One Small Cut on Corporate Welfare

Corporations have said they need lower taxes to be competitive globally. Let’s give it to them, and possibly even a flat tax, in return for a reduction in corporate welfare. Corporate welfare comes in many forms, but one definition might be “corporate welfare is any financial advantage that benefits executives and/or investors without benefiting the workers or the nation as a whole”. I’m not a tax attorney but here’s one small cut to get the ball rolling. Executive bonuses benefit only the recipients, and some have gotten to be outrageous, so revise the deductibility of such bonuses as follows:

The only portion of an executive bonus that can be deducted is an amount equal to the average bonuses received by the workers of the company.

As a simple example, suppose three executives got $10,000 bonuses and the employees each received a $500 bonus. Only $500 of each of the three executive bonuses would be deductible as a payroll expense. The rest would come off the bottom line.

A small step like this won’t reform taxation or reduce the income inequality that was exacerbated by a stimulus program that favored the wealthy but it would signal the population that these issues will be addressed.

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One Nation On Probation

Here’s a perfect example of unintended consequences.  As vehicle manufacturers have complied with higher gas mileage mandates Federal and state gas tax revenues have fallen.  Federal losses have been exacerbated by the fact that the Feds don’t always use gas tax money for roads and bridges.  I don’t like tax hikes any more than anyone but I don’t want bridges collapsing under me either, so if more highway money is needed let’s discuss how to get it, or more specifically how not to get it.

Some states have shown interest in a tax based on miles driven rather than fuel used.  That’s their business, but when they suggest determining miles driven by equipping cars with GPS tracking devices (as one state is trying) they’re suggesting treating every driver like a criminal.  It’s an unimaginable infringement on privacy and freedom of movement as well a huge expense.  They would not only know how many miles you drove, but where you went, how long you stayed, and how fast you got there, and all that data would be subject to subpoena.  Abuses of the system are obvious.  Once they saw the tax revenue coming in the next step would be to make the GPS system a traffic cop that automatically issued speeding tickets.  If you happened to be near a crime scene you’d automatically be put on a suspect list and might even suffer a wrongful conviction.  Someone with access to the data might use it for stalking another person.  The computer would become the police, and that’s evil that goes beyond Orwellian.  States might mine your location data for profiling or sell your data to companies to mine for targeted advertising.  You could be sure the data would be provided to the NSA as well.

There are two less intrusive options.  The first, simplest, and cheapest option is just to raise the gas tax.  That requires no additional staff to administer a new program.  States that really want to tax miles driven and also require annual safety inspections get mileage reported as part of the inspection, and mileage is reported when a vehicle is bought or sold in every state, so they know miles driven and could base the tax on that information.  Simply charge the tax based on last year’s mileage and let revenue lag by one year.  After the first year it would make little difference.  Where you go is your business, not the states or private companies.

Progressives can’t stop eroding individual privacy in favor of the collective. In this case, say NO.

The Sun Also Sets.

Once started, government programs take on a life of their own.  They set up their offices, hire or transfer employees, and go about their mission.  Sometimes they get reviewed.  If they’re succeeding in their mission they get more money to expand.  If they don’t appear to be accomplishing their purpose they get more money to try harder.  If they become politically popular they get even more money regardless of their success rate.  A prime example is Head Start, a politically popular program that has had no demonstrable positive effect on a child’s success later in school.  It’s popular because it gives the appearance that the government is doing something, and it provides free babysitting for welfare moms.

Every program should have mandatory reviews and a sunset clause If they’re not performing up to expectations.  Review each program at two to five years, depending upon the program’s time frame for expected results.  If it isn’t performing give it only one budget increase to try to save it.  Review each program again at another two to five years.  If there’s no measurable accomplishment, the sun sets, the office closes up, and no more tax dollars are wasted.

If a program has a specific purpose, such as to boost the economy during a recession, it should automatically be canceled when the condition that motivated it ends.  Political popularity is not a good reason to spend tax dollars.

Welfare is neither a right nor a requirement, it’s a program.

And every program has rules, so if you want to participate, live with them.

