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9 Lies Liberals Tell About Taxes — UPDATE

Wednesday, April 20, 2011
By Dan

David Cay Johnston’s article last week, 9 Things The Rich Don’t Want You To Know About Taxes, deserves a stronger rebuke, but I’m a busy man, so let’s just cut to chase:

  1. Conservatives (not read as “rich,” but principled) argue that most people don’t pay income tax.  We all know about payroll tax, but that is earmarked for a particular program.  The fact that lower income people are tax payers because they pay into social security and medicare does not make misleading the argument that they do not pay into the general Treasury.  That’s like two people traveling cross country, one paying for gas and tolls.  When he complains that his companion is not paying his fair share, his companion says, “That’s a lie! I’ve paid for all my own meals.”
  2. Same lie in a different context.  Lumping in FICA and Medicare in a conversation about income tax is bringing a squeegee to a gun fight.
  3. More number fudging.  In 1960, the top 400 tax payers were a larger slice of the population.  Twice as large in fact, as there were only 180 million people in the U.S. 50 years ago.  Secondly, the fact that the top 400 pay less in taxes merely means that the high income tax base is spread out over more individuals.  The top 4 running backs had more yards in the NFL in 1960 than the top 4 do today–there are more backs and more teams.
  4. Ignoring the corporate form and law is fertile ground for propaganda. Hank Paulson did not earn that money, his hedge fund did, and so long as the fund retains the money, it remains at risk.  Risk of investment losses, and more importantly, risk of the funds’ creditors.  Substitute Paulson for Maddoff (a trade many would argue is like for like) and you can see the huge difference.  Maddoff would have been wiped out, but instead he took the money out of the fund (paid taxes on it) and bought personal and real property with it.  Letting the money ride is the privilege of owning a business, and without it, the credit crunch would have been that much worse as more capital bled into taxed oblivion.  So too, leveraging.  The reason the tax code sees the McCourts as paupers is because they are.  They no longer have any legal right to the revenue that they have leveraged.  Their lifestyle may be quite nice, but on paper they have no income because–and this is important–THEY HAVE NO INCOME.
  5. I don’t know how this would be a secret–most people appreciate that, as societies develop, the capital owners become more wealthy.  Risks and costs reduce, allowing the owner of a good company to exact a higher margin.  If you build a better mousetrap factory, you should make more profits in the mousetrap business. There is no requirement in this country that the boss share the wealth.  There is in other countries, it’s called socialism.  There’s a reason socialist countries have few billionaires and fewer productive companies.
  6. No one disagrees that the tax code is a labyrinth of deductions and dim witted incentives.  Corporations are legally bound (to their shareholders) to fight for every legal advantage and preserve the capital invested in the company for business purposes.  As much as it hurts the tender sensitivities of liberals, there is no legal requirement to maximize your tax burden.  The fact that Congress, in its microscopic wisdom, continues to enact deductions and offsets cannot be blamed on the corporations that benefit from them.
  7. This is just arguing out of both sides of your mouth. David complains in #4 that evil hedge fund managers refuse to take money out and be taxed, but here he claims higher taxes would encourage them to do just that.  Higher taxes have not lead to a single job outside of the federal government. Companies have an incentive to make money, not jobs.  If it is more profitable to move jobs from humans to machines, they will (and are obliged to their shareholders to).  So to, if it is more profitable to outsource jobs internationally.  By the way, allowing companies to “repatriate” funds is a uniquely American concept.  Only the IRS believes that it has the right to tax taxpayers wherever their profits are made–every other taxing authority leaves taxes to the local jurisdiction.  Why should a company that employs its personnel in, conducts its business in, services customers based in, owns its factories in and benefits from the police, fire and courts of Singapore be required to pay taxes in Washington?  Because it’s corporate parent was formed in Delaware 100 years ago? If you really want to emulate Germany, let’s do that–a German citizen can move to Dubai, make gobs of money at a lower tax rate, and retire in Germany with full health care, never having paid a penny of German taxes on the Dubai “windfall.” No American can do that legally.
  8. All politicians like taxes in the same way that hookers like prophylactics. They won’t admit it, but they need them to get on with their business (in both cases, screwing people). Reagan’s increase to social security was because he saw the insolvency coming.  That surplus is now a deficit and it grows every year. Would you rather he had taken the Obama approach and cut FICA in half just when it began to take in less than it put out every year?
  9. So move to Germany.  Singapore has immaculate streets, should we adopt a penal code that imposes caning for littering?  Senator McCain suggested a fix to the health care issue, which Obama & Biden called the largest tax hike on the middle class in history. And then they proposed it themselves a year later, only without the offsetting tax deduction. Health care is only tied to jobs in the US because of wage freezes imposed by Democrats during World War II.  Rather than allowing competition for employees (which would have raised wages), Congress froze pay and that meant employers could only compete on fringe benefits, like dental and health care coverage.  Idiotic policies have consequences.


