the 15% marginal tax bracket without capital gains. Adding this to the lower tax brackets takes us way over the mid-point number on the returns of 71.45 million to 106.07 million returns. The median return is clearly among the first one-fifth of the returns in this large group of returns. Nonetheless, the average effective tax for this entire 15% marginal tax rate bracket group is only 5.1% of AGI. The 10% tax bracket that brought us close to the median return paid an average tax of only 0.7%, so it is likely that the median return paid substantially less than 5.1% of AGI!
So, the Obama ad claim that you probably paid more taxes than Romney is false. But no, according to PolitiFact.com, the Obama claim is true. How do they substantiate this claim? Well they decide that Obama, the context of the remainder of the ad notwithstanding, was talking about the sum of income and payroll taxes. Of course, they choose not to add in property taxes because that is not something the Democrats wish to consider when they talk about comparing the taxes of the rich and the median person. According to our Democrat politicians, the Medicare and Social Security money extracted from our paychecks by unpaid tax collecting employers goes into a lock box and is paid back to us when we retire or reach age 65. They like to call it an insurance premium which will lead to payouts to us in retirement which scale in accordance with the amount of premiums we paid in. But in this context it is convenient to forget all that and treat this payroll extraction as general tax money and forget that Romney gets a worse deal in payback even than the median taxpayer does from these extractions.
Now most people have an employer who according to the government pays half of the Medicare tax and, generally, half of the Social Security tax. So, the employee's share of Medicare is 1.45% and his usual share of Social Security, before the recent 2% reduction of limited duration, was 6.2%. Adding these together would produce an upper bound average tax payment on AGI of 12.75% in normal times, but of only 10.75% in 2011. This is lower still than Romney's effective tax rate.
Oh, but wait. The truth, always suppressed by Democrats otherwise, is that it is a fiction that the 6.2% for Social Security and the 1.45% for Medicare paid by the employer is really paid by the employer. People who are self-employed pay it all and those who work for an employer are actually paid less by that amount because of this extraction. That money would have been paid to the employee in the market for labor if it were not siphoned off by the government instead. This is the argument of the Tax Policy Center of the liberal Brookings Institute. As a result they add in both the employee's and the employer's extractions for Social Security and Medicare and claim that the median taxpayer probably does pay more tax than does Romney.
If the Democrat fiction on employer contributions to Social Security and Medicare were maintained, then Romney could claim his share of those payments as a shareholder in many companies with many employees and show that he paid a much, much larger tax due to his huge employer tax payments! But it does not work that way. Inventive approaches to issues are the province of Democrats only. Republicans are usually too straightforward to make such arguments and if they did, the Progressive media would raise an incredible fuss!
We really ought to also remember that the many companies partially owned by Romney as a shareholder may have paid the world's highest corporate taxes on any profits they made. They also spent a fortune on foolish laws, mandates, and regulations arising from local, state, and federal governments for vanishingly small or non-existent benefits for Americans generally. More and more, these governments delight in moving the expenses of gifts to others, commonly to special interests, to the accounts of businesses in the private sector. The governments are awash in red ink, or they would be if they were forced to do the kind of accounting that businesses are forced to do by governments. So, they force businesses to pick up the tab more and more often without regard to the impact on lower profitability, less hiring, less capital investment, and more bankruptcies for businesses. Not only does Romney pay out huge sums on his investment in many companies making these government mandated payments, but he also pays a capital gains tax on any money earned by him due to sales of appreciating stock. Romney does much more than his fair share in supporting the cost of government.
The Obama ad is a discussion of Romney's tax returns, which report on his income taxes. One naturally assumes that the final statement by Obama that Romney probably paid less in taxes than you means that he probably paid less than you in income taxes. So, let us discuss the truth of Obama's claim based on income taxes reported on the income tax forms Obama is demanding Romney add to those already released.
I was stunned because most Americans who pay any attention to politics, government, and the economy are well aware that about 46 - 48% of Americans pay no income tax at all. Immediately this would make one think it is unlikely that half of Americans are paying 14% in taxes on their Adjusted Gross Income (AGI). In fact in 2011, Romney paid a 15.37% average effective tax rate on his AGI and he claims he paid 13% or more in every one of the last ten years. This contradicts Biden's claim that he often paid no taxes in this period of time. Apparently, Biden's unnamed source was rather impeachable, as is Biden's intellect.
