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The Certainty of Taxes
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By the time you read this, I will have just barely submitted my 2005 personal income taxes prior to the extension deadline of October 16th. It’s a hassle I have every year, not so much because I already look at tax returns all the time in our business, but mostly because it takes a HUGE amount of effort to organize all of my documents and provide them to all my accountants. Having said that, I suppose having five K-1s also doesn’t help my cause either. My accountants, incidentally, find that I’m one of their best clients because from everything I give them, they just have to plug in the numbers and double and triple-check my spreadsheets with my receipts and forms. I already organize and dot all the “I’s” and crossed all the “T’s.” Nevertheless, it doesn’t ever seem to get me a discount . . . maybe because I wait too long, consumed with too many other things.

In that spirit, I thought I’d write a couple of things about taxes, because they seem to be one of those topics a lot of folks have misconceptions and strong opinions about. Never one to shy away from “hot” topics, here goes . . .

The critics have argued tax cuts across the board have benefited primarily the rich. I wouldn’t necessarily take issue with that point, but it’s wise to examine it in the larger context — away from plain, old, sound-bite television. But it is the rich, however, that create jobs. It is also the rich that pay most of the taxes. Those who wish to see the wealthy pay even more in taxes should absolutely love the developments of recent years.

Income tax revenues have surged over the past few years with most of the gain in revenue coming from the wealthy. Corporate income tax revenue has also surged as solid economic performance has contributed to strong growth in corporate profitability. Tax revenues are expected to rise another 11 to 13 percent this year on top of last year’s record 15% rise. [You’ll have to pardon the fact I sometimes feel like a frustrated, wanna-be economist, despite this subject being one of only two “Cs” I received in my last 11 years of formal schooling (high school on) — of course, my professor also thought 6% unemployment was the lowest we’d ever see and was the threshold of “full employment.” Go figure. We’re currently at 4.7% nationally and 2.8% locally. The two “Cs” haven’t inhibited me one bit. Perhaps one of us still read books right side up.]

On to my current reading: according to the latest report from the Joint Economic Committee, the rich have been paying more than their fair share for years. The majority of federal income taxes are paid by the very highest income earners. The top 1 percent of income earners pays about 32 percent of all income taxes. The top 5 percent pays 51.4 percent. The top 10 percent of high-income earners pay 63.5 percent. And lastly, the top 20 percent of all income earners pay 78 percent of all federal income taxes. The Bush tax cuts have made the system even more progressive. The bottom 20 percent are now paying less and the top 20 percent are paying even more according to the Congressional Budget Office tax report. And incidentally, there is absolutely no evidence that increasing taxes does anything to solve social problems.

Ben Franklin, the founder of my graduate school and Tony’s undergraduate school, among MANY other things, once wisely said, “Revenues without economy are never sufficient.” Tax revenues have increased every year since the Bush tax cut of 2001, yet the deficits continue to grow bigger and bigger. The answer is not to feed Uncle Sam more — he must learn to control his appetite through a congressional amendment requiring a balanced budget. A tax on the rich is a tax on capital formation. The vast majority of the savers in this nation are the rich and to penalize them even more through progressive taxation can only reduce their propensity to save. What we ought to have our representatives in Washington advocate is more privatization, a flat tax, a constitutional amendment, medical savings accounts and other incentives proposed by “public choice economists.”

I bring all this up because as you recall, entrepreneurs, which are our clients and what we consider ourselves to be, are those “greedy guys” who “for selfish reasons” constantly strive to create better products and services and provide people with job opportunities in the process. Smart entrepreneurs clearly understand how the invisible hand of the marketplace works. They recognize that the most certain road to success is to give people what they want at prices they are willing to pay. That’s why so-called capitalism (a.k.a. business freedom) is the ultimate win-win philosophy.

President Bush trumpets the fact that the deficit this year will be roughly 2.3 percent of Gross Domestic Product ($296 billion deficit as compared to $13 trillion in annual Gross Domestic Product), actually less than deficits of 17 of the past 25 years, according to the Wall Street Journal. The President also notes that his promise to cut the deficit in half by fiscal year 2008 will be reached even sooner.

Yet, the Democrats still boast that President Clinton oversaw a sizeable budget surplus during the final four years of his reign with a combined surplus of $559 billion in fiscal year 1998 through fiscal year 2001. They talk of the positive impact of a tax increase in Clinton’s first term and a spending restraint as the reasons why. The evidence suggests something else, however. Deficits gave way to surpluses in Clinton’s second term because of strong economic growth and the tax revenue surge resulting from skyrocketing stock prices in the late 1990s. The reality that Clinton had an opportunity to slash defense spending in the 1990s also contributed mightily to lesser spending and the resulting surpluses.