Mr. Johnston,
Thank you for your comment. From what I’ve read of your writing, I think we both agree that the tax code is bloated, inefficient and unfair. Where we disagree is that I do not think it is fair to blame the wealthy or the corporations for taking advantage of a system put in place by a corrupt legislature and an increasingly broken form of government.

My view is that a decent accounting firm and an army of lawyers is the only corporate defense against waves of populism that attempt to make capitalism a four letter word. I would rather we reduce the tax code to 25 pages and let all of those intelligent people accomplish something far more productive.

As for who is to blame, I do not exempt George Bush or even Reagan from their fair share of blame for complicating the tax code. Republicans are just as guilty as Democrats for ruining the tax code, they’re just not so damn sanctimonious about it.

My remark about Germany was not an ultimatum, but a way to make a point. I don’t know the statistics, but I would bet that far more Germans emigrate to the US than the reverse. My point is that their taxation has consequences that many Americans would reject. Moreover, although Germany’s GDP may be growing quicker, most of the incremental increase is due to exports, which benefited from a weakening Euro. On average, German workers are less productive than their US counterparts. Meaning that the US economy, if not run into the ground, should outperform Germany in the long run. Moreover, the government benefits you endorse are unsustainable. The UK is facing riots as it tries to extricate itself from free universal college education and European health care is not a model to be aspired to.

Regarding your claims about the top 400 taxpayers, your clear implication that the rich keep getting richer, a 2007 Treasury report showed that the top of the taxpayer base is not constant. The top 25% of taxpayers change from year to year as businesses succeed and fail. As the Wall Street Journal put it, the “rich are not the same people over time.”

I also disagree with your points about FICA. The fact that the government can and does raid the coffers of social security and Medicare, does not suddenly make those revenues part of the general treasury. The treasury bonds put in the trust fund will have to be paid by income tax and other general revenue sources. And that income tax is paid by a smaller and smaller percentage of people.

The fact that social security has collected $2 trillion more than it has paid out does not mean that the Treasury has that money free and clear. Those funds were paid into the social security system by people who have not yet retired or begun to draw benefits. As I’m sure you are aware, the 2010 trustee’s report projected a $7.9 trillion deficit for social security. Claiming the past $2 trillion as “excess” is like allowing an insurance company to spend the premiums they collect because the policy holder has not died yet. We can argue about whether or not this is a lie, but it sure is not being honest.

People who only pay FICA and Medicare can claim their money was wrongly used (or more accurately, loaned) for general spending, but they cannot claim to have supported the federal budget directly. That is the same as my mortgage bank claiming they bought my house. You know as well as I do that a loan is not an equity interest. Saying otherwise is indeed a lie. The fact remains that the burden of supporting the wrongheaded, ineffective and wasteful federal bureaucracy falls on a minority of earners, even though the largess is aimed at the majority. That is a moral hazard, and raising taxes on the “rich” will only make it worse.

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One Response to “9 Lies Liberals Tell About Taxes — UPDATE”

  1. David Cay Johnston

    Wow, talk about lies, Dan. You are full of them.

    With hard facts taken right from the public record it is easy to show that you have written line after line of utter nonsense in your April 20 post.

    Here are just a few of the glaring examples of errors, straw men and muddled thinking by Dan who dares not sign his full name:

    Dan: “Conservatives (not read as “rich,” but principled) argue that most people don’t pay income tax…”

    Hard facts: No, they do not, unless they are fabulists. A majority has paid income taxes every year since World War II. The majority was 53% in 2009 and 2010, but will go back to more than 60 percent this year.

