IRS Classifies Businesses As Big Or Small

IRS research data has looked at tax statistics to compare different kinds of businesses to distinguish "small business" from other kinds of businesses.

Overview

Lots of business returns (about 20 million out of 44 million) involve trivial instances of self-employment or income from property that don't amount to a regular business establishment in the traditional sense.

Of the remaining 24,184,000 businesses, about 246,000 business entity returns (and the pass through income of their partners and shareholders) involve big businesses (defined at having income of $10,000,000 or more per year). Less than a third of big businesses by this definition are organized as C corporations. The vast majority of the rest are taxed as partnerships or S corporations (with 6,000 structured as sole proprietorships or individually owned rental income sources). S corporations are more common than C corporations or partnership taxed corporations including LLCs for these entities (although the biggest big businesses are almost exclusively organized as C corporations). The big businesses (other than C corporations) collectively had 1,240,000 owners (although many were owners with only passive business income).

In between are 23,942,000 small businesses. Of these, 4,942,000 have employees and 19,000,000 do not. Moreover, a significant number of 1,760,000 S corporations and 864,000 C corporations with employees (about half of the small businesses with employees) employ only the business owner or members of that business owner's family whose are claimed on the business owners' tax returns (although the exact number was not possible to discern from the data available in this study).

Of course, an entity that files its taxes on Schedule C, Schedule E or with a Form 1065 partnership return could actually be a limited liability companies or limited partnerships (and other data show that a very large portion in fact are limited liability companies or limited partnerships).

Thus, while there are 44,000,000 businesses in the U.S. that file tax returns each year, probably fewer than ten percent of them have non-owner employees.

The 24 million or so enterprises categorized as true businesses have about 20 million owners, of whom about 9.4 million of those owners receive 25% or more of their income from their small business (the "narrow" definition of small business owner).

There are 7,452,000 people who are shareholders or partners in entities taxed as partnerships or S corporations that constitute more than de minimus businesses (excluding spouses where both husband and wife are partners or shareholders in an entity). But, only 5,321,000 of them have active income or losses from a small business, and only 2,305,000 of them have active income or losses from a small business with employees (which in a signficant number of cases simply represents owner-employees of S corporations). The others are either owners of big businesses, rather than small ones, or have only passive income from the enterprise which is an investment rather than a vocation for them.

Most prior tax statistics, due to a lack of data, have greatly overstated the number of business returns that represent small businesses as we conventionally think of them. A great many businesses are vehicles for passive or occassional investors, and a great many small business owners are passive investors.

A significant number of typically closely held business forms typically associated with small businesses are actually "big businesses" with an alternate form of organization for tax purposes. The exclusion of big businesses from statistics related to "small business" based upon entity type, materially reduces the amount of business activity that is fairly characterized as coming from the small business sector and greatly diminishes the extent to which tax increases for high income taxpayers has an impact on small business. About 32% of a broad definition of "small business" income (and 29% of a narrow definition of "small business" income that includes only income from small businesses that makes up 25% or more of a small business owner's total income) is taxed at the 33% or 35% marginal tax rates; while about 86% of the business income of big businesses not structured a C corporations is taxed at those rates.

Big business income of about $220 billion in 2007 made up about a third of the taxable income attributable to non-C corporation businesses significant enough to be classified as businesses (the other two-thirds being "small business income").

The number of business owners who obtain active business income from small businesses signficiant enough to have employees other than the business owners themselves is quite modest, on the order of 3-4 million. In contrast, the typical business return represents self-employment but not a "firm" in the economics sense.

The Details

De Minimus Business Activity

Many business returns involve de minimus business activity or 1099 labor performed for another firm, or incidental rental activity of personal assets, that doesn't really amount to a full fledged business. In this category it found: 12,491,000 sole proprietorships, 5,043,000 Schedule E filers (e.g. rental income), 1,095,000 Schedule F filers (farm income), 797,000 partnerships, 2,000 S corporations and 1,000 C corporations.

Big Business

It also excluded "big businesses" with $10,000,000 or more of income at the enterprise level. This involved 5,000 sole proprietorships, 1,000 Schedule E filers, less than 500 Schedule F filers, 68,000 partnerships, 92,000 S corporations and 75,000 C corporations (about 246,000 big businesses in all).

This left as genuine "small businesses" 10,679,000 sole proprietorships, 4,592,000 Schedule E filers, 1,415,000 Schedule F filers, 2,232,000 partnerships (including entities taxes as partnerships like LLCs), 3,462,000 S corporations, and 1,563 C corporations.

Only a subset of these genuine small businesses had employers: 1,659,000 sole proprietorships, less than 500 Schedule E filers, 126,000 Schedule F filers, 553,000 partnerships, 1,760 S corporations and 864,000 C corporations. The number for S corporations and C corporations probably includes many employee-owners with no other employees who take wages rather than profits for tax reasons.

Partners and S Corporation Shareholders

Partnerships and S corporations partners or shareholders. There are 1,952,000 partners with active business income or losses from small business partnerships and 3,369,000 shareholders with active business income or losses from small businesss corprations. There are 1,855,000 partners with passive business income or losses from small business partnerships and 436,000 shareholders with passive small business income or losses from S coorporations.

There are 452,000 partners and 199,000 S corporation shareholders with active business income or losses from big business partnerships and S corporations. There are 508,000 partners and 66,000 S corporations shareholders with passive business income or losses from big business partnerships and S corporations.

In partnerships that are employers, there are 591,000 partners with active income in small businesses and another 193,000 partners with active income in big businesses. In S corporations that are employers, there are 1,714,000 shareholders with active income in small businesses and 170,000 shareholders with active income in big businesses.

In partnerships that are employers, there are 186,000 partners with passive income in small businesses and another 119,000 partners with passive income in big businesses. In S corporations that are employers, there are 226,000 shareholders with passive income in small businesses and 59,000 shareholders with passive income in big businesses.

READ MORE - IRS Classifies Businesses As Big Or Small

Combined U.S. Tax Burden Lowest Since 1958

Americans are paying the smallest share of their income for taxes since 1958, a reflection of tax cuts and a weak economy. . . . The total tax burden — for all federal, state and local taxes — dropped to 23.6% of income in the first quarter, according to Bureau of Economic Analysis data. By contrast, individuals spent roughly 27% of income on taxes in the 1970s, 1980s and the 1990s — a rate that would mean $500 billion of extra taxes annually today, one-third of the estimated $1.5 trillion federal deficit this year. . . . Individuals paid taxes at an annual rate of $10,549 per person in the first quarter — about the same as individuals have paid since 1990 when adjusted for inflation. Incomes have grown; tax payments haven't.

