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Conservative Support for Progressive Taxation

In this age of neo-conservative and neo-liberal dominance, it seems that lingering around every corner is someone ready to argue for getting rid of the income tax base altogether in favor of a consumption tax that does not reach capital income (whether in the form of a retail sales tax or the Hall Rabushka combination of a business VAT and a wage-based consumption tax).  One common figure pushing flat consumption taxes (or no tax at all) is Robert McGee, who writes from a radical libertarian perspective--he considers taxation a form of thievery.  Reading these arguments makes one particularly appreciative of the political titans of the past who were able to engage in deliberative dialogue over politically sensitive issues without being tongue-tied by their need to seek reelection from an ever-finicky electorate.

It also makes for a pleasant surprise to see conservative scholarship that breaks the mold.  In that vein is an article by Mark Hoose, an adjunct professor at Southwestern University School of Law, who writes about "The Conservative Case for Progressive Taxation" in the New England Law Review (40 New Eng. L. Rev. 69 (2005)).

Hoose notes the intensifying efforts of various self-styled conservative groups to convince Congress to enact significant, even radical, tax reform.  Beginning in the early 1980s, many steps have been taken along the path--reductions in rates under Reagan, the "base broadening" reforms of the Tax Reform Act of 1986, and in the latet 1990s, Clinton's signing of the Republicans' dream bill reducing the tax rates on the capital gains that accrue primarily to the wealthiest taxpayers.  With Bush's election, the step-by-step undoing of the social compact on taxation has been almost completed--further cuts in rates, significant narrowing of the tax base by excluding more investment earnings from tax, more deductions for capital expenditures, and a tentative repeal of the estate tax.  These groups are ready for the next step--the final elimination of the progressive income tax, to be replaced by a regressive sales tax or flat consumption tax.

Hoose asks whether a classical conservative should favor radical tax reform or instead some continuation of the current progressive income tax system in place since 1913.  He briefly defines conservatives (after jokingly citing Leo Rosten's quip that they are the people who admire radicals a century after their death) by looking to three particular conservative leaders:  Edmund Burke, Russell Kirk, and William F. Buckley. 

Edmund Burke (British Parliament in the late 18th century) argued for liberty generally and economic liberty in particular, but also demanded high respect for tradition and customs.  Burke valued traditional institutions, such as the State, which was necessary for social order.  He believed that institutions should be changed, if at all, only through slow and careful steps.

The conservative movement was challenged by progressivism at the turn of the 20th century, which led to the implementaion of the progressive income tax (after several earlier attempts) in 1913, in spite of conservative opposition.  The Great Depression and World War II strengthened progressivism, resulting in the New Deal expansion of the role of government in the economy. 

Conservatism began its long haul back with the publication of Russell Kirk's The Conservative Mind in 1953, claiming the following six tenets of conservatism (in shortened form).

• belief in a transcendant order or natural law
• antagonism to uniformity through egalitarian or utilitarian goals
• importance of social hierarchy rather than a classless societey
• primacy of property rights to freedom
• faith in prescription and distrust of ideal reconstructions of society
• reluctance to accept change or hasty innovation (conservatives prefer the devil they know)

Kirk also emphasized the importance of prudent restraints on power, voluntary community, and the need to accept some change because of the need for renewal.

Finally, Hoose leans on Buckley as the key to modern conservatism.  While agreeing with Kirk on the need to preserve existing insitutions, Buckley rejected the isolationist views associated with Taft and pushed international involvement.  For the extreme libertarians (or neoliberals), economic liberty became "an end in itself" where "government itself was the enemy" (in sharp contrast to the views of the early conservatives). Id. This group combined libertarian views about economics with interventionist foreign policy and social conservatism and heralded the "creative destruction that comes with unregulated capitalism."  Id.  A growing new branch of conservatives is the neo-conservatives, which combine social and economic conservativism (but not libertarianism) with nationalism.  Strands of social and fiscal conservativism and populism run through all of these.

Hoose rejects the newer -isms and analyses progressive income taxation through a classical conservative lens.  He concludes that if the classicists were around today, they would support progressive taxation.   A few key ideas relevant to his decision follow.

• The current system has significant advantages: it is not so progressive as to challenge the traditional order, it successfully raises large revenue streams, with remarkably high compliance levels, it is "embedded" in the economy (homeowners make plans in reliance on the system).
• Proposed reforms are often misleadingly presented (claim of a flat tax of 17% simply unrealistic given the need for some exemption level) and may be considerably more complicated than claimed (e.g. McCaffery's consumed income tax at a progressive rate).
• Natural law provides little guidance--some authorities seem to provide no support for progressivity, but the Bible appears to support it, out of concern for the poor
• Progressivity is not such a strong egalitarian tool that it threatens the order of society, and yet it does conform with Kirk's ideas of voluntary community  (charitable contributions; pooling resources through taxation and government programs offered in a democratic society)
• Conservatives today are not as likely to explicitly support a class-based society, but rather a sense of social peace with respect for the law; at any rate, while government is by definition somewhat egalitarian the progressive tax system does not disrupt order or functioning property rights system and in fact some restraints on power are necessary and arguably supported by progressive taxation's check on the extreme wealth of those at the top
• Although libertarians complain that the progressive income tax is a "taking", that argument applies to any form of taxation if it applies to one form of taxation.  Once the need for a state is accepted, the argument against taxation from the libertarian perspective loses.
• Unless there is a head tax, there will be some differentiation among individuals in the amount of tax to be paid.  Progressivity is not a devil here, and is no more intrusive than other aspects of business
• The current dominance of modern economists' notions of efficiency as supporting nontaxation of investments is not clearly supported empirically and may amount to a false "scienticism". Faith in the market has taken on "cult status", it has led to tax policies that attempt not to burden the market by not taxing capital and limiting taxation of business, and it has resulted in surprising property decisions that uses the state to wrest existing property rights from current owners for the benefit of specific commercial interests.
• The proposed tax reforms have little in the way of track records, either here or elsewhere, and have never been relied on as the sole revenue generator in other nations
• Prudence values (maintaining institutions, resisting hasty innovation) support the current system.

