Wednesday, May 6, 2009

The Adulation Is So Loud - It's Like Three Cheerleading Squads

There was a three-for-one special at the Associated Press this week. The following headlines were used to describe the same news story (in order as they appeared):

Obama To Target Tax Evaders

Obama To Close Tax Loopholes

Obama To Raise Taxes On Multinational Companies

The first headline which was changed by mid-morning on Monday is terribly inaccurate. Sure, Obama is going to increase the number of IRS agents by 800 according to the story, but this is nothing more than editorializing in a poorly written manner. Imagine you argue there should be no federal deduction for state income taxes paid, as the Heritage Foundation has. You could base your arguments on the fairness between taxpayers in states with income taxes and those without. (Note: As a result of this argument, Congress began allowing a deduction for either state income tax or state sales tax several years ago.) You could also argue that the federal government should not subsidize state budgets and in this manner force states to be judicious with their residents' money. (Note: Many states actually argue along the lines of 'Well, sure we are taxing you at 10% but for those in the 25% federal bracket it is effectively only 7.5%) What cannot be claimed, however, is that all taxpayers who deduct state income taxes on their federal return are tax evaders. A tax evader is someone who illegally minimizes his income either by unreported income or falsely reporting expenses. See Tim Geithner, Tom Daschle or Charles Rangel for examples.

The second headline isn't quite as bad as the first, but is still misleading. It calls the current tax policy a loophole. Tax loopholes generally discribe ambiguities in the tax code which have unintended consequences. These ambiguities generally occur to the chagrin and embarrassment of lawmakers. An example was found in Arizona around 2000. Due to pressure from environmentalists, the state gave a tax credit for vehicles that ran on alternative type fuels. What the state didn't initially expect was for every golfer in the state (and some non-residents) to purchase golf carts for their hobby and receive the credit. I beleive that loophole has been closed through more specific language. What this AP article describes isn't a 'loophole' because a lawmaker or committee used some vague terminology but a law in which the AP disagrees.

The final headline calls Obama's plan for what it is - an increase of taxes. Did a capitalist infiltrate the AP? By the way, no industrialized nation has a tax on income similar to what Obama is proposing. The article notes that most corporations pay an effective rate of about 25% on domestic activities but only a 4% rate on foreign activities. You have to love the disclaimer that notes this doesn't take into account foreign taxes paid. I suppose the AP is arguing that companies should pay 25% overseas and another 25% to Washington and if the company operates in many nations there could potentially be a greater than 100% tax rate. That would turn the 'loophole' into a noose for most companies.

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