From USA Today via the Tax Profs Blog.

The top income tax rate in 1958 was 91% (where it remained from shortly after World War II until 1964). At the time, the nation was running under the recently overhauled Internal Revenue Code of 1954, which was revised, in part, because of budget surpluses run by the federal government in 1948, 1949 and 1950 (the Korean War soaked up surpluses in the following years). There was also a gift and estate tax regime in place in 1958 which was less generous (and more complicated) than the one in place as of 2011.

In contrast, the top federal income tax rate in 2011 is 35%, and for most long term capital gains and qualified dividends the top federal income tax rate is 15%. Thus, in addition to a low aggregate tax burden by historical standards, top marginal tax rates are also low by historical standards. It is also easier given the state of transportation and telecommunications technologies to relocate to a low tax state now to minimize state and local tax burdens than it was to do so in 1958.

READ MORE - Combined U.S. Tax Burden Lowest Since 1958

Obama's Deficit Reduction Proposal

President Obama called for cutting the nation’s combined budget deficit by $4 trillion over the next 12 years. . . . The president vowed not to extend tax cuts for the wealthy or to dismantle the government-run health care systems for the elderly and poor. . . . Among his proposals is a “debt fail-safe” mechanism that would force lawmakers into much more severe action if the deficit has not contracted significantly by 2014. The provision would impose across-the-board cuts on most government programs, officials said. . . . there would be $3 in spending cuts and interest savings in the president’s proposals for every $1 that comes from increased tax revenue. . . . "we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. And I refuse to renew them again.” He said people like him “don’t need a tax cut,” and added, “Not if we have to pay for it by making seniors pay more for Medicare, or by cutting kids from Head Start, or by taking away college scholarships that I wouldn’t be here without.” . . . Along with allowing the lowered tax rates to expire, Mr. Obama suggested limiting itemized deductions for the top 2 percent of taxpayers. . . . Rather than change Medicare to a voucher program, Mr. Obama proposes broad reforms that he says would save hundreds of billions of dollars over the next 12 years and more than $1 trillion in the following decade. In the speech, the president embraced some of the proposals of his own debt commission, including $770 billion worth of cuts in nonsecurity related spending by 2023. Cuts to defense programs would be increased to nearly $400 billion over the next 12 years, officials said. The president stayed away from proposing changes to Social Security, saying that it was not a significant piece of the country’s deficit problem.

From here

A look at the details shows a proposal that allocates deficit reductions by category, is big on cutting "fraud, waste and abuse," and with some notable exceptions, particularly in the area of health care cost reductions, is short on specifics, but big on having a process to get the job done.

The White House offers more details here:

the President is calling for:

•A debt failsafe that will ensure that our nation’s debt is on a declining path as a share of our economy. If by 2014, budget projections do not show that the debt-to-GDP ratio has stabilized and is declining in the second half of the decade, the failsafe will trigger an across the board spending reduction, including on spending through the tax code.
•The trigger will ensure that deficits as a share of the economy average no more than 2.8% of GDP in the second half of the decade.
•Consistent with prior fiscal enforcement mechanisms put in place by Presidents Reagan, George H.W. Bush and Clinton, the trigger should not apply to Social Security, low-income programs, or benefits for Medicare enrollees.
•The trigger should also include a mechanism to ensure that it does not exacerbate an economic downturn or interfere with our nation’s ability to respond to a national security emergency.

Discretionary non-defense spending would be cut $200 billion over 10 years ($20 billion per year) in addition to $400 billion ($40 billion per year) in the President's budget, and would cut $770 billion over 12 years.

Defense spending would be cut by $400 billion by 2023 ($33.3 billion per year) by "pushing harder to not only eliminate waste and improve efficiency and effectiveness, but conduct a fundamental review of America’s missions, capabilities, and our role in a changing world. . . .(The President will make decisions on specific cuts after working with Secretary Gates and the Joint Chiefs on the comprehensive review.) . . . in addition to the savings generated from ramping-down overseas contingency operations."

Health care cost reductions in projected Medicare and Medicaid spending over the next twelve years is to be reduced by $40 billion per year on average ($34 billion per year on average in the first ten years), by a variety of means. A blue ribbon commission would be given the power to implement cost savings proposals when health care cost inflation is above a target unless an alternative is developed by Congress.

•Building on the Affordable Care Act, the President is proposing additional reforms to Medicare and Medicaid designed to strengthen these critical programs by reducing waste, increasing accountability, promoting efficiency, and improving the quality of care, without shifting the cost of care to our seniors or people with disabilities.
• . . . This framework includes . . . an amount sufficient to fully pay to reform the Medicare Sustainable Growth Rate (SGR) physician payment formula while still reducing the deficit.

The President’s framework proposes specific reforms to strengthen Medicare and Medicaid over the long term, including: . . .

The President’s framework would strengthen the Independent Payment Advisory Board (IPAB) created by the Affordable Care Act. . . . Under the Affordable Care Act, IPAB analyzes the drivers of excessive and unnecessary Medicare cost growth. When Medicare growth per beneficiary exceeds growth in nominal GDP per capita plus 1 percent, IPAB recommends to Congress policies to reduce the rate of growth to meet that target, while not harming beneficiaries’ access to needed services. Congress must consider IPAB’s recommendations or, if it disagrees, enact policies that achieve equivalent savings. If neither acts, then the Secretary of Health and Human Services would have to develop and implement a proposal to achieve the savings target.
•Set a new target of Medicare growth per beneficiary growing with GDP per capita plus 0.5 percent. This is consistent both with the reductions in projected Medicare spending since the Affordable Care Act was passed and the additional reforms the President is proposing.
•Give IPAB additional tools to improve the quality of care while reducing costs, including allowing it to promote value-based benefit designs that promote proven services like prevention without shifting costs to seniors.
•Give IPAB additional enforcement mechanisms such as an automatic sequester as a backstop for IPAB, Congress, and the Secretary of Health and Human Services.

