(Un)Reasonable Profits Board

Perhaps I am too conservative fiscally. Perhaps I am just too conservative. But, since this is my blog, I get to speak my piece.

Dennis Kucinich (D-OH) has introduced into the House of Representatives HR 3784, the Gas Price Spike Act of 2012. Lest he not be the only one associated with this lovely piece of legislation, he has been joined by his co-sponsors John Conyers (D-MI), Bob Filner (D-CA), Marcia Fudge (D-OH), James Langevin (D-OH), and Lynn Woolsey (D-CA).

I need to be fair to these representatives. Let's look at where their districts are.

• Kucinich (West Cleveland and near western suburbs)
• Conyers (downriver suburbs of Detroit)
• Filner (far southern California on the borders of Mexico and Arizona)
• Fudge (Cleveland and its near eastern suburbs)
• Langevin (most of Rhode Island except for Providence)
• Woolsey (area north of Oakland and most of Sonoma county)

These are pretty liberal areas, so these representatives may be doing a good job of serving their constituencies. But, that is the extent of the faint praise they will get from me.

Here is a summary of the way the bill would work if it were to become law. 

• The President would appoint a 3-member Reasonable Profits Board (RPB), not subject to Congressional approval.
• The RPB would determine what constitutes reasonable profits for the sale of crude oil, natural gas, or other taxable product (fuel which is the product of natural gas or crude oil). 
• To the extent that profits on said sale exceed the reasonable amount by less than 2%, an excise tax of 50% on such unreasonable amount would be imposed.
• To the extent that profits on said sale exceed the reasonable amount by 2%-5%, an excise tax on such unreasonable amount of 75% would be imposed. 
• To the extent that profits on said sale exceed the reasonable amount by at least 5%, an excise tax on such unreasonable amount of 100% would be imposed.
• These excise taxes would allow for tax credits for fuel-efficient vehicles and to allow grants for mass transit.

Let's see. We have an anti-trust act which prohibits monopolies and price-fixing. It has been used when appropriate. Oil company profit margins are less than they were (in total) 30 years ago. I thought we lived in a free enterprise type society.

What comes next? Do we get a similar tax on pharmaceuticals? The companies that make them are generally judged to be pretty evil. How about cosmetic companies? They have high profit margins. 

In my opinion, this is a bad idea with a very slippery slope to go with it. 

Thankfully, this one won't pass, but I still felt the need to write about it.

Translation: Refundable Tax Credit = You Are Giving Money to Someone Else for Something You Probably Don't Approve of

It's one of the worst things since we forgot how to slice bread -- the refundable tax credit. And in recent years, it has been a pet trick of politicians to make an individual or group of individuals vote for them.

Before I go on my complete rant, it may be helpful to understand what a refundable tax credit is. Let's take a stepping stone approach. First, there is an income tax. This causes you, the taxpayer, to owe to the government an amount of money based on your income. Whether you like it or not, the 16th Amendment to the US Constitution permits such an income tax to be imposed and attempts to prove that the 16th Amendment was never ratified have been shot down by the US Supreme Court.

Our Tax Code ("The Internal Revenue Code of 1986, as Amended," if you care, which you probably don't) provides that there are items that get taxed (such as wages) and other items that produce offsets to that tax or credits. One such well-known credit is the deduction for contributions to a bona fide charity. That seems reasonable to me. Such charitable contributions to a BONA FIDE charity are in the public interest and giving an individual or corporation a credit of some number of cents on the dollar seems reasonable.

Now, suppose your tax liability before considering the credits is, say, $1,000. And, suppose that you paid no installments (through payroll or otherwise) on your taxes during the year. Further, suppose that your nonrefundable (normal) credits add up to $500, leaving you, tentatively, with a tax bill of $500. Finally, suppose that you qualify for 3 refundable tax credits in the amounts of $750, $1,000, and $2,500. Then, your tax bill is 0, right?

Wrong, not only do you not have to pay any tax, you get a tax refund despite the fact that you have paid nothing into the system. That's right, you paid nothing in, but you get $3,750 back. IMHO, that is not fair to all the good people who have paid into the system.

In recent years, these refundable tax credits have become really popular. You see, they have the potential to get a politician votes from two constituencies at once -- the people who get the credits and the industry being favored by the credit.

If this doesn't make sense, let's consider an example. Suppose I am running for Congress from the lovely 5th Congressional District of California (for those among you who haven't memorized California's Congressional districting map, this is essentially Napa and Sonoma counties). Further suppose that I introduce legislation for a refundable tax credit on the purchase of Napa or Sonoma produced wine. Wine drinkers will be thrilled with me. But, even more so, since wine drinkers will essentially be paying less for their product, so to will the wine producers love me.

Let's look at some of the refundable tax credits which actually have become part of the Tax Code in recent years.

First-Time Homebuyers Credit


In all fairness, this wasn't so much a credit as an interest-free loan from the government to you. If you were a first-time homebuyer in 2008 or 2009, you were entitled to a refundable tax credit for that year of 10% of the purchase price of that home, but not to exceed $7,500. But, starting in 2010, you were required to repay that 'loan' to the government in equal installments over 15 years. Of course, if adding that $500 into your tax liability left you still with no liability, you owed nothing.

