ataxingmatter

The GOP Tax Bill Disses the Working Class

Here's something about the GOP House and the GOP Senate:  they each passed tax bills (supposed to come out in a "conference" agreement sometime today) that diss the United States' working class taxpayers.  White or black, Christian or Jew or other, citizen by birth or naturalized citizen--workers are treated as an inferior "taker" class and owners are treated as a superior "maker" class--the same old GOP class warfare that has been evidenced in Republican-driven tax legislation for decades.  That shows in the provisions that have been discussed quite a bit already, even though there is no official distributional analysis and even though the Treasury Department put out a one-pager claiming to provide an analysis showing huge economic growth would eliminate any deficits (based on both the tax "reform" legislation and promised cost-cutting "reforms" to Medicare and Social Security):

• the  significant reduction in impact of the estate tax,
• the huge reduction in the statutory corporate tax rate of most benefit to officers/shareholders (it was 35%, it will be 21% under the conference agreement, apparently, even though the "effective" corporate tax rate ranged from negative to around 24-25%--essentially more favorable than many of our fellow advanced economies' corporate tax rates);
• the territoriality of the corporate tax (generally, zero tax on foreign earnings of U.S. companies);
• immediate expensing of company investments (a five year provision that allows companies huge tax benefits for those five years);
• the elimination of the corporate alternative minimum tax (AMT), at a cost of about $250 billion in revenues.
• the reduction in the top rate for wealthy individuals (from 39.6% to 37%),
• the substantial reduction in the  State and Local Tax Deduction for workers (thus changing entirely the economics of paying for a house already purchased, while allowing sole proprietors, partnerships and other "owners" of equity in businesses the ability to deduct such State and Local Taxes in full);
• a larger standard deduction but the elimination of personal exemptions;
• a larger child tax credit that only becomes refundable over time (limiting how much it helps the poor) but is available to wealthy households (starting to phase out at half-a-million of income!);
• the only slight reduction in the ability of wealthy individuals to take advantage of the mortgage interest deduction (reducing the debt limit to $750,000 instead of $1,100,000)
• the elimination of the corporate AMT (which cuts taxes for wealthy shareholders/owners/managers) but the retention of the individual AMT (which primarily affects the upper middle class and not the wealthiest taxpayers under the current rate bracket system);
• the elimination of the Affordable Care Act mandate and penalty (which reduces the amount of Medicaid and insurance subsidy funds for poor and middle-income taxpayers, as well as guaranteeing the deconstruction of the health care system for 13 million or more Americans by 2027 and  increasing insurance premiums for upper-middle-class taxpayers); and
• the opening of the Arctic National Wildlife Refuge to rape by fossil fuel oligarchies (a piddling amount of revenue, but sufficient to buy off the principle-less Sen. Lisa Murkowski from Alaska );
• making the corporate tax changes permanent (and effective without any transition period) while making the individual tax cuts other than benefits for the wealthy like the estate tax changes temporary.
• (just to name a few).

When the health care mandate removal is combined with the other provisions,  "On net, the poor would actually lose out in all years once this effect is taken into account."  Dylan Matthews, The Republican tax bill that could actually become law, explained, Vox.com (Dec. 14, 2017).  The following Tax Policy Center graph from the Vox article (using the Urban-Brookings Microsimulation Model) shows that by 2027 the top 0.1% end up doing much better (average tax cut for the top 0.1 percent is $221,550 a year).  The bottom 20% do worse while the middle--the second and third quintiles--have a very insignificant plus (average tax cut of the third quintile is $490).   Within the third or middle quintile, more than 62% of taxpayers that earn between $54,700 and $93,200 would see their taxes go up, "[b]ut only about 0.1% of the very richest one-thousandth of Americans would see a tax hike."  Id.  Early gains--though small, intended perhaps to benefit the GOP in earlier votes--don't last because the individual cuts aren't permanent.  A change to chained CPI for indexing brackets amounts to a tax increase on individuals, while the permanent corporate tax cuts mean rich and very rich do well while middle and upper-middle lose out. 

 

Maybe the most damnable characteristic of these House and Senate provisions, other than the sheer favoritism for the already wealthy, is the favorable treatment in determining the rate at which income is taxed for "owners" compared to the disfavored treatment for taxation of workers' wages.  As the Tax Policy Center notes, the Senate version of the tax bill "would reduce taxes on business owners, on average, about three times as much as it would reduce taxes on those whose primary source of income is wages or salaries."  Paul Krugman, Republicans Despise the Working Class, NY Times (Dec. 15, 2017), at A27.  And this dissing of the working class goes along with treating partners in real-estate partnerships (like the Trump family and many other real estate developers) with kid gloves:  "a partner in a real estate development firm might get a far bigger tax cut than a surgeon employed by a hospital, even though their income is the same." Krugman, Republicans Despise the Working Class, NY Times (Dec. 15, 2017) (quoting Howard Gleckman at the Tax Policy Center). 

The Vox article describes the pass-through provision as part of its "here's who would be better off" section:

Pass-through companies, like the Trump Organization, which get a new deduction reducing their tax burden. The House-Senate compromise bill allows people with pass-through income to deduct a portion of that income from their taxes; the deduction is reportedly for 20 percent of pass-through income, less than the 23 percent under the Senate-passed bill.  Dylan Matthews, The Republican tax bill that could actually become law, explained, Vox.com (Dec. 14, 2017).

Note that this is an off-the-top reduction of what would otherwise be personal taxable income taxed at the taxpayer's individual tax rate.  Workers who are paid wages get no such break. And wealthy people will use good lawyering and tax planning to organize their businesses so that their income is counted as pass-through income rather than wages. This is just a continuation of a trend of favoring passive ownership of capital in this country.  See, e.g., the Berkeley Blog, Wealthy investors to win bigly with Republican tax plan ( Nov. 9, 2017).

Imagine a company where two siblings as owners and a third sibling is the principal employee.  They all receive about the same income from the company--for the worker bee, as wages and for the other two, as a profit share.  The worker bee does all the creative thinking and working.  So the two owners pay tax under this provision on 20% less income than the worker bee.  And this is true in an economy in which economists are generally agreed that pass-throughs are currently taxed favorably, taking everything into consideration, and "don't need another break".    Dylan Matthews, The Republican tax bill that could actually become law, explained, Vox.com (Dec. 14, 2017).  This pass-through provision is as clear a snubbed nose to all those who work hard to earn a decent living as one can imagine.  Fact is, the "owners" are often the takers, and the "workers" are the makers.

 

PS. The Vox article suggests that the corporate tax break is justifiable, based on the GOP "economic theory" that claims that a lower corporate tax rate will "spark so much additional investment in the United States that it would bid up wages and leave the middle class better off through its indirect effects."  Id.  This is just another way to state the "supply-side" "trickle-down" theory that has been relied on  for decades by right-wingers but has never been shown to be justified empirically.  In 2004, the GOP made the same claim for its "repatriation tax holiday" for multinational corporations, claiming that the low tax would allow those corporations to invest and expand, leading to job creation.  It didn't.  It led, instead, to share buybacks and more money for the shareholders.  In fact, a large number of repatriating corporations that did share buybacks with the money also laid off thousands of workers.

PSS.  The Vox article also suggests that the limitation of the state and local tax deduction for individual taxpayers (but not for businesses) has a "reasonable case" supporting it.  Sure, the benefit of the state and local tax deduction is regressive, in that higher income taxpayers in larger houses with larger property taxes and larger incomes get more of a deduction.  And yes, it tends to benefit those states with higher state income taxes that are used to develop infrastructure and education.  But that misses several points in response.  First, for people at the upper-middle income bracket, the Alternative Minimum Tax generally limits the availability of the state and local tax deduction.  Second, people who currently own homes and are paying taxes on those homes and living in states with higher taxes likely took the availability of a property tax deduction into account in determining what they could pay for their home: the bill does nothing to provide a reasonable transition for these folks that takes their expectations into account.  Third, when the GOP is trying to counter a Democratic president, it always makes the argument that it makes more sense to support states in allowing them to experiment with different ways of raising revenues and supporting their economics.  That's what the "blue" states have done:  they have recognized that having higher taxes allows development of infrastructure, support for education, funding for research and other priorities, and these expenditures have created a more sustainable economy and better standard of living in those states--exactly what the "state experimentation" is supposed to do.  Yet the GOP provision on state and local taxes is now justified as a way to undo the benefit for "rich" states without doing anything to help the "poor" states.  (In fact, Ryan and McConnell have made it clear that their goal is to harm the poor states by reducing funding for Medicaid, Medicare and Social Security on which those states in particular depend.)

 

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The Times Handles the Trump Tax Cut Framework with Kid Gloves

There's been a good bit written about the Trump tax cut framework released just over a week ago.  Most of it points out, as I have here and here, the absurdity of the claims by Trump and GOP spokespeople that this isn't a tax cut aimed at benefiting the ultra wealthy.  After all, even with few details and no attempt to deal with the really tough issues that would face real tax reform considerations, it is awfully clear that almost everything in the package is designed to make the wealthy even wealthier. 

Just a quick review of the way the proposed tax cuts exclusively or primarily benefit the ultra wealthy:

• elimination of the estate tax, which taxes fewer than 2% of the estates, those that have in excess of $11 million (the couples' exempt amount) and haven't used the various trusts and family partnerships to let even more estate value escape tax through valuation gimmicks
  • Not waiting on the tax cut proposal, Trump's Treasury secretary Steve Mnuchin announced in "Second Report to the President on Identifying and Reducing Tax Regulatory Burdens" (Oct. 2, 2017) a current step to let wealthy people continue to use valuation gimmicks to avoid a fair estate tax, through withdrawal of the Obama Administration's proposed regulation under section 2704 that would disregard the purported restrictions on certain family-controlled entities in setting estate valuations--a regulation clearly merited because of the ridiculous scams of putting assets in family partnerships in order to claim that they are worth 1/3 of their actual value, even though the partnership can be dissolved afterwards with the full value magically returning.  (I'll deal with the regulatory changes in my next post.)
• elimination of the AMT, which imposes tax when the taxpayer would otherwise benefit from a surfeit of regular income tax subsidies (loopholes, tax expenditures, deductions, credits).  For a thorough analysis of the AMT, see A Taxing Matter series of 6 posts, beginning here.
• reduction of the statutory corporate tax rate for the largest corporations from 35% to 20%, which benefits primarily the highly compensated managers (who receive substantial amounts of stock options as part of their compensation) and big shareholders (who tend to be mainly the ultra wealthy who own most of the financial assets) and does little or nothing to help small businesses, that already pay tax rates of 25% or less
• creation of a single 25% rate for recipients of all business pass-through income (i.e., from partnerships), which benefits almost exclusively the ultra rich, since small business income is already taxed at 25% or less, while wealthy partners in real estate firms would be taxed at the highest individual rate under current law on their pass-through income, and
• creation of full, upfront expensing, resulting in a non-economic windfall to businesses that will, again, mainly just increase profits passed on to their wealthy owners. (Although this is purportedly a five-year provision, everybody knows that is just a gimmick to pretend that its impact on the deficit is less than would be admitted if it were permanent.  Everybody also knows that the intent is to make it permanent.)

But there are always journalists who try a little too hard to give obviously bad tax ideas a surface claim to reasonableness.  Apparently, even James Stewart, who writes "common sense" entries for the business section of the New York Times, suffers this vulnerability.  See, for example, his "Tax Cuts are Easy, but a Tax Overhaul?  Three Proposals to Make the Math Work," New York Times (Oct. 6, 2017), at B1 (digitally titled "Tax Reform that doesn't bust the budget? I've got a Few Ideas, Oct 5, 2017). 

I like the print title better, since the Trump Plan has clearly already ditched any real idea of "tax reform" for a wholesale attempt at trillions of dollars of tax cuts mostly benefiting the rich.   There are other things that aren't so good about the article.

1) Stewart calls the Trump giveaway to the rich "the most ambitious attempt at tax reform in over 40 years."  That's simply not correct, because it isn't an attempt at tax reform and it isn't really ambitious. 