All in all, the Hoose article is an interesting venture into the kinds of arguments that a classical conservative, as opposed to a modern "economic conservative", can put forward in support of a progressive income tax system.

New Year Finds Increasing Deficits, Income Gap and Health Care Gap

Two studies were announced last week, both bringing bad news for ordinary Americans.  The insights from those studies was confirmed in the rough and tumble dysfunction of the new Medicare drug program for the neediest recipients. There may well be something to learn from all of this, as Congress looks to the new year.

The Congressional Budget Office announced Thursday that red ink will flow into the next decade if the Bush tax cuts are made permanent at a cost of $2.6 trillion for the decade.  Its study, Budget and Economic Outlook: Fiscal Years 2007 - 2016, summarized here, projects a budget of $336 billion for 2006, or 2.6% of GDP.  When projected needs for the military occupation of Iraq and Afghanistan are added in, as well as additional flood insurance payments related to the last fall's hurricane season, the CBO projects a deficit for 2006 in the range of $360 billion.  That means that government borrowing --already over $8 trillion (including funds borrowed from the Social Security trust fund--will have to increase even more to finance the deficit and any additional tax cuts the Congress may ultimately enact this year, adding to the debt burden of future generations.  Kent Conrad, a member of the Senate Budget Committee, told the Wall Street Journal that this Congress has been "the most fiscally irresponsible in our nation's history." 

The Center on Budget and Policy Priorities, in a study entitled "Pulling Apart", available here, looked at the state by state income gap between the wealthiest families and those at the bottom.  It found a steady widening of the gap from the early 1980s to the early 2000s.  Although there was some decline in inequality at the turn of the century, by 2003 the wealthy were again rapidly leaving the poor behind.  Those at the top, who generally are the primary owners of capital wealth, generally benefited from the rebounding stock market. Those at the bottom, who generally work for wages in jobs that are particularly vulnerable to slowdowns in the economy, suffered most in the recent recession and have continued to be affected by the slow recovery to the jobs sector.  In thirty-eight states that showed a widening gap, the income of the richest grew by an average $45,800 or 62% while the income of those at the bottom grew by an average of only $3000 or 21%.   Even within the top quintile of well-to-do Americans, the top 5% saw their income grow much more rapidly than the remaining members of the quintile.  A significant cause for the decline, according to the report, is the law wages earned by the 70% of workers without a college education, outsourcing, low-wage service jobs, and the weakening of unions.  Workers at the bottom are struggling against a decline in the real minimum wage, while capital owners at the top are enjoying extraordinary growth in wealth from increased productivity of workers that remain.

These data are particularly telling when individual states or districts are considered.  In the District of Columbia, the average income of the poorest groups increased in two decades by only $382, from $12,321 to $12,703.  At the same time, the best off saw their incomes increased by a whopping $70,362, or about $3,350 a year.  See the statistical sheet for DC. Similar figures are available for other areas at this link.  And see the analysis by Citizens for Tax Justice at this link.  As noted by Ed Lazere at the D.C. Fiscal Policy Institute in a report on the study by the Washington Post, "It seems pretty clear that there's a large group of disadvantaged residents in the city who aren't getting the help they need to move up the economic ladder, whether it be education or training or other supports."  D'Vera Cohn, Separation Between Rich, Poor Widening in DC, Jan. 27, 2006 Wash. Post.  Lazere points out the need to increase skills for the city's residents, since most are working but simply cannot earn enough at their jobs to move ahead.  Id. 

These income distribution statistics are confirmed by an IRS study that looks at income and tax rate trends.  See, e.g., Michael Strudler & Tom Petska, Further Analysis of the Distribution of Income and Taxes, November 2004 (revised 2005).   The authors examine trends in the distribution of incomes and tax burdens based on a "retrospective income concept" that attempts to make the income measure both comprehensive and consistent over time by including the same income and deduction items for the years studied.  The income measure includes capital gains, unemployment compensation, pensions and annuities, but does not include social security benefits because they were not reported when the system was first developed.  The study predictably finds that "[w]hile all of the income thresholds have increased over time, the largest increases in absolute terms, and on a percentage basis, were with the highest income-size classes."  Id.  An American would have had to earn more than $233,000 to be in the top 0.1% bracket in 1979, but more than $1,278,000 in 2002--a 400% increase.  The increase at the bottom was only 130%. Thus, the fact that those at the top pay higher average tax burdens is not surprising--"an increasing proportion of income has shifted to the upper levels of the distribution where it is taxed at higher rates."  Id. The Strudler & Petska study also demonstrates just how much the highest-income Americans have been benefited by the Bush tax cuts.

