ataxingmatter

"Getting Rid of the IRS"--Detroit's Nolan Finley's wrong solution to the wrong problem

I suppose it shouldn't be surprising that the mostly-to-the-right Detroit newspapers would have a center-page opinion piece calling for the elimination of the IRS, that ages-old mantra of the radical right and of those corporate-backed propaganda tanks and radical-liberatarian idea pushers like Cato and Heritage Foundation and Claremont and many of the Tax Party groups, etc.  But this one is so bad that it is necessary to call it out for what it is--a bunch of hog-wash.  See Nolan FinLey,  Let's Get Rid of the IRS, Detroit News (June 10, 2013).

Finley starts out with a presupposition that the scandal-mongering about the IRS is not only completely accurate (which it isn't--liberal and conservative groups were selected for scrutiny, and scrutiny was called for in respect of groups that had "tea party" in their names, since most of them were in fact mainly doing politicking) but that it was also "obvious[ly]" done from at the orders of Obama operatives to aid the President's election chances (which is completely unfounded conspiracy-mongering speculation).  He states that "the IRS has been caught red-handed targeting conservative political groups for special scrutiny in what seems obvious was an attempt to aid the reelection bid of President Obama."

An initial scaffolding of distortions and malicious speculation cannot bode well for any opinion piece.  So it isn't a surprise that the rest of the piece doesn't hold water, either.  He calls the required statutory scrutiny of applicants for 501(c)(4) status a "dragnet"--failing to even acknowledge that the statutory requirement states that such groups must be "exclusively" operated for social welfare purposes and that it is in fact through administrative dispensation via interpretative regulations that the IRS applies instead a "primarily" for social welfare purposes test, thus permitting (too much) politicking as long as it isn't the primary activity.

He goes on to claim that use of the term "patriot" as a screening filter for politicking groups implies that "the United States government finds something sinister in patriotism".  Again, that's a ridiculous association of what may possibily have been a perfectly reasonable though politically unwise filter term--i.e., if there are lots of groups with "patriot" in their names that do a lot of politicking, then it is a reasonable term to pick for giving those groups extra scrutiny to see if they do too much politicking, though the expectation that conservatives would rise up in arms if those types of groups receive extra scrutiny should have been a red flag cautioning against use of that term in spite of its usefulness.

Then Finley asserts that this conspiracy-theory thinking provides "more than enough reason to jettison plans to make it [the IRS] the enforcement arm of Obamacare."  Now, it is true that the IRS has so many different federal programs that it has to oversee that it is almost impossible for it to do an appropriate task of doing so.  Congress has loaded it with tasks (including all the tax expenditure programs embedded in the federal income tax code) and consistently underfunded it so that it is usually understaffed and overstretched.  But the answer to that is not to take away a task that it is perhaps best suited for out of all the agencies, but rather to fund the IRS appropriately so that it can do the tasks assigned to it by Congress.  Finley completely ignores the underfunding problem, since--as revealed later on--he really wants to decimate or eliminate the IRS entirely.

 Finley talks about the IRS as "an institution America no longer trusts"  because it is "the most feared agent" and on "that has proven itself willing to manipulate the levers of government to achieve a political end."  Again, many problems in this rhetoric. 

• If the IRS is actually the "most feared" (I personally suspect the CIA and FBI and NSA would come in ahead in that race, but haven't seen any actual empirical study on this issue)--even after the enactment of three laws pulling back on its power to enforce and essentially hamstringing its employees with the "ten sins" provisions included in the 1998 act (see earlier post)-- it is because for decades the right-wing propaganda tanks and media have been pushing distrust of the IRS and of taxes and of government generally.  People are influenced by that constant cry of "bad guy" based on blowing up of individual anecdotes into massive (presumed) patterns.
• And the claim that the IRS "has proven itself" using its power for political purposes is simply unfounded.  There is no "proof" of the assertion made by Finley.  He is merely playing the Bill O'Reilly game of asserting speculation--or even worse, falsehoods,-- as fact in order to buttress his own personal vendetta against the IRS and its employees.  Most IRS employees are civil servants, not political appointees.  I've known quite a few Republican IRS employees in my years as a tax practitioner, and have considered writing about what I consider a related problem -- that  too many IRS employees are too willing to court the pleasure of taxpayers such as big multinationals or large law firms or accounting firms that may well become their future employers or clients when they leave the Service.

 Now Finley hits his stride with his real objective--arguments for disbanding the IRS, eliminating the income tax, and replacing it with a (regressive and hard to enforce) national sales tax.

The most fitting punishment would be to disband the IRS. And junk the income tax, too. Mike Huckabee, former governor of Arkansas and now a TV talk show host, is urging Congress to replace the income tax with a national sales tax. You’d pay tax on the money you spend instead of the money you earn.That would eliminate the need for an IRS that audits tax returns, hands out non-profit status and enforces a tax code that is egregiously complex and unfair. Id. (paragraphing removed).

 Finley reveals his true ignorance here (if he hasn't done for most readers already).  Let's just consider first some of the ancillary issues around "disbanding the IRS".

• Because the IRS does function as the major enforcement agency for many things besides the income tax, Congress would have to undertake a comprehensive analysis of all of those activities and assign them to some other agency.  In all likelihood, that other agency would lack agents with expertise to handle the assigned task, and the result would be essentially a transfer of those currently staffed with the activity to the other agency, requiring considerable time to merge functions and perhaps failing to do it well enough to maintain current operating efficiency, much less improve it (just as huge mergers or consolidations of businesses often go awry). 
• Further, the time to do the study, legislate the transition, and implement the transition would require continued operation of the current agency and the replacement agency, duplicating costs at a time when conservatives like Finley claim they want to cut wasteful government spending.
• The Internal Revenue Code is not really "egregiously complex."   

1. Read earlier posts on the right's tendency to overstate (by tens of thousands of pages) the "size" of the Code and to treat "size" as an appropriate substitution for any analysis of complexity. 
2. Only 30% or so of individual taxpayers itemize, and itemization is the primary complexity faced by individual taxpayers.  Most of those who do itemize are in the relatively wealthy part (upper 30% )of the income distribution, and most of those who have difficult and complex decisions to make are the very wealthy who have expensive tax experts to do their work for them.
3. Most of the complexity in the Code stems from two factors--(a) tax expenditures (subsidies) that benefit (substantially, in most cases) particular types of wealthy and business taxpayers lobbied for by those taxpayers and (b) anti-abuse rules necessitated by the clever tax strategies invented by the wealthy taxpayers' (especially corporate and business taxpayers') expensive tax experts.
4. It is naive to think that any tax system--whether income or excise or transfer or territorial or worldwide or sales or VAT-- could be "simple" for wealthy individual and corporate taxpayers with a global playing field and incredible sums able to be spent on avoidance and at the same time generate sufficient revenues to provide for the most basic of public goods and services, including a decent safety net for those caught in vulnerable positions by age, illness, or other lack of privilege.

5. Most sales tax systems include incredible arrays of exemptions (for example, for non-profit groups and charities) and exclusions (for "necessities" where the sales tax could make a difference between life and death for those living in poverty) and special provisions (lobbied for by particular industries).  A VAT (if that were the form required) would in all likelihood require the same complexities about what is income or not that an income tax requires.  A VAT or a national sales tax would require a mechanism for enforcement of collection not unlike the IRS's function and a mechanism for tracking individual's payments not unlike the IRS's current function.  It would not permit the elimination of audits of tax returns (just different kinds of returns), handing out nonprofit status (just a different rationale and basis) or enforcing a complex tax code (just a different one). 

 Finley's ignorance is further revealed by his claim that a "similar outcome" (disbanding or making the IRS much smaller) could be achieved by "vastly lowering current income tax rates in exchange for eliminating all deductions and credits" because there would be "no reason to examine returns."

• lowering rates doesn't achieve anything but less revenue--which will have to be made up for in other ways (adding complexity) or by further hardship on the already suffering ordinary people of this country who bore the brunt of the Great Recession, the foreclosure crisis, the unemployment crisis, and the corporatisation of education that has paid administrators twice or more what they are worth while cheating professors, teachers and students;
• eliminating all deductions and credits might simplify somewhat the income tax, but at the cost of considerable unfairness in many cases--for just a few obvious examples, removing the foreign tax credit for taxes paid to other countries would result in some instances in "double taxation" of the same revenue by the US and the other country; removing the "standard deduction" and "personal exemption" would undermine a universal view that the income tax shouldn't reach the amount necessary to maintain a barely sustaining level of income for food, shelter and clothing;
• even if it were possible to "lower rates and eliminate all deductions and credits", it wouldn't be possible to get rid of the IRS or eliminate audits or curtail enforcement or reduce the tax code to something a kindergartner could understand--a critical question for the Code is "what is income"--and therein lies a huge portion of the complexity and most of the ways that taxpayers have found to abuse the rules by claiming "phantom" losses.  (Note that Finley doesn't talk about removing elections, exemptions, and exclusions--was that intentional?)  There would still be the same need for returns, audits, and enforcement, and there would still need to be all the procedural provisions for litigation and regulations and penalties and interest on overdue taxes.  There would be rules still for all the different types of entities (much of the complexity of the Code lies in the rules for permitting partnerships to have considerable flexibility in their allocation of income and losses among the partners).  Certainly Finley wouldn't suggest that the tax code should get to tax gross income and taxpayers be required to forego claiming any losses!

Finley ends with what he thought was a question requiring an obvious answer of "none"--essentially asking that if we can eliminate the IRS and get rid of the health care "entitlement", "what's the downside?"

The answer is not the one he so ignorantly professed to believe.  The downside is huge, and there is little upside.  Finley disregards the growing inequality in this country and the continuing poverty in what is still the richest country in the world.  He doesn't care, apparently, that his "solution" would create even more problems for the poor, as programs that they depend on administered through the IRS-such as the Earned Income Tax Credit and the standard deduction and personal exemptions--would be eliminated with his proposal.  Further, without a tax collection and enforcement agency, much of the good done by the federal government would wilt on the vine--from the Centers for Disease Control to the NIH and the Smithsonian, from transportation safety to education funding, and even the right's much beloved military.  We simply can't and shouldn't get rid of the IRS--every advanced country in the nation has a bureau that collects and enforces the tax laws.  We could get rid of the particular health care reform enacted as Obamacare, but we shouldn't --rather, we should continue to improve it, ultimately instituting Medicare for all and removing the rent-seeking profiteers from the picture except for those who have so much money that they can afford to buy luxury health care.

Finley's proposal amounts to more hot-air from the right about their favorite target--taxes and tax enforcement--that would have regressive results lopsidedly benefiting their favorite beneficiaries--the wealthy and Big Business (owned mostly by the wealthy).  Apparently, people like Finley really want a country where brute market forces allow a few to reap all the benefits and the many to suffer, resulting in a classed society with the few living in relative splendor and the rest living off the dregs.  That would be the result of most of these proposals for turning to a regressive sales tax and shutting down federal tax enforcement, making such proposals a form of class warfare pure and simple.

