ataxingmatter

One in 189 of those with $200,000 or more in AGI paid no federal taxes in 2009

[edited 5/30 to correct "one in four" goof]

 The IRS recently released another "statistics of income" report.  This one has news that should make most ordinary Americans think twice about the GOP agenda of reducing taxes for the rich while cutting back on all kinds of programs that serve ordinary Americans--the fact that a large percentage of the upper crust--one out of every 189 Americans with $200,000 or more in income --pay no federal income taxes whatsoever.  See Rubin, IRS Finds One in 189 High Earners Paid No U.S. Taxes in 2009, Bloomberg.com (May 29, 2012).

  How does someone with $200,000 or more in income pay no taxes, when ordinary folk with jobs who make $50,000 to $75,000 pay 15% to 25% of their income in taxes? 

• As I've often discussed here (see items under charitable contribution deduction), rich folk can easily afford to give away more to charity and they get a tax bonus that is much more than that available to poorer folk when they do so.  They get an especially big break if what they give away is appreciated stock that they bought a while ago--and rich folks own most of these financial assets, so they are the ones that get almost exclusive enjoyment of this lucrative loophole:  they get to deduct the full value of the stock they donate, without having ever paid taxes on the appreciation.  That's one of the boondoggles in the Code that Congress can and should get rid of, no matter what else it does about taxes. 
• Another way rich folk pay less in taxes is by ensuring that the income they earn is of a type that isn't subject to tax.  Big CEOs generally have rich pension plans and other forms of deferred tax compensation that facilitate lowering their tax bills.  Rich folk are the buyers of municipal bonds, which again enjoy a specific tax break in section 103 of the Code that excludes the interest income from the owners' tax returns.  This is supposed to help municipalities, since the tax break gives the wealthy an incentive to buy the bonds even though they pay lower rates, since all the interest is tax free.  But it is a costly break that provides an advantage only for the rich.  Wouldn't it be better to eliminate it and tax wealthy people on all of their interest income at ordinary income rates?  Maybe the tax money could also fund programs for important municipal projects--like intracity rail transportation in Detroit, a much needed idea whose time has come.....
• A third way that rich people avoid taxes is by having so many deductions--high-end medical "equipment" (like swimming pools for arthritic patients), lots of interest on mortgages on high-end homes, and other deductions of special value to those who would otherwise pay tax at a higher rate.

 As the Rubin article notes, the IRS announced that for 2009 there were 10,080 households with "adjusted gross income" of $200,000 or more who paid no US or foreign income taxes. Adjusted gross income is not economic income--AGI does not reflect items that are excluded from the calculation of income for tax purposes and is reduced by certain "above the line" deductions that are especially beneficial to the wealthy. "Using an expanded concept of income that includes some nontaxable items and looking only at U.S. income taxes, there were 35,061 households, or 0.88 percent, that paid nothing."  Id.

The Alternative Minimum Tax was initially enacted to deal with the general unfairness of having extraordinarily well-to-do people be able to avoid tax entirely.  As it was modified over time, it came to function as a way to ensure that those who accumulate lots of different deductions nonetheless pay tax, by treating some of those deductions as unqualified preferences for AMT purposes.  But the AMT has lost a lot of its punch as Congress has eviscerated its provisions, such as the limitation on foreign tax credits.   This is one of the reasons that many progressives have supported two things--elimination of the preferential rate for capital gains (a type of income especially enjoyed by the ultra rich) and adoption of a new type of minimum tax on some high level of gross income (the Buffett Rule).  This new information about the number of rich people who end up paying nothing in federal income taxes should result in more people telling Congress that it's time to pass these two proposals.

They're Bamboozling Us: Obama Carrying the Torch for the Right-Wing

Mark Thoma, in Barack Obama Fail Department, highlights Brad DeLong's justified rant against Obama's (and his handlers') deafness about the real issues and the position he should be taken to fight the right-wing's attack on the entire New Deal.

Obama spent part of his press conference pushing the case of the wingnuts that want to decimate the social welfare programs and that are threatening to derail the country with a default on its debt just so they can get their way.  Those wingnuts don't care what happens to the country and the vast majority of people who can't afford to buy financial insurance that will pay if the US defaults.  They just want "victory" for their no-tax,  pro-corporatist ideology (that masquerades as an interest in personal freedom), at whatever cost.  yet there Obama was, saying:

Of course, one of the most important and urgent things we can do for the economy is something that both parties are working on right now, and that's reducing our nation's deficit...

Brad DeLong appropriately upbraided Obama for his betrayal of ordinary Americans in pushing the right-wing agenda forward!

