The GrayMan Writes About Taxes: Corporate Returns and Reports

If you haven’t read The Cheating Culture by David Callahan, I recommend it. It’s disturbing, and I don’t think I absorbed all of its implications, but it’s an important book. I bring it up because it catalogued many examples of corporate cheating — cheating their customers, cheating their stockholders, and cheating the government.

Let me say first of all that I believe the U.S. corporate tax rate is too high, and acts as an incentive for companies to move out of the U.S. to friendlier places. Unfortunately, I don’t see any signs of it coming down under the current Administration and current Congress, because the loudest voices in the public sector seem to cry out in favor of punishing private sector success instead of making more success possible. I fear for the long-term effects.

That said, I don’t believe elevated tax rates justify the kinds of corporate cheating that Callahan wrote about. And one of the potential cheating tactics that seems possible to confront is the practice of reporting earnings on tax returns that differ from earnings reported in annual reports to stockholders.

Until the recent economic and financial turmoil, many companies posted profits every quarter even if it took some creative accounting to record those profits. Some of those companies got caught cooking the books, but usually not until they had collapsed or were close to collapse. They got into this habit in order to satisfy public perception and stockholders’ expectations, because no one wanted to mention the Emperor’s nakedness in terms of how unrealistic those expectations were. I understand that some of those companies that reported near-constant growth and profits in their annual reports, however, somehow produced lower earnings or even losses when it came to filing their taxes.

It doesn’t seem right for companies to tell their stockholders something different than they tell the government, especially if they’re telling their stockholders they made a profit in order to boost their share price, and then telling the government they took a loss in order to avoid paying taxes. Some might argue that this practice is only the difference between preliminary and final numbers, i.e., that it’s just a matter of “corrections” — I understand about honest mistakes, but it seems to me that either their accounting is good at the time it’s done, or it’s not good at all. If there are questions, resolve them before you issue the report with your name on it.

How can this influence tax policy? Let companies file their annual report as their tax return. Or, if that puts too much onus on the IRS to figure out any tax liability, let them submit the annual report along with their tax documents and show that the two match. If they don’t agree, or they differ more than some small allowance, assess a penalty based on the difference. (This would be irrespective of the company’s actual performance, and only related to what the company reported.)

In other words, split the difference between the return and the report, since we apparently can’t have complete faith in either one.


For those who are interested, The Cheating Culture has its own website at

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The GrayMan Writes About Taxes: Political Action Tax?

Quick question: Have lobbyists improved the political situation in Washington? Have they achieved consistency in policy-making, and clarity in directing governmental affairs? Or have they, taken all together, produced a confused mess of infighting and backbiting and self-serving that has helped to drag our political discourse off any true course?

If you think lobbyists — even those with whom you disagree — do more good than harm, then you won’t like this proposal.

I think most forthright observers on either side of the political aisle would admit that the numbers and types of lobbyists and political action groups have polarized more than they have unified our nation, especially since every group that starts to lobby for their interests seems to spawn another group to lobby for the opposite interest. They attract attention and money, which they dole out to their political advantage — even taking part in writing legislation that directly affects their interests — because that’s what they’re designed to do.

So, then, I propose requiring lobbyists to pay more up-front for the privilege of lobbying.

I propose that all lobbyists — whether individuals or organizations, whether for-profit or non-, whether affiliated with a political party or completely independent — should have to match every dollar given to every candidate or cause, whether directly through donation or indirectly through advertising or other action, with a dollar given to the general fund of the U.S. Treasury. Very simple: do an audit, find out what was spent on lobbying, and cut a check directly to the government for the same amount.

Of course the counter-argument would be that such a tax would inhibit free speech, but what lobbyists have right now is not free speech: it’s privileged speech, with steady access to power-brokers and audiences that most citizens don’t have. The question is whether that ready access is worth paying a premium. I suspect it would be, just as I suspect that, if anyone took this proposal seriously and tried to enact it, the lobbyists would rise up in one accord against it — because the only thing that would unite them would be a threat to their well-built structures of power and influence.

Oh, that government of the lobbyists, by the lobbyists, and for the lobbyists would indeed perish from this earth.


Another plug for the “Raleigh Tax Day Tea Party,” which will be held on Wednesday, April 15th (of course), from 6:30 – 8:30 p.m. at the North Carolina State Capitol. This event is one of many national grassroots “Tea Parties” in cities across the country. The Tea Parties began as a means to focus attention on the so-called stimulus plan — which has not, will not, and probably can not stimulate the economy as much as its proponents promised, but has burdened us and will burden our descendents with even more unreasonable amounts of national debt.