(if you don't believe me about "rent-seeking profiteers" in the health care business, read Saturday's New York Times story about the way Questor--a Big Pharma company--has reaped huge profits by essentially building a monopoly power over an immune-disorder drug called Acthar and now intends to purchase a competitor's potential threat (selling for tens of thousands less) because  a US startup wanted to make it available cheaply in the United States.  Questor bought Acthar in 2001 when it was selling for just a few hundred dollars a vial.  By 2007 questor had increased the price to almost $1500 a vial.  And in 2007, Questor increased the price in a single jump to $23,000 a vial--yes you read that number correctly.  This is the perfect example of the fact that the right's beloved "market" doesn't work if the government doesn't provide the right framework--in this case, enforcement of anti-trust laws much more stringently than has been done in the last few decades as anti-trust has practically dropped from the national vocabulary.)

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Margaret Thatcher, Polarizing Right-Winger

The major news media celebrated Margaret Thatcher upon her death.  They seem to praise her stubbornness and ability to move the UK to support her very conservative anti-union, pro-deregulation and privatization policies and talk of her impact on the UK.  David Brooks, a typical voice on the right who saw Thatcher as a hero of conservative politics, has this to say in his op-ed in the New York Times today, The Vigorous Virtues, New York Times (Apr. 9, 2013).

Margaret Thatcher was a world historical figure for the obvious reasons.  Before Thatcher, history seemed to be moving in the direction of Swedish social democracy. After Thatcher, it wasn't. ...

She lionized the self-made striver. ...She championed a certain sort of individual ...: "upright, self-sufficient, energetic, adventurous, indepedent-minded, loyal to friends and robust against foes." (quoting Shirley Letwin)...

Today, bourgeois virtues like industry, competitiveness, ambition and personal responsibility are once again widely admired .... Today, technology is central to our world and tech moguls are celebrated.  Tony Blari and Bill clinton embraced and ratified her policy shifts.  Millions more have been influenced by her idea of what makes an admirable individual.

A.C. Grayling presents a much more realistic--and somber--view of Thatcher's "contribution" to the UK in his op-ed, Thatcher's Divided Isle, New York Times (Apr. 9, 2013). 

It is hard to think of a more divisive figure in British politics than Margaret Thatcher. ...

Her admirers laud her for breaking Britain's once-powerful trade unions, and liberalizing the City of London's financial services industry; these acts, they say, halted the country's economic decline.  Her detractors blame her for destroying much of the country's manufacturing base by refusing to aid struggling industries and effectively annihilating the mining sector by emasculating the National Union of Miners.  Her premiership will always be remembered for the bloody battles between workers and the police, and the high unemployment and sudden appearance of industrial wastelands that followed. ...

Mrs. Thatcher left behind a changed and divided Britain.  She dismantled local government structures ...which meant that urban decay and the effects of unemployment were not adequately countered.  .....[S]he did little to advance the cause of women generally. ...She was also unfriendly towards homosexuals. ...

She began the deregulation of banking that led ultimately to Britain's contribution to the global financial crisis of 2008.  She reversed the trend of greater social integration and diminishing of the wealth gap that had characterized Britain in the three decades after 1945.  Postwar convergences in class and wealth disappeared and former divisions resurfaced as consumerism and social incivility followed quickly on her brusque reorganization of British society. ...

This much is quite clear:  Thatcher wanted to break unions, privatize public resources, and deregulate industries.  She pushed the same ideological conservative manifesto that Ronald Reagan did in the USA. Reagan's legacy (and Thatcher's) regretably lives on today as we face daunting inequalities of opportunity and resources, inequalities that underlie a host of other problems in society.  It traces back to the use of Friedman's Chicago School "free market" theories to push lower taxes for the wealthy, expanded use of more regressive taxation and less supportive social insurance programs (the calls for a VAT or national sales tax to replace income taxation, the demands for Social Security cuts and Medicare premium increases, etc.), treating government as "the problem" rather than an essential part of the solution, unquestioning admiration of the wealthy few as "responsible" "job creators"  and an accompanying trend to treat the poor and lower income (Romney's "47%")  as irresponsible bums living off so-called "entitlements".  The result is the expansion of harmful extremes of inequality from coupling regressive tax policies  with wealthy corporatists' capture of elective officials (think Citizen's United) and hence of legislative policies.

 

 

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Mark Thoma puts Holtz-Eakin on (figurative) hot seat

As most of the ataxingmatter readers know, I do not frequently applaud the economic punditry of those freshwater economists who think the way to deal with the problem of failed market fundamentalism policies is to double-down on those failed policies. 

I've noted that we tried that already.  We doubled down on  reaganomics policies of tax cuts/militarization/deregulation/& privatization throughout the Bush regime, and that got us into a witch's brew of problems. 

Because of that double-down mentality, where the neos told us war was good and greed was good and where we applied the laughable, made-up-out-of-whole-cloth "Laffer theory" that told us there was no evil that tax cuts (especially for the rich and big corporations) couldn't conquer, the Bush regime very ably turned a budget surplus into a staggering deficit and a financil crisis that would guarantee more deficits and debt before we were done with it. 

We ended up with failed (de)regulatory policies.  They allowed Big Banks and their big moneymakers to speculate their way into phantom billions of profits (all soaked up by the big jefes/big moneymakers).  But instead, we got a near-breakdown of the financial system, that forced all us ordinary taxpayers to subsidize the Big Banks' losses without getting recompense from the banksters' earlier oversized payouts. 

We ended up with failed tax (cut) policies.  They cut taxes on big multinational corporations and the ultra rich, based on the claim that those are the "job creators" that we should reward.  But instead  they only ended up siphoning off needed revenues from programs that could build infrastructure and support quality education and research.  They privatized education by providing lots of federal loan money to students that went to for-profit schools, only to learn that those schools tend to be traps that don't educate but just take money for the profit of the "education" business.  They quit funding the stuff we need, so they could subsidize those that didn't need it.  And they kept the subsidy up--for Big Oil, for wealthy decedents--even when the money was just piling on for those that already had lots of it.

That's what makes the current ultra-partisan Congress and the constant right-wing talk of deficits and debt as justification for stripping the safety net (while still conferring outsize gains on the ultra rich and Big Business) so disgusting.  The right still  refuses to pay attention to facts and justifies this oft-discredited, clearly wrong-headed market-fundamentalist and class-warfare orthodoxy as "plain as day" correct thinking. 

ASIDE:  This seems sort of like the GOP's plans for gaining the loyalty of our increasing diverse electorate by being careful to package their mostly white, Friedman-orthodox, oligarchy-favoring policies in the sheep's clothing of multicultural spokespersons who avoid the "tell" of who they really are and use words that talk about ordinary people as though the policies were actually aimed at benefitting them.  Meanwhile they double-down on their claims that redistribution upward is all about job creation, and condemn those who talk about preserving the safety net by NOT reducing benefits as "socialists" who don't understand the American way. 

The American way they seem to be harking to is the era of the corporate titans of malfeasance that Teddy Roosevelt warned us against, who grabbed the gains of the market place well in excess of their productivity merit and didn't give a damn about the rest of us. (Take Leland Stanford and the building of the great western railroads, subsidized by vast land grants and other programs from the federal government.  Stanford was quite willing to let the Chinamen he hired to use their explosive expertise to carve out railroad tunnels live in hunger because he withheld their pay and die because of inadequate safety , but meanwhile he lived a life of luxury supported by his corporate structure that sent all the money supported by the government subsidies his way and none of it theirs.)

Douglas Holtz-Eakin is a prime example of doubling down on failed policies by ignoring the facts of recent experience.  See Holtz-Eakin, We have to get US government spending under control, guardian.co.uk (Feb. 14, 2013).  Mark Thoma does a good job of putting him on the hot seat and telling it like it really is.  Read it at Holtz-Eakin Tries to Scare You. Don't Let Him, Economist's View (Feb. 14, 2013).  Here's an excerpt

Holtz-Eakin (in the Guardian essay): "Debt reduction produces jobs and better economic growth."

Mark Thoma (in the Economist's View take-down): "[R]eading that last line, he has learned nothing from the failure of the confidence fairy to appear.  Waiting to fix the debt--a problem driven mainly by health care cost escalation that won't become severe for many years--is not risky, but his advice certainly is."

***

Holtz-Eakin (in the Guardian essay): "Down with the orthodoxy.  It is time to get the deficit under control."

Mark Thoma (in the Economist's View take-down): "The notion that we are responding in the same way as in the 60s and 70s, and that we are faced [with] the same type of shock (that require[s] the same types of policies)--an oil price shock and other large supply-side distrubances from demography that we faced then--is wrong and he ought to know that."....."The 'pundit orthodoxy' he disses is from Paul Krugman.  Kind of funny, given how wrong Holtz-Eakin has been relative to Krugman ... but Krugman can speak for himself, and has, on how wrong the 'we're about to become Greece!!!' crowd has been.  There is, however, one thing he [Holtz-Eakin] is correct about.  Holtz-Eakin is right to say we shouldn't listen to some pundits, especially those like himself who have been so wrong about how events would unfold at every step along the way."

Holtz-Eakin does a lot more in the Guardian article that is just plain bad, such as claiming that the so-called  Affordable Care Act "entitlement" will contribute to the so-called "entitlement problem," which will contribute to the "serious" problem that the "deficit orthodoxy" won't acknowledge.  He then hammers on the right-wing orthodoxy's pet do-away-with-it-if-we-can projects--Social Security, Medicare, and Medicaid, suggesting that "serious debt reform" requires "serious entitlement reform."  

As I noted in another recent post, right-wingers like Holtz-Eakin love to talk about safety net programs as "entitlements", whereas they talk about entitlements for the rich and MNEs, such as the percentage depletion allowance, the preferential capital gains rate, and the various subsidies that have handed outsize profits to big banks as though they were rightfully merited acknowledgements of the good those institutions do the rest of us! The talk about these safety net programs, when entering into a right-winger's discussion of fiscal issues, is always lopsided.  It is always how we need to cut back on them, and never about how we need to consider if the programs are worthy, the funding currently provided needed or even currently inadequate, and, if the answer is yes, what means make sense, in a sustainable democracy to serve the people, to ensure the ongoing viability of the safety net.  Not reducing benefits but increasing revenues and decreasing rent-profit-taking. 

So  Holtz-Eakin fails to acknowledge that actually the Affordable Care Act is a first step in addressing otherwise mushrooming health care costs which occur because we treat health care as a ripe field for rent-seekers to make rentier profits rather than acknowledging (like other advanced countries) that health care is at least a quasi-public good that must be heavily regulated to ensure accessibility.  And like all the right-wingers pushing the hand-wringing worry over deficits for which their own policies are the primary cause, Holtz-Eakin suggests that the core of what we have to do is, quelle surpise, "spending cuts and deficit control", since "doing nothing or worse, increasing spending, is a profoundly anti-growth strategy."

This is the doubling-down on failed policy orthodoxy that Americans should reject out of hand.  Spending cuts and efforts at "deficit control" that focus on taking away health care and pension benefits from retirees and others dependent on the safety net are perfect prescriptions for disaster.  We aren't Greece.  But if the right-wingers like Holtz-Eakin get their way, we will be.

 

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More on the Threat to Social Security and Medicare from the so-called "Fiscal Cliff"

In several posts recently I have discussed the harmful demands the right is engaging in related to the so-called "fiscal cliff" created by the original Bush tax cuts (set to sunset en masse), the artificial debt ceiling (used by the GOP to exact promises of spending cuts during a recession along with extension of unneeded tax cuts for the rich), and the ill-conceived notion that the U.S. military should continue to be funded at dangerously high levels that (i) ensure that the military-industrial complex will find a war or quasi-war in which to engage their newest toys while (ii) sucking resources from public infrastructure projects and education that are vitally needed to sustain our economy.  See, e.g., The GOP's extortion demands: cut Social Security or we'll shoot; If the Dems got backbone; Is it a fiscal cliff or merely a bump in the road; We face an 'austerity crisis' not a 'fiscal cliff. 