Absolutely the last thing, the last thing, the country needs is to cut federal spending or raise taxes in fiscal 2011, 2012, and it is now looking like fiscal 2013 as well.

And then of course, Obama continued with his foolish belief that bipartisanship is a worthy goal or that one should always keep reaching out to opponents even when they have shown themselves to be wacko artists who don't give a damn about the future of the country.  He should be using the full force of presidential rhetoric to hack them apart.  Instead, he bobs and curtseys and makes nice.

[B]ecause of the work that's been done, I think we can actually bridge our differences. ... Nobody wants to put the creditworthiness of the United States in jeopardy. Nobody wants to see the United States default. ...

In fact, the extremists on the right who now occupy the House are eager for a default to bring ruination so that they can blame Obama, get control of the White House, and then really go to town with the deregulation, militarization, privatization, and tax cut regime that is their Bible.  As Mark Thoma puts it:

We have Republicans threatening to default on the debt and blow up the economy if they aren't allowed to put the economy at risk in another way -- through immediate deficit reduction -- and a president selling the demands from the other side as a jobs package. To make it worse, some Republicans seem eager for default to happen based upon the false belief that they'll somehow gain political advantage for wrecking the economy. No wonder the economic outlook is so grim.

Presimetrics

Over at Angry Bear, my colleague Mike Kimel wrote a book called "Presimetrics".  It measures the economy in various ways related to the terms of presidents (and their parties).  Kimel concluded that Democratic presidents show the best broad-based economic growth and the best job creation.

Now, that fits because Democrats--albeit usually in weak form and often co-opted by the financial wealth holders of the country--generally adopt policies that do have something to do with furthering broad based growth that benefits ordinary American, rather than just feathering the nests of the already rich.  What kinds of policies?  Well, anti-trust, pro-unionization, financial regulation, regulation of industrial pollution, environmental protection, "green" industries, unemployment compensation, progressive taxation, estate taxation, and the AMT (which undoes some of the accumulated preferences mostly enjoyed by the rich, from charitable deductions for value they never paid taxes on and so comprising a pure windfall, to huge mortgage interest deductions on their million dollar homes, though it still leaves them their preferential taxation on capital gains).

Others are beginning to catch on to Kimel's conclusions.  See, e.g., this graph at The Far Left Side (constrasting the last 11 Presidents by party and their impact on the economy for bad or good--Republicans are almost uniformly bad, with their corporatist policies intended to benefit the rich at the cost of productivity sharing with the workers who make it possible).  You might want to read the site, as well as Kimel's book (available through Angry Bear).

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 passes

No big surprise here.  The House on December 16 passed the Senate-approved TRA by a vote of 277-148, clearing it for the President's signature.  The bill extends the Bush tax cuts for two years and reduces the number of estates subject to the estate tax, and the rate of tax when they are taxed, even below the number subject to the tax in 2009.  It includes the usual "patch" for the AMT for two years, and various tax breaks for businesses--especially expensing provisions that will likely merely result in more pay to managers and more payouts to mostly wealthy shareholders.

Those most vulnerable get the relief from the lower rates (not many dollars for them, of course), the 2% cut in the payroll taxes, and the extension of unemployment compensation.

Those at the top of the wealth and income heap who have garnered almost all the benefits of productivity gains in the economy over the last few decades get most of the benefit of the bill--tens of thousands of dollars of tax relief for the top 20% of the income distribution, substantial estate tax reductions, and none of the burden-sharing that progressives had advocated (such as the carried interest treatment as ordinary income).  The bill even provides what amounts to an interest-free loan to the wealthy who convert regular IRAs to Roth IRAs--the "deal of the century" according to one CPA who services the wealthy.  See Leondis, Tax Measure Gives Deal to Wealthy Roth IRA Converters, Bloomberg.com, Dec. 17, 2010.  And of course, the bill also lets the wealthy transfer up to $100,000 from regular IRAs to charities without paying the income tax they should have to pay on the appreciation. 

All in all, the wealthy made out like bandits in the tax bill.  And in many ways, that is the appropriate way to view them--they have stolen the sustainable livelihood of the middle and lower classes for two decades and are rapidly moving into position to become a ruling oligarchy.  The bill was a big win for corporatism and the wealthy on the right.

