The Republican National Committee (RNC) joined with Mitch McConnell and approximately 18 Republican Senators in urging Roy Moore to resign. They pulled campaign funding and took the moral high ground…until the Senate voted on the tax reform legislation and they discovered that they only had one vote to spare.
The Alabama election takes place on December 12, 2017, before the date of a final vote on the reconciled tax bill that Republicans hope to place on the President’s desk before year end. And so, following the lead of the President, who is satisfied that Roy Moore not only denies but “totally denies” all allegations against him, the RNC changed direction and agreed to re-dedicate its support for the alleged perpetrator of over eight sexual assaults, four of which were on minors.
The Senate Tax Bill
Analysis of the Senate Bill has been extensive in the past few days. It has highlighted several problems arising from the hasty way it was passed.
Firstly, the alternative minimum tax (AMT) has not been repealed. Under current law, AMT is 20% compared to a regular tax rate of 35%. The bill passed by the Senate has both at 20%. Because certain deductions permitted against the regular tax liability are added back for AMT purposes, most corporations will, unless this is fixed in conference, now pay AMT rather than regular tax.
Additionally, the base erosion anti-abuse tax (BEAT) is a problem. It’s complicated. It’s intended to protect the tax base from US parent companies making payments to overseas affiliates whose earnings will be subject to a lower tax rate. But it will have negative consequences for the US taxpayer who reduces its US tax bill by any number of legitimate tax credits available to investors in renewable energy or low-income housing.
It’s not clear if these problems are oversights or intended features. It’s hard to admit the truth – that this was passed too quickly and without due consideration – because that is the point made by the Democratic Senators. Perhaps, as Nancy Pelosi said in respect of the Affordable Care Act, “We have to pass the [healthcare] bill to know what’s in it”. It was a terrible argument then; it’s a terrible argument now.
Christmas for the 1%
The 1% wealth bracket in the so-called Blue states of California and New York will be negatively impacted by the elimination of deductions for state and local tax and the limitation of the property tax deduction to $10,000. Overall, however, it is clear where the benefits of the Senate Bill flow, state, local and property taxes notwithstanding: to those making over $1,000,000.
The reduction in the corporate tax rate that has been approved will, according to many the CEOs interviewed, result not in additional investment in human or other capital but rather in share buybacks and increased dividends.
Why is the 1% Angry?
Senator Charles Grassley observed that the importance of repealing the estate tax was to ensure that those productive members of society would not be punished for a lifetime of thrift and hard work:
“I think not having the estate tax recognises the people that are investing, as opposed to those that are just spending every penny they have, whether it’s on booze or women or movies.”
The quote from Grassley raises a great point: fundamental attribution error. People are comfortable attributing outcomes to others based on their character and disposition: the poor are lazy; that’s why they are poor; the rich are rich because of hard work and intelligence. When explaining their own misfortunes, however, people are inclined to attribute causation to external circumstances. Gressley reinforces this fundamental error by his tactless comment.
The last ten years have been extremely rewarding for the top wealth slice of US society. Corporate earnings have been strong, and the financial markets have delivered robust returns to those who have been able to participate. It is not clear why either corporations or the wealthy have any reason to complain.
The middle and lower classes, on the other hand, have struggled with wages that have been essentially flat over the same period and with health, education and housing costs that have been climbing. It was this constituency that Donald Trump appealed to in his bid to be elected.
One of the unfortunate features of this tax bill is that, while everyone will enjoy tax cuts for the next ten years, the benefits will flow disproportionately to those with incomes over $500,000 after ten years. Individual tax cuts will phase out unless extended, whereas corporate taxes will remain at the same level. Consequently, the benefits of the corporate rate cut – increased dividends and share buybacks – will continue to flow to those with incomes over $1mn.
There is hypocrisy on both sides of the political divide, but the Republicans are running the show at the moment and the ‘house’ is beginning to look very crooked indeed.
An Update on Trumptopia: What’s Going on in the USA?
Whiskey Tango Foxtrot (WTF)
This 2016 movie, produced by and starring Tina Fey, is based on a book that was written as a memoir by the main character, Kim Barker. It follows a period of three years between 2003 and 2006 – it was initially supposed to be a three-month assignment – when Kim takes an assignment to be a war reporter in Afghanistan.
The premise of the movie is that one’s perspective shifts to adapt to the circumstances, however bizarre, in the manner of the proverbial frog in increasingly hot water. Kim exits before she is boiled, but only just. The most poignant moment in the movie (there are not that many – the emotional tone is mostly flat), is when Kim returns home to visit a marine who lost his legs to an IED in Helmand Province. She had been told by a fellow reporter that the marine’s assignment to Helmand resulted from a segment she reported where he discussed his habit of keeping his weapon unloaded. He had greater fear of an accidental discharge than of an engagement with the enemy.
