Taxable Talk

With a very competitive election race between Democrat Barack Obama and Republican John McCain, the innuendo, charges, and rhetoric have flown back and forth. Senators McCain and Obama hold different views on many issues. Since I write a tax blog I’m going to examine the differences on tax issues between the two Senators. I hope that this series will enlighten you on the candidates and this important issue as we head towards November and Election Day.

First, though, I’m going to give a general overview on taxes, the economy, and how legislation is (and isn’t) enacted.

Taxes

A man condemning the income tax because of the annoyance it gives him or the expense it puts him to is merely a dog baring its teeth, and he forfeits the privileges of civilized discourse. But it is permissible to criticize it on other and impersonal grounds. A government, like an individual, spends money for any or all of three reasons: because it needs to, because it wants to, or simply because it has it to spend. The last is much the shabbiest. It is arguable, if not manifest, that a substantial proportion of this great spring flood of billions pouring into the Treasury will in effect get spent for that last shabby reason. — Rex Stout (And Be A Villain, 1948)

Rex Stout’s words, penned sixty years ago, match my views on taxation. (If you’d like to read an excellent overview on taxes, I strongly recommend Charles Adams’ For Good and Evil.) There has been a lot of discussion on earmarks and taxes during the current election cycle. Let’s first examine what taxes exist, and how they are enacted into law.

The primary tax in the United States is the income tax, authorized by the 16th Amendment. But it is not the only tax that the federal government collects. There are excise taxes (primarily on fuel, trucks, and wagering), payroll taxes, and an estate tax. There are taxes on individuals and on businesses.

All taxes add a cost to the price of a good. If the cost of a good increases, and the supply of the good remains constant, fewer of the good is sold—that’s the law of supply and demand. Taxes always decrease overall economic performance.

Yet the government must have revenue in order to operate; some amount of taxation must occur. Well, why don’t we just tax businesses? Assume that the only tax was an income tax on businesses. We would still be paying the tax. Again, this is a result of basic economics. If a business is taxed, it will raise its prices in order for it to continue to make a normal profit. All taxes on businesses are passed on to customers. When laws have been passed “banning” businesses from passing on taxes most businesses respond by cutting production, which hurts consumers because not enough of a good is produced.

Consider, also, regulations. Economics teaches that businesses pass on their costs to their customers. The cost of complying with regulations is passed on to consumers. Of course, many regulations are necessary but it is important to remember who ultimately pays for regulations—you and I.

Tax Legislation

The Constitution requires that tax legislation be first introduced in the House of Representatives. Tax legislation normally is first heard by the Ways and Means Committee. Once legislation passes out of committee it is then heard by the full House. The Speaker of the House has tremendous control over what legislation is heard by the entire body. With the Democrats in control of the House, this means that Nancy Pelosi (D-CA) can in most circumstances determine what is and isn’t considered.

Once legislation passes the House, it is then heard by the Senate. Tax legislation is usually first reviewed by the Senate Finance Committee and is then considered by the full Senate. Before legislation is considered by the Senate, cloture must be achieved; it takes 60 votes for cloture. (A bill needs a majority, 51, to pass. If the vote is tied the Vice President, who serves as president of the Senate, can cast a tie-breaking vote.) If a measure is amended in the Senate a Conference Committee is appointed to mesh out the differences. Then the legislation must again pass the House and Senate. Then the bill is sent to the President who can sign the bill or veto it. If a measure is vetoed, Congress can override the veto by getting a two-thirds vote in both the House and Senate in favor of the measure.

Why did I bring up how the legislative process works for taxes? Because it is of vital importance when considering the impact of a President. When Congress is controlled by one party and the President is a member of the other party usually few measures will actually be enacted into law. That’s certainly been the case with the 110th Congress. But this isn’t just President Bush using his veto power. This particular Congress just hasn’t been able to agree on much of anything. Whether that’s good or bad I’ll leave for you to decide.

Part 1 Conclusion

It is important to understand how the legislative process works in order to evaluate what a President can and cannot do. Of course, if voters demand that a piece of legislation be passed Congress usually responds. However, America is divided, and there have been few times in recent years where the public has demanded a certain piece of tax legislation be passed. One example of legislation that is passed because of what the public would do is the annual AMT patch. The public would yell bloody murder if an AMT patch were not passed; Congress knows this and, thus, passes the patch annually.

In Part 2 I will examine the proposals of Senator Obama (D-Illinois). I will look at the totality of the legislation he proposes—not only tax legislation but spending legislation because if a new program is passed the money to fund it must come from somewhere. I’ll also look at earmarks and how this does or does not impact Senator Obama’s proposals.