“Entrepreneurs at the Government Trough,” LeadStories.com 8/8/16.

Entrepreneurs at the Government Trough

As the spat between Hilary Clinton and Donald Trump revealed, neither is willing to admit what’s really going on when one declares bankruptcy. Clinton and her speech-writers deserve credit for the clever line that Trump’s books always end in Chapter Eleven, a nod to the Internal Revenue Service’s code that lets both individuals and corporations ask for the legal protection of the courts to reorganize their debts and see to what extent they can repay any of them.

What neither presidential candidates disclose is the tax benefits accrued by bankruptcies or any kind of declaration of losses from legal investments. When regular citizens—the 99%--lend money to uncle Vinny’s latest get-rich scheme, they are just out of luck (unless all the proper investment documents have been set in place). The best they can hope for is that Vinny will buy them a drink at some point or put a good word for them with the local boss or the friendly neighbor. Besides that, they have no prayer. 

But the legitimate investor as an individual or through a Limited Liability Company who puts money in a losing proposition is aided by the government and given full deduction of the amount invested against present and future good and profitable investments (thereby reducing the tax liability). Perhaps this is the way the government would like us to increase our “propensity to invest,” take risks, and maybe fund a great innovation; perhaps it’s also an indirect a sanction for greedy behavior that may or may not contribute to the growth of the economy.

We value entrepreneurs; we lionize them in books and films as courageous heroes and heroines whose visionary zest makes us all proud to be Americans. It’s these brave investors who take advantage of new technological innovations by way of underwriting the ideas of their ingenious inventors. We are led to believe that they are, after all, the engines that feed the entire economy. But should their poor or unfortunate decisions be underwritten by the rest of us, the run of the mill workers and consumers who live paycheck to paycheck?

So, the government isn’t only incentivizing entrepreneurs to invest in new or old ideas and industries, make them more efficient or bring their ideas to fruition, but it also gives them all a pass—another incentive—when they simply make mistakes or are just plain foolish. Could this lead to reckless investment behavior? Are we encouraged to take greater risks because the actual costs (after deductions) is mitigated? Would it do the same for those driving too fast and surviving a dangerous ride? 

When American capitalists, like Trump himself and all those millionaires funding Clinton, smugly explain to the rest of the country why they are better than the rest of us, why they deserve a bigger piece of the pie, they forget to acknowledge that they too are the beneficiaries of government largesse, that they have their own privileged welfare safety nets. This is not to say that there is a big difference between the government coming in and bailing out a losing investment (or the large banks a few years ago) and having business protections in place to allow for the orderly unraveling that does not place big creditors above small creditors. Is your investment secured? Will it meet the legal criteria for protection?

Admittedly, these safety nets don’t come in the form of food stamps or any such embarrassing forms of financial support, but in point of fact are they that different? If you are rich and can afford to invest in a scheme or a new invention, do it on your own! Why do you expect the government to clean up the mess and allow you to fully deduct your mistake?

Some would argue that the mistake merely reduces their net income and taxable base…it is merely a deduction like the cost of steaks for a restaurant, and depending on the tax bracket that is the amount they deduct. 

Perhaps it’s the same screwed up logic that lets property owners deduct the interest on their mortgages but doesn’t allow renters to deduct their rents: owners of private property deserve government subsidies, while those renters, even if they need it more, are left by the tax code to fend for themselves. This is probably why the incredible two-home deduction is in place as well, benefitting the very few who own two homes, probably applicable primarily to congressional representatives who have to live in D.C. part of their time (and write these laws) and all their wealthy donors.

Next time we hear politicians quibble over the size of the government and its role, we should remind the disputants that they should start by eliminating all unfair subsidies that benefit the already rich at the expense of those who remain poor no matter how hard they work. And speaking of work, has either presidential candidate really worked the way their potential constituents have been for years? Receiving $250,000 for a speech to Wall Street is hardly “work” when compared to the minimum annual wage of around $15,000; the same goes for licensing agreements from one’s brand in comparison to those who actually clean and serve in all those hotel and resort properties.

