Not surprisingly for those of you who are members of the ABA Tax Section, there is a meeting of that group next week in Florida when a thousand tax lawyers (give or take a few) will be talking about everything from basis to wealth taxes; GILTI, BEAT, Dual BEIT, to EITC. Yours truly will be on a panel of the Tax Policy and Simplification Committee, meeting Friday morning, to discuss how the tax system should respond to the wealth gap. Joining me on the dais will be Roger Royse (moderator and panelist), Rich Prisinzano from the Penn Wharton Budget Model, and Dan Shaviro, Wayne Perry Professor of Taxation at NYU and a blogger at Start Making Sense. We'll talk about the income and wealth gap data, including the different perspectives of Saez & Zucman, serving as wealth tax advisers to Senator and Democratic presidential candidate hopeful Elizabeth Warren; Penn Wharton Budget Model, applying a more standard budget model to determine harms and benefits of the Warren Wealth Tax; and Cato INstitute. We'll also discuss Sen. Ron Wyden's proposal for a mark-to-market system of capital gains taxation (including a lookback charge of some kind for hard-to-value assets, Prof. (and former Cleary partner) Edward Kleinbard's Dual Business Enterprise Income Tax proposal, and other means of making the regular tax system more progressive such as rates, removing the capital gains preference, and reinvigorating the estate tax that has been the object of a GOP murder squad for the last 20-30 years at least.
Meanwhile, today in Florida there was a Tax Policy Lecture at the University of Florida on Taxing Wealth, with Alan Viard, resident scholar at the American Enterprise Institute, David Kamin, Professor at NYU School of Law, Janet Holtzblatt, Senior Fellow at the Tax Policy Center, and William Gale, Arjay and Frances Fearing Miller Chair in Federal Economic Policy7 at the Brookings Institution.
Last fall, the Tax Policy Center held a program on Taxing Wealth (webcast recording available at this link) with Mark Mazur, Ian Simmons, Janet Holtzblatt, Beth Kaufman, Greg Leiserson, Victoria Perry, and Alan Viard. Sony Kassam from Bloomberg Tax served as moderator. The link has a series of power point presentations from that meeting as well, for your edification.
Ian Simmons, for example, includes the letter from billionaires dated June 24, 2019, asking that "[t]he next dollar of new tax revenue should come from the most financially fortunate, not from middle-income and lower-income Americans." Such a tax "enjoys the support of a majority of Americans--Republicans, Independents, and Democrats." It's not a new idea, since all those millions of middle-income Americans who own their home "already pay a wealth tax each year in the form of property taxes on their primary form of wealth--their home." The billionaires are asking "to pay a small wealth tax on the primary source of our wealth as well"--such as Elizabeth Warren's proposal, which would tax "only 75,000 of the wealthiest families in the country" (those with assets over $50 million) and would generate an estimated $3 trillion over ten years to "fund smart investments in our future, like clean energy innovation to mitigate climate change, universal child care, student loan debt relief, infrastructure modernization, tax credits for low-income families, public health solutions, and other vital needs." All this is necessary because of the wealth gap: "[t]he top 1/10 of 1% of households now have almost as much wealth as all Americans in the bottom 90%." The signatories support a wealth tax because:
it's a powerful tool for solving our climate crisis
it's an economic winner for America through increased public investments
it will make Americans healthier, addressing the difference in longevity (15 years) between the richest and the poorest Americans
It's fair -- "[t]axing extraordinary wealth should be a greater priority than taxing hard work."
It strengthens American freedom and democracy, since high levels of economic inequality lead to political power and pluotocracy and higher levels of distrust in democratic institutions
It is patriotic -- 'The richest 1/10 of the richest 1% should be proud to pay a bit more of our fortune forward to America's future."
Janet Holtzblatt discussed whether wealth should be taxed, with a set of powerful powerpoint charts. As she notes, there are a number of reasons to think taxing the wealthy is a good idea because it (slide 4) :
curbs the accumulation of power that comes with the accumulation of wealth--and, I will add, this is power to get laws and regulations written in your favor, including tax laws, as well as power that allows pollution, rent-seeking, on-demand schedules for workers and other 'evils' that come with plutocracy
ensures that the wealth pay their fair share of taxes
finances new initiatives (child care, student debt relieve, climate change policies, housing initiatives)
provides better data for research on wealth inequality
Those not supportive (or, as JH puts it, "less optimistic") suggest that (slides 5, 7)
even with a wealth tax, the rich remain the richest and the most powerful
incremental changes to current tax system would be more easily implemented
wealth taxes would have a negative impact on savings, investment, entrepreneurship
wealth taxes won't raise as much revenue as claimed
OECD countries with wealth taxes haven't been all that successful (in 1990 12 had them, in 2018 only 3 still retained wealth taxes: Norway, Switzerland, and Spain)
There are lots of issues with wealth taxes: (slides 8-20)
on what assets
at what rate (tax burden will depend partly on rate of returns on investments
using what exemption threshold (liquidity constraints at lower thresholds; taxing middle income instead of wealthy)
using what means to prevent tax avoidance (dependents' wealth with parents? include assets in family-run foundations? restrictive limits for trusts? exit taxes?)
