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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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More Thinking on Ethics : How about Ethics and Economics

A few days ago, I broached a question about "The Countermajoritarian Difficulty and Congressional Ethics".  We seem to talk a good deal about congressional or political corruption, usually referring to elected officials taking bribes, commiting some kind of fraud such as failure to report taxes or gifts, committing sexual harassment on the job, or otherwise engaging in generally disapproved and personally reprehensible activity.  Why, I asked, don't we treat politicians' failures to consider the public good as an equal or greater ethical failure? 

Joe McCarthy was a lying publicity seeker who destroyed numerous individuals' lives to further his own megalomania and dogmatic views of right and wrong, come what may to the country that he was ostensibly serving.  It was a witness's heartfelt question--do you feel no shame? --that ultimately expressed the deep emotional harm McCarthy's communist witch-hunt had created and played a role in bringing Congress to its senses and the anti-government activities investigations to an end.

Today, that groundswell of community disgust at the antics of a figure like McCarthy won't work with congresspeople like Michele Bachmann, Ted Cruz, Eric Cantor, Rand Paul and Ted Yoho (the Florida Republican House member who was a vet and who has naively suggested that the US can solve its debt payment problems by "sitting down with creditors" like he did in his veterinary clinic and who thinks it won't really do much harm to let the US government default if it means keeping a law that a few radical anarchists don't like from taking effect).  They are apparently oblivious, because they are so arrogantly sure of their own dogmatic views, immune from facts, and inclined to ignore harm to individuals they don't agree with (the poor, the vulnerable, the sick) while grandstanding for their Tea Party/right-wing "base" and the dogmatic, anarcho-libertarian "principles" they claim to be living by. 

Yet it seems we need an ethical guidestone for dealing with these kinds of shenanigans.  Somebody in Congress needs to step to the plate and suggest a revamping of the rules to prevent dogmatic abuse of the legislative process with the intent to derail the government itself.  This is, ultimately an ethical, moral and justice issue.

Yves Smith has been thinking about ethics, too, from the perspective of the role of ethics in economic theory.  Like me, she is deeply suspicious of the exaggerated role of economic theorists in setting fiscal, economic, and tax policy and the way economic modelling pushes fairness considerations to the periphery.  She raises some important questions for consideration, as do the many thoughtful comments on the post.  See Ethics and Complex Systems, Naked Capitalism (Oct. 16, 2013).

The way economists frame and analyze questions make it well-nigh impossible to incorporate matters of ethics. ...[M]ainstream economics has fetishized the use of mathematics, and consideration of fairness aren’t easily integrated into reductivist models. Even the accepted heresies, like information asymmetry and principal-agent problems, show how markets can fail to deliver desirable outcomes but those sub-optimal results are usually characterized as inefficiencies, not as “unfair” or “bad”. ...

[M]ost economists have a clear point of view on what they think the measure of success of economic policies should be, whether it is narrow commercial terms (growth, GDP, interest rates) or broader social outcomes. But even economists who care about the latter (as in they care not just about the level of growth but also how resources are shared), often think of the problem in a combination of distributive and mechanistic terms.

The weakest form of the “greater social welfare” arguments think that the first consideration should be growth and if we have more growth, the distributive problems (who gets how much) are easier to solve. Some who argue more fiercely social welfare oriented policies sometimes do so from a vantage of human dignity, but more often, their arguments are efficiency-based. ...

So another way to think about this problem is that economists effectively put unfair economic outcomes in the same box as externalities like pollution. And just as companies often fight with the public at large over how much pollution is acceptable, so too is there debate over how much unfairness is tolerable. ...

I contend that this perspective is inadequate and in fact has done great harm. Over the course of my life, one of the side effects of the increased infiltration of economic-style thinking into more and more walks of life has been a decline in a sense of social responsibility among what passes for our elites. ...

