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The importance of redistribution

I have dedicated this blog to a concept I call "democratic egalitarianism"--the idea that individuals flourish best in a free society that allows them to choose democratically the rules that govern their lives, with the understanding that the institutions must be sustainable and must allow all individuals to flourish, not just a select few.  It is that latter idea that supports a view of egalitarianism--not that everyone is always "exactly" an equal of others, but that the society's resource allocation provisions have to counter the tendency for resources to concentrate in the hands of a powerful few.  Since there can be no absolute equality, society's institutions must counter the tendency for wealth and power to aggregate in the hands of those with more wealth and power by mandating downward redistribution of wealth and power. 

The claim is that every decision in society is in some way redistributionist.  Most redistribute upwards to those that already have wealth and power and "connections".  Society's institutions have to counter that--at least at the margins--with downward redistribution from those with wealth and power to those without wealth and power.  Hence, a progressive income tax system that taxes those at the bottom of the income distribution less than those at the top serves this underlying value.  A regressive sales tax system that taxes those at the bottom more severely, in relative terms, than those at the top undermines sustainable democracy.

The US is becoming more and more a society of haves and have-nots, a society that could allow a candidate for president to make claims about merit that suggest that anyone who isn't a successful "have more" is just plain irresponsible (Romney's infamous 47% speech to a private group of wealthy and powerful fundraisers).  The Great Recession--engendered in large part by the greed of the have-more class, especially bankers and corporate managers and owners who reap disproportionate rewards for their labor or simple ownership of assets compared to the workers who make those rewards possible--has left the US an even more unequal society than it was before, as the wealthy have mostly recovered and moved ahead, while the middle class and poor have mostly suffered, with jobs that have moved from decent to inadequate and pay scales that continue to reflect the upper class's willingness to exploit the rest of society for their own selfish ends.  (And this is true even if that upper class gives "generously" to charities that further their own interests and push their own views about education or transportation or religion onto the recipients of that "charity".)

The Times today has a number of excerpts from commencement speeches given by nationally known figures.  I found the excerpt from Ben Bernanke's speech at Princeton worth noting.  Here's the excerpt the Times printed:

"A meritocracy is a system in which the people who are the oluckiest in their health and genetic endowment; luckiest in terms of famiy support, encouragement, and, probably, income; luckiest in their educational and career opportunities; and luckiest in so many other ways difficult to enumerate--there are the folks who reap the largest rewards.

The only way for even a putative meritocracy to hope to pass ethical muster, to be considered fair, is if those who are the luckiest in all of those respects also have the greatest responsibility to work hard, to contribute to the betterment of the world and to share their luck with others." Ben Bernanke, excerpted in Commencement Speakers: In Looser Tone, A Call to Take Risks and Be Engaged, New York Times (June 16, 2013), at Y20

This sounds well and good as far as it goes.  But it suggests that this kind of society (a "meritocracy") where people who are born into the good life are the ones that can succeed, is okay so long as these meritorious people "contribute to the betterment of the world and share their luck with others", a phrase which sounds like a mere tithing-type responsibility to "give back."

Nah, I don't think so.  I don't think that goes nearly far enough.  This is not a society I want to live in--where the rich get richer and exercise some royal-like "noblesse oblige" interest in the dregs of society that their very success has created. 

If we are to have a society that believes in merit, then it needs to be one that recognizes that the luck of birth has nothing to do with merit but with the concentration of wealth and power in the hands of too few people.  Merit, in any useful sense, is only okay so long as the ranks of those who merit success can readily expand to include those not so lucky at the outset.  Else the upper class will essentially become a superior caste that enjoys all the rewards, except for the crumbs handed out as charity, and the masses will be essentially peons serving the wealthy few.

How does one maintain a notion that merit is good but avoid the problem of the lucky, powerful few ruling over everyone else?  It requires a lot of work, work we haven't been doing very well lately.  It requires a decent minimum wage sufficient for people to live on.  It requires government systems that actively reallocate resources towards those in need and away from those who already have plenty rather than providing millionarie congressmen millions more in agricultural subsidies  for their agribusinesses as we currently do.  Through a progressive (i.e., redistributive) tax system, a decent anti-trust system that prevents monopolies and even semi-monopolies, a more innovation-supporting copyright and patent system that does not allow a few well-funded groups to control too much of the new knowledge base for too long, a strong labor law system that does not allow employers to ride roughshod over workers, and a very strong sense of the public good and the need to maintain some systems of primary importance to core democratic values as public rather than private ones--like health care, education, and probably energy.  We are failing on so many of these points, as anti-trust has withered to a shrunken ghost of its former self, as global MNEs exercise too much power over workers and communities, as companies are allowed to ignore the externalities of their success (government subsidies and government stability) and of their business models (environmental pollution, worker deprivation). 

In particular, the tax system is so frequently under attack from the radical right because it offers an important tool for preventing oligarchy--through the estate tax, which should be strengthened rather than weakened, through the income tax, which should be made more progressive by getting rid of preferential rates for capital gains (among many other important progressive reforms), and through the provisions for standard deductions and personal exemptions and refundable credits,  which can provide a part of the social safety net that any wealthy, advanced nation should provide.

These things won't happen until people stop allowing corporate greed--and the wealth and power ambitions of the Koch brothers and their ilk--to decide the fate of the nation.  We do still have the power of the ballot box.  We as individuals have to work to counter the corporatist creedo that is being preached by Koch-funded think tanks and "social welfare" (really political party) groups.  We have to elect people willing to fight for a sustainable democracy and to legislate against the interests of the biggest and most powerful businesses and their owners/managers.  The corporatist lobby that commodifies everything is extraordinarily powerful.  Fighting it isn't easy.  But it must be done.

See the Motherboard article, below, for another analysis of the "meritocracy" idea, and some insight into what the inventor of the term, Michael Young, meant to be doing in his seminal work a half century ago.

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tax breaks for wealthy; corporate tax shouldn't be reformed away; seed patents are a real scandal

No time for lengthy commentary today, but worth calling attention to some noteworthy items.

(1)  The CBO released a new report detailing the income groups that benefit most from the various tax expenditures in the internal revenue code. No surprise that it finds that those in the highest income brackets receive an enormous amount of (not-needed) money from these tax subsidies.  

