15 July 2024

Recycling In Colorado

Almost no one is opposed to recycling in principle. But Colorado has a quite low 15.8% percent rate of trash being diverted to recycling or composting. The Colorado Sun explores what can be done to address the issue.

Facts About Rare Diseases

The linked post discusses whether it is better to spend money on treating rare diseases or using genetic screening (pre-conception and post-conception, potentially linked with fertility treatments related screening) to address them. But a predicate to that debating that intelligently is understanding the underlying problem.
Rare diseases cost Americans around 8 trillion dollars a year. About half of that is direct medical costs. If families are lucky, they may go bankrupt paying for treatment of often questionable effectiveness. The unlucky families may go bankrupt just trying to find a cure; unfortunately less relevant as only about 5% of rare diseases have treatments. . . .

In the United States, a rare disease is defined as one that affects fewer than 200,000 Americans. Despite each disease affecting no more than .06% of the population, there are about 7,000 different rare diseases, meaning roughly 10% of the U.S. population has a rare disease.

These numbers may seem large, but it makes sense if you consider the complexity of human genetics and development. Humans have around 20,000 genes. Mutations in some genes are lethal. Mutations in some genes lead to normal human variation; you may not even know the person has a mutation. And mutations in others lead to rare diseases; not lethal at or before birth, but often quite deleterious. Around 80% of rare diseases are genetic and many of these diseases are discovered in children – the mutations are severe enough to be noticed early.

30% of children with rare diseases do not live past the age of 10. The devastation of rare diseases stems from their chronic, progressive nature and the fact that many involve multi-organ system failure or neurological impairments.
From here.

The average rare disease in the U.S. affects about 4,760 people.

Part of the economic issue is that curing a rare disease generally has a cost comparable to curing a non-rare disease, but benefits fewer people. Yet, a single medical grade genetic test can screen for all genetic diseases.

News Deferred

I am aware of the failed attempt to assassinate Trump and the dismissal of the classified documents criminal case based upon a challenge to the constitutionality of the special counsel and Trump's VP pick. 

I am choosing to postpone processing any of these stories too deeply for the moment, so that I can avoid being too distracted while dealing with work and household obligations.

10 July 2024

A Comprehensive Entity Taxation Reform Proposal

The Corporate Double Taxation Problem

The U.S. has about 1.4 million entities taxed as C-corporations, as of 2020 (the most recent year for which full tax statistics are available) of which only 644,000 had tax taxable income and only about 433,000 had any net tax liability. Thus, almost a million C-corporations are small, closely held entities that pay bonuses to management annually calculated to eliminate any corporate level tax liability after any available corporate tax credits. But C-corporations that pay significant corporate income taxes in at least some years are economically extremely important as they include all publicly held corporations and many large, privately held businesses in the U.S. For example, in 2020, corporations has $33,400 billion of gross revenues and owned $124,500 billion of assets.

One of the widely acknowledged issues with U.S. federal income taxation of corporate earnings is the double taxation of C-corporation income. U.S. C-corporations pay tax once when income is earned at the corporate level at a rate that is currently a flat 21%. Then, when dividends are distributed to shareholders, shareholders are taxed on their dividend income but C-corporations don't receive a deduction for this payment.

This double taxation issue has been an important driver of the preference for pass through entity taxation in the U.S., and it creates a strong tax incentive for U.S. corporations to retain rather than distribute their income. And, since U.S. corporate income tax rates have generally been lower the the maximum U.S. individual income tax rate, it creates a tax preference for C-corporations that retain their income due to deferral of income taxation at the shareholder level. 

It also creates a strong tax incentive for C-corporations to finance their operations with debt rather than equity, which from a macroeconomic perspective causes C-corporations, mostly publicly held companies, to have excessively high debt to equity ratios, which makes the U.S. economy more vulnerable to business failures, and less robust, in recessions.

The favorable tax rates for corporate income, capital gains income, and "qualified dividends" in U.S. tax are also rough justice attempts to mitigate the double taxation of corporate income.

Options To End Corporate Double Taxation In the U.S.

There are various ways to end the double taxation of C-corporation income.

1. One could exempt dividend income from taxation, but that would distort how progressive marginal income tax rates for individuals work and would create a perception of unfairness. This would also continue to preference for debt over equity in corporate finance with the macroeconomic costs that come with it. And, it would be unfair to people who would be taxed on capital gains income from stock but not on dividend income from stock.

2. One could exempt corporate income from taxation. But this would create a massive tax incentive for corporations to retain income indefinitely. This would also massively favor equity investment over debt investments and would lead to a surge in preferred stock replacing corporate bonds.