Barker felt guilty and wanted to give him the opportunity to reproach her. His response was not to blame her at all: “You embrace the suck. You move the f**k forward. What other choice do we have?” He gives her a brief history lesson on the murky issue of causation of the war in Afghanistan and the Middle East.
It is a telling lesson on the complexity of the human condition, people’s tendency to overestimate the magnitude of their own causal contribution to world events and a reminder that there are fewer easy answers than might be desirable.
Fire and Fury
The recent book by Michael Wolff is an excellent read not because it reveals anything the reader has not already heard or suspected, but rather as a sober chronicle of dysfunction and a reminder of what government should be about and what it should not be, but all too often is about.
There was drama in the LBJ administration. There was inappropriate behaviour; foul language; manipulation; ego. LBJ’s time as Vice President was a marked contrast to his stature as Master of the Senate. The transition to President in the wake of JFK’s assassination was remarkable. As the world watched, wondering how this would go, Johnson worked the levers of power to bring in a budget below the level of $100bn demanded by Harry Byrd, Chairman of the Senate Finance Committee as the price for releasing JFK’s tax cut bill that was holding up consideration of the Civil Rights Bill. LBJ continued to work his inside the ropes knowledge of the legislative process to get the Civil Rights Bill passed into law. This was American government at its best.
The picture Wolff presents is American government at its worst. The legislative initiatives that have been undertaken by the current administration are healthcare reform; tax reform; immigration reform. Healthcare struggled and failed; tax reform passed and immigration reform is caught up in the politics of funding the government.
The President’s approval ratings are in the doldrums; he is forced to deny the racism revealed by his vulgar language and he is fighting with his Chief of Staff via twitter. In the meantime, those whose deportation hangs on immigration reform live in fear of arrest and infrastructure reform is on hold.
Unified Field Theory
Steve Bannon, the early architect of the Trump administration policy (since ousted and discredited by the President) and the author of the President’s Inaugural Address, was widely considered to be a proponent of a comprehensive policy to take the country back – a kind of unified field theory. His premise was that the American people had spoken through the election of Donald Trump. His organizing philosophy was a robust ‘America First’ policy on trade; a very restrictive immigration policy (widely interpreted as White Nationalist and anti-Muslim) and generally tearing down the administrative state to restore power into the hands of the executive branch.
This political philosophy was well targeted to flatter the ego of the President. Wolff’s book reveals that the President does not read and rarely listens. His attention wanders quickly and the passage to his understanding is apparently a narrow window defined by short-burst images and soundbites frequently played out on his favourite cable news network, Fox News.
There could not be a sharper contrast to the skill set required to approach the long-term issue of, for example, infrastructure repair. There could not be a sharper contrast to the achievement marked by the Civil Rights Act. There is no unified field theory of human progress. It is about hard work, incremental steps and the occasional watershed victory. Bannon was short-lived.
How Hot is the Water Right Now?
Kim Barker refers in her book and in the movie to the concept of “Kabubble”, the world in which the reporters are analogized to frogs in boiling water. The need to keep the war top of the media’s mind at home requires ever more extreme assignments at increasing levels of risk to the reporters and their teams.
The US is currently living in its own Kabubble: Trumptopia, a land where hours of media coverage are devoted to discussions of whether the President used the word “shithole” or “shithouse” to describe certain countries whose populations are considered unsuitable for immigration by the President on the basis simply of their geography (and perhaps, coincidentally, the colour of their skin).
Senators sacrifice their credibility in the cause of loyalty to a President who never repays it. If the key issue is which word was used, the story has missed its mark. If the public wishes the coverage would end because, not surprisingly, it is tired of the noise, then the essence of Trumptopia is revealed: the use of the bizarre to distract from the appalling.
Heads are spinning, and the frog has only a little time left…
US Healthcare: Income Disparity and the ‘$1trn Toll’
Valued at $18.62trn, US GDP ranks third in purchasing power parity behind China’s $21.29 and the EU’s $19.97trn. Considering China’s population of 1.38 billion, the EU’s 516 million and the US’s 326 million inhabitants, US production is impressive. But what those goods and services yield to society is what matters. In the US, over $3trn of the GDP is derived from healthcare. Of this total, at least $1trn is a regressive toll; a tax that exacerbates income disparity, stifles creativity, hurts competitiveness, and returns negative yields to society. It is unsustainable.