As one blog put it: "a whopping $2 trillion of that goes to folks who make more than $450,000 a year. In other words, 17 percent of all tax breaks goes to the top 1 percent. $2 trillion is about double the 10-year cost of the sequester." Bill Scher, $2 Trillion Wasted in Tax Breaks for Wealthy, Campaign for America's Future.org (May 30, 2013).

The wealthy enjoy tax breaks that have no relation to anything they produce but do relate to the fact that they are the primary owners of financial assets, such as the preferential rate for capital gains and the preferential rate for corporate dividends.  They also benefit much much more from any tax break they get than others do, especially when it comes to the mortgage interest deduction, the charitable contribution deduction or the exclusion for interest on tax-exempt bonds.  That's because they have more expensive homes, get bigger mortgages, have more financial assets that they can contribute to their pet projects for a FULL deduction of value (not just, as with most other property contributions, for their actual investment), and are about the only purchasers of tax-exempt bonds (the rates for which are generally set to attract the wealthiest buyers) and always itemize, whereas 70% of Americans just take the standard deduction. 

This $2 trillion is an economic waste--for some, its just more money to "invest" in offshore bank accounts and tax scams; for others, it just feeds Wall Street's private equity funds and "private banks" with more cash for casino capitalism bets and takeover gambles. As John Kominitsky, a commenter on the blog, notes "This is the "capital" Wall Street sucks up to fuel their Speculation Casino of derivatives (CDO's) high-speed computer trading, outsized "executive bonuses", and tax dodging off-shore accounts."  So the tax breaks for the wealthy (costly to ordinary Americans who have to make up the tax money needed) feeds the Wall Street casino capitalism monster (costly to ordinary Americans who lose their homes and livelihoods as Wall Street banks require bailouts and private equity firms make megaprofits off firing people).

 (2) The New York Times is on a roll on tax issues, seemingly reading more deeply than it had been doing for a while.  Today's editorial makes the valid point that there is no justification in today's economy for abolishing corporate taxes even if they were replaced with something else.  See editorial, No replacement for corporate taxes: the system needs to be reformed, not abolished, New York Times (May 31, 2013).

The editorial calls the "tax cut crowd" out on one of the arguments I've lambasted here for years--the idea pushed by corporate lobbyists (and people like Tim Cook in his recent congressional testimony) that since there is a good deal of corporate tax avoidance, we should just cut corporate taxes way back or even eliminate the corporate tax altogether, since we'll "obviously" never get sophisticated companies to pay more.This is wacky.  Rewarding tax avoidance by eliminating the broken corporate tax system altogether gets it backwards, as the Times notes.  The editorial makes six important points.

1. the corporate share of taxes has steadily declined, while corporations' use of the good things that the nation provides--the "social and economic foundation on which corporate success is built"--continues apace.
2. Ending the corporate tax just rewards the wealthy even more (who own most of corporate stock) and results in heavier burdens on everybody else

And, I would add, everybody else will carry that burden either by paying a larger share of taxes paid or by suffering from reduction in government services of particular importance to them, such as lower funding for education, for aid to the poor, for research, etc.   The wealthy can buy themsevles whatever they want, so are now more willing to let government shrivel.

3. cutting out corporate taxes means increasing the deficit

4. There's no justification for cutting out corporate taxes in order to replace that system with another one, like a value added tax.  That implies that it is reasonable to favor publicly traded corporations with all the benefits of US government without any of the obligations to pay for that benefit.

This is particularly unreasonable given the Supremes' decision that corporations have a right to spend their money to influence election campaigns for real people, and the right-wing's attempt to make a scandal out of the IRS scrutiny of groups that use 501(c)(4) status to conduct politicking in order not to have to reveal their donors, frequently major corporate owners like the Koch brothers and MNEs like Exxon Mobil. The idea of eliminating corporate taxes and passing the burden to less able to pay individuals is just another piece of the corporatist, class warfare agenda.

5. It also doesn't make sense to scrap corporate taxes if we decide to get rid of the preferential rate for dividends.  There is ample reason for raising the tax rate on capital investment income--it mostly goes to the wealthy, so the preferential rates for the wealthy exacerbates the growing inequality in this country, though, as the article notes, there is little political will even among Democrats to set the system aright.  But even so, eliminating the capital gains preference doesn't support eliminating the corporate tax--corporations don't have to pay dividends and shareholders get to choose when to realize taxable gains. Getting rid of the corporate tax would exacerbate the problem of corporations and shareholders controlling tax revenues through personal decisions.

6. We do need to reform corporate taxes--to prevent the ability of MNEs like Apple, Google and GE to pay ridiculously low or no US corporate taxes.  And that needs global cooperation.  So in the meantime we should require country by country reporting of profits and taxes.

 (3) This last item isn't a tax item, but it is something that is just about as pervasive as tax issues in our lives--the question of whether corporate giants should be allowed to "own" patents on living organisms, especially on self-replicating living organisms like seeds. 

I think the Supreme Court's recent decision in the Monsanto case is wrong. The current policy represents corporatism gone viral: it leaves farmers dependent on the few chemical giants that own the original genetically modified seed and all seeds that plants that sprout from it make.  It rips profits from farmers' hands and puts them in the hands of managers and shareholders of Monsanto and companies like it--a kind of class warfare by proxy. It leaves our agriculture, and our environment, at the mercy of a big corporation that has been steadily pushing us to overuse poisonous pesticides and herbicides that ruin our air, our water, and our land.  Congress needs to act to undo this patent determination.  See Kristina Hubbard, Monsanto's Growing Monopoly: what the Supreme Court got wrong: patents on self-replicating seed are unethical, dangerous and anti-competitive, Salon.com (May 30, 2013).

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Another reason for NOT cutting Social Security benefits--seniors poorer than you think

As everybody knows, a constant refrain of the far-right GOP establishment is a desire to cut taxes for the wealthy while cutting benefits for the poor. 

The ideological right talks about benefits for the poor as "welfare" but never talks about the tax expenditures for the wealthy--which amount to much more of an income redistribution, from middle class to wealthy--as "welfare".  They should, because that's what it is.  The tax preference for capital gains, a "privileged" tax rate, favors the very wealthy who own most of the financial assets, who itemize and who have much of their income in the form of capital gains (now, after the Democrats' weak-handed agreement to extend almost all of the absurd Bush tax cuts, also used for corporate dividends), just as the overly generous estate tax exemption levels and rates favor the very wealthy, who are the only ones EVER subject to the estate tax at all. 

