Based on its hugely preferential treatment of big businesses, over small businesses, the Rubio/Lee tax plan must have been written by lobbyists for some of the nation’s largest businesses.
The the Rubio/Lee tax plan would be more accurately described as the “the Rubio/Lee tax scam”. Let’s look at just a few of the false claims and the misleading statements that they use to sell it.
The Rubio/Lee tax plan white paper claims to eliminate double taxation, when in fact, it creates a new type of double taxation on interest income, as explained below. The white paper’s misleading claim is that parents are double taxed, via the payroll tax. You read that right. Their argument goes like this. Since parents are paying a payroll tax, while raising children, who will themselves grow up to pay payroll tax, this qualifies as double taxation. What?… That’s such an absurd claim that even most liberals would be embarrassed to make it and yet, this comes from two supposed conservatives.
In fact, if you look at how the payroll tax works, it’s an entirely “pay-as-you-go” system. What you pay in payroll taxes has absolutely zero effect on what your children will be able to get out of it, when they retire. Indeed, under the Rubio/Lee plan, parents do get a slight break. But that break is nothing more or less than a give-away, to buy votes. By using this phony double-taxation argument, the proponents of this plan are trying to keep other people from seeing it for what it really is – a blatant give-away, to a large demographic, for the sole purpose of buying votes. You see, if they can get enough people to buy their double-taxation hype, then that vote-buying scheme won’t look so offensive. On the other hand, if they just said that their plan was giving away some of your money to parents, without specifying a rational-sounding reason, many singles, retirees and others would vehemently oppose it, as the vote-buying scheme it is. So on this argument, the tax plan becomes a “tax scam”.
The Rubio/Lee tax plan also removes both taxes on interest income and deductions for interest expense. But there are two exceptions. Interest on home mortgages would still be deductible and financial institutions would still pay tax on interest income. In addition, this plan allows businesses to deduct the full amount of capital expenses in the year the expense is incurred. At first glance, this might sound reasonable. But in fact, it gives large corporations a huge advantage over small businesses and startups. There are two reasons for this.
- Under the current system, both big and small businesses take deductions on capital expenses, by depreciating the capital expense over a period of years. But under the Rubio/Lee plan, big businesses that take a deduction on a capital expense, will almost certainly have profits in other areas, where they can take full advantage of that same-year deduction in the year the expense was incurred. By contrast, a small business or startup will just as certainly not have enough profits in the same year and will likely have to carry that expense deduction forward for some years to come.
Winner: Large Corporations
Loser: Small Businesses
- Assume that Mega-Corporation and Small Business, LLC (possibly a startup) both want to build a new facility. Today, since interest payments are deductible, both the Mega-Corporation and Small Business, LLC borrow money for the capital expense. Both get to deduct their interest payments and depreciation over the years. Under the Rubio/Lee plan, since interest payments are no longer deductible, Mega-Corpora digs into their reserves and builds their facility with excess cash, taking the full deduction in that year. All of their profits are taxed and no interest payments are made. But Small Business, LLC, not having the corporation’s war chest and being too small to be able to sell bonds or stock to raise enough money, has no choice but to borrow money for their capital improvements. As did Mega-Corporation, Small Business, LLC takes the full deduction in the first year. Also like the corporation, they pay tax on 100% of their profits. But that’s where the similarities end. Unlike Mega-Corporation, Small Business, LLC must pay interest on the loan, out of their profits. This wouldn’t be so bad under the current system, since they would be able to deduct that interest expense and not pay tax on the money used to pay that interest. But since, under the Rubio/Lee tax plan, interest payments would no longer be deductible, Small Business, LLC must pay tax on the full amount of their profits, without being allowed to deduct their interest payments. So to rephrase that point, those interest payments would have been deductible under the current system, thus giving Small Business, LLC some degree of parity with Mega-Corporation. However, since the interest payments are not deductible under the Rubio/Lee plan and Small Business, LLC doesn’t have the option of using excess cash, as does Mega-Corporation, Small Business, LLC is forced to spend a lot more money in taxes.
Advantage: Large Corporations
Loser: Small Businesses
By pretending to help business in general, but actually putting small business at a decided disadvantage, compared to large corporations, this tax plan once again justifies the term, “tax scam”.
