Debate and Taxes

Last night’s debate was honestly a lot better. Now I understand exactly why Obama had held back on the first one: he wanted to give Mitt Romney enough time and rope to where he’d spew everything he had to spew, and then leave it ripe for dissection. And oh, Obama dissected. I am very proud of Mr. President today.

And Mitt Romney again proved that he is deeply unqualified for any post that doesn’t involve the letters C, E, and O.

The big buzzword of right now is “tax cuts”. Tax cuts, tax cuts, everyone wants to have lower or no taxes, but guess what: the treasury is gutted, needs refilling badly, and Romney thinks that if he cuts tax rates, reduces certain types of income tax, and eliminates deductions,  it will balance out.

This made me start laughing outright. I spent way too much time working at an accounting firm, apparently, because my bullshit meter went into the stratosphere on this one within five seconds.

I’m about to drop a piece of knowledge, guys and gals, and you’re not going to like it. You’re also not going to like it if you’re a Romney fan (in case of which…please close the blog now).

This is independent of any political party.

Ready?

It’s math. And the math says that Romney is full of shit.

Mathematics does not depend on politics. It either adds up or it doesn’t. Accounting math, specifically, depends on reconciliation across the board to be shown as correct: that a series of numbers add up to a certain percentage or a sum, and add up to the same sum across two platforms. If it doesn’t reconcile, you’re doing something wrong. That’s how you know your accounting is good or not.

First of all, let’s get rid of this ridiculous idea that we’re overtaxed. We’re not. Compare today’s tax rate with that under Richard Nixon, or even Gerald Ford. The difference is palpable. If your taxes were to be computed using the Nixon Administration’s numbers, you would be screwed. It’s simple fact. Look up the archives of the U.S. Tax Code if you don’t believe me. Taxes are at an all-time low.

Second, tax cuts don’t do a damned thing to bring in revenue.

You’d think, “But two-for-one sales bring businesses loads of revenue!” True – businesses, and businesses alone. But a government/treasury is an administration, not a business, and business math, which is centered largely on profit and bottom-lining, doesn’t work here.

This is why it doesn’t work:

Cutting a price to bring on a sale and make up the price cut in volume of sales makes sense – in business. Why does it make sense? Because it is banking on an increased number of consumers paying their money. This is good when you’re selling material goods and certain services. This is how buy-one-get-one-free sales succeed. The catch to that is that you cannot predict your number of consumers. You’re banking on taking a loss, and hope that you break even/make a profit in volume. You have that option because consumers are a variable number in this case.

In taxes, this is the exact wrong approach. Why? The number of taxpayers isn’t variable. People  retire from the workforce and enter it at a relatively constant, break-even rate. The taxpayers are a fixed constant, which means that the money has to come from their wallets one way or another, and it’s a matter of who can pay how much. Their number is the same. What isn’t the same is their incomes, and having an even rate across the board, and a plan that eliminates deductions but yet doesn’t tax certain types of income completely defeats the purpose of the tax rate to begin with. Because what does a tax return depend on, and the amount of tax taken out? The type of income. Because they’re not taxed the same way. Self-employed income gets taxed much higher than W-2 income. Pass-through K-1 income is not taxed the same way as either of the above. C-corp tax and partnership/S-Corp tax aren’t anywhere near the same.

Logically, if X is a fixed constant, and 3x = Y, then 1.5X will simply not yield the full amount of Y if you’re expecting it at the same proportionate rate. They just don’t reconcile. In this case, 1.5X will bring you Y divided by 2. Remember basic division from elementary school? If you have to divide, the same denominator is applied on both sides of the equal sign.

Therefore, tax cuts do not create more revenue. They slice it.

Again, this is simple math. You don’t need to be a rocket scientist or a CPA to be able to set up an equation and try to work it out. Pencil and paper would do.

Let’s dissect Romney’s tax ideas. He claims that he won’t tax dividends, interest, or investment income (cap gains, accumulated interest on IRAs, etc). This right here should be a red flag. Most people do not make a significant amount of dividend income to have it make an impact on their returns. Bank interest, at the current rates, is laughable as a source of income, to where the IRS dictates you not to bother even reporting if it’s below $10. But this is the thing: if you look at the big picture of what all that adds up to, you will realize that put together, this is exactly how the wealthy had acquired their wealth as of late: all of those types of income are rooted from previous investments. Not taxing those sources of income effectively puts more money into already well-lined pockets and further starves the IRS.

And then, atop that, Romney says he will eliminate deductions. Okay, which ones? Standard deduction is something across the board; for some people, it’s irrelevant because they’d be in AMT because of their amount of income/tax rate (self-employed; or making over 300K/year; or receiving mostly passive income). For Joe W-2, who only makes a certain amount a year and is taxed at 25%, that standard deduction, added up to the tax withheld from his pay, could mean he’d get a partial or full refund of his tax liability. This does mean that Joe W-2 is not paying taxes; he had paid them in the minute he had agreed to have his taxes withheld from his pay. There is a massive difference between receiving a refund and not filing a tax return.

