politicalcivility.com Blog

A recent study by the American Council for Capital Formation highlights what the US can do for real economic stimulus versus handing out checks that came as a result of us borrowing more money.  ACCF’s study showed the adverse effect of corporate taxes on investment.  This is significant for the US because has the second highest corporate tax burden in the world, and yet we wonder why jobs are going overseas (hint: it’s not just because the labor is cheaper).

If we really want to turn the economy around, we have to stop punishing businesses for being profitable and allow them to keep their earnings, which they in turn reinvest in growing their businesses and creating new jobs.

Link to the study findings: http://accf.org/publications/newsletter/volumes/jan-feb2008.html#study

For those keeping track, today is TAX day.  Hopefully you’ve already filed and will avoid a) the bad weather and b) long lines at your local post office.  I think this brief history is very informative and demonstrates the shift away from the founders intent of how government should be funded.  The table at the end shows just how far we’ve gone.

A Brief History of the Income Tax in the U.S.

1634 – The Massachusetts Bay Colony enacted an income tax (no other mention of taxing personal income is mentioned for over 200 years). 

1861 – With the advent of the Civil War, both the Union and the Confederacy instituted income taxes to finance their war efforts.  This constituted the first time the U.S. federal government levied an income tax; the federal government’s then limited operations were previously financed almost entirely from tariffs on imported goods.  Technically, the personal income tax was unconstitutional (at the time), but no challenge was made in the judicial system.  After the war, the income tax was eliminated and the federal government reverted back to its previous sources of revenue.

1894 – The federal government introduced a new tax on individual income with the passage of the Wilson-Gorman Act.  This act required that any gains, profits, and income in excess of $4,000 be taxed at a rate of 2%.  In compliance to this act, the Farmers’ Loan and Trust Company of New York determined to remit payment to the U.S. Treasury on behalf of its shareholders subject to the tax.  Charles Pollock, an owner of ten shares in the company, sued Farmers’ Loan to not remit the payment.  Pollock lost at the lower court but won at the Supreme Court level.  The majority opinion of the court cited the constitutional guarantee that “No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.”  A “direct” tax was a tax on property, while an “indirect” tax (not barred by the constitution) was a tax on an event like receiving a gift or rendering labor for a wage.  Tax on a security’s appreciation was considered an effective tax on a property, and thus a “direct” tax.  To make the tax constitutional, congress would have to apportion the tax burden among the states according to their proportional populations.  Since the Wilson-Gorman Act did not accomplish the requisite apportionment among the states, it was ruled unconstitutional.

1909 – The federal government levied an income tax on corporations, which was challenged but upheld by the Supreme Court.  The rationale was that a corporation is created by law; therefore, the authors of the law (governments) have the right to tax a corporation’s creation and operation (events that lead to “indirect” tax status).

1913 – The decision in Pollock vs. Farmer’s Loan and Trust Co. was unpopular and stirred debate for several years.  In fact, the presidential candidates competing in the election of 1912 largely debated on the grounds of whether or not an amendment overturning Pollock was needed.  The sixteenth amendment to the constitution was proposed.  It would sanction a federal income tax on both individuals and corporations with no requirement for apportionment.  Sponsors of the amendment presented it as a measure that would affect the “super rich” who were portrayed as having gained too much control over the nation’s wealth.  Public opinion fell on socioeconomic lines with support coming mainly from western and southern states and opposition coming from the northeastern states.  In the end, 42 of the then 48 states ratified the amendment.  Connecticut, Florida, Rhode Island, and Utah formally rejected the amendment, and Pennsylvania and Virginia never even bothered to consider it.

Shortly after the amendment was ratified, congress passed the Revenue Act of 1913, under which taxpayers became responsible to submit their first Form 1040 on March 1, 1914.  This act allowed filers to claim personal exemptions of $3,000 for individuals and $4,000 for those “married filing jointly” persons.  Given the size of the average income at that time, only 6 percent of Americans made enough money to exceed the exemptions and, therefore, assume a tax liability.  Tax rates varied from 2 to 6 percent (the highest rate was applied to taxable income in excess of $500,000).

1943 – Congress instituted the pay-as-you-go system, which remains in force today.  This system requires employers to withhold and remit payroll taxes and also requires persons earning non-wage income to make quarterly payments to the IRS for estimated tax liability.