. . . Under current law, States face a patchwork of different Federal payment contributions for Medicaid and the Children’s Health Insurance Program (CHIP). The President’s framework would replace the current complicated Federal matching formulas with a single matching rate for all program spending that rewards States for efficiency and automatically increases if a recession forces enrollment and State costs to rise.

. . . The President also supports reform of Medicaid to incentivize more efficient, higher quality, care for high-cost beneficiaries, including those who are eligible for both Medicaid and Medicare. These nine million beneficiaries comprise 15 percent of Medicaid enrollment but consume nearly 40 percent of total Medicaid spending.

. . . . Together with employers, States, hospitals, physicians and nurses, the Administration has launched a new public-private partnership called Partnership for Patients that will help improve the quality, safety and affordability of health care for all Americans. The two goals of this new Partnership are: preventing patients from getting injured or sicker while they are in the hospital and helping patients heal without complication. Achieving the initiative’s goal would mean more than 1.6 million patients will recover from illness without a preventable complication, reducing costs by up to $50 billion in Medicare and billions more in Medicaid over the next 10 years.

. . .. limit excessive payments for prescription drugs by leveraging Medicare’s purchasing power – similar to what was called for by the bipartisan Fiscal Commission. It would speed up the availability of generic biologics, and prohibit brand-name companies from entering into “pay for delay” agreements with generic companies. And, it would implement Medicaid management of high prescribers and users of prescription drugs.

. . . clamp down on States’ use of provider taxes to lower their own spending while not providing additional health services through Medicaid; recover erroneous payments from Medicare Advantage; establish upper limits on Medicaid payments for durable medical equipment; and take other actions to improve program integrity.

Non-health care mandatory spending would be cut by $360 billion over 12 years ($30 billion per year) through "measures to reform agricultural subsidies, shore up the federal pension insurance system, restore solvency to the federal unemployment insurance trust fund, and enact anti-fraud measures. . . . The Fiscal Commission and other bipartisan efforts have put forward additional proposals that should be considered as part of a comprehensive deficit reduction effort to meet this target. Reforms to mandatory programs should protect and strengthen the safety net for low-income families and other vulnerable Americans."

A key piece of the plan is tax increases:

He also supports efforts to build on the Fiscal Commission’s goal of reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit. Reform should be designed to ask more of those who can afford it while protecting the middle class and promoting economic growth. . . . the President is continuing his effort to reform our outdated corporate tax code to enhance our economic competitiveness and encourage investment in the United States. By eliminating loopholes, reducing distortions and leveling the playing field in our corporate tax code, we can use the savings to lower the corporate tax rate for the first time in 25 years without adding to the deficit.

He does not include Social Security in the package:

The President does not believe that Social Security is a driver of our near-term deficit problems or is currently in crisis. . . . The President in the State of the Union laid out his principles for Social Security reform which he believes should form the basis for bipartisan negotiations that could proceed in parallel to deficit negotiations:

•Strengthen retirement security for the low-income and vulnerable; maintain robust disability and survivors’ benefits.
•No privatization or weakening of the Social Security system; reform must strengthen Social Security and restore long-term solvency.
•No current beneficiary should see the basic benefit reduced; nor will we accept an approach that slashes benefits for future generations.

Analysis

The President is a bit light on taxes to close the deficit gap (a 50-50 split between taxes and spending cuts, rather than a 25-75 split would have been better). The defense cuts are overly modest, because they are arbitrary and don't spell out cost saving changes in the scope of our missions and procurement approaches. The non-discertionary savings cuts seem fairly high given the many rounds of cuts that they have been subjected to already. The "other mandatory spending" cuts seem appropriate.

The cuts to health care are about right in magnitude but assume cuts are possible in spending without really demonstrating that it is possible to sensibly bend the curve on health care cost inflation, leaving that problem to experts who may have little more of an idea about how to do it than the politicians do.

Thumbs up:
* Repeal of Bush Tax Cuts for those making more than $250,000 a year.
* Reducing tax expenditures.
* "reform agricultural subsidies, shore up the federal pension insurance system, restore solvency to the federal unemployment insurance trust fund, and enact anti-fraud measures."
* "clamp down on States’ use of provider taxes to lower their own spending while not providing additional health services through Medicaid; recover erroneous payments from Medicare Advantage"
* "limit excessive payments for prescription drugs by leveraging Medicare’s purchasing power. . . speed up the availability of generic biologics, and prohibit brand-name companies from entering into “pay for delay” agreements with generic companies. And, it would implement Medicaid management of high prescribers and users of prescription drugs."
* Defense spending cuts.

Neither Here Nor There:
* "incentivize more efficient, higher quality, care for high-cost beneficiaries, including those who are eligible for both Medicaid and Medicare." But how?
* "launched a new public-private partnership called Partnership for Patients that will help improve the quality, safety and affordability of health care for all Americans." How will this happen?
* "IPAB recommends to Congress policies to reduce the rate of growth to meet that target, while not harming beneficiaries’ access to needed services." What can they recommend that would meet that standard?
* Discretionary non-defense spending cuts. Where?

Thumbs down:
* Lowering corporate income tax rates.
* Limiting itemized deductions based on AGI.

READ MORE - Obama's Deficit Reduction Proposal

Scott Adams On College Curriculums

I understand why the top students in America study physics, chemistry, calculus and classic literature. The kids in this brainy group are the future professors, scientists, thinkers and engineers who will propel civilization forward. But why do we make B students sit through these same classes? That's like trying to train your cat to do your taxes—a waste of time and money. Wouldn't it make more sense to teach B students something useful, like entrepreneurship?

From here, by Scott Adams, of Dilbert fame.

FWIW, business majors at Miami University of Oxford, Ohio have to take a semester of calculus, or at least they did when I was a part-time student there, and I had something of Adams' view of that requirement for them.

The theory was that calculus was necessary for them to understand economics, but, in practice, it was simply a hurdle to keep out lots of people who probably could have been very successful in business but were weak in high level quantitative skills, or simply intimidated by the requirement.

The reality is that nobody in the business world ever does calculus (or for that matter trig, which is often considered a pre-requisite for calculus), and that even key calculus concepts in economics, which can be taught in a non-mathematical way, aren't used outside a very narrow group of people who also need advanced economics, in the business world. Plenty of business lawyers have trouble doing compound interest calculations (although they sometimes resort to algebra), and tend to get uncomfortable when non-linear equations come into play.