    The major reason there are so many people not paying income taxes in recent years is a 1997 law sponsored by self-described conservative Republicans creating a child tax credit and expanded in 2001 at the behest of President GWBush to $1,000 per child. So slashing the number, and the share, of people who pay income taxes was an idea sponsored by conservatives.

    Dan: “The fact that lower income people are tax payers because they pay into social security and medicare does not make misleading the argument that they do not pay into the general Treasury.”

    Hard facts: Since 1983 about $2 trillion more was collected in Social Security taxes than was needed to pay benefits, enabling income tax rate cuts for those at the top. You can argue, if you want, that the money was used for farm subsidies or nuclear submarines, but the fact is that all that money went into the general Treasury and was spent on general government purposes. In other words, you are just wrong on the facts.

    Dan: “More number fudging. In 1960, the top 400 taxpayers were a larger slice of the population. Twice as large in fact, as there were only 180 million people in the U.S. 50 years ago. Secondly, the fact that the top 400 pay less in taxes merely means that the high income tax base is spread out over more individuals….”

    Hard facts: The facts here eviscerate your points. Yes, population increased, but it did not double, as your words imply. The growth was on the order of a two-thirds increase so you are off by around 60 million people.

    Still, in 2007 the top 398/400 taxpayers were indeed a smaller share of a much larger population than in 1961. Despite this, the share of all income going to the top 398/400 taxpayers increased significantly in 2007 event though their relative size declined.

    In fact the top 400 more than tripled their share of national income from 1992 to 2007 despite growing population.

    So, America has a vastly bigger population than in 1961, but a dramatically increased concentration of income among this significantly smaller, by your standards, share of the populace. The hard facts make my point solid and reduce yours to nonsense.

    But wait, there’s more.

    For every dollar of after-income tax going to each of those at the top in 1961 they had $36.50 more in 2007, while the bottom 90 percent each had 50-cents more, IRS data show. That’s a growth ratio of 71-to-1. At the same time the federal income tax burden of the top group fell three times as much as the bottom group.

    Suggestion: next time check the official data before you write so you avoid such dumb mistakes. (Notice I don’t call your proven mistakes lies, just dumb mistakes.)

    Dan: “Ignoring the corporate form and law is fertile ground for propaganda. Hank Paulson did not earn that money, his hedge fund did, and so long as the fund retains the money, it remains at risk….”

    Hard facts: Multiple error alert!

    1. Hank Paulson never ran a hedge fund; he was the Treasury secretary and before that ran Goldman Sachs.

    2. Hedge funds are not corporate form, they are partnerships, so your corporate form point is also nonsense.

    3. Beyond your magical thinking about hedge funds somehow earning money on their own, the 20 of the 2&20 compensation hedge fund managers get (5&44 for John Paulson) is from risking other people’s capital, not the manager’s money. We call that compensation for services in American law. The exception occurs when people donate lots of money to candidates and get a special tax rule that benefits them.

    Your writings here, muddled as they are, suggest you like competitive and level playing fields (I sure do!), but in this case your seem to favor a tilted field.

    Dan: “there is no legal requirement to maximize your tax burden. The fact that Congress, in its microscopic wisdom, continues to enact deductions and offsets cannot be blamed on the corporations that benefit from them.”

    Hard facts: Finally you got one right in that first sentence. But then you go and ruin it. By your reasoning that Congress just gives away tax favors with no encouragement or inducement. No thought by you about lobbying ($73,500 per senator and congressman last year by GE alone), no campaign contributions, no jobs for members of Congressional spouses (can we say Daschle? Tauzin?) And your language suggests that whatever Congress does is proper and should not be questioned.

    Who’d have thought Dan worships government as a power unto itself rather than a creation of the people to act on our behalf for the reasons set forth in the preamble. Yet there it is, plain as day. Well, muddled writes as muddled thinks.

    OK, arguably I am pushing further than your ill-thought through words, but really, the smell of your implied nonaccountability makes me hold my nose.

    Dan: “allowing companies to ‘repatriate’ funds is a uniquely American concept. Only the IRS believes that it has the right to tax taxpayers wherever their profits are made–every other taxing authority leaves taxes to the local jurisdiction.”