More on the White House "deal" on tax cuts

Dan Shaviro, a colleague at NYU, ends up being hopeful about the Obama-GOP deal.  See "The deal on extending the tax cuts", Start Making Sense, Dec. 6, 2010 and "The tax cut deal: too soon to tell who really won?", Dec. 7, 2010.  I think that is because Dan tends to credit Economics 101 with considerably more wisdom than I do (and place "efficiency", as defined by the free marketers, higher on the wish list for tax policy than I), so he thinks Social Security isn't on a sound footing and that benefits will need to be cut; thinks expensing for corporations is a reasonable way to spur growth; thinks there is some possibility that the 2012 replay of "Bush tax cuts, take 2" might play out in favor of Obama if he is "very clear that he planned to veto any extensions and let all the tax cuts expire UNLESS the Republicans made the deal he requires".  I'll intersperse my comments with Dan's below.

1) extending all the expiring individual rate cuts for 2 years:

Dan says "we knew this was going to happen" so the only problem is that it comes up again in 2012 when Obama will "might face extra credibility problems".

I think we only knew this was going to happen because Obama didn't fight on this at all.  Obama signalled at the beginning that he would cave, and he did not take to the bully pulpit at all.  He conferenced with Republicans and cut out the Democratic leadership in reaching his "deal"--which is a Republican policy in everything but name.

2) extending unemployment insurance through 2011:

Dan says it is an important stimulus and "wasn't going to happen otherwise." 

I agree on the stimulus.  But the Dems should have brought unemployment extension up on a daily basis and forced the Republicans to vote against it.  So the "wasn't going to happen otherwise" is part of the give-up before you start negotiating that got us into this mess. 

3) reduce the Social Security payroll tax by 2% for one year:

Dan says "good stimulus" though "targeting could have been a lot better" and admits my point (made when payroll holidays were first brought up) that the payroll holiday feeds into the drive to decimate Social Security by hitting the Trust Fund.  But Dan thinks the "concern" about long-term fiscal problems is real, and so is comfortable with addressing it "sooner" anyway.

I disagree. The concern about Social Security is being hyped in order to destroy Social Security as we know it.  It is in line with the enmity towards unions, towards single payer health care, towards re-regulation of the banks, towards breaking apart big banks, and towards any other policy that would restore a vibrant middle class.  By allowing a payroll holiday for everyone, the majority of the benefit goes to people who don't really need it, and too little benefit goes to those who do.  Targeting is better than a tax cut purely for the rich, but that isn't saying much.  Doing some stimulus in a means that pushes the GOP agenda to eviscerate Social Security forward is like tying one hand behind your back--a rather unwise way to enter a long-term battle for the economic future.  Will we have the brutal mix of casino and winner-take-all capitalism that has driven most of this country's policies from Reagan on or will we have a tempered capitalism that ensures a broad-based growth and creates an economic system that works for everyone?  The Republican's aims to let states go into bankruptcy and use that mechanism to destroy public employee unions says they are in this battle to destroy the New Deal if they can.  We need to fight just as hard on the side of the middle class.

4) Estate tax cut by increasing the exemption from the 2001 level to $5 million (basically 500% of the 2001 amount) and lowering the top rate to a mere 35%.

Dan thinks this might actually be preferable "in efficiency terms" to the current law, which would have restored 2001 rates in 2011, if done in a "distribution and revenue neutral framework".  And even though this isn't that, he doesn't think a more progressive estate tax "is long-term feasible anyway."  So this is not "a terrible outcome in a realistic overall sense."

Here we part ways 100%.  There is no such thing as a distribution and revenue neutral framework--that is a fiction of economics 101 that permits what we have seen, which is four decades of redistribution upwards.  Further, distribution neutral is not desirable in an economy where the winners already take all--if we don't reverse the direction of distribution in this economy, we will end up in oligarchy (if we aren't there already).  In that context, this was the single most viable opportunity for reinstating an appropriate estate tax, either by letting the Republican-passed law take hold (return to 2001 exemption and rates) or by passing a slightly modified but ideally more progressive version (higher exemption but progressively higher rates beginning at 45%).  This is indeed "a terrible outcome in a realistic overall sense."

5) extensions of the EITC, tuition tax credit and expensing (as well as the R&D credit, not mentioned by Dan 

Dan says that the EITC and tuition tax credit are okay because they may add progressivity and the expensing provision is okay as a short-term stimulus.

The EITC is okay.  Tuition tax credits just subsidize the things colleges spend money on that they don't want students to have to feel they are paying for--like too high administrative salaries (across-the board, at private and public universities).   We ought to fund higher education at public institutions, but with conditions, such as limiting the percentage of total budget spent on administration or on the revenue sports, etc.  As for expensing, it is unclear how it can be stimulative in this context, when the reason companies aren't expanding is because they don't see a demand for the business.  Most companies have the cash on hand and can borrow at a funding cost that is extraordinarily low.  That isn't what is holding back investment.  Odds are, the savings from expensing will just go to another round of higher manager salaries and big payouts to shareholders (who will also continue to benefit from an extraordinarily low dividend and capital gains rate under the deal).

