Voice For Liberty

Category: Taxation

  • Flentje: Align taxation with spending

    In a recent newspaper column and an appearance on the KAKE Television public affairs program This Week in Kansas, H. Edward Flentje of Wichita State University said that we should seek to align government spending with taxation.

    Presently we have systems where one level of government — say the federal government — collects taxes, and then sends the money back to local governments. Often this is in the form of grants, which local governments must apply for. If successful, the local units must then spend the money in certain ways. Flentje says that this system of money government moving from one level of government to another is the root of “cynicism, distrust, and outright anger at government.”

    Citing Alice Rivlin, Flentje listed a number of programs that the federal government should stop funding. Local government, instead, should take over these programs.

    Flentze mentioned Sedgwick County Commissioner Richard Ranzau, who is not voting for federal grants, one of the ways in which tax money is sent from one level of government to another. Ranzau says he votes against these grants for several reasons. The money is borrowed, he says, and we shouldn’t pass on the cost of current government operations to future generations. Second, accepting grants makes us dependent on federal spending, which, since grants come with strings attached, gives the federal government more control over local governmental bodies. And third, Ranzau sees no constitutional basis or justification for many of these programs.

    While taxing and spending locally is preferred to remote taxation and spending, I would add that many of the programs suggested to be left to local government, particularly education, economic development, and job training, are best left to non-governmental, that is, market solutions.

    Align spending with taxing

    By H. Edward Flentje, Professor at the Hugo Wall School of Urban and Public Affairs at Wichita State University

    “Spending is more responsible when the government that spends is the government that must finance that spending.” As an advisor to the late Robert F. Bennett, during his term as Kansas governor, 1975-79, I heard those words spoken often by him.

    At the time Governor Bennett was being besieged from two sides. On the one hand he faced a barrage from low-level federal bureaucrats dangling dollars with strings designed to tell him what state government should do and how to do it.

    On the other hand, Kansas local officials were demanding that the governor and state lawmakers send a larger portion of state taxes to local coffers.

    More recently, the political philosophy underlying Bennett’s words has led to the demise of much revenue sharing and hundreds of categorical grants across the country. Kansas lawmakers eliminated two sizeable revenue sharing programs aiding cities and counties in the aftermath of 9/11, as other states are doing in the current downturn.

    Still, in the current year, roughly $1 trillion in taxpayer funds will move from one level of government to another, and often from a second to a third level of government, through countless state and national programs. Huge administrative structures and arcane formulas remain in place to carry out these transfers between governments. Most deficit spending and budget battles today at all levels of government are tied to these transfers.

    This behemoth has become incomprehensible to the public breeding cynicism, distrust, and outright anger at government — national, state, and local government.

    One of the clearest and most consistent voices on how to tame this beast is Alice Rivlin, founding director of the Congressional Budget Office, co-author of a recent bi-partisan deficit reduction plan, and long-time advisor to Democrats and Republicans, most recently Paul Ryan, who last week released House Republicans’ budget plan.

    As lawmakers struggle with unsustainable finances, they would be wise to revisit Rivlin’s radical suggestions of nearly twenty years ago on dividing more clearly the jobs of national and state governments, in her words:

    Devolution. The federal government should eliminate most of its programs in education, housing, highways, social services, economic development, and job training.

    The productivity agenda. The states should take charge of the primary public investment needed to increase productivity and raise incomes, especially to improve education and skill training and modernize infrastructure.”

    Rivlin’s proposed reordering of state and national spending is reminiscent of Bennett’s prescription that spending should be aligned with taxing. Her “productivity agenda” also parallels rhetorically at least Governor Brownback’s “growth agenda” for Kansas. To carry out her plan would call for state and local officials to address their broadened obligations and the revenue requirements associated with removal of federal funding in education, skill training, and infrastructure.

    Public disenchantment is challenging as never before the century-long practice of taxing (or borrowing) at one level of government and sending those revenues for another level of government to spend. Aligning spending with taxing offers a guide as national, state, and local lawmakers work to place their respective jurisdictions on a sustainable financial course. This realignment will not happen overnight, but one can hope it will not take another century to complete.