A. The Explanation.

At least the national media and a slew of bloggers are beginning to provide some background information to ordinary Americans on just what is driving the national discussion of "fiscal cliffs" and "austerity" demands.  See, e.g., Richard Rubin & Heidi Przybyla, Tax Pledges Confound Math as Obama Seeks Deal with Republicans, Bloomberg.com (Nov. 16, 2012) (noting that "The $607 billion fiscal cliff is the combination of tax increases and spending cuts that will take effect in January if Congress doesn’t act" and characterizing the positions of the parties as follows: "Republicans want to extend expiring tax cuts for all income levels and are demanding an overhaul in 2013 of entitlement programs and the tax code" while "Obama wants $1.6 trillion in higher taxes for top earners over the next decade, achieved through a combination of limits on breaks and higher tax rates on ordinary income, capital gains, dividends and estates"); Jackie Calmes, Demystifying the Fiscal Impasse that is Vexing Washington, New York Times (Nov. 16, 2012), at A19 (the online article is dated Nov. 15). 

[A] slew of tax cuts — $400 billion for 2013 — expire on Dec. 31: All of the Bush-era rate reductions; smaller tax cuts that periodically expire for businesses and individuals; and the 2-percentage-point cut in payroll taxes that Mr. Obama pushed in 2010....  Also, 28 million taxpayers — about one in five, all middle- to upper-income — would have to pay the alternative minimum tax in 2012.... That is because Congress has failed to pass an inflation adjustment....

***

An emergency unemployment-compensation program is expiring, which would save $26 billion but end payments to millions of Americans who remain jobless and have exhausted state tax benefits.

Medicare payments to doctors would be reduced 27 percent, or $11 billion, because this year Congress has not passed the usual so-called 'doc fix' to block the cuts....

The biggest cut would be $65 billion, enacted across the board for most federal programs over the last nine months of fiscal year 2013, from January through September.  This cut, known as the sequester, was mandated by an August 2011 budget deal between [President] Obama and Congress that ended [the GOP] standoff over raising the nation's debt limit.   Demystifying the Fiscal Impasse that is Vexing Washington

It is surely accurate that our still-weak economy would do better if we do not hit it too hard with decreases in government spending--especially decreases to government spending that supports the most vulnerable amongst us who need unemployment support in order to provide the basic necessities.  Similarly, it is surely true that some of the Bush tax cuts and the Obama payroll tax reduction are still vitally important to those in the lower 60% or so of the income distribution because of the slow growth in the economy.  We will want to find some resolution to the situation that accommodates the need to avoid a harmful austerity approach.

So the Times' explanation of the components of the so-called "fiscal cliff" is okay.  And it is reasonable in noting that the situation is currently "vexing" to Washington.  Similarly, the Bloomberg article succinctly characterizes the clear poles of the Democratic and Republican positions--a Democratic insistence on higher taxes paid by the rich, and a Republican insistence on so-called "tax reform" and spending cuts, aimed in particular at the earned benefit and safety net programs of Social Security, Medicare, and Medicaid. 

B. A Grand Bargain or a Devil's Bargain--How the Heck Did Social Security Even Get In the Picture?

Where the Times article fails is in its discussion of the "reasons"  for excessive worry about the "fiscal cliff" (if one can really call the GOP recalcitrance to immediately pass an extension of at least a good portion of the Bush tax cuts for individual taxpayers in the true middle class any form of reason).  

The Times article asserts that the "main disagreement" between Dems and Republicans is merely the question of extending the Bush tax rates for the top 2 percent of taxpayers.  That is a considerable understatement, one that results in part from the way the media reduces complex issues to easily retained soundbites, in that it ignores the considerable disagreement about whether and to what extent there should be any changes at all to the various earned benefit programs. 

The  article author appears to operate on an unstated assumption that because President Obama seemed ready to trade off changes in Social Security, Medicare and Medicaid benefits for higher taxes on the very richest of the rich in August of 2011, he will still enter into such a "Grand Bargain" to avoid the so-called "fiscal cliff."  Progressives hope, at least, that Obama will not fall prey to those same conclusions: Obama is now in a position of considerable leverage, and he must recognize that he cannot allow the Democrats to be extorted into a Devil's Bargain to reduce Social Security, Medicaid, and Medicare benefits in exchange for the pittance of slightly higher taxes on the upper crust.

The article goes even further astray at the end with its label of a "two-part deal" as the "best-case outcome".  It claims that "[m]any budget experts and economists are hoping for a two-part deal.  The first part would extend many of the tax cuts and repeal the automatic spending cuts to avert the changes scheduled after Jan. 1.  But it would be contingent on the second part: a framework for reducing projected long-term deficits by overhauling both the tax code--to raise revenues--and entitlement programs--chiefly Medicare and Medicaid, whose rising costs in an aging population are unsustainable."  Id.

Of course, here the "many" is simply put out there without any context, so one can't challenge the statement as accurate or inaccurate.  The right-wing has a stable of market fundamentalist economists who want to see earned benefit programs reduced, and there are certainly the Blue-Dog Dems and a number of others (like the Bowles Simpson group) who go along with that with little questioning of the ultimate negative impact on quality of life and decency of those determinations.  Overall, there is considerable parroting of the right-wing rhetoric that suggests that these vitally important programs have to be overhauled, rather than recognizing that it is the factors that lead to ever-increasing costs for medical care in the United States that must be addressed.  And it mistakenly suggests that there is a consensus in that regard. This is a perfect example of the way today's journalists buy into the rhetoric that is promoted (at great expense) without questioning the fundamental presuppositions underlying it.  In fact, the sequester deal did not touch Social Security, Medicare and Medicaid because there was no consensus that these programs should be reduced.  And the election results demonstrate that there is no consensus now that these program benefits must be reduced, though there is likely a consensus that health care costs in this country are increasing well beyond what is reasonable.  It is absolutely critical that the distinction be made.

So let's take these issues into consideration here.

C. Thinking about the two key components of the so-called "fiscal cliff"--tax cuts and spending cuts.

1. The Bush tax cuts, job creators, and uncertainty

The right has, not unexpectedly, argued that not extending all of the tax cuts--including those that amount to significant dollars for the wealthiest upper crust--will create a dire situation since, the right argues, the wealthy are the "job creators".  There is no empirical evidence supporting the idea that tax cuts for the upper crust do anything to create jobs: most jobs are created by small businesses, and those with incomes above $250,000 make up only about 3% of small businesses. 

Others argue that the uncertainty of letting the Bush tax cuts expire on December 31 is itself a dire blow to the economy.  But in the same breath, the media and most members of the Democratic and Republican parties acknowledge that they do not disagree on the need to extend the tax cuts for the middle income group at this time--the Democrats because they recognize that the tax cuts are still needed at a time of continuing slow growth out of the Great Recession caused by the profligate regulatory and tax policies of the Bush years, and the GOP because they recognize that they have no opportunity for an electoral majority if they continue to ignore the middle class. 

Thus,  savvy political advisers note that allowing the Bush tax cuts to expire and then enacting judiciously selected tax cuts targeted at the middle class (perhaps similar to the Bush tax cuts for the lower income groups or perhaps more carefully selected and without the many corporate tax giveaways) are fairly sure things, so that the arguments from uncertainty reduce to the same-old right-wing scare tactics.

2. The sequester, military spending, health care costs, and the importance of Social Security, Medicare, and Medicaid

Some conclude that neither side wants the sequester, with its domestic spending cuts and military cost-cutting, to go into place.  This, too, may be incorrect and overly simplistic. 

Many progressives recognized that we have a substantial imbalance in spending, in which we neglect public infrastructure (roads, bridges, public transportation especially rail and inter-and intra-city rail) and human capital development (funding for public education and for basic research) while pushing money at the military-industrial complex.  The latter step merely encourages the military to find ways to use the military investment it makes--i.e., more money essentially fosters war-mongering simply by providing plenty of the tools to carry it out through exorbitant expenditures on the military.  Letting the sequester take place is probably the only way that our dysfunctional Congress--with far-right-wing/Tea Party dominance in the House and the minority-control rule through the filibuster in the Senate--will be able to undo the disastrous emphasis on military spending above everything else that began with Reaganomics.  

Accordingly, a better course might be to let the sequester take hold, too, and then selectively undo cuts that jeopardize sound government--such as cuts to research, centers for disease control, public transportation, public infrastructure, education, and funding of public pension obligations.  Surely the right recognizes that Americans are not happy when lax regulation results in deaths from medical care because Congress was lobbied out of regulating compounding pharmacies or deaths from bridge collapse because Congress refused to spend sufficiently on upgrading our antique transportation infrastructure or continually falling behind in research on Alzheimers and cancer and the many other modern afflictions because Congress has been so stingy with federal funds supporting basic research at our research universities.

OF course, we know from the election that today's GOP sees no problem with cuts to various domestic programs that the Dems (and many ordinary Americans) hold dear--the right's admitted goal since Reagan has been to reduce the size of government, on the ill-founded belief in market fundamentalism that private markets can do everything better.  

But we have years of evidence that disproves that belief, and progressives must start publicizing the absurdity of the right's claims about market fundamentalism and the right's denials about basic scientific theory.  Climate change is real, and investments will be required to protect our great cities.  Social Security is not bankrupt, and there is no reason that it cannot continue for years (even indefinitely) without reducing benefits.  Markets like medical care simply don't work without governmental intervention because Big Pharma, Big Insurance, and Big Med (especially for-profit hospitals, nursing homes but also too highly compensated doctors combined with too lowly compensated aides and other assistants) exercise near-monolithic control of access and pricing, rendering the health care "market" dysfunctional, and government intervention will be required to create health-care delivery systems that serve the people. 

(Even those who ascribe to Milt Friedman's views of how markets work--views which in my view are based on unrealistic and overly simplistic assumptions that leave out most of the truth of human behavior in order to arrive at neatly mathematical formulas--recognize problems with the health care market where physicians operate in a structure of monopolistic competition.  In Capitalism and Freedom, Friedman noted that state licensing acts as a barrier to entry that gives physicians considerable market control, thus resulting in rent profits.  Friedman's market fundamentalism solution would be to allow anyone to practice medicine without a license, thus creating consumer "choice."  Query whether anyone without considerable wealth would actually prefer a return to those "quack" days of frontier medicine where such a market existed or would rather have a version of today's regulated system of health care professionals with both affordability and competence. I argue that the latter is both preferable and attainable.  See below.)

The following provides some of the factual evidence for the importance of government intervention in the medical care market--European and Canadian health care, which are generally forms of government single-payer or single-payer/single-provider care, and Medicare, which is a form of government single-payer care, are both considerably less costly and substantially more universal in coverage than the standard, private market U.S. medical care model.   See, e.g., the OECD's comparative statistics on medical care provision in the US compared to OECD countries and Canada, available here (see statistical spreadsheet here).

