Tag: Taxes

Paul Ryan’s Cindy

Paul Ryan wants to talk about how his tax bill is going to help this mythical Cindy person. She was invented by the House Ways and Means Committee in a discussion of how awesome their tax bill will be for everyone.

What if Cindy’s employer offers tuition reimbursement? Completing her degree is part of pursuing “her own professional aspirations”. Bummer! Tuition reimbursement is now taxed — so the 5250$ she is given to pay for University is now taxed, so the 711$ savings is now 186$ in tax savings. Still a savings, but not as impressive as the initial story. The budget also cuts moneys to local schools. Does the county reallocate funds from road repair to update text books? Cindy blows out a tire in an unrepaired pothole and that’s where her 186$ in savings goes. Maybe the school cut services instead. Great, she saves 186$ but at the expense of her kids education. Does the state just raise their income taxes? Does the county raise property taxes? Cindy doesn’t own her own home, but rent has to cover property tax expenses. Does her landlord lose money or does the landlord raise Cindy’s rent to cover the new local taxes? Cindy’s public library was going to build out a maker space where her kids could gain familiarity with 3D printing and robotics. Does the county raise taxes to fund the library, or do her kids miss out on this opportunity? Maybe she ends up saving a few hundred dollars a year in taxes, but losing beneficial services. Or maybe she ends up paying 300$ more in rent and is behind a hundred bucks a year.

The committee’s cherry picked scenarios aren’t exactly alternative facts, they’re real facts. But they conveniently omit the larger picture that is an individual’s budget. Not to mention hundreds of other real scenarios where an individual or business ends up paying more in federal taxes under this tax plan. Or, in Cindy’s case, saving money on federal taxes until the extra child tax credit expires and then paying more under the plan.

And none of their scenarios address the likelihood that Cindy will be working for many more years because this debt increasing fiasco of a tax plan will create a situation where we have to save money by enacting something like Ryan’s path to prosperity plan. Which ups the Medicare eligibility age, so individuals who could have retired under the current scheme now need to work just to retain medical benefits.

More Corporate Tax Rate Bullshit

I’m never sure if ‘lower the corporate tax rate’ people are just completely ignorant of how business accounting actually works or just a pack of liars (not mutually exclusive, I know).
 
The idea they promote is that CapEx isn’t deductible like a business’s current expenses – CapEx gets depreciated over a number of years. If I buy a new snazzy machine for my manufacturing plant and pay half a million dollars for it, I actually deduct 100k a year for the next five years. Depreciation calculations are more complicated, but the crux of it is [cost] / [years over which product depreciates]. And there’s a whole table defining depreciation periods.
 
*But* section 179 deductions allow the full cost to be deducted the first year. These deductions have a 500k limit and a spending cap of like 2 mill. The whole thing is more complicated because there are years where bonus depreciation is a thing … but like the “OMG the corporate tax rate is 35%” (on business that have over 18 MILLION a year in taxable income) … “Lowering the corporate tax rate will spur investment” is only *maybe* true for companies talking about multi-million dollar investments. This isn’t something meant to help the small manufacturer. Say my small/medium business that sunk half a mill into a snazzy machine and *didn’t* depreciate it over time. Under Section 179, I deduct the whole equipment purchase this year … which is a bigger savings the *higher* the corporate tax rate happens to be. Thus I’ve got less incentive to invest in new equipment if the tax rate is lowered.
 
Since they’re talking about 35% tax rates, we’re writing tax code to benefit GE (Apple, Amazon, insert your favorite enormous company here) … it isn’t like capital expenditures aren’t written off income AT ALL. Depreciation is spread out over the useful life of the equipment. Computers depreciate over 5 years. Cars and trucks depreciate over 5 years too. Equipment used in the manufacture of musical instruments depreciates over 12 years.
 