  • Cost of tax compliance is high

    Each year Americans spend enormous effort and cost on tax recordkeeping and compliance. A study by the Tax Foundation estimated the time and cost of complying with the federal tax laws, and found: “In 2005 individuals, businesses and nonprofits will spend an estimated 6 billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion. This amounts to imposing a 22-cent tax compliance surcharge for every dollar the income tax system collects. Projections show that by 2015 the compliance cost will grow to $482.7 billion.”

    In Kansas for 2005, compliance costs for the income tax were estimated at 27.1% of the tax collected. That’s almost $2.5 billion in total costs, or $877 per person. To place this number in context, Kansas spends about $2.9 billion on public schools each year.

    Furthermore, the cost of complying with the federal tax code is highly regressive. Those earning less than $20,000 spent nearly 6 percent of their income on compliance. Those with incomes of over $200,000 spent just 0.45 percent of their income on compliance. Curiously, those earning less than $20,000 will generally pay no income tax, yet they still pay to comply. (Many of these low earners will qualify for various spending programs that are implemented through the income tax system.)

    By simplifying our tax code, we could eliminate much of this cost, and return that effort to productive use. As Paul Jacob wrote in a commentary: “This complexity has costs. And not just to my sanity. A whole industry has risen to ease the burden of figuring out our taxes. One hates to begrudge anyone an honest living, but really, most of today’s tax accountants would better serve humanity in some other job.”

    It is estimated that nearly half of all households will pay no federal income tax this year. Some will point out that all workers pay social security taxes, but as we’re told, that’s not really a tax, it’s the government saving for our future retirement. (Only the truly deluded believe this.)

    For those who do pay taxes, they often aren’t aware, on a continual basis, of just how much tax they pay. That’s because for wage earners, federal and state taxes are conveniently withheld from their paychecks. Many people, I suspect, look at the bottom line — the amount they receive as a check or automatic bank deposit — and don’t really take notice of the taxes that were withheld. This makes paying taxes almost painless.

    For property taxes, anyone who has a mortgage probably has these taxes incorporated into their monthly mortgage payment, so they’re not aware of the taxes on a monthly basis. Renters pay them as part of their rent. Everyone who trades with a business pays them, as taxes such as the sales tax are part of what people have to pay to buy something.

    To increase tax awareness, we should eliminate the withholding of taxes from paychecks and from monthly mortgage payments. Instead, each month or year the various taxing governments should send a bill to each taxpayer, and they would pay it just like the rest of their periodic bills. In this way, we would all be acutely aware of just how much tax we pay.

    Since tax withholding from paychecks and mortgage payments reduces our awareness of just how much tax we pay, it’s unlikely that governments will stop the withholding of taxes and submit a bill to taxpayers. Instead, it’s left to ourselves to remain aware of how much we are paying.

    A curiosity of tax season is that many people are happy because they get a refund. And they’re delighted to get that refund, so much so that many will pay high interest rates on a refund anticipation loan just to get the money a little earlier. The irony is that by adjusting their withholding, they could take possession of much of that money during the year as they earn it.

  • The ‘tax expenditure’ solution for our national debt

    While most critics of government spending focus on entitlements, regular appropriations, and earmarks, there is a category of spending that not many pay much attention to. The spending is called “tax expenditures.”

    It’s a big issue. As economist Martin Feldstein writes in the Wall Street Journal, tax expenditures will increase the federal budget deficit by $1 trillion this year.

    Tax expenditures are implemented through the tax system. It’s usually the income tax system, especially at the federal level. Taxpayers may receive tax credits, which reduce the tax that must be paid dollar for dollar. Many credits are refundable, meaning that if the taxpayer has no tax liability, the government will send the recipient a check. Examples cited by Feldstein include “$500 million annual subsidy for the rehabilitation of historic structures and a $4 billion annual subsidy of employer-paid transportation benefits.”

    While supporters of many of these programs portray them as not costing the government anything, Feldstein writes that they do: “These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures.”

    I argued this in testimony I presented to a committee in the Kansas Legislature this year, when it was considering restoring and expanding the Kansas historic preservation tax credit program. I told committee members: “We must recognize that a tax credit is an appropriation of Kansans’ money made through the tax system. If the legislature is not comfortable with writing a developer a check for over $1,000,000 — as in the case with one Wichita developer — it should not make a roundabout contribution through the tax system that has the same economic impact on the state’s finances.”

    In that committee, not one member voted against this program, even though the committee has some members who consider themselves very fiscally conservative and hawks on spending.

