“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

 

 

 

 

“What is fair tax-burden?,” The Colorado Springs Business Journal, August 19-24, 2011, 23

TAX GRIEF

When I purchased in 1986 an old Victorian house in the historic North End, the county assessor—or his agent—showed up. He looked around and then announced that my annual real-estate taxes will be increased to around $700. That’s all?, I asked in amazement. Perhaps it should be more, I offered, having just moved from Boston. He chuckled and left, thinking I was deranged. I thought it was the bow tie I was flaunting as a freshly minted professor...

And then I learned a simple lesson: you get what you pay for: less taxes, less services. Garbage wasn’t collected by the city, and when we had a big snowfall, Tejon Street wasn’t plowed for days. So, why do taxpayers believe that they can demand city or federal services and pay no taxes?

Perhaps Elisabeth Kubler-Ross (On Death and Dying 1969) was right, after all. We first deny that any taxes are needed, comparing ourselves to the Founders. The more taxes, the more waste can be expected. There is nothing that government does right. Denying it taxes, it’ll learn to live within limited means. The road to small government is strewn with denial that government is needed at all. Can’t we just all get along? We all own guns anyway, so peace is bound to be maintained...

But when taxes keep being collected, when paystubs show that take-home pay is much less than expected, people begin to get angry. I don’t mean being frustrated or upset, I mean angry enough to demonstrate and march (The Tea Party). But anger is an exhausting emotion, especially when worrying about daycare and mortgages. It’s a lot of work, and for what?

Then bargaining sets in place: cut taxes for the rich, change the tax rate, retain the Bush’s Administration tax cuts, declare a tax holiday for the weekend. For bargaining to be effective at least two willing parties must engage in the process. Who are you bargaining with, the government, the IRS, your local mayor? And what is your trump card? Unless self-employed and willing to go underground, you can’t avoid paying taxes because they are deducted by your employer. So, you are in no position to bargain, after all, except when the city turns off street lights...

When there is no one to bargain with, when no one is listening or cares, we become depressed. Helplessness sets in. Why keep on fighting a losing battle? Alcohol or pot looks enticing, just like watching mindless TV. Should I even bother going to work? Once taxes are deducted and bills are paid, what is left? Our Great Recession is about to become the Sad Depression.

Just as we learn to accept the death of a loved one or a pet, we accept the reality of taxes. Only taxes and death are definite, it is said. We realize at some point that public goods must be paid for somehow. Unfortunately we cannot ask the Canadians to pay for our roads or the Mexicans for our bridges. The French will refuse to pay our defense bills, and the British won’t pay for our parks. Only New York is lucky enough to have Mayor Bloomberg pay for social programs from his own philanthropic foundation. CS must collect taxes to provide government services; Mayor Bach isn’t rich enough...

The question, then, isn’t whether we should or shouldn’t pay taxes, but what is a fair tax burden. Currently we have a progressive tax system—the rich pay incrementally more than the poor. Some think it’s a fair way to redistribute wealth and income. Some think that a flat tax, say 5% across the board, is fair. There are others who think that we can do away with taxes as we know them and have Value Added Tax (VAT) on consumption, like some European countries.  As for effective tax spending, there are enough MBAs on the government payroll and millionaire members of Congress to ensure that...

Since Washington seems like a rudderless ship adrift on an ocean of confusion, perhaps we should grant all Americans a federal tax holiday till the end of year. In an era where no economist has a handle on the future, why not experiment for a while. A complete personal tax relief is no crazier than what we see coming out of Washington.

And while we are at it, let’s ask the entire Congress to resign. Democrats and Republicans alike decry taxes, deficits, and spending while garnering pork for their districts. They display a level of hypocrisy unmatched by any other profession. Is being a politician a profession at all? Outside of money and an inflated ego, what qualifications are required?

 Raphael Sassower is professor of philosophy at UCCS and has low esteem for all politicians, especially those who vie for reelection. He can be reached at rsassower@gmail.com Previous articles can be found at sassower.blogspot.com