• Ambitious? How can Stewart call a grab-bag of all the old GOP cuts-for-the-rich gimmicks "ambitious."  Unless he thinks that conning typical Americans who don't understand much about taxes into thinking that this is a populist tax reform intended to help the middle and lower income classes and not drop more riches on the already rich makes it 'ambitious'..... 
• Tax reform?  This isn't tax reform; it's just a series of tax cuts.  The framework leaves any thinking about tax reform for somebody else to do--which means it really isn't intended to happen at all.  Later in the article Stewart quotes Holtz-Eakin (right-wing tax cut advocate) and Kevin Brady (same) about the "ambitious" framework.  They're gung ho.  Brady says it's ambitious because they are trying to do what the 1986 reform  effort did in several years in only a few months.  Nope--they are not trying to do what the 1986 reform did.  The 1986 reform was a fully bipartisan effort in both the House and Senate, with  Packwood in the Senate and Rostenkowski  in the House leading lengthy hearings and in-depth study of issues, along with a responsible and active Treasury and CBO providing in-depth analysis of impacts.  Trump and the GOP now intend to pass a tax cut for the rich with only GOP support (unless Trump can bully some election-vulnerable Democrats into going along with the travesty).  And they don't intend the kind of exhaustive study and consideration that would provide real information on who would benefit and who would be hurt.  We've already heard that some GOP want to pay an outside (GOP-friendly) consultant to do the "dynamic scoring" and not the CBO, because they want to be sure that it predicts plenty of growth (a number that is easily manipulable, which is why 'single score dynamic scoring' is utterly absurd).
  • Tax reform would look at the wasteful expenditures we make through the tax system to support old technologies that are clearly part of human-caused climate change, such as our continuing century-long subsidy of fossil fuel extraction, coal-based mountainside destruction, and environmental wildlands-destroying oil, gas, mineral and cattle leases. 
  • Tax reform would consider who has benefited most from the many loopholes and tax expenditures that we've riddled the original 1986 tax reform act with in the years of money-smoothed lobbying since--such as the reinstatement of the preferential capital gains rate within 2 years of the 1986 tax reform's well-considered removal of the preference, or the reinstatement of the absurd R&D credit when thorough study and consideration showed that it did not result in more research but merely more money (fungibly located, to the advantage of IP-intensive industries like pharmaceuticals and digital software firms).
  • Tax reform would have a target amount of revenue to raise with taxes, based on social, infrastructure, and other important spending and the debt service needs of the already incurred federal debt, rather than a mere pie-in-the-sky idea of a "dynamic scoring" that would "show" that trillions of dollars of tax cuts over ten years would magically pay for themselves through turbo-charged economic growth that none of the top economists think possible.

2) Stewart acknowledges that the framework appears to be a tax cut for the rich and that it appears to recklessly drive up the deficit and that it leaves the hard part for Congress to figure out (which loopholes to close and how to do it) while claiming huge benefits from corporate and business tax cuts that add to the huge corporate and business tax cuts enacted under Bush 2, many of which were made permanent under Obama.  But he excuses all that with the cop-out phrase "this plan is just the opening salvo."

• Opening salvo?  Something that comes after years of GOP planning and saying they wanted to cut taxes on corporations, eliminate the estate tax, eliminate the AMT, cut taxes on high earners, move to a rate structure with fewer and lower rates, and move to much lower tax revenues by eliminating world wide taxation and adopting a territorial system --i.e., do all the things that this 'framework' does?   That's just an "opening salvo"?  I think that term casts what is going on here in much too friendly a light.
• Opening salvo?  when these planners have already said that they are convinced that dynamic scoring (i.e., counting your chickens (economic growth) before they hatch, even before there are any eggs to count) will solve all their problems because they ALWAYS assume that tax cuts to wealthy people will trickle down to everybody else and make the economy grow, even when every bit of evidence from history suggests that simply isn't the case, including the recent Kansas disaster? 

3) Stewart claims that "substantial aspects" of the framework already have bipartisan support, by which he means the idea that "global competition" demands that we cut corporate tax rates and everybody agrees that companies should not be able to stash earnings overseas tax-free. 

• Bipartisan support?  Of course, while there are various 'free-market' economists who make the argument that we need to cut corporate rates for competitive reasons, it can be argued that when 75% of corporations pay no federal income taxes whatsoever and when highly profitable companies have been able to increase their profits and when U.S. corporations pay a smaller amount of taxes as a portion of GDP than corporations in other advanced countries, global competition does not seem to be a problem.  The problem is the loopholes in our system that allow multinational firms--especially those that depend on intangible intellectual property rights--to pretend to move those rights around and thereby claim that the profits from that intellectual property created here are earned abroad and not subject to U.S. taxation.  We could deal with that, but the GOP in House and Senate aren't interested in asking those questions in ways that lead to effective answers.  Democrats tend to be more interested in considering what the root problems are.  So "bipartisan support" that appears on the surface is likely only skin deep. 
• Global competition?  Right now, we already allow U.S. companies to move active businesses abroad tax free.  We facilitate their ability to take advantage of low-tax jurisdictions to compete with U.S.-based companies!  We give financial institutions a pass on the 'subpart F' provisions of the Code through the "active financing" exception.  And the Mnuchin report on regulatory "burdens" indicated that the Trump administration will pull back on the anti-inversion regulations.  We know things we can do to stop the way quasi-sovereign U.S. multinationals play various tax jurisdictions against each other.  We could deal with that with a renewed emphasis on something other than the old 'transfer pricing' methodologies and with full taxation on taking business assets out of the country.  We could clamp down on transfer of technology to China in exchange for China letting our multinationals into the markets there.  So it is not really "global competition" but failure of this administration or this congress to focus on addressing remedies to problems.

4) Stewart claims that the framework's "doubling" of the standard deduction will allow "many more individual taxpayers ... to file a simple short-form return."

• Doubling of the standard deduction? Looked at alone, it sounds good.  But doubling the deduction while eliminating the personal exemption actually puts a cap on the amount of income exempt for low-income families, rather than increasing it.  A family of 5 might well end up paying more in taxes out of an income already inadequate to provide a decent standard of living, especially when coupled with the 20% increase in the lowest rate, from 10% to 12%.  Why does Stewart just repeat the (not necessarily correct) selling points for the framework without taking these issues into account?
• Simple short-form return?  having 4 rates instead of 7 and doubling the deduction while eliminating the personal exemptions is simplification on an inconsequential scale.  The real complications are character of income (that nasty preferential capital gains rate, again), and whether something counts as income or not.  The people on the low-income of the scale don't have simple returns because they have an Earned Income Tax Credit to calculate.  People in the middle may have pensions, capital gains, income from investments of varying types, rental income, mortgage interest deductions, and various other items that requires a little more work.  Many provisions have exceptions designed to aid certain kinds of businesses or small businesses, all of which add to complications while filling an important function.  But let's also remember that tax preparation software has already made even  complicated tax returns fairly "simple" to figure out--just enter the right numbers into the right places in the software.  We don't need tax cuts for the rich to have a fairly simple tax return process for the majority of the people of this country.  Most already claim no itemized deductions (nearly 70%, a fairly consistent number).  Most can easily do their tax returns with cheap software.  Most don't need tax cuts for the rich to facilitate their tax returns.

5) Stewart claims that "a lower rate for small businesses and pass-through entities, while more controversial, should promote economic growth."  And he thinks that is the most important thing this framework does.

• Lower rate for small businesses?  Who is kidding who.  Most small businesses are just that--they are SMALL in assets and in revenues, and they are NOT taxed at the 35% statutory rate that applies to corporations that have more than $18 million in taxable income (note--taxable income of 18 million means gross revenues of many more millions).  Most small businesses are taxed at 25% or less already!
• Lower rate for pass-through entities?  The main pass-through entity is a partnership, and there is no current rate for partnerships to pay tax, because their income, gain, loss, deduction and credit items pass-through to the partners, who take them into account on their tax returns and pay at whatever rate the partners pay based on their total taxable income 'picture'.  Creating a flat rate of 25% for pass-through income won't benefit small business proprietors, who already pay a lower rate in most cases.  But it will hugely benefit wealthy partners in real estate development partnerships and similar companies that would have otherwise been paying tax at the 39.6% rate and under this would pay tax at only 25%.
• Promote economic growth?  What about this is in any way empirically supported as promoting economic growth--especially the broad-based, raising- all-boats type of economic growth that actually goes to the middle and lower classes and has a multiplying effect on growth because of the increased demand that creates more business that creates more jobs, etc.?  There's really no support for these long-term GOP tax cut proposals to actually do anything about creating jobs and creating sustained economic growth that will actually help the middle and lower income groups.  Cutting corporate taxes mainly puts more money into the pockets of corporate managers already paid in 12-15 million a year and more.  Cutting the tax on recipients of partnership pass-through income mainly puts more money into the pockets of the real estate developers and hedge fund managers and joint venture capitalists who already earn tens or hundreds of millions annually.  None of those profits will necessarily remain in this country (they are likely to be used to expand in China). And again, Kansas.  The Kansas "experiment" in drastic cutting of business taxes was supposed to prove, once and for all, that the GOP ideology of tax cuts that pay for themselves was not an Arthurian legend based on Arthur Laffer's absurd napkin theory but a real, empirically provable, workable way to jumpstart huge economic growth.  After finding the state swamped in deficits and facing reduced growth from the predictable decline in state services, even the GOP members of the Kansas legislature recognized that taxes had to be raised.  And they did it over Gov. Brownback's veto.....That says a whole lot about cutting taxes that the Trump framework people will, of course, call 'fake news' (their favorite term for dissing any facts they find inconvenient).

OKAY, I know.  I've already got 5 items picked for discussion and I've not even gotten to Stewart's three ideas for making the absurd Trump tax framework "add up mathematically."  That's because he assumes away many of the problems with the framework, making it easier to claim he's found a solution to the deficit issues.

6) Stewart takes the framework at its word but disregards the state and local tax deduction (likely to be heavily lobbied against) and the expensing (costs $220 billion for just 5 years and would be much more costly than that when made permanent).  He's willing to buy the idea of a budget resolution that says it is okay if the tax cuts result in a $1.5 trillion revenue shortfall over ten years (i.e.,, okay if tax cuts for the rich create an additional $1.5 trillion deficit), on the assumption that drastically faster economic growth will make up much of the difference.  As he puts it, "that's a debatable proposition, but for purposes of this discussion, let's accept it."

• A budget resolution for a $1.5 trillion cost over ten years to tax cuts that likely will cost $3 trillion to $7 trillion?  How is just "accepting" that reasonable, or common sense?  Sounds nutty to me.  Especially in light of the arguments that the GOP has made in the past (and can be expected to make again in the near future, in part justified by the deficits created by their tax cuts for the rich) for decreasing funding for Medicaid, Medicare, Social Security and any other programs for the vulnerable based on their "worry" about deficits and debt.
• Accepting an assumption of economic growth at sustained high rates that are much higher than experienced even during periods of economic stimulus from federal spending?  Not just "debatable" but outright "unreasonable."

7) Finally, Stewart gets to his "three ideas".  Based on his conclusions in item 6, he assumes that he needs to find just $1.1 trillion over 10 years to make the framework workable.  (You already know that I think that it is ridiculous to assume away huge portions of the problems with the framework, so I won't reiterate more than in this sentence.)  How does he propose bridging the gap and raising the $1.1 trillion? With some ideas that progressives have been proposing for the last 40 years.

• A tax bracket of 44% on the top 0.1% of taxpayers who have more than $2.1 million of adjusted gross income would raise about $300 billion over 10 years.
  • This wouldn't be near enough to compensate for the huge tax breaks that go mostly to these same taxpayers, but it is something that should be added to at least clawback some of the largess to the rich.  The rich received tax cuts from Reagan and Bush 2 that have drastically lowered their share of taxes paid.  They would receive another wallopingly huge gift of tax reduction from the Trump framework.  Probably the rate ought to be higher (a number of rates at 40%, 44%, 48% and 55% rate, for example, for various levels of income).
  • Stewart says raising rates would "raise issues of fairness" by penalizing earned income (i.e., for those CEOs and hedge fund managers who make $300 million or $700 million annually in compensation) while leaving passive investment income that is subject to a capital gains preferential rate untouched.  Yeah, that's a problem, but it is easily solved.  Eliminate the preferential capital gains rate, which just favors the very rich anyway, isn't justifiable under any of the reasons put forward for it, and was eliminated in the well-considered 1986 reforms (before the lobbyists got to Congress and got them to un-eliminate it).  Even Holtz-Eakin acknowledges that raising capital gains rates to the same as ordinary income rates would be reasonable. 
• Tax capital gains at death, he says,  because they are taxed preferentially (if at all) during the owner's life  and there is no justification for allowing them to pass from generation to generation without ever being taxed.
  • Hard to disagree with this idea.  There is no justification for allowing appreciation to pass untaxed to heirs, with or without an estate tax.   This is something that should be enacted (without the elimination of the estate tax) because most estates haven't been taxed at all, and most estates of the ultra wealthy have huge appreciation that horribly exacerbates inequality when it passes to heirs (who did nothing to earn it, in many if not most cases) with bump up in basis and no taxation of the gains.  Combine that with the way such assets permit borrowing during life, to be paid off by sale of a few assets at death at no taxable gain, and you have the ability of the ultra-wealthy to live off their assets with almost no taxation during their lives or in their estates (especially if the estate tax is eliminated) or in the hands of their heirs.  As Steve Rosenthal puts it in commentary to Stewart in the article, "to take away the backstop of the estate tax without a tax on capital gains at death is crazy."  Couldn't say it better myself.
  • Stewart says Congress could exempt "family owned farms and small businesses."  Yeah, it could.  But it shouldn't.  Those family-owned farms  may be huge corporate entities, not 'small' in any sense of the word.  They can afford to pay tax on gains that haven't been taxed in a lifetime.  Any exemption should be minimal (maybe  exempting gains on assets of $1 million or less, like the pre-Bush estate tax exemption amount).
• Curb the deduction for corporate interest expense.  This is another workable idea, since debt remains one of the ways that corporations finagle where income goes and where deductions are generated, in spite of the various existing provisions for limiting deductibility of corporate interest payments. 
  • Most GOP proposals, as Stewart notes, couple reductions in interest deductions with elimination of taxes on interest income. That is not necessarily a sound approach, and you can bet that the real estate industry (among others) would huff and puff and blow the straw house of limitations away in no time.  Just look at the "at risk" rules under section 465, which were intended to prevent taxpayers from using nonrecourse debt to create basis to allow utilization of phantom losses, as originally enacted in 1976.  It just took another session of Congress to get a loophole that essentially swallowed the rule, allowing "at risk" treatment of "qualified nonrecourse financing" for real estate projects.  So any reductions to the deficit here would likely be temporary at best.  And there are other real estate tax expenditures that should be attacked, too, like the section 1031 like-kind exchange rules that favor in particular real estate developers by allowing deferral of  gain when trading properties (even when it is actually getting cash that a middleman holds, and then buying another--a far cry from the original intent of the section).