What makes investing in large capital expenses more attractive? I’m GigantorGuitarCo and we’re talking two hundred eighty million dollars in receipts and a hundred fifty mil in taxable income. And I buy a six million dollar something-or-other to make guitars. At a 35% corporate tax rate, my tax deduction by depreciating that purchase is 2.1 mil. At the 20% corporate tax rate, I only reduce my taxes by 1.2 mil. And yeah it sucks that I had to outlay six million dollars this year and only got to save 175k on my taxes. But doesn’t it suck *MORE* to spend six mil and only save 100k on my taxes??
 
Now the theory is that lowering the corporate tax rate will leave the companies with more money *to* invest. In this case, GigantorGuitarCo didn’t *have* 6 million dollars and instead spent years using sub-optimal processes because they simply didn’t have the money to invest – regardless of how much they’d be able to save on taxes *by* making that investment. I’m paying 52 million in taxes at 35%, but next year my taxes, at 20%, will be 30 mill. Frees up 22 million dollars, and I use that money to buy a whole bunch of equipment. Honestly, my best case would be that the corporate tax rate was 20% for ONE YEAR. Lets me free up capital to invest in my business, then give me the maximum tax benefit as I depreciate out the equipment.
 
But that’s mathematics without thinking about business. As the CEO of GigantorGuitarCo … wouldn’t I use a loan (business interest is tax deductible too), hire a couple of new tax attorneys, or lose some equity and do a fund raising round to get that six million dollars if the machine was going to provide some huge benefit to my company? And if the machine isn’t going to provide that much benefit … why wouldn’t I take my 22 mil in tax savings and stash it somewhere? Buy the machine when we *need* it, or when tax rates go up and the ROI calculation is different.
 
Sure there are edge cases where lower tax rates will spur investment in the business — *some* CEOs raised their hand when Gary Cohn asked if they planned increased investments when the GOP tax plan passes. [Although these may just be die-hard trickle-down guys who will SAY anything to promote corporate tax cuts] But the entire point of business’s investment (and the rational for depreciating CapEx instead of allowing full cost deduction in the first year) is that the new thing-a-ma-bob adds value to your business. My six million dollar investment makes guitars better/faster/with less human labor, thus increasing my profit margin. Said another way, CapEx is meant to increase employee productivity. Short some dramatic surge in demand … increased productivity means *fewer* employees. Not stellar economic stimulus, that.

Corporate Tax Rate Bullshit

The most nonsensical bit about the trickle down sales pitch is that few trot out GE as an example of a company being helped by corporate tax cuts. These cuts are going to help all sorts of small businesses, farms, etc. The corporate tax rate is not a flat 35% unless your business makes over 18,333,333$! On the low end, the rate is 15% of taxable income <=50,000$. 50k may not seem like a lot of money for a business, but small/medium c-corp entities don’t pay taxes on their receipts. They pay tax on their *profits*.

This is the problem I had with not-a-Joe the not-a-plumber’s question to Obama years ago. Buy a plumbing company that runs two million dollars in receipts a year. You’ve got 20 people working for 50k a year and that’s a mil deducted right there. Petrol for your trucks, vehicle maintenance, office supplies, advertising. Bring an accountant on staff (their salary is deductible too) and you can get into the whole amortization/depreciation adventure when you expand your building or buy new vehicles. You’re not paying taxes on two million dollars @ 35 (or whatever) %. You’re paying whatever personal income rate on the money you pay yourself and the business is probably paying about 20k on 100k in profits. 20k is a lot of money too, but it’s 20% of the 100k in profits. And if you want to pay less in corporate taxes, you know an easy way to do that that also benefits your company? Hire another dude, invest in some energy efficient building enhancements … turn that profit into deductible expenses.

On Corporate Tax Rates

Sean Spicer, at his non-televised press briefing yesterday, seems to ignore the same basic fundamental of corporate tax calculations: “I’ve talked to several CEOs and business leaders in the past couple of weeks about tax reform, and it’s amazing how many of them tell you that they pay the 35 percent rate. And you say to them, what will you do if that rate drops? And the number-one thing they talk about is they’re going to invest and build more in their company. And I think that’s what we need to do.”

