Today's Wall Street Journal features an op-ed by Kevin Brady, right-wing Texas Republican who chairs the notorious "Joint Economic Committee" that has been a notorious producer of anti-tax propaganda-driven studies over the years of Republican hegemony in the House. See "Tax Reform Needs Accurate Tax Tables", Wall Street Journal (May 6, 2013), at A15.
The op-ed spends a lot of time denouncing information about tax rates. It suggests that the entire US tax system is far too progressive in nature, because "one of the most salient characteristics of the U.S. tax code [is] the decreasing share of taxes paid by the bottom 50% of taxapyers and the increasing share of taxes paid by the upper 1%." Of course, Brady mentions nothing about the accelerated growth of inequality of income in that same period, resulting in the upper 1% controlling so much more of the U.S.'s wealth and income compared to that bottom 50%. In fact, the upper group pays less than it should given the enormously increased bite of wealth and income, a fact that Brady conveniently overlooks.
The op-ed also talks only about the income tax rates, thus appearing to suggest that the income tax is the only relevant portion of the U.S. tax system and that rates, rather than base, are the most significant factor. In fact, there are a range of taxes--income, estate, payroll, excise/sales taxes. Regrettably, the income, estate and payroll taxes are much too lenient on the highest paid groups.
The shrinking of the income tax rate structure (from many different rate levels in the 1970s to our minimal group of rate brackets today) is highly favorable to the highest income group. The rate levels off at less than half a million, while the highest paid CEOs are making 20-30 or 40 million a year. As a result, those in the top 1%--and especially those in the top part of that 1%--are taxed at the same rates as people who make a "mere" $400,000 a year. Further, the base on which that rate is applied to determine tax liability is notoriously laden with tax expenditures that primarily benefit that same group at the top, beginning with the charitable deduction for non-taxed appreciation and continuing through Roth IRAs/ IRAs /generous pension plans to too-high mortgage interest deductions and others. Only those in the top 30% even bother with itemizing deductions. And among those, it is those at the top who garner the enormous benefits of deductions from those tax expenditure provisions.
The estate tax is similarly designed to provide special benefits to the wealthy--from the lack of a progressive rate structure that ensures that the wealthiest tycoons who've amassed fortunes from loopholes like the carried interest provision will pay peanuts on an estate hardly taxed during their lifetimes, to the various gimmicks for evading and deferring estate taxes-- including various kinds of trusts,"family" partnerships and irrational "discounts.
On the other hand, the sales tax is a mere gnat for the wealthy while its expansion cuts into essential living expenses for the growing legions of the poor and nearly poor. The payroll taxes for the working poor and the middle class take a significant bite out of their labor's rewards, while the wealthy CEOs and directors pay Social Security only on a miniscule portion of their wage income.
But Brady's most misleading statements are those that repeat the tax-cutting mantra that the GOP has pushed for well-nigh four decades now, beginnning before Reagan but put into overdrive during the George W. Bush administration--the idea that tax cuts stimulate economic growth, and especially that tax cuts on the capital income of the wealthy will stimulate growth, create jobs, and increase wages for the majority of Americans who are not wealthy. Here's what Brady says (notice how the statement presupposes the truth of his claim):
The most important defect of tax-distribution tables is that they cannot help one to assess how proposed tax changes will affect economic growth.
Suppose Congress eliminated the double taxation of capital income by doing away with taxes on capital gains and dividends at the individual level. Current tax distribution tables would depict this change as a reduction in progressivity due to the large share of capital gains and dividends attributable to the top income quintile.
But doing away with taxes on capital gains and dividends would significantly lower the after-tax cost of capital for new business investment in buildings equipment and software. New business investment increases the demand for and productivity of labor, driving real wages higher.
For households in the bottom 50% of the income distribution, the benefits are significant but indirect--more jobs at higher real wages. Id.
The fact is, we have been following this agenda of reducing taxes on capital income for decades. The result has been an unprecedented growth in inequality and the continuing decline of wages for the vast majority of Americans who work for their income. The right's "philosophy" of low taxes on capital and high taxes on labor doesn't work and never will. Brady doesn't appear to much care --his arguments seem designed to justify the right's continuing push for policies that create an oligarchic elite served by an increasingly indebted worker class with few employment rights as the courts favor Big Business over the people this country was founded to protect. Brady's op-ed, in other words, is just another volley in the right's class warfare against American workers.
Max Baucus announced to his fellow Senators today that he will not seek re-election to the Senate in 2014. He has been the top Democrat on the Finance Committee since 2001. See Senate Finance Chairman Max Baucus Won't Run Again in 2014, Bloomberg.net (Apr. 23, 2013).
As someone who thinks that Baucus has been a hindrance to progressive reform of the tax code and financial regulation, I must admit that I do not find his retirement a loss. His chairmanship of the Finance Committee has been marked by a failure to understand the most important issues related to federal income and estate taxation and by adoption of positions that are too favorable to Big Money and Big Business (especially Big Banks). He has been tone-deaf, in other words, to the class warfare waged by the right against the middle class and the resulting growth in inequality in the country that has been worsened by the current tax provisions that support redistribution upwards to the very wealthiest owners of financial assets and businesses. In particular, he has failed to use his position to push for reasonable reform of the capital gains preference and the wealth-favoring versions of the estate tax passed by the Bush administration. He has refused to consider a reasonable financial transactions tax. In fact, Baucus was too willing to go along with the initial passage of the Bush tax agenda in 2001-2004, and he did nothing to ensure that the Bush tax cuts would fade into oblivion on the sunset date. In fact, he worked to make permanent almost all the Bush tax cuts and supported the corporate-friendly "extension" of the broad menu of corporate tax cut provisions (including a retroactive extension of the R&D credit, which cannot possibly serve the purpose it is claimed to serve when enacted retroactively). The tradeoff provided only token items on the progressive menu.