Stewart, at the end, takes a victory lap, because these three provisions, if enacted, could conceivably raise enough revenues to close the (assumed) $1.1 trillion gap.  The problem --this is very misleading for typical readers.  It looks like he is presenting the "tax cuts for the rich" framework as a workable plan that can be easily paid for and that is promising in terms of economic growth potential.  As you can see from my analysis, I think the framework itself is not a workable plan, it cannot be easily paid for, and it does not hold out a real promise of economic growth.

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The Tax-Cut Framework Won't Create Jobs and Digs the Inequality Ditch even Deeper

Marcus Ryu, a self-described Silicon Valley entrepreneur who created, with others, a company now worth $5 billion on the New York Stock Exchange, argues in today's Op-Ed section of the New York Times that "Tax Cuts Won't Create Jobs", NY Times (Oct. 9, 2017), at A23 (the title in the digital edition is different from the print title:  Why Corporate Tax Cuts Won't Create Jobs).  He is right.

The tax cuts proposed in the framework set out by the Trump administration and Republican leaders in Congress claims to be pursuing economic growth that will benefit ordinary people (Trump's purported base).  These claims are based in part on claims that  U.S. taxpayers (individual, corporate and individual who owns businesses through partnerships) are much more heavily taxed than taxpayers in other advanced countries.  Trump often points to the statutory tax rate for corporations (35%), which is higher than the statutory rate in most other advanced countries. But Trump usually ignores the fact that the vast majority of corporations (including very profitable U.S. multinationals) pay no or much lower taxes, in part because of the many loopholes and deductions that reduce the income that is taxed.  When one considers the nation's GDP and the percentage of GDP paid in taxes, it is quite clear that the U.S. is actually one of the lowest taxed of developed countries, which often have income taxes, corproate income taxes and value-added taxes (which the U.S. does not have), as well as specialty taxes such as financial transaction taxes (which the U.S. does not have).  See, e.g., Business Insider, Is the U.S. the highest taxed country? (Sept. 6, 2017).

"[T]he most comprehensive measure by which to judge Trump's claim, combining corporate and individual taxes paid, is tax burden as a percentage of gross domestic product. It compares how much money in a country is put toward taxes with the economic output of the country.  By this measure, the US has the fourth-lowest tax burden of any OECD country, with only South Korea, Chile, and Mexico ranking lower." [emphasis added]

  Trump has claimed that the proposed cuts in the Trump tax-cut "reform" framework don't benefit the wealthy and don't benefit him but are for the middle class and those with less wealth and income.  The only way that claim would work would be if tax cuts that are clearly targeted at the rich (elimination of the estate tax, elimination of the AMT, drastic cut in the rate at which wealthy partners pay taxes on partnership income shares, drastic cut in the corporate tax rate  when most of the benefit of tax cuts to corporations is used to pay dividends or do share buybacks for the wealthy managers and shareholders) had such a dramatic impact on overall economic growth and on sharing of the benefit of the tax cuts with ordinary workers that it made up for the fact that almost all of the benefit goes directly to the very wealthy and almost all of the negative impact (via additional borrowing and deficits) will result in fewer benefits from the poor.  That positive balance is so unlikely from these tax-cuts-for-the-rich that they appear to be just another of the many Trump lies intended to mislead the American people.  See, e.g., Business Insider, Trump tax reform plan just got its first brutal review showing how it would benefit the rich and almost no one else (Sept.  2017) (noting that "Americans among the top 1% of earners would see the bulk of the plan's benefits, while lower- and middle-class Americans — even most upper-class people — would see few benefits," citing the Tax Policy Center's study of the framework).

Marcus Rye sets out a number of key ideas in his op-ed.

First, "lower tax rates will not motivate more people to start companies."  That is because most people who start a company do so because they have an idea, they want to strike out on their own, or they are ambitious for fame and fortune generally.  Research on the 1986 significant changes to marginal tax rates shows that those changes did not induce higher-income people to work longer hours.

Second, existing companies won't shy away from a promising investment because of the tax rate on potential gain.  Company leaders are motivated to expand if possible, and "lowering the corporate tax rate isn't going to make us create jobs any faster."

Third, tax cuts just "increase our post-tax profitability, which effectively transfers money from the federal government to our shareholders."  The result is a bump in the share prices but no long-term impact on operations or employment plans.  It doesn't even make it easier to raise cash for expansion, since companies are having no trouble getting capital now because of low interest rates. 

Fourth, the tax-cut proposal demonstrates shoddy business reasoning.  It "wish[es] away huge tax-revenue shortfalls with stupendous growth projections."  No well-run business would do that kind of shoddy planning.

Fifth, "by 2027, when [the tax cuts] are fully phased in, four out of every five dollars ... will flow to the top 1 percent, an egregious wealth transfer to those who least need it."

Finally, "tax cuts that deepen our already severe inequality in income and wealth are not in the long-term interests of any citizens, not even the very wealthy. Extreme inequality is corroding our civil society, poisoning our politics, and undermining our effectiveness as a nation.  This is an extremely hard problem to solve, but when you're in a deep ditch, the first thing to do is to stop digging."

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Right Wing Propaganda Tank IPI Likes the Trump Tax-Cuts-for-the-Rich "framework"

There's no surprise here.  The Institute for Policy Innovation (IPI) is a right-wing "think" (i.e., propaganda) tank that has consistently argued for tax policies that favor multinational corporations and the wealthy.  So IPI has a posting on Sept 29 that is supportive of the so-called "tax reform framework" put out by the Trump administration. 

As an earlier post on A Taxing Matter noted, the Trump framework is a wish list for the wealthy, providing one tax cut for the ultra rich after another:

• elimination of the estate tax (that only affects the heirs of estates worth more than $11 million);
• territoriality (that advantages multinational corporations that actually operate from the U.S. but claim headquarters in low-tax jurisdictions);
• a flat 25% rate on "pass-through income" that gives almost a 15% rate cut to wealthy owners of partnerships in the real estate, joint venture, oil and gas and other businesses (and affects very few true small business owners whose effective tax rate is already no more than 25%, if that much);
• elimination of the top rates on the progressive individual rate structure (reducing the top rate from 39.6% to 35% (or less));
• reducing the statutory rate for corporations to a low 20%, when corporations already pay much much less in taxes than they have generally paid under the income tax system while making record profits and paying their key managerial personnel the kind of salaries and percs that have exacerbated the increasing income inequality gap in the U.S.;
• elimination of the Alternative Minimum Tax (AMT), a provision that was enacted to ensure that wealthy taxpayers are not able to use so many loopholes and special provisions that they escape taxation altogether on their income (the elimination of the AMT being a pro-wealthy tax cut that ordinary folk in the lower two-thirds of the income distribution will benefit not one whit from); and
• permitting immediate expensing for five years of equipment and similar expenditures by businesses (another provision that will allow mega corporations to make even more profits that can be shared--through bonuses, higher salaries, and share buybacks with the wealthy managers and shareholders of the enterprise and a provision that runs explicitly counter to the actual economics of the business, in which new equipment stays at close to original value in the early years with wear and tear actually economically backloaded onto the last years of the useful life).

As a result of these provisions, the wealthy who own the vast majority of financial assets (including stock in corporations and partnership interests in real estate and other partnerships) will enjoy hundreds of thousands of dollars of tax cuts.  In fact, the major portion of the tax cuts will go to the very wealthy who need them least.

Meanwhile, the rate of taxation on the lowest income group in the country, the bottom percentile, would be increased by 20% (from a 10% rate to a 12% rate)--a truly significant and revealing increase for people who are struggling to make ends meet in an "as needed" worker environment where steady full-time jobs for a regular paycheck are vanishing as corporations call workers in when they want them and send them home sometimes after only a few hours.  (This is of course accompanied by a continuing right-wing assault on worker rights and the attempt to shrink labor's power and ability to negotiate with extraordinarily powerful employers in unison rather than individually.)  While the standard deduction (and possibly child care credits) will be increased, the personal exemptions will be eliminated, as well as perhaps other deductions that sometimes stave off disaster, such as the medical expense deduction.  This means that many of the low to lower-middle income  families with children will pay the much higher rate of tax on a larger portion of their income--i.e., their taxes will increase. For the rest of the lower income and middle income classes, tax relief will be minimal--a few hundred to a thousand dollars, most likely.

Note that the members of the Republican Party establishment who are pushing this framework have in the past said that they were very concerned about deficits.  Their concern about deficits was the purported reason for limiting the infrastructure plan to jumpstart growth after the Great Recession.  Their concern about deficits was the purported reason for nearly shutting the government down time after time over the decision to raise the debt limit for payment of debt obligations the United States government had already incurred.  Their concern over deficits was a purported reason for wanting to "reform" Medicaid, Medicare and Social Security--the programs that exist to help the most vulnerable Americans.  But now those same Republican Party establishment figures are saying they don't care at all about the deficits.  They are willing to allow the deficit to mushroom in order to give yet another gigantic tax cut to the very wealthy.  The budget resolution put forward by the Senate Budget Committee would allow a $1.5 trillion tax cut over 10 years, but this plan is likely to cost between $3 trillion and $7 trillion (or more).  (Note that the $1.5 trillion figure already includes gimmicky thinking--instead of using the actual law as the baseline, the GOPers are assuming a baseline that assumes that expiring tax cuts don't expire, which gives them more room for additional cuts than if they had to account for actually extending those tax cuts too.  So much for McConnell's pledge that any tax reform would have to be revenue neutral.  See Tentative U.S. Budget-Tax Deal Gets Nod from Two Republicans, Bloomberg (Sept. 19, 2017).   Republicans, as usual, claim dynamic scoring will work, because it will show that growth will make up for lost revenue.  Toomey, a Pennsylvania Republican tax cut ideologue, claimed that tax-cut induced growth would actually reduce the federal deficit, and Wisconsin Senator Johnson agreed (especially with the aid of "dynamic scoring", maybe done outside the CBO). Id. Sadly, that is not supportable.  This is utter hypocrisy.

And while Trump and various functionaries in his administration have explicitly said that their tax "reform" framework is meant to aid the middle class and not give a bunch of tax cuts to the wealthy, there's no evidence in support of that statement.  Their program aids the wealthy and ignores or harms the middle class and poor.  See, e.g., Trump Says His Tax Plan Won't Benefit the Rich--He's Exactly Wrong, The Atlantic.com (Sep. 29, 2017); Trump Proposes the Most Sweeping Tax Overhaul in Decades, NY Times (Sept. 27, 2017) (noting that Trump described the overhaul as "an economic imperative" for whom "the biggest winners will be the everyday American workers as jobs start pouring into our country, as companies start competing for American labor and as wages start going up at levels that you haven't seen in many years" though there was scant detail on how working people would benefit from "a proposal that has explicit and substantial rewards for wealthy people and corporations"). Trump explicitly said in his Indianapolis speech that wealthy people like him would not benefit (see New YOrk Times article, cited above). And Mnunchin said the same thing months ago ("no absolute tax cut for the upper class"). See  Trumps Tax Plan: Prioritize Cuts for the Rich. That statement is simply not true, since the estate tax, the AMT and the reduction of taxes on pass-through income and on corporate income would each directly benefit the Trump family. He also said the framework would "protect low-income and middle income households, not the wealthy and connected".  See New York Times article on Indianapolis speech, above.  Again, that statement is simply not true:  it will provide huge tax breaks for the wealthy and connected and minimal tax breaks or even tax increases for the low and middle income households. And Steve Mnunchin effectively admitted that the plan will result in tax breaks for the rich, essentially by disingenuously claiming that you can't do a tax cut aimed at the middle class without also giving something to the rich.  See, e.g., Eric Levitz, Trumps Tax Plan:  Prioritize Cuts for the Rich, Say He Isn't, Daily Intelligencer, New York Mag.com (Sept. 27, 2017);  Can't guarantee tax cut for entire middle class: Mnuchin, Reuters.com (Oct. 1, 2017) and by saying that the statement that there would be no tax cut for the rich "was never a promise. It was never a pledge...It was [just] what the president's objective was".  Trumps Tax Plan, NYMag.com (Sept 27, 2017). And of course, Gary Cohn, similarly has refused to guarantee that no middle-class family would face a tax increase.  See Cohn, Mnuchin Draw Line on Corporate Rate, Tease Debt Reduction, Tax Analysts.org (Sept. 29, 2017) (Mnunchin claiming $2 trillion of growth with a claim that the tax cuts would cause a 2.9 percent GDP growth rate over the decade and a cut in the deficit; Cohn claiming enough growth to pay for the entire tax cut).  Note that one of the gimmicks that Mnunchin used to avoid the real effect was to separate the estate tax from the regular income tax cuts--so they admit that they are benefitting the wealthy with the estate and AMT taxes, and then claim they are not with the income taxes.  In fact, the income tax cuts also are beneficial for the wealthy.