The highest income group winds up paying an average tax that is less than all of the groups above the 20-to-40 percent class. Under the new laws, the 0.1-percent group would pay average taxes that are 3.19 percentage points less than the 1-to-5 percent income group, 2.91 percentage points less than the 5-to-10 percent income group, and 1.24 percentage points less than the 10-to-20 percent group. In fact, under the provisions of EGTRRA/JGTRRA [the 2001 and 2003 tax cut bills], individuals in the 0.1-percent group wind up paying less than one percentage point (0.99) more than the 20-to-40 percent income group. In contrast, the highest income group paid average combined taxes that were 12.03 percentage points higher than the 20-to-40 percent income group in 1979 and 4.29 percentage points higher than this group underexisting 1999 laws.  Id. (emphasis added).

Couple these disturbing trends with two other pieces of information.  First, with the new drug program in Medicare coming on line, millions of needy Americans were simply assigned to drug plans.  Although they had been receiving their medications directly through government programs, they are now expected to navigate the complex, confusing and ultimately unsatisfactory system of private providers that is causing this nation's elderly such anguish as it gets off the ground.  Regretably, it turns out that nearly one-third of impoverished Americans were enrolled by the government in Medicare plans that refuse to cover 15% of commonly used drugs.  The agency insists that they will be covered since a therapeutically equivalent alternative of medically necessary treatments must be covered, but many of those having problems are the most vulnerable who may have trouble navigating well-understood situations, much less the labyrinth of the new prescription drug program.  They may simply not know where to turn, and lack of coverage of their 'brand" may require another visit to a physician to get a prescription for a covered equivalent.  See the story in the Jan. 28 Chicago Tribune.   At any rate, the prescription drug plan experience in the "comparison shopping" of Bush's ideal health care market is so far a very unsatisfactory one.  It just may be that finding the right doctor to treat you when you are sick or even chronically ill doesn't work the same way finding the right supplier of the tile for your bathroom floor, in spite of Bush's view that health care competition is the "cure" for the lack of accessible health care for millions of Americans.

Meanwhile, the veterans' health care system has worked to improve its care since the 1980s and has emerged as a leader in high quality care, according to an annual survey conducted by the National Quality Research Center mentioned by Paul Krugman in his Jan. 27 New York Times Op-Ed.  As Krugman notes, the VHA's success story suggests that a "government agency can deliver better care at lower cost than the private sector."  Id.  Maybe it is time we really looked at the places that privatization works and does not work.  Universal health care, funded by tax revenues and provided through a government system of hospitals and clinics, may be the answer we have avoided for far too long. 

Can we really watch the poor get poorer and the rich get richer (and pay less taxes to boot) and still justify our failure to provide universal health care for those who need it?  I think not.  We should act now to create a single-provider health care system that puts medicine to the service of the people.

Tax shelters, Tax lawyers and Crime

Since I have written a good bit about corporate tax shelters and the need to rein-in both accounting firms that develop complex shelter products for their audit clients and a tax bar that appears in some cases to have lost its bearings (see, e.g., Putting SEC Heat on Audit Firms), I must comment here on a post on another blog, May It Please the Court, titled "Paying Taxes: Sport or Folly?.  The blogger appears to think no tax lawyer could ever do wrong when it comes to helping clients to shelter taxes.  The blog post complains about IRS investigations, and possible indictments, of lawyers at Jenkens and Gilchrist who profited enormously from the mass marketing of "get rich quick" schemes that helped taxpayers get rich by paying less taxes to Uncle Sam than one would otherwise have expected.  If you look at the Jenkens & Gilchrist site, linked above, you'd find nothing to suggest that the firm had been an active provider of cloned shelter opinions for deals that are marketed with cathcy names like "COBRA" (currency options bring reward alternatives).  But the firm is the subject of civil lawsuits from disgruntled clients, appeared conspicuously in the materials developed by a Senate investigative subcommittee, and has received several summons from the IRS and Justice Department in the course of their investigation into its involvement in promoted shelters.  See Lynnley Browning's Jan. 25 story in the New York Times, Tax Shelter Inquiry Expands.  Three Jenkens & Gilchrist lawyers are now the subject of a cirminal investigation in Manhattan.  Opinions for shelters garnered the firm as much as $75,000 a piece, even though the opinions were cloned the same way the tax shelter transactions were, and the highest paid among them garnered more than $90 million in fees from 1999 to 2003.  Id. 

Now, the blogger suggests that it's simply "wrong" for the IRS to prosecute tax lawyers, since they are merely "figur[ing] out what [the Congress] did wrong when they wrote the code."  Loopholes, the blogger would have us to believe, are simply Congress's little accidents that tax lawyers are free to lap up and utilize to cut their clients' taxes, even if the loophole requires using a provision in ways clearly in contravention of the purpose behind its enactment. 

The tax minimization norm, and the zealous advocacy of client's position that goes with it, have animated the tax bar ever since Learned Hand's famous lines supporting tax planning.  But tax lawyers get carried away, and tax planning can become the rationale for a business to enter into transactions, rather than the handmaiden of the business's normal operating needs.  James Maule again hits the nail on the head when he notes that tax lawyers can go too far as easily as anyone else.  And until we know more about their particular behaviors, it is simply premature to judge the wisdom of the government's investigation of the attorneys.  As Maule notes on his "Mauled Again" blog discussion of the May It Please the Court post, what causes trouble for tax attorneys is generating the appearance of a business transaction, when all there is is a tax avoidance deal.  Tax attorneys in those cases are trying to perform a kind of tax alchemy--for example, making an ordinary business transaction into one that magically transforms a transaction without a tax benefit into one that provides a loss to use against a pre-existing capital gain.  A lawyer involved in tax alchemy deserves to land in front of a grand jury panel explaining his millions.

