Varner: Companies don’t pay taxes, people do | Columnists


CARSON VARNER For The Pantagraph

Students may be a little weak on past events, but they know JO, and if they know anything about the first President Bush, it’s, “Read my lips.” No new taxes. Has the current occupant of this office put himself in a corner and said that no one who earns less than $400,000 will pay any more taxes?

Line 1040 12 is a favorite for me because it allows for a charitable contribution of $600 for those taking the standard deduction. I would like this amount to be increased considerably. To pay for it, why not reduce the maximum residential mortgage deduction from a maximum of $750,000 to $500,000? We want to encourage and help families own the roofs over their heads, but $750,000?

But Biden might not agree, as some of those owners would likely earn less than $400,000.

Although no politician would vote for it these days, our roads need fixing. And why not increase the gas tax? Gasoline is about $9 a gallon in Germany today, but I don’t know a word in their language for “pothole.”

Yet we have been given a wide range of government-sponsored gifts, and never have so many been given to so many to be paid for by so few.

The top 1% and corporations would foot the bill for a massive infrastructure overhaul, free federally regulated child care and more. We need good child care, but to federalize the system you might need a bureaucrat for every teacher in the classroom.

Revision of the tax rate

We’ll leave the top 1% to fend for themselves today, but let’s focus on the question of business. For years, the US corporate tax of 35% was the highest in the world. The 2017 reforms have ensured that our rate is not exactly low, but at least at an internationally competitive level of 21%. You might think that if it goes up to 35% or whatever, it has nothing to do with your personal well-being. One step at a time, but the bottom line is that business is YOU.

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The money that a company brings in goes into several pots, taxes being one of them. Think of the competition our new neighbor Rivian faces to find quality employees. A profitable company will use some of its money to increase wages, not out of charity, but for good business reasons.

Obviously, higher wages can reduce profits, but when those wages attract the best workers, the company can compensate for this with increased productivity. When employees have been taken care of, then come taxes and shareholders. Every extra tax dollar is a dollar less for shareholders. So ask yourself, what does this have to do with me? Who are these shareholders, by the way? Look in your mirror.

Institutions own corporations

We often imagine that American companies are owned by a few millionaires and billionaires. Bill Gates owns less than 2% of Microsoft, Jeff Bezos about 10% of Amazon, and Elon Musk 17% of Tesla, though if his planned purchase of Twitter goes through that number will surely shrink.

I was surprised to learn that 80% of the stock market is owned by what are called institutions. This includes various types of mutual funds, IRA retirement accounts, and company and government pension plans. The California system (CALPERS), which is the largest, has assets of over $500 billion. Closer to my heart, the Illinois State University Retirement System only has $23 billion.

At Illinois State University, we are not on Social Security. We spend 8% of our income on SURS and hopefully that’s matched by the state. That money is out there in the markets working very hard to give you a comfortable retirement. If corporate taxes go up, it’s money straight out of your pocket.

My calculations say that if you have a good job at ISU, when you retire you will be a millionaire, or very close. You probably don’t feel that rich, but a retirement income paid out over hopefully decades requires a healthy nest egg that will continue to work hard for you.

So if corporate taxes go up, President Biden, like Bush I before him, will have broken his promise. That said, there is no free lunch, and even a more limited government needs a lot of money, and needs the wealthy and the average Joe to pay their share. What’s right seems to be totally in the eye of the beholder.

Tax systems

We have one of the most progressive tax systems in the world. There are other types of taxes, but this most maligned 1% pays about 40% of all federal income taxes. We have more inequality than Western Europe, but we also have more energy and freedom to develop businesses. Elon Musk is an immigrant with incredible energy and creativity. Why do you think he came here rather than any other country?

We want the most efficient system possible, and for that I have three guiding principles. Fifty years ago, corporation tax was 48% and the personal rate was 70%. Today, they are respectively at 21% and 37%. These past high rates have drained the energy and creativity of our business. If you yearn to go back to the 1970s, these tax rates would take us back there.

Next, minimize loopholes (or the more polite word, preferences). Every loophole is a haemorrhage of revenue. See Illinois Schedules M and 1299c. There are loophole pages showing what Illinois politics is (Democrat and Republican). My favorite is line M 24. I have an investment (Abbott Labs) in Chicago’s 22z subarea and pay no Illinois tax on dividends. I am saving a little, but think what this bureaucracy is costing the Treasury.

The next one is probably the one you have too. At the bottom of the first page of the IL 1040 is line 18s, a 5% credit for property tax paid on your home. The average savings for us would be a few hundred dollars. You probably think this is a break you deserve. It was reported that Winnetka’s house used in the movie “Home Alone” has a property tax of $31,000, making the $1,550 much more substantial credit. You know what I mean?

Finally, I like to see taxpayers’ money spent as close to home as possible. You may remember a proposal that would cap property taxes and raise state income taxes. We would send more money to Springfield, and they would send it back – or fly over us heading northeast?

In 1980, as I said, the personal tax rate was 70% and my wife and I, as young faculty members at ISU, had a marginal rate of 49%. The Reagan reforms reduced the maximum rate to 50%. Then, with regulatory reform filling in the gaps and Democrats on board, the maximum rate was reduced to 28%, helping to give us 40 of the most creative and productive years in human history.

I remember a Republican saying his Democratic opponent had never encountered a tax he didn’t like. The answer was that the Republican never found an escape for his friends he disliked. There may be some truth in each. I have to believe that rational discussion and action will be our way, despite all the noise.

Carson Varner is a professor of finance, insurance and law at Illinois State University.

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