But the Rubio/Lee tax plan gets worse. As mentioned above, the small business is forced to pay tax on profits used to pay their interest payments to the bank. I want to make this very clear. Tax was paid on the money used to make those interest payments and under the Rubio/Lee tax plan, there is NO deduction for that previously paid tax. However, under this plan, interest income earned by financial institutions IS taxable. So when the bank receives those interest payments, they have to pay tax on them again. Can you say, “Double Taxation”?
So, for claiming to eliminate double taxation that doesn’t exist, while creating an entirely new type of double taxation, this tax plan yet again earns the term, “tax scam”.
But it gets far worse. Since the Rubio/Lee tax plan doesn’t allow the deduction of a legitimate expense (interest payments), it violates “Generally Accepted Accounting Principles” (GAAP). GAAP is the set of principles under which all U.S. business accounting operates. So by violating GAAP, it means that companies will be forced to keep two sets of books. One set of books will be for the business’ own use in determining their real profits and/or losses, while a second set of books will have to be kept, using non-GAAP methodology, to determine fictitious profits and/or losses, for tax purposes. For large corporations, that additional accounting load would be a minor expense. But for small businesses, that additional workload could be the difference between profitability and debt.
Therefore, for stepping outside the long established boundaries of GAAP and forcing companies to keep two sets of books, this tax plan earns another well deserved “tax scam” designation.
The Rubio/Lee tax plan is indeed, a scam. It is clearly intended to benefit big businesses, who have a stable of lobbyists parading through the offices of Marco Rubio, Mike Lee, and other less than virtuous politicians. At the same time, this scam would serve to keep down the smaller businesses that compete with those larger corporations, through innovations and who cannot afford to pay even the lunch tab for a single lobbyist. In fact, the closer one looks at the Rubio/Lee tax scam, the more it looks like it was written by lobbyists, on K Street, than by any qualified and impartial economist.
Moreover, the Rubio/Lee tax scam is yet another attempt to undermine any talk of real, substantive tax reform. In particular, the FairTax (H.R.25 and S.155), is seeing record support and the power brokers and the leadership of both parties are getting scared that they’ll lose their power base, which is the income tax.
In the private sector, economists are hired first and they shape the ultimate plan that the business will adopt. But in the public sector, politicians decide on a plan and then hire economists who are instructed to come up with a plausible “justification” for that plan, even if the plan is completely un-workable. It’s obvious that whomever designed the Rubio/Lee tax scam was tasked with coming up with a plan to benefit big political donors and to maintain the income tax, at all costs. By contrast, the FairTax was designed by independent economists, whose only instruction was to find the best fix for our current broken system. They were hired by businessmen (not politicians) and they were not told to “justify” any particular type of tax plan. Rather, their only instruction was to design the best possible fix for the current system. The FairTax was what those independent economists came up with.
But when you think about it, the Rubio/Lee tax scam is really pretty good news for tax reform, since it signals desperation in the ranks of the power brokers and congressional leadership, who are having trouble selling their flat income tax as any more than a distraction. This will remain good news, so long as we keep in mind that the Rubio/Lee plan is only meant to help big political donors, at the expense of small businesses and individuals, while simultaneously distracting from real tax reform.
The FairTax now has more support in public opinion polls and in Congress than any tax bill in history. It was introduced into the 114th Congress with 57 House co-sponsors, which is a record for introduction. It closed out the last Congress with a total of 83 sponsors and co-sponsors in both houses – also a record. Furthermore, it is the number one positive ranked bill on PopVox, for bills with more than 100 votes, having 95% support for H.R.25 and 93% support for S.155. No other bill on PopVox, with more than minor activity, has shown such massive support.
But the really good sign for real, substantive tax reform, is evident in the fact that the Rubio/Lee tax scam is the best that the power brokers in DC have been able to come up with. It shows that not only are the power brokers scared, but they are flailing about, tossing out half-baked plans that are reminiscent of Herman Cain’s abortive 9‑9‑9 plan and that fall apart at even the most modest of examinations.
The FairTax is making great advances. Help pass real, economically viable tax reform. Call your members of both houses and tell them to avoid the distractions of other so called tax reform plans that are meant only to undermine real tax reform and to pass the FairTax, as written and totally unamended, now.