Americans are generous in overlooking this duo of free-loaders; maybe they believe they can be like them one day. But the rate and gap of wealth and income inequality is getting bigger, not smaller as time goes by. And the opportunity to climb up the ladder is getting slimmer every year. Inequality.org reminds us that “America’s top 10 percent now average nearly nine times as much income as the bottom 90 percent.” Similarly, “America’s top 1 percent, for instance, holds nearly half the national wealth invested in stocks and mutual funds.” This is where Occupy Wall Street (remember them?) and the Tea Party (still in full force in the House of Representatives) are in agreement: between big banks and big government bailing them out, what is left to the average American worker? 

So, when the two candidates tell us they hear us, that they care about the plight of the working men and women of this country, let us ask them to describe the hardship of the working poor of America, the Walmart employees who still need food stamps and Medicaid to finish the month. Instead of ignoring them or simply using them as a rhetorical tool, let’s ask them to start their speeches by pointing out the hypocrisy of the rich and their callous use of government welfare. Let them begin with a confessional moment before they promise the rest of us a better future.

“Is the time right for tax reform, or is it already too late?” The Colorado Springs Business Journal, May 7 - 31, 2013, 21.

IS THE TIME RIGHT FOR REIT?

Now that those who are punctual have paid their taxes in an annual ritual of disbelief and disgust—I still owe money? where does it go?—perhaps it’s time to plan for next year. As Nathaniel Popper reported in The New York Times earlier this week, corporate America is not only planning, but plotting to evade federal taxes altogether.

What may seem a novel idea is actually practiced by many mom-and-pop operations that set themselves up as Limited Liability Companies and though different are treated by the IRS as S Corporation which allows such entities “with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. This means that any profits earned by the corporation are not taxed at the corporate level, but rather at the level of the shareholders.”

Assume we have a company whose profits are $100,000. The company pays 35% in corporate taxes ($35,000), and after that dividends are distributed to shareholders some of whom might pay as much as 39.6% marginal rate, for potentially a total tax rate of 74.6% ($74,600). If the company is no longer a C corporation, its profits flow to individual shareholders who then pay taxes only at their own marginal rate—saving the 35% bite up front—and avoiding double taxation.

This has been known for years, and shouldn’t raise any controversy. Many small businesses set themselves up in such a way, whether or not owned by one family or few investors. What has raised some eyebrows in this season of congressional debates over taxes and budgets is whether or not what’s right for small LLCs (with as few members as one and as many as one hundred) should be right for large corporations (with thousands of shareholders, including large pension funds).

The legal and tax designation of a Real Estate Investment Trust–REIT—was set up already in President Eisenhower’s days. Its main purpose, as distinct from other businesses, was to recognize that since their holdings were exclusively real estate, these trusts represented passive investment that should be treated differently by the tax code. As Popper suggests, over one thousand companies have slowly converted their tax status, with IRS approval, to be taxed as REITs. Is it right?

On the one extreme of the spectrum are those who say, absolutely! If you are not violating the law, if you are approved by the IRS (which is vigilant about one’s status), then by all means minimize your tax burden as much as possible. As long as your actions are legal, they are ipso facto moral as well!

One may challenge this answer, and ask: but aren’t the overall taxes collected less than if the entity stayed a C corporation, and if so, wouldn’t this undermine government activities, such as national defense?  Shouldn’t overall national concerns override individual temptation to reduce one’s tax liability?

On the other extreme of the spectrum are those who claim that though legal, the REIT move is unfair. Why benefit only a select few corporations? Moreover, if REIT-designation is available, eventually no corporation would ever pay corporate taxes. Either way, this unequal treatment, though legal, is immoral.

This discussion may be academic: 83 out of the 100 largest publicly-traded companies game the tax code to the tune of $150 billion annually, according to some estimates. Forbes reported that 26 companies paid their CEOs more than they paid in federal taxes in 2012. Obviously this is legal. But isn’t it time to revisit the very notion of corporate taxes? Do corporate taxes make the US less competitive? ABC reported in 2007 that Halliburton (the one that got billions of dollars in contracts during the Iraq war) was moving its corporate headquarters from Houston to Dubai in the United Arab Emirates. Dare we ask why?

Perhaps we are asking the wrong questions, and instead of worrying about the REIT tax loophole, we should ask about overall tax reform. Oh, if only tax policy were discussed in logical and moral terms, what a wonderful world we’d have!

 

Raphael Sassower is professor of philosophy at UCCS. He can be reached at rsassower@gmail.com See previous articles at sassower.blogspot.com