(For some interesting stats on the very wealthy around the world, you might find the charts and information here interesting.)

The ideological right also talks about benefits for the elderly--which they have paid for throughout their working lives under earned benefit provisions in place since FDR--as "entitlements", a generally derogatory term meant to engender hostility from middle class hardworking folk (based on the "those welfare bums are not like me" idea).  What the right fails to point out is how important Social Security earned benefits are as the very underpinnings of a decent standard of living at later stages of life, paid for as much as possible by hardworking folk.  It is in fact a decent standard of living when you are older and less able to take care of yourself, when you depend more on community and on what you have managed to put aside during your prime, that is at stake. 

Of course, much of the right's ideological tirade against Social Security "entitlements" is misleading and downright wrong.  For instance, you've undoubtedly heard the argument for cutting Social Security benefits that goes something like this: 

Seniors do fine in America today, and can live long after they retire.  We think social Security was just intended to cover the little time between retirement and death that faced Americans a half century ago.  So we should up the retirement age or at least cut benefits, because with fewer workers supporting the big baby boom of retirees the Social Security fund is going bankrupt and we're now sacrificing our children's futures, by  contributing to the deficit with a "bankrupt" Social Security system, just to provide a cushy retirement to seniors that don't need it.

This argument is wrong in so many ways it is hard to count them.  Social Security is one of the most effective programs we have.  It is not bankrupt.   We've used the Social Security surplus for years to mask deficit spending--especially the wasteful deficit spending of the Bush years, to fund his wars of choice rather than pay for them with taxes that has been our preferred means of paying for wars in the past.  To reneg on the promise of benefits now would make millions of seniors, many of whom have fought for this country in Korea, Vietnam, Iraq and Afghanistan or by keeping the mom-and-pop store going and the home fires burning, pay for Bush's wars instead of the wealthy Gun, Oil and other corporate interests that support the neo-liberal/neo-conservative militarization campaign.  There is no need for benefits to be cut--we are a wealthy country and could actually increase benefits by taxing the wealthy on all of their earned income (or better still, eliminating the distinction throughout the Code between earned and "capital" income) and extrapolating the progressive nature of the benefit schedule for those increased income levels as well. 

But the biggest issue is the one that gets overlooked--many of our seniors are not doing so well, and without Social Security would be doing horribly.  Even with Social Security, the medical expenses near life's end are all-absorbing for many seniors, a situation that we should be remedying rather than worsening.  And this is particularly bad for those poorest seniors who worked at grueling labor jobs during their prime--they tended to make less money and receive less in benefits than others, yet have more potential job-related health issues and be less able to work into their seventies as others can do.

For information on the poverty of American seniors, taking into account not just their direct incomes but their benefits from transfer systems and their real costs, see Dylan Matthews, Senior Poverty is Much Worse Than You Think, Washington Post WonkBlog (May 20, 2013). The graphs are particularly helpful in seeing the way poverty and near-poverty take a heavy toll on the senior population.

We should not cut benefits.  We should in fact move to a single-payer Medicare-for-all system that would continue the health care savings that we've begun, and we should move to at least full wage coverage for Social Security taxes, with a corresponding extension of the progressive benefits scale.

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Kevin Brady's misleading Wall St. Journal op-ed

Today's Wall Street Journal features an op-ed by Kevin Brady, right-wing Texas Republican who chairs the notorious "Joint Economic Committee" that has been a notorious producer of anti-tax propaganda-driven studies over the years of Republican hegemony in the House.  See "Tax Reform Needs Accurate Tax Tables", Wall Street Journal (May 6, 2013), at A15.

The op-ed spends a lot of time denouncing information about tax rates.  It suggests that the entire US tax system is far too progressive in nature, because "one of the most salient characteristics of the U.S. tax code [is] the decreasing share of taxes paid by the bottom 50% of taxapyers and the increasing share of taxes paid by the upper 1%."  Of course, Brady mentions nothing about the accelerated growth of inequality of income in that same period, resulting in the upper 1% controlling so much more of the U.S.'s wealth and income compared to that bottom 50%.  In fact, the upper group pays less than it should given the enormously increased bite of wealth and income, a fact that Brady conveniently overlooks.

The op-ed also talks only about the income tax rates, thus appearing to suggest that the income tax is the only relevant portion of the U.S. tax system and that rates, rather than base, are the most significant factor.  In fact, there are a range of taxes--income, estate, payroll, excise/sales taxes.  Regrettably, the income, estate and payroll taxes are much too lenient on the highest paid groups.  

The shrinking of the income tax rate structure (from many different rate levels in the 1970s to our minimal group of rate brackets today) is highly favorable to the highest income group.  The rate levels off at less than half a million, while the highest paid CEOs are making 20-30 or 40 million a year.  As a result, those in the top 1%--and especially those in the top part of that 1%--are taxed at the same rates as people who make a "mere" $400,000 a year.  Further, the base on which that rate is applied to determine tax liability is notoriously laden with tax expenditures that primarily benefit that same group at the top, beginning with the charitable deduction for non-taxed appreciation and continuing through Roth IRAs/ IRAs /generous pension plans to too-high mortgage interest deductions and others.  Only those in the top 30% even bother with itemizing deductions.  And among those, it is those at the top who garner the enormous benefits of deductions from those tax expenditure provisions.

The estate tax is similarly designed to provide special benefits to the wealthy--from the lack of a progressive rate structure that ensures that the wealthiest tycoons who've amassed fortunes from loopholes like the carried interest provision will pay peanuts on an estate hardly taxed during their lifetimes,  to the various gimmicks for evading and deferring estate taxes-- including various kinds of trusts,"family" partnerships  and irrational "discounts. 

On the other hand, the sales tax is a mere gnat for the wealthy while its expansion cuts into essential living expenses for the growing legions of the poor and nearly poor.  The payroll taxes for the working poor and the middle class take a significant bite out of their labor's rewards, while the wealthy CEOs and directors pay Social Security only on a miniscule portion of their wage income. 

But Brady's most misleading statements are those that repeat the tax-cutting mantra that the GOP has pushed for well-nigh four decades now, beginnning before Reagan but put into overdrive during the George W. Bush administration--the idea that tax cuts stimulate economic growth, and especially that tax cuts on the capital income of the wealthy will stimulate growth, create jobs, and increase wages for the majority of Americans who are not wealthy.  Here's what Brady says (notice how the statement presupposes the truth of his claim):

The most important defect of tax-distribution tables is that they cannot help one to assess how proposed tax changes will affect economic growth.