Of course, the Republicans will cast Baucus' choice to retire as a reflection of problems for Democrats. See the Bloomberg News article cited above, in which Rob Collins of the National Republican Senatorial Committee says as much. I suspect that Baucus knew he would be targeted by liberal Democrats for his failure to vote for gun control and for his failure to support progressive tax policies.
That said, he remains as Finance Chair through 2014, and he has said he intends to produce a rewrite of the tax code. He is the wrong person to do that, and so it is important that other Democrats relegate him to a position of less influence in order to come up with more progressive changes than he would support.
Is Ron Wyden (who would become the most senior member of the Finance Committee when Baucus leaves) capable of carrying the banner of progressivism? His emphasis on "tax simplification" is worrisome, because it suggests that he does not understand the relationship between complexity in the tax code and sophistication of taxpayers to whom the complexity applies. The main reasons for complexity are two-fold: (i) existing tax rules are expanded to cover abusive schemes developed by sophisticated tax advisers (attorneys and accountants), and (ii) existing tax rules are riddled with exceptions to provide subsidies (tax expenditures) favoring industries represented by heavy lobbying. To the extent that tax simplification reduces the anti-abuse rules needed to prevent various tax scams and manipulation, simplication is a policy mistake. To the extent that simplication results in changes to the tax expenditures, it can be useful but it is often also mistaken, because the easiest way to "simplify" such rules is to expand them to cover even more of heavily lobbied-for industries. Wyden needs to expand his understanding of the relationship between simplification as a goal and fair allocation of resources to the extent that resource allocation is handled through tax expenditures in the Code, reasonable rules to ensure that the most sophisticated taxpayers pay their fair share, and fair distribution of the tax burden. Baucus did not serve the publci well in regards to these issues. Let's hope that Wyden does better.
Obama seemed to get a spine for a brief time around the State of the Union address. But he just can't seem to maintain a strong progressive position--too easily swayed by the Wall Street bunch that run his Treasury or just not understanding what is required to keep his base voting for him. If he treats Social Security--which doesn't have anything to do with the deficit--as one of the cards he can "trade" to the right-wing Republican crowd for some kind of a "grand deal" (of undefined necessity), he will destroy the gains of Roosevelt's New Deal for petty concessions from the entrenched GOP that intends to dismantle the New Deal.
Obama has been threatening to include chained CPI as one of his own budget recommendations. This is foolhardy. For those who depend on Social Security, which they have paid into all their working lives, reducing benefits--which is what moving to chained CPI does--is nothing short of betrayal.
Robert Reich is urging people to sign onto a MoveOn petition to Obama to make clear that we understand the importance of holding firm against the radical right's attempt to dismantle the New Deal. I've reproduced the letter and link, below.
From: Robert Reich Date: Thu, Apr 4, 2013 at 11:10 AM Subject: Mr. President, don't hurt seniors with your Chained CPI
Social Security is not driving the deficit, therefore it should not be part of reforms aimed at cutting the deficit. The chained CPI, deceptively portrayed as a reasonable cost of living adjustment, is a cut to Social Security benefits that would hurt seniors.
There are several sensible reforms to Social Security that should be considered to help make it sustainable, including lifting the ceiling on income subject to Social Security from $113,700 to $200,000 or more, as well as instituting a 1% raise in the payroll tax rate, a rate that hasn't changed in over 20 years.
Both of these reforms would go a long way toward protecting the long-term health of Social Security, but neither should not be conflated with efforts to reduce the federal budget deficit.
President Obama needs to stand by his Democratic principles and fight to protect Social Security benefits.
That's why I created a petition on SignOn.org to President Barack Obama, which says:
Mr. President, the chained CPI is a cut to Social Security benefits that would hurt seniors—it's an idea not befitting a Democratic president. If you want to reform Social Security, make the wealthy pay their fair share by lifting the cap on income subject to Social Security taxes.
This petition was created on SignOn.org, the progressive, nonprofit petition site. SignOn.org is sponsored by MoveOn Civic Action, which is not responsible for the contents of this or other petitions posted on the site. Robert Reich, former U.S. Secretary of Labor didn't pay us to send this email—we never rent or sell the MoveOn.org list.
David Cay Johnston, former NY Times reporter and now Syracuse professor, writes about the thing that most journalists don't bother to (or are told not to) write about--the way that Big Business successfully lobbies legislators and regulatory agencies to write the rules to favor Big Business, at the expense of ordinary Americans, all under the false claim that they are pushing de-regulation for the good of competition and ordinary consumers. Johnston, Missing the Story, American Journalism Review (March 2013).
Johnston describes a number of ways that state legislatures, Congress and state and federal regulatory agencies have made life easy-street for Big Business at the cost of ordinary consumers. He notes it is often discussed as "deregulation" but that "is a misnomer because, literally, no such thing exists in commerce....Everything in business is regulated in some fashion, and has been since long before the first nearly full set of laws we have.... [Thus, d]eregulation typically means reregulation under new rules that favor business interests." Id.
Businesses claim that the 'deregulation' they seek is just another step towards their ideal of "free markets" to help competitiveness. Not so, Johnston replies. The regulatory climate that results is almost always one that creates "moats" making competition much harder for small businesses and allowing duopolies or monopolies to arise that can set prices as high as they wish. And often the captured regulatory agencies allow the most absurd subsidies imaginable.
The Bush Treasury did that in spades. One example is the changes the pro-business Treasury under Paulsen made in the regulations under section 368 governing corporate reorganizations, in which the Bush Treasury (many officials of whom are still part of the Obama Treasury) promulgated rules that provide, for the first time, the possibility of a loss recognition by shareholders in the nonrecognition reorg exchange. Settled law at the time said no such loss could be recognized. And the Bush Treasury also did it in setting up (through regulations) yet another tax subsidy of Big Oil (as an add-on to an already ridiculous subsidy enacted by Congress when it allowed Big Oil to operate as limited partnerships). Here's how Johnston describes this.
The simple story is that Congress in 1986 exempted monopoly pipelines from the corporate income tax if they organized themselves as Master Limited partnerships. The George W. Bush administration then let these pipelines include the nonexistent tax in the rates they charge.
