Does Sanders understand Tax Code?
From Tim Worstall, Forbes
Senator Bernie Sanders appears not to understand The Tax Code, something of a problem as he wants to reform it
Senator Bernie Sanders has laid out his proposals for changing the US tax code. There’s a slight problem in them as he seems not to understand how the code currently operates. This usually is something of a problem, when people try to reform what they do not understand.
His proposals are here:
Sanders’ specific proposals would:
Stop large corporations from stashing their profits in the Cayman Islands and other offshore tax havens to avoid paying U.S. taxes. Legislation already introduced by Sanders would raise more than $590 billion over the next decade.
Establish a Wall Street speculation fee to ensure that large financial institutions pay their fair share in taxes. A speculation fee of 0.03 percent on the sale of credit default swaps, derivatives, options, futures, and large amounts of stock would reduce gambling on Wall Street, encourage the financial sector to invest in the productive economy, and reduce the deficit by $352 billion over 10 years.
End tax breaks and subsidies for big oil, gas and coal companies to reduce the deficit by more than $113 billion over the next 10 years. The five largest oil companies in the United States have made more than $1 trillion in profits over the past decade. Exxon Mobil is now the most profitable corporation in the world. Large, profitable fossil fuel companies do not need a tax break.
Tax capital gains and dividends the same as work. Taxing capital gains and dividends the same way that we tax work would raise more than $500 billion over the next decade. The top marginal income tax for working is 39.6 percent, but the top tax rate on corporate dividends and capital gains is only 20.
Taking the first three briefly, taxing non-repatriated profits might actually be an interesting proposal: as would exempting them from taxation if they are repatriated. Something should indeed be done in this area and I would argue that the US should move to a territorial taxation system, tax only the profits made in the US. That’s if the decision to simply abolish the corporate income tax is seen as too politicall dangerous. The second, a Financial Transactions Tax, or Tobin Tax, would not raise any revenue at all. As we’ve seen from the European Union’s own report into the one that they are considering. For such a tax increases the costs of raising capital, meaning there will be less investment in the economy in the future and that economy will therefore be smaller than it otherwise would be. And as we all know a smaller economy returns less tax revenue. The numbers for the EU are that direct revenues from the tax would be about 0.1% of GDP while the indirect tax revenue losses will be about 0.9% of GDP. Losing 0.8% of GDP in lower tax revenues is not generally known as an increase in tax revenues. The third is pretty much a “Meh” moment. It’s almost sacred ritual these days that a left leaning politician must denounce the oil companies’ “tax breaks”. But they’re not different in any major manner from the essential allowances in the law that all investment activities get. It costs a few tens of billions of $ to get a major oil or gas project rolling and that investment must be written off over time in some manner. That is all that’s going on: they only start to get taxed on their profits after they’ve recouped their investment expenses. For the obvious and logical reason that it is only a profit after you’ve recouped your original investment.
But it’s that last that shows that Sanders really doesn’t understand the current tax code. For the current tax rates on capital gains and dividends are most certainly not 20 %. That’s the amount that is charged to the recipient, yes, but there’s another charge on the same gains being made at the company level. The true tax rate is therefore significantly higher than 20%, as I’ve had occasion to point out before:
For of course the US doesn’t in fact have a full tax rate of 15% on dividends nor 20% on capital gains. What it has is those tax rates charged to the individual: but there’s another layer of tax that applies at the corporate level. By looking just at who writes the check Hanauer is entirely misleading as to the actual rate of taxation on those monies. The integrated tax rate on dividends is, for 2012, a shade over 50%:
The current top U.S. integrated dividend tax rate is 50.8 percent – fourth highest among OECD and BRIC countries
And the capital gains tax rate on stocks in incorporated companies is similarly high:
The current top U.S. integrated capital gains tax rate is 50.8 percent – fourth highest among OECD and BRIC countries
I hope we can all agree that 50% or so is more than 20%? Indeed, those were the rates for 2012. In 2013 they’re even higher:
The current top U.S. integrated dividend tax rate is 50.8 percent – fourth highest among OECD and BRIC countries
This rate will rise sharply to 68.6 percent in 2013, significantly higher than all other countries measured
The current top U.S. integrated capital gains tax rate is 50.8 percent – fourth highest among OECD and BRIC countries
This rate will rise to 56.7 percent in 2013, the second highest among countries measured
In this situation I would of course normally back the Good Senator’s call. Yes, capital gains and dividends should be taxed at the same rates as work. Indeed, I regularly call of the complete abolition of the corporate income tax and its replacement with simply treating investment income just like any other income under the tax code. But given that doing this, taxing investment returns the same as work income, would mean lowering the tax rates on investment income this is obviously not what Bernie Sanders is calling for. Well, I assume that he’s not, for to raise an extra $500 billion in tax revenues by cutting tax rates would need a great deal more faith in the Laffer Curve than even I possess let alone the distaste that I’m sure Sanders has for the idea.
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