Taxing Regulation

Occasionally, we abandon our single commentary format to look at a range of media. Today, our theme is taxes and regulation.

On taxes...

President Obama’s recent jobs speech (opposite the NFL’s opening night), combined with the loose proposal of a Buffett rule (as of yet undefined), has sparked renewed discussion over taxation. While folks take myriad positions, most seemingly agree our system could use an overhaul. Here are a few interesting takes on the various problems with our current system:

A Short History of the Income Tax—Required reading. This walks through the history of the income tax briefly and suggests why it’s likely been less effective than originally intended.

The Problem of the Corporate Tax—Takes the above piece a step further, highlighting the problems our current corporate tax system creates. As we’ve suggested before, efforts spent avoiding onerous taxes represent capital that could otherwise be spent more productively in a world with a simpler, more logical tax code.

Explaining the Perverse Impact of Double Taxation With a Chart—And finally, a helpful illustration of the numerous ways income’s frequently double-taxed—which hardly seems a logical way to promote investment in capital creation, as the author points out.

Overall and on average, we’d argue the tax code is too long and complicated with too many loopholes—which taken together mostly promotes attempts to find those loopholes. And most folks can probably agree time spent finding loopholes is likely time better spent manufacturing more widgets or hiring more people or inventing the next tablet computer or, or, or. Reasonable people can certainly disagree on how much folks should pay—on what’s “fair” and what’s not. But it’s harder to disagree with the suggestion the current system’s overly clunky and likely ineffective. (And, we’d also remind folks who feel unfairly under-taxed they can solve this problem right now, by donating here.)

An idea we can get behind...

“We’re also planning to cut away the red tape that prevents too many rapidly growing startup companies from raising capital and going public.”

--President Barack Obama, September 8, 2011.

The above quote was to us the most interesting aspect of the President’s recent speech announcing his jobs plan. It seemingly references 2002’s Sarbanes-Oxley Act (SarbOx) and onerous provisions dramatically increasing the cost of raising capital. And, if followed through on (and perhaps broadened from the narrow scope of the quote), would likely be a very nice incremental positive for America’s economy.

In reviewing the draft bill, we found the word “regulation” 42 times—but not once in reference to the statement above. A form of the word “public” appears dozens of times but not once in connection to “going.” “Raising capital,” “Sarbanes” and “Oxley?” Absent.

However, the idea of reforming SarbOx isn’t dead. In fact, a bill (HR 2941) recently introduced in Congress would ease SarbOx’s onerous costs by exempting corporations under $1 billion in market cap from section 404 of the act—arguably the largest, most costly compliance burden. As of now, this legislation is far from passed—it’s sitting in congressional committee, where most proposed legislation goes to die. Considering a Democrat (Obama) and a Republican congressman have each at least paid reference to easing SarbOx, it appears cooperation may be possible. This may not go as far as we’d like, but it’s a step forward—and one case where we hope the two parties can move beyond gridlock.

Regulation nightmares

No doubt, grappling with regulation can be costly for businesses—and the onus is greater on small businesses. For example, no one argues it should be easier in this country to sell illegal substancesthan beer. However, beware of assuming anecdotal evidence broadly reflects reality overall. While we agree there are a lot of needless regulations that could be killed or amended (a view purportedly shared by the current White House—though we will be convinced more by deeds, not words)—America is still one of the relatively easier places in the world to start and run a business.

According to the World Bank, the US ranks fifthoverall in ease of doing business. That’s not first (Singapore’s first, Hong Kong’s second). But it’s better than, say, Germany (22nd) or Japan (18th). For all the recent media comparisons between the US and Greece, Greeceranks 109th overall in ease of doing business—dead last among developed nations. In fact, the nearest developed nation ranks 29 spots higher.(Greece also ranks 149th in the “starting a business” category, but a relatively low 49th in “closing a business.” Which seems a bit emblematic of their overall issues.)

So without a doubt, the US is far from being as regulated as Greece. But we’re certainly not arguing a favorable relative comparison to a largely socialist enclave eliminates the need for simplification and reform. That’s much more about the absolute level of needless regulation, which in our view, is absolutely unnecessarily high in America today.