The cost of this fake tax is both tiny and huge.
The pipelines raise prices to cover the cost of the tax, which in turn means they have to raise prices even more to cover the taxes on the extra earnings, known as "grossing up." A 42 percent tax on profits, grossed up, means a pipeline gets to earn its profit plus 75 percent for taxes. These higher costs are then built into prices people pay for gasoline and natural gas to heat homes. Paying this fake tax costs each American less than three cents per day, about $10 per year, I calculate. That is the tiny part. The huge part is that collecting just a penny a day from everyone in America adds up to $1.1 billion in a year — or $3.3 billion at three cents per day per American. Id. (emphasis added).
Note, folks. That's an unnecessary $3.3 billion subsidy provided to already-profitable businesses that comes entirely at the cost of ordinary Americans. It is a subsidy put into law entirely through Big-Busienss-friendly tax administrators in ways that most Americans do not see it--or, if they see it, they believe it is a "real" tax cost of the businesses rather than just another theft subsidy.
This is another aspect of the problem of the way the media treats any discussion of "free markets." The fundamentalist approach to free markets (that I have sometimes labeled "free marketarianism" or "friedmania") claims to believe that deregulation helps people by increasing competition and opening up markets. In fact, it is usually the opposite. Deregulation helps Big Business by decreasing competition and allowing the development of powerful oligarchs and powerful monopolies or near-monopolies. Brute capitalism, that is, allows those who hold capital to hold power, and those who hold power act against the interests of ordinary people in order to consolidate their power. Another blog addressed this well:
A free market requires that everybody plays nice and follows the rules. Guess what. There’s always someone who will do whatever evil they think is required to make money. Once you realize that, you know there can be no such thing as the free market.
***
That’s one of the primary reasons that uncontrolled capitalism has been such a gross failure since the Reagan/Thatcher “revolution”, leaving us with record inequality and damaged democracy, and bringing the world economy to the brink of total collapse that simply evaporated trillions of dollars. Random Notes from the Exasperation File, Class War In America.
I have often noted that the media treat the daily ups and downs of the stock market as though it is an accurate reflection of the entire economy. It is not. When the stock market is up, it is likely that one or another segment of Big Business is doing well or exceptionally well. That means the affluent--those in the top 30% who own most of the financial assets of this country, including Big Business's CEOs and board members, are doing well. So as the stock market has resurged after the 2007 financial crisis brought on by the excess of Big Financial Businesses, the wealthy who run and own those Big Businesses are doing mighty well indeed.
This is corporatism at its worst--the takeover of the economy and all of its institutions by a corporate mindset that favors the wealthy and the managers/owners of Big Business over ordinary people, leaving ordinary people's views unheard. It often is associated with class warfare, wherein the rich ensure that their money buys laws and regulations written by, for, and of the rich. Corporations pay less in taxes and ordinary workers pay more--either in direct taxes or in the indirect tax of wage and benefit loss that is a tax subsidy for the wealthy.
Those at the bottom of the economic distribution are of course the ones most hurt by the decline and by the class warfare policies of the rich. They are most likely still doing poorly or just barely getting by, mostly because those big profits at Big Business are taken at their expense--through constantly rising prices not reflected in increased quality or costs of production, or through increasingly unfair worker wages and benefits that have been cut in order to increase the rents to the owners/managers. And usually with the assistance of legislators and regulators.
Take a friend of mine, who was laid off from an auto parts manufacturer for almost three years and has been struggling to make a full-time living at it since he was reinstated--at a much lower salary then before the crash (conveniently for the company but not so good for the workers). He bought a new truck about a year before the financial crash. The payments were supposed to be around 250 a month. In the first months of the layoff he couldn't find any substitute work, and he fell behind in payments on the truck (his family depends on him as the sole breadwinner; his family has almost no assets and no liquid assets; he depends on the truck to allow him to take odd jobs when his job at the factory is on hiatus--often landscaping, mowing, etc.). The interest rate on the loan went up to 32% almost immediately. That would once have been treated as illegal usury. Not now, since "deregulation" has allowed financial firms to rip off their customers coming and going for their own profits. Now his payments are around $400 a month and he owes as much on the truck as he did several years ago in spite of all the payments he has worked hard to make since then. This Thursday he missed the payment again, after keeping up for most of the year. He missed it because his company began selectively laying off workers for a week or 3 days at a time during the winter, and he didn't work for about ten days of the month before the payment was due. On Wednesday he talked to his adviser at the financial firm that gave him the loan. It was a new "adviser". They replaced a more understanding one with one who was considerably harsher. The adviser told him on Wednesday that he would give him til Friday to make the next payment. On Thursday, however, he sent a repo man who took the truck. Friday my friend got a paycheck and could have made the payment (as he'd told the adviser on Wednesday). Instead, when he went to make the payment thinking he could get the truck back that day, the financial firm advised him that he now had to pay off the truck in full--as well as a bunch of additional charges due to the repossession. What would that be, he asked? He assumed he owed about $3500, in his calculations the amount still due on the original loan. Oh, no, the finance guy told him. You will have to pay $4975 on Monday, and that amount will increase by $25 a day for every day you do not pay. It's that much because of all the late fees we added on the bill. Oh, and we are charging you $400 for repo-ing the vehicle on Thursday (even though we had promised we would not do so).....
Again, deregulation of financial institutions has made these rent-seeking add-on charges customary for anyone in the lower part of the income distribution. Big Business sells it as competitive services for the underprivileged but it is really deregulated excess profits for the financial firms for acting like modern equivalents of plantation owners with a captive workforce unable to ever build up financial assets and always dependent on the firms' calculations as to what they owe or are owed.