 

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The Tea Party's Disruptive Anti-Government (and anti-tax) Politics

The New York Times ran an interesting piece by Kim Messick on the Tea Party's psyche yesterday: Messick, The Tea Party's Paranoid Aesthetic, New York Times (Aug. 10, 2013).  It's worth trying to understand this political group's understanding of itself, since it " is a political movement ... that tries to shape the decisions of political actors — voters,legislators, pundits — into maximum coherence with its own agenda."  Id.  Its agenda is much influenced by the corporate funding that supports it but there is clearly something that holds the group together.  Messick says that they so identify their own ideas and values with the country that they see any divergence from those values and ideas as literally "unAmerican" and any evidence that the country supports things they do not support as evidence of a vast conspiracy causing the undoing of the true America.

In the case of the Tea Party, the content, though mostly political, is often religiously inflected. (A 2011 study ranked the predictors of Tea Party affiliation. The strongest was being a Republican. The second strongest? Believing that religion should play a larger role in politics.) There are invocations of God and His justice, historical interpretations (of the Constitution, say, or some program or proposal), evaluations of candidates for  office, and policy recommendations. (“Affordable Care Act bad! Tax and spending cuts good!”) These elements are then assembled in various ways to communicate the message an advocate finds appropriate for a given audience or occasion. I want to argue that we can discern in these messages a kind of master narrative, a collection of meanings that expresses the Tea Party’s sense of American history and of its own place within that history. It is this “story line,” I think, that explains the powerful appeal of the Tea Party movement to so many of its adherents, as well as its endorsement of a uniquely intransigent approach to the conduct of political affairs.

The key, says Messick, is Columbia historian Richard Hofstadter's description of paranoia in American politics (originally set forward in a 1963 essay):

The central image is that of a vast and sinister conspiracy, a gigantic and yet subtle machinery of influence set in motion to undermine and destroy a way of life. One may object that there are conspiratorial acts in history, and there is nothing paranoid about taking note of them. This is true… The distinguishing thing about the paranoid style is not that its exponents see conspiracies or plots here and there in history, but that they regard a ‘vast’ or ‘gigantic’ conspiracy as the motive force in historical events. History is a conspiracy, set in motion by demonic forces of almost transcendent power, and what is felt to be needed to defeat it is… an all-out crusade. The paranoid spokesman sees the fate of this conspiracy in apocalyptic terms— he traffics in the birth and death of whole worlds, whole political orders, whole systems of human values.  Id.

So Messick surmises that the intransigent, destructive tendency of the Tea Party to fight "to the death" against any policy or idea that it disagrees with stems from this paranoid identification of its own values as the only true American values, and any divergence from those values as a betrayal engendered by conspiratorial Others whose efforts to destroy the 'real' America must be stopped at all costs.

Tormented by difference, unable or unwilling to abide the fluidity of American identity, some persons anchor it in the racial, ideological, or ethnic features of their own community. This community then becomes “normative” for the nation as a whole; any threat to the former, any challenge to its prestige or authority, is automatically a threat to the latter.

***

The Tea Party’s paranoid aesthetic conveys this narcissistic view of itself and its role in our politics and history. ... This is the message paranoid narcissism ceaselessly delivers to its devotees. “The Others are irreligious, unproductive, licentious, treacherous. You are the rock on which this nation was built and you are the foundation on which it will rise again. You.  It’s all about you.”

***

[W]hen our identity is at risk — as it always is for the paranoid narcissist — there can be no room for compromise. The very suggestion is absurd: it amounts to the claim that we should accept being only partly ourselves. For the Tea Party, intransigence is another name for self-preservation.

If Messick is correct, we can count on this group to place itself and its own values above all else, to be willing to destroy in order to avoid having any bit of its view of the correct American way being undone. 

On tax issues, the Tea Party's ideas seem to be sharply influenced by the assumptions of personal decisionmaking and market "freedom" espoused by Chicago School economists.  Because Tea Party adherents define "freedom" in a unique way that disregards at least a century of developing understanding of the role of government in supporting the freedom of individuals to live a decent life, their views  on taxes tend to be anarcho-libertarian in nature--they see taxation itself as "theft by government" rather than the reasonable contribution of each citizen to the furtherance of a civilized society that supports all members and ensures that the basic institutions for a decent life are available to all.  This is perhaps the most threatening aspect of this religio-political group--their fervent ideological belief that they have the one view of the way America is supposed to work, and that progressive income taxation is anathema to that view.