1945 – WWII and FDR’s New Deal introduced large financial obligations and tax law was altered accordingly.  The portion of Americans subject to a tax liability grew from 6 percent in 1939 to 74 percent in 1945 (the sixteenth amendment’s reach beyond just the “super rich” would continue to the present day).  Also the progressive rate structure applied to taxable income increased during this period.  The lowest rate structure ever enjoyed by U.S. taxpayers occurred just after the passage of the sixteenth amendment (1913); 1 to 6 percent.  The rate structure from 1944 to 1945 is still the highest ever experienced in U.S. history; 23 to 94 percent!  The highest rate was applied to income exceeding $200,000.  (How much work incentive would you have if you knew that for every additional dollar you earned, 94 cents would go to Uncle Sam?)

Today – the table below shows the sources of federal government revenue for 2007:

The National Taxpayers Association just released their 2007 scorecard (Full Report and Criteria):

Quick Glance:

1. Rep. Bishop: B+
2. Rep. Cannon: A
3. Rep. Matheson: D
4. Sen. Bennett: B
5. Sen. Hatch: C+

Hatch’s ranking, sadly, doesn’t surprise me.  The last 8 years or so I have watched Sen. Hatch abondon the principles and conservative platform that got him the job in the first place. He seems more concerned with power and writing songs, than showing real conservative leadership in the Senate.

Matheson’s grade may come back to hurt him if the economy continues to decline.  Frankly, I thought his record on tax policy would have been more in the ”B” range. 

A recent report by the Tax Foundation puts Utah in the top 20 states in terms of friendly business tax climate.  That is down from #15 in 2007.  Perhaps the best news is that Utah ranks #5 in terms of the corporate tax rate index.  More than any “corporate welfare” program or the investment boondogle that is the Utah Fund of Funds, a healthy tax climate will attract business.  In addition an environmental policy that emphasizes conservation versus a strict “preservationist” or land lock up mentality will create an attractive environment for business and manufacturing to come to the state.

The one downside of the report is Utah’s ranking 30th as it pertains to personal income tax.  This is after the record tax reductions over the past couple of years.  In 2004, Utah was ranked 42nd, so we are seeing some improvement.  Unless Utah keeps moving up in the personal income tax area, the great corporate environment we’ve created may be wasted, because who wants to work in an area with high property taxes and high personal income tax.  Companies will have to offer higher salaries or find ways to locate employees elsewhere.  I saw this happen firsthand in Ohio.  The tax burden was so ridiculous that business looked for ways to locate facilities in unincorprated areas so employees could avoid city or county personal income taxes.  So Utah needs to work on both ends, not just on corporate tax breaks.

Here is a link to an OpEd written by my co-worker, Derek Monson, here at Sutherland: http://www.heraldextra.com/content/view/256596/58/.

I am hopeful that this legislation not only passes, but gets funded. 

Here’s a link that gives a nice quick overview of what the Grace Commission found about taxation and governement spending.

http://www.freecanadian.net/articles/grace.html

This is a follow-up on the $55 dollar tow job post.

If I had any lingering thoughts that government should be involved with health care, they went right out the window today.  You might say what does a tow job and government run health care have in common.  Well let’s take a look at why what normally would be a $55 tow job on the regular free market, becomes a $200 tow job under state regulation.

I live in Lehi and last night was one of the most amazing wind storms and drifting I’ve ever seen.  Frankly to watch how powerful mother nature is was pretty awesome notwithstanding the danger it posed on the roadways.  Anyway I got stuck in a drift, like hundreds of others, on my way home and had to abandon my car or else spend a cold night in the old accord.  I choose to walk the mile or so home.  When I went with some neighbors to dig out my car early this morning, we found it had been towed.  I called Vern’s Tow Shop (which is about two miles from where I was towed), and was informed that my towing fee would be $198.  I was blown away, so I had my wife call in and get a quote for our other car from the same place.  We were told it would cost $55.  For those keeping track that is a $143 difference in cost for the same work.

How does this happen?  Well the state legislature thought it would be a good idea to “regulate” towers by setting standard baseline fees for towing companies anytime they towed an abondoned car.  Now either they didn’t care to take a look at market prices or the towing lobby worked some smoke and mirrors, because the base fee to tow a car you have to abadon in a snow storm is $121 plus a fuel surcharge, plus a milage fee, plus a housing fee, etc., etc.