This tells me exactly what the current administration wants from corporate tax reform — not something that would help small businesses. They want to help enormous corporations that actually benefit from lowering the top level US corporate tax rate. Companies sheltering money overseas or investing overseas.

Privatization Of Government Services

When government services are privatized, why are the functions not turned over to a not-for-profit company? The government provides services that shouldn’t be run for profit. Services that create a conflict of interest when profit is involved (the major component of my argument for single payer health care). The ideal scenario for the prison system is no “customers” — no one is breaking the law. That’s terrible for a company’s bottom line. To sustain profits, prisons need more prisoners … and retention, they need those prisoners to stay longer. There’s a civic disinterest in the conditions that lead to increased profits.

Hell, cut taxes in half and spin half the government into non-profits charities. Private contributions are tax deductible, and you just saved 5k on taxes … donate some of that to NASA, NEA, etc.

Negative Tax Rate

I’ve just about got our taxes completed for the year – we expect a huge refund because we have a tax credit that is 30% of the geothermal installation cost (the credit that made our geothermal system cost almost exactly as much as a far less efficient air exchange heat pump). What I didn’t expect was to receive a federal tax refund that exceeds our federal tax payments.

But the child tax credit is refundable – so we have a carry over for next year from the geothermal system and get a thousand bucks for having a kid. At which point, it occurred to me what Trump may be hiding in his tax returns. Not that he pays 0$ in federal taxes (yeah, I paid a whole heap of money to the state, medicare, social security, sales tax, and property tax too … doesn’t change the fact the federal government is literally giving me more money that I paid them this year) but that he finagles his adjusted income to be sufficiently low to qualify for refundable tax credits.

People get outraged when wealthy people pay a lower tax rate than the poor. Even more so when wealthy people literally pay less in taxes. But to have the federal government giving a fairly affluent individual a couple of grand extra … that would be shockingly egregious.

Personally … I didn’t try to get the money beyond including the energy efficiency tax credit in my pricing of geothermal and solar systems. I put all of my info into a tax preparation application and got an answer back. It took me a day to realize that that answer actually exceeded my payments (and that the changes I was trying to model for additional HSA contributions didn’t seem to change our refund any because our refund was maxed out and what was changing was the carry forward on form 5695. I’m also not turning it down. We have paid tens of thousands of dollars in federal taxes each year for decades – I’ll consider it getting an extra grand back from last year.

Tax and Budget Reform

I wish there was a decent way to file RFE’s (request for enhancements) with the federal government. I can’t do a thing about the complexity of the tax code or the annoyance of having to spend a weekend filling out forms just to get my money back. But there’s existing tax code for charitable deductions (although you can fall afoul of the AMT if you donate too much of your income … so that may need a little rewrite here). Create a new tax deductible donation categorization for government entities — then each department of the government not get themselves registered as a not-for-profit-goverment-entity that qualifies for tax deductible charitable donations. I would feel a LOT better about paying 10k in taxes this year if I knew the money was going toward departments I support (and not going to departments I do not support). I could literally donate every dollar I owe in taxes to specific departments – then get my payroll deduction contributions completely refunded (bonus, US government, you got the interest on my payroll deductions since you held on to them). Don’t want to bother? Then don’t – your payroll deductions will get allocated out for you through the budgeting process.

With a significant adoption rate, if no one wants to fund the Department of Whatever, then the people writing the budget could well take that as a hint. Obviously that’s not a perfect rule – no one wants to fund the IRS, but you’re still going to need someone to handle tax collection & filing (at least until you manage to sort out the tax code & processes). But someone who advocates eliminating the Department of Education may be surprised how many people voluntarily earmark their taxes for Education. Or the military industrial complex may be shocked that donations don’t approach the 60% or 16% (depending on your point of view of “all spending”) of the federal budget that goes into the military and Homeland Security.