This is a companion piece to “Tax Policy: History & Ethics of Taxation.”
(EUGENE, Ore.) - In this piece I will look at the practical economic ramifications of the tax increases being put before the voters in the 2010 ballot measures 66 & 67. The vote is a long way off, but there is no reason to not begin considering these issues now.
As the vote approaches, you will increasingly be inundated with propaganda on one side or the other of this issue. It is worthwhile to prepare yourself with a solid understanding of the issue before you are subjected to the sales pitches of various self-interested parties.
Oregon Tax Revenue Structure
In 2007, the most recent year for which statistics are available for both individuals and corporations, total corporate income tax liability was $413.2 million and total individual income tax liability was $5.6 billion. The huge disparity between individual and corporate taxes results from the different ways in which the two groups are taxed.
Individuals pay taxes on all of there income. They can make deductions for mortgage interest, medical expenses, and a few other types of expenses, but in general, they pay taxes on everything. Basic costs of living, such as housing, food, and transportation are non-deductible.
Corporations pay tax on their net income, after they deduct all of the expenses of doing business.
If a corporation requires vehicles to conduct its business, all of that expense is deductible. If an individual requires a vehicle to go to work, they pay tax on all of the income used to fund that expense.
If a corporation operates from offices, factories, or warehouses, their costs to purchase and maintain those buildings are deductible. If a corporate employee needs to stay in a motel or rent an apartment, those costs are deductible. If an individual lives in a house, they pay taxes on the income that they pay their rent or mortgage principal with.
If a corporation buys food or liquor for a party or company event, those costs are deductible. If an individual buys food for their family, they pay tax on the income used to buy that food.
Aside from the extremely different tax rules that apply to corporate and individual income, corporations and individuals are also taxed at different rates.
Corporations pay 6.6% tax on their net income.
Individuals pay taxes on their entire income on the following progressive scale:
$2850 – 5%
$7150 – 7%
Over $7150 – 9%
The “effective tax rate” for taxable income, which is total income minus deductions, is 7.5% on average for all individuals. Individuals at roughly the $40,000 dollar income level pay a higher percentage of their income in taxes than corporations, and those rates continue to go up the more they make.
Tax Fairness
Individuals pay 13.5 times as much in income tax as corporations. To put this another way, the people who do the work pay 13.5 times as much to maintain government as the shareholders who produce nothing, but collect the profits. This is because the shareholder, who produces nothing, is taxed at a lower rate, and has a completely different set of tax rules, which shield most of their income from taxation.
Basic fairness would dictate that all individuals be taxed according to the same laws. A corporation is only a collection of individuals. A corporation is its shareholders. Shareholders, through the State established legal fiction of corporation, work and do business according to a completely different set of rules than individuals, and their activities are taxed in an entirely different manner.
There are endless arguments about this issue, but if you step back and look at it objectively, it is really just a bit of gimmickry that clever people have invented in order to cheat others out of what is rightfully theirs. No matter how many legal arguments, statistics, and economic theories someone sights, they can never overcome the basic fact that in the end the result is two different sets of rules for the same supposedly equal people who are constitutionally entitled to equal treatment under the law.
If you read my piece on the history and ethics of taxation, then you will understand that this situation is a result of the basic law of taxation: the powerful tax the weak, and the rich tax the poor.
Measure 66
Measure 66 is a referral to the voters of House Bill 2649, which would increase individual income taxes. HB 2649 adds a temporary tax bracket for individuals earning between $125,000 and $250,000 with a rate of 10.8% and a temporary tax bracket for individuals earning over $250,000 with a rate of 11%. These taxes expire January 1, 2012. HB 2649 also adds a new permanent tax bracket for individuals earning over $125,00 per year with a rate of 9.9% per year.
Oregon tax brackets are normally adjusted to reflect inflation, so that as incomes rise due to inflation, individuals are not pushed into higher tax brackets. HB 2649 eliminates adjustments for the $125,000 tax bracket, so over time, an increasing number of tax payers will be pushed into the higher tax bracket, even if their real (inflation adjusted) income does not increase.
HB 2649 also decreases the amounts of Federal Income Tax that can be subtracted from taxable income for individuals earning over $125,000. Once again, this is not inflation adjusted, so over time this will result in increasing taxes due to inflation.