Meanwhile, the reality of the repatriation provision of the America Jobs Creation Act (the one that lets big companies bring home profits they've stored overseas at a pitifully low tax rate, on the basis that the tax dividend will be invested in creating new jobs at home) has hit again, as Ford brings home hundreds of millions at a savings of $250 million, while laying off tens of thousands of workers.  See this story.

United for a Fair Economy

Hats Off to TaxProf blog for displaying information on United for a Fair Economy, a progressive center that aims to spread word about the extent of economic inequality in the United States and its damaging consequences.  The following is from their home page.

UFE raises awareness that concentrated wealth and power undermine the economy, corrupt democracy, deepen the racial divide, and tear communities apart. We support and help build social movements for greater equality.

The group runs workshops, contributes op-eds, and does reports on topics related to its missions.  Early in the Afghanistan war, the group produced a report "More Bucks for the Bang" that showed how CEO pay at big military contractors rose faster than at other companies after the start of the war.  Each year, the group charts "Executive Excess" comparing trends in worker pay to CEO pay.  In the first "State of the Dream" report, the group calculated the rate at which the black-white income gap is narrowing and projected that it would take 581 years to reach parity.

Their most recent report looks at the estate tax.  See the release here and the report here.  It concludes that the rise in the exemption level to $2 million means that very, very few estates will be subject to the tax.  According to their report, only 0.27% of estates--one in every 370 or 6,343 out of 2.3 million deaths-- will be subject to the federal estate tax this year.  That compares with 2.18% in 2000, before the Bush Administration's changes to the millionaire's tax began to phase in and 7.65% back in 1980!  By 2009, they project that only one in 600 estates will be subject to the estate tax.

The estate tax raised approximately $23 billion in 2004.  If it is repealed completely, the estimated revenue loss is around one trillion dollars over ten years. Id.  The estate tax applied to only 300 farms in 2004, and only 27 of those needed to (or wanted to ) sell any assets in order to pay off the estate tax.  Id.  Special considerations give farm heirs up to 14 years to pay off any estate tax due, if liquidity is a problem and they want to retain the farm.

UFE also coordinates a project called "responsible wealth."  It enlists wealthy taxpayers, investors and businesspeople  to push for tax policies that do not contribute to economic inequality and for living wages.  One of its reports responded to the President's Tax Reform Panel, here.

It is important that these progressive tax policy institutes become better known to ordinary Americans so that they can find the facts about tax reform proposals and budget decisions and understand how those proposals will impact everyday decisions.  Citizens for Tax Justice, United for a Fair Economy, the Urban Institute and other groups help to enlighten Americans as a counter force to the well-funded efforts to push the repeal of the estate tax, consumption taxes and other tax systems that shift more of the tax burden from those in the upper quintile to ordinary Americans.  Keep up the good work!

State Tax Cuts and Impact on the Poor

Governor Pataki's budget proposal has been unleashed on New York State.  See this Rockefellar Institute description.  Like Bush on the national level, he includes a multi-billion dollar tax cut that is claimed to "unleash[] opportunity by further reducing the tax burden on our working families and job-creating businesses."  See this New York Times story by Danny Hakim. However, like the Bush tax cuts, one suspects that the intended beneficiary of the cut is more likely the wealthy investor and not so clearly the ordinary working American.  More than half of the tax cut would go to those in the upper 10% in New York, and the state's estate tax would be eliminated. Id. New York deficits are expected to approach $4 billion by early 2009, due largely to the tax cuts projected. Id.  The Citizens for Tax Justice site provides a nice bullet-point summary of the proposed budget plan, here. 

In the reverse Robin Hood pattern of class-warfare that has been typical of so many tax cut proposals of late, the program "provide[s] the greatest benefit to those New Yorkers who need it the least," according to Assemblyman Richard Brodsky, reported in the New York Times story.   

These tax cuts at the state level are particularly worrisome in the current climate where the wealthy have been the beneficiaries of federal tax cuts, and the income gap between those at the very top and ordinary Americans over the rest of the spectrum has been steadily increasing.  For the latter, see David Wessel's discussion of the IRS data report by Emmanuel Saez at Berkeley, in the Jan. 19, 2006 Wall St. J. at A2.  Wessel notes that economic growth and productivity gains are not going to typical workers in the middle classes but rather to executives and professionals at the top. 

   At the same time, pensions are being frozen and workers are being shifted to 401(k) plans where they may lose a considerable part of their expected retirement benefits.  See this story in the New York Times complete with some very informative graphs.  The Times shows that these pension changes result in significant losses for most retirees, with gains only for those in the youngest age brackets.  Even those assumptions of gains under 401(k) plans are questionable, since they depend on rosy investment scenarios-- 401(k)s are assumed to return between 8.2 and 8.9 percent each year.  (My personal experience with a 401(k) has certainly fallen far behind that--it peaked the year before I left Cleary, Gottlieb to teach, and hasn't reached anywhere near that number since.)

Shifting taxes away from the rich at the same time that the rich are getting richer and the poor poorer does a double disservice--it keeps revenues from government that should support its programs, from disease intervention to counterterrorism, and it dumps more of the burden of supporting government programs on people who are increasingly struggling to manage. 