and tax evasion (enhance IRS enforcement, enhance penalties, enhance IRS access to third party data--but the wealthy have resources to battle IRS claims)
assuming what actual amounts of tax revenues could be raised ("street fights over revenue estimates...among top public finance economists") (Slide 15)
how much wealth is there? JH notes several 2016 estimates between 86.9 trillion and 101.2 trillion (slides 16-17) {Zucman says just under $115 trillion]
Fed Reserve Survey of Consumer Finance ( 3 year intervals; leaves out Forbes 400 and some pension wealth)
estate tax data (adjusted for mortality probabilities and population)
income tax data (capitalized using assumed rates of returns)
how is that wealth distributed between the top 0.1% and the rest? Bricker 2016 study estimates range from about 15% to 22% (Slide 18)
how much wealth is hidden by "tax net misreporting rates"? IRS 2016 misreporting: farms 71%; nonfarm proprietors 64%; CGs 27%; PS/SCorps/Estates/Trusts 16% (slide 19)
how much tax revenues? between 815 billion and 1.098 trillion between 2021-2030 (slide 22, Urban-Brookings TPC Microsimulation Model [ with lower thresholds and rates than those proposed by Warren]
who pays? 40,000 tax units in the top 1% minus the top 0.1%; 127,000 tax units in the top 0.1%,with those in the top 0.1% paying between 97% and 100% on the different options considered
Greg Leiserson discussed the idea of mark-to-market taxation (an idea that Ron Wyden has endorsed), in "Taxing wealth by taxing investment income: An introduction to mark-to-market taxation" (Sept 11, 2019). The key to MTM taxation is that a tax is assessed annually on investments, whether or not they are sold or otherwise disposed of ('through a transaction that results in "realization" for federal income tax purposes). The burden of such a tax falls predominantly on the wealthy, since those are the primary owners of bonds, stocks, real estate empires, and pass-through businesses that produce investment income, as well as the appreciation of those assets that is taxed currently as a capital gain on disposition. Leiserson provides a chart (below) showing the nominal investment income of US households and nonprofits including an offset for inflation.
As he notes, much of this income is taxed at preferential capital gains rates, and much of the income tax is deferred because capital gains and losses are generally taxed only when the asset is sold. Deferral amounts to a reduction in taxes paid under time-value-of-money principles. But yet another way in which owners of investment assets escape taxation is the estate tax: appreciation in property in the estate (such as unrealized capital gains from stock that has appreciated in value significantly over decades) is never taxed, since the heirs get a step up in basis to market value, so that if the asset were then immediately sold, there would be no gain remaining.
MTM taxation eliminates the deferral advantage. MTM taxation combined with elimination of the preferential rate for capital gains would eliminate the preferential treatment of capital gains that exists in current law. Leiserson notes the difficulties for a MTM system: which assets are covered, rate of tax applied, and whether there are special rules for volatility. Further, "[i]f a comprehensive system of mark-to-market taxation is enacted, then there would be no unrealized gains at death going forward, because gains will have been taxed on an annual basis, including in the year the person dies" so long as the system applies over some transition period to gains accrued prior to enactment. Otherwise, the system would have to tax gains at death (repealing step-up in basis rule) or at any other disposition, including gifts, to ensure fair and equal treatment. He suggests other measures--such as limiting the home sales capital gain exclusion or requiring mandatory distributions of pension account balances above a threshold, that would be reasonable in a MTM context.
One difficulty with MTM taxation is valuation of assets that are not regularly traded. Ron Wyden's proposal suggests a lookback charge--an additional tax payment for assets not subject to MTM taxation that is collected upon disposition to account for the deferral value while still relying on realization as a trigger for taxation. Wyden and Leiserson suggest different possible methods. One is to take the gain upon sale and allocate it ratably to each year between purchase and sale, compute the tax on each year's income at the rate applicable in that year, and then calculate interest on those unpaid taxes for the years til payment. Unrealized gains would be deemed realized on death or gift and taxed accordingly.
Three key ideas here:
To protect lower and middle income taxpayers from the tax, there could be a lifetime gain exemption threshold ($0.5 million, say) that has to be reached before the rules apply or an asset value threshold ($2 million; $10 million, etc.). Under the latter, taxpayers would fall into and out of the MTM regime as assets fluctuate. (The asset approach is suggested by Wyden.)
The revenue raised is significant though it depends on the particular model. Leiserson suggests MTM combined with elimination of the preferential rate on capital gains "could easily raise $1 trillion over the next decade--and potentially much more." He notes that just eliminating the preferential CG rate gives a much lower estimate--that's because of "the ease of tax avoidance under current law such as the ready opportunity to defer tax by not selling assets and potentially avoid tax entirely through step up in basis--all while simply borrowing against these same assets to finance any spending."
"The wealthiest 1 percent of families holds 31 percent of all wealth, and the wealthiest 10 percent holds 70 percent of all wealth." "The highest-income 1 percent of families receives 75 percent of the benefit of the preferential rates for capital gains and dividends under current law." The wealthiest 10% would bear the burden of MTM reforms.
Of course, while everybody is talking about taxes, some of that talk is the same old endless market fundamentalist myth (Reaganomics) about how tax cuts are what make the economy grow and will actually pay for themselves -- in spite of near 4 decades of evidence to the contrary, where highest growth rates have generally been in times of higher tax rates, with some consideration for stimulus impact of tax cuts after periods of recessions. See, e.g., NY Times editorial, There's No Such Thing as a Free Tax Cut (Jan 22, 2020). The op-ed notes that Treasury Secretary Steven Mnuchin "repeated the risible fantasy that the Trump administration's 2017 tax cuts will bolster economic growth sufficiently for the government to recoup the revenue it lost by lowering tax rates" [in the 2017 tax legislation] even though 2 years in, the "budget deficit has topped $1 trillion." This is because, as most of us who haven't drunk the Laffer-curve tax cut kool-aid know and the Times op-ed reiterates, "businesses responded to increased demand more than they did to the lower tax rates." Nonetheless, we should not be surprised that the Trump Administration is talking about two "big ideas" for taxes if the man gets reelected: 1) cutting Medicare and Social Security: see, e.g., Trump Opens Door to Cuts to Medicare and Other Entitlement Programs, NY Times (Jan 22, 2020) and 2) passing another tax cut bill: see Steven Mnuchin Confirms Trump's New Tax Plan is Imminent, USNews (Jan 23, 2020). Those two ideas go hand in hand.