Total Healh Care Spending Per Person, 2010: US (8233); OECD avg (3268); CA (4445)

Total Health Care Spending* as Share of GDP, 2010: US (17.6); OECD avg (9.5); CA (11.4)

Pharmaceutical Expenditure* Per Person, 2010: US (983); OECD avg (496); CA (741)

Practicing Physicians Per 1000 Population, 2010: US (2.4); OECD avg (3.1); CA (2.4)

Practicing Nurses Per 1000 Population, 2010: US (11.0); OECD avg (8.7); CA (9.3)

Physician Consultations Per Person, 2010: US (3.9); OECD (6.4); CA (5.5)

Medical Graduates Per 100000 Population, 2010: US (6.6); OECD (10.3); CA (7.2)

*expressed in dollars adjusted for purchasing power parities (rates of currency conversion that equalise the cost of a given 'basket' of goods and services in different countries)

The U.S. medical care market's high costs are attributable to a variety of factors, but perhaps the most significant is the potential for "rent" profits to Big Med, Big Pharm, and Big Insurance. 

Note that the right's "reaganomics" rhetoric has been that we have to reduce the size of government by cutting government costs specifically for the social justice programs that serve a majority of our citizens, particularly in their old age.  The right's most important priority for reductions in government services, that is, are reductions to the earned benefit programs that it calls "entitlements" (a term that it does not extend to the various tax expenditures that provide all kinds of gravy for the upper crust and multinational corporations like Big Oil, Big Pharma, Big Banks, etc.).  The right wants to reduce the deficit on the hides of the poor, the elderly and those who have little besides Social Security and Medicare for retirement (because of their reasonable reliance on their availability to buffer the viscisitudes of private markets in their old age).  So the right proposes either privatizing ("voucherizing" Medicare; "optionalizing" Social Security) or shifting programs to the States (where reductions in Medicaid funding for the poor can be hidden more easily) and/or reducing benefits by increasing the age for eligibility and decreasing potential payments.  In other words, the right treats a problem caused by the unduly high costs of a wacky, quasi-monopolistic, market-based medical care system as best solved not by bringing the costs down the way every other civilized peer nation has done, but instead by preventing the majority of Americans from having access to decent medical care if they are poor or old and dying or physically handicapped or otherwise unable to afford private insurance.

 *****

After all, as Robert Reich argues, the "fiscal cliff" and "looming budget deficits" aren't the worst of our problems. 

The central problem of our economy is widening inequality. It's reducing the purchasing power of the vast middle class on which job growth depends, and turning the economy into a speculative casino for multimillionaires and billionaires.  It's also undermining our ability to turn the economy around, as those millionaires and billionaires subsidize politicians who refuse to raise taxes on the wealthy and seek to cut spending critical to the middle class and the poor.  Robert Reich, Stop income inequality!, Salon.com (Nov. 15, 2012) (formatting changed).

The more I think about this, the more I am convinced that, as Kenneth Thomas says, Democrats Should Just Sit Back and Ride Over the Fiscal Cliff (in a post at Middle Class Political Economist, republished on BusinessInsider.com, here). 

[The fiscal cliff] is the combination of spending cuts and tax increases set to take place on January 1 based on several different laws.  Estimates of the consequences run as high as $800 billion next year, or 5.2% of the country's $15.29 trillion gross domestic product in 2011.  Yes, that would mean a recession, with obvious consequences for the middle class.  But this is only true if we did nothing after January 1, and that's not going to happen.  Id.

Growing inequality calls for both "predistribution" and (rightly directed) redistribution

In putting forward my theme of democratic egalitarianism, I have often noted that there is no such thing as an economically egalitarian society--there will always be differentials among people, those differences often relate to social class and the education, privileged upbringing, and networking connections that ensure success for some and deny success to others as well as to innate abilities, so that those differences inevitably translate into some being better off economically than others.   

Because of those differences, the "powers that be"--i.e., existing concentrations of financial assets, prestige and associated political power among the privileged class at the very top of the income and wealth distribution-- result in redistribution upwards from poor and middle class to the upper crust.  And most in that privileged upper-crust think they've acquired it all on the basis of their own merit and that the reason others don't have it is because they are irresponsible, don't work hard enough, don't have a good business sense or are just incompetent. 

(That is of course the tale told by the like of Mitt Romney at his private fundraiser in Flordia, where he revealed his utter disdain for half of the US population and his self-indulging belief that he got where he is entirely on his own merit .  He can't even see, much less acknowledge, either his silver-spoon upbringing of class, wealth and connections or the various government-subsidized upwards redistribution from which he has benefited through capital gains preferences, carried interest treatment, disregard of the harm caused by his leveraged-buyout business model, and government subsidies through high-value government contracts and low-cost government loans.) 

Therefore, I have argued,  democratic institutions (government, programs, policies) must target achieving a sustainable economy that provides a decent livelihood for all.  They must also prevent inordinate inequality, because huge inequality among the citizenry foils all attempts to achieve either a sustainable economy or sustainable democratic institutions. 

That means that government policies must focus on creating paths for redistribution downwards from the upper crust to the middle and lower classes, undoing the corporatist top-down approach that has supported class warfare and allowed the wealthy to capture most of the productivity gains since Reagan's presidency.  Two government systems can work, on the margins, to achieve some level of downwards redistribution--benefits and taxes.  Benefits do so by providing a safety net under those most vulnerable who have never achieved a sustainable economic livelihood--the unemployed and unemployable, the sick, the elderly, the children who have poor schools, poor families, and inadequate shelter, nutrition and opportunity.  Taxes do so by taking more from those who have grabbed an inordinate portion of the resource pie and using those revenues to fund benefits as well as infrastructure (human and physical) that supports the efforts by ordinary Americans to achieve sustainable livelihoods.

We have been moving backwards on both of these systems.  The radical right has spent the last 30-40 years pushing an agenda that ultimately wants to (i) dismantle or radically reduce benefits programs (voucherizing medicare, privatizing social security, cutting back on unemployment, allowing states to reduce medicaid and children's health coverage, etc.) and (ii) eliminate taxes on corporations and the primary source of income of high-wealth individuals through a gradual reduction in progressive rate structure, elimination of the estate tax, elimination of capital gains taxes (and treatment of wealthy people's wages as though they were capital gains, through provisions like stock options and carried interest).  Paul Ryan's positions on Medicare and Social Security should be a clarion-call to get out the vote--against the Romney-Ryan ticket-- of every person who does not earn more than $300,000 a year.   The Norquist-Koch Brothers-Karl Rove-Ryan-Romney agenda on taxes should similarly cause ordinary Americans who earn less than $300,000 a year to take to the streets and to refuse to vote for any member of the GOP.  Recall that the beginning of the current trend towards too little tax revenues and especially too little taxation of the ultra rich was radical reduction of rates with purported base-broadening (such as elimination of the capital gains preference, creation and then ramping up of the alternative minimum tax).  As could be expected, lower rates lived on (and were lowered even more by Bush) but much of the base broadening was short-lived:  lobbying by the privileged at the top led to a quick return to a capital gains preference and the undoing of the AMT as an inequality leveler.  The Bush tax cuts rewarded corporate owners and managers and the wealthy class with extraordinary tax relief, while imposing long-term deficits on the country, behind a cheerful facade of "tax simplification" that was irrelevant for the 70% of the population that uses the standard deduction.

There is a third leg to the reduction-of-inequality stool.  Tax reform that restores a truly progressive income tax is one leg.  Benefit reform that builds on the achievements of the New Deal rather than destroying them is another.  The third leg is what some call "predistribution"--paying attention to the means by which the uppercrust has seized all of the productivity gains and reduced the ability of everyone else to have a decent, sustainable livelihood. 

British Labour leader Ed Miliband has called for predistribution as a new agenda in Britain.  See Predistribution: A Big New Idea, Noted, The Nation (Oct. 8, 2012), at 5. 

The term [predistribution] was coined by US political scientist Jacob Hacker, who in 2011 noted that discussions of government responses to inequality often begin and end with redistribution [downwards]--taxing the rich to provide benefits for the rest.  But that's only half the equation, Hacker said, uring progressives to pay more attention to 'the way in which the market distributes its rewards in the first place.' That includes regulations that protect consumers and empower workers: 'The regulation of markets to limit extremes and give the middle class more voice is hardly easy. ... But it is both more popular and more effective than after-the-fact mopping up.'

Milibrand agrees.  Noting the high human cost of austerity, he said, 'We need to care about predistribution as well as redistribution.' After trying 'to make work pay better by spending more on trasfer payments,' he argued, government must 'also make work pay better by making work itself pay.'

These concepts--predistribution (making up for malfunctioning markets to make work itself pay) and redistribution downwards (actual reallocation from market results through taxation and benefit policies)--are closely interrelated.  Successful redistribution downwards augments the ability of workers to afford necessities and small luxuries, and that economic activity empowers workers in the markets and gives workers an opportunity for a voice in the markets and workplaces compared to a position where employers and owners have almost dictatorial control and can garner all the workers' productivity gains for themselves.  Focus on predistribution, however, reminds us that worker rights are essential to a sustainable, broad-based economy

What kinds of rights are we talking about?  Surely a critical right is the workers' right to collective bargaining (supported by a "yes" vote on Proposal 2 in Michigan that would put that right in the state constitution where it could not be removed by the radical right legislative block).  Surely the right of the state to build infrastructure (that will create worker jobs) rather than allowing a wealthy tycoon to corner the market on international bridge crossings in Detroit and hog the revenues for himself rather than allow them to be earned by the people (Proposal 6, vote "no" so that Matty doesn't have veto power allowing him to co-opt public infrastructure for his private profits).

Predistribution pays attention to how much ordinary workers are paid compared to how much the managers at the top get out of a company.  We should be "pushing local employers to narrow the pay ratio between the top and the bottom ranks of their workforce."  Id.  For too long, we have acted like it is just fine for the "market" to demand that the wealthy be allowed to exploit communities and workers for their own benefit.  We need to say no.

Predistribution pays attention to regulations that protect workers--from worker safety to time off to family leave. It disregards the multinational corporations' pleas for laws to suit them and instead asks why we should be subsidizing their ability to move active business assets to foreign countries and leave US workers unemployed.  It acnkowledges that we have for too long allowed corporate owners and managers to snow us with their claims that "globalization" and "free trade" worked for our benefit, when in fact these are excuses for offshoring jobs so that the owners and managers can enjoy even higher "rent" profits.  As Milbrand says, "It's just not true that all the top CEOs will leave the country unless we pay them whatever they demand."  Id. 

Illinois's Tim Johnson (Rep.) Squirms under Norquist No-Tax-Increase Pledge

Back in 2002, Tim Johnson represented a safely red district in Illinois and the radical right was pressing on his back with its reaganomics-inspired program to cut-taxes-to-shrink-(nonmilitary)-government-and-eliminate-public-infrastructure-and-social-justice-programs; de-regulate-to-free-up-big-business; privatize-wherever-you-can-especially-schools-bridges-and-other-essential-services.  Not to be outdone, Tim Johnson signed the no-tax-increase pledge on the dotted line, with his right-hand aide as witness.