By the way, as a tax professional and tax academic, I can tell you many ways that you can provide tax cuts for the middle class and poor without providing tax cuts for the rich. Just to consider a few:

• do not eliminate the estate tax--it only taxes the very wealthiest of the wealthy, so it can only benefit the very wealthiest of the wealthy.  The claim that eliminating the estate tax "saves" small businesses and family farms has been debunked time after time.
• do not eliminate the AMT--it only taxes the top quintiles of the income distribution.  If you want to save the affluent rather than the real middle class, you can structure the AMT to hit only the top quintile.
• do not cut the corporate tax rate to 20%--that primarily benefits the wealthy who own most of the financial assets and hold the high-paying managerial positions
• do not cut the pass-through tax rate to 25%--that only benefits the ultra wealthy, since small businesses already pay a rate at or below 25%
• do not move to a territorial tax system--that primarily benefits the wealthy and will do nothing to increase jobs;
• do not increase the bottom rate paid by the low-income Americans from 10% to 12%--that only hurts those taxpayers.
• do not eliminate the highest tax rates (the investment income tax, etc.)  Consider adding a financial transaction tax.
• eliminate the "carried interest" provision that allows wealthy managers of joint ventures to enjoy capital gains instead of ordinary income rates on their compensation along with, often deferral of any income inclusions.
• eliminate the section 1031 like-kind exchange provision, that benefits real estate professionals like the Trump clan with near permanent deferral of income.

As Ron Wydon put it "if this [Trump/GOP] framework is all about the middle class, then Trump Tower is middle-class housing. It violates Trump's tax pledge that the rich would not gain at all under his plan by offering sweetheart deals for powerful C.E.O.s, giveaways for campaign coffers, and a new way to cheat taxes for Mar-a-Lago's loyal members." Id.  In other words, saying it is for the middle class is a whopping fairy tale.  And of course, it doesn't provide any particulars about the nitty gritty issues that would have to be addressed, like preventing abuse of the 25% pass-through rate, limiting the deductibility of interest expense, or phasing out the expensing write-off after 5 years.  Anyone with any understanding of the history of tax provisions knows that lobbyists will start immediately with demands for 1 or 2 year extensions to the expensing elimination, and as soon as the public's awareness of the issue has ebbed, Congress will cave and make it permanent.

IPI likes the plan, nonetheless, because most of the things that IPI claims are "pro-growth" tax policies are actually "pro-wealthy" tax policies that have almost no evidence in support of helping to spur greater growth.  IPI specifically mentions expensing (highly profitable for large corporations, since smaller companies can already expense most new investments); the move to territoriality (favors multinational corporations that have moved their key IP abroad); the elimination of the AMT (favors the wealthy); the elimination of the estate tax (favors the ultra wealthy); and the reduction of corporate tax rates from a statutory 35% rate (paid by almost no corporation) to a statutory 20% rate (lower than the statutory rate of our so-called "competitor" nations, that also have a VAT, which the US does not have).

There is no real evidence that any of these tax changes will spur economic growth, and Congress has never funded the research that would be necessary to show that they do or don't.  It has depended on little more than Arthur Laffer's napkin drawn curve (not based in empirical evidence) and general Chicago School "free marketarian" and "trickle-down" theories.  Oh, and gimmicks like using "dynamic scoring" that assumes a large rate of growth to justify tax cuts that otherwise clearly create huge deficits.  Kansas's experiment in slashing taxes for businesses and wealthy was supposed to prove that cutting taxes was a great way to engender growth.  It proved exactly the opposite.  Reagan's 1981 tax cut was supposed to prove that big tax cuts cause huge economic growth--instead, deficits mushroomed and every other year of his term there were tax increases of one kind or another--mostly hitting little guys and not the wealthy.  Similarly, Bush 2 cut taxes and saw a surplus turn to a deficit, and ended his term with a Great Recession because of a speculative boom fueled by loose money in banks and financial businesses.

In contrast, there is real evidence that public expenditures to improve infrastructure, protect the environment, support basic research not funded by corporations, and fund educational opportunities have real positive impacts on economic growth that is beneficial for the entire society.

Let's call a spade a spade.  This plan for so-called tax "reform" is really just a smokescreen for shrinking government and making it even harder to protect the environment, enforce the laws, make polluters stop polluting, protect the vulnerable and do the other things that the people acting together through government can do but that the people each acting individually simply cannot do.  Like Trump's typical lies (about how "great" his response to the Puerto Rican devastation has been, when he waited days to act, sent much fewer military personnel much later and otherwise treated Puerto Ricans like unimportant Americans compared to the way he treated Texas and Florida), the tax "reform" framework is a lie.  It is a boon for the rich, a boondoggle for the poor and middle class, and a bad joke for the future economic growth of the country.

And that's why Trump has already started threatening Democrats that don't support his plan.  In his Indiana address, he threatened to campaign against Democratic Senator Donnelly if he did not support the tax boon for the rich that will result in at least a $2 trillion increased deficit over a decade.  (Of course, given his failures with Senator Strange in Alabama, maybe that threat, like so much else Trump does, is truly hollow.)

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Trump's Refusal to Release His Own Tax Returns and California's Legislature

As most everyone is aware, Trump has refused to release his tax returns, breaking precedent with decades of presidential candidates and president's release of tax returns.  Even Dick Cheney,  grumpy corporatist veep, released his tax returns.  I had fun using them as the raw material for an introductory course in federal income taxation where we looked at the returns to understand how the various "lines" correspond to items specified in the Code (like "adjusted gross income" and "miscellaneous deductions").

Trump, however, used various excuses, none of them particularly strong, to say he "couldn't" release his returns.  The main excuse was that his returns were under audit.  Of course, that makes no difference whatsoever.  Any taxpayer can release returns, whether or not they are under audit, and other presidential candidates (Nixon comes to mind) have done so during an audit period.  Trump most likely didn't want to release his tax returns because he didn't want to provide fodder to critics who would look at the relatively measly amounts of taxes that he had to pay,  or find information about trusts and other entities set up to keep money of shore or, who knows, find information about connections to various Russian oligarchs.  Another reason that Trump likely hasn't wanted to release his returns--he wants to be able to pretend that he is not a beneficiary of all those many loopholes in the Code that particularly benefit the ultra-wealthy.

That comes to the surface now, because of his claims, in an Indianapolis speech, that he would not receive any benefit from the so-called "reform" tax "framework" put out by Trump and the GOP leadership.  We know from 2005 returns that he has, at least in that year, had to pay $31 million in Alternative Minimum Taxes (AMT) in a year when he would otherwise have paid very little in taxes.  That is, in fact, the purpose of the AMT--to force wealthy taxpayers to pay some tax on their incomes when they otherwise have the ability to take advantage of so many loopholes that they would get off pretty much tax free.  So we know that Trump lied when he said in Indianapolis that he would not get a benefit from his own tax proposal.  His tax proposal would eliminate the AMT backstop for wealthy payment of at least some taxes.  That would directly benefit Trump.  He lied.

Trump would also directly benefit from the elimination of the Estate Tax.  That is a tax that is very low at this point, because of decades of GOP whittling away at it to reduce it to zero on behalf of their wealthy donors.  When a married couple with $11 million in assets die, their estate would not pay any estate tax, because there is an exemption for the first $11 million for a couple.  On the rest of the estate above $11 million (a size of estate of those in the top 1% of the distribution), the tax rate is now exceedingly low--only 35%.  Trump's plan would reduce it to zero.  He said in the Indianapolis speech that eliminating the estate tax would help middle class people, small family farms, and small businesses.  He lied.  Only the wealthy pay any estate tax (see above).  Very few small businesses and family farms are subject to the estate tax at all--estimates say there would be only about 80 in a given calendar year at this point.  Of those that are subject to it, the amount subject to the estate tax is only the excess over the exemption amount.  And family farms get 14 years to pay off any tax like that the heirs might owe, through a provision for installment payment intended to help preserve family farms and allow them to pay the tax due, if any, over time out of the operating profits of the business.  So, again, Trump lied. 

Trump also would likely benefit huugely from the reduction of rates on corporations, through getting more dividends out of the even higher corporate profits that would result  (to the extent that he has investments in corporate stock, which are likely substantial, since most of the financial assets in this country are owned by those in the very tip-top of the income and wealth distribution). So, again, Trump lied.

Trump would also likely benefit bigly from the reduction of rates on pass-through income from real estate partnerships and hedge funds.  The Trump empire is clearly in real estate, and there are likely quite a few partnerships in the structure of the Trump companies.  Since otherwise passthrough income is currently taxed at the individual partner's personal income tax rate, a 25% rate on income that would currently be taxed at a 39.6% rate (including the tax on investment income), is a 14.6% lower rate or more than a 1/3 reduction in the tax rate on the income. So, again, Trump lied.

Given that Trump distorts so easily the actual effect on him personally of his tax proposals, it would clearly be helpful to the citizenry to have a chance to review Trump's tax returns (and to have had them before the election to take into account as he talked about taxes and wealth). Every president has done so since the 1970s.  Seventy four percent of respondents in national polls think Trump should release his tax returns.  See McGuire release.

The California legislature has decided that if Congress won't act to do something about this, than it will.  As Democratic Senator Mike McGuire, a proposer of the bill, noted in a June 1, 2017 release about the bill:

 "Everyone knows that President Trump used the birth certificate issue against President Obama as a dog whistle to white supremacist groups,” Senator McGuire said. “The truth is that we have never elected a president who was not a citizen. That has never been a problem and does not require a solution. But we have elected a president – and he is currently in office – who has serious conflicts of interest that are endangering our national security and who is consistently violating ethical norms to enrich himself and his family. That’s a very serious problem which does require a solution – and the solution is SB 149.”

The legislature has passed a bill (Senate Bill 149, titled Presidential Tax Transparency bill), now apparently awaiting Governor Jerry Brown's action, that adds a ballot-eligibility disclosure provision requiring presidential candidates to release 5 years of tax returns.  See Brandon Carter, California legislature passes bill requiring presidential candidates to release tax returns, The Hill (Sept. 14, 2017); CNN Wire & John Fenoglio, California passes bill requiring presidential candidates to release tax returns; Trump could be impacted in 2020, KTLA News (Sept. 16, 2017). The California secretary of state would make the returns public (with redactions as necessary) on the state website. Although it was mostly Democrats who supported the measure, the bill was bipartisan: some Republican members in both chambers supported the effort.

Expect a court challenge to the bill if Governor Brown does sign it into law.  The challengers would argue that any additional restriction--even a ballot eligibility requirement--is unconstitutional, since it would add to the eligibility requirements in the Constitution.  But the supporters would ably demonstrate that's a specious argument: every state has requirements that candidates must comply with to get on the ballot--mode for getting signatures, mode for making requests, timelines within which to comply, fee payments, etc.  This tax return release provision is more similar to those (i.e., a disclosure requirement that is procedural in nature) than it is to the eligibility requirements of age, citizenship, residency set forth in the Constitution ("achievement" requirements that are substantive in nature).  The substance on the tax return isn't relevant to whether a candidate can be on the ballot; just the procedural element of complying with the disclosure requirement.  Constitutional scholar Laurence Tribe agrees with me that a disclosure requirement isn't an additional qualification (see KTLA News article for quote). And other states--New Jersey, Connecticut, Massachusetts, New York, for example-- are considering or have passed similar action.

Trump's "Give the Rich a Break" Tax Plan

National GOP leaders on Wednesday released a 9-page document that they called a tax "framework" (available here on the Washington Post site) describing in vague terms how they intend to cut taxes for the nation's wealthiest people while doing very little that serves the government needs. Overall, the GOP framework would amount to about $2.2 TRILLION in less revenue to support federal programs (like protecting the environment from corporate pollutants, supporting higher education loans for students, funding basic university research) (assuming $5.8 trillion loss to lowering rates and shift to territorial system and maybe $3.6 trillion recouped by eliminating as yet unspecified deductions).  See GOP proposes deep tax cuts, provides few details on how to pay for them, Washington Post (Sept. 27, 2017).

• They promise 3 rates (12%, 25% and 35%, without stating what the applicable income brackets for those rates should be).  That lowering of rates is primarily beneficial to the wealthiest, since the people who just barely get by on their wages (especially with the new corporate regime of calling people in for short shifts, as needed, rather than paying them a regular full-time job) are hit hardest by the payroll taxes that won't be lowered at all under this plan.  That is, ordinary wage-earners in the middle and lower classes are generally already taxed on a consumption basis--they spend what they earn and have little left for saving for the future.  They pay relative low income taxes but pay significant payroll taxes through withholding on their wages (with no deferral).  This is another excursion into the current GOP's 'alternative fact' universe, where huge tax cuts mainly benefiting the wealthy are sold as a 'simplifying' reform that will benefit ordinary people.

 

• Although the lowest rate is higher than the poorest wage-earning taxpayers pay now, the planners claim that this is still a tax cut because of the "doubling" of the standard deduction for those taxpayers that do not itemize.  However, the personal exemptions are eliminated, so that the combination of the standard deduction and the higher rate is likely to be at best a minimal cut for small families and an actual tax increase for larger families.  See, e.g., this article.

