I strongly condemn all such attempts to silence the opposition. If you can't
argue your own case clearly enough to convince us without silencing your
opponents, then give it up. You should have stuck to the facts. You've lost
my vote for sure.
-Scott
--
INTERNET: j...@netlink.cts.com (Jim Bowery)
UUCP: ...!nosc!ryptyde!netlink!jim
NetLink Online Communications * Public Access in San Diego, CA (619) 435-6181
Ok, let's try this as an example.
Expected long run inflation rate=4%
Current Debt interest rate=4%
Asset base=0, we have a pure service industry.
Cash flows=$1 million a year, with no change forseable.
Assume that the expected lifetime of the business is thirty years, after
which the owner retires. Also assume that we can expect the $1 million
cash flow each year. The present value of this company is
24,691,681.33. Now, this asset rate is taxed at the 4% debt rate, minus
the $100,000 deductable. This amount is
(24,691,681.33-100,000)*.04=983,667.25 in taxes. therefore, total
profits for the year are 1,000,000-983,667.25=16,332.75.
Under the current tax system, the business receive a 28% tax on income.
Therefore, taxes are 1,000,000*.28=280,000.
Profits=1,000,000-280,000=720,000.
The valuation is textbook example. I've followed the NAT proposal to
the letter. Your response?
Tom the non hacker
Read my lips, no second term
Buchanan in 92!
Ok, so far you've told us that all consultants can pay 0 taxes no matter what.
But lets continue.
>If the business itself is to be treated as an asset, then you
>have to look at the investment entity that owns the business,
>how accurately it calculates the net present value of the asset
>at the time of purchase, and what it does with the asset to
>improve on that value after purchase, since the capital gains
>in the asset aren't taxed under the NAT. Only in that way
>can you decide whether the relevant business is "efficient" or
>not. In other words, "efficiency" means you are getting a
>high return on your assets, however you define them.
I thought it was very clear that the business itself was being treated
as an asset. If you don't define the business as an asset, then you
would pay 0 taxes on it. Silly in the extreme.
(long mathematical argument deleted for space, but leads to conclusion)
>In other words, if your current after tax (ignoring social security) income
>is more than 15.4% of your net assets, you benefit from the NAT.
>
>If you factor in the standard exemption, it is even more appealing.
However, to achieve a After tax income rate of 15.4% requires a before
Income tax rate of 21%. Since very few businesses ever achieve such a
level of profitability, most businesses, by your own argument, still
prefer income tax. NAT is being based on a level of performance that is
rarely achieved in the real world. And its inclusion will only harm
those businesses that are trying to grow to reach the level it sets.
They will have less available capital to reinvest in their own business.
And more ironically, every time they reinvest their money, they
increase their capital base and, therefore, their taxes. now the
argument we're about to hear is that capital gains are not taxed.
however, by that logic, a business can grow infinitely and never pay
more taxes. Wrong answer.
Since Mr. Bowery liked my first example so much, lets look at a few more.
Farmer brown owns a 1000 acre farm. His land is valued at $700 an acre,
and he owns $300,000 in equipment. This year, farmer Brown expects to
make $60,000 from his crops, after paying for seed and fertilizer.
After taxes, How much does farmer brown have?
Under an income tax, farmer Brown has 60,000-.28*60000=43200.
Under Asset tax, farmer brown has 60,000-.06*(700*1000+300,000)=0
So, we've just destroyed the farm industry. next example.
Mr. Jones is trying to decide how much to spend to build a new home, and
how much to give to charity. He has $100,000 he inherited from his
father, and earns $25,000 a year. He expects his earnings to remain
relatively constant. He also expects to retire in 25 years. How much
money should Mr. Jones spend on his house
Under Income Tax, Mr. jones gets depreciation on the home for 25 years.
therefore, the more he spends on his home, the more he saves later. he
spends $100,000 on the home.
Under Asset tax, If his total assets exceed $100,000, he will pay taxes.
Depreciation is no longer a factor, since the assets are now to be
valued at the fair market price. therefore, he should only spend
$75,000 on the house. Any more, and he takes on a tax liability for the
next 25 years.
So, Asset tax causes less investment in new home starts too. Sounds
real good for the economy.
Now, what I want people to do is this. Look at my examples and numbers.
Look at Mr. Bowery's numbers and examples. Decide which set of numbers
more closely represents reality. Then decide if you want an asset tax.
Um, have to disagree. Most consultants are consultants because they
figure they can make more bucks on their own than working for a company.