Also, FWIW, my cats always filed their tax returns when required to do so as a result of their taxable income (which just happened to be never).

READ MORE - Scott Adams On College Curriculums

Short Takes

* Spinal fluid biomarkers can distinguish between people suffering from Lyme disease (a tick carried infectious agent), Chronic Fatigue Syndrome (probably a viral condition with a long latency period), and uninfected individuals. This is important first, because Lyme disease and Chronic Fatigue Syndrome can present with similar symptoms, and second, because diagnosing Chronic Fatigue Syndrome and even finding ways for sufferers to convince people that they have a genuine biologically caused disease rather than simply being lazy, is a major challenge.

* The Kalash people in a remote part of the Hindu Kush Mountain range are one of the most genetically distinct populations in the world. When one has a computer break the world's autosomal genetics into the most distinct possible seven clusters, the clusters that you get are: African, European, South Asian, East Asian, Papuan, indigenous American and Kalash.

Their Y-DNA haplogroups (from a sample of about 43 people) are as follows:
L3a 22.7% (most common in Pakistan)
H1* 20.5% (most common in South Asia)
R1a 18.2% (most common in Eastern Europe and South Asia)
G 18.2% (most common in Southern Europe, Anatolia, Druze, Brahui and Pashtuns)
J2 9.1% (most common in Anatolia and where Indo-Europeans have had an impact)
R* 6.8% (most common in Thailand, Indonesia, the Phillipines and Australian aborigines)
R1* 2.3% (most common in indigenous Americans)
L* 2.3%. (most common in South Asia)

Their mtDNA haplogroups (from a sample of 44 people) are as follows:
pre-HV 22.7% (most common in Socotri, North Africa, Iran and Arabia)
HV* 4.5%
H 4.5% (the modal haplogroup of Europe)
U2e 15.9% (most common in South Asia)
U4 34.1% (most common in Central Asia)
U7 2.3% (most common in South Asia)
J1 2.3%
J2 9.1%
T* 4.5%

They speak a language from the Dardic branch of the Indo-European family (one of the more basal of the Indo-Iranian part of the late language family), and practice a polytheistic religion.

They are between areas that areas typically Central Asian and areas that are typically South Asian in genetic makeup. Their traditions place them as a lost contingent of Alexander the Great's army, but given their uniparental markers, the genetic makeup, their particularly contingent would have had to have picked up members mostly from the area from Anatolia to the Hindu Kush. Their Dardic language is also an anomaly for an isolated community claiming to descend from the Greeks, they lack common distinctively Greek uniparental markers, and their religion is close to Hinduism than it is to Greek pantheistic beliefs. An origin a millennium or two earlier (if not much more ancient) would seem to be a better fit for the facts.

Given their autosomal makeup, any new arrivals in the region from somewhere would have had to either admixed substantially with a relict population that was largely wiped out or overwhelmed genetically elsewhere such as Europe and Central Asia's pre-Neolithic hunter-gatherers, or South Asian hunter-gatherer populations disrupted by Munda, Dravidian, and Indo-Aryan populations respectively. Alternately, they might have undergone significant selectively driven evolution analogous to that found in Tibetans as a result of living at high altitudes. The case for incorporation of a relict Central Asian hunter-gatherer population is most strongly supported by the modal mtDNA haplogroup U4, which was one of the second most common types found in ancient DNA from Central Asian hunter-gatherers.

* There are a couple of kinds of invasive ants that have an unusual reproductive system. Future queens are clones of the current queen. Future drones (reproducing males) are clones of their fathers. Workers, who do not reproduce, have a mix of the queen and the drone's genes similar to that of ordinary sexually reproducing animals. (I'll try to find a reference later).

* As a thought experiment, it is interesting to consider would it would look like to have a society where a human or near human species with reproduction system in which only half of women had children, but they had an average of four and a half surviving descendants, assuring the replacement of the species. There are several different permutations of this that would be possible. Half of children could be gay. Half of the children could be infertile (perhaps clones of their same sex parent, or perhaps surgically or chemically neutered). Half of females could be in "harems" like those of alpha dominated gorillas or lions, and only alphas might have the pheromones necessary to trigger reproduction. One imagines that such a society might resemble the Byzantine courts.

Alternately, one could imagine a society where half the women were in a social class that averaged surviving three children, while the other half the women were in a social class that average one surviving child. A study of the vital statistic of a Bronze Age society in Spain based on its burials and the inferred diets of the dead, which showed a minority elite with a high protein diet surviving at much greater rates than a "middle class" (perhaps soldiers) or an even more deprived underclass (perhaps servants or slaves), with this kind of demographics.

* There is a tendency in Anglo-American political economy to imagine a society with strong property rights and weak governments as a "state of nature" against which political action should be measured. But, this sense is to a great extent ahistorical, particularly in farming and more urbanized societies. The oldest Minoan Linear A script is preserves administrative records of ration distribution systems, basically welfare states, that had strong parallels in Sumeria, Egypt, the Hebrew Bible and Rome - i.e. all of the major civilizations of the Mediterranean of the Copper Age, Bronze Age and Iron Age, and arguably via feudal societies into to the Middle Ages. There also seems to be evidence that these were command economies in which soldiers played an integral economic part, perhaps along the lines of the large role played by military owned enterprises in the civilian economies of modern Egypt and China. Likewise, fedual societies were basically agrarian economies run on a military footing with involuntary serf labor.

Decentralized market driven economies with contract rights and private property as an important organizing principle doesn't really emerge as the predominant component of the economy until after the Middle Ages end in Europe.

* NPR made some notable observations about the Middle Eastern oil states that are experiencing revolutions at the moment. Generally speaking, these states don't impose significant taxes on non-petroleum activities. Oil money funds government operations including strong military forces and a significant welfare state. This helps explain why the oil rich states of the Middle East have managed to survive while being so undemocratic. Historically, constitutional monarchy and republican government in cases like Rome, England and France have their roots in the need of a monarch to obtain consent of representatives of people who were going to be required to pay taxes to support the state. Taxes are the price of democracy.