Suppose Congress eliminated the double taxation of capital income by doing away with taxes on capital gains and dividends at the individual level.  Current tax distribution tables would depict this change as a reduction in progressivity due to the large share of capital gains and dividends attributable to the top income quintile.

But doing away with taxes on capital gains and dividends would significantly lower the after-tax cost of capital for new business investment in buildings equipment and software.  New business investment increases the demand for and productivity of labor, driving real wages higher. 

For households in the bottom 50% of the income distribution, the benefits are significant but indirect--more jobs at higher real wages.  Id.

The fact is, we have been following this agenda of reducing taxes on capital income for decades.  The result has been an unprecedented growth in inequality and the continuing decline of wages for the vast majority of Americans who work for their income.  The right's "philosophy" of low taxes on capital and high taxes on labor doesn't work and never will.  Brady doesn't appear to much care --his arguments seem designed to justify the right's continuing push for policies that create an oligarchic elite served by an increasingly indebted worker class with few employment rights as the courts favor Big Business over the people this country was founded to protect.  Brady's op-ed, in other words, is just another volley in the right's class warfare against American workers.

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Fixing Sequestration (for the rich only)

Once again, Congress has demonstrated that it notices mostly what affects rich people and can't quite identify with ordinary Americans.  And that it will not pass either spending laws or tax laws (which include a wealth of spending laws through the tax expenditure mechanism) that equitably deal with the misallocation of resources between the wealthy few and the rest of us.  Tax policies operate for the high and mighty:  once again, inequality is the real characteristic that matters.

The sequestration--a response to the GOP-led desire for austerity, shrinking government, and otherwise ensuring that rich people and major businesses don't have to pay much in taxes--was ridiculous from the outset because it cut programs across the board, at a time of significant unemployment, without prioritizing programs that support the safety net or ensure education (like Head Start) or protect critical infrastructure or other needs.  The only reasons it made some sense was that (1) it would finally lead to some cuts in our engorged military spending and (2) it should have permitted Congress to develop enough spine to refuse to make the Bush tax cuts permanent for anybody but those ordinary Americans making $100,000 or less. 

But we all know that latter wise move didn't happen.  Congress made the ridiculous-when-they-were-enacted and more-ridiculous-still-when-they-were-made-permanent Bush tax cuts permanent for the vast majority of Americans, leaving only a smattering of wealthy Americans subject to imperceptibly higher taxes.  Businesses got another extension of the equally wasteful Bush tax cuts enacted in the Bush Administration's giveaway mode--the R&D credit (often enacted retroactively like this extension was, whose ostensible purpose is to incentivize US-based research, which a retroactive credit by definition cannot do), the active financing exception for the Banksters that got us into the Great Recession to start with, and all the rest.

So we ended up with across-the-board cuts that could not reasonably be expected to work out well for the economy--especially when Keynesian theory (the only kind of economic theory that hasn't been roundly disproven by actual facts) suggested that we should be continuing to increase government spending to make up for the gaps in the economy from MNE hoarding of their cash offshore and consumers drawing back because of the steady decline of their spending power from job cuts and real salary decreases.  IN fact, these damaging cuts were never actually expected to go into effect--Dems hoped (rather naively) that the sequester would force Republicans to support more reasonable tax increases.  Repubs hoped (rather reasonably, in retrospect) that they could blame any problems on the Dems and claim credit for protecting ordinary Americans by not increasing taxes, and of course they've been claiming for the last months that any complaints about the problematic impact of the sequestration cuts are "exaggerated," and "they have relished the success of forcing visible spending cuts on a Democratic administration."    Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, Salon.com (Apr. 26, 2013). 

Few in Congress were ever willing to stop the gravy trains for the rich--carried interest for private equity, publicly traded "master limited partnerships" for oil and gas pipeline companies that are excepted from the ordinary treatment of publicly traded partnerships conducting businesses as corporations subject to an entity level tax; so many tax expenditures that favor Big Business that very few companies actually pay any tax on their huge profits; the assignment of income benefit of a stuck in the last century transfer pricing tax system that allows some of today's biggest companies (Google, Microsoft, etc.) to transfer their indispensable intangible properties offshore to avoid US taxation of profits attributable to the support provided by this country, while nonetheless retaining 100% ownership and control; and of course the biggest boondoggle of them all, the preferential rate for capital gains coupled with an absurdly lenient estate tax, that together allow the rich to live richly during their lifetimes and then pass their estates with negligible tax cost and substantial tax benefits (from the "step up in basis at death" that, for example, allows heirs of master limited partnership interests to restart the perpetual tax-free profits machine).

But hark, what is this?  The reductions caused by the sequester affected the ease with which rich people can get on a plane and fly to their business and vacation destinations!  Such suffering.  So incomprehensible how we could allow it.  The Senate swiftly moves into action--this was something they hadn't anticipated--that the sequester could actually bother some of their own class.  Suddenly, They acted.  In just a short time last night, with unanimous consent, the Senate voted to "let the FAA transfer some money from the Transportation Department to pay air traffic controllers."  See Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, Salon.com (Apr. 26, 2013).  The House was expected to act today.

At the beginning of the sequester, most of the Republican politicians who had pressed for even much larger cuts, insisting there was much dross in the federal government, pooh-poohed any complaints that the sequester was leading to real pain for ordinary Americans.  That story changes only when the rich feel any squeeze at all.  As Pareene implies in his story, the media is too much of the time an unquestioning go-along in this conning of the American people:

the story of Congress hurriedly making sure the well-off minority of Americans who fly regularly don’t get briefly inconvenienced — while ignoring the costs of brutal cuts on programs for low-income Americans facing housing or hunger crises — is treated as a wonderful and encouraging display of bipartisanship.

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Baucus Will Not Run in 2014 (yay!)

Max Baucus announced to his fellow Senators today that he will not seek re-election to the Senate in 2014.  He has been the top Democrat on the Finance Committee since 2001.  See Senate Finance Chairman Max Baucus Won't Run Again in 2014, Bloomberg.net (Apr. 23, 2013).

