Quotulatiousness

October 5, 2016

“You have to die to eventually get out of the taxes […] few people are willing to take that step”

Filed under: Business, Politics, USA — Tags: , , — Nicholas @ 02:00

Megan McArdle addresses the social media outrage at revelations from Il Donalduce‘s partial tax returns leaked to the media:

The big news this weekend was the leak of Donald Trump’s 1995 tax returns to the New York Times. The returns showed that in that year, Trump claimed $916 million worth of business losses; those losses, said the Times, “could have allowed him to legally avoid paying any federal income taxes for up to 18 years.”

Liberal social media dissolved into an ecstatic puddle; conservative social media, at least the part that is supporting Trump, angrily denounced the Times for publishing this tripe.

A few sensible people tried to explain that while the story might have well show that Trump was a bad businessman, it didn’t really show any sort of interesting tax shenanigans. And since we had long known that Trump lost a bunch of money in Atlantic City, a story that has been amply and ably covered by folks like our own Tim O’Brien, it didn’t even really offer much news.

Why did people see scandalous tax avoidance in this case? At issue is the “net operating loss,” an accounting term that means basically what it sounds like: When you net out your expenses against the money you took in, it turns out that you lost a bunch of money. However, in tax law, this has a special meaning, because these NOLs can be offset against money earned in other years. You can use a “carryforward” to offset the losses against income made in future years (as many as 15 future years, under the federal tax law of 1995). You can also use a “carryback” to offset those losses against income you made in past years (three in 1995, which when added to the 15-year carryforward term, gives us the 18 years the Times refers to).

To judge from the reaction on Twitter, this struck many people as a nefarious bit of chicanery. And to be fair, they were probably helped along in this belief by the New York Times description of it, which made it sound like some arcane loophole wedged into our tax code at the behest of the United Association of Rich People and Their Lobbyists. They called it “a tax provision that is particularly prized by America’s dynastic families, which, like the Trumps, hold their wealth inside byzantine networks of partnerships, limited liability companies and S corporations.”

Every tax or financial professional I have heard from about the New York Times piece found this characterization rather bizarre. The Times could have just as truthfully written that the provision was “particularly prized by America’s small businesses, farmers and authors,” many of whom depend on the NOL to ensure that they do not end up paying extraordinary marginal tax rates — possibly exceeding 100 percent — on income that may not fit itself neatly into the regular rotation of the earth around the sun.

[…]

Rich people do manage their income to minimize their taxes, and some of the means they use to do so should probably be written out of the tax code. But the wealthy individual who manages to make a lot of money while paying absolutely no taxes on it is more a creature of myth than reality. That myth, like many myths, has some basis in fact: It used to be eminently possible to do, thanks to loopholes in the tax code that allowed people to take advantage of real estate losses, among other things. Those loopholes, however, were mostly closed by that notorious liberal crusader Ronald Reagan, during the 1986 tax reform package.

If Trump managed to pay no taxes for years, the most likely way he did this was by losing sums much vaster than the unpaid taxes. This is fair, it is right, it is good tax policy. There are many valid indictments of Trump as a candidate and as a businessman. But on the charge of unseemly tax avoidance, if this is all the evidence we have, then the grand jury would have to return … no bill.

Some politicians absolutely love tax laws, because they get to write them in ways that force taxpayers (both individual and corporate) to behave in certain ways to minimize the taxes they pay, and then they get to pillory disfavoured individuals or corporations in the media or on the campaign trail when they actually follow those arcane and intricate laws and end up paying “less” tax than the politician thinks they should. Win/win from the political hack’s point of view, but lose/lose for the law-abiding taxpayer.

QotD: Why professional athletes and actors get paid much more than firefighters and teachers

Filed under: Economics, Media, Quotations, Sports — Tags: — Nicholas @ 01:00

I agree that most people are troubled that the likes of Tom Brady and Jennifer Lawrence earn far higher pay than does any firefighter or school teacher. But this reality reflects not people’s correct understanding of a failing economy but people’s incorrect understanding of a successful economy. It reflects also a failure of economists to better teach basic economics to the general public. So let me ask: would you prefer to live in a world in which the number of people who can skillfully fight fires and teach children is large but the number of people who can skillfully play sports and act is very tiny, or in a world in which the number of people who can skillfully fight fires and teach children is very tiny but the number of people who can skillfully play sports and act is large?

I’m sure that you’d much prefer to live in a world in which skills at fighting fires and teaching children are more abundant than are skills at playing sports and acting. Precisely because saving lives and teaching children are indeed far more important on the whole than is entertainment, we are extraordinarily fortunate that the numbers of our fellow human beings who possess the skills and willingness to save lives and to teach children are much greater than are the numbers who can skillfully play sports and act.

The lower pay of fire fighters and school teachers simply reflects the happy reality that we’re blessed with a much larger supply of superb first-responders and educators than we are of superb jocks and thespians. Were it the other way around, then while we’d be better entertained with more top-flight sporting events and movies, all but the richest amongst us would suffer significantly greater risks of being unable to educate our children and of dying in house fires and from other mishaps.

Don Boudreaux, “Thinking At the Margin: It’s Revolutionary”, Café Hayek, 2016-09-01.

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