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Archive for January, 2012

I’m an accountant. This is tax season. I’m not busy yet, so its a time to think and establish themes for the year.

Theme 1 – My role as a professional is to care, to apply my knowledge for the best interests of my clients, emphasizing finance, but in the context of finance as part of one’s individual and social life.

Theme 2 – My role as a thinking and caring person, is to put my energies into improving things, to apply what I’ve learned over my life.

That translates into activism, and in my case in the form of social entrepreneurialism.

In my case, it also translates into an obligation to comment on American tax policy, especially as it promises to be a prominent component of the 2012 electoral discussion.

Many critical tax law issues are up in the air, or more accurately kicked down the road. That strategy is a disaster for the American economy. The republican criticisms of that approach are valid, specifically that without certainty as the arc of the future tax and other law beyond just one or two years (2012), that the additional risk in the uncertainty HINDERS the formation of enterprising plans. Things don’t happen. People wait. But, this is a time that we need things to happen.

And, I agree that the federal government is currently innefficient in delivering on its purpose as governance, and even inefficient in areas in which government is normally the most efficient deliverer of services. We do spend too much on social security (it should be means tested). We do spend too much on medicare and medicaid (it’s services should be far more limited than currently). We spend far too much on defense.

That being said, although there are wonderful republican individuals that I’ve known and worked with, especially those with a charitable emphasis, that bear a sense of personal responsibility as a component of their liberty, the current crop of republican presidential candidates leaves me more than cold.

If they had no ideas that they planned to implement, at least that would be stability. The plans and priorities articulated in the debates, are worse than nothing, and largely around the tax code.

The democrats emphasize the unfairness of the tax code. The tax code is horrendously unfair and inconsistent, that is true. But, that is a distraction from the real work of constructing a tax code that is effective towards realizing universal prosperity.

The largest incongruity in the tax code is the subsidy for speculation, in stark contrast to encouraging enterprise and work.

Specifically, most unearned income from dividends and long-term capital gains, are taxed at a maximum of 15%, and most families that I encounter aren’t taxed at all. Those with family taxable income of less than $69,000/year aren’t taxed at all on qualified dividends and long-term capital gains. (That is after deductions “above the line” like IRA contributions, after standard and itemized deductions, and after exemptions. An average family might have close to $100,000 actual income, and pay no tax on dividends and long-term capital gains.)

And, even the 15% maximum rate is paltry. Its paltry when Warren Buffet pays 17% average tax rate (he does get 6,000,000 in work-based compensation). Its paltry when Mitt Romney pay 15.2% average tax rate, even with $80,000/hour speaking fees that are earned income.

That contrasts to social security tax which is normally a minimum of 15.3% tax (if you include the employer’s portion), and starts at dollar 1. On top of that, a successful self-employed plumber, can pay up to 25% regular tax, for a total of approximately 40% federal tax rate.

Comparing what Mitt Romney does with his money to the plumber’s. Mitt Romney invests in companies with limited liability, probably protected by risk mitigating options to protect his investments from losses, doesn’t work at them, doesn’t have all of his personal assets at risk if something happens that slips through insurance cracks. He can get sick and his money will still multiply. And, he has much much much more than he needs anyway.

In contrast, the plumber does put his initial investment at risk, and as a sole proprietor, ALL of his personal assets are at risk if he incurs a small or large loss. If he gets sick, his business stops. He works. The professional relationships are his. His reputation.

Mitt Romney pays 15.2% tax for assuming no responsibility, while the plumber pays 40% tax for doing the actual work, and for putting all of his personal assets at risk.

Aside from the unfairness of that situation, the important point is that the tax code then encourages Mitt Romney to speculate on pre-existing securities rather than work. (Maybe he personally puts money into new enterprise, a more noble and courageous effort than passively investing in stocks.)

We have volatility in stock and other markets largely because of that, because a bubble is created by the law (rather than governance protecting us from danger).

Money goes where it receives the highest return. It is more like a machine than a responsible person.

Lets do what we can to humanize money, personally encouraging that it be used productively and charitably, and to remove incentives that distort how capital is used in our society.

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