Though Trump doesn't dare state what he is really doing to his base, who he has deceived with typical right-wing rhetoric into thinking that he is trying to rightsize the economy to serve them when he instead engages in class warfare to stuff his own pockets, he is hip to hip with Newt Gingrich's desire to "starve the government" to create a huge deficit (we are up to $1 trillion in our new "gilded age economy") that then provides cover for the wealthy to suck in even more of the country's wealth by downsizing Medicare and Social Security, programs essential for those who are not among the wealthy.
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 reformwould 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 reformwould 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 cutsthat 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.
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.)
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):
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.
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
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.
It must respond when a loophole is exploited by closing the loophole.
It must do so in a way that permits the voluntary compliance system to function as well as can be given resources available.
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
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.
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)
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)
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.
There is class warfare going on, right now, all across this country. It's highlighted by the election gimmicks and gambits of those on the right who claim to be supporting ordinary Americans but whose real intentions show in the results. And it is ultimately a sad statement about Americans' understanding of what is required for a sustainable economy that supports decent lifestyles for all.
Let's start by looking at the maps resulting from studies of well-being that identify the states where people are not at all well-off, such as the 2013 survey done by Gallup Healthways, available here. Those poor states are the reddest of the red belt in Mississippi, Tennessee, Florida and elsewhere across the Deep South--places where I grew up in a decidedly Republican household that bought the GOP economic fallacies hook, line and sinker, and places where today's populations are worse off in terms of the various measures of economic well-being and happiness than the more progressive northeast and west.
Isn't it likely that the anti-government, low-tax and pro-wealthy/pro-big business policies of the GOP politicos that have run these states for several decades have something to do with these negative results, and that the more progressive policies in the northeast and northwest are reflected in the much more positive results in those areas?
Yet rural, southern populations continue to proudly proclaim their allegiance, against their own economic interest, to ill-fated Reaganomics that favors tax cuts (for the wealthy and big business) coupled with use of old-time, regressive consumption taxes (toll roads, sales taxes and property taxes), privatization of public functions (e.g., charter schools managed by for-profit, nontransparent corporations), socialization of losses, militarization, and de-regulation.
The results are harmful at national and state levels, as those same right-leaning voters suffer from poor K-12 education, low-quality public services including neglected roadways, nonexistent or outdated public transportation systems, inferior safety nets, inferior health results, lower literacy rates, higher teenage birth rates, less access to universities, and, yes, fewer and lower-paying jobs.
Of course, those in the top 5% like to think of themselves as suffering, and therefore see any demands for increased minimum wages (that they consider cutting into their ability to capture more and more (rentier) profits beyond their already unreasonable percentages) as "class warfare." See, for instance, this Wall Street Journal video "Do You Make $400,000 a Year But Feel Broke?" from September 5, 2014 depicting the purported hard times for a couple in Chicago making $400,000 a year, buying a $60,000 car every four years, paying a mortgage on a $1.2 million house along with $25,000 a year in maintenance and , entertainment ($10,000 a year) going on vacations ($25,000 a year), club dues ($12,000 a year), and paying for their children's sports ventures ($10,000 a year). These and other "necessities" and (purportedly reasonable) discretionary expenditures take all of their after-tax money.
Given that perspective, no wonder those in the top have so little consideration and sympathy for ordinary Americans who have incomes in the $50,000 to $60,000 range, much less for the poor who struggle to put food on the table and heat in the furnace! They can't even imagine such limited lives. With the growing inequality in this country, the gap between the upper class and the rest of us is increasingly wider.
Outside the sphere of political debate, you also see the real world impact of inequality. Merrill Lynch recommends an investment strategy to its clients based on the growing economic clout of plutocrats, Singapore Airlines is now selling $18,400 first class cabin tickets, and observers think Apple is going to start selling a $10,000 watch. Conversely, Walmart is now primarily worried about competition from dollar stores. The executives at these companies are not hysterical liberals trying to drum up paranoia about inequality, they are trying to respond to real economic conditions — conditions that have entailed very poor wage growth paired with decent returns for those proserous enough to own lots of shares of stock.
The ability to care about those so distant from the well-heeled in-group appears to be diminishing as the gap between the well-heeled and the rest of us widens. Those super-wealthy corporate managers and CEOs and super-rich shareholders are not likely to recognize in themselves the greed and exploitation of others that their excess returns on capital represent. As Mitt Romney made so clear, rich folks (i) think of themselves as "meriting" their outsized incomes, in spite of the fact that they often start out with silver spoons and garner greater returns than ordinary folks simply because they have larger capital portfolios to start with and can't possible achieve a level of productivity of 100s times that of ordinary workers, as current CEO pay-levels claim under "free market" theory; and (ii) find it much easier to blame the misfortune of ordinary Americans on their purported laziness and "lack of personal responsibility." (See earlier Taxing Matter posts on Romney's self-justifying 47% remarks during his presidential campaign.)
But that means the rich (and the GOP most closely aligned with big business and big capital) often support policies that can only lead to greater income and wealth inequality, fewer and fewer Americans able to enjoy a decent, sustainable lifestyle, and the growth of a very small oligarchic elite. Those policies include making it harder for poor people to vote (justified on the basis of non-existent voter fraud), making it harder for middle class and poor people to go to college (less state monies to universities, less grants and more (profitable-for-big-banks) loans), making it harder to support a family (less public transportation, lower wages, more jobs outsourced, refusal to fund Medicaid expansion, yammering for the repeal of the Affordable Care Act even though the US's market-based health care system is less efficient, more costly, and lower quality than single-payer systems in most other advanced countries), etc. The long-run result of these pro-elite pro-corporate policies may well be social chaos, as the rich oligarchy faces off against a suffering and shrinking middle class and a grievously disadvantaged lower class. That may not be so far away as many of us once thought, given the rapidly growing wealth inequality and the more radical right-wing policies that have moved into the GOP mainstream in the form of Rand Paul and other free-marketarian extremists who denigrate government and want to remove the social-economic safety nets put in place under the New Deal.
