A Pox on Both Their Houses

A 15% tax rate makes me smileI would laugh too If I got such a tax breakI have never understood the hatred that the Right expresses toward George Soros, nor the hatred the Left expresses toward the Koch brothers. While both are politically active, it seems to me that it is their money to do with as they wish—even to spend it on politics. 

However, I recently read an article that a Facebook friend recommended about the new tax law just passed by the Kansas Legislature and signed by Governor Brownback. TaxFoundation.Org describes the law in this way:

On May 22, Kansas Governor Sam Brownback (R) signed HB 2117 into law. This tax cut bill reduces income tax rates, increases the standard deduction, and eliminates some income tax credits. The legislation also exempts from tax some income of pass-through businesses. The tax reduction is estimated to be around $800 million annually beginning in 2014, totaling $4.5 billion over six years (see Table 1). By comparison, the state’s individual income tax brought in $2.7 billion in 2011.

On the surface this sounds great. Taxes in most states are too high. Government is bloated.  I think having one tax rate of 4.9% is better than the system currently in place in Kansas, all good as far as I am concerned. But the Devil is in the details. TaxFoundation.org describes some of the less mentioned parts of the tax law—in particular the exact meaning of the term "pass-though" business. 

In addition to the individual income tax changes, the new law changes the way pass-through businesses are taxed. These businesses (such as LLCs, S corps, partnerships, farms, and sole proprietorships) are generally taxed not under the corporate income tax, but rather on the income “passed through” to the tax return of the business owner. This income is thus taxed under the individual income tax.

I own such a business so I understand how such corporations work. The point is that these entities do not pay taxes, their shareholders pay taxes on their individual income tax forms, on a pro rata basis. So If I own 40% of a corporation that makes one million per year, I would pay taxes on $400,000. (I wish!) These corporations would give a capital return to the shareholders to pay their taxes. (This is not a dividend, as a dividend would be taxable.) 

Nothing wrong with such a structure. The taxes are paid, just differently. What is odd about the bill that was just passed in Kansas is that the average worker will continue to pay state income taxes on their wage income, but the well-to-do and the wealthy, if they structure their businesses correctly, will pay no state income taxes at all. I can guarantee that these businesses will be structured this way very quickly, if they are not this way already. So those who are employees will pay state income taxes, but those that employ them will not pay state income taxes. 

Why did I mention the Koch brothers at the beginning of this article? While this will not help David Koch as he lives in New York City, this will greatly benefit Charles Koch as he lives in Wichita, Kansas. 

Since Koch Industries is a private company, the second largest in America, the profits of the business are not known. It has revenues of $100 billion a year. (For full disclosure I need to add that my retail lumber yard buys from Georgia Pacific, a Koch Industry company.) 

Let’s do a little "back of the envelope" calculations. Charles Koch will show on his state income tax return for 2012 his share, 40% or so, of the money Koch Industries makes. This is because Koch Industries is a "pass through" company, a Sub Chapter S corporation. To be conservative let’s say it is 1 billion dollars even though a better guestimate would be much higher. Koch would then pay state income taxes of $64 million or so on this part of his return. This has to be on the low side of the taxes he pays currently to the state. 

One of the well-paid workers working at Koch Industries in Wichita will pay 4.9% of his income in taxes above $30,000. How much will Charles Koch pay in state income taxes for the billions in income Koch Industries will make for 2013? Zero, zilch, nada, nichevo. 

Charles Koch will probably save more in taxes from this bill than he will spend on the elections in this election cycle. I have no objection to Koch spending his own money on elections. But I greatly object to the taxpayers of Kansas giving Koch a tax break to do so. 

I suppose it could just be a coincidence that this will benefit Charles Koch and that he is spending $100 million or so on politics in this cycle. (The Kochs spent $10 million for the last year in Wisconsin. ) I suppose it could be a coincidence that the Republican governor Brownback has national ambitions. I suppose it may be an unintended consequence that this new tax bill in Kansas will benefit Charles Koch. I suppose. 

It does not matter whether it is the tax rate of 15% Soros gets for his off-shore hedge funds or this new tax break for Charles Koch. The whole system is corrupt. No matter who wins the election in November, we lose.