Welfare was supposed to be a hand up, not a handout, but the “War on Poverty” that began with President Johnson in 1964, while it helped some, also enabled a generation of people for whom the safety net became a hammock.  Instead of ending poverty it institutionalized poverty and contributed to the breakdown of the nuclear family by incentivizing single parent homes.  The Personal Responsibility and Work Opportunity Act of 1996 reversed some of this by incorporating a responsibility to work and by replacing AFDC with TANF, where the “T” stands for “temporary”.  We also have SNAP and WIC programs that provide food aid and both public housing and rent subsidies to provide help with shelter.  It’s an alphabet soup of up to 80 programs with each having different eligibility requirements.  It’s also an invitation to fraud and waste.  Since all welfare should be managed at the state level, is there any reason why there couldn’t be just one program run by one agency that covered everything?   The goal isn’t to deprive people of benefits for which they’re eligible, it’s to make the system more efficient with less overhead, fewer forms to fill out, and less fraud.  I’ll suggest a model I call ISIC, but first I’ll discuss a few related  topics.

Deadbeat Dads: Social services would cost less if every man who fathers a child and then walks away from mom paid child support.  An aggressive effort to pursue child support needs to be a part of welfare.  Sorry guys, but I shouldn’t have to pay for you to play, so “man up” and take responsibility for your kids.

Earned Income Tax Credit: EITC is a Federal welfare program that provides tax credits for low income people who work.  For some it’s a disincentive to work because it’s easy to look at the EITC chart and figure out how to get maximum money for minimum work.  Eliminating it would be politically unpopular, but why not replace it with a single coordinated welfare system?.  The amount of the tax credit is currently based on charts for 0 to 3 children, with the third being a recent expansion to EITC.  If we can’t eliminate EITC, return it to a maximum of 2 children, or even use just one chart somewhat below number 2 for everyone, and impose a maximum number of years in which it can be collected.  Why on earth are we subsidizing people to have children they can’t afford instead of encouraging smart lifestyle choices?  Also, the IRS should be prohibited from issuing EITC to those in the country illegally.

Drug Testing: I won’t advocate drug testing because it’s expensive and has mixed results, but if a state wants to do it, it shouldn’t be considered an unreasonable search that violates the applicant’s rights.  Welfare application, like job application, is voluntary; it’s not an arrest situation.  If a judge rules that pre-welfare drug testing violates a welfare applicant’s right without also ruling that pre-employment drug testing violates a job applicant’s right, the judge is making a welfare applicant “better than” a job applicant.  What happened to equal rights?  I also wouldn’t say that drug use should automatically disqualify an applicant if they’re willing to go to rehab.  The objective of welfare is to help people reach financial independence, not to punish them.

Workforce Housing: This is not a welfare issue but it is an issue in some communities for lower income families trying to improve their lives so I’ll mention it.  They need affordable places to live.  There has to be something between run-down “poor housing” and the “mcMansions” that require six-figure incomes to buy.  Workforce housing is not public housing, it’s simply affordable housing.  Many communities oppose workforce housing because they fear it will lower property values or cause an influx of children who will place increased demands on schools and hence property taxes.

Job Training. This is often discussed in connection with both unemployment and welfare.  Like many government programs, there are too many job training programs, around 47.  Why not consolidate and cut this to two, one for office/paraprofessional jobs and one for skilled trades?  To be useful, candidates must have completed high school, one way or another, and jobs matching the training must be available.  To be fair, candidates only get one pass through.  No one should become a professional student at taxpayer expense.

Minimum wage: Also not directly a welfare issue, raising the minimum wage is a topic of recent interest.  Doing so would lift some out of poverty but could harm small businesses.  The minimum wage hasn’t been raised for years, so doing it makes some sense, but not by around $3-6 all at once.  The adverse effects on the economy could be minimized by raising it incrementally over a period of 3-5 years while still providing an immediate benefit to those working at minimum wage.  The impact of a minimum wage hike also could be minimized by allowing the unskilled labor market to tighten so wages would rise naturally instead of by government mandate. I realize that a minimum wage hike conflicts with strict conservatism but my goals are to shrink welfare rolls and government itself.  Also, with inflation predicted, some wage growth is necessary to avoid stagflation.  Finally, with liberals buying votes all around, standing your ground on “NO” won’t win elections, and if you can’t win elections you can’t change the course of the country.

