Currencies, Economics, Politics

03 November 2008

More on Taxes

I summarized my thoughts on coming tax changes for individuals a few days ago here.

Obama has also talked a lot about corporate tax reform and "closing loopholes".  What does he mean?  To get an idea of what may be in store, a Brookings paper written in 2007 by Jason Furman (Obama's economic policy director) and Larry Summers, makes interesting reading.  I summarize:

-Go after small businesses and sole proprietorships that underreport taxes through an increase in IRS audits and better reporting.  Now as someone who has largely earned W-2 paychecks and 1099 income and paid every cent of taxes honestly, I do sometimes resent the under-reporting and over-deducting that some small businesses seem to engage in and the conversion of taxable income to lower-taxed capital gains by LLCs.   Nonetheless, I fear an IRS witchhunt on small business, particularly if it is focused on hard-working sole proprietors rather than the ultra-wealthy LLC crowd (hedge funds, lawyers, private equity) that bankroll Obama.  Sounds like there will be a horde of government bureaucrats looking into every plumber's files.
-Go after large businesses and corporations that shelter earnings by increasing audits, closing tax shelters, taxing overseas income and disallowing depreciation for overseas investment. This is not good news for US multinationals.  If this happens, I would rather own stock in European or Japanese manufacturers that do business in the US than US companies doing business abroad.
-Impose a VAT to pay for universal healthcare.  While Furman admits a VAT is regressive, he posits that it is less regressive than payroll taxes (no cap) and manages to capture spending out of savings and investment by rich people and retirees.  Under a VAT, you not only pay taxes when you're earning income during your working life and then pay tax on interest and capital gains as you save, but you get to pay again when you're retired and spending out of your already twice-taxed savings!  Wonderful. Expect a VAT.  If we do get one early it might be good news for shorter-term TIPS (as a VAT temporarily pushes up CPI).
-Increase progressivity.  Obama will make income taxes more progressive, but Furman has data that shows that income tax cuts account for only 10% of the rise in inequality since 1960 (between the top 0.1% of earners and the rest of us). 90% comes from estate tax cuts, capital gains tax cuts and corporate tax subsidies and underpayments.  Expect capital gains and estate taxes to rise (though estate taxes may still end up lower than they were pre-Bush).

I also found a roundtable from early this year featuring Obama advisors Furman, Rubin and Rivlin talking about their ideas on stimulus.  Furman likes the idea of refundable tax credits, but says such stimulus must be temporary. Will Obama's refundable tax credit handouts prove as fleeting as his tax plans are fleecing?

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