 

• They promise to eliminate the "alternative minimum tax", a tax provision that was enacted as a safety provision to ensure that wealthy taxpayers who can afford tax planning and generally can most easily benefit from the various loopholes and tax subsidies written into the code would pay some modicum of taxes rather than get off scott-free from any tax burden. The "framework" (page 5) claims that "it no longer serves its intended purpose and creates significant complexity."  It is admittedly somewhat complex, but not unduly so with modern tax preparation software which makes that complexity a minimal problem.  I have been required to pay the AMT, and it hasn't made my life or tax return filing more complex.  In fact, the people who owe the AMT should be paying more tax than they would pay without the AMT, and that means it is in fact serving its intended purpose of ensuring that taxpayers cannot aggregate too many of the various haphazard subsidies in the Code to permit them to essentially escape a reasonable tax burden on their economic income.  Elimination of the AMT is a tax break for the well-to-do:  Trump, for example, has had to pay the AMT (real estate developers are one of the much-favored groups in terms of various tax expenditures in the Code that benefit them).

 

• They plan to eliminate the estate tax--a tax that ONLY applies a low 35% rate to individuals who leave estates worth more than 5.5 million dollars or couples that leave estates more than 11 million dollars, and even then is often the only tax that the assets in those estates have ever been subject to, since these wealthy Americans are the ones most able to take advantages of various trusts and other loopholes and borrowing to ensure that they live as tax-free as possible off their assets during their lifetimes and pass them almost wholly intact to their heirs with stepped up basis to start the game all over again.  This is a tax break for the very wealthy and their silver-spooned heirs--especially lucrative for the multibillionaires who own (and live off of) most of the financial assets.

 

• They plan to give corporations an exceeding low statutory rate of 20%, even though the primary beneficiaries will be the owners and managers who already have enjoyed a hugely disproportionate share of corporate gains (compared to their workers) that has resulted in the cascading inequality of distribution of resources in this country, in part because the wealthy typically own most of the countries' financial assets and get a very low preferential capital gains rate on their income compared to the higher rate on wages paid by ordinary, non-wealthy wage-earners.  It is claimed that low corporate tax rates are necessary to allow corporations to be competitive, based on the statement that our statutory rate (the rate provided in section 11 of the Income Tax Code) reaches a maximum of 35% for the biggest companies.  But the majority of corporations--even highly profitable ones-- pay no income tax at all.  And those that do pay a corporate income tax pay an average effective tax rate (actual tax as a percentage of actual economic income) around 24% , at best, and that is not substantially higher than the corporate tax rates in other developed countries.  Further, most of those other developed countries do not depend solely on the income tax--they generally have some kind of value-added tax (a VAT) in addition to income taxes and often have various other taxes (such as a financial transaction tax).  Making claims about competitiveness based solely on the corporate income tax is, in other words, foolishly incommensurate and really says nothing whatsoever about ability to compete.

 

• Further, they plan to allow corporations to expense all investments, at least for the next 5 years, even though the economic reality is that expensing is an upfront subsidy since wear and tear is most significant at the back end of an investment, not the front end.  Expensing (see page 7 of the framework) will cost huge amounts of tax revenues.  It is just a way to reduce corporate taxable income (not economic income) even further, making the 20% rate on a lower amount of income produce even less tax revenues from corporations, which already pay a ridiculously low amount and are enjoying record high profits.

 

• The framework calls for changing to a territorial system (at a time when most U.S. multinationals have already used various gimmicks to 'offshore' their main profit-making IP) and lower taxes on U.S. multinationals.  The result will likely be significantly lower corporate tax payments from U.S. multinationals.  Further, unless the reorganization provisions and ability of U.S. multinationals to move active businesses overseas on a tax free basis is curtailed, these rules will likely encourage other companies to offshore even more of their active business assets.  It will favor multinationals over domestic corporations, pushing even more companies to move businesses overseas.

 

• And they intend to preserve the R&D credit (see page 8 of the framework) -which was eliminated in the 1986 tax reform and then reinstated  on a piecemeal basis over multiple years due to pressures from corporate lobbyists.  There is no evidence that the R&D credit, rather than the more legitimate business deduction or capitalization for research expenses, produces more research.  And Congress has done nothing--in spite of years of pushing for making the R&D credit permanent--to establish that it provides any actual economic growth benefit.   It just provides an upfront dollar for dollar reduction in taxes compared to the deduction's lesser benefit.  And there is no evidence that the credit has resulted in more money being put into research.  Research intensive businesses with good leadership invest in research whether or not they get a special tax benefit because otherwise their busienss will die.  (Of course, businesses with no attention to anything other than the bottom line may make bad decisions:  one reason the pharmacology industry has been lagging is that they have tried to merely buy others' research rather than doing it themselves, and like the infamous purchaser of Epipen, they have simply gorged themselves on exploitative prices because of their monopoly on a particular drug.)

 

• They plan to have income from "pass-through" entities like partnerships taxed at very low rates to the individuals, who already enjoy exceedingly low rates on their gains from corporate stocks and other financial assets (the preferential capital gain rates) and will receive even more cash out of their corporate stock ownership with the even lower proposed statutory rate on corporate stock.  This plan for pass-throughs, by the way, will continue to lavish tax benefits on an already super-coddled wealthy class--those who run real estate development businesses through partnership structures (the Trump empire, for one), those who run hedge funds (some of the wealthiest individuals in the country) and those who run master limited partnerships (fossil fuel tycoons).

 

• They say they will "simplify" taxes--which should mean eliminating most or all of those absurd provisions that have grown over the years to clutter the tax statute with special subsidies (that, again, mostly benefit the wealthy).  But there is no indication that the GOP has any intent to eliminate any of the special giveaways.  With real simplification that made economic sense, the framework would call for things such as
  • eliminating the preferential capital gain rate (that benefits the wealthy who own the vast majority of the capital assets)
  • eliminating the section 1031 "like kind exchange" rules (that allow wealthy real estate developers to trade properties for significant gains but defer tax on those gains indefinitely, often til death when the step up in basis allows their heirs to inherit and start the game all over again)
  • eliminating the various preferences for fossil fuels that have been in the code in one form or another for years, giving oilmen their wealth while subsidizing the most polluting kind of fuel extraction and use (all the while with their lobbyists arguing against significant long-term subsidies for more environmentally friendly wind and solar)
  • phasing out the mortgage interest deduction--at least for mortgages at more than the average national housing price-- so that multimillionaires cannot get the benefit of the interest deduction on $1.1 million of mortgages, again, a provision that primarily benefits the wealthy in the top 20% of the income distribution, and
  • eliminating the provision in the charitable contribution provisions that allows wealthy shareholders to donate certain assets for  a full fair market value deduction rather than a basis deduction--thus significantly reducing the overall income tax they owe.

But of course--although most academic research suggests that a mortgage interest deduction serves no legitimate purpose, the GOP 'six' indicate they will retain it, because it "help[s] accomplish important goals that strengthen civil society as opposed to dependence on government:  home ownership".  Fact is, countries without a mortgage interest deduction have just as high rates of home ownership, and the economic effect of the deduction (especially in its current form) is to favor purchase of ever larger homes by those taxpayers in the upper income distributions.  

As with so much else from the man currently holding the office of President, what is said (paraphrasing) --that the wealthy will not get a tax cut and the poor and middle class will get big tax cuts --can't be trusted.   Like so much else, Trump says he is "very good at it", but then he thinks he is good at everything and is inevitably shown to be fairly ignorant of the issues that matter. The framework, like everything else the GOP has proposed this year --including repeal of the Affordable Care Act; defunding of Medicaid; withdrawal of scientific information about climate change from the EPA website, reduction in the size of existing national monuments meant to protect the land for all of us --is designed to benefit the GOP establishment's wealthiest donors who continue to call the shots on tax and economic policies.

And of course the claim that this 'framework' can result in "the simplicity of a 'postcard' tax filing for the vast majority of Americans" is absurd.  The complexities of accounting for various income sources and the heightened complexities that most low-income Americans face in claiming the Earned Income Tax Credit will remain, even if rates are reduced and the standard deduction replaces the standard deduction and personal exemptions.  The claim (page 4 of the framework) that "typical families in the existing 10% bracket are expected to be better off under the framework due to the larger standard deduction, larger child tax credit and [unspecified] additional tax relief that will be included during the committee process" seems clearly wrong for many if not most of those taxpayers in that lower bracket. 

 And their posturing that this "reform" is to benefit "small businesses" is equally absurd.  The main beneficiaries of the pass-through rate will be the huge joint ventures, master limited partnerships, real estate partnerships (like the Trump companies), and hedge funds whose owners will enjoy a reduction in their tax rate on that income from 39.6% to 25%.  Most actual small business owners are already paying tax around the 25% rate.

The proposal will not end incentives to ship job and capital overseas (see page 3 of the framework on goals)--those gimmicks with transfer pricing of intangibles will continue, as any lowering of the corporate tax rate here to 20%, which is below the international average of 22.5% (according to the report--it may well be too low a figure), will push other countries to lower their rates as well.  It is a corporate lobbyist's ideal playground--playing one country against the other to push the "race to the bottom" faster and faster and continue the quasi-sovereign hegemony of multinational companies around the world.  If we want to end the corporate inversions and the transfer pricing gimmicks, we know various ways we could do that, including changing transfer pricing mechanisms in ways that various academics have recommended.   Congress hasn't really wanted to, since their wealthy corporatist donors wouldn't like it.

What reveals the hypocrisy of the GOP is their sudden switch from deficit hawks during the Obama administration, which made it harder to get a decent stimulus package through Congress and to promote funding for desperately needed infrastructure projects, even when interest rates were incredibly low, to a willingness to incur significant deficits in order to debt- fund even more tax cuts for the wealthy on top of the Bush-era tax cuts that led to a switch from federal surplus to federal deficits and more debt. As Ed Kleinbard so aptly states, "The Republican tax "plan" is a deficit-busting mess, and it would slash the President's taxes", Vox.com (Sept. 28, 2017).

What reveals the GOP hypocrisy even more is their presentation of this framework without any appropriate CBO or Joint Committee on Taxation analysis.  And statements by Senator Bob Corker (Tenn) in connection with scoring tax reform that they don't trust the CBO, implying that the GOP should go to a private (pro-GOP) source for "dynamic scoring" so that it will show the results they want--is truly worrisome.  See The sudden and regrettable demise of the CBO, USNews.com (Sept. 21, 2017).  It disparages the nonpartisan professionals in the Budget Office while showing that the GOP is willing to do practically anything to further the lie that their budget, with  huge tax cuts proposals for the wealthy, will miraculously result in widespread economic growth that will float even poor folks' boats. 

We already know that tax cuts do not have the miraculous growth effect that they claim.  Kansas actually engaged in an "experiment" to prove that tax cuts would stimulate growth.  Even the state's GOP legislature recognized the utter failure of the claim, as the state's economy sank under the burden of the tax cuts.  Kansas actually voted to end the experiment and raise taxes!

And of course we have experimented this way nationally with various Republican administrations.  Reagan cut taxes drastically in his first year in office, caused huge deficits and then increased taxes every year of his term afterwards.  The cuts ended up most especially benefiting the wealthy, because the tax increases took the form of higher payroll taxes and other means of hitting lower-income folks that didn't bother the wealthy.  George H.W. Bush promised not to raise taxes, but recognized that he could not keep that promise and run the government appropriately. If we are going to spend billions on continuing to buy arms and military planes we don't need (a silly idea, but one that seems ingrained in the GOP mentality), then we have to have more money to fund things we really do need, such as a fair medical care system for the most vulnerable (Medicare) and funding for basic research that corporations don't want to pay for (NSF and NIH, among others).  George W. Bush cut taxes on the wealthy and corporations, fulfilling corporate lobbyists wish lists that had been circulating for 20 years, including creating a 'tax holiday' for corporations to repatriate untaxed profits that they had offshored at a very low rate.  All that was promised to drive economic growth, but of course it didn't.  As with the similar idea in this year's "reform" talk, the 2004 tax holiday provided a way for corporations that had engaged in various gimmicks to move their profits overseas to low tax jurisdictions (even while the money is often in U.S. banks) to bring it back to the US at low or no taxes and then use it to do stock buybacks that benefited their wealthy shareholders with big boosts of income taxed at preferential capital gains rates.  Most of those corporations did not use those funds in any way to create job--in fact, some of the biggest so-called repatriators laid off employees at the same time.  The tax holiday merely gave even more of a tax subsidy to unpatriotic corporations that were willing to scam the system by pretending to sell their invaluable IP to offshore subsidiaries, and then even higher payments to the CEOs for raking in more cash.  In other words, the tax holiday was a great exercise in supporting the creation of an even greater inequality gap.  Historical trends are fairly clear on this.  The U.S. economy has thrived more under Democratic presidents who have increased taxes and has turned to deficits more under Republican presidents who have cut taxes.

What we should do at a minimum is increase the amount that corporations pay into the federal government, so that a higher percentage of our GDP is paid in corporate taxes, as in other developed countries.  And we should add a financial transactions tax, at least, to the mix while eliminating the preferential capital gains rate and the like-kind exchange provision. 