* Some of the dates assigned to remains used to argue for an early presence of modern humans in Europe engaged in relatively primative economic industry have been revised upon further examination to more recent dates. Remains previously touted as more than 30,000 years old, which had "long been considered to be the earliest evidence of the remains of modern Homo sapiens anywhere in Europe" in Southern France and Southwest Germany have been re-examined within the last decade and determined to have actually been less than 10,000 years old.

This also influences how one conceptualizes the Chatelperronian lithic industry in Europe, which in turn relates to how smart we think the Neanderthals were. The prior and more primative Mousterian industry is clearly associated with Neanderthals. The industry that follows the Chatelperronian is associated clearly with modern humans. The Chatelperronian has traditionally been associated with Neanderthals as well, but some researchers have argued for it as "an independent development by Neanderthals (d'Errico et al. 1998)" while others "see the Chatelperronian as the result of the acculturation of Neanderthals by modern humans (Mellars 2005)." People care, because if the Chatelperronian was an independent Neanderthal invention, then maybe they were pretty smart and advancing their technology just as the humans did when climate conditions improved. In contrast, the opposite extreme would be to argue that admixture of modern human traits into Neanderthal populations is the only reason that they were able to innovate as much as they did even in the relatively primate Chatelperronian era. Between the two extremes is the possibility that the Neanderthals were capable of mimicing modern human Upper Paleolithic lithic industries, even if they would have been hard put to develop it themselves.

John Hawks, approaching the same underlying question of Neanderthal intelligence from another angle wonders if the ability of people born blind to repurpose their visual centers for language doesn't suggest that language is less hard wired, and hence, less likely to require genetic evolution, than has been often assumed: "Kaschube and colleagues showed that the apparent developmental robusticity of the visual cortex could be maintained by simple rules of self-organization. It doesn't take specialized genetic control to create a visual cortex, it just takes information structured in the right way to flip a few genetic triggers" and the right kind of environmental exposures. As he explains:

The blind subjects tell us that the ground for language processing is almost as fertile elsewhere in the cortex. Many brain areas have the genetic equipment to recruit and organize neurons into useful circuits for language processing. Language development is developmentally robust because it can rely on a rich language environment, not because of genetic standardization. The basic problems of language evolution must be explained by showing how robust language communities emerged. I don't preclude genetics, far from it -- weaker language environments may have become stronger because of evolutionary change. But that evolution must have been substantially domain-general, because language processing is not specifically canalized by genetics.

I like this scenario because it means we shouldn't be looking for lots of language-specific genetic changes in the last few hundred thousand years. The Neandertal genome suggests that there may not have been any at all.

My second speculation: If the language environment determines the instantiation of language processing, then brains must be substantially different in the way they process language. Children experience different language environments -- not only different languages, but different microenvironments within language communities. Only strong genetic controls could canalize brains despite the differences in their language environments. In brains where language processing emerges readily in the visual cortex, genetic controls cannot possibly synchronize brains in the face of environmental variation.

* A case is being made that the strong genetic discontinuity between South Asia and Southeast Asia, despite the lack of an obviously inpenetrable geographic barrier is attributable to the effects of the Toba volcano erruption, that while not wiping out the modern human population in South Asia, did seriously disrupt and reshape it:

Oppenheimer . . . [suggests] that the prolonged ash cloud could have devastated all or most of India, especially both M and N related populations in the east and south, closest to the volcano. He hypothesizes that this area could then have been repopulated by M dominated groups immigrating from the east, who might then have spread, in a cline, to the rest of the subcontinent, while N-related groups to the west could have repopulated India from that region. This could have left India populated by more recent M and N hapolotypes than those found farther east[.]

He also associates this event with the distribution of tone languages which are found in Africa, "scattered among so many indigenous peoples of Southeast Asia, southern China, Indonesia, Taiwan, the Philippines, and Melanesia" and in "northernmost reaches of the Indus valley . . . "would have been a likely spot where a branch of the Out of Africa migrants, who could have broken from the main group to travel north along the banks of the Indus, might have been able to survive the effects of Toba with their African traditions more or less intact. If tone language was part of their HMC inheritance, then that could explain the prevalence of tone language in this area today." Suggested musical linkages that might be legacies of this connection are discussed here.

READ MORE - Short Takes

Political Economy Quote of the Day

In short, what the economy could use is a debate over medium-term entitlement and tax changes. Instead what it's getting is a debate over near-term non-security discretionary spending.

From Tom Gallagher via Brad DeLong.

I also think we need a debate over the medium-term defense budget and note that while some entitlements are out of whack, that Social Security is not one of them. Medicare and Medicaid are the principal out of control entitlement programs. But, at any rate, it is clear that Republicans Congress and the President aren't addressing the real causes of the deficit, and that the voters don't really care.

A case in point, the R&D tax credit, a dreadfully complex part of our tax code that costs about $7 billion a year.

I was dismayed, for example, to learn today that the President's budget proposed a 20% increase in the research and development tax credit which he also proposes to make permanent. I was once a fan of it (who doesn't like new technology), but increasingly clear evidence from media accounts makes clear that it is a key factor driving the low effective corporate tax rates of some of the nation's biggest businesses, and an important cause of disparities across industries in effective corporate tax rates, is the R&D tax credit.

The R&D tax credit is at the heart of what is wrong with our corporate income tax; it is not a solution to be touted as a success and expanded. The immense tax expenditure of the R&D tax credit would be better spent as grant money than on the research ventures it is devoted to now. We already have a market driven government incentive for research and development. It's called intellectual property rights.

The R&D that needs government subsidies in a world with strong intellectual property rights is the kind that is not now and will not in the short run be profitable, like basic research and medicines that help those who can't afford to pay for them.

READ MORE - Political Economy Quote of the Day

Fed Taxes At 60 Year Low; Colorado Taxes Low

With all the rhetoric that the Tea Party has generated about controlling growth in government at the federal government level and in Colorado, you might think that taxes are unusually high. But, this isn't the case. Federal taxes are at a sixty year low and Colorado taxes are well below the national average.

Also, while the federal government is running big deficits, Colorado's state budget has to be balanced every year.