More troubling still are the callous "cost-benefit" analyses of safety net provisions for those that are caught in this triple bind of outsourced jobs, low wages, and disappearing pensions.  Robert H. Frank's "Economic Scene" in the Jan. 19 New York Times provides a refreshing acknowledgment of the role of sympathy and empathy in making economic judgments.  He considers Steven Landsburg's article in Slate concluding that it was not wrong to pull the ventilator on a poor woman who couldn't pay her bills, even though she was conscious and wanted to live and that action resulted in an agonizing death.  Frank notes that many "attacked the argument as morally preposterous."  He agreed, but noted that it was also "economically preposterous."   The problem lies with our inability to measure many of life's valuable benefits in dollars.  We may be able to count the costs of hospital care relatively easily (as long as we have a calculator at hand to add up all the separate bills), but we cannot so easily weigh the benefits of a dying person's living an additional day to see a mother en route from Africa.  Frank relates Landsburg's valuation mechanism--imagine offering the sick woman, before her illness, a chance to buy insurance for ventilator coverage or get cash.  The poor would likely choose cash, so the benefit of having the ventilator must be worth less than the cash.  Frank notes that this overlooks both the desire of people to have collectively financed rescue efforts available for all (thus the inability of a poor person to self provide for such contingencies is beside the point) and the empathic benefit to large numbers of people, not just the single individual served, when a mortally sick patient receives treatment.  If there were time, many would have contributed to provide the care for her, but because there is not time for "endless series of individual private fundraisers", we have government take on the rescue function.  Frank pointedly notes that using cost-benefit analysis helps us to think intelligently about decisions but cannot be used to override basic human values.  We need to think about both when we consider how to pay for emergency rescue efforts and whether to jeopardize those (and other) programs by enacting further tax cuts for the wealthy.

Seeing Double: Norquist's "Americans for Tax Reform" Entities

Stuart Levine has an interesting post  here on Grover Norquist related to Norquist's connections to Jack Abramoff, the indicted lobbyist whose connections with Republican power centers in Washington run wide and deep.  Levine speculates about Norquist's two "Americans for Tax Reform" organizations--one is a "501(c)(3)" charitable foundation and the other is a "501(c)(4)" civic organization.  Levine describes a Texas Observer story about a $25,000 check that raises some questions about the use of the organizations.

"In October, I asked: Did Grover Norquist Commit Tax Fraud? The information that is publicly available is still too limited to allow one to definitively answer that question. However, the facts that are publicly available point to systematic violations by Norquist of various provisions of the Internal Revenue Code."

"Case in point. In an article entitled The Pimping of the President, the Texas Observer gives a detailed account of how Jack Abramoff and Norquist got paid by two Native American tribes to provide a personal audience with President Bush. There seems to be some question as to who was in attendance, but there is no question that Norquist's organization, Americans for Tax Reform, recieved [sic] a $25,000 payment for Norquist's efforts. (A facsimile of the check accompanies the article.)"

Levine speculates that Norquist's organizations may have been in violation of tax laws in one of two ways.

"First, Americans for Tax Reform may have been engaged in a profit-making endeavor. If that was the case, there was a violation of the rules under Section 501(c)."

"Alternatively, the lobbying was a business activity that Norquist personally engaged in. If that was the case, Norquist would be deemed to have "constructively received" the $25,000 check. In that event, he should have reported the $25,000 payment as income on a Schedule C on his Form 1040 for the year. He would not have been able to claim a deduction for the transfer of the funds to Americans for Tax Reform, regardless of whether the entity that the funds found their way into was the 501(c)(3) or 501(c)(4) entity."

"Let me reiterate: There are not yet sufficient facts on the public record to prove that Norquist engaged in tax fraud. However, it is difficult to believe that the actual transaction reported in the Texas Observer was an isolated incident. Rather, it appears that Norquist, and probably others, used 501(c)(3) and 501(c)(4) entities to engage in the "business" of partisan politics. That business made them money, as their influence and the funding of their controlled 501(c) entities grew."

The rapid growth and complex operations of civic and charitable organizations is another area in which IRS enforcement has fallen behind.  There are simply too few IRS resources to do the job well.  Does that mean that most of these organizations are corrupt or being used for fraud?  Undoubtedly not.  But it does mean that unscrupulous individuals could use tax exempt organizations to bypass the laws on operations of businesses, as Levine has outlined in his speculation about Norquist.  Now that Congress has settled a spotlight on issues connected with tax exempts (including acting as accommodation parties in tax shelter transactions), the IRS should follow up on leads like the Texas Observe story and see where they take it.  If tax-exempt status is being used fraudulently, the IRS should take immediate action to end the special status and pursue those who have benefited.

Do Tax Cuts Create Jobs?

United for a Fair Economy did a report in November 2005 (revised in January 2006), called "Nothing to Be Thankful For," about the relationship between tax cuts and jobs, viewable at their website at this link.  As their press release notes, the  Bush Administration's promise that massive tax cuts targeted primarily to the wealthy would result in job creation for ordinary Americans has not panned out.  Instead, the tax cuts have played a major role in creating massive deficits that slow growth.  The report concludes that:

• Tax cuts have no predictable effect on employment, either in job creation or job destruction.
• Since 2003, job creation has fallen millions of jobs short of the administration's promises.
• The current weakness in job creation during an economic recovery is unprecedented since World War II. 
• The number of good-paying jobs (ones that pay $16 an hour or more) has remained flat at 25% of all workers. Id.

The report further concludes that the quality of jobs has declined appreciably since the passage of the 2001 tax cuts, as measured by income, health insurance and retirement benefits.  Inflation-adjusted family income has actually declined, and the number of workers with benefits has decreased.  For African American and Latino families, the picture is even bleaker as the racial economic divide has widened further.  Unemployment among African Americans is higher, and the earnings gap between both groups and whites has increased. 

