Sunday, February 18, 2007

Gross Taxes

Illinois is in a heap of trouble. Pandering to the least common denominator, buying votes, and a lack of self-government has gotten us here. The question is: what'll get us out?

According to my sources at the Chamber, for fiscal 2007, the State will have $28.8B in receipts. To fund true costs, approximately $5.9B more would be needed. Worse yet, when you total up all of the State's debts and unfunded obligations (apart from general obligation bonds), the price tag is a whopping $106B, or roughly $8,800 per person for the 12 million residents of Illinois.

(deep breath)

OK, this is very bad, and appears to be getting worse. We're the worst in the Union with respect to unfunded pension liabilities: $46B. This number is going to grow - rapidly - while the State continues to operate in the red. And we'll continue to operate in the red as long as the General Assembly sees fit to spend exorbitantly on pensions and health care for State employees and dream up anti-competitive measures like the Gross Receipts Tax (GRT).

The GRT works like this. You own a business and sell your services for $100. Before you factor in any of your costs and expenses, the State taxes a cut right off the top of 1%. This affects every business in the product cycle. So if you sell $100 of steel to a manufacturer, you pay 1%. If the manufacturer makes a product (say, a truck part) and sells it to a distributor for $250, he pays 1% of that amount. If the distributor sells it to another party (who uses the part to modify a truck chassis, for example) for $300, the distributor pays 1%. The last party sells a truck with the part in it for $500, and pays his 1% fee. You can see quickly how Illinois businesses will be directly hurt via the pocketbook, and how indirectly they'll be hurt by companies seeking parts or raw materials from neighboring states like Indiana or (shudders) Wisconsin.

I told you what has gotten us here, but let me elaborate just a bit. Businesses have been accused of not paying their fair share of taxes, while education and entitlement programs have spiraled out of control. I'm no disciple of the Wall Street Journal editorial page. I'm in business, but when you get right down to it, so is most everyone else who has a job. My point is this: I'm no defender of business, just for the sake of defending business. But I am, I like to think, fair.

Folks, we have a self-government problem, and there's a solution. As I've said before, and I'll keep saying it, most government programs should be pushed to the most local levels possible. County for sure. Township preferably, City ideally. Then, when the bills come due, people get to decide: as residents of our town, do we want our taxes to be used to pay for out-of-market retirement benefits for municipal employees? For classroom expenditures that serve to supplement parental involvement? For universal heath care coverage? Then, and I think only then, are we going to see a return to common sense. People will rediscover self-government in their DNA - no, it's not gone, it's just been dulled and underutilized.


JWales said...

" .... by companies seeking parts or raw materials from neighboring states like Indiana or (shudders) Wisconsin".

A.H., you never cease to amaze me. Any chance you get you'll take a pot shot at the northern border. I'm going to show some restraint though and not return fire.

Regarding Illannoyes' financial woes, I would think that rip-off toll road system would fund the entire state. Last summer it cost me $17.50 to go thru that god forsaken "greatest city in the world" you call Chicago, ONE WAY! Pulling a single axle boat trailer (which the toll collector cheated me on by the way). A nice premium to drive on some of the sorriest roads in the U.S.A.

Daniel Webster said...

"...But I am, I like to think, fair."

Fair is good I guess. It's better'n being unfair to be sure. Somehow this method of taxation doesn't seem like an issue of fairness though...

But you know what the economic guru said: "the way to ensure Big Bu$ine$$ is paying its fair share of the taxes is to put a 1% duty on every progressive step in the pickle manufacturing/distributing enterprise." ;)

I just can't wait to read what Hargis has to say about this!

BTW, I'm to infer, am I not, that the reason, or at least one of the chief among reasons for the cost of education and entitlement programs spriraling out of control in your State (according to the experts) is that businesses haven't to date paid their fair share of the taxes? What?...y'all have a Republican Congress up there?

The Monarchist said...


Yeah, I couldn't resist. Guilty as charged.


Maybe I should say it this way: a fair analysis of the issue isn't that businesses aren't paying their fair share, as the D-controlled General Assembly would have you believe. It's that they have gotten themselves into power by pandering and vote buying, and now, need someone to foot the bill. The real reason that the costs of these programs and entitlements keep going up is because the Dems keep promising them, then they get elected and deliver on them. The majority of people who vote in my state are sorely in need of a Red Bull. Or, something that will wake them from the slumber of dependency.

It's not uncommon for someone connected to retire from a career as a Park Commissioner making close to $80,000, only to be appointed as a Water Commissioner, making $125,000. And oh, yes, they get about 80% of their pre-retirement salary in pension payments from the first job while earning from the second.

Every year it seems, the Tribune does a feature on a handful of people who are exploiting the system like this. Perfectly legal, mind you, but then again, for some people, "legal" is their moral compass. If it's OK by the law, then they're doing nothing wrong.


michael hargis said...

Fair share.

That one just cracks me up. I can't imagine a more useless and damaging goal for a society than fairness. A friend of mine coaches little league baseball, and has to make sure everyone on the team gets equal playing time. So the kid who can't run, field, or hit plays just as much as the kid who spends all winter honing his skills.

