Max Baucus Introduced Retroactive Tax Bill: Another Insane Attempt At Confiscating Middle Class America This Christmas!

Rothschild Sleeper Cell ~ Max Baucus

Rothschild Sleeper Cell ~ Max Baucus

The test of any tax plan is how well it measures up to the principles of sound tax policy:

Does it promote neutrality?
Does it simplify the tax code and make it more transparent?
Does it make the system more stable and predictable?
Does it avoid retroactive measures?

Generally speaking, a tax plan that conforms to all of these principles will promote economic growth. And that should be the primary goal of any tax plan. A plan that violates any of these principles is likely to diminish the growth effects of any plan.

While lawmakers have unfortunately violated most of these principles routinely over the decades, they have typically avoided perhaps the biggest sin—enacting retroactive tax increase. While the courts have allowed retroactive tax hikes as an extension of the federal government’s taxing authority, retroactive increases undermine the credibility of the government and cause a breach of faith that people have in the rule of law.

Retroactive taxes are not really income taxes at all. They are essentially a confiscation of wealth that was legitimately built up under a different set of rules. Sort of the tax equivalent of an ex post facto law. The only thing a government can do that is more extreme is an outright wealth tax or seizure of a private asset or industry, as we’ve seen in certain third world countries. Sort of a death tax for the living.

Why is this issue such a big deal now? Because the “staff discussion draft” tax proposal recently released by Senate Finance Chairman Max Baucus (D-MT) contains at least three measures that would impose severe retroactive tax hits on a broad swath of American businesses.

From the person who insisted on Obamacare while calling it a “Train Wreck”

The staff drafts include the following retroactive tax bites:

• A “deemed repatriation” provision which would impose a 20 percent tax on companies’ accumulated past foreign earnings;

• The repeal of the current depreciation system, not just prospectively for future investment, but retroactively for existing assets that have not yet been fully written off. Depreciation would be slower and the present value of depreciation allowances much smaller than under current-law MACRS; and

• A repeal of the last in, first out (LIFO) method of inventory accounting which assumes the last items added to inventory are the first sold. It would force businesses that have been using LIFO to bring into current income the accumulated difference between LIFO and FIFO accounting for all past inventory.

Some commentators claim that retroactive taxes are fairly efficient ways of raising revenues for the Treasury because they have few economically distortive effects on taxpayer behavior; because you can’t go back and do things differently. But this assertion not only presumes that taxpayers have piles of idle cash from which to pay the tax, it presumes that the retroactive tax won’t teach people to expect such tax grabs in the future.

Each of the retroactive tax measures in the Baucus discussion draft is largely a capital stock tax, or a tax on assets and working capital.

Baucus Tester

Baucus Tester

Not coincidentally, this was last tried during the Great Depression.

The only way many companies will be able to pay the tax is to reduce their current investment and slow the growth of the capital stock which, in turn, will undermine the long-term health of the company and its workers.

The “deemed repatriation” proposal is especially egregious on a number of accounts. Even the term “deemed repatriation” is disingenuous because it is really a euphemism for “forced” or “required.” Companies will have to pay the tax on their accumulated foreign earnings whether or not they actually bring those earnings back to the United States.

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Under our worldwide tax system, companies do not have to pay U.S. tax on foreign profits until those profits are brought home. This is similar to capital gains where shareholders don’t pay tax on the increased value of their stocks until they realize the gain by selling the stock. So as long as companies keep their foreign profits actively invested abroad, they can defer any taxes forever.

In many cases, companies have been reinvesting those profits into growing their business in foreign markets. So the 20% deemed repatriation tax really acts as a surtax on those equity investments. For example, let’s say that a U.S. firm had used $1 billion of its foreign earnings to buy a Polish consumer products company in order to gain a foothold into the emerging Central European market. The repatriation tax effectively deducts $200 million from that investment, thus jeopardizing the profitability, or even the existence of the business, since it might have to be liquidated to pay the tax.

As an analogous example, consider the effect of a one-time 20% surtax on the gains of everyone’s holdings of common stock. While some savers may have enough idle cash to pay the tax, many cash-constrained shareholders would be forced to sell their stock in order to pay the tax. Imagine what that would do to the stock market.

In similar ways, the staff recommendations for lengthening depreciation lives and repealing LIFO are punitive taxes on the underlying capital for many industries, diminishing their productivity and profitability. The effects are not one-time, but long-term.

The retroactive recommendations contained in Baucus’s staff Discussion Draft violate what should be an inviolable principle of sound tax policy. The long term ramifications are serious and extend well beyond the affected industries. The American economy is built on risk-taking and entrepreneurship. Americans will be less likely to take risks if they know that lawmakers can cavalierly reach back and tax the income that was legitimately earned under a previous rule of law.

While it is too late to say that these retroactive proposals should never have seen the light of day, now that they are out there they can serve as an example of how bad policies can arise from failing to adhere to the principles of sound tax policy.

Scott A. Hodge is president of the Tax Foundation

A nonpartisan research organization inWashington, DC.

Middle Class America ~ Bamboozled By Bankers

Middle Class America ~ Bamboozled By Bankers

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