Funding the government so that it can deal with the hundreds of billions in financial aid needed in Texas (Hurricane Harvey) and Florida (Hurricane Irma) and Puerto Rico (Hurricanes Irma and Maria) while at the same time starting to handle some of the deteriorating federal roads, railways, bridges and other infrastructure throughout the country would be the best way to ensure that we could continue the economic growth begun under the Obama administration. That funding would require REAL tax reform:  eliminating the preferential capital gains rate, eliminating the many loopholes by which highly profitable corporations manage to pay almost no federal income tax, and creating a significantly higher graduated rate structure for taxing estates (while eliminating the step up in basis).

(Of course, we should also recognize that spending the hundreds of billions annually on defense does much less to defend America and make it great than spending a higher proportion of that money on education, infrastructure, and other ways to increase opportunities for all.  Let's get rid of the militaristic jingoism that keeps the U.S. armament industry rolling in cash and start funding scientific and health research through NSF and NIH.  That is the way we created a thriving middle class after the second World War and the way to support continuing innovations that will make a difference in our lives and economy into the future.)

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Should simplicity be a primary goal of tax reform?

I was at a housewarming party last Saturday and talked to quite a few people I didn't know.  One was an economics professor at a regional school.  Naturally, economists and tax professors gravitate towards talk about the economy and tax policies, so it isn't surprising that our talk got there fairly quickly.   I will add that his views were not too surprising, either: he suggested that corporate inversions and other forms of corporate tax planning and abusive transactions would disappear if only we made the tax code "simpler."  Not surprisingly, that is the issue I hear most insistently from many of the economists that I talk to-- especially those who have bought into Milt Friedman's free marketarianism:  they suggest that the entire problem of the tax code--or the problem of the unprecedentedly low percentage of GDP we raise from corporate taxes in particular--could be solved if only we made the tax code simpler.  

One thing they don't seem to realize is that the neoliberal approach has led to corporations treating their employees as just another number to be crunched for the benefit of the bottom line,  their obligation to community and people as just another PR element, and their obligation to pay a fair share of their income to support the many levels of legal stability and benefits that they receive from government --including the benefits from basic research supported by government funding--as just another expense to get rid of in any way possible.  If the statutory rate is 35% even though the ACTUAL EFFECTIVE RATE is near zero for 75% of corporations and no higher than 20-26% for many corporations, they will still argue that the statutory rate should be 25%.  If it is lowered to 25% (and the effective rate for almost all corporations is near zero with a few paying around 10%), they will argue for a statutory rate of 10%.  And so on.

The argument from simplicity is, these days, mostly another example of class warfare being waged on behalf of the wealthy, corporatist elite against ordinary American workers.  And Congress today--controlled as it is by a majority in both the Senate and House that is generally much farther right than the nation's people--tends to use the complexity of the tax code exactly in that way--as a flagwaver to fool ordinary Americans into thinking that the corporatist, wealth-favoring tax changes the right wants to enact are "reforms" that will aid economic growth and ordinary Americans. 

See, for example, the Joint Economic Committee (JEC)'s hearings today (April 20, 2016) on the topic of tax code complexity (and note the presupposition about complexity and the "taxing" problems in the wording of the title): Is Our Complex Code Too Taxing on the Economy? The title alone tells a lot about the JEC's implicit bias against taxes and against "complexity".  But if anyone thinks this was likely to be a useful discussion of complexity, just look at the first three speakers.  Only Jared Bernstein comes from a Center that has recognized some of the fairness issues that most of the push for "simplicity" pushes under the rug.

• Art Laffer, Mr. RightWing TaxCut Spokesperson personified and the person who has made a reputation (and I bet great wealth) out of arguing that tax cuts pay for themselves after drawing a graph on a dinner napkin and proclaiming it to be a theoretically supportable description of how human behavior responds to tax rates, testifies about "The Economic Burden Caused by Tax Code Complexity (written in 2011 but presented in 2016 anyway--if it's propaganda, ya don't need to update?). 

A lot of these numbers about the "cost" of complexity are speculative, one-sided in that they overlook the huge costs of a simple tax code that permits enormous sums to be lost through tax evasion, and based on theoretical assumptions far removed from actual experience to project trillions of economic gain essentially from reducing the tax rates on corporations and the wealthy.  Consider one of the "complaints" in the Laffer 'study'--the requirement that businesses file forms reflecting business-to-business payments in excess of $600.  It is clear that many small businesses evade taxes by using cash outlays where possible for those kinds of transactions.  Reporting has proven to be an efficient way to capture those kinds of tax evasion.  The same kinds of complaints are registered, of course, whenever any reporting requirement is created, whether it be an employer withholding and reporting requirement or a business reporting requirement.  In a digitalized business world, creating and filing appropriate reports can increasingly be automated and almost costless.  Compliance costs without such reporting are much greater because they require people and audit time at the business and at the IRS enforcement end.  Those issues are disregarded entirely by Laffer.  

Laffer also claims that "the more complex a tax system is, the higher the compliance costs will be."  It is not clear that such a statement is empirically true.  Note that he claims to be talking about "the tax system."  It is worth noting that an entire system may have simple areas and complex areas, and complexity tends to reside in specific areas in which there are highly technical issues that require a complex system of rules to arrive at a reasonable answer or where Congress has acted rather hastily to add 'bolt-ons' to the tax system rather than systematically working through how provisions should work.  Could the code benefit from a 1986-style revamping to remove the bolt-ons and re-integrate the system?  Yes.  Should that revamping be based on a "let's "simplify everything and make the taxes of the rich and powerful even less" philosophy? NO.  Our current system is more complicated than it needs to be, but at the same time, not as complicated as it needs to be to prevent many of the tax avoidance schemes that tax planners dream up. Once a system of rules is in place and operative, it is not necessarily true that there will be higher compliance costs, even if there are changes every few years in the specifics of how the system works to address new issues. 

Laffer also states as fact that IRS administration costs are higher when the tax code itself is more complex.  However, a "simpler" tax code that nonetheless intended to capture a share of the profits to fund government could well result in much higher administration costs, as it would require considerably more agency interpretive rulings and interaction with taxpayers and audit/enforcement actions to prevent sham transactions designed around "simple" language.  It makes you wonder, of course, if by "simpler" Laffer doesn't really mean--one that collects less tax, period, by having fewer brackets and lower rates.  That sounds simpler to the unknowing and naive, but ask any tax professor and he or shee will tell you that determining the income to which the tax applies is the complex part, not the rates.   What that kind of "simplicity" does is disguise from ordinary Americans yet another tax break for the wealthy as a move for a "better" tax system "because" it is "simpler".  

Note that Laffer also talks about the "teams of accountants" and others that businesses track and measure taxes, as though they could all be done without if only we had a "simpler" tax system.  Fact is, even without taxes, those teams of accountants would be part of the business world, because for most businesses, much of their business information and their tax information goes hand in hand.   

So while Laffer claims to want a "fair" tax system, what he means by simple would be a tax system that shifts the burden from rich to poor even more than we already do and that eliminates the critical use of the tax system as one of the few levers that can operate to reduce the gaping inequality that has resulted from decades of tax cuts primarily benefiting the rich.  So while I claim that the costs of complexity are mostly problematic if they fall on the poor or near poor, Laffer values the cost to the rich as much higher, because he looks at time used to comply (of course, that will be hired time) and the wealth of the rich to conclude that the burden is greater because their time is more valuable.  He complains that the top pay more and pay proportionately more than the bottom, but of course that is exactly what a system designed around ability to pay will do: since the marginal utility of the last dollar is less to a wealthy man, one should tax them proportionately more than one should tax a poor man who perhaps already cannot satisfy the necessities of life using every one of his dollars.

For my earlier analysis of the Laffer Curve, see, e.g.The Laffer Curve Part II (March 2008) and other posts linked therein.

• Scott Hodge, the President of the Tax Foundation, a right wing organization that calls itself nonpartisan and wants to be considered a "think tank" (it is a propaganda tank) that drums up an annual piece about "tax freedom day" full of specious arguments to bolster ordinary Americans views that taxes are too high about how long a typical worker works to pay his taxes.  

I'm not surprised that he starts his testimony with the increasingly meaningless statement that the Code was 409 thousand words in length in 1955 and now is 2.4 million words in length.  OF COURSE the code is longer in 2016 than it was in 1955 when it was still an embryonic text.  It took a while for Congress to realize the lengths to which wealthy taxpayers and corporations would go to invent pathways through loopholes in the code to avoid taxes, and then to put the appropriate blockade up. 

There is of course the same thing about billions of hours spent complying with tax requirements, coupled with costs estimates claiming this is all "wasted" effort.  Think about that.  Complying with our tax obligations is actually a privilege of citizenship, and at least a good part of the compliance "burden" is something we should be proud to do as a way to pay our fair share.  This constant talk of tax compliance as though it is inherently evil also misses the point that the tax accountants and return preparers and legal advisers (especially of course for the more sophisticated and wealthy taxpayers amongst us) are also people who are earning a living by helping their fellow citizens navigate one of their citizenship duties.  This is not "wasted" per se; much of this effort adds to GDP and is a viable part of a complex economy. You wouldn't guess that from reading Hodge.

Even worse is Hodge's first item of "complexity" for the income tax system that the Tax Foundation would like to see eliminated--progressive tax rates.  Please note.  The number of rates and the number of brackets has almost nothing to do with complexity.  See Jared Bernstein's discussion of this issue, please, as well as numerous posts here on A Taxing Matter.  This is a figleaf to cover the propagandizing of the Tax Foundation on behalf of the wealthy. It is the same as their push to ensure that "everybody" (even the poor and near poor) should pay some income tax, and the wealthy should pay less.  Of course Hodge also quotes the economic theoretical "truth" that at some point "when the "tax price" of earning the next dollar of income gets too high, people will stop working to earn that extra dollar."  However, that idea is very hard to prove, especially with our very low-rate tax system and given the different forces at play besides taxes in determining whether and how and for how much we work.  After all, while the average paycheck in the country may be in the $50,000 range for a year's work, there are many CEOs willing to take ordinary paychecks of obscenely high amounts from $70 million a year to $700 million a year to in the billions per year.  They pay such a small percentage of that paycheck in income taxes that it doesn't affect their willingness to hold that CEO seat one bit.  Yet on the flimsy assumptions (supported by Laffer economics that claim tax cuts create economic growth) about getting more work if taxes are less and if progressive rates are eliminated, Hodge claims a boost of GDP of 1.4 percent and 1.1 million jobs.  Quite speculative and without empirical foundation.  Certainly didn't happen when Reagan cut taxes in his first year (and then increased them every year of his presidency thereafter).  Nor when George W. Bush's administration put in place gigantic tax cuts for the wealthy.  (In fact, we entered the Great Recession.....)

Hodge also wants to eliminate the phaseouts on some of the tax expenditures that limit their benefit to high income taxpayers (not terribly complicated to do--tax software calculates it automatically) and claims giving rich people that money will result in .1% GDP growth.  This is, quite simply, pie in the sky made-up numbers, which any economist can do by tweaking their hypothesis to get the results they want.

Now Hodge is right about one of the individual items he mentions--the Earned Income Tax Credit phases out in a "jerky" way that is especially hard on low income workers.  Many Americans in or near poverty don't claim the EITC, and others make errors claiming it.  This is the kind of complexity that should be reduced, and it is even possible that a uniform phase-out rate--at a much higher income level than currently used or than recommended by Hodge--would be a good solution to that complexity.

Hodge goes on to claim that we should not eliminate itemized deductions (i.e., they are quite valuable for the upper class), but that we should instead lower every single tax rate by 10%!  I heartily disagree.  Most people should use and do use the standard deduction--around 70% of taxpayers.  The only people who generally take itemized deductions are those with complex real-life economic situations (rental properties, business investments, unusually hefty medical expenses, or significant charitable contributions perhaps) and most of those are from the upper end of the income distribution.  Further, the operation of the Alternative Minimum Tax was designed to counter, in part, the ability of affluent taxpayers to amass quite a few itemized deductions (charitable contributions that are in many way quid pro quos for those taxpayers whose name is in bold letters over the building they funded or in the bulletin of the opera they made possible, etc.):  the AMT's effectiveness has been undercut by Congressional responsiveness to lobbying from higher income taxpayers but does still act to ensure that those who aren't in the richest group pay a more reasonable share of taxes than otherwise (It theoretically doesn't apply to the wealthiest taxpayers because their regular tax rates should be above the rate for the AMT).   For more information on the AMT, see the series I wrote earlier on this blog, at the following post (and the links to earlier Parts therein):  What Should Congress Do About the AMT (Part 5).   It might be reasonable to say that the standard deduction should be increased to ensure that we are ensuring a sustainable living allowance for lower-income workers (which is the reason the standard deduction and personal exemption are in the code).  But we should not reduce "each rate" by 10% and thus provide a significant benefit to wealthier taxpayers.  That is most certainly not a reasonable "simplification" solution.

