Thursday, October 23, 2014

Living like a King

I read nearly two dozen books a year. I was an early adopter of the Kindle because my reading isn’t evenly spread throughout the year – I tend to binge read while traveling or on holiday. Schlepping 10 books in a bag became old very quickly…especially since I’m a light packer otherwise. Now I download books to the iPhone and use the Kindle app – much more convenient! In today’s social media technology environment – being able to travel, vacation and have electronic gadgets to read books is a whole series of luxuries known as #firstworldissues. Traveling has its own array of #firstworldproblems.

In a post 9/11 world where all but one major airline company went through bankruptcy, fees have become the solution for balancing the books. CNN/Money reports that $31.5 billion was earned by airlines in 2013 – up from $2.8 5 six years earlier. Annoying as those fees are – they are democratic. If you want more legroom – pay the fee. If you want to bring a lot of stuff, pay a fee. If you don’t want to pay a fee – choose an airline that doesn’t charge fees.

The monetization of every element of airline travel began with the 1978 ‘deregulation’ of the industry. Before then the Government assigned prices and managed schedules. While the industry remains highly regulated, the ‘deregulation’ allowed airlines to introduce the hub-and-spoke system, mange its own pricing and have increased competition. Government still controls routes, security and a slew of other components. Business Class travel was introduced in 1978 – allowing those who were willing to pay for the privilege of having more space.

Companies pay for executives to fly in Business Class for a variety of reasons. Keeping key staff comfortable and happy is certainly part of it, but it's also making sure that their time is productive in the air and on the ground is cost-effective. A well rested sales person/executive is more effective than somebody who needs a day to recover from traveling. Financially the cost of business travel is deductible.

Companies pay federal taxes. For shareholders the goal is to be as profitable as possible – but for tax reporting the goal is to maximize deductions to reduce the tax liability. Travel is a true cost of business and should offset revenue. Does it make sense, though, for first-class and business-class travel to be fully deductible? By allowing a deduction for a luxury item means that the taxpayer is essentially underwriting the premium service. A deduction of the base cost of the fare would be more in the spirit of Government’s desire to incentivize commerce which would then eliminate the taxpayers role in subsidizing luxury travel.

U.S. companies pay one of the highest tax rates in the world – 35%. They pay this rate on revenue earned anywhere. So a U.S. company that earns money in France has to pay whatever tax it owes to the French Government but in addition must pay 35% to the U.S. on those monies as well. A Corporate Inversion is the process where businesses relocate their main offices outside of the United States. These companies still pay 35% tax on all income earned in the U.S. – they just don’t pay a tax on money earned in another country. President Obama has called this “un-American” and shames the businesses for “not paying their fair share.” Taxing money earned outside of the country isn’t fair. No wonder businesses take full advantage of all of the legal options to reduce their tax obligation.

Theoretically taxes are levied against revenue earned in a jurisdiction to offset the costs of services provided by government for that jurisdiction. Local sales tax, then, helps pay for local police to keep the community safe. Federal taxes help pay military costs, etc. Charging a levy against money earned outside that jurisdiction makes it hard to justify the applicability. Why would Boston need to charge a tax on money earned by its residents in New York? It doesn’t. In corporate taxes, though, the U.S. charges 35% to Burger King on money it earns everywhere in the world.

The U.S. tax code is currently 73,954 pages. The code is full of incentives for individuals and business to behave and conform in a manner that Government wants. (Home ownership only became a standard when the Government tax code made it financially beneficial for the majority by having the cost of mortgage interest reduce their tax liability.) One of the consequences is that some companies then don’t pay any tax, and the overall percentage of taxes paid by business have declined. The problem lies in the tax code – not in those who take advantage of what the code allows.

The desire for the State to manage every element of its citizens behavior has resulted in the world’s greatest Democracy to move further towards Imperialism. It applies both to the people who fly in Business and First Class which is subsidized by taxpayers through a tax deduction and to politicians who have created a system that penalize companies for earning money outside the borders. It’s time to do away with the monarchy…again.

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