History will certainly take the current President Bush to task for his unwillingness to impose spending restraints on a Republican Congress. This president has had many opportunities to veto legislation laden with wasteful pork, and chose not to do so. History will also likely be unkind to President Bush in regard to the Medicare prescription drug program passed in 2005. It would be extremely difficult to find any similar program that will challenge our ability to pay for it in coming decades, as does this costly program.

Moreover, there’s no secret that the national media has a strong liberal bias and as a result, Republican policy initiatives are typically cast in a negative light while any good news relative to the economy is relegated to the back pages. President Bush has arguably experienced even greater liberal distaste than others, as he is seen as one who did not occupy the White House legitimately . . . Democratic presidential candidate Al Gore received more votes in November 2000, and in their view, should have run the show in recent years.

The collective disappointment of many regarding the President is magnified when considering the poor performance of the Republican leadership in Congress in recent years. One would have hoped that necessary tax cuts after the horrific events of 9/11 and the recession would have been offset by spending restraints, but such was not the case.

Least you think I’ve gone soft here . . . as the Fall elections approach, I for one, would like to see Speaker Hastert step-down for his involvement in the cover-up of Mark Foley’s nefarious acts. Maybe by the time you’re reading this, it will have happened. I’d also like both political parties to FINALLY RECOGNIZE and focus-on what President Bush has CERTAINLY gotten correct during his presidency: Islamafacism as our civilization’s greatest threat for many years to come.

Rather than sugar-coating the issue or flat-out denying its existence, the national media could do much to help shed more light on this historical matter of grave importance. Until the majority of Muslims in the Middle East can peacefully accept a secular society and their youth are given better, more civilized options than strapping dynamite or C-4 to their bodies, we will live with quiet anxiety. The American Muslim community has been eerily silent on this subject too. Could you imagine if a “majority” religion, like Christianity or Judaism, had leaders who were equally silent in a similar situation? Our national media would chew them up.

The U.S. economy is doing outstanding when we consider all the variables. And yes, there hasn’t been another attack on U.S. soil since 9/11, but now is NOT the time to get complacent. All successful companies and peaceful societies share this natural tendency. We must NOT cut and run. Our past isolationism and do-nothing responses (Beirut, Komar Towers, 1st WTC bombing, USS Cole, just to name a few) have encouraged an enemy that seeks to destroy what we hold so dear. Plain and simply. Chastise Bush if you must, but of our last five Presidents, he is the only one who saw the historical significance and acted accordingly, admittingly after a horrendous act finally occurred on our continental soil.

Reasonable, civilized people may debate Iraq, but it seems to have provided a battleground outside our borders where our enemies feel compelled to engage us. Better there than in Orlando, Chicago, Seattle, Boston, Omaha, and so on. If Iraq eventually proves to be another secular Muslim society, like Turkey, Morocco and only one or two others, so much the better. The more people in the World living in democracies, the safer the World will be for us and our children. On that note: thank a soldier when you see one, especially on this upcoming Veteran’s Day, and let’s agree to keep politics off of them. Remember those that have given the ultimate sacrifice so that you and I and our families may be free, and keep them in your prayers . . . always.

Some Interesting Tax Facts:
– The 2002 1040 instruction book had 126 pages. In 1986, it had 52.
– Even after adjusting for inflation, the U.S. government collected twice as much income tax revenue in 2001 as it did in 1981.
– Let’s talk about complexity. Before the 1998, 1999, 2000, 2001, 2002, 2003 and 2004 tax changes, the Internal Revenue Code was 9,471 pages long and it contained 1.3 million words. The epic book War and Peace has 1,444 pages and half as many words — 660,000. The tax regulations then took up 91,824 pages and consisted of 5.75 million words while the Bible contains 1,291 pages and 774,746 words.
– The paperwork received by the IRS would circle the globe 26 times.
– The Tax Foundation estimates that in 1994, business spent more than 3.6 billion hours, and individuals spent ore than 1.8 billion hours, in preparing tax returns. That equates to approximately three million people working full-time 12 months a year just to comply with the tax laws! The total annual cost of tax compliance is $192 billion — an amount equivalent to General Motors’ entire output for 1994.
– In 1948, the average American family with children paid three percent of its income to the federal government in income and payroll taxes.
– According to the Tax Foundation, 2004 U.S. families spent more on taxes than they did on food and shelter combined.

5 Comments

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