The Biggest Tax Story Ever

In all well-run households, we make decisions about what we can afford and what we cannot afford. When we overspend at home, we live with the consequences. But when our elected officials overspend public money, they gain votes. This is an inherent conflict of interest in our budget process.

Twenty years ago, the U.S. national debt stood at 48% of GDP (Gross Domestic Product, the value of all goods and services produced in our economy over a year). Ten years ago, this debt ratio was up to 61%. As of March 31, 2009, the debt ratio is 76% of GDP. During the last two decades, GDP has gone up 64%, from $6.9 trillion to $11.3 trillion (adjusted for inflation).

The equivalent in our household might be putting five kids through private college all at the same time, but with no savings to pay for it. For perspective, Europe’s average debt-to-GDP ratio is 69%, even with European nations’ worthy, but expensive, social programs. As a result of excessive debt, five of the most indebted countries in Europe have already lost their Triple ‘A’ (AAA) credit ratings, and the United Kingdom may be next according to a recent Standard and Poor’s release.

I don’t know if our schools, roads, healthcare or other government services are that much better than they were 20 years ago, but I don’t feel that they are. However, my opinion is that the private sector has helped make our citizens’ lives better in the last 20 years through its innovations. The last estimates I saw were that we get somewhere between $.40 and $.70 of our tax dollar back in the form of benefits. The rest somehow gets lost in the bureaucracy.

BWFA applauds President Obama’s stated intent to close tax loopholes. Estimates are that an additional $9 billion in new tax revenue can be realized from going after 57,000 wealthy individuals who fail to report income on undisclosed foreign accounts. No doubt, we will see some high-profile individuals if or when the names are ever disclosed.

Worse yet, 85 out of the top 100 U.S. corporations have offshore branches, many of which exist for the sole purpose of avoiding taxes. One of their techniques is to have the U.S. parent corporation borrow money from the offshore branch, and then deduct the interest payments made to the branch; the payments are tax-deductible for the corporation, and the offshore branch doesn’t have to pay tax on the interest it receives from the U.S. corporation. There is a five-story building in the Caymans that serves as the official address for 18,857 corporations, 12,000 of which are U.S. corporations.

Government estimates are that we can get an additional $190 billion (over 10 years) from closing this loophole. When added to the $9 billion in new tax revenue from individuals with foreign accounts, our debt could be reduced by 2.3%. However, we have to understand that the tax receipts will not be pure financial gain because when businesses have to pay more taxes, their stock price falls, they distribute less to shareholders as dividends, they make fewer investments, and they create fewer jobs.

Even though the U.S. has the second-highest corporate tax rate (35%) in the world, behind only Japan, the typical U.S. corporation actually pays only 1%-4% of its income in taxes. Our efforts to close loopholes are right and noble, but some of the gains are illusory, and won’t really make much of a difference.

Also, when tax rates get too high, taxpayers leave. Last year, Maryland created a new higher tax bracket (9.45%) for individuals earning over $1 million per year. A May 27 article in The Wall Street Journal reported that one-third of Maryland’s high-income individuals vanished from 2007 to 2008. This is explained, in part, by falling incomes due to the recession, but a number of them left Maryland for good. This means that the citizens remaining in Maryland will have to pay the missing millionaires’ tax bills, perhaps to the tune of $500 million.

The solution involves better management of our governments: federal, state and local. They are the only forces large enough to bankrupt our nation and stop the almost unbroken improvement in the welfare of our society over our nation’s history. Hard choices will have to be made because traditional “reform” policies and “closing loopholes” won’t be enough. We need campaign finance reform, term limits, more transparency and better accountability at all levels of government.