The Bush Administration has claimed that tax cuts have stimulated the economy since 2000, but the report notes that is very difficult to prove.  Historically, gross domestic product shows steady progress, whether taxes are being raised or lowered.  Report at 11. Yet there are several reasons to think tax cuts are "a particularly bad tool for growing the economy."  Report at 12. 

• Most tax cuts take considerable time to have any effect on the econmy, other than rebates for low income recipients who spend the rebate immediately.
• There is no assurance that tax cut windfalls to the wealthy will be spent on entrepreneurial activity rather than overseas investments or luxury imported items that don't boost the economy.
• There is even more concern with tax cuts, such as those passed by Reagan and by Bush, that redistribute income and wealth from the lower income classes to the wealthy, since societies with equitable distributions of income generally have healthier economies.
• Tax cuts have historically been connected with increases in federal deficits.  When cuts are paid for by borrowing, they "are not really tax cuts: they are tax postponements."  Report at 13.  As a result, the US is running its largest deficits in history, at a time when its borrowing is also at record levels.

UFE's report is consistent with the reports about falling median household income.  While average compensation has increased, with those at the top making out well indeed, real wages of those in the bottom groups have gone down.  Inflation hit a five-year high of 3.4% last year, outpacing whatever wage gains most workers made.  See Labor Department's Consumer Price Index Survey. Average weekly earnings, adjusted for inflation, declined by 0.4% in 2005.  See Labor Department's Real Earnings.  This was the third straight year that weekly wages fell after adjusting for price changes.  Jared Bernstein at the Economic Policy Institute called the lack of improvement in living standards "the biggest problem in the current economy."  See Nell Henderson's story in the Washington Post, linked here.

Because of the tax cuts, federal revenues represent a very low share of the economy.  The Congressional Budget Office predicts that they will average about 17.1 percent of GDP over the next ten years, which is lower than the average for any prior decade since the 1940s.  See the Oct. 6, 2005 report of the Center on Budget and Policy Priorities, here.

At a time when inequality is increasing and wages for ordinary Americans are not even keeping up with inflation, shrinking the safety net, stretching the deficit , handing the savings to the wealthy to invest in the Cayman Islands, and expecting future generations to hand out a big chunk of their income to pay for today's cuts is simply not sound fiscal policy . 

Church Politics (4)

In earlier posts, I commented on the IRS probe of the All Saints Church in Pasadena California based on a claim that it had exploited its tax exempt status to play politics.  In that case, the church was one with a generally liberal perspective and a pastor had preached a sermon shortly before the election that imagined a debate between Bush, Kerry and Jesus about the Iraq war.

Now there is a claim about partisan politics from the pulpit in two evangelical megachurches.  This claim was not brought by the IRS, but rather by a large group of local pastors who signed a complaint asking the IRS to investigate the two churches to determine whether their tax-exempt status should be revoked.  The churches are World Harvest Church of Columbus and Fairfield Christian Churck of Lancaster.  Further information is available in this story from the Columbus Dispatch.

As noted in the story, the complaint claims that pastors of the two churches used their churches to support "flagrant political campaign activities" on behalf of Republican gubernatorial candidate Kenneth Blackwell, citing nine instances when Blackwell was featured at church events.  Id.  The pastors stressed that they were merely asking the IRS to uphold the law against active political campaigning on behalf of a candidate by tax-exempt religious organizations.

The pastors of the churches purportedly involved in campaign activities insist that their activities are merely values-oriented, not partisan political activities.  See this story in the New York Times.

A particular concern in the All Saints case was that the IRS might be using its audit powers in a heavy-handed and partisan fashion.  It is hard to test that hypothesis, because a letter to a church is not made public unless the church itself releases it.  I argued, as have others, that transparency would help assure Americans that the tax laws are being adminstered fairly.  All such letters should be released, with an adequate description of the behavior that leads to the letter.

The two megachurches raise even starker concerns that tax-exempt status may be misused to further particular candidacies.  Surely merely inviting several candidates should not be sufficient to avoid being treated as supporting the candidacy of a single individual when one person consistently takes part and no others do.  It is too easy for groups to prearrange a date and the mode of inviting the candidate to ensure that only the preferred candidate participates.  One solution would be to bar any appearances in churches or church-sponsored activities by a single candidate for office, unless that appearance is matched by similar appearances of at least two-thirds of the other candidates for that office, either concurrently or at different times that have been fully confirmed at the time of the appearance of the first candidate.  In this way, events at the church could not become candidate-endorsement events by virtue of frequent appearances of a single candidate.  There would always be multiple candidates at events, or multiple events each with different candidates. 

Without some such guidelines, the rules against campaign participation will continue to be honored in the breach.  That is always harmful in our voluntary compliance tax system and in this case it is harmful to our democratic institutions.

Tax Cuts and Budget Deficits

As the federal government gets underway again after the holidays, we can expect more fireworks than just the probable confirmation to the Supreme Court of a radical conservative supporter of the "unitary presidency" concept.  The House and Senate will be back at the budget battles.  First, there is the so-called "deficit reduction" budget bill approved by the Senate in December with minor changes (resulting in more than $39 billion of cuts, primarily to programs benefitting the less fortunate).  Then the two chambers must face the question of whether they will or will not enact a further series of foolish tax cuts benefitting the wealthy. 

Next will come the Administration's fiscal year 2007 budget recommendations.  Bloomberg.com ran an interesting article on January 13, see Bush's 2007 Budget to Reveal Cost of Making Tax Cuts Permanent, about Bush's "day of reckoning".  That budget, due the first week of February, will be the first that must take into account the budgetary impact of extending the various tax cuts beyond their current slated expiration dates (including accelerated expensing for businesses, estate tax repeal for multimillionaires, and rate cuts especially beneficial to the wealthy).