How is my friend (who happens to be an African American) supposed to ever advance beyond the near-serfdom in which he currently exists? Lucky for him, we are willing to offer him a personal loan at market-rate interest so that he can finally pay off his overseer and begin to dig himself out of the hole that our deregulated, GOP-ideology-driven state puts most Detroit low-income residents in. Mass transit hardly operating and not permitted to expand as it should to permit low-income residents to commute easily to work in the region. White suburbs that cannot be annexed into the city, so continue their oblivious lives exploiting Detroit's assets while pitying the poor black residents that just can't seem to do anything right. Businesses that charge white folks in the suburbs less than black folks in the city. Insurance companies that rip off their Detroit clients. And on and on.
This is all happening in a world where white folks with money set all the rules and now, in Michigan, have made it very hard for any union to form and exert some worker-power on behalf of the employees. Michigan's new, so-called "right-to-work" law that the religiously right-wing Republican party of Michigan passed with no input at all from the people and with misinformation galore--all of the newspaper coverage talked about workers being "forced" to join a union unless you have "right-to-work" and how "right-to-work" would free them not to have to pay for the union and encourage more economic growth and more jobs. None of the newspaper articles or the legislators reported the fact that right-to-work states tend to have lower wages for their workers, less good jobs, and poorer economies. Of course, the information was wrong to start with--no one was forced to join a union without right-to-work laws--they were merely required to pay some amount (less than union dues) for the services that the union provides. Now, they can demand the same services and pay nothing. No Republican business would provide services on that basis, but Republican legislators serving their oligarchic base ensure that no true freedom exists for anybody without money.
Michigan, of course, has also just taken over the City of Detroit, with Gov. Snyder's appointment of an emergency manager. This is as undemocratic as it gets, given the state vote rejecting the last EM law and the fact that the EM will have dictatorial power to ignore the Mayor, the City Council and all other elected officials. Snyder is a right-wing tool, in office backed by a majority-GOP legislature that reflects the racism of most of the "upstate" part of Michigan and blames Detroit's problems on its predominately black residents. The legislature passed right-to-work to retaliate against unions for trying to get protection for workers' rights in the constitution. Apparently, the GOP thinks the constitution should only protect the wealthy, as it does by prescribing a flat tax, ensuring that the wealthy in Michigan get to choose what they support but are hardly taxed at all by the State. The rabid right in this state forget that what condemned Detroit was the "white flight" to the suburbs and Michigan's foolish state constitution which does not allow Detroit to take the suburbs into the city. So Royal Oak's mayor a few years ago could refuse to fund metropolitan buses because he didn't want Detroit's black population able to cross the border into Royal Oak and pollute the city by taking jobs there. And the wealthy residents of the 90% white suburbs of 80% black Detroit come into the city for its amenities--opera, plays, sports, museums--and its work, but take their pay out of the city to maintain their schools and shops and amenities while complaining about how awful Detroit is. We Detroit residents are very worried that the GOP's takeover of the Democratically elected city government will result in the rape of the city's assets--Belle Isle is a jewel in Detroit's crown that the state covets; Detroit's water system is another asset that the state--and the white suburbs--covet and want to control. The EM will be pressured by Snyder and the rest of the upstate Detroit haters to take over those assets and make Detroit pay for being a center of unionism and Democratic voters.
The Michigan passage of the so-called "right-to-work" law and the renewal of the emergency manager law AFTER it was defeated by the people in Novemberare perfect illustrations of the contempt that the current Republican party shows for ordinary people when it is in power in a state. And it also illustrates well the capture of legislators and agencies by oligarchs, monopolies and duopolies. This is, as Johnston notes, a sad state of affairs that will only get worse unless the press reinvigorates itself to inform rather than kiss Big Business's ass.
Elizabeth Warren started out her questioning of big bank regulators by noting that actual trials, where guilty parties are paraded before juries, information about their wrongdoing is spread over front pages, and everybody is aware that bad guys get punished for their bad deeds has an effect on whether the wrongdoing is committed in the first place. In the case of the big Wall Street banks, however, she notes that they made out like bandits during the speculative orgy that caused the financial system crisis, and yet not a one has paid by being taken to trial in this expressive way.
"Tell me," she says to a group of bank regulators called before her Senate committee, "about the last few times you've taken the biggest financial institutions on Wall Street to trial. Anybody?"
The FCC representative, Tom Curry, notes that ordinarily they are just trying to move things along and correct deficiencies. Warren interrupts and notes--"yes, and you set a price for that... that's effectively a settlement. What I'm asking is ... when did you last take a financial institution, a Wall Street Bank, to trial? " Curry "We've had a fair number of consent orders. We don't have to bring them to trial." Warren "I understand that you say you don't "have" to but my question is when is the last time that you did?" (No further responsive answer).
The same kind of interchange--can you identify when you last took Wall Street Banks to trial --was similarly nonresponded to by Elisse Walter. Nobody else even offered to comment. Certainly nobody offered a single date for "last time a Wall Street bank was taken to trial."
Warren closed with a comment that made clear that she thought that a very different standard was being applied to Wall Street than is applied to ordinary citizens that commit even minor infractions. She noted that there are District Attorneys every day squeezing ordinary citizens on rather small matters and taking them to trial explicitly to set an example, but "For Wall Street banks, 'too big to fail' has become 'too big to try [take to trial]'. That just seems wrong to me."
You go, Elizabeth. Without using the words "class warfare", she has made absolutely crystal clear the class warfare problem that exists in our country today, where Wall Street institutions and their chiefs and chief owners get all kinds of protections while the little guy is shaken down for peanuts. As a commenter on the site already noted, if only there were 99 more like her in the Senate.....
As most tax practitioners and academics know, Professor Paul Caron maintains a "tax prof blog" that provides timely links to most things tax in major papers, blogs, journals, conferences and the like, as well as announcements and releases from the IRS, Treasury and Congress related to tax. Paul does not usually provide much analysis or opinion, but rather an excerpt or two and a title.