To reduce the size of government you must reduce dependency on government.

PARA: A Fed-free stimulus.

Instead of spending tax dollars to stimulate the economy or having the Fed manipulate it, why not let industry do it?  That’s the plan with PARA: the Pro-America Repatriation Act.  Corporations are holding billions of dollars of foreign earnings overseas and have asked for a zero tax “holiday” to bring it all back into the USA.  Now that’s a bit greedy so let’s make a win-win compromise.  A company can repatriate as much money as it wants.  From one-half to three quarters of it can be designated as PARA funds that will be tax-free.  Non-PARA money will be taxed at one-half the current corporate rate.  The rules of PARA are simple: the money must be invested in the US economy within the next 2 to 5 years, with the time limit dependent on the amount.   PARA money can be used to construct new facilities or update existing ones in the USA (all work must be done by US contractors except vendor-specific equipment work), to buy capital equipment, to hire US workers, to train it’s workers in new techniques, or to run an apprenticeship or co-op program for US citizens.  It cannot be used for bonuses, dividends, stock buybacks, debt repayment, or to hire foreign workers.

Any PARA designated money not invested within the agreed time frame will be taxed at twice the corporate rate.  There’s no “roll-over” to the next holiday.

Just because you can make it complicated doesn’t mean you should.

Everyone has heard about fraud, waste, abuse, pork, goofy grants, etc., but there’s another vampire sucking on our economy.  It’s overhead.  Now some overhead is essential to running any program but excess overhead is a nonproductive use of resources.  Business figured this out years ago and responded by cutting management levels, improving communication, eliminating duplication, seeking best practices, modifying supply and distribution chains, and taking advantage of technology.  The government hasn’t gotten the message: our systems are too complicated.  Every time technology enables more data tracking the government demands more data.  Washington is always issuing new rules but programs don’t get simplified (or eliminated if they haven’t proven to accomplish their objective).  Our convoluted income tax code is a prime example of excess overhead, as are health care administration and the alphabet soup of welfare programs.  No one benefits from all this wasted effort.

The economy is a car, efficiency is the gas, excess overhead is the brake, so which do you step on to get moving?

Flat out easier.

The principle of a flat tax is simple.  All income is taxed at the same rate for everyone.  I specify all income because some wealthy individuals want a flat tax that leaves capital gains untaxed (I wonder why).  I don’t believe in “wealth redistribution” but I do believe everyone should pay their fair share and there’s no reason why passive income is “better” than earned wages.  To encourage small investors and help seniors without gifting hedge fund managers a limited amount of investment income (interest, dividends, and capital gains) could be exempt, e.g. $10-25K.  The capital gain exemption on the sale of a primary residence should also remain.  A flat tax would provide larger personal exemptions to protect low wage earners, a higher standard deduction to reduce the need for itemizing, and no loopholes.  There would be no tables or scales.  If the government wanted to impose any surcharges they would also be flat.  Deductions for those who chose to itemize would include dependents, state and local taxes, uninsured medical expenses, charitable contributions capped at 10% of income (if you’re poor you can’t afford to give away more and if you’re rich you don’t need taxpayer support for your generosity), uninsured catastrophic losses, and capital losses with carryover to be written off at an age-dependent rate.  The mortgage interest deduction would go away as would both the AMT and the current EITC.  As I said, the sole purpose of a tax is to collect revenue.

Corporations have asked for a lower tax rate to be more competitive in the world.  Let’s give it to them, but in exchange they must give up some of the subsidies and other taxpayer-funded benefits they enjoy.  Make it simpler and reduce overhead, that’s the goal.

While a national sales tax would be even simpler it would hit lower income people disproportionally hard as they spend more of their income on necessities and less on discretionary items. If they had to file for some form of refund the system could be as complicated as the income tax it replaced.