The toll is the difference between what the US spends on healthcare per GDP compared to western counterparts.
Healthcare expenditures in the United States as a percentage of GDP peaked in 2010 at 17.9% before falling to a current level of 17.1%. Despite this downward trend, US outlays easily remain the highest in the modern world.
Other countries’ healthcare expenditures as a percentage of GDP are: Sweden 11.9%, France 11.5%, Germany 11.3%, Cuba 11.1%, Canada 10.4%, Japan 10.2%, Australia 9.4, U.K. 9.1%, Israel 7.8%, Russia 7.1%, Iran 6.9%, China 5.5% and India 4.7.Averaging western powers Australia, Canada, France, Germany, Japan, and the U.K. comes to 10.31% of GDP—meaning the U.S. spends a staggering 65% more than its peers.
The Issues with Comparisons
Parallels can be problematic. Comparing nations’ healthcare costs and outcomes is not the equivalent of comparing apples to apples. Each country has unique attributes: obesity levels, median age, youth dependency, elderly dependency, total dependency rates and more. However, contrasting nations is not apples to oranges; it’s more like comparing two different types of apples.
Thus, costs and outcomes can be reasonably assessed. What is so unnerving about the US is that the median age and elderly dependency ratio, both key drivers of overall healthcare costs, are lower in the US than all its western competitors. At 43.3%, Japan’s elderly dependency ratio is nearly double that of the US.
No matter how one slices and dices key metrics, healthcare costs to US citizens are disturbing. Obscene adult obesity levels plague the nation. Maternal death rates run 1.5 to 3 times higher than direct competitors. Infant mortality rates run closer to Russia’s pathetic healthcare outcomes than US allies. Lastly, life expectancy in the US is one to five years less compared to the UK, Germany, France, Canada and Japan.
Many argue the premium that America spends on healthcare funds ground-breaking research, leading technology, and revolutionary drugs. Yet, for the majority of the lower and middle-class, these investments have failed to generate expected returns. The reason is the underlying financial model employed by the United States. While most modern societies utilize some form of universal insurance, the US rejects it—labeling it socialism.
Instead, America administers an inferior structure designed to generate revenues from a plethora of tests and dispensed medicines after disabling diseases, chronic ailments and incapacitating disorders are on set. The arrangement explodes costs and diverts monies from wellness and preventive care. If best-practices were implemented, more efforts would be directed to proven strategies prior to an illness that lead to positive outcomes.
More importantly, budget-busting end of life decisions would become more rational and humane – saving countless billions over time. Instead, Americans have been brainwashed to accept negative yields from their healthcare investments in the name of capitalism.
The Conservative View
Most conservatives scoff at these suggestions and believe that a return to pure capitalism would cure America’s healthcare crisis. The problem is free-markets tend to lean towards profits calculated in dollars, not outcomes. Equally, the good old days of healthcare delivered under free-market principles is a fallacy. The capitalistic principles in America’s healthcare have been defiled since WWII. The most egregious example is employer healthcare costs subsidized by federal and state governments that encourages massive fraud and abuse. These write-offs totalled $235bn in 2017 and are by far the single largest tax expenditure in the budget.
A prime example of the power of universal insurance is national defence. It protects all citizens equally. The free market then allows individuals to scale upon that – i.e. 2nd amendment rights. To achieve the best relative returns in healthcare, the same concepts should be applied. Base blanket coverage should be offered for all citizens with free-market alternatives available for those who want supplemental benefits. The additional coverage should be available for purchase from any insurer in the world—at true risk-adjusted market rates—without any tax implications.
In summary, to reverse the growing menace of income disparity, the most effective initiative the US can implement is universal healthcare. If provided, positive effects would be immediate. Employment costs would plummet, enabling companies to hire additional staff. For the majority, the soul-crushing financial costs and unknowns of healthcare would be lifted. The multiplier effect would be supercharged as incomes expanded and expenses pared. Mental health would improve and further reduce healthcare costs. The gains are incalculable.
Unfortunately, without a Democratic supermajority, the prospect of universal coverage is a pipe dream. America beware. If current levels of income disparity continue or even widen as anticipated by the new tax bill, expect the upper class to become complacent and the disenfranchised to disengage – it’s human nature. The consequences: up and down society, competitive spirits will be subdued. American hegemony will be jeopardized.
Implementing universal care is not the be-all-end-all answer to what ails America. But doing so will reduce costs and redirect monies to other social products and services that better serve society. Then, regardless of wealth or status, everyone will be afforded one of the necessary pillars to thrive in a competitive world—good health. What is more valuable than that? If the proverb “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime,” is accepted as gospel, then providing basic fundamental healthcare cradle to grave should be too. Status quo is not an option. If income disparity is left unchecked, the United States risks entering a death spiral—it’s called an “American Spring.”