Dan seems to think that Obama will be able to argue credibly that "this time I mean it" when it comes to the 2012 election and the Bush tax cuts are ready to expire once again.  Fat chance. There's nothing so far to convince anyone--Obama caved before fighting on the public option and on taxes for the rich and on the estate tax and on capital gains and on carried interest and on and on.  Obama in fact is now pushing his Democratic colleagues to support an agenda that will easily get 100% Republican support and maybe enough reluctant Democratic support to pass, rather than rallying them to fight so that he can veto, if need be, wrong-headed legislation.  So he has proven that the Dems lose in the minority and they don't bother to fight when they are in the majority.  No way his base will trust him to do it better next time around. 

Meanwhile, the GOP is already blaring that there is no way that they'll give an inch on anything.  They won't support the Build America Bond program, because they want states to declare bankruptcy as a means to destroy public employee unions.  And they don't seem to care that they are destroying the American social contract between the wealthy and the rest of us at the same time--we are what we are because we have recognized the importance of a strong middle class that acts as a check on oligarchy.  Yet the Republican party--and now too many Dems--are willing to throw it all away just to get elected one more time (maybe) in the future.

In my view, the American people are the losers here.  The AMT patch primarily helps those with high incomes.  Most of those who pay the AMT because of bracket creep are in the 250-500,000 income range--certainly not middle class.   Only a few are in the 75-100,000 range.  The extension of extremely favorable taxation of secondary market capital gains and dividend income is of benefit to the wealthy who own most of the financial assets.  The extension of the tax rate cuts even below 250,000 already aids the wealthy--adding the tax rate cut at the top means that most of the rate cut goes to the very well off.  This is a very good deal with corporate managers and owners, and rotten for ordinary Americans. It's the upside down world of George W. "the have-mores are my base" Bush.

Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)--dividends at capital gains rate

IN this series, i've been discussing the merits of enacting a new series of tax cuts that mimic, at least in part, the Bush temporary tax cut legislation that expires at the end of this year. 

The primary arguments for the original Bush temporary tax cuts were either bogus to start with or proven weak over the period of the tax cuts. 

1. The Republicans who pushed the cuts claimed first that they were intended to return to taxpayers the surplus.  Of course, that argument was laughable from the beginning: Bush deficits started in the first year of the Bush regime and got worse for the long term as the costs of a military budget pumped up by preemptive war and other augmenting of government spending at the same time that tax revenues were cut again and again throughout the regime. 
2. Various Republicans also admitted that their goal was to cut the size of government--though they didn't mean the military and they did mean any programs that protect average Americans (such as Social Security, unemployment compensation, environmental programs, OSHA, etc.).   But the size of government grew in spite of the reductions in revenue, resulting in expanding deficits.
3. The various  expensing provisions; repatriation with almost no taxation (in the 2004 "American Jobs Creation Act"); tax breaks for oil and other natural resource companies; international tax breaks; and other corporate-favorable provisions were supposed to stimulate entrepreneurial activity and job creation.  Instead, businesses used the low-tax repatriated income to pay managers more and workers less, and laid off workers at the same time.  The expensing provisions allowed corporations tax breaks for equipment they would have bought anyway, but didn't create new jobs--the Bush regime's jobs record was terrible, barely keeping up with inflation and certainly not spurring new job growth.  The tax breaks for natural resource companies fed their complacency about everything from jobs to safety to environmental protection--giving companies more for less doesn't create better citizens and doesn't get us cheaper energy either.  The record from the tax cuts as far as entrepreneurialism and job creation was dismal--the mainstream neoconservative and neoliberal theories of market fundamentalism didn't work out as claimed.
4. The lowering of capital gains taxation and the taxation of dividend as a net capital gain at the lower rate were also heralded as ways to spur investment in new businesses (entrepreneurialism) and job creation.  Bullshit.  Most of the result was just more money in the pocket of the richest Americans who own most of the financial assets, and that money in the pocket was as likely to be invested in offshore bank accounts as put to work supporting a new business here in the US.  The dividend tax cut didn't even lead to much in the way of dividend payouts--except perhaps for firms whose managers and directors saw a chance to benefit themselves.  Even if those expiring tax cuts are not renewed with new tax legislation, it is not likely to have much of an effect on companies' dividend policies.  See Higher Taxes May Not Push Firms to Cut Dividends, Wall St. J., Aug. 30, 2010.
5. The cuts in individual rates were supposed to provide more money as an economic stimulus.  But the Republicans who passed those rate cuts knew that the AMT would act as a clawback to the cuts over time, except for those at the very top who were always subject to the AMT and those in the bottom who are hardly ever subject to the AMT.  And they knew that amending the AMT to conform to the temporary tax cuts would be tremendously expensive--at least a trillion in revenue lost for the decade of the tax cuts, where the "temporary" nature of the bill had been necessary to claim that the cost was "just" 1.3 trillion over a decade.  In other words, the tax cut bills passed during the Bush regime with the 2010 sunsetting gimmick were a sham from the beginning--they cost much more than those who passed them wanted to admit, and they carried with them a clawback mechanism that would undo the cuts in rates for many individuals.  The various annual "patches" to the AMT are extraordinarily costly in terms of lost tax revenues since they are essentially an extension of the tax cuts to an even broader base, and the corporate changes to the AMT have reduced its effectiveness in cutting back on corporate preferences while costing the fisc billions.
6. The estate tax scaleback and one-year repeal was the most gimmicking of all.  Cutting the budget by $30 billion a year in order to fund a giveaway to the wealthiest and most privileged Americans is hard to justify in any budgetary climate.  So Republicans pushing estate tax repeal and the various "coalitions" funded by wealthy families like the Walton heirs have painted a facade of "helping little guy farmers and businesses" on their efforts--a facade that many Americans may have bought hook, line, and sinker since they do not tell the truth, much less the whole story.  Very few family farms and very few small businesses are threatened at all by the estate tax. 