This is not an atypical way of titling items on tax prof blog. The observant reader will notice a slight bias in the title. The Wall Street Journal article is actually titled "The State Tax Reformers: more governors look to repeal their income taxes" (Jan 29 2013 updated). The article summarizes states that are lowering or eliminating their income tax (sometimes including their corporate income taxes) and sometimes replacing it with a broad sales tax--for example, in the Republican strongholds of Nebraska and Louisiana. The Journal article then goes on to opine (and it is indeed opinion) that "this swap makes sense" because "income taxes generally do more economic harm because they are a direct penalty on saving, investment and labor that create new wealth" whereas "sales taxes ... hit consumption, which is the result of that wealth creation." This is the typical "free market" pitch favoring capital income (and the rich) over labor income (and everybody else).
Of course, the Journal then proceeds to quote Art Laffer for the right-wing corporatist ALEC in an article claiming that a majority of new jobs are created in states without an income tax because of their lack of an income tax.
[Aside: Laffer is (in)famous as the 'free market' economist who described his view of the maximum tax rate by drawing a bell curve on a napkin. The Laffer Curve is more ideology than theory, as I explain in an earlier post: CFP's Laffer Curve Video, ataxingmatter (Feb. 2008). ]
Not surprisingly, Caron's title suggests that the "real" policy reason for the shift is a "real" desire to create jobs.
I have significant doubts. Most of the anti-income tax proponents are pro-Big Business and pro-wealth. A shift from an income tax to a consumption/sales tax is a move from a somewhat (often minimally) progressive tax system to an explicitly regressive tax system. Such a move favors those with capital assets and mainly capital income. Claims (like that made by the Civitas INstitute cited in the Journal article) that shifting from income tax to sales tax will result in "average annual personal income growth" mean almost nothing since averaging income growth across a population doesn't really tell you whether almost all of it goes to the wealthy or not--if that growth goes to those already in the wealthy distribution, then inequality increases and in fact most everybody else is worse off, in spite of the "average" growth.
The Journal acknowledges the regressive nature of a sales tax swap, but suggests that exemptions of necessities (e.g., food, medicine, utilities) and rebates for low-income families will suffice. I also find that doubtful--the very low absolute benefit to the poor of the exemptions and/or rebates, while important, is substantially less than the very real high absolute benefit to the wealthy of the switch to a consumption rather than income tax. Accordingly, the so-called "reform" will inevitably increase an already devastingly problematic inequality that has resulted in lower quality of life for most Americans on many different areas from literacy to access to health care to teenage pregnancy to death rates and all the many other factors in which Americans enjoy a lower level of quality of life than most other OECD nations.
Not, in other words, a good idea. As noted in Nick Carnes (who teaches at Duke University), A Tax-Reform Plan that Rewards the Wealthy and Stalls the State, NewsObserver.com (Jan 24, 2013, modified Jan. 25, 2013), these proposals are being pushed by right-wing propaganda tanks, including a "wealthy conservative foundation [that] has paid [Arthur] Laffer to write another report and to fly to our state to promote it." Id.
The goups behind these proposals have their one-size-fits-all state-level strategy down to a science, but they don’t have a handle on the actual science of state tax reform. It’s easy to see why their ideas are appealing. Who wouldn’t like to grow our economy and lower taxes without cutting vital services like schools and public safety?
However, independent economists in every state where the Laffer plan has been introduced – including North Carolina – have found serious problems with the evidence its proponents have used to back it up. No matter how low the tax rate is, businesses and wealthy people won’t relocate to a state where the schools are bad, the streets are unsafe and the infrastructure is crumbling – things that all tend to happen when taxes are cut to the levels that the Laffer plan outlines. Id.
The Carnes article goes on to note that "Kansas, which earlier passed the Laffer bill, is now projecting $800 million annual budget deficits and has extended an emergency sales tax that should have expired years ago" while state agencies are facing a 10% across the board cut, with education expected to lose a billion dollars in state funding over the next five years. Yet no businesses have flocked to Kansas because of the legislation. Id.
And guess what. It is the wealthy who would benefit if North Carolina were to carry through with enacting its own form of the "Laffer bill". Carnes notes that families earning $24,000 a year would pay $500 MORE in taxes under the Laffer plan, whereas wealthy families with incomes of more than $900,000 a year would pay $42,000 LESS in taxes. Id. Shifting the tax burden from the wealthy who can easily bear it to the low-income who cannot, while at the same time cutting government support for essential public services that build a shared community is a disaster in the making.
The Wall Street Journal isn't flummoxed by such facts (which it doesn't even acknowledge). The Journal article suggests that the idea (set forth in some Big Oil/Fracking states) of replacing income taxes with revenues from oil and gas extraction would be good (and maybe better than regressive sales taxes) because "it would make everyone a stakeholder" in increased drilling and fracking, thus "help[ing] to build a politicial constituency for more mining and drilling." Note the presupposition that supporting "more mining and more drilling" is inherently a public good! (One assumes that the Journal staff think this because Big Oil/Big Gas is Big Business, and the Journal is ALWAYS in favor of whatever Big Business wants.)
That idea strikes me as truly worrisome--we have a climate-change problem, and trying to "buy" votes to support environmental degradation at whatever cost through the swap of income taxes for some (probably minimal) increased royalties (probably also accompanied by less in the way of services, especially for the poor or for public goods like public education) is not a good idea. Yes, probably those very people who are the poorest and most harmed by environmental degradation would tend to be able to be bought off by that swap--they would not realize that the wealthy are again getting the mountain of the share of the benefit, and they are bearing most of the burden in terms of the long-term costs of the environmental degradation as well as the long-term costs of lower public revenues spent on programs especially important to them because of their lack of a cushion of wealth (schools, public parks, fire/police, health care, etc.).
Interestingly, the Journal article notes that Alaska got rid of its income tax in the 1980s and suggests that's been a good deal. Of course, Alaska also gets more back from the Federal government than it gives in Federal taxes--ie, Alaskans have replaced their income tax revenues with federal handouts.