Now let’s look at what this looks like in a government run health care system.  Let’s say for example, that I have a common cold and need to go to the doctor.  With the current market, it probably costs $75-100 depending on if they give you a test or not.  In the government run “price” controlled system, based just on a simple towing example, I (the taxpayers, because government run health care is NOT FREE) would be paying between $270-$360 for the same visit.  So much for “affordable” government health care!

Don’t believe me…may I recommend the book “A Taxpayer Survey of the Grace Commission.”  This book outlines how a Home Depot hammer costs the military several hundred dollars and many more examples of how when government gets involved affordable goes out the window

Our blogger discussion this morning with the Lt. Governor left me with a nagging question: What does fully funded look like in education?  The Lt. Governor talked about the record increases in public education funding in the state over the past two years and highlighted the nearly $600 million increase to occur this year.  In total, education has seen an increase of 45%, according to the Lt. Gov’s numbers, yet all I hear and heard during the voucher debate was that education is “underfunded.”  So my question to state office of education is what does fully funded look like?  Please just give me a dollar figure.  If it’s not $7,500 per pupil, what’s the number?  The follow-up question is this…If we get public ed to fully funded, what are you committing to deliver for our investment?  What can I hold you accountable for?  And if you don’t live up to your end of the bargain, can we close you down and send our money to those schools who are now giving a better education for less?

Final Low Lights:

(4) Subsidized Total Cost per Passenger Boarding

• Bus: 87% or $5.11
• Light Rail: 86% or $3.51
• Vanpool: 75% or $3.53
• Paratransit: 92% or $36.82

In sum, this means that the Utahns are subsidizing public transportation to the tune of $162 Million in 2006.  All this for a service that does little to relieve congestion, adds significant amounts of pollution, and lacks oversight and accountability.

The Utah quarter is finally out, but as Paul Harvey would say…”And now the rest of the story.”

History of Railroad Construction

I find it rather ironic that Utah/Gov. Huntsman choose a symbol that represents one of the worst cases of government waste in US History.  While the “golden” spike put Utah on the map so to speak, the building of the transcontinental railroad should serve as a grave reminder not as a point of celebration.

A Few Facts About The Railroad

1. Paralell Lines: North Pacific (NP) and Central Pacific (CP) were paid for how many miles of track they laid, so the line that built the most rails got the most cash.  For awhile in Utah the two companies were laying and getting paid for tracks that were being built parallel to each other, which of course cost taxpayers additional millions of dollars.
2. Free Land: The two companies were given more than 44,000,000 acres of free land to build the railroad. Assuming and average of $4.00 per acre (the going rate at the time), CP and NP received a $401 Billion (in today’s dollars) land subsidy.  Arguably one of the largest government handouts in the history of America.
3. Huge Loans: CP and NP also received more than $61,000,000 dollars ($139 Billion in today’s dollars).
4. Bloodshed: Competition was so fierce amongst the two railroads that war literally ensued as many lives were lost on account of a series of attacks each company carried out on the other’s employees.
5. Repairs: In the first year alone, repairs for the “newly” built railroad cost the taxpayers in excess of 113 Million (today’s dollars) to repair the line, because CP and NP had built the railroad so poorly.
6. Bankrupt: Despite all the corporate welfare these two companies received, at the end of the building of the railroad, both companies were nearly bankrupt.  The subsidies, during the building, hid the waste and corruption and lack of good management of these two companies.

The list could go on.  Some sources estimate that the building of the transcontinental railroad actually cost 3x the numbers I have listed here.

Now that’s something to be proud about.  Maybe the golden spike should have ended up on the $1,000 bill instead of the quarter.  At least then it would better represent the largesse needed to build our government funded landmark: The Transcontinental Railroad.

—–

Sources:

1. “The Myth of the Robber Barons,” by Burton Folsom.  He gives a lot more detail about how corrupt this process was and also highlights how another rail line in the Northwest was built privately, cost significantly less (even though they used far superior build supplies) and without any government help.  This line also charged less, was more efficient in getting goods from East to West, and paid its shareholders handsomely.
2. http://measuringworth.com/calculators/uscompare/