101217 SVC Transcript
The Bauman Letter Weekly October 11, 2017 Transcript
Hello, everyone, and welcome to The Bauman Letter weekly podcast. This is Ted Bauman speaking to you. I wrote last week, or rather spoke last week, about the tax system proposal that the Trump administration and Republicans in Congress have put forward. I also spoke about those in some detail in my monthly podcast for the month of September. In both cases, I invited you to let me know what you think and tell me what your view of these things are. So today, I’m going to turn it over to you and read a couple comments that I received from my readers, and maybe reply to them a bit. Basically, I want you to have some voice in this. Let’s start with a comment that came from one of you that says: The proposed tax code change is absurd. The error of trickle-down thinking has been obvious for decades. A better plan would be “bubble up.” My personal taxes would probably go up. Now, I received a fair number of comments from people who criticize the notion that tax cuts for very wealthy households would necessarily translate into lower taxes, or rather into growth over time. And therefore higher incomes and taxes could be slashed and lead to growth, and that we wouldn’t go into deficit. And all that sort of stuff. A lot of people have basically said that we’ve heard that story before, but all we’ve seen over the last generation or so is increasing deficits. When taxes go down, spending never goes down. And certainly we don’t see economic growth occurring as a result of tax cuts. In fact, we tend to see economic growth happening when taxes are relatively high, like the Clinton administration. So I’m not going to take a position on that myself, except to say that I understand that a lot of people are skeptical about the notion that tax cuts at the top necessarily produce better economic growth and therefore better incomes for people across the board. It’s far more complicated than that. I think a lot of people who wrote in to me tend to recognize that. The second question or observation I want to relate to you is from a reader who says: I fully agree that the tax code is fundamentally unfair. That it’s riddled with complexities and loopholes, and it’s manifestly incapable of raising the funds required to support the entitlements and the functions of the federal government. But on the question of the passthrough of business profits, however, I do think that it is a genuine tax reform. I believe 1
the taxation of the profits of the business should be paid solely by the owners of the business whether they are a corporation, partnership or sole proprietorship. Otherwise, those profits are subject to double taxation. First, on the business itself, and second on the owners of the business. There’s a strong case that all corporations should be exempt from income taxes, which has long been the case for partnerships and sole proprietorships. Well, I think that there is an interesting point to be made there. I’m tempted to agree with you when you say that the taxation on companies and taxation on the individuals who own those companies is actually redundant and double taxation. I will say, though, that the understanding of corporate taxation is not that it's taxation on the owners of the company, but rather, it's taxation on the corporation as an entity in itself. Remember that in our legal tradition, the corporate form, like the C corporation, is a separate legal entity that has legal standing separate from the owners of the company. That’s really the logical basis for saying that you can tax a legal entity separately from the people who own it. Now, there’s a case to be made that shouldn't be the case: that all taxes should be paid by the owners of capital when they receive income from their investments and their corporations. I certainly get it. I think the problem here is that this particular type of reform, this idea of basically saying that we’re going to tax business income at 25%, it creates a perverse incentive, which can only be cured if you adopt the kind of radical proposal you’re suggesting. In other words, I agree with you that if we were to abolish all forms of taxation on business income or rather on the income of businesses, on profits, and simply tax the incomes of the owners of businesses, then this particular proposal would not be such a problem. The problem is that it’s not what this proposal does. It leaves the existing corporate income tax on profits, corporate profits, intact. It also leaves the profits on distributed dividends intact, but it creates a different environment for people who choose to form LLCs, sole partnerships and so on. My point is that while I may agree with you that it would be better for us not to tax the profits of businesses and just tax the income that is withdrawn from them by the owners of those businesses, until we do that across the board, this particular proposal to me seems like it's going to be a problem for the reason that I set out in my last podcast. Now, the next reader took me to task. He says: Sorry to say after listening to your comments on tax reform, any credibility of yours as an adviser has been seriously damaged. A very nonobjective treatise of pros and cons and a lack of understanding of how a reduction in taxes increases revenue due to workforce participation and more people paying taxes. Kennedy and Reagan proved the value of tax cuts, and although you may be one to see an increase in taxes, most citizens pay less. As with Social Security, it’s the government’s misappropriation of funds that is the largest problem with the system. Bottom line: Your comments appear to be politically and 2