The median household income in 2010 was $47,022. According to Table 3.4 of an IRS study of 2010 Individual Income Tax Returns, broken down by tax brackets, one can estimate an upper bound on the average effective tax rate on AGI for a taxpayer with median income. 142.89 million individual tax returns were filed in 2010, we can examine when we reach half this number of tax returns (71,446,026 returns) as we work down the column in the table of tax returns by margin tax rate. Including all returns with a marginal tax rate of 10% or less, we have accounted for 63,744,030 returns. The next group in the table is 42,321,591 returns in the 15% marginal tax bracket without capital gains. Adding this to the lower tax brackets takes us way over the mid-point number on the returns of 71.45 million to 106.07 million returns. The median return is clearly among the first one-fifth of the returns in this large group of returns. Nonetheless, the average effective tax for this entire 15% marginal tax rate bracket group is only 5.1% of AGI. The 10% tax bracket that brought us close to the median return paid an average tax of only 0.7%, so it is likely that the median return paid substantially less than 5.1% of AGI!
So, the Obama ad claim that you probably paid more taxes than Romney is false. But no, according to PolitiFact.com, the Obama claim is true. How do they substantiate this claim? Well they decide that Obama, the context of the remainder of the ad notwithstanding, was talking about the sum of income and payroll taxes. Of course, they choose not to add in property taxes because that is not something the Democrats wish to consider when they talk about comparing the taxes of the rich and the median person. According to our Democrat politicians, the Medicare and Social Security money extracted from our paychecks by unpaid tax collecting employers goes into a lock box and is paid back to us when we retire or reach age 65. They like to call it an insurance premium which will lead to payouts to us in retirement which scale in accordance with the amount of premiums we paid in. But in this context it is convenient to forget all that and treat this payroll extraction as general tax money and forget that Romney gets a worse deal in payback even than the median taxpayer does from these extractions.
Now most people have an employer who according to the government pays half of the Medicare tax and, generally, half of the Social Security tax. So, the employee's share of Medicare is 1.45% and his usual share of Social Security, before the recent 2% reduction of limited duration, was 6.2%. Adding these together would produce an upper bound average tax payment on AGI of 12.75% in normal times, but of only 10.75% in 2011. This is lower still than Romney's effective tax rate.
Oh, but wait. The truth, always suppressed by Democrats otherwise, is that it is a fiction that the 6.2% for Social Security and the 1.45% for Medicare paid by the employer is really paid by the employer. People who are self-employed pay it all and those who work for an employer are actually paid less by that amount because of this extraction. That money would have been paid to the employee in the market for labor if it were not siphoned off by the government instead. This is the argument of the Tax Policy Center of the liberal Brookings Institute. As a result they add in both the employee's and the employer's extractions for Social Security and Medicare and claim that the median taxpayer probably does pay more tax than does Romney.
If the Democrat fiction on employer contributions to Social Security and Medicare were maintained, then Romney could claim his share of those payments as a shareholder in many companies with many employees and show that he paid a much, much larger tax due to his huge employer tax payments! But it does not work that way. Inventive approaches to issues are the province of Democrats only. Republicans are usually too straightforward to make such arguments and if they did, the Progressive media would raise an incredible fuss!
We really ought to also remember that the many companies partially owned by Romney as a shareholder may have paid the world's highest corporate taxes on any profits they made. They also spent a fortune on foolish laws, mandates, and regulations arising from local, state, and federal governments for vanishingly small or non-existent benefits for Americans generally. More and more, these governments delight in moving the expenses of gifts to others, commonly to special interests, to the accounts of businesses in the private sector. The governments are awash in red ink, or they would be if they were forced to do the kind of accounting that businesses are forced to do by governments. So, they force businesses to pick up the tab more and more often without regard to the impact on lower profitability, less hiring, less capital investment, and more bankruptcies for businesses. Not only does Romney pay out huge sums on his investment in many companies making these government mandated payments, but he also pays a capital gains tax on any money earned by him due to sales of appreciating stock. Romney does much more than his fair share in supporting the cost of government.
13 September 2008
Corporate Tax Rates by Country
To see how much higher US corporate tax rates are compared to those in other countries, one should read this report. Here is a list of some corporate rates (in %) by country as of 2007:
Japan 39.5%
United States 39.3
Germany 38.9
Italy 37.3
Canada 36.1
France 34.4
Belgium 34.0
New Zealand 33.0
Spain 32.5
Luxembourg 30.4
Australia 30.0
United Kingdom 30.0
Denmark 28.0
Norway 28.0
Sweden 28.0
Mexico 28.0
Korea 27.4
Finland 26.0
Netherlands 25.5
Greece 25.0
Portugal 25.0
Austria 25.0
Czech Republic 24.0
Switzerland 21.3
Turkey 20.0
Poland 19.0
Slovak Republic 19.0
Iceland 18.0
Hungary 16.0
Ireland 12.5
Bravo for Ireland, which is enjoying a very high rate of economic growth! All of these countries reduced the corporate tax rate in either 2006 or 2007, except the United States, New Zealand, the United Kingdom, Norway, and Sweden.