    Hard facts: No “allowing” involved. Companies are free to put their money any place they choose. And you misplace responsibility (see lack of accountability theory above) since Congress makes the laws. The IRS is just the tax police department. Blaming the IRS for a tax law is like blaming the cop writing you a ticket for the traffic laws. Did you cut class during eighth grade civics and neglect to read Article I of our Constitution?

    Also, America is not unique in taxing extra-territorial profits, which you would know if you had done a scintilla of research.

    More significantly the worldwide tax system saves multinational companies money – billions and billions — because they can accumulate untaxed profits offshore, borrow against those assets and create a tax deduction for interest inside the U.S.

    None of the companies that do this wants to end this system. I know because in addition to getting my hands on their lobbying memos and the like, I have asked CEOs and tax executives in interviews and public forums going back years and each one asked spoke in favor of retaining the corporate income tax and, where relevant to the company, worldwide taxation. And why would they want what you imagine. They understand, unlike you, that this system gives them pools of zero cost capital and, sometimes, negative cost capital. Of course all capital comes with a cost. They just subtly shift that cost onto others.

    In your supposed lock on truth you somehow never read any of the piles of official studies, statements and analyses that would have shown you why your fact-free observation is, in this case, laughable. You did not even consult the data, now so easily available on the Internet.

    Dan: “corporate parent was formed in Delaware 100 years ago…”
    Actually, the rush to Delaware came earlier, but after New Jersey lost its lock on weak corporate laws.

    Going back further, the Framers would not agree with you. At our nation’s founding corporations were tightly controlled, allowed to exist for limited periods of time for specified and generally for a single purpose. They were also required to establish that their existence produced a significant public benefit – jobs did not count. Justice Rehnquist would not agree with you, either, which you would know if you read his opinions warning about corporations.

    Dan: “so move to Germany…” Curious, since what I wrote was “adopting the German system is not the answer for America.”

    Given your now well-established inability to tell a fact from a fantasy, though, I guess it is not surprising you missed that line.

    Even so, given your claim that you expose lies and things un-American, what could be more un-American than what you wrote? After all, we live in a country founded on challenges to government power.

    You know that tea party back in December 1773 (and the others that followed)? They were protests against a tax exemption. And that tax favor was seen by the people as a burden on them to bail out rich friends of King George who has mismanaged a giant corporation. See any parallels to the bailouts of the rich friends of President George?

    So to suggest that someone who disagrees with you should leave, in a country that enshrines dissent and inquiry and freedom of speech in its Constitution is, well, its about as un-American as it gets, Dan.

    You did get part of your ninth point right – it makes no sense to cut the FICA tax when a minor portion of that tax (the DI part of OASDI) is in deficit. But then you go and mess up your somewhat clear thinking by ignoring facts again, not to mention an utter lack of historical context. See, the idea for that came from self-identified conservatives and not from Obama, who merely (and foolishly in my view) acquiesced. And that FICA tax rate cut actually raised taxes on 51 million of the 151 million taxpayers or one in three.

    You also get it right that the way we finance health care is stupid (and a burden to small business owners with employees like me). But then again you ignore facts and muddle your argument.

    See, the approval of health care as a tax-free fringe benefit was promoted by a conservative businessman and his allies and enacted during World Ware II with bipartisan support and then enshrined after the war with bipartisan support. The guy who tried, and failed, to get us a modern healthcare system that would get health care off the backs of business was a Democrat named Truman in 1948.

    Your post’s headline uses the word “lies” to describe my work. That word means “to make intentionally false statements.” I cite the definition because you have made so many egregious errors in your brief post that, a fact I am not so sure you know its meaning.

    Yet you failed to show that a single statement in my article was intentionally false. Indeed, you did not even meet the much lower standard of just showing error.

    For sure you do not like my opinions about our tax system, or at least most of them. But opinions are not matters of truth or falsity and thus do not meet the definition of lies.

    What you have successfully accomplished is revealing your utter lack of knowledge, your propensity for major factual errors, your bad math, your lack of research, and your heavy reliance on pure fantasy, all wrapped together into a smug package of nonsense.


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