As someone who thinks that Baucus has been a hindrance to progressive reform of the tax code and financial regulation, I must admit that I do not find his retirement a loss.  His chairmanship of the Finance Committee has been marked by a failure to understand the most important issues related to federal income and estate taxation and by adoption of positions that are too favorable to Big Money and Big Business (especially Big Banks).  He has been tone-deaf, in other words, to the class warfare waged by the right against the middle class and the resulting growth in inequality in the country that has been worsened by the current tax provisions that support redistribution upwards to the very wealthiest owners of financial assets and businesses.  In particular, he has failed to use his position to push for reasonable reform of the capital gains preference and the wealth-favoring versions of the estate tax passed by the Bush administration.  He has refused to consider a reasonable financial transactions tax. In fact, Baucus was too willing to go along with the initial passage of the Bush tax agenda in 2001-2004, and he did nothing to ensure that the Bush tax cuts would fade into oblivion on the sunset date.  In fact, he worked to make permanent almost all the Bush tax cuts and supported the corporate-friendly "extension" of the broad menu of corporate tax cut provisions (including a retroactive extension of the R&D credit, which cannot possibly serve the purpose it is claimed to serve when enacted retroactively).  The tradeoff provided only token items on the progressive menu. 

Of course, the Republicans will cast Baucus' choice to retire as a reflection of problems for Democrats.  See the Bloomberg News article cited above, in which Rob Collins of the National Republican Senatorial Committee says as much.  I suspect that Baucus knew he would be targeted by liberal Democrats for his failure to vote for gun control and for his failure to support progressive tax policies. 

That said, he remains as Finance Chair through 2014, and he has said he intends to produce a rewrite of the tax code.  He is the wrong person to do that, and so it is important that other Democrats relegate him to a position of less influence in order to come up with more progressive changes than he would support.

Is Ron Wyden (who would become the most senior member of the Finance Committee when Baucus leaves) capable of carrying the banner of progressivism?  His emphasis on "tax simplification" is worrisome, because it suggests that he does not understand the relationship between complexity in the tax code and sophistication of taxpayers to whom the complexity applies.  The main reasons for complexity are two-fold:  (i) existing tax rules are expanded to cover abusive schemes developed by sophisticated tax advisers (attorneys and accountants), and (ii) existing tax rules are riddled with exceptions to provide subsidies (tax expenditures) favoring industries represented by heavy lobbying.  To the extent that tax simplification reduces the anti-abuse rules needed to prevent various tax scams and manipulation, simplication is a policy mistake.  To the extent that simplication results in changes to the tax expenditures, it can be useful  but it is often also mistaken, because the easiest way to "simplify" such rules is to expand them to cover even more of heavily lobbied-for industries.  Wyden needs to expand his understanding of the relationship between simplification as a goal and fair allocation of resources to the extent that resource allocation is handled through tax expenditures in the Code, reasonable rules to ensure that the most sophisticated taxpayers pay their fair share, and fair distribution of the tax burden.  Baucus did not serve the publci well in regards to these issues.  Let's hope that Wyden does better.

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Obama caves yet again: offering Social Security cuts to appease the right...

Obama's budget isn't even released yet and he's already caving to the "let's make the rich richer and forget the rest" crowd.  That crowd that claims that we need a capital gains preference so the rich can gather all that extra money to purportedly create jobs.  The crowd, that is, that fails to acknowledge that the rich tend to take all that extra money to Singapore, the Bahamas, or the Cayman Islands or hide it away in some Swiss bank, none of which does any good for our economy compared to what the government investing that money in infrastructure projects would do. See, e.g., David Leigh, Leaks reveal secrets of the rich who hide cash offshore, The Guardian (Apr. 3, 2013);  The corporatist crowd that refuses to admit the empirical evidence that says government investment is as important as private investment in creating jobs.  It is the government that makes the market go round.  And government money--our money--spent for schools, bridges, safer communities provides jobs and improves lives.  Without that government investment, there is no market, just barter.

President Obama seems to have forgotten that he was elected. as a Democrat, over the Republican candidate.  Obama has no business proposing cuts to Social Security benefits as part of a purported deficit reduction package.  Social Security is not a deficit driver: it is a social insurance program earned by those who receive it by payments over lifetimes of hard work.  It is the only stable retirement income most have.  The average Social Security beneficiary receives just short of $14,000 a year from Social Security--that's just 125% of the poverty line, which of course is defined so low as to guarantee that anyone living at or below that line is indeed in abject poverty and unable to move out of it.

The Republican Party has argued for cuts to Social Security benefits for decades, using whatever crisis of the momen they can engender to argue that we can't afford the system in place.  They've invented the perjorative term "entitlement" to imply that those who rely on social insurance because of disabilities or old age are just 'freeloaders' who are mooching off others.   Not so, since Social Security is an earned benefit program like insurance: workers pay premiums throughout their working life, and then once they reach retirement age they may draw benefits. 

There are a number of reasons for the amount of debt that the US government has--most of them related to the four-decade-long drive by the Republican Party to protect the wealthy and the corporations they own from much of a tax burden and to allow the accumulation of immense wealth by a few at the top of the income distribution.  Outsize military expenditures driven by Bush's preemptive wars undertaken at the same time that the Bush Administration pushed through tax cuts that favored the rich are of course a big problem.  The Bush tax cuts threw us from surplus to deficit and we haven't gotten beyond them yet.  The almost complete capture of the financial regulatory agencies by Wall Street, and the resulting financial crisis driven by casino capitalism spiked with the heady bubbles of derivative inflation is of course another part of the problem, and we haven't gotten beyond that yet, as Big Banks still exercise far too much power over their own regulation, proven by the LIBOR scandal that demonstrated their ability to manipulate the purportedly objective market rate to suit their profit machines.

But Social Security is not one of those drivers of the debt.  And the debt is not so outsize that it merits sacrificing the most vulnerable amongst us to mollify the wealthy who merely want to avoid paying their fair share of the revenues needed to get rail service up to snuff, bridges safe, and public schools owned by the public again.

 The average Social Security benefit is just under $14,000: the use of chained CPI will result in a loss to the average recipient of "$4,631 in Social Security benefits by age 75, $13,910 by age 85; and $28,004 by age 95" (from release by Social Security Works, based on “Inflation Indexation in Major Federal Benefit Programs: Impact of the Chained CPI,” Alison Shelton, AARP Public Policy Institute, March 2013.).