Federal Taxes Are At A Sixty Year Low

Federal taxes are currently a smaller share of the nation's economy than they have been at any time since 1950 at 14.8% of GDP (compared to 17.5% of GDP during George W. Bush's last year in office). CBO projections that federal tax revenue will increase ignore the extension of the Bush tax cuts and other tax cuts passed at the end of 2010. (Taxes during World War II were also much more onerous than they are today.) The average tax burden of the median family as a percentage of income is also the lowest it has been in many decades (at least as far back as 1955).

The top marginal tax bracket isn't quite at an all time low, although it is close. But, a large share of the income of the highest income Americans consists of tax exempt municipal bond interest, and qualified capital gains and dividends that are taxed at a top rate of 15%. This rate is also paid on carried interest income of private equity fund managers and the stock option income of top executives in big businesses. The 400 highest income Americans paid an average tax rate of 16.6%, down from 30% in 1995.



Thirty-six percent of federal tax return filers owe no taxes, a record high. Forty-seven percent of American households owe no federal income taxes.

Federal estate taxes are lower than they have been in any year since at least 1934, except 2010 when they were suspended for a year.

Federal taxes are generally progressive.

Quintile - Combined 2010 Federal Taxes (incl. corp. tax incidence) as % of Income
Bottom 0.0%
Second 7.3%
Middle 14.1%
Fourth 18.4%
80th-95th Percentile 22.3% (calculated personally from information in source)
95th-99th Percentile 25.0%
Top Percentile 26.0%
Top Tenth of A Percent 27.7%

Note that individual tax rates for the upper middle class are higher than those of the highest income earners, because the upper middle class receives mostly earned income which is taxed at a higher federal rates than the investment income that makes up most of the income of the highest income earners.

Corporate income taxes which indirectly tax cprporate shareholders, significantly mitigate this effect. Corporate income taxes are one of the most progressive taxes as applied in the mix of federal taxes, even moreso, in practice than the estate tax, on average. Corporate income taxes provide just under a third of all federal taxes whose incidence falls on the top 0.1% of income earners, while in 2011 (in which we have a restored by lenient estate tax), estate taxes will account for just 2.5% of that top 0.1% of income earners' tax burden.



If the secret to economic growth is low taxes, our economy should be in great shape. Of course, in reality low taxes are, if anything, negatively correlated with economic growth and not closely related to it in any case, and our economy is still in pretty dismal shape.

How High Are Corporate Tax Rates In Practice?



But, what about the horrible job killing corporate income tax with a top marginal rate higher than most of our developed world peers? (The average corporate tax rate in the 34 O.E.C.D. nations is 26 percent.)

Well, it isn't as terrible as it seems. The top marginal rate on the books is 35 percent. But, most corporations don't actually pay those rates, due to a variety of tax reduction strategies.

Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years. . . . Thirty-nine of those companies paid a rate less than 10 percent.

The corporation that owns Carnival Cruise lines pays corporate tax rates of 1.1% on its profits.

Over the last five years, on the other hand, Boeing paid a total tax rate of just 4.5 percent, according to Capital IQ. Southwest Airlines paid 6.3 percent. And the list goes on: Yahoo paid 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent.

Some corporations do pay significant corporate taxes, although their average amount paid to all levels of government combined is still far below the top federal rate alone:

The average total tax rate for the 500 companies over the last five years — again, including federal, state, local and foreign corporate taxes — was 32.8 percent. Among those paying more than the average were Exxon Mobil, FedEx, Goldman Sachs, JPMorgan Chase, Starbucks, Wal-Mart and Walt Disney.

There are wide differences between industries, (see also here) with the R&D tax credit explaining a large part of that discrepency.

As a result of [the drug industry's credit for research] and other tax breaks the pharmaceutical industry pays just 5.6 percent of its profits in taxes. This puts it just above the biotech industry, which pays 4.5 percent of its profits in taxes.

Tax burdens are also very low for the motion picture industry.

Hindsight has cast doubt on the benefits of low corporate income tax rates. The two lowest corporate income tax rates in the OECD are those of Ireland (12.5%) and Iceland (15.0%) (the U.S. rate, based on average state levies is deemed to be 39.1%). What happened to them? Ireland is in a state of utter economic collapse and Iceland went bankrupt. Also at the low end in corporate income tax rates is Greece (25.0%) which has just thrown the European economy into a tizzy as it had to be bailed out. Few American policymakers are hoping that our economy becomes more like that of Turkey (20.0%) either.

Germany, whose economy is generally viewed as being one of the healthiest in Europe has a top corporate tax rate of 30.18%. The only countries with higher corporate tax rates are Japan (39.54%), the U.S., France (34.43%), Belgium (33.99%) and Canada (31.32%), and many of those countries have less generous tax loopholes than the United States.

Also, there are multiple ways to tax corporate income. While the U.S. has high corporate income tax rates relative to other OECD countries, it has low long term capital gains tax rates that partially compensate for its corporate income taxes, and many OECD countries have wealth taxes that are like real property taxes but apply to a person's entire net worth, thus imposing a significant tax burden on people with large stock holdings that is not present in the United States.

Colorado's Tax Rates Aren't High

Are Colorado's tax rates high? No.

Colorado's overall tax rates are 33rd in the nation, i.e. well below average, according to one study, and 34th in the nation, according to another study.

Thirty-one percent of tax filers in Colorado owe no taxes.

Colorado's average combined state and local sales tax rate is 6.98% (2.9% state and an average of 4.08% local), which ranks 24th in the nation.

Colorado is one of twenty-eight states without a state level estate or inheritance tax. In 2006, there were 210 estates in Colorado (0.7% of all decedents estates in Colorado) that owed federal estate taxes. In 2011, the number will be considerably smaller as the estate tax exclusions have been increased.

Colorado's property tax rates on residences as a percentage of home value are the 39th lowest in the nation. (They are 36th lowest relative to state income.)

Colorado's corporate income tax is a smaller share of its total business tax collections than all but eight other states (five of which: Nevada, Ohio, Texas, Washington and Wyoming, don't have a corporate income tax). The combined federal and Colorado top corporate tax rate is 37.8% which is lower than every state but Alabama, Texas, Nevada, South Dakota and Wyoming. Nevada's lack of a corporate income tax hasn't prevented that state from having one of the most troubled economies in the entire United States.