It is worth recalling that the series of Bush tax cuts enacted during his first term were all fit within artificial ceilings on the amount of revenue to be lost by the use of sunset gimmicks. The multimillionaires' estate tax exemption increases through 2009, and then the tax disappears in 2010 only to be resurrected from the dead in its full 2001 glory in 2011.  The rate structure, so-called marriage penalty relief and increased child tax credit (the main item that aided ordinary Americans in the lower four quintiles) similarly return to their pre-Bush structure, like Cinderella's garments and coach, after 2010.  The treatment of most dividends as net capital gains eligible for the very preferential capital gains rates expires, without more, after 2008.

The alternative minimum tax (AMT), of course, is a different story.  Congress couldn't afford to actually lower rates for all those middle class taxpayers, so it retained the AMT without any permanent fix, knowing full well that the AMT would gradually take back most of the tax cuts for middle income taxpayers. It has passed temporary fixes every one or two years, but has not been able to bite the trillion dollar bullet to repeal the AMT.  See my previous discussion of the AMT situation--Part I, Part 2, Part 3, Part 4, Part 5 and Part 6--including my proposal that the AMT be retained but reformed so that ordinary taxpayers are completely protected from paying the AMT but higher income taxpayers continue to be required to pay at least some tax on their economic income.  The regular tax system would then function for lower-and-middle-income taxpayers relatively simply, especially for the two-thirds of taxpayers taking advantage of the standard deduction.  Taxpayers at the very top of the income distribution generally don't pay tax under the AMT system, because they are paying taxes at the highest marginal rates under the regular tax system.

Now, one could make a strong argument for letting most of the Bush Administration's extravagant and poorly distributed tax cuts expire as they were designed to do.  As various prior postings have discussed, the capital gains preference rates provide a windfall to the very wealthy who own most of the capital and have less labor income.  The estate tax already falls only on the wealthiest few at the very top of the asset pyramid.  Taxation of an estate upon its transfer is appropriate, to help prevent the growth of privileged classes who inherit capital wealth.  Returning to prior law on capital gains and estate taxation would further democratic egalitarianism by helping to reduce the growing inequalities between the small owner class and ordinary taxpayers who work for a living.  Expanded expensing provisions should be pulled back, since they result in substantial understatement of business incomes. 

Bush continues to push for extending the cuts, however, making the stale argument that tax cuts of all stripes lead to economic growth that can trickle down to ordinary taxpayers.  To allow for those extensions in the FY 2007 budget, however, Bush will have to acknowledge the substantial impact of extension on an already fragile budget.  The Bloomberg article notes that extending the cuts would cost $118.3 billion in 2011 alone, even without adjusting for the AMT.  See Bush's 2007 Budget to Reveal Cost of Making Tax Cuts Permanent.  That additional revenue loss will inevitably add to the fiscal year deficit, which White House Office of Management and Budget Deputy Director Joel Kaplan estimates at more than $400 billion for 2006. Id.  That's a significant increase from the July 2005 forecast of $341 billion, blamed by Kaplan on costs for Gulf Coast recovery projects (and, one might add, the high costs of the ongoing Iraq occupation). See this story on Al Jazeera.  Continuing the Bush pollyanna approach to policies almost certain to ensure long-term deficits, Kaplan nonetheless asserts that sticking to the tax cuts will permit the Bush Administration to fulfill its promise to narrow the deficit significantly. Id.

The Bloomberg article reports that Robert Bixby, head of the Concord Coalition, and Stanley Collender, head of Financial Dynamics, both suggest that the Administration may seek to obscure the impact of tax cut extensions on the budget deficits by any of a number of (ultimately unreasonable) techniques, including assuming that future spending will be frozen at current levels, disregarding emergency and supplemental budgets (Iraq war, Katrina aid), projecting high growth rates for the economy based on the stimulus of lower taxes, and, quite possibly, disregarding the need to reform or repeal the AMT.  Instead of gazing through such rose-colored glasses, we should consider the budget situation honestly. Part of that consideration should be an open and frank assessment of the demerits of continuing policies that aid the investor class at the expense of the working poor, in light of our dreams of a sustainable democracy where each person has an opportunity to develop to his or her full potential. 

the New Capitalism

Looking at the news over the past few weeks, it is relatively easy to understand the general malaise that besets ordinary Americans who work for a living and worry about providing for themselves and their families, especially if there is a medical crisis or as they age.

Robert Pear reported in the January 10 New York Times on the Growth of National Health Spending.  While the rate of increase in overall health care spending has slowed, it still rose at a brisk 7.9% pace in 2004.  It represented 16% of the national economy, and the increase in spending for hospital care and doctors' bills was the highest recorded since 1991.  Id.   For ordinary Americans, these trends bode ill.

The rate of growth in health spending slowed in 2004, but it's still substantially higher than trends in earnings, which are the key to being able to afford health care. ... Health insurance is becoming less affordable to more people.  ...[H]ealth spending grew faster than the economy or consumer prices."

Ordinary Americans have made it clear that having affordable health care is one of their highest priority concerns.  In a Wall Street Journal/NBC News poll, 33% identified health care as a top priority, just behind the 41% who identified the Iraq war as a top concern.  Yet Congress and the White House do not appear to understand the growing frustration of ordinary Americans.  They have shown no interest in creating a national health insurance program that provides universal access to health care along the lines of the European model.  Bush is said to intend to make health care a priority for 2006.   See this story in the January 12 Wall Street Journal.  But his focus is on tax breaks for Americans who buy their own health insurance and broader use of health savings accounts.  Those proposals shift the risk to individuals and offer little for those who are unable to afford insurance in the first place.  Undermining the employer-based insurance system and shifting the risk to individuals may result in decreased care for lower-income Americans.  Many will likely avoid preventative care to cut costs and resort to hospital emergency rooms when their medical situation becomes so severe that some care is mandated.