It is not clear how one counters such religio-political fundamentalism.  Anyone who has ever tried to have a rational discussion of religious faith with a fundamentalist religious person knows that reason cannot penetrate such belief. Facts are generally irrelevant.  Any evidence that counters the exact specifications of the faith is treated as spurious.  The Tea Party adherents that I've met seem very similar.  It appears to be much more convenient for Tea Party adherents to close their minds to evidence than to question their ideologies or even to allow any adjustment to their "values" based on historical developments.

So the only defense appears to be making sure that this minority group never becomes a majority political group.  The filibuster in the Senate, in the context of Tea Party extremists, is a worrisome procedural tool that favors just such intransigent minorities.  We should get rid of it.  As for the House, perhaps the only answer is  engaged and energetic contesting of any election in which a Tea Party extremist has a chance.

 

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The Right's Goal--end the one tax expenditure that truly aids poor working families

The Tax Foundation, that propaganda tank that masquerades as a "nonpartisan" "think" tank, is at it again.  Now it's pushing the right-wing agenda of ending any tax expenditures that redistribute resources down to those in the lower-income distributions. It's produced a study on the "benefits" of eliminating the Earned Income Tax Credit that often makes the difference between food security and living in your car for the working poor.  Erik Wasson, Tax Foundation Charts Benefits of Ending Earned Income Tax Credit, The Hill (Aug. 6, 2013).

 The Tax Foundation "study" includes various right-wing assumptions about the working poor and the benefits of tax cuts that are not empirically supportable.

1) While conceding that the EITC helps the "really" poor, the Tax Foundation repeats the old right-wing saw that those working poor who aren't "really" poor will be disincentivized to work by having the EITC, in essence making that old Romney claim that the EITC is a "bad" policy because it provides aid to the poor, which will keep them from taking "personal responsibility" and thus keep them from getting those multiple jobs that would provide them the same sustainability that the EITC provides. Here's how the Hill story describes the report on this point:

The report argues that the tax credit encourages work for very low wage  individuals but serves to discourage work for those making more because the  refundable credit phases out.  Id.

The undertone is that poor people are lazy, so government help should be limited to the really destitute, else it will just encourage laziness. 

These assumptions are integral to the Chicago School's economic analysis, which depends on nice mathematical equations about humanity that assumes away most of what makes us human, including the fact that we are quite different from one another.  Chicago School ideology says that if you give somebody something, they will become essentially addicted to the freebie and no longer work.  Do you know anybody for whom that is true?  I don't.  I know people that my family has assisted through hard times who have worked even harder to show their gratitude for helping them through a tough spot.  The Tax Foundation folk apparently see only the mythical "welfare queens" when they think about the EITC.

2) Instead of giving the money to the poor, the Tax Foundation calculates that we could use it instead to provide a rate cut for those who pay taxes of about 5.7%.  Now that is outright redistribution upwards.  Because of the personal exemption and standard deduction and EITC, most taxpayers in the bottom two quintiles pay no or very little income tax.  The benefit to those low-income taxpayers would be redistributed upwards (the only kind of redistribution that the right likes, apparently) to those in the top three quintiles.  Ending one of the best anti-poverty/food-security programs in the country in order to add some more to the pockets of the have-mores.

3) Oh, and the Tax Foundation makes their End EITC Now agenda even rosier by assuming a dynamic scoring of the elimination of the EITC--with those poor families not receiving needed aid, the Tax Foundation says the economy should grow by an additional $29 billion above and beyond the dollars saved that currently go to the EITC!    Jobs would flow from just cutting out this assistance for poor people.

[E]liminating the Earned Income Tax Credit would increase employment by 274,000  full-time equivalent jobs.  Eliminating it and lowering tax rates by 5.7  percent across the board would create 783,000 jobs, the study says. The jobs  would come in a five to 10 year timeframe, study author Michael Schuyler said.  Id.

Now, maybe those rich guys getting the extra tax break will indeed make more money--but the odds of that money being invested in the US are slim, don't you think?  And when poor families lose both food stamps (see yesterday's posting about the right-wing's effort to ensure that families placed on the brink of desperation by the financial crisis will be shoved over the cliff by not having enough food) and the EITC, they will cease being participants in the economy and become drains on local city, county and state budgets. They aren't going to get jobs that aren't there.  And jobs aren't going to be created by the money "saved" from not helping poor working families.  The Tax Foundation study's proposal is not a recipe for economic growth, but another example of the right's class warfare against everybody who isn't already in the upper class and that's a recipe for economic disaster.