Colorado's overall mix of state and local taxes is typical for the United States, and has changed very little in the last decade. This mix of taxes in Colorado is quite regressive as of October 2009:

Quintile - State and Local Taxes as a Percentage of Income
Bottom 9.0%
Second 9.0%
Middle 8.2%
Fourth 7.5%
80th-95th Percentile 6.3%
95th-99th Percentile 5.4%
Top Percentile 4.2%

Colorado's overall state and local tax system is regressive primarily as a result of its reliance upon sales and excise taxes. The combined effect of Colorado's income and property taxes is close to, but not exactly, flat.

Approximately what is the combined federal and state and local tax rate by income level in Colorado?

Quintile - Combined Taxes From All Sources as % of Income In Colorado
Bottom 9.0%
Second 16.3%
Middle 22.3%
Fourth 25.9%
80th-95th Percentile 28.6%
95th-99th Percentile 29.4%
Top Percentile 30.2%

Thus, when taxes from all levels of government are considered in Colorado, the overall effect is progressive.

Do low state tax rates lure high tech businesses? No.

READ MORE - Fed Taxes At 60 Year Low; Colorado Taxes Low

The Lame Duck Session Legislative Frenzy

The lame duck session of Congress, with just four more days to go after today (or so) has been busy.

In addition to passing a major tax bill covering the next two years (and extending extended unemployment benefits for another thirteen months), it has passed Don't Ask, Don't Tell repeal (i.e. legislatively permitted gays in the United States military), passed a law prohibiting the use of false caller ID numbers to solicit personal information, is making progress in passing food security legislation, has passed a defense appropriations bill and appears to be well on its way to passing the rest of the appropriations bills. There seems to be a good chance that the START nuclear arms treaty will still be passed, and that there may yet be a few judicial nominees confirmed before the lame duck session ends. Diana DeGette's Stem Cell research bill seems less likely to pass.

The failure of Republicans to acknowledge that any new revenues are needed, and to get more in the way of tax cuts than they had even sought, combined with a failure of anyone to put any meaningful defense spending cuts on the table in this year's defense budget, seems to insure that the next two years have record deficits. President Obama's deficit commission, whose proposals were mostly politically impossible, and unwise from a policy or social justice perspective, made few productive contributions to that debate. Their report, which secured consensus around none of its proposals, was dead on arrival in Capital Hill.

Defeated, despite support from the President, 55 Senators (it was opposed by 41 Senators filibustering the measure), and a majority of members of the House of Representatives, was the DREAM Act, which would have made U.S. citizenship available to young adults assimilated into U.S. society who are children of illegal immigrants who brought them to the U.S. who commit to higher education or military service. Given that opposition to any form of loosening of immigration policy has become highly partisan, with Republicans on the anti-immigration side of the debate, and the timid, consensus oriented ambitions of the DREAM Act, any form of compromise on immigration legislation once Republicans gain control of the House of Representatives in January seems doomed until 2013 at the earliest.

Shutting our doors to increased legal immigration is surely harmful to our economy, and a Republican policy favoring draconian efforts to close the border to illegal immigration and deport ten million or so undocumented aliens in the United States (and their U.S. citizen families), which is impracticable, inhumane and would be devistating the economy if it happened, leaves the nation in a hypocritical limbo.

The DREAM Act isn't the only bill with strong Democratic support that failed to become law. The Employee Fairness Act, a major pro-union legislative initiative stalled and died. The President's campaign promise to shut down Guantanamo Bay went unmet, and he has largely toed the line of the Bush Administration with regard to war on terrorism policies, despite some half-hearted efforts at reforms.

Defeats of multiple nominations and bills with healthy majority support in the U.S. Senate by Republican minorities willing to use every procedural tool to say no to the Democratic agenda (even bills and legislative ideas they had previously proposed themselves) has also highlighted the problem of excessive minority power in that body, but so far, has not mustered enough political will to end the filibuster and other anti-majoritarian institutions in the Senate.

Without reform, the President may even have to resort to recess appointments to put people in place to get the government's work done.

Some bills, including the tax bill, passed only with major defections by Congressional Democrats, with predominantly Republican support. It isn't clear that this has won President Obama any long lasting credit from the Republican base which has villified him, contrary to the facts, as a socialist, gun hating unAmerican. But, his swing to the right politically may cost him the enthusiastic support of the Democratic base in 2012, although the nomination of a fire breathing Tea Party conservative as a Republican nominee could change that political reality.

It also isn't clear if House Republicans who campaigned vigorously against even politically popular parts of the American welfare state, as well as the health care reform bill, will receive cooperation from President Obama in doing so. His commitment to the Democratic agenda on this issue is not at all clear.

The last minute defense appropriations bill managed to avoid becoming a forum for discontent over the course of the war in Afghanistan, now that the war in Iraq is almost over. But, Democrats in Congress are increasingly growing uneasy about the U.S. commitment to Afghanistan, which has become the longest war in U.S. history, and Republicans aren't keen to support the President in general, despite generally more bellicose attitudes towards foreign affairs. A heated debate over U.S. policy in Afghanistan is sure to resurface in the next session of Congress.

As we head into a period of divided government, the Republicans have a mostly fiscal agenda that is mathematically impossible and a visceral opposition to anything proposed by the President or any Democrat regardless of its policy merits, while the Democrats simply don't have much of a plan, period despite being in a state of remarkable ideological consensus within the legislative party, due to the defeat of many Congressional Blue Dog Democrats, including both of the Blue Dogs from Colorado.

It is hard to see much on the legislative horizon but gridlock, and we will be lucky if there is enough consensus to even pass the appropriations bills necessary to keep the government running in 2011 and 2012.

House Democrats, rendered impotent and irrelevant as a minority in Congress in a house that lacks rights for the minority party, will have plenty of time to consider these matters while their bills are shot down in committee and the Republicans embark on the agenda of trying to make the administration look bad because they have no substantive power to pass their own agenda without Democratic consent.

The reduced ranks of Democrats in the Senate, under the less than impressive tactical and stategic leadership of Harry Reid, seem sure to cave further to Republican demands in every case where the President doesn't inject them with backbone, and the President seems less than enthusiasic about holding his ground. The President's vision for our nation's future, which seemed so clear on the campaign trail, appears to have grown cloudy.

