In discussing tax issues, I have frequently called on Congress to consider ordinary Americans, defined loosely as those in the lower four quintiles of the income distribution, in developing tax policies. I have argued that tax giveaways to the rich cannot be justified when they result in decreased safety nets for lower-income taxpayers or intergenerational transfers through increased debt burdens. The result is too often an increase in the inequality gap between wealthy owners at the top of the income distribution and those who depend on a wage for a living at the bottom of the distribution. That inequality gap stifles innovation, as a narrower and narrower band of financially secure individuals at the top remain free to take on entrepreneurial risk. It also threatens democratic institutions, as oligarchic families aided by lenient estate taxation amass critical concentrations of wealth that carry enormous status and power. Power captures and corrupts institutions, subverting the political processes and reducing the provision of public goods.
This holiday season, the New York Times provides two noteworthy perspectives on these issues, as Congress rushes to pass budget measures and tax legislation and as gift-giving is highlighted in defining the celebrations.
I. Questioning the "starve the beast" mantra that tax cuts allocate resources more efficienctly.
The first is Cornell economist Robert Frank's December 22 article "Tax Cuts for the Wealthy: Waste More, Want More." Noting the typical tax cut mantra of "it's your money, and you know how to spend it much better than anyone in Washington," Frank comments that there is more than one way to spend wastefully. One, for which government is often berated, is to pay more than the market rate for an item that is needed. Certainly, the federal government has done this at times--especially in issuing big-ticket contracts through the Pentagon. But Frank notes that another wasteful form of spending is far more common in private than in public spending--the "keep up with the Joneses" rat race of the wealthy which is "made even worse as the chief beneficiaries of the tax cuts race to outdo one another." Id. He gives a few real world examples--$700,000 Dunand mechanical watches that are no more accurate than a $30 Timex and a recent $10 million birthday party for the daughter of David Brooks (magnate who manufactures the too scarce body armor for the military in Iraq).
These keep-up-with-the-Joneses expenditures are economically inefficient. "[M]ost of the tax cuts financed by recent budget cuts will go to families that already have everything they might reasonably need." Id. The sole objective of many expenditures is to achieve greater status than a wealthy peer; yet no matter how much is spent, everyone in the peer group spends more and nobody's status is any greater among the peers than it would have been if all had spent less.
More to the point, Frank notes that dollars used to finance the cuts would in many cases not have been used wastefully by government. "[E]ven though government does buy some items at inflated prices--body armor whose price includes a profit margin large enough to finance a $10 million birthday party?--many of these items serve vital purposes." Id. As a result, "there is little reason to expect large tax cuts for wealthy families to have resulted in a more efficient allocation of our nation's scarce resources." Id.
2. Questioning the "starve the beast" mantra that we should leave the safety net to the generosity of those who are able to retain more of their own resources.
Frank's piece could have been written as a companion to the December 19, 2005 New York Times article by David Cay Johnston looking, in this holiday season, at the generosity of the wealthy, "Study Shows the Superrich Are Not the Most Generous." Johnston reports on New Tithing Group's research based on I.R.S. data on charitable gifts (full report linked here and release linked here).
Johnston notes two particularly unflattering conclusions as to the wealthiest Americans:
- "Working -age Americans who make $50,000 to $100,000 a year are two to six times more generous in the share of their investment assets that they give to charity than those Americans who make more than $10 million." [emphasis added]
- "The least generous of all working-age Americans in 2003...were ...the 284 taxpayers age 35 and under who made more than $10 million--and the 18,600 taxpayers making $500,000 to $1 million. The top group had an average $101 million of investment assets while the other group had on average $2.4 million of invetsment assets." [emphasis added]
These statistics on the generosity of the supperrich are particularly interesting in light of the tax cuts provided to the superrich for their donations in KETRA, the Katrina aid bill. A major provision of KETRA was a tax expenditure resulting from temporary removal of the gross income limitation on charitable contribution deductions and temporary elimination of the phaseout of itemized deductions related to charitable contribution deductions. Instead of a 50% limitation, taxpayers can make contributions between August 28 and December 31, 2005 that amount to 100% of their adjusted gross income. Furthermore, the recipient need not be a charity that serves low-income families or Katrina victims. It need only be a public charity rather than a private foundation or donor-advised fund. The "extra" contributions can even be provided for designated purposes (e.g., building a concert hall for a symphony orchestra that will carry the donor's name in large gold letters and a plaque at the entrance memorializing the donor's generosity). The contribution might merely be an acceleration of an additional donation planned to be made in the following year.
Obviously, this provision only benefits the superrich. Ordinary taxpayers (those in the lower four quintiles and a good number of those in the upper quintile) cannot afford to give away even half of their income, much less 100%. The superrich who have excess assets and considerable economic income that is not subject to taxation are the only ones in a position to benefit from the temporary charitable deduction provision.
It seems a shame that we chose as part of the Katrina emergency aid to provide an indirect benefit to the types of charitable organizations most likely to be supported by wealthy patrons and to the types of donations most likely to involve some kind of status quid pro quo, rather than using federal revenues to provide a direct cash benefit to Katrina evacuees. It seems especially lamentable, in light of the empirical evidence that the wealthiest Americans are in fact less generous than others who can less afford to be so.
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