After I'm done suffering under your idea of fairness, I'm gonna get myself elected and inflict my fairness on you. Payback is a you-know-what. My newest guitar hero is Kenny Wayne Shepherd, a blues master if there ever was one. Maybe I can figure out a way to get some of his chops without having to put the time in practicing. Close the talent gap. Make things more fair.

Fairness explains a lot. Adult stem cell research is curing diseases right now, and has none of the ethical baggage associated with fetal stem cells. Private investment dollars are flowing into adult stem cell research. Fetal stem cells aren't doing anything except causing tumors and aren't likely to for decades and thus aren't getting their fair share of the research money. The result is that fetal stem cell supporters have to go begging at the federal trough. Unfairness.

Foreign workers are sometimes able and willing to do certain jobs for much less than their American counterparts, who wouldn't touch the job without a company car and a key to the supply cabinet. That's unfair, so the altruistically fair-minded among us demand that Congress make those foreign workers too expensive to hire. Screw 'em...oh, and gimme a raise.

Look around your house and see what you've got that I might want. Consider how unfair that is, especially in light of the fact that you don't pay your fair share of taxes. The share I pay is unfair, too, but that's because I have to pay too much. But it's obvious that if you were paying your fair share, you wouldn't have all that stuff I want.

To steal and mangle Wm. Buckley's description of National Review:

Fairness stands athwart the path to liberty, yelling "STOP!"

Call Me Mom said...

I'm not in a state to comment on this topic right now, (mentally or physically, lol) as our, re-elected on the promise of lowering taxes, governor has just submitted a budget that will, by some estimates, tax every man, woman and child in the state approximately $300.00 more than last year. Apparently, despite the mighty flow of tax dollars to our school system, Wisconsin voters don't know how to do the math.

Or is there a connection there?
"Why don't they teach logic at these schools?" ~ C.S. Lewis

Daniel Webster said...

Mom, don't feel like the Lone Ranger up there in Wisconsin, or that Wisconsin residents are the only "cheese heads" living in the United States. ;)

The People of Oklahoma have resisted every attempt, with exception of one, at creating a State lottery system. That one exception came, not so long ago, with the promise that a certain percentage of the proceeds would go to help fund public education in the State. Like I've said before, the way to get these proposals through is to attach education to it, and the people (from any state) will buy into it hook, line, and sinker. I'm pretty sure you could legalize prostitution in many states as long as you could show the potential for increased revenues to the public education system (note I said "the potential for").

Hargis, isn't it your position that businesses don't pay taxes anyhow? I can hardly see how the issue of fairness can ever come up as it relates (or doesn't) to tax on a business when the whole tax burden is placed on the consumer, not business. Consumption tax, anyone??

michael hargis said...

Quite so, Webster, but irrelevant. One need only listen to the cheers every time some politician promises to make businesses, large or small, pay their fair share. Trying to educate people to the fact that the IRS never receives a check signed "General Motors" doesn't seem to be working. A new tack is called for, I think, but I'm probably wasting even more time trying to convince people that fairness ain't all it's cracked up to be.

The Monarchist said...

Huh? Corporations pay taxes last time I checked. If you're an S-Corp, you pay 'em personally, but a good-old-fashioned C-Corp pays state and Federal. I would acknowledge as a shareholder of GM that they may not pay so much, but that has more to do with losing money than being a corporation.

GM doesn't pass on its tax burden in the price of their cars, if that's what you're getting at. They can pass on operating costs (pensions, health care, etc.) but taxes are another story.

I'm up for a consumption tax, where do I sign up?


michael hargis said...

Well, AH, you have raised me and I can't call, as the saying goes. I know I didn't dream that notion up out of thin air, though, and I figured it would apply to GM as well as any others.

Am I at least partially right?

Daniel Webster said...

Corporations may well sign their own checks to the IRS, but there's no way on God's earth that they don't pass those expenditures on to the consumer. A tax on a business is just another expense that the business must account for in the sale of its products, just like the wages of its employees.

I don't care how you look at it, the whole tax burden is ultimately paid by the individual consumer. In other words, tax GM all ya like, but their customer base is going to pay that tax, not the corporation. So, who's being unfair to who here; who's not paying their fair share of the taxes???

Hargis, I'm counting on ya, man. Don't let me down!! ;)

JWales said...

Lottery and education? I wouldnt completely rule it out Mr.Webster. Where I live the lottery completely funds what they call the "Hope Scholarship" and is available to all High School grads with a 3.0 or better at graduation. The lottery funded scholarship will pay tuition and books to any college or university in the state if the student keeps a 3.0 + average thruought college. It's a killer deal when you start staring $15k and up for a years tuition.

I suppose it only works if the state administrates the program correctly, obviously. Been working here for over 10 years. You dont even have to play the lottery.

The Monarchist said...

Re: corporate taxes...