They denigrate government, that is, except when they recognize that they need it, such as when the ebola crisis erupted. Suddenly, they want a Center for Disease Control that really functions well, even though they have pushed government spending down. And they want a TSA that can screen arriving passengers, even though they hated the TSA before. And they wanted the President to appoint an "Ebola Czar", even though they scoffed at the idea of administrative officials appointed to oversee important areas before. They want a vaccine for ebola, but they have made it much harder to accomplish because of their constant push for "reducing government" and cutting research funding (making one of their pet projects to seek out what they think are silly projects that have been funded by the federal agencies).
The free market, in other words, is claimed to be the be all and end all -- until push comes to shove and it is obvious that market forces require government intervention.
Consider the compaign for governor here in Michigan. In his ads, current GOP governor Rick Snyder claims to be a hands-on non-partisan fiscally responsible type who cares about everybody in Michigan. Those ads brag about how Snyder cares about senior citizens and education --using the (meager) increases in "meals on wheels" to claim that Snyder has made life better for senior citizens, and the state's increase in support for purportedly public charter schools. Behind that facade of political PR is a deeply partisan governor who has consistently supported the elite rich capitalists over the majority of Michiganders who are ordinary salary earners working hard (or working hard to find work).
Snyder signed a "free rider/right to freeload" bill permitting non-union workers in a unionized environment to free-ride on union contracts without paying their share of the costs of the contracts they benefit from and prohibiting unions from using paycheck deductions to collect union dues. That kind of legislation, sought by the elite owners of capital who benefit from paying lower non-union wages, is (mis)labelled by the pro-wealthy right as "right to work". It is really a "right to freeload" law since the union rules it replaces never required anyone to join a union and always allowed workers who benefitted from a collective bargaining agreement to pay only the 'fair share' payment of the considerable costs of negotiating an agreement and supporting workers in grievances rather than support all union activities. As a result, workers can now pay nothing yet call on the union whenever they have a grievance against their employer. The goal of such laws is to eliminate union support for workers and thereby increase the power of capital owners, so it is particularly sad to see how many workers are fooled into supporting these "right to freeload" laws.
Snyder supported Michigan legislation that gave big businesses a huge tax cut, while supporting another bill that gave seniors a huge tax increase by taxing their (often meager) pensions. No wonder the wealthy who own most of the financial assets in the country and benefit from the decades of lobbying by right-wing propaganda tanks against buinsess and capital taxation think he's a good friend.
And of course, much of Snyder's 'support' for education has been cuts to state funding for Michigan universities (especially Wayne State, which serves the predominately Democratic southeastern region of the state) that has affected the state's economy in real ways, as students have to pay more of the cost and universities have less funding for research that directly impacts economic development. Snyder has also supported an unprecedented increase in charter schools in a system that provides no accountability, doesn't provide improved educational results, and siphons off public dollars for private profits, through the mechanism of private charter management corporations that run the purportedly "public" charter schools.
Snyder doesn't think we need increases in the minimum wage, and his administration has generally shown little interest in figuing out how to help minimum wage workers revive from the Great Recession. For example, his administration has done nothing to deal with the myriad fly-by-night companies that cheat workers coming and going on wages.
ASIDE: Here's one real-life tale illustrating the problem. I know personally of a man in Michigan hired by a Michigan-registered cleaning corporation that had contracts with at least two major national corporations to clean stores in southeast Michigan. The cleaning company claimed that the man was "in training" and therefore not required to be compensated after two weeks of full-time working for the company, including being locked inside a cavernous store overnight to do a major cleaning job. The company refused to pay for the next two weeks, claiming that "corporate headquarters" had made an error and would straighten it out in the next paycheck a month later. The man ultimately was paid only a couple of hundred dollars for that entire month, because the company produced a purported check stub showing a paycheck even when the man representing the company acknowledge that paycheck had never been issued to the man. The company paid the man on a "piecework" basis for cleaning stores, claiming that a 30,000 square foot store with public restrooms could and should be cleaned for $25(that's mopping, vacuuming, and cleaning toilets) and that the work could be done in one hour! The company required the man to pick up cleaning equipment and the company van at the "corporate headquarters" (many miles from his home and many miles from each of the stores to be cleaned) but claimed that it did not have to pay the man for the 3-4 hours per day that he had to spend to drive the company van and equipment to and from various worksites. The man quit, but has never gotten the company to issue the paycheck that he never received and has never received pay for the many hours spent working for the company moving its van and equipment.
I should have written about this long ago, but a recent "dealbook" by my former colleague Steven Davidoff, A Chance to End a Billion-Doillar Tax Break for Private Equity, New York Times (Oct. 23, 2013) reminded me of the import of a recent court decision--Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013), --important for its implications for the private equity industry's privileged "carried interest" tax treatment (income to managers currently treated as preferentially taxed capital gains rather than ordinary compensation income) and the assumed treatment of the pension obligations of employees of companies taken over by those funds (ability of private equity funds to disavow a company's pension obligations to its ordinary workers through bankruptcy).
As Davidoff notes, private equity managers claim that changing the carried interest privilege would result in less investment and ultimately harm economic growth. That's an argument long used by the right to justify the capital gains privilege, but certainly controversial (at least), since uninvested money will earn even less than invested money that is taxed at a slightly higher rate. Given the hugely outsized earnings by equity fund managers--in the hundreds of millions and even billions annually--it seems unlikely that a higher tax rate would sharply reduce investment. They'd still have after-tax income equal or more than most CEOs. And as I've noted frequently here, getting carried interest taxation right would be at least one step towards ensuring that the tax system performs its most important justice function by reducing, rather than exacerbating, the income inequality dynamic that harms the kind of broad-based economic growth that underlies a sustainable economy. See, e.g., works on income inequality and the problems of unequal wealth distribution for sustainable economies by Benjamin Friedman, Piketty & Saez, Kate Pickett and Richard Wilkinson (e.g., The Spirit Level: Why Equality is Better for Everyone (2009)).