>The 15.4% is an intermediate result. Further calculations which
>appeared later, include the exemption and the fact that the NAT
>relieves businesses of social security payroll tax.
>
>After those are taken into account, the critical level at which
>businesses prefer the NAT is about half of the above figures.
>
>We have to remember that just because many businesses won't prefer
>such a tax doesn't mean they won't be able to adapt to it -- which
>is exactly the intent. The NAT, as with any tax reform, changes
>incentives so at first introduction, there are going to be about
>as many winners as losers.
Well, there's a few major problems with your calculations at that point.
1) Eliminating the social security tax means about half the elderly in
America die from a lack of support.
2) You seem to assume that the only expense a business has is payroll.
Otherwise you could never derive the figures you do.
3) You are incessantly confusing individual taxes with corporate taxes.
they are very different.
>> Its inclusion will only harm
>>those businesses that are trying to grow to reach the level it sets.
>
>You are confusing first and second derivatives.
>
>If you look at the valuation placed on corporate stocks from their
>moment of formation, the highest rates of return INCLUDING CAPITAL
>GAINS (which aren't taxed in the NAT) are at the start, then they
>level out with maturity. The NAT virtually eliminates taxes on
>startups. It works like an investment tax break in the case of start
>ups. In the case of mature stocks, it becomes much more difficult
>for people to "play the market" and much easier for them to finance
>growth companies.
>
>IBM, GM and several other such corporations will probably bit the
>dust under the NAT and be replaced by a large number of small to
>medium sized innovative and highly entrepreneurial firms owned by
>their empolyees. That's the precise intent.
Of course most companies register best growth at inception. That's
because most companies are started to deal with excess demand in a
market. And as the market reaches equilibrium, the excess profits
approach 0.
And of course, as companies grow, NAT punishes them, by your own
admission above. Now, let me explain a little economic concept to you.
Its called economy of scale. What it tells us is that in general a
larger company can produce more efficiently due to the availability of
more resources. Under your system, a company is punished for attempting
to reach that level. This means that most companies will seek to remain
smaller, and overall efficiency will decrease. And R&D will be totally
destroyed, since most smaller companies don't have the resources to
support full time labs for experimentation, while large corporations do.
>Since most people aren't taxed on their income, there is more
>investment capital available to individuals to start up their
>own small firms and grow them with the help of others. The
>great American success stories began this way.
This is based on an assumption that individual savings generate a large
part of the investment income in America. This simply isn't so, since
most Americans have very poor saving habits. I believe the national
average is somewhere around 2-3% of income. Most investment income is
generated by the money markets you've been deriding. The destruction of
most money markets does not guarantee that people will fill in the
investment void with their own money.
>> And more ironically, every time they reinvest their money, they
>>increase their capital base and, therefore, their taxes.
>
>The question is will such investment under the NAT result in a
>higher after tax rate of return than the current system. The
>answer depends on what the current after tax rate of return
>is expected to be.
Well, under NAT, most such investments will have to produce at a rate
above the tax rate to be worth making. In fact, the will have to
produce at a rate equal too twice the tax rate, since the other option
is to buy government bonds. This is somewhere around 12% break even
point. This will most certainly discourage new investment.
>>now the
>>argument we're about to hear is that capital gains are not taxed.
>>however, by that logic, a business can grow infinitely and never pay
>>more taxes. Wrong answer.
>
>Your logic is wrong. All of those capital GAINS become, IN THE
>NEXT TAX YEAR, capital ASSETS that contribute to the tax base, but
>at a much lower rate of taxation than either current income OR
>capital gains taxation. Hence the incentive to invest for growth
>is compatible with a growing tax base.
But, the investment under NAT is taxed evey year, while under Income tax
it gets taxed once. So lets look at present value before making any
decisions.
Lets assume the real tax rate is the 40% quoted above. Then the real
value of my income, if I reinvest, is .6I.
However, under NAT, if I reinvest, I get the full value of my investment
minus the tax liability into the future. Suppose for simplicity I can
assume that my investment will remain forever (or at least as long as I
do). the calculation looks like this:
I-.06I/.06=0.
That's right, ladies and gentleman, a simple present value analysis
shows that my investment is worthless under NAT.
But wait, we have some revenue generated, so we better factor that in too.
The present value of income earned by Income tax is .6X/.06=10X
Under NAT, its X/.06=16.7X
Now, lets compare the two, and see at what level the income flow balances.