So what should this list of bogus and failed reasoning tell us about what the Congress should do on taxes for 2011 and thereafter? 

1. I say let the Bush cuts expire according to the way they were written.  But enact a new set of tax cuts that are better targeted to jumpstart the economy and to put money where it is needed.  
2. Let the corporate giveaways  expire as slated.  
3. Let the estate tax mess expire as slated.  Enact a new estate tax law that (i) increases the exemption amount to a reasonable level (say, $2 million) and indexes it for inflation and  (ii) enacts a progressive rate structure (ranging from 55% on the estate that exceeds the exemption amount, up to some higher rate of 65% or 70% on multi-billion-dollar estates. 
4. Let the capital gains changes die as slated, and do not enact any further capital gains preferences (so dividends would go back to being treated as ordinary income). 
5. Let the individual rate changes die as slated, and enact a new tax cut for individuals making $100,000 or less, with a temporary tax cut for individuals making up to $200,000 for a three year period to aid us in getting out of this recession.
6. Enact genuine AMT reform--in which capital gains are treated as a preference and which provides a significant exemption amount based on gross income.  See the earlier articles (2005-2006) in ataxingmatter on AMT reform for more specifics about the kinds of reforms to the AMT that make sense.
7. In conntection with the rate cut and AMT legislation, enact measures to pay for the tax cut, including

(i) a carried interest provision taxing all profits interests as ordinary incom

(ii) a corporate tax provision limiting the benefits of tax-free reorganizations and consolidations, and

(iii) a charitable contribution provision eliminating the deduction of value in excess of basis.

AMT and tax rates

I received an interesting email today--one of many that are now sent out seeking publicity for someone who has written about, or wants to advise on, certain tax positions.    This one starts out as follows:

"We are currently experiencing the lowest income tax rates in America's history."

Now, if you read much that is put out by many of the groups talking about tax these days, you won't find that statement there.  In fact, there is a considerable amount of material that talks about the US as a high-tax jurisdiction and claims that we can't be competitive unless we lower our corporate tax rates or that we will drive entrepreneurs out of the country if we don't lower our individual income tax rates or if we tax managers of private equity funds at the ordinary rate like everyone else who earns compensation for the services they provide. 

But of course the quoted statement is quite true.  We had much, much higher tax rates in the pre-Reagan era and we had significantly higher tax rates before Bush II's succession of tax cut bills.  And those eras were eras of the economic growth that supported improving standards of living for ordinary folks. 

Of course, the email didn't stop with that statement--it suggested that Americans should start planning, because taxes are likely to rise soon.  That statement may be true or not--it depends on Congress and on what steps are taken this year to deal with the sunset provisions put in by the Republicans when they passed the series of tax cuts under Bush.  The sunset gimmicks were used because it was obvious, back then, that making those large tax cuts permanent--including very preferential rates for capital gains and dividends and lots of business cuts--would be very costly.  How can a Congress responsibly extend those Bush cuts, given today's economic environment?

