The Comeback (19 page)

Capture “off the book” tax revenues.
The fact is that a large portion of Americans escape paying taxes because they don’t report their true income. The IRS estimates that the cash economy
forces the government to lose some $300 billion annually in lost taxes, which of course imposes a higher tax burden on everyone else. Don’t believe me? Run a free ad on Craigslist for any non-skilled job from waiter to nanny, and see how many responses you get from people who insist on being paid off the books. When my wife and I hired a nanny, most experienced candidates insisted on off-the-books payments because that was what they had done before in their economic interests. Sadly for them, they received no benefit from the Social Security match that the law requires the rest of us to pay (7.5 percent of their salary), and they built up no Social Security benefits; however, they also pay no income taxes. Among those we need to capture:

From the working poor: Many of those reaping government benefits are doing so because they are not reporting all their income and so qualify as “needy.” The Las Vegas doorman getting fistfuls of dollars, the maids, bellboys, hairdressers, cab and limo drivers, bartenders, and others getting tips and income by conducting a cash business are certainly entitled to the tips and other income that they receive. But they are not entitled to pay no taxes on this income. Movement to electronic payments will ease tax under-reporting and help keep people honest. In addition to the tens of billions of legitimate payments going to the IRS, we should see a dropoff in eligibility for government assistance programs and thus lower expenditures for these programs.

But it is not only the tax revenue that is lost, it is the benefits that are obtained fraudulently by those claiming poverty. Anyone seeking government payments should have a high barrier to prove that they are entitled to the payments and are reporting all the money they make. Given the fact
that most low-wage earners pay little taxes on reported income—and actually get money back through the Earned Income Credit—there is little reason not to insist that everyone be paid “on the books.” Absent this change, the Earned Income Credit should be eliminated because it is rife with and encourages fraud. Moreover, it is only right that every citizen pays legally required taxes. Yet today, barely a majority of adult Americans actually pay income taxes.

From small businesses: Many small businesses operate with two sets of books so that they will never show a profit for tax purposes. Most commonly, many personal expenses are attributed to the business and thus are tax-deductible. That is unfair even if it is how business is done in this country, and a few thousand comprehensive audits of small businesses would uncover patterns and trends useful in tax collection. I am concerned that small businesses are over-regulated, but running a party store or nail salon should not be a tool for tax avoidance.

From credit card companies and large companies and their fraudulent executive expense accounts: Overlooked fraud is not restricted to the working poor and small businesses. Some executives at larger companies take advantage of the generous cash rebate programs from credit card companies to transfer corporate expense payments into certificates usable like cash for personal expenses at restaurants and retailers. One former employee at CEA used a corporate American Express card to pay company bills and to accumulate “points,” which he said would be used for last-minute business air travel. When I asked him to account for the benefits, I learned that, for the $3 million in American Express corporate purchases he’d made over eighteen months, he had received $30,000 in cash equivalencies at
clothing stores and restaurants. He was immediately fired, but he probably never paid taxes on that $30,000 he stole from us. Credit card companies should be held accountable for these gifts. Comprehensive category audits are needed, and penalties for willful fraud need to be increased. For example, the IRS should simply subpoena the top 10,000 gift certificate receivers from American Express to determine how their cash equivalencies were used. Were they used for personal or corporate expenses? If it was corporate spending that “earned” the points (or dollars) and they were used to reduce corporate expenses, that is fine. But if individuals at the companies are receiving personal benefits that they are almost certainly not reporting as income to the IRS, then the IRS must act to prevent fraud and collect fair tax revenues.

On another personal note, any greater effectiveness of tax collecting makes me uncomfortable, but it is fair, necessary, and right. I have had challenges with the IRS, as the IRS sought to assess me additional taxes. Two years in a row my response to the IRS was somehow “lost,” and they sought to assess additional penalties. The experience was frustrating, and I felt helpless. Eventually, in each case, I prevailed, and the IRS dropped both cases.

I don’t like paying taxes. But I recognize that taxes are the price of living in a free society with a functioning, relevant government. No matter how angry I am at our federal government, I remind myself that paying taxes is not only a civic duty but a privilege, as long as these taxes are fairly raised and prudently spent. Our challenge is to ensure that taxes to support government spending are fair and actually promote our nation’s defense, prosperity, and welfare.

“Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon.”