Making Work Pay Credit


This was a 2009 and 2010 reduction in your tax bill of up to $400 if you were single, or married filing separately and up to $800 if you were married filing jointly. It was put in place by the 2009 stimulus bill. I didn't find it to be very stimulating. It phased out for people that the government decided didn't need it as their incomes were high enough already.

American Opportunity Tax Credit


This one is for qualified education expenses for years 2009 through 2012. If your income was less than $80,000 for individuals or $160,000 for couples, you can get a refundable tax credit of 100 percent of the first $2,000 of tuition, fees, and course materials paid during the taxable year and 25% of the next $2,000.


Health Care Premium Tax Credit


This was brought to you by the Patient Protection and Affordable Care Act, or Health Care Reform, if you prefer. I'd love to explain it for you in a nutshell, but the IRS proposed regulations on the topic are 20 pages of 3-column gibberish long. let's just be glad that we have until tax season during 2015 to figure it all out.


Adoption Tax Credit


This one was part of the Health Care and Education Reconciliation Act of 2010, also known as Public Law 111-152. Under this law, adopting parent(s) can claim a credit of up to $13,170. For parents who go through traditional adoption procedures, that amount cannot come close to covering the cost of the adoption or the costs that they will incur. On the other hand, there have been well-documented stories of parents adopting children to get these credits for little if any cost. Like many other provisions, I like the intent, but not necessarily the execution.


Additional Child Tax Credit


This is one that I have never understood. Essentially, families with three or more children and who have low enough earned income are entitled to a refundable tax credit for each child in excess of two. You don't get it either?


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Perhaps you are one of the people who thinks that these refiundable tax credits are a good idea. If so, then consider this in the National Taxpayer Advocate's Annual Address to Congress:

While refundable credits provide valuable benefits to the target populations, they can be tempting targets for fraud because taxpayers eligible for them may claim refunds that exceed the amount of taxes they have paid.  In 2011, the IRS’s Electronic Fraud Detection System (EFDS) flagged 1,054,704 returns on suspicion of fraud, an increase of 72 percent over 2010.  Meanwhile, the IRS’s centralized Identity Protection Specialized Unit (IPSU) received more than 226,000 identity theft-related cases, an increase of 20 percent over 2010.

That's a lot of potential fraud. I think it's time to consider whether there is a better way than these refundable tax credits.

A Better Fair Tax

Those of you who know me well know that I am a proponent of the Fair Tax, HR 25 as it has been introduced in the current Congress. In a nutshell, here is how it works:

• Every household gets a 'prebate' equal to 23% of the cost of basic needs for a household of that size
• Income is not taxed
• Payroll is not taxed
• You pay a 23% national sales tax on consumption of all new end user products

Essentially, you can tax people on either of two components, or both: productivity or consumption. Intuitively, if you tax someone on productivity, then you are telling them that working hard increases what they give to the government and decreases what they keep. I realize that's not quite right, but it feels that way. On the other hand, if you tax consumption, you are motivating people to be more productive so that they are able to consume more. That makes a lot of sense to me.

I promised you a better Fair Tax, but first I digress. Many, including some Republican presidential candidates, are espousing a flat tax. Flat taxes are regressive by nature. They place a burden on lower earners that the low-income segment of the population cannot afford to bear. And, a flat tax does not promote productivity.

However, ask an American today what the top priority for the country should be. While some will disagree, many will say that we need more American jobs. 

As I said, I like the Fair Tax. In their book on the subject, former Representative John Linder (R-GA) and radio talk show host Neal Boortz point out that CEOs of most large foreign-domiciled multinationals would move jobs and facilities to the US if the Fair Tax were implemented. [The current version of the Fair Tax is sponsored in the House by Rob Woodall (R-GA) who was formerly Mr. Linder's Chief of Staff.] Suppose we had a Fair Tax that did even a better job of promoting and developing US jobs.

Are you listening?

I haven't done the math to know what the right numbers are, but let's put the Fair Tax on a sliding scale. The technology to do this is available today. Here is how it would work (remember that my numbers are approximate as I have not vetted the math). If a product subject to the Fair Tax is manufactured entirely outside of the US (made in a foreign country with foreign components), the sales tax is 25%. If it is made entirely in the US with US components, the sales tax is 16%. For products that are partially American, there would be a sliding scale between 16% and 25%. 

This would motivate buyers to buy American which would, in turn, motivate producers to make American products. You're worried about all the jobs that have moved overseas, this would move a bunch of them back quickly.

And, again, to counter the critics, the Fair Tax is not regressive. For low income earners who buy only the necessities, they will pay no federal tax -- not income tax, not FICA tax, not sales tax. The higher earners will continue to have more disposable income, will spend more and will pay more tax. And, finally, the underground economy will be taxed. 

I'm not commenting here on the illegality of things like narcotics or prostitution, but the fact is that neither the group that peddles illegal drugs nor the group that earns in the prostitution industry currently pays their fair share of federal taxes. This would change that.

I think this truly is the better Fair Tax. Let's make it the law.