3. One could replace federal corporation income taxes as a withholding tax on ultimate dividend payments for which shareholders receive a tax credit when receiving dividends. This is the most common approach in developed country economies that works quite well there, even though it retains some of the bias for debt financing over equity financing. But in the U.S., in light of federalism considerations, where there is no coordination in corporate taxation between federal corporate income taxes and state corporate incomes taxes, with some states not having these taxes at all, and other states having significant ones, this is difficult to implement gracefully.

4. One could have some sort of simplified pass-through taxation regime similar to what is done now with mutual funds, real estate investment trusts, and publicly traded partnerships. This would be close to neutral at the macroeconomic level between debt and equity financing. Pass-through taxation is predominant for U.S. closely held entities, many millions of which are taxed this way, mostly through limited liability companies, limited liability partnerships, limited liability limited partnerships, limited partnerships, and S-corporations. As of 2020, there were 4.9 million corporations taxed on a pass-through basis (primarily S-corporations, REITs and RICs), another 4.3 million entities taxed as partnerships, and 2.8 million single person limited liability companies taxed as sole proprietorships, for a total of 12 million entities using pass-through taxation regimes (a figure that ignores trusts and estates which have another form of pass-through taxation). But this is administratively very complex and it causes tax audits of the pass-through entities to impact far more people. It is also less fair, as the amount of taxable income allocated in this system to shareholders may not exactly match the amount distributed to them creating "phantom income" in some cases, and windfalls in others. The phantom income problem is particularly problematic in entities where substantial corporate profits are retained for future operations, rather than being distributed.

5. One could continue the imperfect status quo of mitigating the harm caused by corporate double taxation by taxing some combination of corporate income, capital gains from the sale of corporation shares, and dividends from corporation at reduced income tax rates, doing rough justice in terms of equity between total tax rates on shareholder received income from corporations and income from other sources, but presenting the problems discussed above.

6. One could allow a deduction for corporate taxable income for dividends paid. This is already done, in full and in part, depending upon ownership percentages, for dividends paid by C-corporations to other C-corporations that own a significant part of their stock. It has the virtues of being simple, being easy to administer, being easy to integrate between varied state and federal corporate tax systems, almost perfectly eliminating double taxation of corporate income, and ending the preference at the corporate level for equity financing over debt financing. This is the model I explore below, considering its viability in terms of tax rates, which I conclude are very viable. With the appropriate corporate tax rates, it also basically eliminated an incentive to retain earnings in order to defer income tax liabilities.

The Federal Tax Revenue Impacts Of A Corporate Dividends Paid Deduction

U.S. C-corporations paid $374 billion of corporate income taxes in 2020 at a flat corporate income tax rate of 21% from $2,700 billion of corporate net income, reduced by $193 billion of corporate tax credits.

U.S. taxpayers received $328 billion of ordinary dividends and $248 billion of qualified dividends from C-corporations in 2020, for a total of $576 billion.

So, U.S. C-corporations paid 21.3% of their taxable income to shareholder as dividends in 2020 (this isn't quite right, because it excludes dividends from C-corporation to other C-corporations, many of which are partially or fully income tax free, and includes dividend income from foreign corporations that are subject to U.S. corporate income taxes, but neither of those amounts are material).

If dividends paid were deductible from the income of C-corporations, total C-corporation income in 2020 would have been $2,124 billion. So, a revenue neutral transition from non-deductible corporate dividends to deductible corporate dividend payments would require a flat 26.7% corporate tax rate.

If C-corporations were taxed at a flat 41% corporate tax rate (slightly more than the 40.8% of federal taxes due at the highest marginal income tax rate plus the Obamacare tax on investment income), but were allowed to deduct corporate dividend payments and take all existing corporate tax credits, corporations would have paid $678 billion in federal income taxes in 2020 (an increase of $304 billion per year). This would be equivalent to a 32.3% flat corporate income tax rate without a deduction for dividends paid by corporations but with all existing corporate tax credits. A 41% federal corporate tax rate with a dividend paid deduction would be an 81% in federal corporate income tax revenue from current record low corporate tax rates (although this is moderately overstated because corporate tax credits would grow significantly with higher corporate tax rates, although it would still be at least a 31% increase).

The increased federal corporate income tax revenues in this scenario would be partially offset by reduced state corporate income tax revenues due to the reduction in the state corporate income tax base, unless states decided to disallow the dividend paid deduction for state corporate income tax purposes.

This would also make a variety of anti-evasion and double taxation mitigation provisions of the tax code obsolete. These would include the accumulated earnings tax, the personal holding company tax, the separate dividend paid deduction for dividends paid by C-corporations to certain other C-corporations, the special tax rates applicable to qualified dividends, and the special tax rates applicable to capital gains in C-corporation stock. 

These changes (except the special rate applicable to capital gains and qualified dividends) would have a negligible federal tax revenue impact. The end of the tax treatment of capital gains would increase federal tax revenues by $162 billion, and the end of favorable taxation of qualified dividend would increase federal tax revenues by about $84 billion.

