Tag Archives: Taxation policy

Income Taxes On A Postcard?

Texas Senator Ted Cruz has now officially declared that he is seeking to become the Republican Party’s nominee for President of the United States in 2016. Welcome to the race, Ted!

Thus, what better time than now to review some of his positions? One of his most popular stances, for instance, is his demand that the United States government abolish the Internal Revenue Service (IRS).

It’s a line that always attracts a wide round of applause. But oddly enough, Senator Cruz also demands that the income tax code of the United States be simplified to a level where Americans can file their annual tax returns on small postcards.

So that raises a very simple question: if we were to abolish the IRS and require American citizens to file their tax returns on postcards …

… where would they mail their postcards?

Without the IRS to process them, the federal government would then need to create a new agency to collect the postcards and confirm that the “amounts due” in taxes were previously withheld from wages or remitted through estimated tax payments.

And what would we call that new agency? The most appropriate name would undoubtedly be “the Internal Revenue Service of the United States.”

In other words, in order to process the very activity that Senator Cruz proposes to establish, we would need to recreate the very agency that the Senator proposes to abolish.

And how does Senator Cruz explain that irony? He hasn’t yet done so, but his advisor Rick Tyler recently suggested that the “Treasury (Department) could … assume the responsibility of collecting postcard tax forms. There would be a … division inside Treasury” that would perform the functions that are currently performed by the IRS.

But do you know where, within the structure of the federal government of the United States, the IRS currently resides? Yep, the IRS is a Bureau within the Department of the Treasury.

So Senator Cruz and his advisor are proposing: (1) to abolish a Bureau of the Treasury, (2) to create a new document that would have been processed by that Bureau, and then (3) to establish a new Bureau, in the very spot of the abolished Bureau, to process that very document.

If you understand that logic, congratulations! You undoubtedly possess an aptitude for Presidential politics.

But if you don’t, you are not alone.

Fiscal Gimmickry: Pensions For Highways

For many years, the federal government of the United States has utilized accounting gimmicks to finance payments for obligations like pension plans and highway funds. But can you believe that the government is now creating a gimmick to sacrifice one of these obligations to pay for the other?

It’s true. Last month, the federal highway trust fund was running out of money. Because members of Congress could not agree on a responsible approach for raising new funds, many critical transportation infrastructure projects were about to grind to a halt.

So how did our elected leaders resolve the problem? They decided to weaken our nation’s private pension plans in order to generate additional government funds. By authorizing a practice known as “smoothing,” the government permitted private corporations to reduce their current funding payments into their own employee retirement benefit plans.

The reduction in pension expenditures during the current period is producing greater corporate taxable income. That, in turn, is increasing income tax payments to the government this period, which are being added to the highway fund.

Of course, this maneuver will result in greater pension payment obligations during future period(s). Interestingly, though, it would not have affected the tax liability of the corporations at all if the accrual method of accounting had been mandated under American laws of taxation.

Under this method, an expense is an expense whether or not it is paid. Prior to each payment, a liability (and its corresponding expense) must be recorded to reflect the unpaid obligation. The subsequent payment eliminates the liability; it does not affect the expense.

Although Generally Accepted Accounting Principles (GAAP) usually requires that the accrual method be used for corporate financial statement reporting purposes, American tax laws permit the use of the cash method to calculate taxable income and deductible expenditures.

In other words, had all corporate plan sponsors been required to follow the accrual method of financial statement reporting for taxation purposes, they would not have benefited from the government’s permission to delay pension payments. But because many of them use the cash method for taxation purposes, such benefits can be claimed by taxpaying organizations.

Thus, in the end, the federal government opted to take advantage of its own accounting gimmickry to generate highway funds by explicitly encouraging corporations to weaken their pension plans. Although America’s drivers are benefiting from this practice in the present, its employees and retirees will undoubtedly pay the price in the future.

Pfizer’s Tax Inversion Strategy

How terribly dysfunctional is the corporate tax code of the United States? Last week, you could easily find an example of its deleterious nature on 42st Street in Manhattan, in the very heart of New York City.

That’s where the pharmaceutical giant Pfizer Inc. announced its pursuit of its British competitor Astra Zeneca. Although it cited several strategic and operational reasons for the proposed acquisition, it acknowledged that the transaction would yield attractive tax benefits as well.

As a firm that is headquartered in the United States, Pfizer is subject to a top income tax bracket of 35%. But as a firm that is headquartered in Britain, Astra Zeneca is only subject to a top bracket of 21%, a rate that will fall to 20% next year.

Because of these differential tax rates, Pfizer acknowledged that it would complete its acquisition transaction by merging its 42nd Street corporate headquarters office into Astra’s London location.

Such a transaction, known as a tax inversion, would not actually require Pfizer’s executive management team or other New York based Pfizer employees to move to London. Only the “official” corporate headquarters location would need to shift to Britain, and a few legal corporate meetings each year would need to be held there as well.

Pfizer, of course, has been headquartered in the Big Apple since it was founded in Williamsburg, Brooklyn in 1849. If its acquisition and headquarters relocation strategies are executed as planned, Pfizer would follow in the footsteps of insurance giant Aon, which was founded in the American Midwest in 1919 but which moved its headquarters address from Chicago to London two years ago.

How is the public interest of the United States served by regulations that slash the tax rates of iconic American firms that shift their corporate headquarters overseas while maintaining their U.S. operations?