When the Bush cuts were passed, Congress also used another gimmick--it left the Alternative Minimum Tax (AMT) in place without changing its rates to correspond with the changes in the regular tax rates as had usually been done in the past.  The AMT kicks in for higher income individuals who have significant amounts of items that are treated as preferences under the AMT.  But without lowering the AMT rate at the same time that there was a substantial lowering of the regular tax rate, the AMT applies to many more people --for someone subject to regular tax at a marginal rate of 25%, the AMT tax rates of 26% and 28% on a broader tax base will likely result in AMT liability.  So the AMT would have essentially clawed back the Bush cuts, except that Congress has passed a "patch" increasing the AMT exemption level every year, to prevent that from happening.  (The AMT exemption applies instead of the standard deduction and personal exemptions.)

It is a very costly patch, and it is not (yet) in place for 2010.  So the AMT will hit more people than before this year if a patch isn't passed.  The CBO has put out a very readable study of the AMT and the expected increases in AMT taxpayers over the next few years, assuming that there is no patch and that the Bush tax cuts are allowed to expire as written.  (If the Bush tax cuts were extended, the cost of increasing the AMT exemption level for inflation would be even more expensive.) You can access the study here:  The Individual Alternative Minimum Tax, CBO (Jan. 15, 2010). 

Is the AMT bracket creep all bad? Certainly nobody likes paying more taxes. But the main income group that will be hit by the bracket creep, at least in the next few years, is taxpayers who have between $200,000 and $500,000 of adjusted gross income--a farily well-to-do group that benefited from the Bush tax cuts. 

One of the problems is that the preferences (the items that get added back into the AMT base) are not finely tuned.   I've argued that the AMT should treat the capital gains preferential rate as a preference, but Congress has shown no inclination of late to bite that bullet.

I've also argued that comprehensive reform of the AMT should protect ordinary folks--but not those richer folks in the $200,000 to $500,000 bracket-- from having to deal with this alternative tax system.  If you take the average income of around $50,000, then folks who earn up to double that shouldn't be subject to the AMT.  That could be done with a new exemption, indexed for inflation, of around $100,000 or $150,000 at most, maybe, but to do that will be costly.  It means biting the bullet by adding preferences to expand the AMT base even more (such as my suggestion re capital gains) and/or allowing the Bush cuts to expire. 

The CBO study provides some information on the costs of various suggested "fixes" to the AMT bracket creep problem.  Just continuing the "patch" through 2019 would cost $450 billion.  Amending the preferences to allow taxpayers the benefit of standard deductions, personal exemptions (which are indexed, unlike the current AMT exemption) and state and local tax deductions for AMT purposes would cost around $530 billion over the same period.  Repealing the AMT would cost $620 billion over that period and reopen some loopholes that the AMT helps to close.

Deficits as far as the eye can see--what's the story?

Let me tell you a story of the passage of time, the passage of tax cuts, and who really cares about deficits or the impact of tax cuts or deficits on the middle class.

Back in 2001,  Bush and the Republican controlled Senate and House passed a huge tax cut, purportedly targeted at middle income Americans.  Americans had not been clamoring for tax relief.  The tax relief planned by the Bush Administration and Congress didn't result from long deliberation about how to achieve a less distorting tax and fairer tax system, like the 1986 tax reforms.  Bush merely took advantage of the relatively decent economic years under Clinton (much of which, we now know, was a mirage caused by the fevered frenzy of big banks speculating in the market through securitizations, derivatives, and other means and generating profits for wallstreet financial institutions and their Wall Street trader barons, but only phantom gains in housing for ordinary mainstreeters).  There was (at least on paper) a budget surplus (for the first time in years).  And instead of using that surplus to spend on public infrastructure projects or to pay down public debt, Bush said we should "give it back" to those who created it through tax cuts.  There was some fidgeting about deficits, but ultimately enough of the spineless Dems went along with the Republican rush for tax cuts galore to pass what was projected (with the use of sunsetting gimmicks) to be a $1.3 trillion tax cut.

Interestingly, once a tax cut is offered, Americans are generally quite willing to grab onto it.  It will be liked...