In spite of the decades of extraordinarily well-funded anti-tax/anti-government propaganda spewed by purported think tanks like the "Americans for Prosperity" arm of the Koch Bros, the anti-estate tax "American Family" coalition arm of the Walton heirs, the Big-Business oriented Chamber of Commerce and Club for Growth and similar groups, the American public seems to be finally beginning to learn to read between the lines and recognize self-serving propaganda for what it is.    Even with all the money being spent to misrepresent and distort the truth about taxes, it is worth noting that Rasmussen polls (run by a leaning-right head) are finding Americans more willing to support tax increases than they were a few years ago.  For example, back in December 2011, despite the anti-tax nonsense of the Tea Party and other radical right-wing groups, only 52% thought tax cuts would help the economy--in the low end of the 51% to 63% range answering that question affirmatively since July 2008.  Similarly, a recent poll showed that 47% favor a candidate who wants to raise taxes on the rich over a candidate who wants no tax increases.  Back in September 50% of Americans favored a mix of spending cuts and tax increases (but 64% weren't willing themselves to pay higher taxes, a product of the NIMBY syndrome).  And a March poll found a significant decrease in Americans responding who thought that America is an "over-taxed" nation. 

[N]ew Rasmussen Reports national telephone survey finds that 56% of Likely U.S. Voters believe America is overtaxed. But that’s down from 66% two years ago and 64% last year. One-out-of-three (33%) now believe the country is not overtaxed, while another 12% are not sure. (To see survey question wording, click here.)

[ASIDE:   The problem with the question about whether Americans are overtaxed--especially in this age of 527 groups spending buckets of money to convince them that they are--is that it depends on who you are asking and what facts they actually know about taxes, the economy, and what the difference is between effective tax rates and statutory rates.  Everybody hears the radical right prattle on about how high our (statutory) tax rates are.  Very few hear much about effective tax rates and fewer still understand the difference.  The wealthy are not over-taxed, though they have spent a good bit of their money to convince typical Americans that they are.  Those who escape federal income taxation because they earn amounts covered by the standard deduction and personal exemptions and earned income tax credits--amounts intended to keep lower income taxpayers from having to pay income tax--nonetheless have to pay signficant state and local property and sales (and often also income) taxes and have to pay significant federal payroll taxes.  Not surprisingly, they may well feel overtaxed when their wages are going down and their tax burden is staying the same and they hear the think tank spew of anti-tax stuff on the airwaves day and night.]

And now Tim Johnson's district has changed.  He represents a more Democratic electorate, that is less likely to swallow the Tea Party tax aversion hook, line and sinker.  So he is backtracking.  Which is good. It's a shame he backtracked bit by bit, at first claiming he'd never signed and then suggesting his aide signed for him before he finally admitted he had signed the pledge but just didn't consider it cast in granite.   See Are you Now and Have You Always Been?, New York Times editorial (March 11, 2012). 

But to give him credit, he finally did take a  stand against the idiocy of the tax pledge.   See Pat Garofalo, GOP Rep. Blasts Norquist's Anti-Tax Pledge as "Disingenuous and Irresponsible", Think Progress.org (Mar. 8, 2012).  He ought to do it more straightfowardly--by admitting that it is a mistake to assume that tax cuts are always good or that tax increases are always bad and by acknowledging that there is plenty of room to tax the rich more without harming anybody's economic recovery.  His statement (quoted on ThinkProgress) weasles by making clear that he is leery of tax increases other than fixing tax loopholes or raising the Social Security tax.....

 One hopes that these few quasi- brave Republicans who are beginning to speak out against the idiocy of a "pledge" to cut off a key tax policy tool of democratic institutions for supporting public infrastructure and public needs will cause Norquist's pledge to go to the same ignominious fate that awaited Joe McCarthy's anti-liberal binge (under the name of anti-communism) when a lone lawyer questioned his decency.  As a constitutent told GOP representative Rick Berg in a North Dakota town hall meeting (quoted on Think Progress), these guys are supposed to work for their constituents, not for Norquist.

Inequality, Taxes, and Corporatism viewed thru the lens of Nick Reding's "Methland"

[editorial note: back from a great break in Colorado with children and grandchildren, so postings will resume normal routine. edited in afternoon to add cite to Angry Bear post by Mike Kimel.]

The Congressional Research Service recently released a new report on U.S. income inequality.  See Hungerford, Changes in the Income Distribution Among Tax Filers 1996 to 2006: The Role of Labor Income, Capital Income, and Tax Policy, CRS (Dec. 29, 2011) (Download Hungerford. Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006. Role of Labor Capital and Tax. 122911).   The CRS report is a sobering document, especially in light of the growing unrest as ordinary people realize how their opportunities are limited by the increased control of resources at the top (e.g., Occupy Wall Street, the "99% vs. 1%, etc.).   For example, see the New York Times article today on inequality and the fact that U.S. mobility trails that of Europe and Canada.  The article is based on a number of different studies such as that of Marcus Jantti and colleagues, American Exceptionalism in a New Light, and suggests that inequality has lingering impacts, especially on the poor and the ability of the poor to move out of the bottom.   See Jason DeParle, Harder for Americans to Rise from Lower Rungs, New York Times, Jan. 4, 2012 (in print edition, Jan. 5, at A1).  The article discusses the considerable evidence that there is limited access today to what we have called the "American Dream":  stickiness exists especially for the poor and the affluent, as the poor generally lack opportunities to get out, and the affluent generally have all the advantages they need to stay affluent.  See especially the graphic accompanying the article, Comparing Economic Mobility.  Id. at A12.  The causes of America's mobility problem are multiple--poverty; a thin safety net (threatened even more now by the right-wing's determined attack on earned benefits like Social Security and Medicare under cover of their purported concern about deficit reduction); the disadvantages of single motherhood; high incarceration rates, especially for black males; a long history of racial stratification that still impacts daily life; the pay tilt towards educated workers (usually made up of children of the affluent); the decline in unionization compared to other affluent countries; and the magnitude of the gap between the rich and the vast majority of Americans.  Even conservatives, who tend to think that mobility is overrated as a policy goal, may conclude that "stagnation at the bottom [is] alarming and warn[] that it will worsen."  Id. at A12 (citing conservative journalist Reihan Salam of the National Review and Daily Post).

Meanwhile, not surprisingly, the right-wing in this country continues to pursue exactly those policies that have so contributed to the decline of mobility, the stagnation of incomes for the lower income population, and the loss of employee power in the workplace.  See, e.g., the plan of the Republican majority in Indiana  to enact so-called "right to work" legislation that allows non-union members to freeload off unions by getting the bargained for rights and wages without paying dues to make that bargaining possible.

What those interested in tax policy should pay especial attention to is the role of tax changes over the last 40 years in augmenting the inequality gap.  Tax is not the sole culprit, but it is a contributor and something that Congress can easily do something about, if it can summon the political will to act.  From the report summary:

Inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). This average increase, however, obscures a great deal of variation. The poorest 20% of tax filers experienced a 6% reduction in income while the top 0.1% of tax filers saw their income almost double. Tax filers in the middle of the income distribution experienced about a 10% increase in income. Also during this period, the proportion of income from capital increased for the top 0.1% from 64% to 70%.

Income inequality, as measured by the Gini coefficient, increased between 1996 and 2006; this is true for both before-tax and after-tax income. Before-tax income inequality increased from 0.532 to 0.582 between 1996 and 2006—a 9% increase. After-tax income inequality increased by 11% between 1996 and 2006. Total taxes (the individual income tax, the payroll tax, and the corporate income tax) reduced income inequality in both 1996 and 2006. In 1996, taxes reduced income inequality by 5%. In 2006, however, taxes reduced income inequality by less than 4%. Taxes were more progressive and had a greater equalizing effect in 1996 than in 2006.

Three potential causes of the increase in after-tax income inequality between 1996 and 2006 are changes in labor income (wages and salaries), changes in capital income (capital gains, dividends, and business income), and changes in taxes. To evaluate these potential reasons for increasing income inequality, a technique to decompose income inequality by income source is used. While earnings inequality increased between 1996 and 2006, this was not the major source of increasing income inequality over this period. Capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996. Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality. Taxes were less progressive in 2006 than in 1996, and consequently, tax policy also contributed to the increase in income inequality between 1996 and 2006.

 

The members of Congress who pass such preferences (the GOP in particular, but certainly various members of the Democratic party such as Max Baucus fall into the same group) spin such preference for the rich (a group which includes most members of Congress) as supporting job creation.  Their spin suggests that anytime anyone invests in corporate stock, they are acting as entrepreneurs and increasing the possibility of jobs for the rest of us. 

The spin is mostly just that.  Most of the capital gains from sales of corporate stock have nothing to do with having invested in a company directly in ways that provide more capital to the company and lead to creationof jobs.  Most of such gains are from secondary market sales--sales of stock from one rich person to another.  Secondary market sales have absolutely nothing to do with job creation or entrepreneurship: they have everything to do with acquiring more money with taxes that are at extremely low preferential rates. 

Similarly, getting dividends from a corporate enterprise has nothing to do with job creation--they just make the corporate stock holder richer at a preferential tax rate (under the 'temporary'[ provision enacted in 2003 and extended several times since).   Many 'freshwater' economists and many tax professionals argue for "integrating" the corporate tax and the tax on dividends or outright elimination of the corporate tax, claiming that  the dividend tax represents a 'double' (and therefore wrong) taxation of corporate profits.  That logic has led to an increasingly rich variety of corporate loopholes built by Congress into the Code--from the various expensing and bonus depreciation provisions (letting corporations reduce their taxable income compared to their actual business profits by claiming a deduction for capital expenditures) to various preference gimmicks, such as the "domestic manufacturing deduction" that provided a significant reduction in the corporate tax rate to all kinds of industries, including many processes that few would consider to qualify for "manufacturing." 

 But the double taxation claim is merely that--a claim based on the way the theor treats corporate entities.  Economists been unable to prove empirically that shareholders actually bear the burden of the corporate tax.  But even if they do, there are other reasons having to do with institutional power and the sustainability of democracy for supporting a corporate tax.  If you start out thinking that "only people pay taxes", you would likely conclude that "corporations can't pay taxes; therefore, the corporate tax is 'really' being paid by the owners of the corporation."  Of course, we used to say that only people can vote, so only people should be allowed to spend money on campaign speech.  Now the Supreme Court--which has treated corporations as "persons" under the Constitution since the nineteenth century--has decided that corporations have free speech rights that are broad enough to allow them to use their vast resources to influence who gets elected.  Thus, corporatism has paved the way for corporations to buy elections and then lobby for the laws and regulations that suit them, while arguing that corporations shouldn't pay any taxes to support the government that grants them various subsidies through the election/lobbying/regulation (deregulation) process.  It has supported the US movement towards "free trade" agreements, such as NAFTA, that have been difficult for the poor in countries with whom we trade, for environmental protections in the U.S., and  for locally owned businesses and local workers in the U.S.

If you avoid the corporatist agenda and start out with the assumption that corporations pay tax (because we have treated such entities as taxpayers under the Code), then you can recognize that corporate tax policy can be set to permit reasonable profits and to disincentivize unreasonable--i.e., societally undesirable--behavior.  An example would be the problem of corporate consolidation in a globalized economy, which provides inordinate power to multinational entities (I have called them quasi-sovereigns) and significantly reduces the power of ordinary employees. 

To understand something about the problem of corporate consolidation (as if the 2007-08 financial crisis caused by "too big to fail" financial institutions shouldn't have been enought), read the book Methland: The Death and Life of an American Small Town, by Nick Reding (Bloomsbury 2009).  In trying to understand the causes of the meth explosion in U.S. rural towns, it details the devastating effect of corporate consolidation on rural workers and economies--Big Agriculture and Big Pharma essentially bought out the vertical processes (for Ag, from seed to table, with a few firms like Cargill, Tyson, and ADM controlling huge swaths of the American food system).  In the process of gaining control, they consolidated many small, local producers, shut out unions, sought-out illegal immigrant labor to avoid wage and benefits laws, and dropped wages--in one case, wages for workers in an Iowa meat processing plant dropped overnight from around $18 an hour to less than $6 an hour, with a simultaneous cut off of benefits. See Methland, at 69 (noting the decline in wages when Cargill took over the formerly locally owned Iowa Ham plant in 1987). 