personally motivated, rather than a thorough review of the reforms. Clearly you are entitled to your opinion. However, your followers deserve a more objective and factualbased explanation. Well, I disagree entirely. I think, first of all, that I pride myself on the fact that I'm willing to take on the received wisdom on both the right and the left when it comes to taxation and politics and that sort of thing. For example, I’ve been very critical of the Democrats’ tendency to try to use taxation to shape behavior like soda taxes and things like that. I think it is fundamentally wrong. On the other hand, I tend to respect facts. And the facts are that there is no discernible relationship whatsoever between tax cuts and economic growth. I have read numerous economic studies from people on both sides of the ideological spectrum that prove pretty conclusively that you cannot attribute economic growth to tax cuts. That economic growth occurs as a result of other factors. Whether taxes are higher or lower at a given point in time is not a driving factor that determines investment. So, I would turn it around and say, well, frankly I think it’s you, the gentleman who wrote in, who is being ideological here. Saying something is true when it is demonstrably not true is not objective. I respect what you’re saying. I understand that you probably don’t like taxes. And I understand that you probably believe that the best thing to do would be to cut them. But it’s not an argument that you can support by resorting to false claims. Frankly, the claim that tax cuts lead to economic growth has just never been proven. I think you will find that the majority of the responsible conservatives and Republicans even in Congress right now will agree with that. They don't want to cut taxes hoping that there is going to be an increase in economic activity that will negate those cuts because they've seen it before. Deficits went up very significantly under Ronald Reagan. They went down under the Clinton administration partly because taxes were higher. But also because the economy was different. However, deficits skyrocketed under George W. Bush, again with very large tax cuts. And deficits actually peaked with the 2008 crisis, but they began to fall again slowly over time under the Obama administration because of the inability of either side to agree to a budget package, which led to the sequester and that led to automatic budget cuts. So that’s why the deficit fell. So I’m afraid that you just can't say truthfully that there is a direct relationship. I do not accept the criticism that I'm simply being subjective. Now, the last question I want to address, or rather the last comment, is a reader who says: I'd be interested in hearing what you think would be a good tax plan for the country as a whole. Well, fair enough. I criticize the proposals from the Trump administration in Washington and so people want to know what I think.
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First of all, I come from an environment of having lived abroad for many, many years where income taxes are not the main form of taxation, or not the only form of taxation that sustains the government. In most of the societies that I’m familiar with, particularly in South Africa where I lived and where I’m a citizen, some form of value-added tax, or goods and services tax, is really the main driver of taxation. It’s the main form of taxation. It’s essentially a consumption tax. It’s a tax you pay on the creation of value added. And so every stage in the production process — from raw materials production to manufacturing to retail distribution and so on — there is a value-added tax paid on the net turnover for businesses, and then there is a value-added tax paid by individuals when they buy something. Now the thing about that kind of tax is that once it's in place, it's almost invisible. Hardly anybody notices it because it's built into the price of goods and services. But it also tends to be extremely difficult to avoid. It’s not possible to fiddle with taxes based on the VAT or some other kind of a consumption-based tax. The result is that arguments about tax tend to be much more sedate and much more about tweaking small bits of the system rather than the kind of wild fights we have here, because we rely entirely on income tax. So my vision would be one where we reduce income tax to possibly a much lower tax. I don’t think it should be a flat tax on all people. I think it should be a graduated tax related to levels of income. But I think if the United States were to introduce a value-added tax, a tax on consumption, it would solve a lot of problems. I'm very unhappy to see that our politicians have not even raised that issue, have not even considered it as far as I know in their current debates. So if you're interested in learning more, look up the term “value-added tax,” or VAT, or as it’s known in Britain, the GST goods and services tax. That is a completely different way to approach taxation, and it is the way most of the rest of the world raises a lots of its money. And they do it very successfully. This is Ted Bauman signing off for today. I will speak to you again next week.
