Taxes Matter I: Tax Planning

Following on my previous post Marginal Income Tax Rates Matter, I’ve decided to create another running series here at Wealth Alchemy called Taxes Matter.  Whenever I come across evidence that taxes do in fact affect economic behavior/performance, such as journal articles, news clips, my own research, etc., then I will post under the Taxes Matter banner.

To kick off the series I want to look at an entire industry that exists because, in fact, taxes matter–the tax planning industry.  This article showed up recently in my inbox from Commerce Clearing House (CCH) titled The Impact of Current and Proposed Tax Law Changes on Top Marginal Rates and Related Choice of Entity Considerations published in the Journal of Passthrough Entities.

Whoa, wait a minute, first I was surprised that there is actually a publication called the Journal of Passthrough Entities.  But wait, there’s more.  It costs $355 a year to subscribe to the bi-monthly journal which works out to nearly $60 an issue.

Now, the whole point of passthrough entities is to shave a few trivial percentage points off of one’s marginal tax rates by arbitraging the differences in the marginal rate between different types of business income.  So, if there wasn’t any demand for services from folks willing to change the entire structure of their business to save a few percentage points on their marginal tax rate then surely this snoozer of journal would not exist.  Yes, no?

In the end, the simple fact that a multi-billion dollar tax planning industry even exists is real, market-based proof that taxes matter.  Why do some folks choose to ignore the obvious?

For instance, I still find it ironic that Barry Ritholtz, the one who doesn’t believe folks respond to marginal income tax rates, recently had a post on his blog trashing Google for their tax-minimization strategies.  If taxes don’t matter, why would Google bother paying millions to the bozos that think this stuff up . . . hhhhmmmm?  Must be a case of double-think.