"[T]he evolution of the meth epidemic had occurred in lockstep with three separate economic trends that had contributed to the dissolution of small-town United States.  ...  And the things that spurred this simultaneous rise and fall: the development of Big Pharmaceuticals, Big Agriculture, and the modern Meican drug-trafficking business."  Id. at 109.

***

"By 1999 ... Cargill-Ecxel [an agribusiness plant in Ottumwa Iowa] placed newspaper advertisements in the poork, industrial border towns of Jarez and Tijuana offering two free months' rent to workers who could make it to Ottumwa from Mexico.  For Cargill and the rest of the packing conglomerates, employing illegals would appear to have been the best of all possible situations, for the simple reason that these employees, lacking legal identification, didn't technically exist, and therefore had no rights.  Nor were they apt to argue with the harsh conditions of an industry that continues today to have the highest rate of employee injury in the United States.  A failed 2001 federal criminal case brought against a Tyson plant in Shelbyville, Tennessee made clear that corporations would essentially not be held liable for employing or recruiting illegal immigrants to work in the plants.  Despite the fact that two Shelbyville managers were caught on tape by federal investigators asking human traffickers for five hundred undocumented workers over four months, Tyson's defense team successfullyh maintained that it's too difficult for Tyson employees to determine who's who among legal and illegal employees.  The ruling institutionalized the notion that employers of immigrants are not beholden to offering the same rights to workers that other companies must, for the simple reason that they don't know--and don't need to know--who works for them."  Id. at 153.

***

"Consider what used to happen in Oelwein, Iowa before the large scale consolidation in the 1980s and 1990s of almost every niche of the food-production chain.  Corn farmers...would have bought seed from the local seed company.  Once harvested, that corn would go to a grain elevator, also locally owned.  It would be shipped to a small feedlot in order to fatten cattle raised in Nebraska, Wyoming, Florida or Arizona; or perhaps it would go to a dairy in northern Missouri, a chicken farm in Indiana, or a pork outfit in Kansas.  The variables were infinite and the market was dynamic.  The barge, truck or railroad car that carried the grain was likely independently owned, too, as would have been the pigs, cows, and chickens it fed.  At each stae, the price would have to be 'discovered' as multiple potential customers vied to handle the product, with competition keeping the price 'true'... in the context of the marketplace.  Eventually, the Oelwsin corn used to feed sows in Topeka might return to Oelwein in the form of hocks to be disassembled, packaged, and shipped at the Iowa Ham plant... From there, a whole new market ... would take over in order to distribute the food and sell it at the retail level, perhaps at the grocery once owned by the Leo family (which today is an IGA).  James and Donna Lein would have been the essential building blocks in a vibrant system in which the variables contributed at all stages to what's called the 'social capital' of rural communities.

Beginning with the precedent set in 1987 with the IBP takeover of Hormel in Ottumwa--and the subsequent takeover of Iowa Ham by Gillette--a few companies would come to control most of the U.S. food business. ... Price discovery no longer happens; the value chain is controlled by a limited number of entities.  Seed is not sold; it's biogenetically engineered by companies like Monsanto, which entered into a joint venture with Cargill in 1998.  Cargill--not the farmer--owns the corn this is grown [under contract]....  In the Illinois and Ohio river valleys, Cargill owns 50 % of the grain elevators and other storage facilities.  Along with Tyson, Swift and the National Beef Packing Company, Cargill owns 83.5% of the beef packing inustry [and so on for turkey production, flour milling, ethanol production, animal feed plants, and soybean crushing]. Id. at 169-160.

***

Once competition has been annihilated ... the surviving companies, like Cargill, begin to effect political decisions through their enormous lobbying capabilities.  The government no longer governs unimpeded: it does so in tandem with the major companies. Id. at 161 (citing Douglas Constance, a rural sociologist at Sam Houston State University, Huntsville Texas).

This loss of local ownership through massive consolidation of business enterprises was a change orchestrated from the top of the U.S. government under Reagan's policies of privatization, deregulation, tax cuts (and loosening of tax and antitrust mechanisms that had worked against consolidation), and militarization.  It is a change continued today through the more and more flexible tax regulations and Code provisions governing tax-free reorganizations.  These policy approaches supporting consolidation of enterprises both vertically and horizontally favor the development of powerful corporations that can influence governmenbt in their favor while demanding subsidies (bonus depreciation, expensing, and other tax loopholes that have steadily reduced corporate taxes well below 25% for most of those that pay them at all, even while the rates remained statutorily at 35%.  Looking at the way corporate consolidation has harmed rural America should lead us to ask whether reversing the policies favoring such consolidation--such as making tax-free reorganizations much more difficult, pursuing anti-trust violations under new theories that look to the problems inherent in quasi-sovereign corporate entities, charging corporate and other businesses an expatriation fee equal to the increase in value of business assets while in the United States--may not be worth considering as one step in remedying both the "too big to fail" and "quasi-sovereign" problems while also providing resources to address the thin safety net and falling wages of the bottom of the income distribution.

For more ideas on inequality and its relation to a dynamic, growing economy and more stable society, see Mike Kimel's post on Angry Bear, The Pelzman Effect: Why Economic Growth Has Slowed in the US over Time.

crony capitalism and casino capitalism--bad flavors for right or left, per Kristof and Stiglitz

The Occupy Wall Street focus on "we are the 99 percent" juxtaposed with the CBO's recent report on the growing inequality in America (see here) come at a time when the American right is pushing hard for policies, like Perry's so-called "Flat Tax" and Cain's so-called "FairTax", that will exacerbate that inequality in a winner-take-all economic system that rewards the speculators and fat cats to the detriment of ordinary society.  Hopefully those first two items will cause ordinary folk to think twice before supporting that exacerbating trend on the right.  The right likes to disguise them as 'folksy' 'down-home' populism.  They aren't.  They are wolves disguised in sheep's clothing.

In Crony Capitalism Comes Home, New York Times (Oct. 26, 2011), Nicholas Kristof notes the "alarmist view" of Occupy Wall Street rampant among the media and the elitist critics of the movement--one that sees the protesters as "half-naked Communists aiming to bring down the American economic system" or "a 'mob' trying to overthow capitalism."  He rightly responds that it is instead a movement that "highlights the need to restore basic capitalist principles like accountability."

[I]n recent years, some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us.

***

The American critique of the Asian crisis was correct. The countries involved were nominally capitalist but needed major reforms to create accountability and competitive markets.  Something similar is true today of the United States.

***

Capitalism is so successful an economic system partly because of an internal discipline that allows for loss and even bankruptcy. It’s the possibility of failure that creates the opportunity for triumph. Yet many of America’s major banks are too big to fail, so they can privatize profits while socializing risk.

***

[Mohamed El-Erian, chief executive of Pimco] told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality.  “You cannot be a good house in a rapidly deteriorating neighborhood,” he told me. “The credibility and the fair functioning of the neighborhood matter a great deal. Without that, the integrity of the capitalist system will weaken further.”

Kristof and El-Erian are correct. 

The movement in the US over the last few decades has made crony capitalism possible by pretending that abstract economic theories about "free markets" developed by Milt Friedman and his Chicago boys and based on unreal assumptions about human behavior should not only be consulted for setting fiscal policy but are the "God's Truth" bible from which such policies should be derived.  This has led to the capture of the markets by big money.  Swarms of lobbyists for Big Oil/ Insurance/ Banks/ Pharma draft the laws that apply to their industries then work with the agencies to draft favorable interpretations into the regulations and then use powerful firms funded by business coalitions like the U.S. Chamber of Commerce, National Association of Manufacturers or supported by "business-funded so-called 'think tanks' to exploit the courts (packed by the right in the four decades since Reagan) to push industry favorable policies no matter the 'externalities'  for people's lives, the environment, other priorities, and individual freedoms.

Crony capitalism doesn't hold capitalists accountable for what they do.  We put minimal if any restraints (tax law, anti-trust law, patent  law) on business monopolization and business consolidation and business ability to use the power of money to influence the work of legislators, executives and courts.  We allow private equity funds that buy, fire, and sell at great profits to themselves but at great cost to communities, not just in jobs lost, but also in abandoned buildings left to be handled at the taxpayers' expense and polluted waterways, ground and air left to be cleaned (if at all) at taxpayers' expense.  Wal-Mart moves from one address to another across the street and a short hop down the road, because it gets a new tax rebate from the county over the line and leaves behind the community that gave it a tax rebate for the first store, without ever providing the financial benefits the rebate was intended to buy and leaving behind the pollution, waste and destruction of an empty shell megabuilding (real life anecdote from Champaign, Illinois).

Crony capitalism results in excessive inequality (witness the way the managers and owners have accrued all the productivity gains of the last decade) and excessive inequality furthers crony capitalism.

[Lawrence Katz, a Harvard economist, says that] excessive inequality can have two perverse consequences: first, the very wealthy lobby for favors, contracts and bailouts that distort markets; and, second, growing inequality undermines the ability of the poorest to invest in their own education.  "These factors mean that high inequality can generate further high inequality and eventually poor economic growth."

This is very similar to what Joseph Stiglitz has been telling us for some time.  In his 2010 book, Freefall, Stiglitz recognized that America's economic crisis stemmed in part from unfounded faith in Econ 101.  :

Modern economics, with its faith in free markets and globalisation, had promised prosperity for all. The much-touted New Economy – the amazing innovations that marked the latter half of the 20th century, including deregulation and financial engineering – was supposed to enable better risk management, bringing with it the end of the business cycle. If the combination of the New Economy and modern economics had not eliminated economic fluctuations, at least it was taming them. Or so we were told.

The Great Recession – clearly the worst downturn since the Great Depression 75 years earlier – has shattered these illusions.  (This and the following excerpts are from the extract of his book, Why we have to change capitalism, The Telegraph)

Saying that does not make anyone "against capitalism".  It just means that we must open our eyes to understand the potential that unfettered capitalism has for highly negative destruction.  As Stiglitz says, "markets lie at the heart of every successful economy but ... [they] do not work well on their own."  We have to let government work to correct the imbalances that otherwise result from unfettered capitalism--especially the kinds of imbalances that start to grow when casino capitalism is let loose by socializiation of losses and privatization of gains resulting in enormous inequality within the society.

Economies need a balance between the role of markets and the role of government – with important contributions by non-market and non-governmental institutions. In the last 25 years, America lost that balance, and it pushed its unbalanced perspective on countries around the world.  The current crisis has uncovered fundamental flaws in the capitalist system, or at least the peculiar version of capitalism that emerged in the latter part of the 20th century in the US.

***

[A] closer look at the US economy suggests that there are some deeper problems [than just the ones resulting from our current financial crisis and recession]: a society where even those in the middle have seen incomes stagnate for a decade, a society marked by increasing inequality; a country where, though there are dramatic exceptions, the statistical chances of a poor American making it to the top are lower than in "Old Europe."

Stiglitz concludes, as many of us have, that this crisis should be taken as an opportunity to ask what kind of society we would like to have and to make the changes necessary to ensure that we are on the right path.