It sure is a good thing American workers are so productive. If we were not, we would be hearing a giant sucking sound as all of our jobs went overseas due to our very uncompetitive corporate tax rate.
Japan 39.5%
United States 39.3
Germany 38.9
Italy 37.3
Canada 36.1
France 34.4
Belgium 34.0
New Zealand 33.0
Spain 32.5
Luxembourg 30.4
Australia 30.0
United Kingdom 30.0
Denmark 28.0
Norway 28.0
Sweden 28.0
Mexico 28.0
Korea 27.4
Finland 26.0
Netherlands 25.5
Greece 25.0
Portugal 25.0
Austria 25.0
Czech Republic 24.0
Switzerland 21.3
Turkey 20.0
Poland 19.0
Slovak Republic 19.0
Iceland 18.0
Hungary 16.0
Ireland 12.5
Bravo for Ireland, which is enjoying a very high rate of economic growth! All of these countries reduced the corporate tax rate in either 2006 or 2007, except the United States, New Zealand, the United Kingdom, Norway, and Sweden.
It sure is a good thing American workers are so productive. If we were not, we would be hearing a giant sucking sound as all of our jobs went overseas due to our very uncompetitive corporate tax rate.
10 September 2008
US Multinational Companies Prefer Paying Offshore Taxes
The GAO reports that US multinational companies are increasingly reporting their income in other countries to save on taxes. Is this a surprise, given that the US has the second highest taxes in the developed world and that it makes its companies pay taxes abroad where they have an operation and then again on that same income in the US?
US companies are increasing their overseas operations and reporting more income in those countries with the lower tax rates. The larger US companies are the ones most effective in lowering their tax rates by this method.
Senate Finance Committee Chairman Max Baucus (Democrat of Montana) is very upset that US companies are shifting operations and income overseas. He believes it is their duty to bring back as many jobs to the US as possible and to report more income in the US.
Domestic income in 2004 was taxed at an average rate of 25.2%. For income reported as earned in other countries, the tax rate paid is less in all but Japan. The largest US companies are then averaging another 4% tax paid to the US on that income reported to and taxed by these other countries. So, it is only favorable to shift income to these other countries when their tax rate is lower than (25.2 - 4)%. In very many other countries, their rate is substantially lower than this threshold rate needed to justify shifting income to them. Of course, when their rates are so low, it also makes sense to shift jobs and capital investment to them also.
The GAO measured US company activities by sales, value added, employment, compensation, physical assets, and net income both in the US and abroad. The GAO concluded that "Most of the countries studied with relatively low effective tax rates have income shares significantly larger than their shares of business measures least likely to be affected by income shifting practices: physical assets, compensation, and employment. The opposite relationship holds for most of the high tax countries studied."
In 2004, the low tax countries included the United Kingdom, China, Switzerland, Singapore, Ireland, Bermuda, and many Caribbean Islands. The high tax countries were Japan, Germany, Italy, Brazil, and Mexico. Of course, only Japan has a corporate tax rate higher than that of the US.
Thanks to Daniel J. Mitchell of the Cato Institute for pointing out the results of this GAO study.
US companies are increasing their overseas operations and reporting more income in those countries with the lower tax rates. The larger US companies are the ones most effective in lowering their tax rates by this method.
Senate Finance Committee Chairman Max Baucus (Democrat of Montana) is very upset that US companies are shifting operations and income overseas. He believes it is their duty to bring back as many jobs to the US as possible and to report more income in the US.
Domestic income in 2004 was taxed at an average rate of 25.2%. For income reported as earned in other countries, the tax rate paid is less in all but Japan. The largest US companies are then averaging another 4% tax paid to the US on that income reported to and taxed by these other countries. So, it is only favorable to shift income to these other countries when their tax rate is lower than (25.2 - 4)%. In very many other countries, their rate is substantially lower than this threshold rate needed to justify shifting income to them. Of course, when their rates are so low, it also makes sense to shift jobs and capital investment to them also.
The GAO measured US company activities by sales, value added, employment, compensation, physical assets, and net income both in the US and abroad. The GAO concluded that "Most of the countries studied with relatively low effective tax rates have income shares significantly larger than their shares of business measures least likely to be affected by income shifting practices: physical assets, compensation, and employment. The opposite relationship holds for most of the high tax countries studied."
In 2004, the low tax countries included the United Kingdom, China, Switzerland, Singapore, Ireland, Bermuda, and many Caribbean Islands. The high tax countries were Japan, Germany, Italy, Brazil, and Mexico. Of course, only Japan has a corporate tax rate higher than that of the US.
Thanks to Daniel J. Mitchell of the Cato Institute for pointing out the results of this GAO study.
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