So in most of the rest of the years of the Bush administration there was additional tax cut legislation, in spite of the fact that Bush had engaged us in what now seems an endless state of war--with the huge, long-term costs of war including transportation to overseas locales, training of soldiers, providing care til death of wounded (both physically and psychologially) veterans, and payment for the many privatized military services instituted since Reagan (Blackwater mercenaries made many times the salary of enlisted soldiers--proving that private enterprise does not do government work more efficiently than government does, which was the original justification for privatization).  And in spite of the fact that tax cuts (ultimately mostly benefiting the wealthy) and war increases meant record deficits.  Congress whimpered a little about the deficits, but they didn't dampen the Congressional appetite for tax cuts.  Various Republicans didn't bother to whimper--they just justified them with their (now disproven) rhetoric that tax cuts would actually increase tax revenues (the laughable line based on the discredited Laffer Curve arguments).  See these ataxingmatter posts for a discussion of the Laffer Curve and why it doesn't even count as theory, much less as generally accepted theory: CFP's Laffer Curve Video; Laffer Curve II--proof?; Reagan's Trickle Down Economics Doesn't Work: tax cuts don't pay for themselves.

Moreover, most of these cuts were set up as "temporary" provisions that would sunset in a few years, reversing to their pre-2001 tax cut stage.  That was done not because the Republicans in Congress didn't intend to make these cuts permanents but because they wanted to hide the real impact on the budget and the huge deficits that the tax cut packages would create.  So they claimed they would "only" cost $1.3 trillion over ten years.....

Of course, that they would make them permanent if at all possible was clear from the outset--both in explicit statements and in the actions over the next few years, as various provisions were offered again and again as permanent revisions to the Code.  Take the estate tax as an example.  The Bush change lowered the rate and increased the exemption amount over several years.  That was then speeded up, with the estate tax being "repealed" for one year in 2010 and then the law would sunset, bringing the pre-2001 estate tax back from the dead in 2011.  Every year, some Republican would introduce a bill to repeal the estate tax that year once and for all or, once that got to be very expensive, to change it to a 35% rate only applicable to amounts above $10 million.   And even now, even the Dems are considering making the 2009 estate tax provisions ($3.5 million exemption for one, $7 million for a couple, 45% rate) permanent!  See "Estate TAx: Why don't the Dems get it?" on ataxingmatter.

Further, in spite of cutting individual taxes and then given corporations the dream package they'd been lobbying for for years, and in spite of reducing taxes on dividends down to the capital gain rate (giving wealthy investors part of what they'd been asking for for years--close to zero taxation), and in spite of continually offering bills to cut something new, resulting in even less government revenues while watching the deficit spiral out of control, Congress also knew that the alternative minimum tax (AMT) would gradually claw back the reductions for those at the bottom of the distribution.  See earlier ataxingmatter series on the AMT in which this is explained in detail:  The Senate and the House on the AMT (July 12, 2005); What Should Congress Do About the AMT (Part I, Part II, Part III, Part IV, Part V, Part VI).

So it seems fairly clear that Congress didn't really care much about deficits (it would not have cut more and more revenues to the government while spending more and more money on war and "homeland security" --remember those giddy military contractors during the heyday of the Bush free flow of money) or about the middle class (it would not have cut taxes with one hand and taken them back with the other AMT hand or cut taxes that primarily benefited the wealthy--such as capital gains and dividends).

Now, of course, Congress--the Republicans and the "blue dog" Democrats--are mouthing their concerns about deficits at every turn of the Great Recession and health care reform discussions.  You'd think their hypocrisy would concern them, but apparently it doesn't.  They are likely to pass a health care reform bill that gives a windfall to private insurance (mandatory premiums from all those who are relatively healthy and have chosen in the past not to be covered) while costing the federal government (coverage of the vulnerable, which will be picked up by government)--a repeat of the privatization of gains/socialization of losses that has been the norm for our handling of the financial crisis.  And part of the reason we did so much of the economic stimulus bill as tax cuts that really don't do much for stimulus--instead of infrastructure building and other projects that would have aided everyone with both REAL PERMANENT infrastructure projects and REAL job creation--was to apease the Republicans who wanted all tax cuts and no infrastructure spending.  Again, some were arguing that infrasturcture spending was deficit-creating and tax cuts were an inherent good.

So it is nice to see someone now looking back to note what the real facts are about the Bush tax cuts.  David Cay Johnston, Easing Impact of a Tax Rise, NY Times (Oct. 28, 2009), writes that the Bush tax cuts have cost us $2.34 TRILLION in revenues, according to new calculations done for the Times by the Tax Policy Center, a nonpartisan research institute whose research is respected by both Democrats and Republicans.  

