Saturday, April 23, 2011

Egypt - Tax Policy for a New Economy

Just a Few Words About Tax Policy
 Don't Make the Same Mistakes We Did

Scholarly books about tax policy are so numerous that a modern pyramid could use them for a foundation.  Likewise, tax experts with credentials as long as a corporate IRS filing are perched in droves, waiting to breathe their "magic" into tax policy for governments everywhere.

Confronted by this daunting expertise, the resolutely humble MeanMesa wouldn't even consider simply "jumping into the fray" as some sort of cheaply masqueraded authority on "good taxes" and "bad taxes."  Instead, what can be offered here is a view from the "Main Street" eyes of an American who is watching "tax policy" relentlessly wrecking what could have been, otherwise, a fairly healthy economy.

And worse, those same toxic tax policies, now seemingly a permanent fixture of American life, have moved into politics -- and, they are the politics of division

All these would be stiff, academic matters poorly suited for a post on Egypt if we were to find ourselves in better times.  But, given the conditions of this present moment, perhaps considerations such as these turn out to be nothing less than "the burning question of the day" when it comes to mapping the path forward, that is, when it comes to defining some basic principles which will structure Egypt's new economy.

Further, rather than "flitting" all across the possible spectrum of tax matters, this post will focus on a particularly destructive "habit" which is currently plaguing the US.  All this may be relevant here because the same tax "habit" will almost inevitably begin to show up in the form of an "absolute necessary" tax policy in the halls of Egypt's new government.

The Temptation of "Tax Expenditures"

This won't be a discussion about ways in which taxes are collected.  It will be a discussion of ways in which taxes aren't collected.  

Setting aside a "marching horde" of specifics and details, we see the US in the challenging throes of a revenue crisis.  The US government is simply not collecting enough tax revenue to fund itself in the general manner expected by its citizens.  Correcting this problem, although it might seem straight forward at first, turns out to be nothing less than attempting to "milk" a stampeding herd of dairy cattle.

That is, while they are still stampeding.

For a glimpse of what we are facing here in the US, let's take a look at a few representative examples which seem to lie at the base of the problem.  For this very limited discussion, we can consider an important feature of the "many headed monster."

First, three hundred of the most profitable corporations in the US pay no tax on their corporate income, that is, not a dime.  In fact, some of these behemoths such as Exxon-Mobile -- one of the largest and most profitable corporations in the history of the entire world -- not only don't pay taxes, they actually receive annual subsidies to help them "make ends meet" because it is "so, so, so difficult" for them to do business without a little "help from their friends."

Of course, US tax law requires that such corporations pay tax on their income, on the profits they derive from doing business here.  In fact, the corporate "tax laws" in the US very conveniently include provisions that such profits be taxed at around 35%.  

"Convenient?"  Well, yes and no.

If these taxes were actually paid at this 35% "top marginal rate" the US debt would be paid out rather quickly.  There is an immense amount of money "flowing" through this particular channel of the economic process.  The "convenience" angle comes not through government or corporate financial solvency but rather through public opinion opportunities.

Even though these profitable corporations never actually pay taxes at these rates, they can continue to complain that these "theoretical" rates are among the highest in the world.  Right away, they can begin "public relations programs" arguing that these rates must be lowered even further so the resulting "burst of business opportunities" will become usher in all sorts of economic benefits.

Further, these remarkable and costly  exceptions to the US tax code are not the product of some simple "happy coincidence" or the slothful oversight of a dozing tax collector somewhere in the IRS.  Each one of them is, instead, the outcome of a carefully crafted bit of legislation from some period in the past. 

Over the years, the US Congress has quietly passed one after another of these "tax expenditures," each one initially sponsored as a "really good idea."  Once in place, these "tax expenditures" tended to become far more permanent than anyone expected.  After enjoying such illicit advantages for a few years or decades, the public relations sections of the corporate receivers were able to characterize the elimination of these "loop holes" as "tax increases."

They are called "tax expenditures" because they are comprised, not of taxes collected then distributed to these "struggling corporations," but because they are taxes which are never collected in the first place.  

Similarities between Egypt and the US (image source)

They never go "through the books."

They amount to roughly $200 billion dollars per year.  Year after year.

What Does This Have To Do With Egypt?

Here, we must concentrate of the "really good idea" part of the US version of the phenomenon.

Egypt is already experiencing its own form of the same thing.  During the "Mubarak economy," not only did far too many "tax dollars" seem to simply disappear into the autocracy, in many cases they were simply never collected in the first place.  Anyone who had access to the government just seemed to wind up with all sorts of "special tax advantages."

In the US case, these advantages were each calculated to encourage some part of the economy in a necessary way.  They "sped up" and "lubricated" an otherwise "free market" response to some pressing problem. or desired result. 

They "encouraged" business to develop in some "vitally necessary" manner by adding the profitable benefit of the "tax expenditure" to the balance sheet.  Once the "tax expenditure" was in place, the then enhanced profit opportunities were supposed to become "great enough" to spur development and growth in the desired way.

So, what could possibly go wrong?

Theoretically, not too much.  In the "real world," of course, massive amounts of fraud and wealth redistribution began immediately.  Worse, these things not only "began," they kept going.  And, as they "kept going," more and more of the corporate profits could be directed at Congressional "campaign contributions" to "keep them going."

As the government of the new Egypt begins to form tax policy, a predictable "something" will emerge almost at once.  Some of the "otherwise tax paying" Egyptians will present themselves as some sort of "necessary exception" to the general laws for tax collections.  Their argument will be that, should they be required to pay the full tax on their enterprises, growth will be slowed and the overall economy will suffer.

This "rivulet of tax exceptions" may begin as a trickle, but in no time it will become a raging torrent.  Worse, it will provide an under carriage for Egypt's next oligarch class, folks already "waiting in the wings" for their chance to replace the old oligarch class.

Grand Pa's Advice

Although it will be important not to "throw the baby out with the bath water," MeanMesa is adding the "extreme caution" sign to these types of legislative proposals.

Absolutely, urgently unavoidably necessary "tax expenditures"
Should representatives in the new Constitutional government of Egypt seem to be passing out these "tax expenditure" favors right and left, each one validated by its immediate necessity for "jump starting" the "post-Mubarak economy," it might be time to consider some new representatives.

If the "tax expenditures" seem to be tilted too much toward being exclusive advantages to only a certain class of recipients, they should be considered suspicious.  Tax expenditures should provide benefits to all Egyptians, or they should not be passed.  The ones which are legitimate should have a concrete "sunset" provision, that is, when they are passed, their absolute end date should be part of the package.

Some tax expenditure plans really will help the Egyptian economy, but Grand Pa suggests erring on the conservative side.  Things in Egypt will begin to get better quickly, but tax expenditures only make sense when "quickly" still isn't "fast enough."

Once tax expenditures have been in place for a while, their benefactors seem to become more and more willing to do anything necessary to keep them in place.  If the new Egyptian economy racks up tax expenditure exceptions to the same extent that the US has, it will experience the same difficulties of huge debt, corporations which never pay taxes and the Egyptian equivalent of a US Congress which is beholding to its contributors and no longer interested in serving its people.

MeanMesa will continue this line of posting with an article about a "fellow traveler" to the tax expenditure idea, the "tax incentive."

Meanwhile, best wishes to the Egyptian people.

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