Obama has no business facilitating the gluttony of the rich.  He should drop the proposal to use “chained CPI” that will  result in a cut benefits for Social Security recipients.

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The Inequality Gap

The Inequality Gap

Robert Reich, former labor secretary, has some worthwhile advice for the President's State of the Union address:  he notes that the focus should be the "central issue you want the nation to help you take action on".  That's "not immigration, guns or the environment" (though "[a]ll are important") but rather "joblessness, falling real wages, economic insecurity, and widening inequality" . See Robert Reich, Memo to Obama: Focus on the inqueality gap, Salon.com (Feb. 11, 2013).

He's right.

"It's the economy, stupid", that old slogan from the Clinton campaign days, goes only so far.  It doesn't tell us, for example, what parts of the economy are most important--is it the stock market's well-being, and indirectly the fortunes of the very few at the top of the income distribution who own significant amounts of those items being sold on the market?  Or is it the unemployment data, with its distressing litany of continuing failure of our economy to provide decent jobs for ordinary people?  Is it the way that corporate owners and managers can use the powers of government to make unionization difficult and thereby make it much easier for corporate management and shareholders to retain all the productivity gains while workers wages stagnate (everything from Wal-Mart's tendency to tear down union fliers in worker areas (based on my personal observation) to the CEO's determination to beat unions down any way possible (see the New York Times story in the 2/12 edition, At Cablevision, Norma Rae's Been Escorted Outside, New York Times (Feb. 12, 2013), at A23, regarding Cablevision's firing of two  dozen employees for being off work, after claiming to have an "open" management that invited worker conversations yet allowing those same employees to cool their heels for 40 minutes waiting to talk to him and then walking out and firing them for not being on the job)?  Or is it the general optimism of the upper class, who can pass on untaxed estates to heirs who will get those stocks at stepped up basis and renew the cycle of monetization without taxation for their own account?

Stock market statistics mostly tell us about the upper class, along with the upper part of the middle class that has some share of that bounty:  they don't tell us about how well the economy is serving others, unless the general well-being of corporate America spills over to the general well-being of average Americans.  It doesn't do that in an era of push-down on unions to ensure that workers have no voice, push-back on taxes to ensure that the wealthy managers and owners not only get all the productivity gains but have to pay too little in taxes to support the system that made those gains possible.  Mostly, stock market statistics tell us about how the privileged are maintaining their privilege, as their ownership of most of the financial assets continues to mean their heightened influence over most laws and their garnering of most of the gains that do take place.

This is well noted in a post on Economist's View (Mark Thoma), embedding a post by Miles Corak on Free Exchange about research on inter-generational social mobility.

The real lesson from the historical research is not that there is anything inevitable about a low degree of inter-generational mobility, or that it signals more persistence than other research. The most privileged will do everything they can to perpetrate their status across generations, and in past eras the structure of labor markets and public policies permitted, and in some measure continue to permit, a non-level playing field.

I've long argued that the way to evaluate the economy is in terms of how well it is serving ordinary people who make up the middle class (roughly defined as the middle three quitiles of the income and wealth distribution)  and how adequate is the safety net it provides for those who make up the lower class (the bottom quintile of income and wealth).  What matters is economic sustainability, in terms of  adequacy of those many intangibles by which we measure quality of life--like accessible quality health care, accessible quality education, accessible quality jobs, decent wages for decent work.  That means that government's intervention in the economy will need to be on the side of the little guy, ensuring that resource allocation isn't so skewed to the already rich that we become an oligarchy where most of us live off crumbs and a few of us live like kings.  If we want a sustainable economy and sustainable democracy, democratic eqalitarianism demands that governments temper market forces with protections for underdogs, providing counterforces to the redistribution upwards tendency of brute force capitalism.

Today, the rise of the US oligarchy and the frightening power of wealth in determining how laws work have put us in a terrible situation:   "debtor prisons, once a relic of the 18th century, are making a frightening comeback in the U.S. justice system."  Alex Kane, Miss a traffic ticket, go to jail?, Salon.com (Feb. 11, 2013).

So an appropriate slogan for progressives today should be something along the lines of "It's the inequality, stupid."  And that certainly doesn't mean more of the same old failed GOP policies that favor the wealthy, mistakenly labeled "job creators" by the GOP in its constant effort to undo unions (witness Michigan's disastrous anti-union legislation or Cablevision's determination to aid anti-union forces and squelch union activists), favor capital over labor (from the problematic preferential rate for capital gains to the ridiculous "carried interest" taxation of the compensation payments to so-called profits partners (a category of "partner" for tax purposes not provided for in the tax code but essentially an invention of Wall Street) to the squandering waste of an estate tax and charitable contribution deduction that favor meritless accession to and use of untaxed wealth and pushes the burden for government revenues to laborers instead).  And it certainly doesn't mean more of the same "deficit hawks, austerity mavens, trickle-down charlatans, and government haters who have commanded center stage for too long."  Memo to Obama: Focus on the inqueality gap, As Reich says:

The President should make it clear that any Republican effort to hold the nation hostage to the GOP's ideological fixation on the budget deficit and a smaller government will slow the economy, likely pushing us into another recession.  And that those most imperiled are the middle class and the poor. 

He should emphasize that the real job creators are not the rich but the vast majority of ordinary Americans whose purchases give businesses reason to add jobs.  And that if most Americans still cannot afford to buy, the government must be the spender of last resort.  Id.

Reich goes on to make some specific policy suggestions for acting to reduce inequality.  These include

• reversing the impact of the reinstatement of the higher Social Security tax rate by exempting the first $20,000 of income from the tax and lifing the ceiling on income subject to it;
• reviving government-run work corps, like the WPA and CCC, "to put the long-term unemployed directly to work"
• raising the minimum wage
• imposing a 2% tax surcharge on wealth in excess of $7 billion to be dedicated to education
• Cutting corporate and military welfare
• not cutting public investments or safety nets
• giving tax credits for actual job creation
• supporting states that rehire teachers, firefighters police and social workers.  Id. (quoting and paraphrasing).

Sounds like a pretty good plan.   As Corak noted (in the Economist's View post cited above):

[D]ynamic labor markets offering new opportunities to the population as a whole, progressive public policies of relatively more benefit to the relatively disadvantaged, and strong families with growing incomes and human capital will lead to much more mobility than aristocrats of a pervious era could ever have imagined.