Just to understand what the cost of those tax cut goodies was when it dug a $2.3 trillion hole--next year, Johnston says, we'll need to dedicate every penny in taxes paid by individuals for one month just to cover the interest on the financing of the federal debt needed to make up for that shortfall. Id.

Johnston goes on to highlight some of the ways that high-income taxpayers can save on taxes, assuming that the Bush tax cuts are allowed to lapse for them.  (Obama has--somewhat foolishly, from my perspective--promised to hold anybody making less than $250,000 harmless from tax rises, and for that reason has supported making the Bush cuts permanent for quite well-to-do families.  That is/was a mistake from my perspective--a quarter of a million in annual income is almost a quarter of a million more than most Americans have --about $50,000 is the median, and even those in the second quintile make much less than a quarter million annually.)  So there's always delaying charitable contributions so you get them against higher taxed income in 2011 rather than against lower taxed in 2010; paying property taxes later (same goal); taking more income now and less then (if you own your own company and can set your own salary and if you think the IRS won't pursue you have paying an unreasonably low salary next year if your company's income is about the same--they should, but probably won't).  These gimmicks are ones that wealthy people can afford to do, and ordinary Americans typically cannot, since they haven't got the luxury of paying themselves or they don't have enough to make significant charitable contributions int he first place, etc.  And with this kind of planning, Johnston notes, the 400 highest-income taxpayers with an average of $266 million in annual income apiece in 2006, paid at an effective tax rate of only 17%, the same rate more or less as that paid by people with an average of $50,000 to $75,000  in annual income apiece in 2006. Id.

Now that right there is a pretty good reason for having a hefty estate tax.  We should get progressive tax payments from the wealthy one way or another.  A hefty estate tax--a reasonable exemption ($1 or $2 million) and a progressive rate structure (45% rising to perhaps 65%)--would be one way to address the fact that most wealthy taxpayers can manipulate their taxes by timing their income or deductions and in other ways.

House passes another unpaid-for AMT patch

The House today passed H.R. 7005 393-30, providing a higher exemption level for the AMT (increasing the exemption levels to $46,200 for individuals and $69,950 for married couples filing jointly), as well as extending the AMT stock option relief.  The cost of the tax cut--around $70 billion for one year.  The legislation goes back to the Senate, which has already passed an AMT patch without a revenue-raiser to offset the revenue reductions.

This is perhaps to be expected in an election year, but it is nonetheless disappointing.   We are facing huge potential long-term costs from the financial bailouts that are continuing, and yet Congress continues to enact AMT patches without paying for them, even though there are reasonable and policy-sensible options for offsetting the revenue reduction represented by reasonable AMT relief for taxpayers in the lower brackets subject to the downward bracket creep of the AMT.  Those options include (i) raising the rates on the top brackets, so that taxpayers with multimillionaire incomes pay at higher rates than those with incomes in the six figures, and/or (ii) eliminating the preferential rate for capital gains and dividends that accrue primarily to the wealthiest Americans, and/or (iii) repealing the deduction for state and local taxes, at least for those in the higher income brackets.  See, e.g., Alternative Minimum Tax: 11 Key Facts and Projections, Tax Policy Center, Dec. 2006. 

The Tax Policy Center also has some interesting tables showing the projected distribution of incomes and tax cuts in 2012 if the 2001-2006 revenue reduction provisions are made permanent and the AMT patch is extended, at this link.

AMT and incentive stock options

Senator Grassley has announced an agreement with the IRS that it will "suspend" collection efforts regarding taxpayers who owe the AMT on incentive stock options.  The rationale--that Congress may pass legislation to undo the requirement that taxpayers pay the AMT on such options.  For Grassley's release on this matter, see here.

Remember that the AMT has for a long time served as a backstop to the regular income tax by eliminating the benefit of excessive preferences.  Rather than redo the regular tax and eliminate preferences for everyone, Congress allowed the AMT to "clawback" some of the benefits of preferences.  Defining the base more broadly, and taxing at just a few rates, Congress was able to ensure that most taxpayers paid at least a de minimis amount of tax. 

Those who are granted the options can avoid the problem of holding onto options that later tank by selling immediately to pay the tax.  A suspension --or, indeed, if it is passed, legislation that undoes the tax treatment for a few who happen to fall within its parameters--is inherently unfair.  Many taxpayers wisely exercised options to pay the tax and avoid the potential of the problem.  Legislation would unfairly reward those who didn't do so.

Congress shouldn't pass that kind of reform of the AMT.  Instead, Congress should make the AMT a genunine "clawback" for excessive preferences by adding back the capital gains preference as an AMT adjustment.