    Here in Wichita, the city council regularly steers spending to certain companies through the tax system by granting property tax exemptions and tax increment financing.

    Feldstein describes problems with spending implemented through the tax system:

    • Politicians use tax expenditures to grow the welfare state. While proposing a freeze on discretionary spending, President Obama at the same time proposed an expansion of a tax credit program for child or elderly care.
    • Once enshrined in the tax law, these appropriations don’t have to be reauthorized each year. They’re on auto-pilot, so to speak.
    • Eliminating tax expenditures is looked on by Republicans as a tax increase, so they are reluctant to support their elimination. Felstein counters: “But eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking.”
    • Tax expenditures distort the economy in harmful ways: “[Eliminating tax expenditures] would also increase overall economic efficiency by removing incentives that distort private spending decisions.”

    Feldstein concludes: “Cutting tax expenditures is really the best way to reduce government spending. And to be politically acceptable, the cuts in tax expenditures must be widespread, requiring most taxpayers to give up something so that the fiscal deficits can decline.”

    The ‘Tax Expenditure’ Solution for Our National Debt

    The credits and subsidies that make the tax code so complicated cost big bucks. Reduce them by third and the debt will be 72% of GDP in 2020 instead of 90%.

    By Martin Feldstein

    When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.

    These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures. That’s why tax and budget experts refer to them as “tax expenditures.” This year tax expenditures will raise the federal deficit by about $1 trillion, according to estimates by the congressional Joint Committee on Taxation. If Congress is serious about cutting government spending, it has to go after many of them.

    Continue reading at the Wall Street Journal (subscription required)

  • Topeka tax increment financing project struggles

    In Topeka, a residential and retail project funded with $5 million of tax increment financing (TIF) is in trouble, as the following story from the Topeka Capital-Journal describes.

    The project is titled the “College Hill Redevelopment District.” Wichita has its own College Hill neighborhood, and a residential project funded by tax increment financing there has not done well, either.

    Both of these projects are residential, and recent times have not been kind to residential real estate. Taxpayers are at risk when TIF districts do not meet their projections. Developers have the opportunity to earn profits to offset the losses they may incur from time to time. Taxpayers, like government, have no ability to profit from successful projects to make up for losses.

    College Hill project pushes on
    All 25 townhomes, 24,000 square feet of retail space remain unoccupied

    All 25 relatively new townhomes in Topeka’s College Hill Redevelopment District stand unoccupied.

    So does its 24,000 square feet of retail space.

    But developers behind the $30 million project to revitalize central Topeka’s College Hill business district say they remain committed. This month, they entered into a contract with a large retail brokerage firm that will work to bring in retail businesses.

    Read the rest of the story at the Topeka Capital-Journal.

  • Tax day should bring tax awareness

    On tax day, here are a few thoughts:

    It is estimated that nearly half of all households will pay no federal income tax this year. Some will point out that all workers pay social security taxes, but as we’re told, that’s not really a tax, it’s the government saving for our future retirement. (Only the truly deluded believe this.)

    For those who do pay taxes, they often aren’t aware, on a continual basis, of just how much tax they pay. That’s because for wage earners, federal and state taxes are conveniently withheld from their paychecks. Many people, I suspect, look at the bottom line — the amount they receive as a check or automatic bank deposit — and don’t really take notice of the taxes that were withheld. This makes paying taxes almost painless.

    For property taxes, anyone who has a mortgage probably has these taxes incorporated into their monthly mortgage payment, so they’re not aware of the taxes on a monthly basis. Renters pay them as part of their rent. Everyone who trades with a business pays them, as taxes such as the sales tax are part of what people have to pay to buy something.

    To increase tax awareness, we should eliminate the withholding of taxes from paychecks and from monthly mortgage payments. Instead, each month or year the various taxing governments would send a bill to each taxpayer, and they would pay it just like the rest of their periodic bills. In this way, we would all be acutely aware of just how much tax we pay.

    A curiosity of tax season is that many people are happy because they get a refund. And they’re delighted to get that refund, so much so that many will pay high interest rates on a refund anticipation loan just to get the money a little earlier. The irony is that by adjusting their withholding, they could take possession of much of that money during the year as they earn it.