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The GrayMan Writes About Taxes: Encouraging Saving

I always thought it was odd that I had to record interest I was paid on money in my savings account as income.

Okay, sure, it’s “income” in that it’s money coming into my hands, but the more I have in the bank for the bank to use to create more money (through the magic of fractional reserve banking, which we’ll cover another day), the better for society as a whole, right? And then as banking fees became more prevalent — because they weren’t making enough money off of the money people already had on deposit — it seemed even more ridiculous to pay the government for the privilege of having a savings account. I guess a case might be made that we’re paying for the deposit insurance, but I’m skeptical.

Contrast the fact that interest received is taxable “income” with the standard advice that everyone should have six months’ income in savings for use in emergencies. It’s free money for the government, so to speak, but hardly an incentive to maintain a “rainy day” fund.

So I propose that there be no tax at all on interest earned on savings accounts if the total amount in savings is equal to or less than 50% of adjusted gross income. In other words, your rainy day savings remain tax free if they include up to a half-year’s pay — and if you start earning more, then you can save proportionally more.

The same principle could be applied to corporations, with respect to their cash reserves — the idea being that people and corporations should be able to maintain, without penalty, reserves against fluctuations in financial markets. Imagine how the current economic situation would be different if businesses, when short-term credit became harder to obtain, could have fallen back on cash reserves to keep paying employees and placing orders.

Would more people store up emergency funds if the interest was non-taxable? I don’t know. In our consumer-driven economy, maybe not. But at least they wouldn’t be penalized for having a little bit of savings.


As we wrote yesterday, the “Raleigh Tax Day Tea Party” will be held on Wednesday, April 15th (of course), from 6:30 – 8:30 p.m. at the North Carolina State Capitol. It’s part of the national grassroots “Tea Parties” movement, consisting of events in cities across the country to voice opposition to the stimulus package, which will stimulate less than its proponents think and saddle our citizens and our descendents with even more unreasonable amounts of debt.

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The GrayMan Writes About Taxes: Investment Vs. Speculation

With respect to capital gains from sales of stock and other assets, Form 1040 Schedule D instructs us to divide them into short-term and long-term gains, with long-term referring to investments held for one year or more. But is a year really “long term”? Thinking of a single year as long term is part of the problem we have with rewarding speculation over investment.

It was, after all, speculation in derivatives and risky mortgages that contributed to the housing bubble and its subsequent burst. (Call it “investment” if you like, but I disagree: investment connotes long-term, and the way these strange instruments were traded and manipulated and traded again never sounded like a long-term strategy.) The speculation filtered down to home buyers, many of whom did not buy a home in which they planned to live for years but instead bought one which they hoped to sell quickly as soon as rising home prices inflated their equity. Many people made a lot of money this way;* unfortunately, many more seem to have lost much more.

How do we encourage investment — real long-term investment — instead of speculation?

I propose that we structure the capital gains portion of the tax code to reward investment. Simply, the longer you hold a stock, shares of a mutual fund, or other investment vehicle, the less tax you would have to pay on any capital gains from the sale. The “investment tax” would be a “regressive” tax in which the actual tax rate would fall with the passage of time, down to whatever is considered a nominal rate.

The main benefit I see from this would be more stability in the stock market and more investment capital available for use as the basis of creating more wealth. The opportunity for speculation and making a quick killing on a stock deal would still exist, but the cost would be higher than if the stock were held longer. The different rates, the appropriate time scale, and the final nominal rate would all be determined based on what is expected to contribute most to economic stability and sound currency.

The same inversely-proportional tax rate could apply to dividends paid by the investment vehicle, with the exception that dividends automatically reinvested should not be taxed; only dividends paid when part of the investment is redeemed. (The key here is “automatically” — no cheating by taking the dividend and then investing it in something else.)

As an added bonus, we could allow for the ultimate “grandfather” clause by stipulating that investors over 70 years of age would not be taxed at all on dividends or capital gains received.

I suspect this idea would affect the venture capital business as well, but the tax level on short-term gains should still be reasonable enough to encourage investing in start-ups and expanding businesses. The idea is not to eliminate short-term investment or even speculation, but to encourage more long-term investment.


While we’re on the subject of taxes, we’re a month away from the “Raleigh Tax Day Tea Party.” It’s part of the grassroots “Tea Parties” held in cities across the country against the stimulus package, which will stimulate less than its proponents think and saddle our citizens and our descendents with even more unreasonable amounts of debt.

Here’s a little about the national movement. The Raleigh event will be Wednesday, April 15th (of course), from 6:30 – 8:30 p.m. at the North Carolina State Capitol.