How would GM pass on their tax obligation in the price of their cars if they don't know how much they're going to pay in taxes? Wouldn't that be the mother of all financial budgeting? They'd have to know - basically on a real-time basis - how many cars are being sold and at what profit, and on the fly, adjust the prices of the very next cars to be sold to account for their profits. It doesn't make any sense. And it's different from wages, because wages are taken out before the shareholders get paid. Shareholders get paid through after-tax profits in the form of dividends (or distributions in the case of an S-Corporation).

I can only speak of the companies I have dealt with in my professional capacity, but corporations are only capable of managing their tax liabilities by expensing additional items in a given period (say, investments in capital equipment).

If anything, GM's taxes are being paid by the shareholders, not the consumer.


Daniel Webster said...

"How would GM pass on their tax obligation in the price of their cars if they don't know how much they're going to pay in taxes?"

Well, it appears that I may well have gotten in over my head here, and since Hargis doesn't appear to be willing to bail me out of my own mess, I'll ask a question in the interest of furthering my education on the subject...

Doesn't GM know, or can't it predict (within a close margin of error, of course) how many vehicles it's going to sell in a given year? In essence, can't it predict pretty accurately how much profit it'll make on the sale of its vehicles in 2007, for example, and determine its tax liability on those profits thereby?

Daniel Webster said...

Oh yeah, almost forgot...

J, do you think it wise to teach children such things as "don't get hooked on gambling," and so forth, and in the next breath to say in effect: "...but it's okay to profit from someone else's problem, predisposition, whatever, in the form of encouraging and exploiting it?" That seems to me to be sending mixed messages, not to mention profiting off of someone else's unfortunate tendency to become addicted to such things.

Granted, we may not be able to stop folks from gambling, but should we be discouraging the practice while encouraging it at the very same moment?

From a moral point of view, does not Christ's command "do unto others..." incorporate the idea that we shouldn't exploit the weaknesses of others irregardless of, or in spite of what we think we stand to gain via the practice?

I have other problems with the lottery system, of course. But as I said, when ya tack the word education on a given proposal, the sky is the limit.

michael hargis said...

Using the lottery to fund education, or anything else, is a ruse. Governments are not in the habit of limiting expenses to revenues. Then what? Maybe a lottery ticket stapled to your paycheck. A withholding bet.

The Monarchist said...

Well, now you got me thinking, which is saying something for a weekend.

Let's use simple numbers... say GM sells 1 car a year, and makes $1,000 profit on the sale. GM also has $100 of expenses, for a pre-tax profit of $900. Taxes at 40% would be $360; net income for the year would be $540. If GM were able to know and forecast this, they could in theory charge $360 more for the car they sell.

Gross profit would be $1,360, and expenses would still be $100, for pre-tax income of $1,260. Taxes at 40% would be $504 and net profits would be $756. Maybe they could do this if there was no one else selling cars, but tacking on that cost to the car just might result in not selling a car and resultant net losses. And they'd still be paying a 40% tax rate. When you factor in the competition in the auto business and the enormous scale of a company like GM, I still think this is difficult enough to be virtually impossible.

That said, if GM instead decided to reward employees or executives with large bonuses, that's a pre-tax expense which would "manage" their tax liability downward. Not an uncommon thing in closely-held companies. Public shareholders are more likely to pitch a fit if the execs reward themselves and return nothing to the owners of the company.


JWales said...

Holy cow!! Caught in the gray area snare! Let me see if I can chew my foot off and get out.

The lottery was already established when I moved here along with the scholarship program, I didnt vote for it or campaign for it. Second, I dont buy lottery tickets.

"..... but it's okay to profit from someone else's problem..... profiting off of someone elses unfortunate tendency........."

I dont buy that baloney, you could twist that type of arguement into almost any scenario in life: dont drink Miller Beer because there's some alchy out there that's destroyed his life, or dont drive a Ford because that's what Jeffery Dahmer drove, or dont shop at 7-Eleven because they sell playboys, or dont watch sattellite TV because .....blah blah blah.

If lottery funds go to educational scholarships, road improvements and infrastructure, shall I not drive on state roads? use public utilities?

The lottery is strictly VOLUNTARY, and I cant stop 15 million people from playing it. Your "do unto others" maybe a little out of context, but if someone asks me I'll tell them the lottery is a waste of one's money and poor stewardship and I dont play it.

Clear as mud??

Daniel Webster said...

"If lottery funds go to educational scholarships, road improvements and infrastructure, shall I not drive on state roads? use public utilities?"

I would say it's your duty, wouldn't you, to purchase lottery tickets in the interest of improving the infrastructure of your state?

Hargis, your scenario ain't that far fetched, lemme tell ya. Already in my State the lottery system is being touted as THE saving grace for public education. There's a commercial airing as we speak touting it as such, and implying that if one chooses not to throw his "earnings" into the lottery pot, he is effectively violating his moral duty to fund the public education system to a greater extent than what he already is. That's just a hop, skip, and a jump from forced participation.

J, the only way to get gray is to mix black and white.

JWales said...

It's a mixed up world D.