In Praise of the IRS
It is tempting to characterize the IRS as the enemy and its employees as agents of the dark side, zealots in pursuit of taxpayers’ hard-earned dollars. The reality may differ. The National Taxpayer Advocate Service (NTAS) has just produced its Annual Report to Congress. The NTAS is an independent body within the IRS that exists to help taxpayers resolve difficulties with their taxes. It consists of 1,800 employees, 1,400 of whom are caseworkers.
There is obviously work to be done: the report weighs in at just over 1,000 pages, over sixty percent longer than the Tax Cuts and Jobs Act 2017. The report is well written – at least the portions read by this author – and contains a mass of fascinating information.
The report advocates for more funding for the IRS. The money – approximately $500m – is needed to enable to IRS to implement the Tax Cut and Jobs Act (new forms; new regulations) and to provide the service taxpayers will need to assist them with compliance.
Is It Helpful?
The information provided by the report, though fascinating, may not be useful. The volume of information is the first but not the only problem. Shane Snow wrote a brilliant article for Contently.com in 2015. Its focus was reading levels and their impact on readability.
Typically, when a piece of writing is run through a spell check in Microsoft Word, the result is a pop-up box showing information about the document – the number of words, characters etc. – and the readability score. Readability score assesses the grade level at which one must be able to read to comprehend the document.
Snow found an inverse correlation between the grade level at which an author writes and their readability. Or, put differently, the more difficult a book is to read, the less popular it is. The first sentence of this paragraph earned an “F”, with college-level reading skill required. The second sentence earned an “A” with a reading level of just below seventh grade. The NTAS report requires a post-graduate reading level. Although well written, as Snow points out, more than ninety percent of the population is not reading at this level. How helpful can it really be to taxpayers?
The Sharing Economy
Presumably, the target audience for this report is less the average taxpayer than it is the leadership of the IRS and the politicians that approve its funding. Small government ideology is inevitably constrained by the need to collect funds to drive the programs it does approve. Ironically, the party of supposed ‘small government’ – the Republican Party – has just passed tax reform that will increase the deficit over the next ten years by $1.5trn and will, therefore, require even more heavy lifting by the IRS.
The “sharing” economy (also known as the gig economy) can be described as “collaborative consumption” or a “peer-to-peer market” that links a willing provider to a consumer of goods or services (coordinated through a community-based online service).
The problem highlighted is that those involved in this economy – the service providers and the platform operators – are not consistently aware of their tax obligations. Some platforms clearly are: Uber and Lyft provide their drivers with a very user-friendly service that many prefer to the alternative of managing their own accounting. Others, apparently, are less efficient.
The issue is not minor. NTAS estimates growth in revenue from this sector of the economy from $15bn in 2013 to $355bn by 2025. It is aware that many of the platforms have set up online forums for discussing tax problems and recognizes that the anonymous nature of these forums contributes to their usefulness. The concern is that advice given may be incorrect per se or because of different taxpayer circumstances and NTAS notes that:
“anti-government/anti-IRS sentiment may skew the forum discussion, to the point where high-risk tax avoidance techniques may be accepted as norms.”
The other significant risk for service providers is that, while they may receive timely and accurate information about revenue collected through the platform on Form 1099, they may not have made appropriate estimated tax payments or saved sufficient cash to pay their taxes when due.
NTAS clearly shows the friendliest face of the IRS. Advocacy for the taxpayer is it mission after all. It notes, however, that the IRS manages to answer only 6 of 10 taxpayer phone calls during the filing season; and only 4 of 10 outside that season. A sizeable number of tax queries go unanswered and may be assumed to lead to incorrect filing.
For those who do get through, the result can be helpful: IRS officials default setting is not to be obstructive, but rather to assist in compliance. NTAS is somewhat creative in seeking to address the problems. One of the recommendations is that its representatives should participate in platforms such as Reddit.
NTAS notes that, while the IRS has been responsive in developing a specific website devoted to the sharing economy, more could be done in terms of providing check-lists or wizards to assist taxpayers. Branding firm Siegel & Gale, whose core principle is to keep things simple, lists the IRS as one of its clients. Evidently, the IRS recognizes the challenge.
It remains to be seen how forthcoming Congress is in authorizing the $500m requested to comply with the obligations imposed by tax reform. More taxpayer confusion is the likely result – but don’t be too quick to blame the IRS!
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