The Journal calls these plans for revamping state laws to provide substantial benefits to wealthy individuals and corporations a "rare bright spot in the current high-tax era." That is garbage from both sides. We do not live in a "high-tax era." IN fact, we live in a low-tax era and we are already paying for that with the significant drop in state support for higher education, state support for parks and other public amenities (police and fire protection, protections for workers, fair and easy access to voting, etc.), and state support for K-12 education as well as the failure of the federal government to fund the kinds of infrastructure and education and basic research projects that could make the difference between a continuing great economy and the continuing muddle we are in after the Bush recession. All of those costs are borne more substantially by those in the lower-income brackets. With the proposed "reforms", the wealthy will be sailing through with even more wealth, able to shut out even more effectively any association with the "lower class" elements and giving even less to support schools, colleges, unemployment benefits, etc. Meanwhile, the poor and near-poor will get much, much less (when they didn't owe much in taxes anyway). Not a bright spot at all. More like class warfare.
The real reason behind these shifts is to benefit the major members of the Republican base--i.e., Big Business and the wealthy. It has little to do with jobs... That's just a handy obfuscating claim to make about policy moves that substantially shift the benefits of the economic system to the rich and the burdens of the economic system to everyone else. This is just another element of the class warfare that has been waged for the last few decades to allocate gains to the wealthy.
As usual, there was one of those all-knowing snippets in the news last Friday about what the direction in the stock market meant for the economy. Observing high corporate profits and buoyed by the idea that the GOP might not play its "just say no" game on the debt ceiling issue (at least for three months), Wall Street profits rose. See Wall Street at 5-year high, New York Times Business Insider, Jan 18, 2013.
Should we so easily consider Wall Street's well-being as a general sign of the well-being of the economy? Sometimes it seems that it marches to its own tune, while ordinary Americans continue to struggle. Foreclosures, job losses, offshoring, state actions to make union membership harder even when most Americans say union membership should be easier, huge inequalities in incomes and wealth and the social problems that go with those inequalities--there are all kinds of things going on that still don't bode well for ordinary Americans whose income is mostly made up of wages and not preferentially taxed capital gains and who don't own much of the financial assets of this country. Democratic egalitarianism isn't satisfied by such a system that consistently rewards one class of income over another based on what amounts to class distinctions--the kind of income that requires hard work is less rewarded than the kind of income that comes with a silver spoon at birth.
In other words, corporate giants making high profits doesn't provide much reassurance to ordinary guys about the stability of their own personal economies. High profits seem to translate to higher payouts to corporate managers/shareholders, but ordinary workers don't get more than a trickle of a share of those productivity gains.
Trickle down hasn't trickled much down the last few decades, if it ever did. Inequality is growing worse, and with that comes even more influence so that the politically powerful are the same as the economically powerful, yielding a return on lobbying that the Founders couldn't have imagined.
The unequal society that is today's United States has many problems that are at least partially caused by the high level of inequality--from teenage pregnancy to illiteracy rates to lifespan of the underclass to low birth weights to college graduate rates and many other indicators of a less than optimal quality of life. And those problems are exacerbated by the continuing blind faith of so many Washington politicians in the "degenerating discourse of mainstream economics" (the link is to a recent post on Yves Smith's Naked Capitalism by Philip Pilkington). We continue to look to Wall Street, and ignore the blight of wealth and income inequality that besets Main Street, because economists have fabricated a convenient theory of equilibrium that is most successful at hiding what is really going on from us while protecting the "free market" impulses of brute force capitalism.
Perhaps one of the positive results of the buoying of Wall Street is the general consumer attitude, which does result in more spending (still perhaps beyond one's means for much of the underclass)? That spending increases business demand, and could even result ultimately in more job creation, especially if accompanied by more federal spending rather than the counter-stimulus current focus on spending cuts and "balanced" budgets (in at least one sense an oxymoron for a federal government that can print its own money). But those jobs will require a better educated public than the US is likely to have. Again, partly due to the mainstream economic discourse, we are effectively debilitating public education through cuts in funding, exploitation of teachers, and privatization for the profit-making gains of education profiteers, rendering what was our greatest strength our greatest weakness.
But what really happens to most of the wealth created by those increases in corporate profits (and those demands for ever higher returns that the wealthy have come to view as their norm, accompanied by those terribly preferential tax rates that mean the wealthy get to keep more of their unearned wealth while ordinary workers cannot)? One suspects that much of that 'extra' wealth heads out of the country--to offshore tax havens, invested in yet another vacation home abroad, put into emerging markets, following the promise of higher returns without much regard for the impact on the US economy.
As long as we are facing the kind of inordinate reward to the uberwealthy and underreward to ordinary Americans, I find it hard to get excited about a five-year high on Wall Street. It's main effect is to drive home the need for Congress to develop better tax policy to at least use tax as a means to help, on the periphery, cut back on inequality. Eliminate the preferential taxation of capital gains and dividends and estates. Don't listen so much to the deficit scolds who want to decimate earned benefit programs like Medicare and Social Security. Invest more in physical infrastructure, particularly mass transit and environmentally sounder energy policies. Don't listen so much to the militarists (who are often in company with said deficit scolds) who want to continue allowing the military budget to engorge itself.
As most people who follow mergers, acquisitions and other mega transactions are likely aware, Michael Dell wants to take the company he founded private in a leveraged buyout. LBOs, of course, use the company's own assets as collateral for debt to purchase the company--one of the types of financial alchemy that has contributed to the last thirty years of corporate consolidations and elite wealth accumulation, both of which are problematic for sustainable economies and sustainable democracies.
Michael Dell has a particularly interesting "problem". Like most high-technology companies, Dell has avoided a lot of US tax by offshoring and claiming its profits in offshore tax havens rather than in the US. So it has more than $14 billion of highly liquid assets in offshore affiliates and not here. See Zahary Mider and Jesse Drucker, Dell Leveraged Buyout May Hinge on Cash Hoard Outside US, Bloomberg.com (Jan. 18, 2013).