As I have made clear, the current tax system is grossly punitive to individuals by comparison to corporations. Measure 66 would compound the injustices faced by individuals by increasing the disparity between corporate and individual tax rates, and by forcing more individuals to count income that they have paid in Federal taxes as taxable State income. These injustices become more pronounced with time because HB 2649 abolishes the linking of tax brackets to inflation. HB 2649 is a bill that will increase taxes for an increasing number of individuals every single year in perpetuity until it is repealed or amended.
The political argument is that because this tax applies to only a small percentage of the population, it is acceptable. $125,000 for an individual or $250,000 for a household is a substantial income. I would be interested to ask anybody making this amount of money to explain to me how they contribute two or three times as much to their State as their fellow citizens who earn normal wages. However, even high wage citizens of the State are still citizens of the State. The “wealthy” people in this State live here. They spend their money here. They invest here.
By comparison, many of the most profitable corporations are not owned by Oregon citizens. They are owned by foreign (out of State) shareholders. They only extract profit from this State. They do not spend their money here. They do not live here. They do not invest here. Why should the taxes of wealthy citizens be increased in disproportion to those of wealthy foreigners? Is that a rational policy for our State? If anything, the disparity between corporate and individual income taxes should be eliminated, not increased.
Politicians may argue that the “wealthy” can afford it. I would argue that the hundreds of multi-national corporations doing business in this State, and their shareholders around the world, can afford it too. They can certainly better afford it than the relatively wealthy of this State. Finally, HB 2649 is not simply an increase in taxes on the wealthy. It is an increase on taxes for everyone that takes effect slowly over time.
HB 2649 is bad public policy. It discriminates against the highest earning Oregonians, while increasing the injustice of the tax system. It is a long term trap that will raise taxes for everyone. The legislature may have revenue problems, but this is not the way to solve them. I would strongly recommend rejecting this bill.
Measure 67
Measure 67 is a referral of HB 3405, which would increase taxes on corporations. HB 3405 increases the corporate minimum tax from $10 to $150. It establishes a corporate minimum tax of 1/10 of 1% of sales, with a cap of $100,000. It adds a new tax bracket for corporations with taxable income over $250,000 with a rate of 7.9%. The rate for this tax bracket falls to 7.6% after January 1, 2011. After January 1, 2013 the bracket only applies to taxable income over $10 million dollars. HB 3405 also increases most business filing fees, and specifies that the proceeds will go to the general fund. The fee increases range from 50-100%.
What stands out about HB 3405 is that it primarily increases taxes and fees on businesses with losses or no net income. 60% of corporations filing tax returns in 2007 had zero income or a loss. The impact of the huge increases in fees and the corporate minimum tax will be disproportionally dumped onto this huge group of non-profitable businesses. This will almost certainly result in many small businesses removing themselves from corporate organization, and it will be a major barrier to corporate organization for small businesses.
Many of the corporations with no income or losses are small locally owned businesses. Oregon businesses account for 67% of all corporate tax filings, but only 26.7% of total tax revenues. The largest and most profitable corporations doing business in the State are overwhelmingly headquartered outside of the State and owned by foreign shareholders.
The fact that HB 3405 places a tax on sales, which is analogous to the tax on gross adjusted income for individuals is on one hand a step towards equitable taxation between individuals and corporations. On the other hand, this tax of 1/10 of 1% versus a 5.6% overall effective tax rate on adjusted gross income for individuals leaves a lot to be desired. More importantly, the cap of the tax at $100,000 means that it falls disproportionally on small business, while giving a major competitive advantage to the largest retailers in the state. The owner of a business that owns a single retail outlet will pay 1/10 of 1% of their sales in tax, while Wal-Mart, McDonalds, Starbucks, and dozens of other big chain retailers will pay a much smaller percent because their tax is capped at $100,000.
The increases in the corporate income tax rate are positive and desirable. The fact that they fall short of equity between individual and corporate rates is disturbing. Corporate income tax rates, at the very least, should be the same as individual income tax rates, which would be 9% under current law.
It is argued by some that corporate income taxes discourage investment. This is patently false. Because corporations only pay income tax on net profits, increasing income taxes encourages reinvestment relative to profit taking. Because Federal capital gains and dividend tax rates are much lower that Federal income taxes, there is a huge incentive for shareholders to earn income by extracting money from corporations instead of reinvesting it. In order to neutralize the incentives that the Federal government gives shareholders to extract profits from corporations, the State corporate income tax would need to be much higher than the individual income tax.