The Sun Capital case arose out of the takeover of Scott Brass, a manufacturing business, by Sun Capital Partners, a private equity fund that buys out distressed companies for restructuring and resale (often involving firing workers and using bankruptcies to disavow pension obligations). As Davidoff summarizes:
About a year after the takeover, Scott Brass sought bankruptcy protection. Sun Capital sued the comapny's pension fund, the New England Teamsters and Trucking Industry Pension Fund, seeking a judgment that it was not liable for $4.5 million of the company's pension. Under the pension laws, Sun Capital would be responsible for this amount if Scott's employees were under the control of Sun and the funds were engaged in a 'trade or business.' The pension fund argued that the Sun Capital funds were liable because the funds were engaged in the trade or business of operating Scott. Sun Capital argued the opposite, saying that it was merely a passive investor. A Chance to End a Billion-Doillar Tax Break for Private Equity
The court concluded that the private equity fund was engaged in a trade or business for purposes of the Employee Retirement Income and Security Act (ERISA), rather than merely a passive investor in the business that it took over, Scott Brass, Inc. Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013).
This decision could clearly "make it harder for private equity funds to walk away from the unfunded pension liabilities of companies they have bought if the company goes bankrupt." Vic Fleischer, Sun Capital Court Ruling Threatens Structure of Private Equity, DealBook, New York Times (Aug. 1, 2013). And it is "not a big leap to argue that the fund was [also] engaged in a trade or business for tax purposes." Id.
No one disputes that the general partner (or its affiliated management company) often gets highly involved with the fund's portfolio companies. In Sun Capital, for example, the management company weighed in on the portfolio company's personnel decisions, capital spending and possible acquisitions. The critical question is whether the general partner's activities can be attributed 'downward' to the fund--that is, from the partner to the partnership.
***
...[T]he court noted that Scott Brass Inc. paid fees to the general partner of the fund for the management services it provided. Those fees were then used to offset part of the 2 percent annual management fees that the limited partners normally pay to the general partner. The court explained that these fees thus 'provided a direct economic benefit' that 'an ordinary, passive investor would not derive: an offset against the management fees it otherwise would have paid its general partner.' ...
If the Treasury and IRS (or courts) were to conclude that the trade or business determination for ERISA should carry over to tax, a number of tax consequences could well follow that would upend the current highly favored tax treatment of private equity fund investors and investor/managers.
foreign investors in a private equity fund could be treated as having income that is "effectively connected" with a U.S. trade or business, resulting in being subject to tax on that effectively connected income;
tax-exempt investors in a private equity fund could be treated as having trade-or-business income, resulting in application of the UBTI (unrelated business taxable income) rules that would subject the normally tax-exempt investors to tax on that income; and
private equity fund managers' profit shares ("carried interest") could be treated as ordinary income from sales in the ordinary course of business (bought out and restructured companies) rather than as capital gains income from a passive investment.
Will Treasury grab this lifeline for eliminating the privileged private equity tax treatment? Remains to be seen.
PS. If private equity funds are really trades or businesses, then isn't a private "credit fund" really a banking business that should be regulated as such? See, e.g., Manning, Exclusive: Florida Private Equity Fund Expands, Plans to Offer Credit, Tampa Bay Business Journal (Oct. 28, 2013).
The House has its priorities firmly in mind. Those priorities involve making sure that the wealthy people and corporations keep their wealth while any and all possible cuts to any welfare or "entitlement" programs are made.
All you have to do is look at the right's emphasis on passing a farm bill (mostly aiding corporate farmers and gentlemanly nonfarmers) and on cutting food stamps to the nation's food-insecure. In June, the House proposed slashing $20 billion from food stamps and ended up passing a separate farm bill because it was so determined to cut aid to food-insecure Americans. Now, the media is all concerned that a farm bill won't pass at all, because the right is insisting on doubling the cut to food aide--slashing $40 billion from the program. See, e.g., Nixon, GOP Rush to Slash Food Stamps Puts Farm Bill in Jeopardy, (Aug. 1, 2013).
These proposed cuts are draconian. As those legislators who took the "live a week on food stamps" challenge learned, it is extraordinarily difficult, time-consuming, and unsatisfying to try to find sufficient food on a budget of $3.00 a day. And there are literally millions of Americans without enough food to live decently, and millions whose well-being will be jeopardized if Congress does not fund food stamps at an adequate level. Food stamp recipients already faced difficulties because of the expiration of the stimulus provisions.
A report released Thursday by the Center on Budget and Policy Priorities, which studies federal spending, found that the 47 million people who currently receive food stamps will see their benefits reduced in November because of an expiring provision in the stimulus bill passed in 2009 by a Democratic-controlled Congress.
The stimulus law provided a slight boost in benefits for all food stamp recipients as part of a bill to strengthen the economy and ease hardship on millions of unemployed workers.
According to the center’s report, beginning Nov. 1, a family of three will see a reduction of about $29 a month — $319 for the remaining 11 months of the next fiscal year. The report said the cut would result in an average of less than $1.40 per person, per meal. Id.
We are the richest country in the world. Twenty of the country's richest billionaires earned in 2012 as much money as is needed to cover food aid for food-insecure Americans who go hungry or eat poorly most of the time. Food-insecure Americans lose focus and lose opportunities while those overpaid equity fund managers whine over the unlikely prospect (unlikely because of all the heavy lobbying and the quid pro quo nature of providing campaign support to those in Congress who write the laws) of actually having to pay regular ordinary income rates on their overabundant take from the profits of other people's money that they manage (i.e., their compensation income, labeled carried interest). Everybody in Michigan pays a very low flat income tax, while underprivileged, unemployed and discriminated against blacks in Detroit scrounge for used metal to sell to buy food or pay the mortgage. Ordinary people have been tossed out of their homes by the banks that were bailed out by the government, while the bank presidents and CEOs and directors and other managers continued business as usual with multimillion dollar salaries, stock options and other perks.