We shouldn't allow that, but fixing it would require real corporate tax reform, not the stuff that commissions and Congress blather on about most of the time, like "lowering tax rates" and "simplifying the tax code", both of which are nonsensical when it comes to corporate multinationals who pay incredibly low effective tax rates already and who will use any "simplification" as just another inviation to exercise their sophisticated tax skills at manipulating the Code for their private tax advantage.
Congress of course hasn't had the gumption to take on Big IT for years. And under the Bush Administration, when Congress and the Treasury seemed to be motivated primarily by seeing how fast they could give away tax breaks to corporate business through the tax code, Congress enacted one of its most foolhardy tax expenditures that especially benefited corporations that had been "bad" tax citizens--the 2004 misnamed "American Jobs Creation Act" that allowed the bad companies that had offshored their profits to avoid tax the indulgence of bringing those untaxed profits home at what amounted to no or negative tax rates--the so-called "repatriation holiday" provision. As usual, the right-wing claimed that these corporate tax breaks would create jobs. They didn't (as shown by Bush's dismal job creation record, even before the onset of the great Recession). Instead, they were used for corporate stock buybacks and similar goodies for those investors who are mostly the wealthy upper-class who own most of the corporate assets. So the repatriation tax holiday exemplified the problems of the corporatist agenda and the way it exacerbates inequality, a kind of class warfare in bits and increments.
So we can expect a new onslaught of lobbying by companies like Dell for another extraordinarily wasteful "repatriation holiday." The lobbyists will claim that such corporate tax cuts are essential if we want big companies to keep creating jobs. But that's bunk. The evidence is in from the last repatriation holidy--it lined the pockets of the rich, as most of these corporate tax breaks have done and did not create jobs.
Obama and the Democrats in Congress should resist. Ordinary Americans should not bear the burden of ordinary income rates when the wealthy are taxed at preferential capital gains rates. And ordinary Americans surely shouldn't be called upon yet again to subsidize profit-making corporation's low-tax regimes through the cuts ordinary Americans will suffer to needed services.
Paul Krugman appeared on Bill Moyers PBS program Sunday night, talking sanely and rationally about the economy and why jobs (should) come first--and along the way noting how politics now dominates what and how we can talk about economic policies. See Moyers & Company, Paul Krugman on Why Jobs Come First (Jan. 11, 2013).
(While you are at the site, also watch Moyers' essay, The Crony Capitalist Blowout, about the goodies that corporations got out of the fiscal cliff deal, which included everything from immediate expensing to the active financing exception and the R&D credit--all subsidies for big corporations that spent lots of lobbying power ensuring they would get them).
We have all kinds of reasons to know that the US is not Greece and will not be like Greece--we are a powerful economy, we have our own currency, and our debt is widely respected. Nonetheless, the right-wing radicals want to destroy the New Deal programs--Social Security, Medicare, and Medicaid, and they are willing to take the entire economy hostage to try to get their way. Just look at Pat Toomey in the clip Moyers shows on the show, threatening to put the US government into default unless the majority in Congress accedes to the will of the wacky minority.
That wacky minority hopes to use brinksmanship games around the debt ceiling to force progressives to yield on their dream target--decimating the New Deal.
The radicals on the right don't really care about the debt ceiling--look at the way they willingly raised it throughout the Bush administration, even while viciously cutting taxes for the wealthy and creating huge deficits out of the surplus existing when Bush took office! They don't really care about deficits. Look at the way they viciously cut taxes for the wealthy and spent on military budgets and preemptive wars when Bush was in office!
What they want is a radical restructuring of the economy in a way that will maintain and further the new gilded age, where bankers and private equity titans get rich off the labor of ordinary folk and ordinary folk find themselves eeking out a living at more or less the same rate they were before the Bush decades. The top 1%, as Moyers pointed out, have seen a 275% increase in incomes over the last decade (due in large part to the Bush tax cuts, but also to the misappropriation of productivity gains by the rich). Meanwhile, average American workers have seen their wages barely increase by $1.23 an hour.....not even keeping up with inflation.
Obama has said he will not negotiate on the debt ceiling. He must hold firm. There are various ways he can combat their "leverage". The obvious one is that it is unconstitutional for Congress to pass laws that require spending, pass laws that raise too little revenue to pay for that spending, and then refuse to permit the government to borrow to make up the difference that they have legislated into being. That is irresponsible, and can be viewed as a violation of their constitutional obligation to ensure that the nation can pay for the debts it has already incurred. See Taylor, Top Dems Urge Obama to Weigh Unilater Debt Hike, Salon.com (Jan. 13, 2013). Obama is correct when he highlights this. And surely as President, his power reaches to borrowing to fund the government that he is obligated by Congress to run under the laws he is obligated to implement. He should make it clear that he is willing to risk impeachment to test that power rather than be held hostage by their petty, selfish games.
What about the "trillion dollar platinum coin" idea? This is the law that grants the executive the right to mint platinum coins of any denomination. Why not mint a few that add up to a trillion, and then pay it to the Fed and draw cash from the Fed based on that coin, to pay our bills? That is perfectly legal--Congress did not limit the use of the coins in the legislation authorizing them. If Congress can play brinksmanship games by threatening to put the US in default and destroy our economy unless the majority enacts the pet legislation of the minority to destroy the Social Security, Medicaid, and Medicare safety net programs, then the Executive should be willing to use every tool at his disposal to prevent that. Of course, Treasury today said it wouldn't do that. See Anne Lowrey, Treasury Won't Mint Coin to Defy Debt Ceiling, New York Times (Jan. 12, 2013). Stupid of them to do so, since it is clearly within the law. Obama cannot "wimp out" on this debt ceiling issue (to use Krugman's term): if he lets the zanies in the GOP use these tactics to force changes in the safety net programs, he will have destroyed the Democratic party and the recovery from the Grand Recession in one fell swoop.