Moreover, ordinary Americans face a pervasive sense of insecurity about their workplaces--both in terms of having a secure job in the future and in terms of having a dependable source of income when they retire.  The January 16 New Yorker reports that "Job instability has become a consistent source of anxiety for American workers: one recent poll found that forty-six percent of respondents worried that a member of their household would be out of work in the near future."   James Surowiecki, "Lifers". 

There are likely multiple reasons for this workplace anxiety.  Not least among them are stories of increasing layoffs and outsourcing of jobs to lower-wage countries.  Lack of health coverage is a growing concern as companies drop health insurance benefits or increase costs. 

"The percentage of companies that offer health benefits to their employees has dropped thirteen per cent in the past five years, and even employees who are covered pay more of their own costs."  Id. 

Furthermore, job insecurity comes at a time when real wages have fallen.  As the New Yorker story notes,

"the average household income is only slightly above where it was in 1973.  This, and not rates of lifetime employment, is the true difference between employment today and in the sixties.  Back then, real wages grew steadily year after year, rising roughly in tandem with productivity.  Today, real wages are stagnant, and most of the economy's gains in productivity are going to shareholders or to people at the top of the corporate pyramid."  Id.

While wages have remained stagnant, the workers' guarantee of a decent living wage in retirement has begun to vanish.  IBM, a company with a healthy pension plan, decided to freeze its pension.  As a result, employees will still get a pension when they retire, but their additional years of work after the freeze will not add to the amount of benefits to which they are entitled.  Instead, IBM will shift the risk to employees, pushing them into a 401(k) plan.  See How Safe Is Your Pension?    Freezing pensions puts employees at risk, since they have to depend on their ability to adequately manage their own individual savings through a 401(k) account or other savings device, rather than having the cushion of the pension plan's broad investments.  But the freeze gives the company a big boost to its bottom line, thanks to accounting rules that let companies realize a gain from eliminating future obligations that have been recorded on their books (especially advantageous when interest rates are low).  Berkshire Hathaway gained $70 mllion when it froze a subsidiary's pension in 2004.  Id.  Verizon indicated it had a $3 billion gain from a pension freeze and other pension changes. See Forecast: More Pension Freezes. A number of other companies have frozen pensions, including Hewlett-Packard and Sears.  Id.  In fact, a survey by Hewitt Associates indicated that 29% of the 152 companies surveyed were considering closing some of their pensions to new employees, and 16% of 157 companies said that they might freeze accruals for some or all of current participants.  Id.

The workplace under the "new capitalizm" is therefore one fraught with anxiety.  As Harold Meyerson reports in a Washington Post Op-Ed, A Gentler Capitalism, workers are faced with significant risk.

"The new workplace ... is a brave new world of short-term employment and relationships, where experience is not necessarily a virtue and institutional memory is sketchy at best.  It may be a fine palce for young workers, but 'as middle age looms and children, mortgages and school fees appear, the need for structure and predictability in work grows greater.' [quoting Richard Sennett].  The frequent migration of executives from one firm to another ... imposes further costs on employees. ... [W]hile Americans have no great love for government, they do expect it to provide a baseline of security--the more so since the employer-provided benefits of the past 60 years are going the way of the dodo. ...The new capitalism disdains stability; human beings, on the whole, don't."  Id.

The question, of course, is what should be done?  My answer will not surprise my readers.  I believe that government has an important function to play to protect citizens from risks when they cannot adequately protect themselves. Tax incentives to encourage ordinary Americans to purchase their own health insurance outside the workplace and expanded tax-favored savings accounts to encourage ordinary Americans to save more for retirement are unlikely to satisfy that need.  Instead, Congress should carefully develop a national health care plan that provides universal health care to all.   One suggestion, an idea presented as part of the contest at slicedbread.com for new ideas that would help create a better economy, would provide a long transition to a national health care system by enrolling each adult on their 35th birthday. Similarly, Social Security should be buttressed, so that the majority of Americans who rely on it as their retirement funding can be assured that it will be there to protect them when they need it.  The most obvious fix for Social Security and Medicare is to apply those payroll taxes at a flat rate to all income, including capital gains, instead of applying it only to labor income at regressive rates by virtue of the "cap".

These changes can be done if we marshall resources and place priorities on human needs rather than on continued tax cuts for wealthy shareholders and top managers and others in the top income bracket.  Consider the GI Bill that educated millions of American veterans after World War II.  The vast majority of the young men in the country were veterans and 80% of those veterans were educated under the GI bill.  It cost more than $100 billion in today's dollars.  Yet that investment in human capital became a key component of the engine of economic growth that propelled America forward in the post-war years.   Creating a sound national health care system and a sound Social Security system could similarly push America's economy forward.  Preventative care would receive more attention, and resources could be dedicated to ensuring that clinics are available in poor communities and rural areas where health care is lacking today.  Good health can lead to better participation in school and more productive lives.  Adequate funds for retirement can keep our senior citizens independent and better able to care for themselves.  It's time for Congress to act--not by shifting risks to individual Americans, but by enacting programs that provide adequate health coverage and retirement safety nets for all.