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Hello, everyone, and welcome to The Bauman Letter weekly podcast. This is Ted Bauman speaking to you. I wrote last week, or rather spoke last week, about the tax system proposal that the Trump administration and Republicans in Congress have put forward. I also spoke about those in some detail in my monthly podcast for the month of September. In both cases, I invited you to let me know what you think and tell me what your view of these things are. So today, I’m going to turn it over to you and read a couple comments that I received from my readers, and maybe reply to them a bit. Basically, I want you to have some voice in this. Let’s start with a comment that came from one of you that says: The proposed tax code change is absurd. The error of trickle-down thinking has been obvious for decades. A better plan would be “bubble up.” My personal taxes would probably go up. Now, I received a fair number of comments from people who criticize the notion that tax cuts for very wealthy households would necessarily translate into lower taxes, or rather into growth over time. And therefore higher incomes and taxes could be slashed and lead to growth, and that we wouldn’t go into deficit. And all that sort of stuff. A lot of people have basically said that we’ve heard that story before, but all we’ve seen over the last generation or so is increasing deficits. When taxes go down, spending never goes down. And certainly we don’t see economic growth occurring as a result of tax cuts. In fact, we tend to see economic growth happening when taxes are relatively high, like the Clinton administration. So I’m not going to take a position on that myself, except to say that I understand that a lot of people are skeptical about the notion that tax cuts at the top necessarily produce better economic growth and therefore better incomes for people across the board. It’s far more complicated than that. I think a lot of people who wrote in to me tend to recognize that. The second question or observation I want to relate to you is from a reader who says: I fully agree that the tax code is fundamentally unfair. That it’s riddled with complexities and loopholes, and it’s manifestly incapable of raising the funds required to support the entitlements and the functions of the federal government. But on the question of the passthrough of business profits, however, I do think that it is a genuine tax reform. I believe 1
the taxation of the profits of the business should be paid solely by the owners of the business whether they are a corporation, partnership or sole proprietorship. Otherwise, those profits are subject to double taxation. First, on the business itself, and second on the owners of the business. There’s a strong case that all corporations should be exempt from income taxes, which has long been the case for partnerships and sole proprietorships. Well, I think that there is an interesting point to be made there. I’m tempted to agree with you when you say that the taxation on companies and taxation on the individuals who own those companies is actually redundant and double taxation. I will say, though, that the understanding of corporate taxation is not that it's taxation on the owners of the company, but rather, it's taxation on the corporation as an entity in itself. Remember that in our legal tradition, the corporate form, like the C corporation, is a separate legal entity that has legal standing separate from the owners of the company. That’s really the logical basis for saying that you can tax a legal entity separately from the people who own it. Now, there’s a case to be made that shouldn't be the case: that all taxes should be paid by the owners of capital when they receive income from their investments and their corporations. I certainly get it. I think the problem here is that this particular type of reform, this idea of basically saying that we’re going to tax business income at 25%, it creates a perverse incentive, which can only be cured if you adopt the kind of radical proposal you’re suggesting. In other words, I agree with you that if we were to abolish all forms of taxation on business income or rather on the income of businesses, on profits, and simply tax the incomes of the owners of businesses, then this particular proposal would not be such a problem. The problem is that it’s not what this proposal does. It leaves the existing corporate income tax on profits, corporate profits, intact. It also leaves the profits on distributed dividends intact, but it creates a different environment for people who choose to form LLCs, sole partnerships and so on. My point is that while I may agree with you that it would be better for us not to tax the profits of businesses and just tax the income that is withdrawn from them by the owners of those businesses, until we do that across the board, this particular proposal to me seems like it's going to be a problem for the reason that I set out in my last podcast. Now, the next reader took me to task. He says: Sorry to say after listening to your comments on tax reform, any credibility of yours as an adviser has been seriously damaged. A very nonobjective treatise of pros and cons and a lack of understanding of how a reduction in taxes increases revenue due to workforce participation and more people paying taxes. Kennedy and Reagan proved the value of tax cuts, and although you may be one to see an increase in taxes, most citizens pay less. As with Social Security, it’s the government’s misappropriation of funds that is the largest problem with the system. Bottom line: Your comments appear to be politically and 2