*Sour grapes alert: We had the chance to do just that, and did not take it. Who knew we were going to be stationed in Northern Virginia for five years, when we expected to be there for two? Timing, as they say, is everything.

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Introducing: The GrayMan Writes About Taxes

The next few days look pretty light in terms of major space anniversaries,* so it’s as good a time as any to run through a series of blog posts on taxes. Not on how to do your taxes (I use TurboTax, just like our Treasury Secretary … make what you will of that), but on a few tax ideas I’ve had rattling around in my head. I want to get them out of my head, because I need to make room for some other things up there.

I’ve written about taxes in the past, and thought a lot about them during last year’s Presidential campaign; maybe I should’ve logged all these things in my scribblings on the Anti-Campaign. Instead, I wrote an essay on one of the ideas and I’ve been shopping around that essay for months. At the moment, it’s submitted to Reason magazine (even though they would probably prefer my essay on The Ornery American web site, “Taxes, Direct Deposit, and Choice”).

The essay that Reason is considering — at least, I hope they’re actually considering it — has to do with the U.S. corporate tax rate. Many people know that our 35% corporate tax rate is one of the highest in the world, meaning that companies can do better financially if they either move to places with lower tax rates or find creative loopholes that reduce their tax liabilities. At the same time, corporations are under scrutiny for how much they pay their top executives. My essay proposed making the corporate tax rate variable according to the “pay gap” between the highest- and lowest-paid company employees: i.e., companies could self-select a lower tax rate if they reduce the gap in employee pay.

So, while I’m waiting to hear from Reason, I thought I’d toss out some of the other ideas I’ve had about taxes and tax policy. Starting tomorrow, over the next few days I’ll present ideas about encouraging investment, rewarding instead of punishing savings, reducing the tax burden on new businesses, and a few other ideas. Hope you enjoy it!

*Considering our trend of focusing on anniversaries in 5-year increments.

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North Carolina Residents: Beware Another Tax Idea

A couple of days ago Michelle Malkin wrote about a proposed law here in North Carolina that would assess fees on motorists based on how far they drive in a year. She included some very sound objections to the idea in her post, Nanny State alert: Meet the mileage police. My only quibble with her is over her characterization of it as a “nanny state” action, because its aim is not to protect us from ourselves or anything else; instead, it’s more a “greedy state” action, because it seems to be aimed solely at increasing revenue.

Why do they need to increase vehicle tax revenue? Because in the wake of high fuel prices, people started driving less … meaning less consumption … meaning less tax revenue. They want to make up shortfalls in the state government’s income.

On the surface, it seems fine that people who drive more should pay more — after all, people who use more electricity pay more. But while we may think of roads as public utilities, “consuming” your share of the road does not require someone to lay out the new roadway ahead of you or produce more roadway behind you because you’ve used it — unlike electricity that has to be generated and then is used up, or water that has to be treated before and after use. Once the road is built, it continues to exist for a long time, and the wear and tear of one vehicle at a time seems too miniscule to meter.

Speaking of the possibility of “metering” our vehicles, how much more state bureaucracy would be needed to collect this tax? The data collection, tax assessment, payment processing, accounting, disbursement, and tax fraud investigation would probably cost far more than this tax would ever produce. (I say that based not on knowledge of the numbers of people involved or any other specific facts, but rather on my own assessment of the inherent tendency of government offices to develop extra layers of oversight and other non-value-added functions.)

The same day that Ms. Malkin presented her argument against the tax idea, Raleigh area blogger Tabitha Hale took aim at the proposal in her post on Red County, NC Road-Use Tax A Privacy Violation? She looked at the issue from a different angle, considering the longer-term view in which GPS-capable data recorders would one day download driving patterns that would be used to assess the tax. Her argument against the bill is also a sound one.

The best case scenario would be for this proposal to be pulled from the table entirely; next best would be for it to die in committee; and next would be for it to be voted down. It seems little good can come from it. Unfortunately, that hasn’t stopped our government in the past from passing laws that have caused more harm than good.

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Happy Election Day — A Tax Quiz

Yesterday I wanted to post the question, “How much tax revenue do you get from a bankrupt business?” Instead I went to bed. So I posted the question now.

Before you answer too quickly, bear in mind that one Presidential candidate has stated to the press (ten months ago, but they didn’t report it) that his proposed cap-and-trade tax on carbon emissions would bankrupt new coal-fired power plants and (emphasis on that conjunction, AND) bring in enough additional revenue to fund alternative energy sources. See this if you don’t believe me; here’s part of the transcript:

So if somebody wants to build a coal-powered plant, they can; it’s just that it will bankrupt them because they’re going to be charged a huge sum for all that greenhouse gas that’s being emitted.

