Sunday, December 14, 2014

Crony Capitalism & The Tax Code

The United States has among the highest taxes in the world; particularly when all local, state and federal taxes are combined.   As a result, the US tax code and most likely the tax code of most other countries is full of loop holes, deductions and exemptions that are the result of companies and other organizations buying influence through political contributions.  All of this distorts markets in ways that hurt the consumer and small businesses that are not in a position to buy influence.  In fact, large companies with their government relations departments and paid lobbyists continue to get bigger through mergers and acquisitions in ways that actually make it harder for smaller companies to compete and grow.

Instead, we need tax reform to level the playing field by eliminating many of these loop holes, deductions and exemptions and to prevent the artificial impact on markets.  Governments also need to stop social engineering to drive behaviors.  About the only thing that should remain in the tax code related to personal income tax is perhaps an exemption of $2,000 per family member to give larger families a break.  Otherwise, tax rates should be cut to no more than 20% as a top rate and all other deductions, except the charitable deduction, should be eliminated.  That means eliminating the mortgage deduction, which artificially inflates home values making it harder for young people to afford first homes. 

The United States now has the highest corporate income tax rate in the world at 35%, which has  caused many companies to ship jobs and whole industries overseas.  This one is simple.  Just subtract annual expenses from annual revenues and if a profit remains, tax the difference at no more than 20%.  If there is a loss allow a carry forward to future years.  There may still need to be some loop holes for depreciation of assets; but otherwise the KIS rule; keep it simple stupid, should apply.  All of the government subsidies for green technology, or any other industry should be eliminated.  Only the market should determine winner and losers; not government. 

All of this is just common sense; but it is not likely to happen because both politicians feeding at the trough and industries and organizations that feed them work together to benefit each other often at the expense of the American people.  Crony Capitalism, supported by the tax code in most countries, is alive and well.  Sadly, it distorts markets and often ends up costing the consumer much more than necessary because competition on a level playing field is limited.  This is another case where government is the problem and not the solution at least not as currently configured.    

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