In all, these reforms would increase federal income tax revenues by about $550 billion a year, which would be a roughly 11% increase in federal tax revenues, more than two-thirds of which would be paid mostly by those in the top 1% and more than three-quarters of which would be paid by those in the top 10% of income earners. 

This would reduce the federal budget deficit by more than 46%, which would also tend to reduce interest rates in the U.S. economy, including interest rates of home mortgages.

Bottom line: 

An increase of the federal income tax rate on corporate income from 21% to 41%, accompanied by a deduction for dividends paid, the end of favorable tax treatment for capital gains and qualified dividends, and the elimination of other tax code provisions whose purposes are made obsolete by this change, is a good idea.

This would be a viable and sensible tax reform that would be more fair, would be less prone to loopholes and tax planning reductions, would raise modestly more federal revenue in line with historic norms for revenue from corporate income taxes, and would make the U.S. economy more robust from a macroeconomic perspective. It would also reduce tax complexity, be easier to administer, make audits simpler for entities currently taxed on a pass-through basis, and be transaction driven. It would achieve great benefits without radical changes to the overall income tax system in a politically palatable manner.

Other Desirable Reforms In Entity Taxation

* Dividends paid by U.S. corporations to people not otherwise subject to U.S. income taxation should be subject to a final 41% foreign dividend payment tax collected by the entity paying the dividends. This is lost federal tax revenue that could be easily curtailed under the existing tax regime, and is especially important in a corporate dividends paid deduction regime.

* Pass-through taxation should be greatly curtailed. Entities with limited liability should be taxed as C-corporations. Limited partnerships with some unlimited liability general partners and some limited liability limited partners, should be taxed as a general partnership of the general partnership and a C-corporation consisting of the limited partners. S-corporation taxation should be abolished. This would greatly reduce the administrative complexity of the tax system, and would make it much simpler for small businesses to craft their organizational documents, to prepare and file tax returns, and to deal with tax audits. It also removes a huge exception to limited liability for entity income related tax liabilities. State laws causing transferees of limited liability company membership interests to lose their voting rights and right to information about the company and arguably the right to bring derivative actions, which were adopted to gain partnership taxation tax treatment (now obsolete for that purpose) should also be repealed. A fringe benefit of curtailing pass-through entity taxation is that it would greatly increase the privacy of entity owners, particularly in entities that did not distribute dividends to their owners.

* Investments in publicly held, marketable securities and commodities should be taxed annually on a mark-to-market basis, on that the theory that gains that could easily be realized shall be deemed to be realized for tax purposes. 

* The proceeds of loans secured by unmarketable or liquid capital assets, such as closely held entity shares, would be taxable as ordinary income when received, and deductible as an ordinary expense when repayments of principal were made by the borrower, to prevent circumvention of capital gains taxations that are de facto realized.

* Equity investments in unmarketable closely held entities should be deemed to be sold at fair market value at death and taxed at that time, rather than receiving a tax free step up in basis, unless a carryover basis election is filed by the executor of the decedent's estate disclosing the carryover basis and representing that the asset is eligible for the election.

This package of additional reforms would raise something on the order of $50 billion of federal tax revenues each year, which combined with the primary package, would increase federal tax revenues by about $600 billion a year, and would reduce the federal budget deficit by 50%.

A Quick And Dirty Fix To Regressivity In Federal Income Taxation

 


A friend of mine observed with respect to the meme above that:

That's comparing net worth to income. (Not that there's anything wrong with a net worth tax on billionaires). His net worth increased $87b in 2021, so $11b comes to 13%. While low, it's not obscenely so. Presumably it's due to unrealized capital gains. Taxing unrealized capital gains would be a bad idea in general, except for in the case of billionaires.

I responded:

I did catch that and let it slide because the basic point the Musk is undertaxed is still true. 
Taxing unrealized capital gains honestly isn't such a bad idea in the case of publicly held securities that can be converted to cash in the blink of an eye. Taxing unrealized capital gains in assets that are less liquid is much more problematic.

As you say, the amount he is being taxed on his income is actually about 13%. 
The top federal income tax rate on ordinary income is about 37% plus 1.45% employer and 1.45% employee Medicare taxes (or the equivalent for self-employment tax) or 3.8% for Obamacare on investment income. The top rate on ordinary income in California for people making more than $1 million a year is 14.4%. 
So, if capital gains and dividends were taxed as ordinary income and unrealized gains in publicly traded securities were taxed, and assuming that his income is almost all investment, he could be paying 55.2% instead of 13% of his income in taxes without even increasing top tax rates on ordinary income for the rich. 
This would be about $36 billion more in taxes collected each year. 
By comparison, that is nine times as much as the total revenues of the U.S. federal government from oil and gas leasing each year, and is about twice as much as total federal gift and estate tax revenues each year. 
Yet it would come from increased tax collections due to a couple of minor tweaks in the taxation of capital gains and dividends in publicly held companies, from a single taxpayer alone. 
Across the board, these small changes would generate immense increased tax revenues and increase equity and reduce income inequality.