And the Reich plan is certainly better than what most of the GOP-led state experiments like Michigan are coming up with, which read like a plan for even more redistributing upwards to the top few, including:

• eliminating income taxes in favor of regressive sales taxes,
• eliminating business taxes in favor of regressive user fees (a GOP-led Michigan "upward" redistribution "innovation"),
• pushing hard against unions  (a GOP-led Michigan "innovation"),
• reducing safety net support like Medicaid (being considered in Michigan),
• taxing vulnerable seniors on pension income (another of Michigan's recent "innovations"),
• cutting support for state universities while reallocating the support that remains to those that serve the upper class rather than underprivileged who will generally need to borrow more and take longer to succeed (another of Michigan's redistributionist efforts).

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As most tax practitioners and academics know, Professor Paul Caron maintains a "tax prof blog" that provides timely links to most things tax in major papers, blogs, journals, conferences and the like, as well as announcements and releases from the IRS, Treasury and Congress related to tax.  Paul does not usually provide much analysis or opinion, but rather an excerpt or two and a title.

So a recent blog post was titled  "WSJ: States Embrace Tax Reform to Drive Economic Growth".

This is not an atypical way of titling items on tax prof blog.  The observant reader will notice a slight bias in the title.  The Wall Street Journal article is actually titled "The State Tax Reformers: more governors look to repeal their income taxes" (Jan 29 2013 updated).  The article summarizes states that are lowering or eliminating their income tax (sometimes including their corporate income taxes) and sometimes replacing it with a broad sales tax--for example, in the Republican strongholds of Nebraska and Louisiana.  The Journal article then goes on to opine (and it is indeed opinion) that "this swap makes sense" because "income taxes generally do more economic harm because they are a direct penalty on saving, investment and labor that create new wealth" whereas "sales taxes ... hit consumption, which is the result of that wealth creation."  This is the typical "free market" pitch favoring capital income (and the rich) over labor income (and everybody else). 

Of course, the Journal then proceeds to quote Art Laffer for the right-wing corporatist ALEC in an article claiming that a majority of new jobs are created in states without an income tax because of their lack of an income tax. 

 [Aside:  Laffer is (in)famous as the 'free market' economist who described his view of the maximum tax rate by drawing a bell curve on a napkin.  The Laffer Curve is more ideology than theory, as I explain in an earlier post:  CFP's Laffer Curve Video, ataxingmatter (Feb. 2008). ]

Not surprisingly, Caron's title suggests that the "real" policy reason for the shift is a "real" desire to create jobs. 

I have significant doubts.  Most of the anti-income tax proponents are pro-Big Business and pro-wealth.  A shift from an income tax to a consumption/sales tax is a move from a somewhat (often minimally) progressive tax system to an explicitly regressive tax system.  Such a move favors those with capital assets and mainly capital income.  Claims (like that made by the Civitas INstitute cited in the Journal article) that shifting from income tax to sales tax will result in "average annual personal income growth" mean almost nothing since averaging income growth across a population doesn't really tell you whether almost all of it goes to the wealthy or not--if that growth goes to those already in the wealthy distribution, then inequality increases and in fact most everybody else is worse off, in spite of the "average" growth.

The Journal acknowledges the regressive nature of a sales tax swap, but suggests that exemptions of necessities (e.g., food, medicine, utilities) and rebates for low-income families will suffice.  I also find that doubtful--the very low absolute benefit to the poor of the exemptions and/or rebates, while important, is substantially less than the very real high absolute benefit to the wealthy of the switch to a consumption rather than income tax.  Accordingly, the so-called "reform" will inevitably increase an already devastingly problematic inequality that has resulted in lower quality of life for most Americans on many different areas from literacy to access to health care to teenage pregnancy to death rates and all the many other factors in which Americans enjoy a lower level of quality of life than most other OECD nations. 

 Not, in other words, a good idea.  As noted in Nick Carnes (who teaches at Duke University), A Tax-Reform Plan that Rewards the Wealthy and Stalls the State, NewsObserver.com (Jan 24, 2013, modified Jan. 25, 2013), these proposals are being pushed by right-wing propaganda tanks, including a "wealthy conservative foundation [that] has paid [Arthur] Laffer to write another report and to fly to our state to  promote it."  Id. 

 The goups behind these proposals have their one-size-fits-all state-level strategy down to a science, but they don’t have a handle on the actual science of state tax reform. It’s easy to see why their ideas are appealing. Who wouldn’t like to grow our economy and lower taxes without cutting vital services like schools and public safety?

However, independent economists in every state where the Laffer plan has been introduced – including North Carolina – have found serious problems with the evidence its proponents have used to back it up. No matter how low the tax rate is, businesses and wealthy people won’t relocate to a state where the schools are bad, the streets are unsafe and the infrastructure is crumbling – things that all tend to happen when taxes are cut to the levels that the Laffer plan outlines.  Id.

The Carnes article goes on to note that "Kansas, which earlier passed the Laffer bill, is now projecting $800 million annual budget deficits and has extended an emergency sales tax that should have expired years ago" while state agencies are facing a 10% across the board cut, with education expected to lose a billion dollars in state funding over the next five years.  Yet no businesses have flocked to Kansas because of the legislation.  Id.

And guess what.  It is the wealthy who would benefit if North Carolina were to carry through with enacting its own form of the "Laffer bill".  Carnes notes that families earning $24,000 a year would pay $500 MORE in taxes under the Laffer plan, whereas wealthy families with incomes of more than $900,000 a year would pay $42,000 LESS in taxes.  Id. Shifting the tax burden from the wealthy who can easily bear it to the low-income who cannot, while at the same time cutting government support for essential public services that build a shared community is a disaster in the making.

The Wall Street Journal isn't flummoxed by such facts (which it doesn't even acknowledge).  The Journal article suggests that the idea (set forth in some Big Oil/Fracking states) of replacing income taxes with revenues from oil and gas extraction would be good (and maybe better than regressive sales taxes) because "it would make everyone a stakeholder" in increased drilling and fracking, thus "help[ing] to build a politicial constituency for more mining and drilling."  Note the presupposition that supporting "more mining and more drilling" is inherently a public good! (One assumes that the Journal staff think this because Big Oil/Big Gas is Big Business, and the Journal is ALWAYS in favor of whatever Big Business wants.) 