personally motivated, rather than a thorough review of the reforms. Clearly you are entitled to your opinion. However, your followers deserve a more objective and factualbased explanation. Well, I disagree entirely. I think, first of all, that I pride myself on the fact that I'm willing to take on the received wisdom on both the right and the left when it comes to taxation and politics and that sort of thing. For example, I’ve been very critical of the Democrats’ tendency to try to use taxation to shape behavior like soda taxes and things like that. I think it is fundamentally wrong. On the other hand, I tend to respect facts. And the facts are that there is no discernible relationship whatsoever between tax cuts and economic growth. I have read numerous economic studies from people on both sides of the ideological spectrum that prove pretty conclusively that you cannot attribute economic growth to tax cuts. That economic growth occurs as a result of other factors. Whether taxes are higher or lower at a given point in time is not a driving factor that determines investment. So, I would turn it around and say, well, frankly I think it’s you, the gentleman who wrote in, who is being ideological here. Saying something is true when it is demonstrably not true is not objective. I respect what you’re saying. I understand that you probably don’t like taxes. And I understand that you probably believe that the best thing to do would be to cut them. But it’s not an argument that you can support by resorting to false claims. Frankly, the claim that tax cuts lead to economic growth has just never been proven. I think you will find that the majority of the responsible conservatives and Republicans even in Congress right now will agree with that. They don't want to cut taxes hoping that there is going to be an increase in economic activity that will negate those cuts because they've seen it before. Deficits went up very significantly under Ronald Reagan. They went down under the Clinton administration partly because taxes were higher. But also because the economy was different. However, deficits skyrocketed under George W. Bush, again with very large tax cuts. And deficits actually peaked with the 2008 crisis, but they began to fall again slowly over time under the Obama administration because of the inability of either side to agree to a budget package, which led to the sequester and that led to automatic budget cuts. So that’s why the deficit fell. So I’m afraid that you just can't say truthfully that there is a direct relationship. I do not accept the criticism that I'm simply being subjective. Now, the last question I want to address, or rather the last comment, is a reader who says: I'd be interested in hearing what you think would be a good tax plan for the country as a whole. Well, fair enough. I criticize the proposals from the Trump administration in Washington and so people want to know what I think.
3
First of all, I come from an environment of having lived abroad for many, many years where income taxes are not the main form of taxation, or not the only form of taxation that sustains the government. In most of the societies that I’m familiar with, particularly in South Africa where I lived and where I’m a citizen, some form of value-added tax, or goods and services tax, is really the main driver of taxation. It’s the main form of taxation. It’s essentially a consumption tax. It’s a tax you pay on the creation of value added. And so every stage in the production process — from raw materials production to manufacturing to retail distribution and so on — there is a value-added tax paid on the net turnover for businesses, and then there is a value-added tax paid by individuals when they buy something. Now the thing about that kind of tax is that once it's in place, it's almost invisible. Hardly anybody notices it because it's built into the price of goods and services. But it also tends to be extremely difficult to avoid. It’s not possible to fiddle with taxes based on the VAT or some other kind of a consumption-based tax. The result is that arguments about tax tend to be much more sedate and much more about tweaking small bits of the system rather than the kind of wild fights we have here, because we rely entirely on income tax. So my vision would be one where we reduce income tax to possibly a much lower tax. I don’t think it should be a flat tax on all people. I think it should be a graduated tax related to levels of income. But I think if the United States were to introduce a value-added tax, a tax on consumption, it would solve a lot of problems. I'm very unhappy to see that our politicians have not even raised that issue, have not even considered it as far as I know in their current debates. So if you're interested in learning more, look up the term “value-added tax,” or VAT, or as it’s known in Britain, the GST goods and services tax. That is a completely different way to approach taxation, and it is the way most of the rest of the world raises a lots of its money. And they do it very successfully. This is Ted Bauman signing off for today. I will speak to you again next week.
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