Of course, a weak economy helps none of this, and 2011, at least, looks more likely to be another year of stagnation than a year of vigorous economic recovery. The stimulus effects claimed for the latest round of tax cuts seem unlikely to materialize, because measures like speeding up depreciation deductions have never had much of a stimulative effect on the economy in the past. Perhaps 2012 will be better, but I am not holding my breath for a strong economic recovery any time soon. We will have high unemployment and a GDP smaller than it was when the financial crisis struck for most or all of the coming year.

There are a few bright spots left. Financial regulation reform bill regulations are still waiting to be adopted and could secure positive policy changes without further legislative action. The failure of Don't Ask, Don't Tell repeal to wreck havoc in the United State military will discredit anti-gay rights doomsayers again. Proposition 8's court defeat is likely to be upheld by the 9th Circuit Court of Appeals, bringing gay marriage to our nation's largest state, and new IRS regulations have brought back door equity of same sex couples of California.

U.S. Sentencing Commission proposals that are making progress could trim some of the most unreasonable criminal sentences in the federal prison system, and a general Republican distrust of the federal government and desire to cut federal spending and employment may put pressure on Congress to reduce the federal role in law enforcement, which in the drug war, in particular, has mostly been a negative one.

The "when the dust settles" estimates of the costs of the finanicial crisis bailouts has fallen all through the later part of 2010, and is likely to fall a bit further in 2011, leaving those decisions as less of an albatross around the adminstration's neck. And, the divestment of U.S. interests in institutions bailed out in exchange for equity in the financial and automotive sector will also allay mostly misplaced fears of a creeping policy of nationalizing industry.

A retreat from the brink today by North Korea, in the face of diplomacy by New Mexico Governor Bill Richardson, suggests that its leadership may still be crazy like a fox, rather than merely crazy. There are some hints from South of the border, that Mexico's drug war may finally be turning a corner, and also that some of the other epidemics of Latin American crime from Venezula to Brazil which aren't so directly related to the drug trade may be running their course. Afghanistan may be wobbly, but time and again, there are reports of major unanswered blows to the Taliban leadership in Pakistan and setbacks for the Taliban in Afghanistan. Perhaps Afghanistan's civilian leadership is simply too corrupt and incompetent to run their country on its own, but there does seem to be some indifferent progress. While there are still embers burning in the various foreign affairs fires that smolder around the world, any really major crisis would have to pretty much come out of nowhere.

READ MORE - The Lame Duck Session Legislative Frenzy

New Tax Law Signed

An omnibus tax law that extends the Bush tax cuts for all for the next two years, and also extends host of other tax breaks was signed by President Obama today. The law also continued the extended unemployment benefits currently in place for another thirteen months. Usually, unemployment benefits at end after six months of benefits. Under the extended law, they end after two years of benefits (or less, depending on the local unemployment rate in a state).

From a public finance perspective, it is profligate, continuing to drive up budget deficits to record high levels. But, it does provide some ability to know what tax treatment will apply to events happening in 2011 and 2012, just two weeks before those tax years begin.

READ MORE - New Tax Law Signed

The Other Estate Tax Revisited

Congress is close to a deal that will make the estate tax for rich heirs more lenient than it has ever been since it was enacted. In 2006, that tax generated $1,000,000 revenue per return with tax owing, was paid by about 30,300 estates per year, and left heirs $2,000,000 of assets tax free and never taxes more than 46% of the entire estate.

There has been nary a peep, however, about the other estate tax. If you aren't a lawyer, financial planner or nursing home administrator, or have a family member who has been affected by it, your probably don't even know that it exists.

The other estate tax, which no one talks about, generates $1,000 of revenue from each of about 400,000 estates per year, seizes virtually all of the property in the estate, and applies only to those with less than about $36,000 a year of income and no assets more substantial than a modest home (usually with well under $200,000 of equity) and car, in their final years.

The estate tax cuts about to be passed by Congress this year are orders of magnitude greater than the total amount recovered with the other estate tax, the one paid by the working class and middle class called the Medicaid Estate Recovery System.

About half of all nursing home costs in this country come from Medicaid, about 8 million of whom are in nursing homes at any one time. To be eligible for the program you have to have income insufficient to pay for nursing home care at a regulatorily determined average state cost of nursing home care, have almost no cash on hand, and very few other assets other than equity in a home where a spouse lives or to which you intend to return and equity in a car you use to go to medical visits or that a spouse not in a nursing home uses. Gifts you make in the five years before you need nursing home care can disqualify you from the program.

Nationwide, the estate recovery program recovers only about $362 million a year, about 1% of the collections of the estate tax and only about 0.8% of Medicaid nursing home spending. But, this tax affects 13 times as many people as the estate tax and deprives them of any and all of the definitionally very modest inheritances (typically a family home and a car and some ordinary household goods) that they might otherwise have received.

Since it affects so many people, the estate recovery program drives as much or more legal work to deal with it than the estate tax for rich people does.

If the people really think that death taxes of broad applicability are a bad idea, this program should vanish and soon.

READ MORE - The Other Estate Tax Revisited

More Detail On Estate Tax Deal

The tax legislation that survived a cloture vote in the U.S. Senate yesterday makes clear some details of the (near and dear to my heart as a lawyer for whom a substantial portion of his practice is tax conscious estate planning):

Via RIA (a tax publisher):

The 2010 Tax Reform Act sets the exemption at $5 million per person and $10 million per couple and provides for a top tax rate of 35% for estate, gift, and generation skipping transfer taxes through 2012. The exemption amount will be indexed beginning in 2012.

The changes will be effective Jan. 1, 2010, but executors will be allowed to make an election to choose no estate tax and modified carryover basis for estates arising on or after Jan. 1, 2010 and before Jan. 1, 2011. Also, a $5 million generation-skipping transfer tax exemption and zero percent rate will apply for the 2010 year.

Effective for estates of decedents dying after Dec. 31, 2010, the 2010 Reform Act will allow the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse.

For gifts made after Dec. 31, 2010, estate and gift taxes will be reunified [i.e. the gift tax exemption will go from the $1,000,000 per lifetime per person it has been under EGRTTA to $5,000,000.]

Despite the indexing provision, presumably there for convenience purposes only in the event that this is extended or made permanent, it appear that the gift and estate tax exemptions will revert to $1,000,000, and the rates will return to graduated rates from 37% to 55% with a bubble rate of 60% in 2013, if the law is not extended.

READ MORE - More Detail On Estate Tax Deal