That will also generate billions of dollars that we can invest in solar, wind, biodiesel and other alternative energy approaches.

The only thing I’ve said with respect to coal, I haven’t been some coal booster. What I have said is that for us to take coal off the table as a (sic) ideological matter as opposed to saying if technology allows us to use coal in a clean way, we should pursue it.

So if somebody wants to build a coal-powered plant, they can.

It’s just that it will bankrupt them.

I thought you’d get zero tax revenue from a bankrupt business, but I’m not as smart as this particular candidate. I guess the one-time bankrupting “huge sum” is what will somehow generate “billions of dollars” for alternative energy.

But what of the people unemployed when the power plants go bankrupt, or the people employed (perhaps not for long) by the factories that either can’t get power or have to pay exorbitant prices for it? Not a word. (Or not a word that was reported. It will be interesting to learn if the newspaper involved deemed the quote un-newsworthy, or if they were asked to delete it by the campaign.)

Orson Scott Card pointed out on The Ornery American that this would amount to a huge tax on the poorest Americans. That shouldn’t surprise us, since this is the same candidate who vows to impose a penalty on businesses that don’t provide health insurance, on the supposition that taking more money away from the business makes the business somehow better able to pay wages and buy health insurance. (See this.)

Ah, the joys of election season. And tonight it will be all over. So sad. 🙁

But meanwhile … happy voting!

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A Unique Idea that Wasn't

Found out this week that the “direct deposit” tax idea that was the foundation of my March 2007 Ornery American essay was actually published in the Summer 1993 issue of The Whole Earth Review. Ain’t that a kick in the teeth?

It was a prediction made by Kevin Kelly as part of an “Unthinkable Futures” piece he wrote with Brian Eno:

Software gains allow a certain portion of taxes to fall to the discretion of the payer. John Public can assign X amount of his taxes toward one service, to the exclusion of another. It’s a second vote that politicians watch closely.

I saw it this past Thursday, quoted on Futurismic. The Futurismic story referenced a BoingBoing piece I’d seen earlier in the week, but the quote didn’t appear in the BB item.

An online version of the original item is found here. My essay is at this link.

I went back into my archives and found the original version of my essay: I wrote it in February 1996. So even though the essay was over a decade old before I polished it enough to be publishable, the central idea was older and put forward by someone not me. Which goes to show that many people can have the same idea at close to the same time, but not everyone will do the same thing with it.

Still, my teeth hurt a little.

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Happy Happy Tax Day

And once again we celebrate the Ides of April. This weekend James Maxey had a (mostly) amusing tax-related post about the National Debt on his blog. I especially liked his idea to levy a “too much fame” tax, though the effective tax rate seems a bit draconian:

We could have a vote each year of the celebrities we’re most tired of hearing about. Then, we’d just go and grab everything from the top ten folks on that list. Britney would be too broke to afford her brazilian waxes after a few votes. Rush Limbaugh could no longer afford to hire a housekeeper to score hillbilly heroin from. If you’re a baseball player caught up in a steriod scandal at the same time you’re closing in on a home run record, well, you’d better hope there are ten people more loathed than you are this year. If you do manage to get rich, you’d learn to keep your head low. The new rule would be, you can be famous, or you can be rich, but it’s dangerous to have too much of both.

The post is called “The Ten Trillion Pound Gorilla,” and as I said I found it mostly amusing. I didn’t think his get-rid-of-the-military idea was very funny; as might be expected from my personal history, it raised my hackles a bit. I’ll leave it at that.

Continuing with the tax theme, I thought my “Direct Deposit” tax scheme from last year had at least the merit of being original, if not being a little amusing too. And if your frustration with Tax Day has you looking for a write-in candidate for any office — from school board on up, anywhere in the country — you’re welcome to check out the Anti-Candidate’s position on taxes. We won’t promise to make it any better, but we won’t promise to make it any worse, either. 😉

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I was very confused by this passage on p. 177 of Senator Obama’s THE AUDACITY OF HOPE:

…FDR recognized that we would all be more likely to take risks in our lives — to change jobs or start new businesses or welcome competition from other countries — if we knew that we would have some measure of protection should we fail.

That’s what Social Security, the centerpiece of New Deal legislation, has provided — a form of social insurance that protects us from risk.

I guess I don’t understand this because the fact that I have a Social Security account that I’ve been paying into for the last umpty-ump years doesn’t enter into my calculus on whether to change jobs or anything else. Nor do I see how Social Security protects anyone from risk. If you lose your job, or your business fails, you don’t start drawing Social Security — in fact your overall Social Security status is hurt because you’re no longer paying into the system.

So if someone could explain that to me such that it makes sense, I’d appreciate it.

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