Remember, the analogy of US government debt to household debt is a silly one, just as is the analogy to Greece. The government is not a family; our income is not the fixed wages of a head of household; our debt may feel staggeringly large for ordinary people to comprehend, but it is not too large a share of our GDP and our cost-of-funds right now is incredibly low. We should borrow while the borrowing is good, to pay for the vital infrastructure repairs that need to be made and to ensure that we do not default on a key obligation to our people--the provision of a decent standard of living through measures that encourage job creation (by creating demand) and provide security against job loss and the vulnerabilities of old age and sickness.
The Peterson INstitute is spending half a billion dollars to distort the public's understanding of debt and deficits, in order to convince Americans that we should run the government like they run their households, in terms of amount of debt. But Peterson is a right-wing billionaire whose views are antiquated and wrong for the time. Keynes is the only one who has had it right, and we should listen to Keynes, not Friedman's brute capitalism theories of a "free" market in which the wealthy control the assets and confiscate the rewards, not Peterson's cacophonous sounds about debt.
Look again at Moyers' program. He runs a tape where Lloyd Blankfein--head of Goldman Sachs, filthy rich, and one of the culprits of the financialization of the economy and the speculation that threw us into the Great Recession--talks about how ordinary people will have to give up on their expectations from Social Security and Medicare. Entitlements, he says, just can't deliver what people want--we can't afford it. This from a guy who has socked away millions garnered from the everyday lives of ordinary people. This from a person who has ridden the easy street rail line of subsidized profits for his banking firm (cost-of-funds extraordinarily low due to the government bailout; and subsidies in the code both internationally (active financing exception) and at home (the tax treatment of derivatives has been extraordinarily kind to banks in terms of sourcing and therefore taxability), etc. This from a person who has enjoyed a priviledged preferential rate of taxation on much of his income, lobbied for through the revolving door of Treasury officials and banksters and their attorneys.
No, Obama shouldn't listen to the Blankfeins of the world, or the Norquists, or the Toomeys. He should turn a deaf ear to Mitch McConnell and to Rand Paul and all of those who insist that we have to keep funding the military-industrial oligarchy but that we can't afford to keep funding the earned benefit programs that have made the difference between an intolerable standard of living and a decent standard of living for millions of Americans.
Pretty much as I predicted, Obama's failure to go over the fiscal cliff--instead "negotiating" and settling for a half-assed deal that hardly got rid of any of the stupidities of the Bush tax cuts--convinced the Republicans that they can play their brinkmanship game on the debt ceiling debate yet again and perhaps finally get the Democrats to undo their own most significant programs of the last 100 years--Social Security and Medicare.
What we ought to be doing is cutting the military/defense and corporate welfare budgets. And then increasing taxes--with (1) new layers of tax brackets and tax rates corresponding to our new levels of income inequality, so that multimillionaires are taxed at a higher rate than mere millionaires and billionaires are taxed higher than multimillionaires and (2), at the least, legislation to eliminate the farce of the so-called "carried interest: privileged compensation taxation for LBO managers, who get mostly preferential capital gains for their "services" in buying companies and loading them with debt that makes the managers but not the workers wealthy.
But the Democrats somehow still thought they would get some kind of credit, even from the staunchest of the right-wingers, for being "bipartisan" and working out a "deal" to avoid the "fiscal cliff." So they made the ridiculous Bush tax cuts permanent, except for those in the upper-upper crust making three times as much as anybody in the middle class. And they made the estate tax cut even larger than it was--with a $5.2 million exemption (double for a couple) and only a 40% rate. Inequality will continue to grow at accelerated rates. And they extended the litany of truly egregiously stupid corporate tax breaks, like the bonus depreciation/expensing provisions that ultimately permit corporate multinational giants a NEGATIVE effective tax rate (read Cary Brown on the way noneconomic frontloading of expensing amounts to nontaxation under time value of money principles).
The GOP however is currently running deranged. The party that purports to care about fiscal conservatism only wants to fund more military and make sure that vulnerable elderly don't get as much in their Social Security checks and have to pay even more for their health care. McConnell--the MINORITY leader in the Senate--has pronounced his party's views on the matter: "The tax issue is finished." Brian Knowlton, McConnell Takes Taxes Off the Table in New Talks, New York Times (Jan 6, 2013).
Folks, the stuff about the debt ceiling and the need to cut benefits under Social Security and Medicare is baloney. The US government isn't a family--it's a sovereign regime . We should learn from the Euro nations that are embroiled in a self-defeating austering regime that leaving citizens suffering while trying to toady to big business is a recipe for disaster.
President Obama had damn well better take Social Security and Medicare off the table as well as any corporate tax reductions. Get rid of corporate loopholes and let corporate tax revenues INCREASE. It is the only way left to try to re-balance an economy that is skewed in favor of the uber-rich and the multinational corporations and against ordinary Americans. Oh, it would also help to move to single-payer single-provider health care and get profit-making out of what should be an important human right.
And are we "spending way too much" anyway, as McConnell declares? Surely not, since we are only spending on things that the Congress has voted to spend on. If McConnell wants to spend less, let him propose a spending cut and put it to the vote. If it fails, then he should vote the taxes or borrowing needing to pay for the spending Congress has legislated.
So, just as my advice in the "fiscal cliff" debate was to go over the cliff, let the Bush tax cuts expire, and then put in place some decent cuts for the REAL middle class (those making less than $100,000 a year), my advice here is to go over the "sequester cliff" and let the across-the-board cuts, with the first real cuts to the military in decades, take place. We should damp down our military zeal and start to put our money where it will build good schools, good colleges, good public transportation, and ultimately good jobs.
As for the debt ceiling, the best thing would be for the Senate to eliminate the filibuster rule (or at least make the right-wingers do a physical filibuster) and eliminate the debt ceiling. It is an artifact of a different age, and is meaningless. Think about this.
1) we have spending bills that require us to spend X dollars
2) we have tax bills that only raise X-Y dollars.
3) we have a governmental obligation to pay the X dollars that we spend to those who provide the goods and services amounting to X dollars.
4) Therefore we have a governmental obligation to borrow the Y dollars that we don't raise with taxes.
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