Beaver County Reds – 11/29/14

This analysis addresses the graphic shown in the subject piece showing what the CPC would/would not like to see in a tax bill.

First, let’s look at some leftyspeak.  The Merriam-Webster dictionary defines loophole as “an error in the way a law, rule, or contract is written that makes it possible for some people to legally avoid obeying it.”  To lefties, a “loophole” also includes a legal provision written into a law the left doesn’t like for ideological and/or political reasons.  For example, a business expense deduction is a “loophole,” but a handout, like the misnamed Earned Income Tax Credit (EITC), for “working families” is not.  A business expense deduction for an evil oil company is a “loophole,” but the same deduction for a “green” business is not.  Lefties also refer to deductions – business and personal - they don’t like as “subsidies,” “spending in the tax code,” and “tax expenditures.”  You should also note use of the word “corporate.”  Most (all?) leftsters use “corporation” as a synonym for “business,” though I’m sure they would disagree in public.  As with all leftyspeak, it allows lefties to mislead people by implying one thing (big, evil company) but meaning another [all businesses (except those union-owned and labor unions), whether big or “mom & pop”].  FYI, a Pennsylvania corporation can be as small as one person.

Of the “Loopholes” listed in the graphic, four are deductions for business expenses.  Reduce or eliminate the deductions – the same effect as increasing the income tax rate - and businesses will spend less in these areas.  The reduced spending will result in fewer jobs supported by those expenditures, like those in the catering, restaurant, entertainment, and corporate/private jet industries.  Stock options result in a business expense for exercised options.  This is a way for startup businesses – large and small - to compensate talent they could not otherwise afford to attract only via wages and benefits.  The employee bets the business will be successful so that his exercise price (determined by the stock option agreement) is less than the stock price if/when he exercises his options.  When this is not the case, the options expire worthless – aka “underwater.”  BCR and the CPC talk about “Wall Street” regarding stock options, but everyone – and I mean everyone from the receptionist to the CEO – in the startup in which I participated received stock options.  This is – or was - typical.  Established businesses also use stock options to incentivize top management to improve company performance.  Options are also used to try to get around the idiotic deductibility cap of $1 million for an annual salary.  It only works, however, if the options don’t end up “underwater” or close to it.

According to Bloomberg Businessweek, here are “The Essentials” regarding deductions related to “Yachts and Vacation Homes.”  “The federal tax code … allows boat owners to deduct mortgage interest on vessels used as second homes.  Tax­payers can claim a deduction on as much as $1.1 million in mortgage payments on two homes: a ‘main home’ where they live most of the time and a second one.  Boat owners qualify if the vessel has basic living accommodations, including a toilet, a galley kitchen, and a place to sleep.  The 73-year-old tax break applies to small weekend sailboats as well as multimillion-dollar yachts. … The boat industry estimates about 5 percent of the 12 million boats registered in the U.S. are eligible for the deduction. … The same tax break also applies to an RV used as a second home, but those aren’t on the chopping block.”  Now, let’s go back to 1990.  President George H.W. “Read my lips, no new taxes.” Bush and the Democrat-majority Congress assessed a 10% luxury tax on private airplanes, pleasure boats, cars, furs, and jewelry whose price exceeded given levels.  The tax rate on pleasure boats priced more than $100,000 nearly killed the U.S. pleasure boat industry.  Customers (“the rich/oppressors”) either delayed their purchases or made their purchases overseas.  Translation: American employees in the pleasure boat industry lost their jobs.  President Clinton and the Democrat-majority Congress repealed the luxury tax on pleasure boats in 1993 after it was shown to produce no significant revenue while it killed jobs in the pleasure boat industry.  Reducing tax deductions has the same effect as increasing the tax rate, as happened in 1990.

Of the five recommendations under “Jobs,” three are purely state/local responsibilities, one (roads and bridges) is mostly a state/local responsibility, and the fifth is a handout (described above) for “working families” (covered below).  If state and/or local voters want to increase spending in the mentioned areas, state and/or local taxpayers should foot the bill, not federal taxpayers.  As a reminder, PA state-imposed fuel taxes will increase by about 25 cents/gallon by 2017 relative to the 2013 rate.  If we need to increase spending for maintenance of federal roads/bridges and the current fuel taxes (gasoline - 18.4 cents/gallon; diesel – 24.4 cents/gallon) are insufficient, we need to increase the federal fuel tax rate, not raid the general fund.  As long as none of the tax revenue went to mass transit, I think most of us would support a fuel tax-rate increase if truly needed.

The result of the CPC proposal would be to cut jobs in areas supported by the specified tax deductions to allegedly add jobs the CPC likes.  I can almost guarantee the net effect would ultimately result in fewer jobs, not more.  If government-directed economies actually worked, we’d probably be speaking Russian.

BCR and the CPC failed to mention a beneficiary of their “jobs” spending, labor union management.  Most government-paid firefighters and police officers belong to labor unions.  Contracts let for “repairing our roads and bridges” and “moderniz[ing] … public schools” include a “prevailing wage” requirement that favors businesses with labor unions.  Since the public sector has a much higher unionization rate than the private sector (35.3% vs. 6.7% in 2013), the “jobs” allegedly generated would result in a windfall of union dues for Big Union managers (BUMs), a portion of which goes to political purposes such as lobbying, taking positions on political issues, and so on.  According to their U.S. Department of Labor LM-2 forms, the American Federation of State, County, and Municipal Employees (AFSCME) spent $70 million in 2012 on “Political Activities and Lobbying,” the American Federation of Teachers (AFT) spent $21.5 million, the National Education Association (NEA) spent $39.9 million, and the AFL-CIO spent $45 million.  These expenditures were by the unions themselves, not their affiliated PACs.

“Working families” – more leftyspeak - doesn’t mean what you likely think it means.  Most of us would ask, “who isn’t in a working family?”  “Credits” like those proposed by the CPC (child and EITC) aren’t what they want us to think.  According to the Tax Foundation, “These are not refunds of overpaid tax; they are payments to people who have already gotten back everything that was withheld from their paychecks during the year.”  That’s why I refer to them as a handout; they are a form of stealth welfare.  By necessity, the vast majority of working families never see a penny from CPC “credits.”  In fact, since “there ain’t no free lunch,” the vast majority of working families get the honor of footing the tax bill for the “credits” given to the CPC’s “working families.”

None of what I wrote above is news to BCR and the CPC; they’re smart, educated people.  As fellow lefty Jonathon Gruber (Obamacare architect), BCR and the CPC likely think we’re too stupid to figure out their deception.

In Peace, Friendship, Community, Cooperation, and Solidarity. <g>