    As a country we spend an enormous effort on tax recordkeeping and compliance. A study by the Tax Foundation estimated the time and cost of complying with the federal tax laws, and found: “In 2005 individuals, businesses and nonprofits will spend an estimated 6 billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion. This amounts to imposing a 22-cent tax compliance surcharge for every dollar the income tax system collects. Projections show that by 2015 the compliance cost will grow to $482.7 billion.”

    By simplifying our tax code, we could eliminate much of this cost, and return that effort to productive use. As Paul Jacob writes in his column for today: “This complexity has costs. And not just to my sanity. A whole industry has risen to ease the burden of figuring out our taxes. One hates to begrudge anyone an honest living, but really, most of today’s tax accountants would better serve humanity in some other job.”

    Since tax withholding from paychecks and mortgage payments reduces our awareness of just how much tax we pay, it’s unlikely that governments will stop the withholding of taxes and submit a bill to taxpayers. Instead, it’s left to ourselves to remain aware of how much we are paying.

  • State taxes and unemployment rates

    A few days ago someone left a comment to a post in this blog that argued — I think so, anyway — that low-tax states are not doing well in this economy, with the measure of “wellness” being the state’s unemployment rate. The author provided a link to an article titled Do taxes kill jobs?. That article contained a table of the states with columns for taxes paid per person and the state’s unemployment rate.

    The author of the comment made this claim: “How are states with lower taxes doing in this economy? Not very well.”

    Here’s a plot of the taxes paid per person and unemployment rate of a states. I didn’t include Alaska, as it is an extreme outlier value because of special circumstances in that state.

    Is there a trend visible? If there is, it’s not pronounced.

    State taxes and unemployment rates

  • Taxation: it’s more pervasive than you know

    Here’s John D’Aloia’s “Trackside” column for December 20, 2009. In this article, John traces through the pervasiveness of taxation in many common products, and how long we must work each year to pay these taxes. Besides taxation, regulation is growing, too.

    John D’Aloia lives in St. Marys, Kansas, where he serves on the city council.

    Have you ever thought about how many taxes you are paying when you buy a product or a service? An amount is obvious when a sales tax is tacked on, but is that the only tax included in the price you pay? You know the answer — of course it is not, but the remaining taxes are out of sight, out of mind.

    The Center For Fiscal Responsibility (www.fiscalaccountability.org), is a project of Americans for Tax Reform. As stated on its website, the mission of the Center is: “… to shed a light on government expenditures, and to promote transparency, accountability, and restraint in government finance.” It has taken on this mission in acknowledgment “… that the American people and its economy can best thrive and prosper when the role of government is limited and subject to the scrutiny of taxpayers.”

    The Center has calculated the percentage that represents the hidden taxes paid for by each dollar spent for 13 commonly purchased goods and services. The Center’s analysis included: excise taxes, “Sin” taxes, telecommunications taxes, taxes on tourists, common purchases sales taxes, corporate income taxes, payroll taxes, property taxes, capital gains taxes, unemployment insurance taxes, workmen’s compensation taxes, and other payments businesses must make to federal, state and local governments. The results of the Center’s analysis shows that taxes represent the following percentages of the price:

    Soda: 37.6%
    Cell Phones: 46.4%
    Gasoline: 51.2%
    Meals Out: 44.8%
    Hotel Stays: 50%
    Landline Phones: 51.8%
    Firearms: 45.6%
    Domestic Airfare: 55%
    Car Rentals: 60.6%
    Cable: 46.3%
    Beer: 56.2%
    Distilled Spirits: 79.6%

    And a drum-roll please for the taxes in the price of the 13th product: Cigarettes: 81.3%.

    Another Center project is to calculate the “Cost of Government Day” for the federal government and for each state. The Cost of Government Day is defined as “the date of the calendar year on which the average American worker has earned enough gross income to pay off his or her share of the spending and regulatory burden imposed by government at the federal, state and local levels.” The 47-page long 2009 Cost of Government Day Report is available for reading via a link on the Center’s website.

    The national average date to pay off governments is August 12th. Kansans have it a bit better. For Kansans, the date is August 4th. In comparison, the shortest period of indentured service is served by Alaskans who are free of working for government on July 11th. The longest period falls to citizens of the Nutmeg State — Connecticut residents work until September 7th to settle with all the government demands to which they are subjected.