Poor people do not "deserve" to starve. Rich people do not generally "deserve" to be rich. Yet flat tax schemeds and preferential taxation of capital income belie that wisdom by giving the rich a pass. Democratic egalitarianism demands a change. Those at the top have been getting richer and richer, but ordinary Americans have not. It's time to reverse the redistribution direction. Instead of redistributing resources upwards to the rich, we must move them down to the needy.
Watch the Bill Moyers program on hunger in America (linked at the bottom of the post). If you do not wince with uncomfortableness at the way we Americans are dealing with food insecurity, you must have lost all compassion.
It is time, folks, to just say no to all this brute capitalism, "free" market ideology that has given us an unequal society with high teenage pregnancy, low birth weight babies, high illiteracy, shorter life expectancy, high unemployment, low educational achievement and all the other indices of an underdeveloped country in the midst of enormous, even obscene wealth. Say "NO" to the right's idea that poverty results from a lack of personal responsibility, rather than a lack of personal opportunity. Say "NO" to the ideology of the self-described meritocracy that considers its own wealth and the poverty of others merited, rather than recognizing the increasing impact of the class status one is born into and the decreasing possibility of upward mobility in America. Say "NO" to the failed pseudo-economic theories of Milt Friedman, Ayn Rand, Glenn Beck, and Karl Rove--the ideology of "free" markets and unfree persons, of "competitive capitalism" and uncompetitive positions defined by class status and money. Say "No" to the politics of the right, that would privatize, deregulate, cut tax revenues and increase military expenditures, that would willingly support a government of largesse and entitlement for the rich and austerity and "personal responsibility" for the poor.
Proponents of lowering the U.S. corporate income tax rate commonly point to evidence that the U.S. statutory corporate tax rate of 35 percent, as well as its average effective tax rate, which equals the amount of income tax corporations pay divided by their pretax income, are high relative to other countries. However, GAO's 2008 report on corporate tax liabilities (GAO-08-957) found that nearly 55 percent of all large U.S.-controlled corporations reported no federal tax liability in at least one year between 1998 and 2005. Id. (from "highlight").
The report looks good for corporations. The GAO report shows that corporate taxes paid to the US are going down, down, down. Corporations paid 15.3% in 2008, 13% in 2009 and only 12/6% in 2010--that's less than have the corporate tax rate of 35% for each of those years! The proportion of federal revenues raised from corporate taxes has been decreasing over the years as well--the GAO reports that for 2012 it is estimated that corporate taxes will have raised only 242 billion, compared to 1.1 trillion in individual taxes and 845 billion in payroll taxes.
When you couple the very low corporate taxes actually paid with the very favorable preferential capital gains taxation to shareholders (including both dividends paid from corporations and sales of corporate shares), corporate shareholders--mostly the very top few percent that own and/or manage most of the financial assets--are doing extremely well. At the same time, ordinary Americans continue to suffer the impact of the recession. For those with jobs, we haven't made up for the losses from the Great Recession. And for those without jobs, Republicans across the country are enacting measures to make them suffer even more--as though, as Paul Krugman notes, making them even more miserable would somehoe restore the economy. See Paul Krugman, War on the Unemployed, New York Times (June 30, 2013).
So why all that chatter about how high the US tax rate is (35% on corporations with more than about 18.4 million in annual income) and how it makes US corporations losers in the cutthroat global competition? That's not hard to understand. Corporate managers like to have the profits earned from workers' labor accrue to themselves and they don't like paying any taxes. So no matter how low the effective tax rate already is, corporations will lobby for even lower statutory tax rates, using corporate resources that are available in part because of those tax policies favoring "paper" deductions for noneconomic depreciation, until they get the statutory rates down to zero (and the effective rates actually negative).
So why do our representatives in Congress buy into that sad-sack tale that really isn't true--both in terms of the need to use any revenues generated by tax reform to cut the rates on corporate tax, and in terms of the refusal to eliminate the discriminatory preferential rate for capital gains that treats profits earned from having money as much better than profits earned from hard work? Because every time there is something for corporations and the wealthy to lobby for, there is also something for congressional representatives (and, importantly, their staffs) to use as a campaign fundraising tool with the corporate elite.
THe lobbying, and the campaigning, and the PR blitz supported by all those purported "think tanks" funded by the corporate and wealthy elite, where the "scholars" are paid to produce the "scholarship" to support the ideology that claims that the wealthy got that way on their merit and therefore merit continuing tax expenditure support for their activities from the government--it all fit together hand in glove to pave the way for yet another corporate tax break that will benefit managers and owners and leave workers high and dry.
Think about the recent brouhaha over the fact that the IRS gave closer scrutiny to 501(c)(4) applicants that were likely to be politicking organizations rather than do-gooder organizations as the exemption requires. That was all about keeping the big wealthy and corporate funders of politicking groups secret. When those groups are secret, it makes it more possible to influence elections with misleading or false statements without people becoming more skeptical because of realizing their source. And the more that goes on, the more those corporations can hobnob with Congress and let them know the items on their wish lists without much intervention from the unknowing public.
This is why the Baucus-Hatch "base broadening to support rate cutting" plan for "tax reform" doesn't make sense. We don't need to cut corporate tax rates. Let's do some base-broadening, but use that revenue where it is really needed--to fund basic scientific research, to support public education, to fund needed infrastructure projects--not to give another tax break to multinationals and their owners/managers. For once, the country needs to think long-term rather than from election to election with campaign fundraising as the holy beacon.
Bloomberg today covers a story about another tax-shelter ploy by hedge fund billionaires to make themselves even richer at the expense of ordinary Americans who will have to pony up more (or be beset by a bigger deficit) when the billionaires don't pay their fair share of taxes. See Zachary Mider & Jesse Drucker, Simons Strategy to Shield Profit from Taxes draws IRS Attack, Bloomberg (July 1, 2013).