Of course, Hodge argues for elimination of the estate and gift tax, claiming that eliminating estate and gift taxes would raise GDP by 0.8 percent and create 159,000 new jobs while repeating the mantra that the estate tax makes it "harder to pass family businesses and farms to the next generation."  This is hogwash, put simply.  The estate tax as currently set is a ridiculous subsidy for wealthy families: coupled with the low rate of tax on capital gains and the step-up in basis at death, it allows them to live off the income of their wealth during their lives at low tax rates (zero if the Republicans like Paul Ryan have their way); pass their estate to their heirs with very little tax due (more than 10 million dollar exemption for a couple, and all kinds of planning schemes to get around taxes on the rest); and give their heirs a step up in basis so that they will never pay tax on the appreciation on the estate from the deceased person's lifetime.  In other words, these arguments support an almost tax-free existence for the wealthy who already have hogged an unfair share of the gains from workers' productivity.  The claims that benefiting the wealthy in this way will result in  better economic growth and trickle down to the middle and lower class are, quite simply, unfounded and unsubstantiable.  These ideas will simply aggravate the already grievous inequality in this country that has one in four children going to bed hungry at night while do-nothing heirs inherit enormous wealth, privilege and the hubris that goes with it.

Oh, and of course he repeats the statement that "the U.S. has the highest corporate income tax".  that is misleading, since while it has a high statutory tax rate, it does NOT college anywhere near that tax rate.  three quarters of U.S. corporations pay ZERO tax.  Many of the rest pay very little tax.  Very few pay a rate of tax that is significantly higher than our industrialized peers.  The claim that GDP would be boosted 2.3% by eliminating the corporate tax, or that wages would increase by 1.9% or that 443,000 jobs would be created are pure salesmanship.  When workers increase productivity and corporate profits grow, their wages have not grown.  That money has gone into the corporate manager/shareholder pockets instead.  Any tax cut would likely be viewed as just more gravy for the already rich owners and managers.

I could make similar counter arguments to every one of the "reforms" Hodge promotes:  corporate integration is just another tax cut for the mainly upper income distribution elite who are the managers and shareholders of corporations.  It makes no sense at all in the current economic context of this country.

Hodge also argues for keeping the "expensing of R&D costs".  Economically, these costs should be capitalized.  A business that wants to thrive will invest in R&D because it needs to do so for business reasons, not because there is expensing.  Of course, expensing something that should be capitalized is exactly one of those distortive tax provisions that the Tax Foundation tends to argue are problematic in other contexts......

Not surprisingly, Hodge pushes the ridiculous consumption tax plans from Republicans like Ben Carson --a regressive "flat" tax that would favor wealth and put  the tax burden on workers by exempting taxes on capital gains, dividend and interest (the kinds of income wealthy people live off), Marco Rubio, and Ted Cruz.  All of these plans shift the burden of taxation to the middle and lower classes (from capital to labor) while protecting the wealth of wealthy people.

 

• Of course they would have a Joseph Grossbauer, CEO of small business and spokesperson on behalf of the National Federation of Independent Business, to claim the taxing requirements for small businesses of making determinations based on tax rules.  Note that he complains at least as much about the frequency of changes to tax provisions--That is not an element of the tax system itself but a result of the way that Congress has grafted on policy that should be handled by spending into the tax system, in part as a way to fool the public about what it is doing, when it enacts one tax expenditure after another in favor of one corporatist interest after another.  And while I don't doubt that some of these complaints about complexity are real, I do doubt the time claimed spent complying and the difficulty claimed for regular determinations about depreciation, employee status, and other items. Note, for example, that the reason for the confusion of what "counts" as real property for tax purposes lies with business owners who push for various tax expenditure provisions in their favor, which result in increased categories that must be examined to determine appropriate classification!   If business owners and their lobbyists would focus more on doing the right thing and less on wringing the last theoretically (aggressively speaking) possible penny out of their potential tax liabilities, tax time wouldn't be as "taxing" as they claim.

• Jared Bernstein, also speaking    Jared Bernstein Testimony Meeting the Goals of the Federal Tax System April 20, 2016  , is a more respectable figure represent the nonpartisan Center on Budget and Policy Priorities, which has tended to be less partisan and more in the center to center.  Bernstein notes that the idea that simplicity is a matter of rates or brackets is itself misleading.

"Complexity has nothing to do with the number of tax brackets and rates.  If taxable income were easy to define, it wouldn't matter how many rates existed in the code; all taxpayers would have to do is look up their liabilities in a table or online calculator."

"What makes our system so complex are the exemptions, deductions, other tax subsidies, and privileges for one type of income, industry, or activity over another. On the corporate side, these include “transfer pricing” opportunities (the ability to book income in low-tax countries and deductible expenses in high-tax countries), deferral of foreign earnings, inversions, and the many other loopholes that explain why the effective corporate rate is at least 10 percentage points below the top statutory rate (about 25 percent versus 35 percent). To be clear, not all subsidies in the tax code are poorly targeted and inefficient. Research shows the Earned Income Tax Credit and Child Tax Credit, for example, encourage work and prevent millions of people from falling into or deeper into poverty, and children in families receiving the tax credits do better in school, are likelier to attend college, and can be expected to earn more as adults. But well-targeted, effective subsidies like the EITC and CTC are unfortunately more the exception than the rule."

 

Needless to say (for anyone who has read much of this blog in the past), I don't agree with the JEC and Laffer/Tax Foundation's simplistic approach to tax reform of pushing for a "simpler" tax system based on fewer brackets, fewer and lower rates, exemptions of income mostly earned by the wealthy, and correspondingly less progressivity.

The taxpayers for whom a simpler tax code does make sense are the poor and the nearly poor.  They usually have much less access to sophisticated tools for tracking their income and expenses and while they often have less income and most or all of it is wage compensation from which taxes are withheld, they need easily understandable rules without "gotcha" complexities that they can apply straightforwardly.  Note that many of the poor and nearly poor in this country are also "unbanked"--meaning they don't have enough assets to maintain bank accounts or pay the fees on accounts with low balances, and they even have trouble cashing checks when they are paid with checks.  They should be taking advantage of various provisions put in the code to help ensure that every American is able to provide for necessities--things like the Earned Income Tax Credit, and various other credits for child care and education expenses, etc.  Simplicity counts here, because simpler provisions help to ensure that those in or near poverty are more able to take advantage of all the provisions that have been put in the code for their benefit.

But the people who do not need a simpler tax code are those at the top of the income distribution and, generally speaking, corporations and businesses.  Simplicity is one of the ideas flogged by those on the right who want to eliminate corporate taxes (a benefit primarily for shareholders, which consist primarily of the wealthy and wealthier elites),  eliminate estate taxes (which would give an even greater windfall to those who inherit through no merit but merely luck of birth and add even more to the worrisome growth of inequality), or legislate a complete exclusion from tax for capital gains (which would give an even greater windfall to those who live off inherited investments or even off investments that started with some personal effort, compared to those who live off the sweat of their brows, while providing the "simplest" returns (zero taxation) to those who need it the least in order to survive and contribute to the economy).  The fact is that the wealthy are well able to make their way through the tax code with sophisticated advisers, seeking every loophole those sophisticated advisers can find.  The simpler you make the code, the more loopholes you create.  The more you cut funding for the IRS and tax enforcement generally, the harder you make it for the government to discover the loopholes or catch those who exploit them on audit.  The reason the tax provisions of most concern to big businesses and those with international investments and those with multiple types of investments (CDOs, hedge funds, private equity, partnerships of one kind or another, S Corporations, etc.) are complex is that new, detailed, specific language has to be developed to counter the loophole exploitation by those who apply hyperliteralism and avoid contextual meaning and purpose of the laws in order to have an arguable defense for a tax planning transaction designed to exploit loopholes.

That's too many words in one sentence. The tax code is complex and can't be put on a post card for most complex entities or wealthy individuals with many different business and money making interests because (among many more reasons, I'm sure):

1. It must cover, in one way or another, all human and enterprise activities that could in any way involve the exchange of valuable goods or money for the benefit or one or more persons.
2. It must do so in a way that achieves at least roughly a set of laws that can be consistently applied, with exceptions explicitly set forth, to a wide variety of taxpayers (single, married, divorced, widowed, with or without children, poor, wealthy, filthy rich, corporate owner, manager and corporate owner, controlling owner of a group of affiliated corporations or businesses, partners in various kinds of partnerships doing business--the list could go on and on) who are trusted to voluntarily comply by providing a true and accurate report of their income and expenses and taxes due
3. It must take into account that the more sophisticated, powerful, and monied a taxpayer is the more likely that taxpayer has resources sufficient to game the system by exploiting any verbal loophole and, as evident by historical trends, will be likely to do so if the penalty is sufficiently light and the reward sufficiently great.
4. It must respond when a loophole is exploited by closing the loophole.
5. It must do so in a way that permits the voluntary compliance system to function as well as can be given resources available.
6. It must make fairness--based on a principled view of what that means, such as ability to pay and benefits received--a key linchpin of the way the tax system works.  Progressivity and reduction of complexity for the poor and near poor should be high priorities. Transparency and reduction of redistributive subsidies for the rich should be significant attributes of a reformed tax code.

Of course, for years our tax system has also been burdened by the partisan obstructionism that considers it silly to think "Tea Party" or "progressive" might be indicators that a group applying for tax exempt status actually intends to engage in political activity and similar right-wing witch-hunts that affect morale at the Treasury and IRS among employees struggling to handle an ever-expanding job function. 

If we wanted to make the tax code work better, we would fund the IRS sufficiently to have employees who can provide service to taxpayers more readily, and we would enact legislation to ensure that those who get paid for preparing tax returns actually know the law they are claiming to apply.  And, in fact, there are a few key provisions that we could eliminate to "simplify" the tax code and make it better across the board while ensuring that we act to protect the Earth's future

1. eliminate all of those tax expenditure provisions that have been in the code for decades that provide harmful subsidies to "old" fossil fuel energy (oil, gas and coal) that contribute significantly to global warming.
2. eliminate the capital gains preferential rate, treating all income as of the same character and taxable at the current ordinary income rates  (and eliminate thereby as well the advantage of "carried interest" in private equity partnerships to those money managers who have gotten wealthy off of other people's money)
3. sharply restrict the number of nontaxable reorganizations (both acquisitive and divisive) by requiring at least an 80% continuity of interest in all reorganization forms for tax-free treatment (and thereby also increase the forces against growth of megalithic multinational conglomerates)
4. limit the number of new tax expenditures ladled into the code to those that have gone through a lengthy process of consideration and review to ensure that they are targeted to the desired objective and eliminated promptly if evidence shows that they have not succeeded in their objective. Generally speaking, the complexity that is least justifiable in the code stems from addition of tax expenditures that favor one or another congressional constituency and are enacted in the tax code in ways that would be hard to do if enacted as a spending provision targeted to the favored constituency.  As Bernstein shows:

[T]he extensive set of legal subsidies to individuals or businesses through exemptions, deductions, and other tax subsidies, generally referred to as tax expenditures, cut federal income tax revenue by over $1.2 trillion last year — more than the cost of Social Security or the combined cost of Medicare and Medicaid. Moreover, as shown in the figure below, these tax breaks disproportionately benefit higher-income households, often wastefully subsidizing behavior that would occur anyway.

 

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

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

A. The Explanation.

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

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

***

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

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

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

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

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

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

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

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

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

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

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

So let's take these issues into consideration here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 *****

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

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

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

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

Tax Extenders: where the Senate stands

Today (August 28), the Senate Finance committee provided an updated revenue estimate and text for the bill --the so-called "Family and Business Tax Cut Certainty Act of 2012"--that it had approved on August 2 to extend $205 billion-worth of "temporary" tax cuts through 2013.  Most of these provisions are further extensions of the Bush cuts put in place going back to 2001, such as the annual "AMT patch" that comes about because the Bush tax cuts reduced the regular tax so much that the AMT does capture somewhat more taxpayers than it otherwise would have.  This is expected to be brought to the Senate floor in September.

Here's what the Senate Finance extenders bill would do, with a cost of 143.221 billion for FY 2013.:

A. Main Individual Provisions

1. AMT exemption:  increase the exemption amount for the AMT (see table below:  the first amounts shown are post-2011 without the bill, the first increased amounts are for 2012 with the extender bill and the second increased amount is for 2013 with the extender bill) and allow the entire regular and AMT liability to be offset by nonrefundable personal credits during 2012 and 2013.