    The Report shows the impact of the explosion of federal government spending in 2009. For the period 1999 through 2008, the number of days the average citizen had to work to cover federal spending increased from 79.62 days to 89.94 days; in 2009, the number of days jumped to 110.88.

    An interesting graph in the Center’s Report displayed the number of pages in the Federal Register each year from 1977 to the present. The Federal Register is published daily telling you what the Federal government is doing for you and to you. The more pages, the more regulations are being written to tell you how to live; the more pages, the larger is Leviathan’s appetite for power and your wallet. During the Reagan years, the average number of pages per year was 53,000. For the last seven years, the average number of pages has been 78,000. As of December 18th, this year’s Federal Register has 67,800 pages and counting, including 64 pages devoted to a proposed rule titled: “Nutrition Labeling of Single Ingredient Products and Ground or Chopped Meat and Poultry Products” and a 425-page notice “Medicare and Medicaid Programs; Quarterly Listing of Program Issuances — July Through September 2009.” I wonder how much these 425 pages enhanced medical care. More than likely, the principal effect was an added paperwork and compliance burden on doctors and hospitals.

    Thomas Jefferson did not foresee the Federal Register, but he foresaw its ultimate impact when he wrote in his autobiography: “Were we directed from Washington when to sow, and when to reap, we should soon want bread.”

    Get out and work hard — The Clerks are depending upon you.

    See you Trackside.

  • Obama’s tax increase on tires

    There’s a reason why some news is released on Friday night. Those making the news hope it won’t be noticed.

    That’s probably why the Obama Administration waited until then to inform the country that it was imposing a tariff on tires imported from China. This tariff will probably protect some American jobs, but it will increase the cost of tires.

    Lew Rockwell, in a post on his blog on the Obama tire tariff, is as plain as can be:

    “To stem the alarming availability of inexpensive tires to American consumers in a depression, and to reward overpaid, underworked unions and inefficient US producers, Obama has imposed — unilaterally, as a dictator — a 35% tariff tax on Chinese tires. The Chinese correctly point out that this is an act of the rankest protectionism, and harmful to the cause of world trade.”

    President Bush did things like this too: President Bush’s tax hike.

  • Wichita Eagle letter promotes taxes, big government

    Today’s Wichita Eagle carries a letter to the editor that, like many we’ve seen before, makes claims and espouses beliefs that are totally opposite to freedom and liberty. In today’s example, Omer C. Belden of Wichita argues that we should “concentrate on saving such successful programs as Medicare, Medicaid and Social Security.”

    To call these programs “successful” is quite a stretch. Each faces actuarial difficulties in the near future, when these programs will not be able to continue in their present form. In fact, Mr. Belden seems to recognize this, as he acknowledges “… their trust funds have been sorely treated …”

    But as Belden makes clear in his letter, if we poured adequate tax funds into these programs, they wouldn’t be in trouble. I suppose that’s true, in a way. Since each of these entitlement programs exist for the sole purpose of taking money from one group of people and giving it to another group, it follows that the more money transferred, the more “successful” the program is. This, of course, assumes you’re in one of the groups on the receiving end of this equation, and you don’t mind receiving something that belongs to someone else.

    In remarking that “taxes are its lifeblood” Belden — while arguing for more taxation — diagnoses the problem with government: unlike most people who must work for their income, the government simply takes what it needs in the form of taxes. (Or it borrows, which simply delays taxation to some future day.) Instead of free people engaging in voluntary transactions, each providing for themselves, their families, and their friends as they see fit, we have a coercive government, forcing us into collective retirement and health care systems. A system, we might note, overrun with fraud — so much so in the case of Medicare that it’s impossible to come up with an accurate estimate of its scope.

    Belden asks the question “isn’t ours a government by and for the people?” This statement is not a founding principle of our country, nor is it a guiding principle of free people. It’s just a line from a speech by a president, and one who was no particular friend of freedom and limited government. The idea that government can do things “for” us is a false and dangerous notion, as government has no resources of its own to give to people. Each thing it does for someone is something taken from someone else.

    The final claim that needs examination in Beldens’ letter is the claim that these programs “helped the medical profession build new clinics, hospitals and offices …” It’s well-known that Medicare and Medicaid pay doctors very little for the services they provide, with most doctors claiming that the payments don’t cover the cost of providing services. These programs aren’t a source of capital for building new facilities.