If State corporate income taxes are high, then the only options for corporations are to increase salaries or increase reinvestment of profits. Increasing corporate income tax rates above individual income tax rates would favor locally owned businesses because they have the option of avoiding corporate income tax by increasing salaries for their executives, who are also in many cases the shareholders of their companies. Corporations owned by foreign shareholders do not have a similar mechanism available to them to avoid paying taxes on income earned within the State.
There may be very good reasons for the State to adopt a tax policy that explicitly favors domestically owned businesses. Such a policy would help to neutralize the disparities between Federal income tax and capital gains and dividend taxes, which would reduce incentives for shareholders to extract profits. At the very least, the State should adopt a corporate income tax rate that is equal to the individual income tax rate. Otherwise, the State is favoring the foreign shareholders of large corporations over its own citizens, charging its own citizens higher tax rates than foreign shareholders.
The fact that HB 3405 increases corporate income tax rates is positive, but that positive is strongly counterbalanced by the disproportionate impact of HB 3405 on small and locally owned businesses. The tax on sales, capped at $100,000, would put small retailers at a particular disadvantage in competing with large national chains. The huge increases in fees and the corporate minimum tax would be a barrier to corporate organization for many small businesses.
Weighing these conflicting effects of HB 3405, I would lean toward rejecting it. HB 3405 would make small steps towards narrowing the disparity between individual and corporate income taxes, but would do so at the price of severely disadvantaging Oregon owned businesses. Locally owned businesses already face a marketplace that is massively distorted to suit the interests of large monopolists. HB 3405 increases the tax burden on Wal-Mart by a tiny fraction of a percent, while multiplying the tax burden on thousands of small locally owned businesses by factors of tens and hundreds. Increasing the competitive disadvantages faced by local businesses, especially now, is not worth the small incremental increase in the corporate income tax.
I would tell the legislature to come back with a bill that simply establishes parity between individual and corporate income taxes. If a tax on sales is to be imposed, it must not be capped. Fees should not be used as a revenue stream for the general fund. Fees should be linked to the services provided, and not be used as a backdoor form of taxation.
Conclusion
Measures 66 & 67 refer to the voters two pieces of extremely poor legislation. Measure 66 would increase the injustice of the tax system by increasing the disparity between individual and corporate income taxes. Measure 67 would make insignificant increases in the corporate income tax at the expense of severely disadvantaging small and locally owned businesses in their competition with large out-of-State monopolies.
As a voter, you should not ratify these perverse public policies. The legislature has the ability to enact a fairer tax code that does not harm local business. Do not be tricked into acquiescing to your own economic suicide, even if the legislature makes extortionate threats to curtail spending on public schools and essential services. If the legislature chooses not to fund schools and essential services through fair taxes, then fire the legislature. Fire the high paid advisers, consultants, and lawyers who get rich off your tax money. End the plush contracts, tax refunds, and other corporate welfare that your tax dollars subsidize. Those are the real solutions to the State's budgetary problems.
References: Oregon Personal Income Tax Statistics 2007 - oregon.gov/DOR/STATS/docs/101_406_09/101-406-09.pdf Oregon Corporate Excise and Income Tax 2007 - oregon.gov/DOR/STATS/docs/102-405-FY07/102-405-07.pdf Ballot Measure 66 - sos.state.or.us/elections/irr/2010/301text.pdf Ballot Measure 67 - sos.state.or.us/elections/irr/2010/302text.pdf
Salem-News.com Business/Economy Reporter Ersun Warncke is a native Oregonian. He has a degree in Economics from Portland State University and studied Law at University of Oregon. At a young age, his career spans a wide variety of fields, from fast food, to union labor, to computer programming. He has published works concerning economics, business, government, and media on blogs for several years. He currently works as an independent software designer specializing in web based applications, open source software, and peer-to-peer (P2P) applications.
Ersun describes his writing as being "in the language of the boardroom from the perspective of the shop floor." He adds that "he has no education in journalism other than reading Hunter S. Thompson." But along with life comes the real experience that indeed creates quality writers. Right now, every detail that can help the general public get ahead in life financially, is of paramount importance.
You can write to Ersun at: warncke@comcast.net
Tax Policy: Measures 66 & 67Salem-News.com