That idea strikes me as truly worrisome--we have a climate-change problem, and trying to "buy" votes to support environmental degradation at whatever cost through the swap of income taxes for some (probably minimal) increased royalties (probably also accompanied by less in the way of services, especially for the poor or for public goods like public education) is not a good idea.  Yes, probably those very people who are the poorest and most harmed by environmental degradation would tend to be able to be bought off by that swap--they would not realize that the wealthy are again getting the mountain of the share of the benefit, and they are bearing most of the burden in terms of the long-term costs of the environmental degradation as well as the long-term costs of lower public revenues spent on programs especially important to them because of their lack of a cushion of wealth (schools, public parks, fire/police, health care, etc.).

Interestingly, the Journal article notes that Alaska got rid of its income tax in the 1980s and suggests that's been a good deal.  Of course, Alaska also gets more back from the Federal government than it gives in Federal taxes--ie, Alaskans have replaced their income tax revenues with federal handouts.

The Journal calls these plans for revamping state laws to provide substantial benefits to wealthy individuals and corporations a "rare bright spot in the current high-tax era."  That is garbage from both sides.  We do not live in a "high-tax era."  IN fact, we live in a low-tax era and we are already paying for that with the significant drop in state support for higher education, state support for parks and other public amenities (police and fire protection, protections for workers, fair and easy access to voting, etc.), and state support for K-12 education as well as the failure of the federal government to fund the kinds of infrastructure and education and basic research projects that could make the difference between a continuing great economy and the continuing muddle we are in after the Bush recession.  All of those costs are borne more substantially by those in the lower-income brackets.  With the proposed "reforms", the wealthy will be sailing through with even more wealth, able to shut out even more effectively any association with the "lower class" elements and giving even less to support schools, colleges, unemployment benefits, etc.  Meanwhile, the poor and near-poor will get much, much less (when they didn't owe much in taxes anyway).  Not a bright spot at all.  More like class warfare.

The real reason behind these shifts is to benefit the major members of the Republican base--i.e., Big Business and the wealthy.  It has little to do with jobs...  That's just a handy obfuscating claim to make about policy moves that substantially shift the benefits of the economic system to the rich and the burdens of the economic system to everyone else.  This is just another element of the class warfare that has been waged for the last few decades to allocate gains to the wealthy.

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Do Good Wall Street Days Translate to Good Days for Most Americans?

As usual, there was one of those all-knowing snippets in the news last Friday about what the direction in the stock market meant for the economy.  Observing high corporate profits and buoyed by the idea that the GOP might not play its "just say no" game on the debt ceiling issue (at least for three months), Wall Street profits rose.  See Wall Street at 5-year high, New York Times Business Insider, Jan 18, 2013.

Should we so easily consider Wall Street's well-being as a general sign of the well-being of the economy?  Sometimes it seems that it marches to its own tune, while ordinary Americans continue to struggle.  Foreclosures, job losses, offshoring, state actions to make union membership harder even when most Americans say union membership should be easier, huge inequalities in incomes and wealth and the social problems that go with those inequalities--there are all kinds of things going on that still don't bode well for ordinary Americans whose income is mostly made up of wages and not preferentially taxed capital gains and who don't own much of the financial assets of this country.  Democratic egalitarianism isn't satisfied by such a system that consistently rewards one class of income over another based on what amounts to class distinctions--the kind of income that requires hard work is less rewarded than the kind of income that comes with a silver spoon at birth.

In other words, corporate giants making high profits doesn't provide much reassurance to ordinary guys about the stability of their own personal economies.  High profits seem to translate to higher payouts to corporate managers/shareholders, but ordinary workers don't get more than a trickle of a share of those productivity gains. 

Trickle down hasn't trickled much down the last few decades, if it ever did. Inequality is growing worse, and with that comes even more influence so that the politically powerful are the same as the economically powerful, yielding a return on lobbying that the Founders couldn't have imagined. 

The unequal society that is today's United States has many problems that are at least partially caused by the high level of inequality--from teenage pregnancy to illiteracy rates to lifespan of the underclass to low birth weights to college graduate rates and many other indicators of a less than optimal quality of life.  And those problems are exacerbated by the continuing blind faith of so many Washington politicians in the "degenerating discourse of mainstream economics" (the link is to a recent post on Yves Smith's Naked Capitalism by Philip Pilkington).  We continue to look to Wall Street, and ignore the blight of wealth and income inequality that besets Main Street, because economists have fabricated a convenient theory of equilibrium that is most successful at hiding what is really going on from us while protecting the "free market" impulses of brute force capitalism.

Perhaps one of the positive results of the buoying of Wall Street is the general consumer attitude, which does result in more spending (still perhaps beyond one's means for much of the underclass)?  That spending increases business demand, and could even result ultimately in more job creation, especially if accompanied by more federal spending rather than the counter-stimulus current focus on spending cuts and "balanced" budgets (in at least one sense an oxymoron for a federal government that can print its own money).  But those jobs will require a better educated public than the US is likely to have. Again, partly due to the mainstream economic discourse, we are effectively debilitating public education through cuts in funding, exploitation of teachers, and privatization for the profit-making gains of education profiteers, rendering what was our greatest strength our greatest weakness. 

But what really happens to most of the wealth created by those increases in corporate profits (and those demands for ever higher returns that the wealthy have come to view as their norm, accompanied by those terribly preferential tax rates that mean the wealthy get to keep more of their unearned wealth while ordinary workers cannot)?  One suspects that much of that 'extra' wealth heads out of the country--to offshore tax havens, invested in yet another vacation home abroad, put into emerging markets, following the promise of higher returns without much regard for the impact on the US economy.

As long as we are facing the kind of inordinate reward to the uberwealthy and underreward to ordinary Americans, I find it hard to get excited about a five-year high on Wall Street.  It's main effect is to drive home the need for Congress to develop better tax policy to at least use tax as a means to help, on the periphery, cut back on inequality.  Eliminate the preferential taxation of capital gains and dividends and estates.  Don't listen so much to the deficit scolds who want to decimate earned benefit programs like Medicare and Social Security.  Invest more in physical infrastructure, particularly mass transit and environmentally sounder energy policies.  Don't listen so much to the militarists (who are often in company with said deficit scolds) who want to continue allowing the military budget to engorge itself.

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