ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Saturday, June 8, 1996 TAG: 9606090009
SECTION: EDITORIAL PAGE: A-9 EDITION: METRO
SOURCE: BILL CORBITT
YOUR MAY 7 editorial (``A better way to tax?") asks: "Why, for instance, should capital gains get special tax preference that other kinds of return on capital - dividend income, interest income - wouldn't?" You also ask why earnings of "productively invested capital" should be treated more kindly than earnings of productive labor since both are necessary for economic growth. I'll attempt to answer your questions from a small-business owner's perspective.
Taxation on capital gains is most insidious because it doesn't recognize the compounding affect inflation has on the dollar's worth of a property. The following two examples are real life, although the value of the '60s dollar vs. the '90s dollar may be off slightly.
Citizen Jones buys an empty lot next to his home for $1,000 in 1966 to use to plant a garden each year. By 1996, he's tired of planting and mowing the lot and sells it for $3,300. Jones has realized a taxable capital gain of $2,300, hasn't he? No, he really hasn't, although the tax laws say he has. From 1966 to 1996, the value of the lot tripled, but increased only by the rate of inflation. He sold the lot for $3,300, which equaled 1,000 1966 dollars. Every penny of that so-called capital gain was the result of inflation's affect on the property value. He was required by law to pay capital-gains tax on $2,300 worth of inflation.
Let's look at your "productively invested capital." A small business is started in 1961 and is worth $5,000 at year's end. Each year for the next 30 years, the business pays income tax on every dollar of income created by its activities. That income each year is based upon the difference in the net worth of the business from the preceding year. For example, year-end 1962, the business's worth had risen to $7,500. Therefore, the taxable business income for business year 1962 was $7,500 minus $5,000 - $2,500.
The founder becomes ill in 1991 and sells the business for $50,000, creating a capital gain, according to our tax laws, of $45,000. Not only has he been taxed on the inflated value of the business in 1991 dollars when he sells it, but he has already paid for 30 years corporate-income taxes on the earnings created by the business, based on its increase in net worth each year over the previous year. In essence, he has paid taxes twice for the increase in worth of the business for that 30-year period - once as corporate-income tax and once as capital-gains tax.
Jobs are what make our economy work. For jobs to be created, someone must risk capital (money) to get a company started or to expand an existing company. Our current tax laws actually penalize those who desire to risk capital to start and grow a company.
Tax laws should be changed so that capital gains are taxed at a lower rate than ordinary income, and always indexed for compounded inflation over the period the property is owned so that real income is taxed, not phantom income created by inflation.
Small-business owners, who create all the new jobs in our current economy (while big business downsizes and dumps employees), have been dealt three disabling tax blows by the federal government the past 20 years:
The investment credit (for replacing old and obsolete equipment) was eliminated. Capital gains became taxable at the same rate as individual income. And most costly has been the quadrupling of the cost of small-business compliance with federal regulations affecting everything from seat belts on office chairs (so an employee can't fall out and hurt himself when he falls asleep on the job) to the decision that the delicious odor of baking bread from a bakery constitutes air pollution.
Whoa, you say, how did we jump from taxes to regulations in the blink of an eye? Aren't the two vastly different? No, they're not. Any government regulation that, by law, requires a business to spend substantial funds to accomplish questionable social or environmental change - even though some citizens could benefit from the change - has levied a tax on that business.
We in the business community have been required by federal law to correct the ills of society for several decades now. Every aspect of our hiring, firing, employee activity on the job, manufacturing processes and interaction with our customers has been regulated in minute detail by an ever-increasing core of inefficient bureaucrats employed by all types of agencies, usually identified by three or more letters of the alphabet.
I understand there's even a regulation that makes it against the law to refuse to hire someone who has bad breath or body odor, if the person can prove he or she has deep religious convictions against bathing and personal hygiene. I'm told one agency is considering a regulation that would fine a company that allows its employees to eat pinto beans on the job because of the potential release of methane gas, which is an air pollutant. Next, they'll outlaw corn bread.
Bill Corbitt of Chamblissburg has been owner and operator of a small manufacturing business for 23 years.
LENGTH: Medium: 87 linesby CNB