—WINSTON CHURCHILL

T
O CHURCHILL AND
most of our citizens today, it seems obvious that private enterprise is the primary driver of quality economic growth and, at least historically, the preferred source of satisfying careers. Yet there is a seemingly incessant condemnation of private enterprise from certain politicians, union leaders, public intellectuals, lawyers, and the media. This steady drumbeat has fomented a multitude of laws and regulations that are hobbling our economic engine, with no end in sight.

To some critics, private enterprise is synonymous with such pejoratives as “big business,” “corporate greed,” “fat cats,” and similar descriptions that label private enterprise as responsible for oh-so-many ills of our society. Clearly, the world these critics live in is out of whack and divorced from reality. But these critics wield significant political power, so they must be confronted, not ignored or discounted.

Let me be clear. The U.S. has more than 23 million businesses. In any population that large, there unfortunately will be bad actors. But an enlightened electorate and courageous political leadership will not support laws and regulations based on the assumption that the bad guys are the norm. Yet that seems to be what we have come to, and it is past time to correct the political dynamics.

I believe there are four major problems that must be aggressively confronted and successfully resolved if we are to ensure that our legal and regulatory structures are reality-based and promote our free enterprise system:

High corporate income tax rate.
The U.S. statutory corporate income tax rate is 35 percent, the second highest among developed nations, behind only Japan. There is no rational economic justification for this high rate, not least because it helps drive businesses abroad in search of economies that better appreciate the economic contributions of business. Instead, arguments for the high tax rate are based on notions of social re-engineering and so-called economic justice.

Moreover, the reality is that businesses do not actually pay income taxes; instead, the economic impacts of tax payments are passed on through the corporation to stockholders in the form of lower investment returns, and to customers in the form of higher prices. Those who demonize private enterprise are engaged in a shell con game. Worse, these high tax rates put U.S. companies at a disadvantage compared to their global competitors.

High tax rates on private enterprise investors.
Individuals are taxed on their investment returns as both dividends, taxed at the progressive income tax rate, and capital gains, taxed at a
separate rate. A 2004 study by the National Bureau of Economic Research reported that:

Interest in the role of entrepreneurial entry in innovation raises the question of the extent to which tax policy encourages or discourages entry. We find that, while the level of the marginal tax rate has a negative effect in entrepreneurial entry, the progressivity of the tax also discourages entrepreneurship, and significantly so for some groups of households.
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Similarly, in a September 2010 study of capital gains taxes, the American Council on Capital Formation concluded what numerous other studies have also found:

The bottom line is that any capital gains tax increase is counterproductive to real economic growth. To the contrary, a reduction in the capital gains tax rate would be a pro-growth fiscal stimulus that creates new jobs and new businesses, funds entrepreneurship, reduces the unemployment rate, increases productivity, and in the long run brings in more payroll taxes. In the case of capital gains taxation, less means more.
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Those who advocate capital gains taxation are actually engaged in class warfare that penalizes all of us.

Excessive, irrational, and corrupt business regulation.
The Competitive Enterprise Institute regularly studies the impact of federal government regulations. In a 2007 analysis, it found that 3,900 separate regulations imposed by over fifty federal agencies inflicted an astounding annual cost on our economy of $1.2 trillion (and of course regulations have only increased in the last three years). Note that this analysis does not include the vast number of state-level regulations that undoubtedly would dramatically expand the cost to our society of government regulation.

In that regard, the American Tort Reform Association recently released a study that grades state-level laws on “the good government principles of public disclosure, competitive bidding, oversight and fiscal responsibility. It focuses on the inadequacies of requirements placed on state attorneys general as they sometimes engage in inappropriate relationships with outside counsel.” A key conclusion of the study is:

Some activist state attorneys general are offering no-bid contingency fee contracts, potentially worth many millions of dollars or more, to personal injury lawyers who have made substantial campaign contributions to those same AGs. This abusive pursuit of personal interests directly conflicts with the public interest, and state laws should work to eliminate such abuse.
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Regulations increase the time and costs of business activities, including innovation, and often penalize only U.S. firms because foreign firms are beyond the reach of our regulators. There is clearly a set of valid reasons for some types of business regulation, such as for certain matters of consumer health and safety, but in most cases, there is little or no rational analysis of the costs of regulation compared to the benefits of regulation. And where cost-benefit analyses do occur, they invariably miss the impact of unexpected and unintended consequences of regulation. Instead, regulation is all too often imposed and expanded based solely on nonrational, emotional arguments.