• married filing jointly and surviving spouses:  45,000 increased to 78,750 and then to 79,850
• other single individuals:                                33,750 increased to 50,600 and then to 51,150
• married filing separately:                              22,500 increased to 39,375 and then to 39,925

Note that the AMT would only affect .9 million taxpayers in 2013 under this schema.  The cost of this provision for increasing the exemption amount and allowing 100% of tax liability to be offset with credits is slightly more than 104 billion for FY 2013

2. Above the line deduction for classroom expenses of $250, at a cost of 273 million

3. Exclusion of income from discharge of indebtedness on principal residence (up to $2 million of discharged debt), at a cost of 199 million

4. parity for mass transit and parking benefits (extended retroactively to Jan 1, 2012), at a cost of 218 million 

5. extend deductibility of mortgage insurance premiums as qualified residence interest (rationalized as a way to encourage home ownership), at a cost of 791 million

6. deduction for state and local sales taxes, at a cost of 1.64 billion

7. deduction for qualified tuition expenses, at a cost of 2.32 billion

8. tax free distributions from IRAs to public charities up to $100,00 per year per taxpayer, at a cost of 594 million

B. Main business provisions (nothing less than 5 million covered here)

1. Extend and modify R&D credit (applying it retroactively back to 12/31/11), at a cost of 6.2 billion

2.  Indian employment tax credit, at a cost of 69 million

3.  50% tax credit for expenditures to maintain tracks, at a cost of 232 million

4.  work opportunity tax credit, at a cost of 947 million

5. special, shorter depreciation recovery for restaurants, leaseholds, motorsports racing facilities and businesses on Indian reservations, at a cost of 335 million

6. enhanced charitable deduction for food inventory, at a cost of 218 million

7. Increase in section 179 expensing amounts, with thresholds of 500,000 and 2 million, at a cost of 8.088 billion

8. election to expense mine safety equipment, at a cost of 27 million

9. special expensing rules for film

9. special deduction for income attributable to Puerto Rican production activities, at a cost of 236 million

10. modification of payments under existing arrangements to controlling exempt organizations, at a cost of 35 million

11. treatment of RIC dividends, at a cost of 124 million

12. extension of treatment of RICs as qualified for FIRPTA purposes, at a cost of 48 million

13. active financing exception to subpart F (for big banks with foreign subsidiaries), at a cost of 9.399 billion

14. look-through rules for CFCs, at a cost of 1.199 billioin

15. S corporation stock basis adjustment for charitable contributions of property, at a cost of 93 million

16. shorter period during which S corporations have to recognize built-in gains tax, at a cost of 184 million

17. empowerment zone tax incentives, at a cost of 360 million

18. Increase in excise taxes paid to Puerto Rico and the Virgin Islands, at a cost of 199 million

19. Extension and modification of credit for American Samoa, at a cost of 38 million

C. Main Energy provisions

1. Section 25C nonbusiness energy property extension/modification, at a cost of 1.456 billion

2. Alternative fueld vehicle refueling property provision, at a cost of 34 million

3. Cellulosic biofuel credit, and special depreciation for celluslosic biofuel plant properties and other items at a cost of 44 million

4. extension of numerous credits for biodieself and renewable diesel, at a cost of 1.881 billion

5. extension of various credits for renewable energy, at a cost of 122 million

6. energy-efficient home construction credits, at a cost of 74 million

7. energy-efficient appliances credits, at a cost of 155 million

8. Cost of "special rule for sales or dispositions" to implement FERC or state electric restructuring, at a cost of 596 million

9. excise tax creidts and outlays for alternative fuels, at a cost of 305 million

 The IRS made available an analysis of the difficulties in responding to potential changes to the AMT in time for filing of returns; that report is available at IRS Complexity Analysis (Aug. 13, 2012).  Links to pdfs of the Senate Finance Committee Report on the Family and Business Tax Cut Certainty Act of 2012 (Aug. 28, 2012); Estimated Revenue Effects; and text of the proposed legislation are available at the Senate Finance Committee website.

Many of these provisions--including the chartiable contribution deductions for value rather than actual investment, the R&D credit extension and the active financing exception extension for businesses, as well as the accelerated depreciation and expensing provisions, don't appear to contribute to growth in the way that the proponents of the provisions claim.   The Finance Committee hasn't made a strong case for continuing to include so many of these tax expenditure subsidies in the Internal Revenue Code.

Two of the business provisions are particularly unjustifiable.  There is no indiciation that businesses will not do research without getting a credit (instead of a deduction) for research expenses.  The Finance Committee justifies allowing this partly retroactive extension of the credit based on the benefit of research itself.  But the Committee hasn't answered the right question--is it essential to research that businesses get a credit, rather than the deduction otherwise available, for research?  The Committee just states that research is important and the Committee "believes it is appropirate to extend the present-law research credit" [that's the TEMPORARY credit that was created more than a decade ago!] and the Committee has enhanced the credit by permitting someone who is selling the business to use the credit for expenses incurred before the sale and by making it easier for a controlled group to manipulate their income by allocating research expenses among the controlled businesses.

The norm in Congress is that all of these temporary provisions will be renewed year after year, no matter what the cost, while a significant faction in the House and Senate continue to push the idea that it is necessary to cut spending on health care and other social safety net costs, cut taxes for the wealthiest amongst us, and increase spending on our already bloated military.

Tax Policy Center on Cutting Tax Preferences to Lower Tax Rates (aka Romney's "plan")

As the campaign heats up and the Congress continues its inability to set partisanship aside to consider the well-being of the country, we can expect continued emphasis on tax rhetoric without much tax substance. 

On the one hand, Obama appropriately argues for higher taxes on the well-to-do, but doesn't seem to be making much use of the bully pulpit to help Americans understand the importance of that approach.  Obama  ought to be arguing for elimination of the capital gains preference across the board, but he is already losing out on fundraising amongst the banksters, so that argument is not likely to be made. 

On the other hand, Romney says he is going to solve all of our problems by lowering taxes even more on his peers, the wealthy, while paying for it by eliminating unnecessary tax expenditures.  The tricky thing about "lowering rates, by eliminating tax preferences" is that you have to decide (1) who gets lower rates and (2) which tax preferences get cut.  Without that info, you've just got an abstract theory about tax reform, not a real proposal.  And of course, if you cut tax rates at the top, thus favoring the wealthy, while not eliminating the tax preferences that are most beneficial to them, you upend the progressivity of the income tax system at the same time.  So specifics really matter here.

Thankfully, there's a new study that sheds some light on the tax preferences/rate cut scenarios.  The Tax Policy Center issued a new report , prepared by Hang Nguyen, James Nunns Eric Toder and Roberton Williams, on July 10 entitled "How Hard Is It To Cut Tax PreferencesTo Pay For Lower Tax Rates?"   The abstract makes clear that this is not the easy solution so often claimed.

 

Some political leaders have proposed to lower individual income tax rates and make up the lost revenue by eliminating tax preferences. To help inform the discussion of such proposals, we examine illustrative revenue-neutral combinations of lower rates and cuts in tax preferences and their effects on the distribution of tax burdens. We conclude that paying for lower rates would require substantial reductions in broadly-used and popular preferences. In addition, requiring that changes maintain the current progressivity of the federal income tax would make it much harder to find a politically acceptable mix of preferences to curtail.

 

The article starts out with a typical "efficiency" oriented statement about taxes.

 

"High tax rates reduce incentives to work, save and invest, encourage tax evasion and avoidance, and magnify the distortions caused by the myriad tax preferences in the current income tax. An enduring goal of tax reforms has consequently been to broaden the income tax base to pay for lowering tax rates."  Id

 

But guess what.  That statement isn't clearly true.  The idea that taxes "reduce incentives" to work, save, invest" and "magnify distortions" and therefore an appropriate goal is to lower tax rates rests on  economic models about market efficiencies that are, quite simply, unproven.  If taxes are so terrible, we should have terrible economic results in periods of high tax rates and much better economic results in periods of low tax rates.  Of course, we can't ever undertake an experiment to prove or disprove this, since there are many other variables--including how those taxes are spent in furtherance of a more vigorous and sustainable economy-- and those are impossible to control.  But we can look to historic evidence to see if high tax rates have correlated with poor growth and low tax rates with high growth, which would tend to prove the statement.  MIke Kimel's book on Presimetrics examined a wide range of correlations, and showed the statement doesn't hold--high tax rates, in fact, have correlated with good growth.

That doesn't mean that broadening the base by getting rid of wasteful or distributionally unfair tax preferences wouldn't be a good idea.  Many of these preferences are of the most value to the wealthy, and mean very little to ordinary taxpayers--such as carried interest capital gains rate for private equity fund managers.  Many of them are outdated, representing old industrial policy that should have given way to newer ideas long ago--such as the various subsidies in the system for natural resource extraction (favoring Big Oil).  Many of them are examples of the worst of crony capitalism, such as the charitable contribution deduction for the value (not investment) of stocks that only the very rich receive much benefit from (because they own most of the financial assets).  Some of the worst tax preferences are those that favor the wealthy--the capital gains preferential rate, that provides a tax break to the wealthy who can structure their income in ways unavailable to ordinary folk and who own most of the financial assets (and so get the lion's share of the capital gains rate benefit).

The Tax Policy Center study suggests it would be fairly hard to get more than a trillion out of eliminating tax preferences if tax rates are cut at the same time, for the following reasons:

1) if you lower tax rates, the savings from eliminating tax preferences is reduced, since the biggest cost of preferences is to those at the top of the rate scale.

2) even if you know that a tax preference "should" be eliminated, you are likely not going to be able to eliminate it because the interest group benefited by it will protest, loudly (the charitable contribution deduction for stock contributions, for example), or because it is administratively impractical to impose tax on the preference item (home rental value, for example)

3) if you eliminate a tax preference and lower the rate, you may shift more of the tax burden to groups that shouldn't bear it (the lower income classes, for example, in the case of the Earned INcome Tax Credit or the Child Credit)

4) If you repeal existing preferences without transition rules, you change economic outcomes in ways that may be resented, but if you transition in gradually over time and without complete repeal, you will likely not get the revenue gains desired to support cutting rates.

The report looks at three scenarios: 

• "current law" (in which the Bush tax cuts end at 2012 year-end--39.6% on ordinary income and dividends and 20% on capital gains and where the personal exemption phase out and limitation on itemized deductions increase revenues from higher-income taxpayers);
• "current policy" (in which the temporary rates in effect today--35% top rate on ordinary income and 15% preferential rate on capital gains and dividends and the AMT exemption indexed for inflation); and
• "current policy with reduced rates" (in which ordinary rates are cut further to a top rate of only 28%, the capital gains and dividend preferential rate is retained at 15%, and the AMT is repealed--i.e., Romney's tax proposal as to rates, except that he would also repeal the estate tax, reduce the corporate tax rate, make the corporate tax system territorial, and have a zero rate on capital gains and dividends for those with incomes below $250,000--though he has not identified which tax preferences he would eliminate in order to make such a drastically reduced tax intake revenue neutral). 

The report notes that the differences in rates under each of these approaches is significant. 

 

The difference between effective tax rates under Current Law and under Current Policy and Current Policy with Reduced Rates generally increases as income rises (Chart 4). For example, the difference in ETRs for the lowest quintile under Current Law and Current Policy is 2 percentage points, while the difference for the highest quintile is 3.4 percentage points and that for the top 0.1 percent is 4.5 percentage points. That increasing reduction in effective tax rates across income categories indicates that the tax system becomes increasingly less progressive across the three tax laws.

 

 The report considers the 173 tax expenditures in four groups based on prevalance of proposals for repeal and limitation and administrative feasibility:

(a) itemized and above-the-line deductions, non retirement fringes and small credits;

(b) investment and retirement income (items that favor saving by individuals);

(c) child, work-related, and social security benefits ("provisions that primarily help low-income households, families with children, and low-to moderate-income Social Security beneficiaries");

(d)  Other preferences (various exclusions from taxable income such as capital gains at death and on home sales; imputed rent; cash benefits for low-income families; veterans' benefits; inside buildup of life insurance). 

The report doesn't consider business tax expenditures and doesn't consider payroll taxes.

 

They conclude that

Current Policy with Reduced Rates could meet the Current Policy revenue target with a significant curtailment of some of the largest tax expenditures, such as mortgage interest, charitable contributions, and employer-provided health insurance. However, these are widely used and popular provisions, so sharply limiting their value could prove difficult. Further, this combination of lower rates and a broader base would cut taxes substantially for high income taxpayers, resulting in a less progressive tax system than under Current Policy.

 

With sufficient base broadening, tax rates under both Current Policy and Current Policy with Reduced Rates could raise the same amount of individual income tax revenue as Current Law. However, meeting that goal under Current Policy would require a sharp curtailment of mortgage interest, charitable contributions, and employer-provided health insurance. Hitting that revenue target under Current Policy with Reduced Rates would be even harder. It would require curtailment of these same popular tax expenditures as well as substantial reductions of additional tax expenditures, such as the special rates for capital gains and dividends, the exclusions for retirement contributions and earnings, and possibly such items as the earned income tax credit (EITC), the Child Tax Credit, and the exclusion of some or all Social Security benefits for low- to moderate-income beneficiaries. From a political perspective, matching Current Law revenue would be difficult, if not impossible.

 

 

ASIDE:  Meanwhile, Romney continues to clam up about his failure to release more than one tax return and the fact that even tax experts cannot get much of an idea why he has put so much of his fortune in offshore tax havens (Bermuda, Caymans, Swiss banks).   Then there's the question of how an IRA got to be worth $102 million in such a short time--without seeing 10 years of tax returns, it is hard to say how that could be and easy to question whether there some slippery manipulation of asset values at the time of putting them in, so that it looks to have gotten super-extraordinarily splendid returns.   One of the problems of having a presidential candidate with so much wealth is that he (1) is great friends with the banksters and thus able to use all the tricks of the trade --which may or may not be legal but one has to question their advisability for a president; and (2) is so accustomed to getting his own way that he is tone deaf to the justifiable interest that Americans have in how he made so much money and what he chooses to do with it. 

Not to mention, of course, his inability to explain away his signing off on SEC and other federal forms as sole shareholder, CEO and manager of Bain Capital through 2002, while claiming to have exited Bain in 1999 so as to avoid blame for the even worse leveraging carried on by the private equity firm, which resulted in a good deal of outsourcing and US job losses.  His way of dealing with that was to call Obama a liar by raising the issue, but that doesn't fly, since the issue is there and should be dealt with head on by releasing tax returns, among other efforts towards transparency.