To recap: 

What are these simple proposals that would profoundly increase tax collections from the rich, make our income tax system much less regressive, and reduce income inequality, without creating serious economic problems due to flawed tax incentives and laws?

1. Tax capital gains and dividends at the same tax rates as ordinary income. The tax expenditures associated with these preferential tax rates for capital gains and dividends has been calculated by the U.S. Treasury Department. These preferential tax rates cost U.S. taxpayers about $162 billion a year. About 68% of capital gains income is earned by the top 1% of taxpayers and 74% of capital gains income is earned by the top 10% of taxpayers according to the Congressional Research Service.

2. Tax unrealized capital gains in publicly held securities on a mark-to-market basis (see also here). The associated tax revenues associated with this change are harder to estimate. The step up in basis of capital gains at death and carryover basis capital gains taxation of gifts during life, combined cost taxpayers about $55 billion a year, so that's an order of magnitude estimate, although probably an underestimate.

Increasing tax collections on the unearned income of the wealthy from publicly traded securities would raise more than $200 billion a year, out of $5,000 billion of total federal tax revenues. This would be a 4% increase in total tax revenues.

Urban Density Is Green

 This is the biggest apartment building in the world.

The colossal Regent International apartment building in Hangzhou, China, is is the largest residential building globally and hosts over 20,000 residents! Initially designed as a hotel, this 36-story architectural marvel was transformed into a self-sufficient community, boasting high-end residential apartments, a vast food court, swimming pools, salons, supermarkets, and more. 
Designed by Alicia Loo, the chief architect behind the world's second seven-star hotel, the Singapore Sands Hotel, this S-shaped giant stands 206 meters tall. He has dominated Hangzhou's central business district since its inauguration in 2013. 
Home to a diverse community, from young professionals to influencers and small businesses, the Regent International building spans over 260,000 square meters, reshaping the skyline and redefining urban living in China.

Rent ranges from about $200 a month for an interior windowless apartment to $550 a month for apartments with a balcony. 

I posted this meme on Facebook and a friend of mine left the comment: "To me it is a symbol of the overpopulation that is killing the planet."

I responded (with minor editing for a blog format):

It shouldn't be. 
First of all, global population is nearing a peak and leveling off - the places that are still seeing surging population, especially sub-Saharan African and Afghanistan, have profoundly lower population density. 
China, in particular, has plummeting fertility rates and is far below the replacement level. It is at 1.4 billion people now, but actually lost population in the last year or two and will continue to. China has a fertility rate about half of the replacement rate, so its population will probably fall by close to 400 million people in thirty years and that's at current rates which are still plummeting. 
High density urban environments have the lowest total fertility rate. 
Second, the environmental impact of people in extremely high density environments is much lower per person than if they are spread out - they use less heating/cooling energy (especially in multifamily housing like this since there is less surface area to lose/gain heat per capita due to shared walls, and shared ceiling-floors), produce far less global warming air pollution, use much less transportation energy, build fewer cars per capita, use less water, destroy less land/sensitive animal habits than lower density development, etc. 
I'm sure it has lots of elevators, which are one of the single most energy efficient means of transportation other than bicycles, almost all power used to go up is recovered going down. And, people in densely populated areas can also use more efficient intercity transportation - this part of China has high speed electric rail that is faster and has less environmental impact than intercity transportation by cars or airplanes for short to medium distance intercity trips (admittedly China's electrical grid has way too much dirty coal, but that isn't an urban density related issue). 

Manhattan, for example, has better energy efficiency and overall less waste production and pollution per capita than any other place in the U.S. 
There is also an iron rule in economics that the bigger and more dense a city is the greater its per capita GDP in a very systemic, cross-cultural, cross-time period way. It is a power law relationship, so more dense urban areas are exponentially more productive per capita with no upper limit observed to date. So dense cities also greatly reduce environmental impact per $1 of GDP by both being more productive and less polluting per capita. 
More density means a smaller human footprint on the Earth. Put 20,000 people in suburban tract homes and you'd eat up 3+ square miles of land instead of one city block of maybe 1% of a square mile (6.4 acres), so that's a 99% reduction in habit destruction that can be left for open space, parks, and farming. 
Sure, the 6.4 acres for this high rise produces way more waste, energy consumption, and water consumption than my urban residential neighborhood would with 180 or so people in the same area of land, rather than 20,000 people, and far more than a suburban neighborhood with maybe 20 people in that land area, or an exurban neighborhood with 4 people in a mini-mansion on a single 6.4 acre lot. But per capita, it is much, much better for the planet.