As the article notes, the IRS is challenging a tax-lawyer alchemy for converting ordinary hedging income to preferentially treated capital gain income by using a bank as an accommodation party to a derivative transaction--the bank buys the portfolio that the hedge fund wants to own, the bank then hires the hedge fund to manage the portfolio just as the hedge fund would do if it were the legal owner rather than the beneficial owner (which it probably should be considered under general tax principles, with the result that the hedge fund "manages" the purported bank portfolio by engaging in almost daily trades, as is a hedge fund's practice, and then the bank purports to sell an option on the portfolio to that very same hedge fund (surprise! :) !) and then the hedge fund exercises that option (quelle surprise!) more than a year after its purchase and claims thereby to have converted its trading gains (ordinary income) into an investment contract gain (Ipreferentially taxed capital gains).
This is the reason that most derivatives are such a financial scam. They are merely an artificial way for banks to make more money than they should by accommodating other parties in practicing banking alchemy--doing artificial stuff that doesn't do the economy any good, produce any goods, or create economic growth that extends to non-banksters. In fact, it does actual harm by assisting other big financial players (in this case, hedge funds and, in particular, hedge fund employees) in scamming the system for no reason other than to reduce their taxes. Simons and Renaissance employees own nearly all of the fund in this case. Id. This is what we can continue to expect from the "greed is good" and "I got everything by my own merit [HA!] but just let me get by with another scam while also subsidizing me with "too big to fail" bailouts" generation of financial institutions and "shadow" financial insitutions like the hedge funds. Hedge funds aren't very good for investors (see, e.g., this item showing that hedge funds return less than the S&P 500 on average--considerably less), but they make good money for their managers--especially when they engage in derivatives to turn ordinary income into preferentially taxed capital gain.
Thankfully, the IRS has challenged the scam, utilizing the core tax principle of "substance over form". See the November 2010 Chief Counsel Memorandum noting that the contract does not function like an option and since it provides the benefits and burdens of ownership to the hedge fund and not to the bank, the hedge fund is treated as the beneficial owner for tax purposes. But remember that the IRS Is underresourced and outmanned by the lucratively compensated tax advising teams for funds and other wealthy institutions. "If they [the hedge funds] win, that will signal to the rest of the hedge-fund community that aggressive strategies can work.," said Steven Rosenthal from the Urban Institute (a former tax partner at Ropes & Gray).
Senators Baucus and Hatch, the Chair and ranking minority member of the Senate Finance Committee, respectively, launched a bid for completing a Code reform before Baucus leaves office with a letter to Senators telling them that they should get their bids in within the month for any tax expenditures they want to preserve. See Letter from Baucus and Hatch (June 27, 2013).
At first glance, this doesn't sound like a terrible idea. There are, indeed, too many tax breaks in the Code for huge estates, owners of capital, Big Oil, Big Pharma, "Non-Profit" hospitals, and corporate executives' deferred pay. Wiping them away and then thinking through things fresh might be a part of a process for real tax reform that makes sense.
But it isn't clear that this duo can possibly carve a better system this way. They have both already bought into the idea that the US has to "lower rates" to let Big Business be "competitive", an idea that ignores business reality and sets Congress up for a series of lobbying "auctions" (this tax break for that campaign contribution) [hat tip Evelyn Brody ]. They are both therefore part of the avid group of Big Business supporters who want to cut taxes, not raise revenues to deal with infrastructure needs, safety net needs, climate change, and the many other challenges that face a nation that has spent 40 years in the thrall of bankrupt Chicago School market theories that support winner-take-all systems. Both have touted the idea that taxes should be "simpler''--as though having language that two-year-olds could read would be a reasonable way to ensure that the most sophisticated legal minds hired by the wealthiest Americans don't scam the system! Remember that most of the complications in the Code are there to do two things--to provide special tax subsidies lobbied for heavily by Big Business (with a few for ordinary folk) and to prevent sophisticated (rich) taxpayers from ripping off the system as much as possible.
Worse, these two have both already made it clear that the group they really want to hit are those who benefit from Social Security and Medicare expenditures--their goal isn't to make our social safety net sustainable through the centuries, but to cut holes in it so that the money can leak out in tax rate cuts to line the pockets of the wealthy heirs, the overpaid CEOs, and the banksters that caused the worst economic recession since the Great Depression, at great personal cost to millions of ordinary Americans who have lost their jobs, their homes, and their prospects for the future because of it.
Not surprisingly, their letter to fellow Senators starts with their claim that the current Code is "broken" "riddled with exclusions, deductions, and credits", with the result that "[t]he complexity, inefficiency and unfairness of the tax code are acting as a brake on our economy."
Now, there are problems with the Code, that I won't deny. But this litany of evils is just what the lobbyists for the corporate and wealthy ordered--it buys into the attempt by free marketarian/Chicago School economists to paint taxes as evil, as sources of anticompetitiveness, as such dragging anchors on businesses and entrepreneurs that it holds back the economy and "forces" Big Business to offshore its work to cheaper labor elsewhere. And it sets the stage for an outcome that removes anti-abuse provisions and decimates progressivity in favor of the "identity theory" notion of fairness--that you have to have a flat rate that treats everybdoy the same to be fair.
Why is the identity theory of fairness absurd? Because it ignores context. It is like saying an Ant is as big as an Elephant, by ignoring the relativeness of size which is essential to the notion of bigness/smallness. In other words, we can't talk about "fair" without some idea of the scale on which fair is to be measured. And saying that "taxing everybody at the same flat rate" is inherently "fair" (as the right-wing proponents of a flat national sales tax tend to do) misses the point of what fairness is all about!