We have gone far down an alternative path – creating a society in which materialism dominates moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community and have led to rampant exploitation of unwary and unprotected individuals and to an increasing social divide.

***

The model of rugged individualism combined with market fundamentalism has altered not just how individuals think of themselves and their preferences but how they relate to each other. In a world of rugged individualism, there is little need for community and no need for trust. Government is a hindrance; it is the problem, not the solution.

But if externalities and market failures are pervasive, there is a need for collective action, and voluntary arrangements will typically not suffice.

The government plays an important role in restraining the "dark angels" of capitalism and allowing the "good angels" to operate for the benefit of society.  Without government as an enforcer of accountability and trust, some version of crony capitalism and its brute-force harm to those who lose out in the struggle for wealthy is inevitable.  

This crisis has exposed fissures in our society, between Wall Street and Main Street, between America's rich and the rest of our society. While the top has been doing very well over the last three decades, incomes of most Americans have stagnated or fallen.

We need to keep this in mind, as we deal with the myriad proposals coming from the right to continue the trend of unfettered markets, crony capitalism and winner-take-all policies.  Deregulation for Big Banks/Oil/Pharma et al will not create jobs, tax cuts for the wealthy will not unleash broad-based growth, and larger inflows of lobbyists [see, e.g., Eggen & Farnam, Lobbyists playing key role in 2012 fundraising, Wash. Post (Oct. 27, 2011)] into even our political decisionmaking processes made possible by the Citizens United case will not provide ever more "free speech" for everyone.  These are excesses of brute-force capitalism exercised in a plutarchy, not evidence of a sustainable democracy. 

The answer is what might be called "mitigated capitalism"--an economy that can benefit from the incentive power of capitalism, but that limits and restrains its excesses through reasonable social welfare programs and safety nets for those that are left behind in one way or another, strong emphasis on providing public education and other systems that allow individuals to take advantage of opportunities to advance themselves, and strong enforcement of laws that protect the public commons (natural resources, air, water, land, and the public square) for the public.  The progressive income tax--a system that taxes every person on their income from whatever source (capital or labor)--and the estate tax--a system that redresses the inability of the tax system to capture the appreciation of capital resources during a person's lifetime--are key ingredients of the tax answer to preventing crony/brute-force capitalism's sway.

More on Repatriation--WIN America corporatist lobbying group's strike back on Heritage

In a recent posting, I commented further on the lack of arguments supporting the corporatist lobbying drive for another "repatriation tax holiday" for multinational corporations that have stashed more than a trillion abroad (often through gimmicky transfers of intangible property such as rights to patents developed in the United States).  See  Repatriation Holiday Lobbying--Money Speaks (Oct. 3, 2011).

The reasons are manifold.  Corporations today are not cash-strapped--they've got lots of cash in the US too.   And even if they need cash that is currently offshore, they can borrow against that cash at exceptionally low rates today. So they aren't investing in expansion that would create new jobs for lack of cash--they are not investing in expansion for lack of customers.  The middle class is collapsing, after four decades of reaganomics have steadily worked to erode unions and the empowerment they offer workers, leaving worker wages in decline while their bosses roll into the ranks of the superrich on their newfound ability to take an undue share of the companies' productivity gains.  Even when money is actually brought back (rather than already resting in US bank accounts), it is most likely to be used to pay even higher performance bonuses to top managers and to pay for dividends and share buybacks for shareholders.  And those shareholders are most likely merely to use it to make new secondary market share purchases--resulting merely in a net change in their portfolios--not direct funding of new enterprises.  Much of those secondary market investments are likely to be in emerging markets rather than in the United States. 

Most telling is that the very fact of one tax holiday means that corporations will inevitably plan for and conduct business assuming future tax holidays.  It is ikely that planning for this current lobbying effort began on the day Congress passed the 2004 Jobs Act!  What that means is that the tax holiday itself encourages even more of the very offshoring activity it claims to be amerliorating.  Corporations will use gimmicks to move and stash away even more money offshore to avoid even more current taxes, in the hopes that there will be a further tax holiday that will allow almost zero taxation on those repatriated profits.  That certainly happened after 2004--the companies that had been good citizens and had regularly repatriated cash found themselves losers compared to the bad citizens that had used offshoring to avoid taxation.  More of the good citizens then became bad citizens, and the amount of offshore cash has grown much faster since the 2004 repatriation holiday than before.

And our experience with repatriation tax holidays was a telling one.  Corporate lobbyists worked hard to get the misnamed 2004 "American Jobs Act" passed with a very low tax rate for repatriated funds.  Yet it resulted in very little job creation. 

(This is not surprising, since (i) corporate tax cuts don't create jobs; consumer demand does and (ii) Congress didn't put any real teeth in the job creation end of the legislation, such as demanding that any corporation repatriating cash and expecting the low rate establish that it had created substantial new jobs with the repatriated funds that were not on the planning board at the time repatriation was first introduced or when it was passed and that those jobs were permanent full-time domestic jobs.) 

In fact, a new study by the Institute of Policy Studies addresses what it calls the "dangerous myth" that "corporate tax cuts create jobs" and the "disastrous results" of the 2004 tax holiday.  It reminds us that a government report found that 12 of the top repatriators brought home $100 billion (a third of the total repatriated under the earlier provision) and yet laid off 67,000 workers in the two years after the windfall.  Further, the 2004 holiday allowed 843 companies to use $312 billion in repatriated funds while avoiding $92 billion in taxes.  The worse factoid of all is the one that shows that U.S. taxpayers  "provided a huge subsidy to corporations that destroyed jobs":  58 corporations that accounted for about 70% of the repatriated funds  cut almost 600,000 jobs.  Report at 6-7.  See America Loses: Corporations that Take 'Tax Holidays' Slash Jobs, Institute for Policy Studies (Oct. 3, 2011) (summary, with link to full report). 

The report is clear in its description of the way US corporations shift profits overseas and then lobby for even lower taxes.

Drug companies — and many other companies as well, especially in the technology sector — don’t just make profits overseas. They shift  profits overseas. The process has become lucratively routine. One example:  A U.S.-based corporation begins the process by having a foreign subsidiary register its patents in countries like Luxembourg that do not tax income from intellectual property. The subsidiary then charges its U.S counterpart a high price for use of the patents. These high royalty fees, coupled with the costs of research, marketing, and management, allow the U.S. operation to report to the IRS an artificially small profit — or even no profit at all. With no appreciable profit to report, the U.S. operation has no appreciable corporate income tax to pay. The company’s actual profits sit undisturbed with the overseas subsidiary.  Report at 11.

The report also scorns the lobbying efforts of WIN America, which has spent more than $50 million lobbying for the tax break, which would cost the fisc around $80 billion in lost revenues.  Report at 9-11.   WIN America--a coalition of 18 publicly traded corporations and 24 trade associations, including the U.S. Chamber of Commerce--has "hired 42 former congressional staffers who worked for the House Ways and Means Commitee or the Senate Finance Commmittee".  Report at 9.  It goes on to rep9ort on the way individual members of the coalition have lobbied for the tax break (e.g., Pfizer's sponsoring a favorable section on 60 Minutes) and cut jobs (e.g., Duke Energy's cutting 10,000 jobs, probably as a result of its 2006 merger with Cinergy in the U.S., contributing to the North Carolina Democratic Party and then, shortly after getting support for repatriation from the Democratic governor of North Carolina and its Democratic Senator Kay Hagan).

For other commentary, see also John Carney, Corporate Tax Holidays Might Not Create Jobs, CNBC (Oct 4, 2011) (commenting on the IPS report as well as the Heritage Foundation report discussed below).

The WIN America coalition was undoubtedly taken by surprise when the right-leaning Heritage Foundation came out with its own report, a "backgrounder" on taxes that condemns the repatriation tax holiday idea as not doing much to create jobs: J.D. Foster & Curtis Dubay, Would Another Repatriation Tax Holiday Create Jobs? (Oct. 4, 2011).    The Heritage Foundation report acknowledges that "if another repatriation tax holiday were enacted, one should expect a similar result as last time: specifically, a surge in repatriations and little appreciable increase in domestic investment or job creation."  And it cites the reasons one would expect--today's multinationals that have money to repatriate are not cash-strapped:  any investments that they need to make for business expansion purposes (that would create new jobs) they can do readily without needing a repatriation tax holiday to grease the skids.

By the way, the Heritage Foundation is resisting repatriation because it wants the big prize--an overall cut in the corporate tax rate and a shift from our current system of taxing worldwide income (after tax credits for taxes paid elsewhere) to a territorial system--and it doesn't think repatriation will be treated as a step in that direction.  Those Heritage-supported tax policies would result in even more offshoring and even less corporate tax contribution to the fisc, which is already terribly low at around 2-3% of GDP.

For additional commentary, see Heritage Foundation Reverses Position on Repatriation Tax Holiday, Huffington Post (Oct. 4, 2011) (

Not surprisingly, the WIN America coalition struck back today, with a press release attacking its ordinary ally for not supporting the repatriation tax holiday drive: Fact Check: Heritage's Flawed Study Ignores Their Previous Support for Repatriation (Oct. 4, 2011).  The coalition has three arguments: (1) Heritage said something different back in December 2010, (2) other studies say repatriation will create millions of jobs, (3) the 2004 Jobs Act really did work in spite of what these other studies claim because the firms themselves say they created jobs, and (4) lots of people support repatriation.  None of these arguments hold water.

The coalition first complains that a December 2010 Heritage study concluded that repatriation would "provide additional liquidity" that would increase shareholder wealth allowing them to make "new investments" and would permit the firms to finance current operations, reducing their need to borrow working capital.  Let's parse this out.  The  primary reason that doesn't make sense today (if it ever did, which is dubious) is, as the Heritage Foundation's current report points out, that US firms are not cash strapped.  They don't need more liquidity to be able to make investments or finance their current operations.  They probably don't even want to reduce loans that are at historically low interest rates any more than they are doing.  And shareholders' "new investments", as noted above, are just a move from one portfolio investment to another--they are not investments that encourage entrepreneurs or go to the working capital of companies but just a result of secondary market purchases.  Very little of that does much for the US economy or anything for creating new U.S. jobs.

WIN America counters that the August 2011 study done for the U.S. Chamber of Commerce by Douglas Holtz-Eakin, The Need for Pro-Growth Corporate Tax Reform, claims that a repatriation tax holiday will "speed the pace of economic recovery, increasing GDP by roughly $360 billion and creating approximately 2.9 million jobs" because repatriation tax holidays are "a private-sector approach to stimulus."  That's quite simply balderdash.  These same kinds of pie-in-the-sky claims were made about the disastrous 2004 repatriation tax holiday, and they were proven wrong then.  They are based on the same bad economics now, the economics that says that "the high U.S. [corporate tax] rate harms economic growth, the amount and quality of U.S. investment, and the wages of U.S. workers."  That claim is simply unsupported--the U.S. is a tax haven, a reasonable amount of taxes will never discourage a business from expanding its business when it thinks that expansion is going to be profitable and it has the money to do it.  It is in fact this same school of economic thought that has given us the Laffer curve, the "rational man" calculations, and the rest of the Hocus-Pocus economics enterprise that treats rigidly unrealistic assumptions as God's Truth to justify an ever-increasing share of corporate profits going to managers rather than workers. 

