Sunday, August 24, 2014

THE POLITICS OF TAXES

Whether you are managing a business or simply handling your own personal finances, reducing your expenses protects your financial position, allowing you to do more with the money earned. Taxes, at the end of the day, are expenses that need to be managed, whether you are in the 1% or 99% group. There is nothing illegal, immoral, or wrong with seeking to reduce your exposure to higher tax rates, whether taking advantage of legal tax breaks or relocating to a more tax friendly region. The anti-business and anti-success anger that came to the forefront following the financial crisis, led for greater push for tax revenues, but the tax increases implemented to appease the anger lead to less than expected results. With lower than expected tax revenues, especially in regard to corporate taxes, the tax grab policies not only failed to provide adequate revenue but discourages investment in American markets. 

Image result for Fair share
In the past, I refuted the fair share argument that is commonly made against successful people. While these individuals possess greater income, the call for fair share is hypocritical. Essentially, the argument is extorting the highest taxpayers to transfer their income to those who truly do not pay their fair share, while getting more of their fair share of benefits. The economy is driven by spending and investment, which would be deterred by constant increases in taxes.  In many cases, investments made by high income earners, in turn provide greater employment opportunities for the rest of us. Also the constant rhetoric that blames successful people for every ill in society only encourages these individuals to weigh their options in terms of residence. The amount of people renouncing their citizenship to avoid domestic taxes is rising. This is not a new phenomenon as we saw the aftermath of the millionaire's tax enacted in New Jersey by former Governor Jon Corzine. Many high income residents decided it was in their best interest to relocate themselves to neighboring states, while leaving the failed Governor to exploit one time gimmicks to pay for his failed policies. There is nothing wrong with making the choice to relocate to an area that better meets your needs. What is wrong is using the tax system as a weapon to punish those who did the right thing and found success to cover for the failed policies.

Image result for declining revenueThere is a growing concern over the declining level of tax receipts from corporate taxes. With the continued anti corporation rhetoric, it is understandable that firms will look to grow in more friendly low cost international markets. As a result, elected officials aim to apply morality to business decision regarding taxes. In the case of Walgreen's, local, state, and national politicians bullied the global pharmacy into remaining in the Chicago metropolitan area, a location not suitable for business or decent living. While there are negative impacts of business relocation, whether from state to state or overseas, like loss in tax revenue or unemployment for workers not relocated, business should be held hostage. Too many communities become reliant on a single business for revenue, rather than focusing on broadening their appeal to attract new corporations and small businesses. Therefore, all the communities eggs are in one basket, and at risk when that business needs to relocate or close down. The burden should be on the elected officials to foster a growing economy that is able to attract business, rather than guilt businesses to remain in economic environments that are being further diminished by the bad policies of the same elected officials. 

Government provides public goods like education, national defense, and public safety, but the improvements needed should not be made at the expense of the economy that employs all the people paying for these services. The belief that a fair tax system only benefits the rich neglects to factor in the effects of potential relocation of the wealthy or future needs to expand the definition of wealthy. In addition, the need for additional revenues must be met with greater fiscal responsibility. There are theoretical concerns over how corporations would spend their savings, yet there is a general lack of interest over how government spends its coerced revenue. We cannot simply tax or cut our way out of the mess we are in. But our approach should factor in that in a global economy, we need to compete harder to retain our domestic businesses and attract foreign investment. Fostering an economic climate that attracts capital would provide the growth in our economy and government tax receipts, which could be a win win for all.

In upcoming posts, I will review some ideas that are put forth that are meant to put us on the "right" path. Some may work, while some may fail, but we will see what is the optimal path.