Then Baucus and Hatch turn to their concept of the "blank slate" and the appeal for senators to name their favorite tax expenditures (ie, their favorite pet interest groups).
We need your ideas and partnership to get tax reform over the finish line. In order to make sure that we end up with a simpler, more efficient and fairer tax code, we believe it is important to start with a "blank slate"—that is, a tax code without all of the special provisions in the form of exclusions, deductions and credits and other preferences that some refer to as "tax expenditures. This blank slate is not, of course, the end product, nor the end of the discussion. Some of the special provisions serve important objectives. Indeed, we both believe that some existing tax expenditures should be preserved in some form. But the tax code is also littered with preferences for special interests. To make sure that we clear out all the unproductive provisions and simplify in tax reform, we plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.
Of course, this "blank slate" approach is a call to arms for all lobbyists, who have already begun aiming their impressive resources at their selected targets. See Politico, Tax Lobbyists Spring Into Action .
But beyond that, note what it says about the provisions--it will keep those that encourage economic growth, increase fairness, or promote other policy objectives. We already know what lobbyists say about all of the provisions that they favor for Big Business and Big Money--that if you don't give favorable tax provisions to all those wonderful (purported) job creators, the economy will crash. And we already know who will use the "make the code fairer" arguments to support their views--it will be the right-wingers who want to eliminate social safety net provisions from the Code. They have lots of money from the Koch brothers and other right-wing wealthy individuals and institutions and lots of paid "scholars" like Cato, and Heritage and all the others to push their views. Tell me--just who is going to lobby for the real concept of fairness in the Code--like (i) getting rid of the preference for capital over labor, (ii) getting rid of tax favorable treatment for any deferred payment or pension plans that are available only to the top managers of firms, (iii) instituting a decent estate tax that begins to eat into the oligarchic dynasties that we've allowed to be created by such limp excuses for estate taxation (including not only much higher rates with more rate brackets, but also elimination of most of the gimmicks using trusts and partnerships and purported discounts; or (iv) creating a much more discriminating rate structure for the income tax that recognizes differences of income in magnitudes as they exist today , with rates for brackets that include half a mil to a mil, a mil to several mil, several mil to 20 mil, 20 mil to 80 mil, 80 mil to 150 mil....and on to the two billion mark? And who is going to make the pitch that we have to raise more revenues in order to meet the needs of the aging baby boomer population as they retire with savings decimated by the Great Recession, homes lost to the lack of banking oversight, and facing significant increases in medical care costs?
It's pretty clear that neither Baucus nor Hatch has any desire to deal with real fairness issues, since that would require INCREASING THE PROGRESSIVITY OF THE CODE. Note what they say to their fellow senators about the task ahead.
The blank slate approach would allow significant deficit reduction or rate reduction, while maintaining the current level of progressivity. The amount of rate reduction would of course depend on how much revenue was reserved for deficit reduction, if any, and from which income groups.
This phraseology reveals perhaps more than they wanted to reveal--first, that they are not even contemplating increasing progressivity, in spite of the past 40 years of reductions in progressive features. And second, they really aren't planning to use elimination of tax expenditures to raise more revenues to make up for the absurd Bush tax cuts that they both helped put into place--note that they say the rate reduction will depend on whether any money is reserved for deficit reduction, providing a pretty strong indicator that there will be no revenues used for government and all the "reforms" would go to another foolish round of tax cuts.
Kitty Richards at ThinkProgress has some similar concerns about this "blank slate" announcement. See Richard, Why we should be wary of 'blank slate' tax reform, ThinkProgress (June 27, 2013). First, using the analysis done for the Simpson-Bowles "zero" plan (which was actually more protective of the lowest income than Baucus-Hatch have declared themselves to be), it would be very difficult to maintain progressivity (much less increase it as I have suggested is required) if base reduction is used to lower rates, since those who benefit most from lowering rates are the taxpayers with the most income.
The Tax Policy Center estimated the effects of the plan and found that it would have disproportionately increased taxes paid by low-income and middle-class families, not even taking into account the expiration of the Bush tax cuts for taxpayers making more than $400,000 per year legislated in last year’s “fiscal cliff” deal. If you compare average federal tax rates under the zero plan and under current law, the zero plan looks even worse – it would actually cut taxes for the top one percent by 10 percent, while more than doubling tax rates for the poor and increasing taxes on the middle class substantially.
Second, she adds, the Baucus-Hatch letter "treats decisions about revenue as an afterthought." Yet revenue-raising is THE PRIMARY REASON WE HAVE TAXES.
Congress should not be engaging in protracted tax reform negotiations that ignore the fundamental problem with our tax code: It does not raise sufficient revenue to fund the operations of government at appropriate levels in a sustainable way.
If Baucus and Hatch are interested in reforming tax expenditures, they should start by scaling back the biggest giveaways to corporations and the rich and devoting that revenue to repealing the sequester, not reducing tax rates for these same corporations and wealthy individuals.
Richards is right on in her critique. We need to recognize the commitments we have to institutions and people, from infrastructure needs like roads and airports to wildfire prevention to climate change action to NIH and other support for basic scientific research on which rests most of the "entrepreneurial" innovations that the self-appointed meritocracy credits itself with. That requires money, and money requires either printing more of it or more taxes. More taxes from the wealthiest corporations and individuals also serves a secondary objective of increasing expanding opportunity and countering, to some small degree, the tendency for most government programs to function as upwards-redistribution paradigms that shift more and more resources to an oligarchic upper crust.
So I cannot think this Baucus-Hatch initiative augers well for the country. I wish Baucus had used his imminent retirement to step back and consider what his legacy could be for a better world, rather than continuing to lie in bed with the lobbyists of the corporate elite. What we need to do first is very simple--get rid of the multiple giveaways to big corporations, revamp the estate tax to make it heftier, and eliminate the many tax expenditures that are mainly for the wealthy (deductions of mortgage interest on second homes, deferred compensation schemes, etc.
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