WIN America then argues that 23% of the 2004 repatriated funds went to job creation and should be considered a great benefit to the economy.  That number is derived from a survey of tax executives--essentially self reporting on the result of the company-favorable tax repatriation holiday, so it is not only a very low return on the high tax cost of the repatriation tax holiday, but also one that must be evaluated with some acknowledgement of the fungibility of money and the ability of firms to claim that job creation and investment that they would have done anyway was done "because of" the repatriated funds.

WIN America concludes with quotes from lots of people (probably written by WIN America or one of its army of lobbyists, don't ya think?).  These quotes just repeat the desired sound bites -- "bringing the money home" will "create jobs and re-invest in America" (GOP representative Gregory Meeks, Sept. 9, 2011); "let's bring those dollars back"... and "companies outght to put it into workforce training or they ought to put it into research and development" (GOP Ohio Gov. John Kasich, Sept. 14, 2011).  And so on.

 

Schwab's Brute Market Capitalism Prescription is worse than a placebo

Charles Schwab has an opinion piece in the Wall Street Journal on his views on what will and won't work to create jobs. See Every Job Requires an Entrepreneur, Wall St. Journal, Sept, 27, 2011, at A15.

I. What won't work, according to Schwab

Responding to President Obama's Sept. 8 jobs speech, Schwab  agrees with Obama that "our recovery will be driven not by Washington, but by our businesses and our workers."  But that's about as far as the agreement goes.  He runs through a laundry list of things that he says "cannot" work (listed below in the unconnected order in which he has them in the piece):

• government spending
• increased taxes
• "artificial" stimulation of the economy
• government regulation
• "shaming the successful"
• redistributing income
• raising taxes on Americans earning more than $1 million a year.

Let's unpack some of this.

Re "shaming the successful"    This is one thing on his list that is put there just to draw the attention and loyalty of the right-wingers.  Nobody suggests that we should "shame the successful".  If anything, our cultural and government policies tend too far towards the opposite.  We praise the successful and treat them like mini-gods, allowing the CEO to benefit from the intellectual property developments of a genius in their lab who gets almost nothing.  We salute the Kathy Giffords, even when it is someone else in their enterprise that made their success possible (think cheap labor in sweatshops that made clothing manufacturers successful).   We toast the Donald Trumps for their "success"--even when it includes numerous failures that have been made less painful by various provisions of the law (think of bankruptcies made more palatable to trump--but not to his creditors--by his ability to "require" hundreds of thousands in monthly income to "maintain" the luxurious lifestyle to which he was accustomed).  We even make celebrities out of assholes who drive our country to ruin--think of the heads of any investment bank dealing in subprime mortgages.   In fact, most everybody makes a practice of applauding the successful, urging that they be followed as role-models, giving them awards, and slipping them nice big loopholes in the state and federal tax codes. 

(Of course, not shaming the successful does not mean that we cannot ask them to bear more of the tax burden in light of their extraordinary success.  More on that later.)

Re "artificially" stimulating the economy:  There's another item that is worded the way it is to set up an a priori conclusion along the lines desired by the author--that little phrase about "artificial" stimulation of the economy.  That (together with the first item about government spending) is an attack on Keynesian policies for dealing with the kinds of tough lingering recessions that we are experiencing today.  Folks, if your heart isn't working, then the docs in the ER are going to apply "artificial" stimulation to get it going again.  When workers are being dumped by businesses while managers make even vaster amounts than before, when large private enterprises are hoarding resources (the trillion and a half of corporate cash sitting uninvested, both here and abroad) and when the financial industry is hoarding its resources (banks reluctant to lend to small businesses, even ones that have shown themselves to be successful), then it is clear that the economic heart isn't working. Government spending functions like those heart shocks in a stagnant economy--the right amount (i.e., enough to be stimulative for long enough) can shock the economic heart into action again and get it moving.  Failure to do it leads to prolonged economic decline, like the Great Depression.

Re Redistributing income:  Redistributing income is merely a description of what any system of taxation does, in every case except in that probably nonexistent equilibrium scenario where each dollar of tax a person pays results in a dollar of benefit to that same person.  The question is only what direction the redistribution goes--does the tax system shore up the financially vulnerable by redistributing towards equality or does it pad the couches of the already financially comfortable by redistributing upwards? 

The problem is that our social system as a whole has been redistributing upwards for the past forty years.  Some examples would include the following: 

• erosion of worker rights and bargaining power, resulting in more and more powerful management that unfairly garners more and more of the productivity gains for managers and owners
  • Also relevant here is the battering of workers' pension plans which corporate enterprises consistently underfunded, while managers' lucrative severance and pension rights mushroomed; all occuring at the same time as there is an escalated attack on publicly funded social welfare programs that provide a critical backstop to what little ordinary workers can set aside during good times
• erosion of voter rights as states become more adept at gerrymandering to ensure the re-election of the status quo
  • This is especially galling when it would be relatively simple to mandate use of a single computerized districting approach nationwide, ensuring a fair system
• constant expansion of statutory provisions (including tax) that benefit particular industries and their wealthy owner/managers (Big Oil, Big Pharma, Big Medicine, Big Banks), from so-called tort reforms that limit remedies for those seriously harmed by corporate malfeasance to tax expenditures that have provided permanent long-term subsidies to established and monopolistic industries (percentage depletion, R&D credit, active financing exception; tax-free reorganization provisions, especially ones that permit offshoring of business activity) rather than using the code judiciously to support the development of promising new industries

In short, much of our current system exists to maintain the status quo of the class distribution in society.  Capitalism will always bend in that direction, since financial resources create political power, which supports capitalist capture and setting the rules to support those in power.  Thus, a strong capitalistic system will favor capital (and the holders of capital) and disfavor labor.  It requires some government intervention to create some socialist counterbalances, such as the social safety net programs of Social Security and Medicare, to temper capitalism's push for unilateral advantage to capitalists. 

Our tax system similarly currently favors capital throughout--from the preferential rate for capital gains, to the net capital gain treatment of corporate dividends, to the favorable netting of certain kinds of business gains under section 1231 (yielding preferentially taxed capital gains when there are net gains and higher valued ordinary deductions when there are net losses) to the barely felt pinch of the estate tax (especially with the recent revisions raising exemptions and lowering rates, but also especially because of the ridiculous gambits with discounts and trusts and other run-arounds that could easily be removed legislatively).  With the 1986 reforms, Congress acted to eliminate, finally, the preferential rate for capital gains, but it took lobbyists only a few short years to get the preferential rate reinstated. the Clinton "reforms" lowered the rate, and the Bush reforms lowered it even more (to zero in some cases), with the preference extended to corporate dividends. 

The result is that the wealthy who own most of the corporate assets enjoy a very favored tax status for their income (as well as favored status in most other aspects of their lives), and the United States is one of the most unequal nations on earth--with the many problems and heartaches that go with that inequality.  See Richard Wilkinson & Kate Pickett, The Spirit Level:  Why Greater Equality Makes Societies Stronger, Bloomsbury Press, NY (2009) (surveying extensive studies on the impact of inequality on societies to conclude that it is inequality, even more than the level of income, that causes measurable harm to all income levels in a society--mental health, poverty, physical health, life expectancy, obesity, educational performance, teen births, violence, imprisonment and social mobility).

Re increasing taxes, and taxing millionaires more.  Schwab of course echoes the Tea Party line that all increases in taxes--even on millionaires who have made out like bandits in the four decades since Reagan--would be inherently bad.  The right doesn't even deem it necessary to provide an explanation for why they think this.  Ryan laments that higher taxes (actually hitting only a tiny portion of small business owners) would kill job creation, even though there's no empirical association of lowering taxes with creating jobs.  Schwab just lets all that built-up anti-tax lobbying speak for itself.

But all of the above provides ample reason for reforming the tax code so that it eliminates these extraordinarily favorable tax privileges that the wealthy and the huge multinational corporations currently enjoy--both by eliminating loopholes in corporate taxation (and especially by restricting their ability to grow ever larger through tax-free restructurings or to move assets offshore without paying tax on built-in appreciation) and in the personal provisions that give such benefit to wealthy taxpayers (exclusions of types of income; deductions and credits, etc.), and by increasing the rates of taxation, at least on the upper class in the income distribution (the top 20%).  Those at the very top have contributed no more but gotten all of the productivity gains, leaving ordinary Americans hurting.  It is only fair to ask them to pay more in taxes, to pay forward some of the huge benefits they have received.

And there are a number of other tax increases that we should consider--such as the financial transaction tax that is moving forward in the EU this week.  See, e.g., Phillipe Douze-Blazy, To Ease the Crisis, Tax Financial Transactions, New York Times (Sept. 28, 2011); Stephen Castle, Europe Readies Plan for Tax on Financial Transactions, New York Times, B5 (Sept. 29, 2011); Alessandro Torello, EU Details Its Plan to Tax Trades, Wall St. Journal (Sept. 29, 2011); Greg McKenna, The Bots of FX, Naked Capitalism (Sept. 29, 2011) (article and comments considering the potential beneficial effect of discouraging high frequency trades).

II.  So what's his prescription?

Schwab says the following: (i) businesses are started by entrepreneurs, (ii) Entreprenurial activity requires investment, and (iii) investment requires "confidence" and "certainty"--"Today's uncertainty on these issues--stemming from a barrage of new complex regulations and legislation--is a roadblock to investment." ... And he urges leaders in both political parties to "review every piece of existing legislation and regulation with a claer eye to what impact it will have on business and growth."

In other words, Schwab opines that if only government would quit doing what government is supposed to do--regulate businesses to protect consumers, protect the environment, ensure that businesses pay for their true costs rather than leaving costs as "externalities" that we suffer from--and ONLY pay attention to what business wants (and the kind of "growth" that results from that), then businesses would create jobs. 

That's wrong on three scores.

First, experience with such "laissez faire" government shows that what results from market capitalism without restraint is monopoly and stagnation and lack of innovation.  It is in fact important to have government as a partner in the economy (representing the people's desires that they cannot implement singlehandedly), else brute capitalism will take over and the overwhelming majority of ordinary people will lose out.  George Bush's reign was one in which a good bit of the "free marketarian" ideology was followed, and it had a LOUSY job creation record.

Second, businesses aren't not investing in ways that create jobs because of "uncertainty" about taxes or regulations or stimulus programs.  The uncertainty has been around since humans engaged in market transactions--how much will the sovereign exact from this transaction; what requirements on place, manner of undertaking the transaction will there be, who else will need to benefit???  That uncertainty is just one of the risks that every business considers, and not one of the major risks like counterparty risk, commodity pricing risks, natural disaster risks, consumer dissatisfaction risk, etc.  On the contrary, those things have in fact created jobs, from businesses that remove asbestos to construction workers building schools. 

Third, the kind of growth that results from government's dereliction of its duty to the people, in the interest of creating the kind of market capitalism growth that has rocketed the upper-class into the ultra rich zones while leaving the middle classes collapsing into the poverty strick, is not what servesthe people.  The people are served by creating a sustainable economy in which decent livelihoods can be had by all, not by creating a kind of restricted growth zone based on market cap applicable only to rich managers and owners. 

Suggesting that "proposed laws and regulations should be put to a simple test [of asking] what will this do to encourage businesses and entrepreneurs to invest?" leaves out most of what government should be doing vis a vis the economy--protecting its citizens from the vagaries of the economic marketplace and ensuring that the markets operate for the good of society.