Bad Arithmetic and Blatant Political Lies

Jan 26 2012 Published by under Bad Economics

I've been trying to say away from the whole political thing lately. Any time that I open my mouth to say anything about politicians, I get a bunch of assholes trying to jump down my throat for being "biased". But sometimes, things just get too damned ridiculous, and I can't possibly let it go without comment.

In the interests of disclosure: I despise Mitt Romney. Despite that, I think he's gotten a very unfairly hard time about a lot of things. Let's face it, the guys a rich investor. But that's been taken by the media, and turned in to the story through which everything is viewed, whether it makes sense or not.

For example, there's the whole $10,000 bet nonsense. I don't think that that made a damned bit of sense. It was portrayed as "here's a guy so rich that he can afford to lose $10,000". But... well, let's look at it from a mathematical perspective.

You can assess the cost of a bet by looking at it from probability. Take the cost of losing, and multiply it by the probability of losing. That's the expected cost of the bet. So, in the case of that debate moment, what was the expected cost of the bet? $0. If you know that you're betting about a fact, and you know the fact, then you know the outcome of the bet. It's a standard rhetorical trick. How many of us have said "Bet you a million dollars"? It doesn't matter what dollar figure you attach to it - because you know the fact, and you know that the cost of the bet, to you, is 0.

But... Well, Mitt is a rich asshole.

As you must have heard, Mitt released his income tax return for last year, and an estimate for this year. Because his money is pretty much all investment income, he paid a bit under 15% in taxes. This is, quite naturally, really annoying to many people. Those of us who actually have jobs and get paid salaries don't get away with a tax rate that low. (And people who are paid salary rather than investment profits have to pay the alternative minimum tax, which means that they're not able to deduct charity the way that Mitt is.)

So, in an interview, Mitt was asked about the fairness of a guy who made over twenty million dollars a year paying such a low rate. And Mitt, asshole that he is, tried to cover up the insanity of the current system, by saying:

Well, actually, I released two years of taxes and I think the average is almost 15 percent. And then also, on top of that, I gave another more 15 percent to charity. When you add it together with all of the taxes and the charity, particularly in the last year, I think it reaches almost 40 percent that I gave back to the community.

I don't care about whether the reasoning there is good or not. Personally, I think it's ridiculous to say "yeah, I didn't pay taxes, but I gave a lot of money to my church, so it's OK." But forget that part. Just look at the freaking arithmetic!

He pays less than 15% in taxes.

He pays 15% in charity (mostly donations to his church).

What's less than 15 + 15?

It sure as hell isn't "almost 40 percent". It's not quite 30 percent. This isn't something debatable. It's simple, elementary school arithmetic. It's just fucking insane that he thinks he can just get away with saying that. But he did - they let him say that, and didn't challenge it at all. He says "less than 15 + 15 = almost 40", and the interviewer never even batted an eye.

And then, he moved on to something which is a bit more debatable:

One of the reasons why we have a lower tax rate on capital gains is because capital gains are also being taxed at the corporate level. So as businesses earn profits, that’s taxed at 35 percent, then as they distribute those profits as dividends, that’s taxed at 15 percent more. So, all total, the tax rate is really closer to 45 or 50 percent.

Now, like I said, you can argue about that. Personally, I don't think it's a particularly good argument. The way that I see it, corporations are a tradeoff. A business doesn't need to be a corporation. You become a corporation, because transforming the business into a quasi-independent legal entity gives you some big advantages. A corporation owns its own assets. You, as an individual who owns part of a corporation, aren't responsible for the debts of the corporation. You, as an individual who owns part of a corporation, aren't legally liable for the actions (such as libel) of the corporation. The corporation is an independent entity, which owns its own assets, which is responsible for its debts and actions. In exchange for taking on the legal status on an independent entity, that legal entity becomes responsible for paying taxes on its income. You give it that independent legal status in order to protect yourself; and in exchange, that independent legal status entails an obligation for that independent entity to pay its own taxes.

But hey, let's leave that argument aside for the moment. Who pays the cost of the corporate taxes? Is it the owners of the business? Is it the people who work for the business? Is it someone else?

When they talk about their own ridiculously low tax rates, people like Mitt argue that they're paying those taxes, and they want to add those taxes to the total effective tax that they pay.

But when they want to argue about why we should lower corporate tax rates, they pull out a totally different argument, which they call the "flypaper theory". The flypaper theory argues that the burden of corporate taxes falls on the employees of the company - because if the company didn't have to pay those taxes, that money would be going to the employees as salary - that is, the taxes are part of the overall expenses paid by the company. A company's effective profits are (revenue - expenses). Expenses, in turn, are taxes+labor+materials+.... The company makes a profit of $P to satisfy its shareholders. So if you took away corporate taxes, the company could continue to make $P while paying its employees more. Therefore, the cost of the corporate taxes comes out of the salaries of the corporations employees.

You can make several different arguments - that the full burden of taxes fall on to the owners, or that the full burden of taxes falls on the employees, or that the full burden of taxes falls on the customers (because prices are raised to cover them). Each of those is something that you could reasonably argue. But what the conservative movement in America likes to do is to claim all of those: that the full burden of corporate taxes falls on the employees, and the full burden of corporate taxes falls on the customers, and the full burden of corporate taxes falls on the shareholders.

That's just dishonest. If the full burden falls on one, then none of the burden falls on anyone else. The reality is, the burden of taxes is shared between all three. If there were no corporate taxes, companies probably would be able to pay their employees more - but there's really no way that they'd take all of the money they pay in taxes, and push that into salary. And they'd probably be able to lower prices - but they probably wouldn't lower prices enough to make up the entire difference. And they'd probably pay more in dividends/stock buybacks to pay the shareholders.

But you don't get to count the same tax money three times.

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