Reality On So-Called 'Tax Cuts'

by Karl Denninger, Market Ticker:

Let’s cut the crap, shall we?

Tax cuts have never resulted in any sort of material improvement in the living standard of the ordinary America — which I define as everyone other than the top 1% of earners.

It has simply never happened.

The last time the tax code was “reorganized” you got more buy-backs and stock options issued to executives.

The same thing happened with all the other tax cut packages since.

Further, when we had the so-called “Reagan Tax Reform” Tipper promised to cut spending in order to make them deficit neutral.  He did not do so; no reduction in spending was ever delivered.

This will be no different.  In fact, unlike the Reagan-era game nobody is even claiming to intend to reduce spending.

The chimera of “tax cuts” being “good for business” is nonsense as well.  Almost no corporation actually pays the tax rate claimed, especially large firms.  They all cheat — Apple has been caught in the “Paradise Papers” and others have as well.  The claim of “repatriation” leading to some sort of boom in investment and wages is nonsense as well.

The answer to corporate tax cheating is quite-simple, yet will never be implemented.  It’s simply this: You pay US taxes on all economic activity that is directed toward sales and services delivered in the US.  Period.

If you put a call center in the Philippines and it takes US calls the employees there are subject to US employment taxes and all of the economic activity generated aimed at US consumers is taxed as US income.  It matters not where the work is performed — what matters is where it is directed.

If you cheat and get caught you not only pay the back taxes you pay them twice plus interest as a penalty, and those inside your firm (or otherwise, such as auditors) who expose it get 10% of whatever they cause to be recovered.  That’ll make it plenty worth it for them to rat you out.

That’s it.  No more “Isle of Man” garbage, no more fancy-pants intellectual property deals, no offshore call centers to eliminate employment taxes on the people answering the phones, etc.  Nope, nope and nope.

Then the small US company is on the same footing as the large multinational.  It’s the only way to make it happen.

Further, there is utterly no reason to allow capital gains rates to be taken by money managers and hedge funds.  That one’s simple too: You can only take a capital gains rate if your personal funds are at risk in earning the return.  Thus the Hedge Fund folks pay ordinary income rates on those earnings, because it’s not their money at risk — it’s yours.

Like most things of this sort there are reasonably-simple and elegant fixes, but there are also an army of lobbyists employed in making damn sure none of their favorite folks get hammered by any of them.

The only thing I see that’s good in the proposed changes are the doubling of the standard deduction which is a definite positive for everybody, especially those in the middle class — most of whom do not itemize.  In fact virtually nobody does with under $100,000 of income because it makes no sense to do so.  In addition, where the individual mandate to get struck (which I rate as having about a 1 in 100 probability) that would be a great thing from a standpoint of freedom — but it will certainly crash the rest of Obamacare should it occur.

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