.6I+10X=16.7X
X=.09I
Therefore, the break even point is at 9%. I have to be assured of a 9%
long run return to break even between the two systems. First, this is
way above the numbers quoted earlier by Mr. Bowery for NAT preference.
Secondly, getting a 9% return is still very difficult in a long run
business investment. So in almost all cases, a business still prefers
the Income tax. Doesn't look like much growth incentive there.
>First, this is a NET asset tax. You are assuming that Farmer
>Brown owns his land and equipment outright -- no leins or
>liabilities. This is not realistic. The Amish typically
>run smaller farms whose NAT liability would be dominated by
>the exemption.
>
>Second, at $60,000 total income (which has not yet factored in
> all of farmer Brown's costs, including his own labor) is the
>basis for calculating the value of the land. So let's see
>exactly how reasonable your example is:
ok, granted most farmers are buried in debts. NAT might offer some
relief in the short run, but in the long run my argument holds. In
fact, under NAT farmers have to maintain large debts to avoid being
taxed out of existence.
Also, you don't use the $60,000 to value the land. You use the assessed
value. This includes the lands value as a farm, plus the lands
potential value as a development sight, plus what people are willing to
pay for it. And $700 an acre is cheap land.
How come every time I use a proper definition of present value and asset
value you change your definition to make certain that someone doesn't
owe a tax?
>The land's net present value according to you is 1000*$700 = $700,000.
>To support this level of land value, at 6% govt. debt rate the
>portion of the AFTER TAX profit attributable to the LAND ALONE
>(ignoring all other capital invesments) must be approximately $60,000.
>Since farmer brown is only making $60,000 BEFORE tax, the $700/acre
>land value figure unrealistically high. Then we must consider the
>other capital equipment. Either the example isn't credible or the
>market for land is highly inefficient for some reason (like centralized
> wealth) and is sapping farmers, particularly young ones, of their
>livelihood.
>
>The biggest problem in rural America is the inability of young
>farmers to make a go of it. The "graying of the farm" is a VERY
>serious problem and is resulting in an increasing centralization
>of our food base without corresponding increases in food production
>efficiency.
I've addressed the valuation of the land above. I think you're making a
grave error in judgement about farming here. the idea that letting lots
of new people into farming will somehow make farming more efficient is
wrong. I see no data to support the theory that a new group of farmers
can out perform the old ones. If such farmers existed, would they
really have a problem entering the market, given the large amount of
land being made available by bankrupcy?
>>Mr. Jones is trying to decide how much to spend to build a new home, and
>>how much to give to charity. He has $100,000 he inherited from his
>>father, and earns $25,000 a year. He expects his earnings to remain
>>relatively constant. He also expects to retire in 25 years. How much
>>money should Mr. Jones spend on his house
>
>Some guy inherits $100,000 from his father at age 40 and we're supposed
>to spend time analyzing his predicament while young families who
>can't afford children are postponing child bearing to the point that
>mongolism, abortion and simple barren families are exploding.
>
>Sorry, try again.
Mr. Bowery, are you trying to increase production or redistribute
wealth? It seems apparent the real goal is the latter. We've recently
had a few too many examples of why redistributing wealth just plain
doesn't work.
>>Now, what I want people to do is this. Look at my examples and numbers.
>> Look at Mr. Bowery's numbers and examples. Decide which set of numbers
>>more closely represents reality. Then decide if you want an asset tax.
>
>Now, what I want people to do is this. Cease listening to theoretic
>arguments from economists paid by the wealthy. Look at at your OWN
>life and lives of people you know. Look at the NAT.
>
>Draw your own conclusions.
So, we should ignore everyone who's been educated about the economy
except Mr. Bowery when we try to figure out if we support a NAT tax.
And we should especially ignore those people who have distinguished
themselves in the field and earned high positions.
And then draw your own conclusions.
Well, under the NAT proposal, the tax rate is always equal to the debt
rate. So, to increase taxes, you have to increase the debt.
Now, here's where the problems start...
Lets assume that, as Mr. Bowery argues, the majority of Americans don't
pay taxes. Now, as a politician, I can increase spending indefinitely,
since I'm pleasing the majority of the people at the expense of a
smaller group, and therefore getting re-elected. but, every time I
increase spending, I add to the national debt, causing taxes to
increase. But this is okay since the majority of people are benefitting.
Well, up until a point. At some point, the government will be absorbing
so much money in loans that the investment market will collapse.
Business will rapidly follow, and everyone will lose their jobs in a
massive depression.
But, ask yourself this. Given the average politician, will he be able
to resist the urge to increase spending to get votes?