October 06, 2011
Trickle-Down (to the classroom) Revenues for Rich Millionaires?
Posted by David Groshoff

While I may be a junior faculty member still in the beginning of my second year of law teaching, I have tended to be a political junkie for much a long time.  And outside of the past year or so, I cannot recall a time in my life when members of both major political parties have referred to “revenues” so much during debates over taxes or otherwise have claimed that “revenues” were not taxes.

Despite the assertions to the contrary, and without getting into a protracted dialogue about whether modestly decreased tax rates increase government revenues, my general impression is that all of these “revenues” are effectively some form of a tax.  The basis for my impression is because the revenue generation proposed would occur via manipulating the Internal Revenue (tax) Code.

I question why both major parties seemingly have increased their use of a euphemism for taxes.  In the 1980s and 1990s, I recall the phrase “tax and spend liberal” — not “revenue generating and spending liberal” — being thrown around to denigrate some Democrats.  But now, the terms of the debate have shifted to revenue generation as a deficit reduction tool, and at least my ears are hearing the word “tax” less often from both sides and the term "revenues" more.

And my irritation at the more frequent use of the revenue/tax lexical blur stems in part from teaching my Business Associations I class this semester.  Specifically, I attempt to split up the “numbers” part of the class into three scaffolded “mini-MBA” chunks throughout the semester so that those of my students who lack prior knowledge of business can more easily digest the material over time.  I employ some materials from a variety of casebooks relative to economic theory and financial principles to supplement Gordon’s book, which is the main casebook in my course.  On the first day of class, I begin with a mini-lecture on basic economic theory and a quick overview of financial statements so that my many number-phobic law students (I encountered the same fear from my non-finance/accounting majors when I was a business school finance professor) can understand the the definitions and application of the basic terms that the students see in the casebook (such as assets, liabilities, debt, creditors, equity, capital, and . . . starting from the top line . . . revenues).  As I wrote on the board that day and walked through a simplified income statement, some of my students became confused as to why I had a “revenues” line and a “tax” line; as a result, I had to spend additional time desensitizing the students to the idea that the two terms were synonymous.  Because that question had never occurred in any course that I’ve taught involving that lexicon prior to this semester, my gut tells me that this confusion occurred at least in part because of the recent political dialogue that dominated the late summer.  And if second-year law students are confused by this term-blurring, how are others without backgrounds in business (mis?)understanding these lexical units?

Beyond the classroom, however, some proposed forms of revenue generation include President Obama’s “Buffet Rule” and the Senate Democrats’ plan this week (that actually revives the word “tax”) and would tax the “richest” among us.  Majority Leader Reid this week called the proposal “the millionaires’ surtax.”  But a few problems exist with these terms as well. 

First, I suppose that I don’t view people whose employment-generated income of $1 million are “millionaires,” given Social Security (eliminated at about $107,000 mark), Medicare (never eliminated), and other withholdings.  These “millionaires,” therefore, never receive $1 million, eliciting the dulcet tones of the Barenaked Ladies in the back of my mind. 

Moreover, as recently as a month ago, Dallas Cowboys’ star wide receiver Dez Bryant demonstrated that an individual who earned approximately $2.8 million from his employer in 2010 may nonetheless need to renegotiate his contract because of his financial problems.  Despite his 2010 income, is Dez Bryant rich?  Is he wealthy?  Was he even “rich” or “wealthy” on April 15th?  But who am I to argue with a prominent Nobel winner in economics who also connects individual income (individual revenue?) levels to the terms “wealth” and “rich?

My take is that having wealth or being rich occur as the result of one’s financial net worth, not one’s income in a vaccuum, as Dr. Krugman and various politicians suggest.  Extrapolating this rationale regarding taxing “wealthy” or “rich” individuals based on an individual’s income to the corporate context, demonstrates, I think, the foolishness in linking income with riches and wealth.  When analyzing the financial health of corporations, we wouldn’t expect to base the evaluation of that corporation's financial strength (i.e., a wealthy or rich corporation) on the top line alone.  In fact, we would look to a number of factors in our analysis.  For example, among others, we would: (1) adjust for accounting gimmickery (depreciation and amortization) that has little to do with a company’s actual cash flow (perhaps sufficiently similar to FICA and other withholdings that have little to do with our own personal cash flows); (2) compare that corporate cash flow generating ability with the company’s assets and liabilities — for instance, interest coverage and financial leverage — (perhaps sufficiently similar to our own personal financial net worths and pending liabilities); and then (3) compare these metrics to other companies’ (perhaps recognizing that an individual employee earning $1 million means nothing if, say, mass inflation hits and the average wage earner makes $2 million (see, e.g., the pre-stagflation enactment of the Minimum Tax and subsequent Alternative Minimum Taxes, aimed at the "wealthy" but consequently burdening far more people over time because of no inflation adjuster)).   

What’s my point?  When having debates about laws and policies, particularly regarding the financial well-being of our nation and its taxpayers, it would be nice if we could at least agree and understand (or even have a general sense of) not only what the various terms employed in the debate actually categorize and define, but also why.

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