Would Romney then eliminate the first-time homebuyer deduction? Or the mortgage interest deduction? Or property tax deduction? So a couple who went close to broke paying for their first house would now have to shell out on a tax bill from the IRS after they’ve paid their locality tax, which can get steep in some areas, especially if the assessor hasn’t been by in a while.

Or, would Romney eliminate the student loan interest deduction? Which people of my generation will continue to use into their fifties. And sometimes, it means the difference between breaking even on the tax bill and owing on it.  Again, for the upper tier it would make little difference, because with his idea about investment income, that little credit is barely relevant. For someone making 40K per year, that and every other credit counts.

Romney’s plan is mathematically impossible to execute. The money that he will not receive by means of even partially lifting liability for passive income tax has to get made up somehow. Killing deductions does absolutely nothing. Unless you put pass-through K-1 income at a 50% rate or higher, you just will not see even a small percent of the money that will be lost by his tax cuts. If you think eliminating deductions will rectify it, you’re kidding yourself. You can’t hope to collect an extra $300 or so in tax revenue from people who can barely pay their own bills. Someone who receives a dividend check of about $2,000 can pay that $300 much easier than someone for whom that $300 means groceries for a month. So where will the money come from? Slicing defensive spending? Of course not. Eliminating corn subsidies? Nope. His own offshore accounts? Don’t make me laugh.

The math just doesn’t add up. Where will the shortfall come from? The deficit can’t take it, and if you print more currency, as has been floated around in the early days of Obama’s presidency, inflation goes through the stratosphere. Salaries hadn’t kept pace with inflation as it is; Romney’s “solutions” to the shortfall would plunge the country into poverty, one way or the next. Anyone remember Hoovervilles?

But I promise you: if major corporations who outsource their labor to China and India got taxed to hell and back (Mr. Clinton, why the hell did you sign that tax break into law?!), the problems of unemployment and treasury revenue will be rectified in short order. You want to have cheap labor? Great. Pay the hefty tax bill for it, or bring the jobs home and your money will at least tide people’s lives over in the form of paid wages. But if that’s implemented, the CEO brigade will riot. Decisions, decisions.

Oh, and China isn’t “cheating”, as Romney put it. For one, he should be one to talk, he pioneered outsourcing while in Bain Capital. For two, if another country decides to open up a plant and give your country thousands on thousands in manufacturing jobs, what do you say? “Thank you very much”. China’s unemployment is an all-time low because the American companies have exported their factories and according jobs there. China’s economy is thriving because it’s powered by American money, and that American money is a fraction of what it would cost to open and keep the same plants and factories in the US. Smart business investment for the CEOs, and an even smarter one by China to allow it. Their revenue benefits too, because more people are employed and paying tax on their earnings.

Want to make the US attractive to CEOs? Tax the living hell out of outsourcing.

The fact that CEOs don’t want to be bothered to pay the overwhelming minimum wage of $7.25 per hour for American workers is another matter altogether. Because we all know that the real reason that companies took jobs out of the US is because paying that wage is way too much money for them. (end sarcasm)

(Don’t get me started on cost of living and wages keeping pace with inflation. I could go on for weeks.)

I have no idea what Romney was thinking going on about taxes in his debate. Hel-lo, did he not think that maybe, just maybe, people who knew accounting, or worked in accounting, would be listening? Did he honestly believe that if he would repeat the same BS over and over again, it would make it magically add up?

You see, this is exactly why I like math and accounting: it doesn’t lie. It does not and never will depend on a political party. Either it adds up or it doesn’t.

K.G.

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7 thoughts on “Debate and Taxes

  1. Math ia a foreign and difficult language of numbers to this wordsmith. This being said I did react and discuss the red flag you so clearly explain “Let’s dissect Romney’s tax ideas. He claims that he won’t tax dividends, interest, or investment income (cap gains, accumulated interest on IRAs, etc). This right here should be a red flag. Most people do not make a significant amount of dividend income to have it make an impact on their returns. Bank interest, at the current rates, is laughable as a source of income”
    Thanks for sharing your knowledge of numbers and making it easir for people like me to understand :)
    M.C.V. Egan

    1. You’re welcome! I just had to react to this. It was as though Romney had no idea that people could possibly work in accounting and see right through it.

      Moreover, 73% of American households do not receive either dividends OR capital gain. So their benefit is a big fat ZERO. How does that help people, exactly?

  2. You already know how I feel about you and you’re writing so a soliloquy isn’t needed. I would like to add that EVERY President since Nixon raised taxes. The Republicans great Gipper, Ronald Reagan did – yes he DID! The Dems’ “Best-President-This-Country’s-Ever-Had/First Black President”, Bill Clinton did too. So did Poppa Bush, you know, Mr. “Read My Lips”. They HAVE to raise taxes for the type of Government that’s being run.

    Now, as to the constitutionality of these taxes, well that’s a whole new blog in itself! ;)

    1. Yep. And really, let’s just say it: raising tax is a necessary part of balancing budgets. Sometimes, to break even, the cost just needs to go up. Where it goes up is another story.

      Obama said one thing that I’ll quote (loosely): if you can afford a private jet, you can pay a little more in taxes.

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