 

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Senate Finance Leaders push "blank slate" to tax reform

  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.  

Related articles

Orrin Hatch on tax reform at the ABA--a predictable right-wing rant

Why We Should Be Wary Of 'Blank Slate' Tax Reform

Why 'Blank Slate' Tax Reform Is A Bad Idea

Senate Invitation to Defend Tax Breaks Propels Lobbyists

Redistribution and public production of public goods--not "let the markets handle it"

In recent posts, the Importance of Distribution and Markets, Minimum Wages, and the Sins of Friedmania,  I have noted the centrality to sustainable democratic institutions of corraling the market so that the power and wealth of the elite few does not work to impoverish the many.  That means that government either rungs many programs for the benefit of the many itself--such as Medicare, Veterans' Care, public education, public utilities--or government ensures that it has systems in place to counter the power of the elite--such as redistributionist tax policies, social welfare policies that satisfy important needs such as health care and retirement security, with a good measure of "required self-help" through mandatory savings mechanisms.

Mark Thoma has a recent piece in the Fiscal Times that reflects the same ideas, from a slightly different perspective.  He enumerates 7 ways that markets don't work and require government intervention: retirement savings, health care, carbon emissions, labor support, financial sector, government contracting, and economic and political power.  See Mark Thomas, 7 Important Examples of How Markets Can Fail, http://www.thefiscaltimes.com/Columns/2013/06/18/7-Important-Examples-of-How-Markets-Can-Fail.aspx#page1, Fiscal Times (   2013).

    "When there are substantial departures from the conditions needed to approximate pure competition, markets usually perform poorly and government intervention can often help. In some cases, e.g. with a carbon tax or cap-and-trade, government intervention will reduce output and employment growth in the industry and many misguided market fundamentalists, or those with other agendas, will object to these “growth killing” policies. In other cases, e.g. in health insurance markets, government intervention will cause the industry to expand rather than contract. Here, the objection is generally about the growing size and power of government. "

   " But in both cases what’s important is that government intervention is moving us closer to the competitive ideal, and true believers in the power of markets would endorse rather than object to these policies. "  Id.

 

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The importance of redistribution

Market Power, Minimum Wages, and the Sins of Friedmania

Mark Thoma on What we Learned about Energy from the financial crisis

Market Power, Minimum Wages, and the Sins of Friedmania

Two items caught my attention in today's newspapers and they represent diametrically opposed positions on what matters in society.  One, by Paul Krugman, deals with the problems of monopoly rents--especially in industries in which there is very little production in this country combined with mostly profit-taking from some kind of intellectual property--think Apple and the financial industry.  The other, by Richard Posner, talks about the importance of national security and minimizes the  need for a minimum wage.

   Krugman notes the "growing importance of monopoly rents," which are "profits that do not represent returns on investment but instead reflect the value of market dominance."  Krugman, Profits without Production, New York Times (June 21, 2013), at A19. He suggests that the growing importance of these rents from markiet dominance represent a "disconnect between profitsd and production" that may factor into our continued lack of robust economic growth.  He contrasts GM in its heyday, when it owned hundreds of factories and employed about 1% of the total nonfarm workforce in this country, with Apple today, when it "seems barely tethered to the material world, employing fewer than 0.05% of US workers, with most work outsourced to China and "charg[ing] what the traffic will bear" for its i-products.  And this story is part of a bigger story--the impact of rent-seeking corporate profits on the overall economy.  It is driving rising inequality, as there is a "sharp shift in the distribution of income away from wages in general and toward profits."  Id.  Since the profits reflect market dominance rents, not returns on investment, a monopolist can be profitable without expanding its production capacity--as Apple is, sitting on "a giant pile of cash, which it evidently sees no need to reinvest in its business."  Id. The effect of monopoly profit-taking is that wages are depressed.  With household spending down as "labor gets an ever-smaller share of national income while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand."

The second item was a small blurb on the editorial page inthe Wall Street Journal, in which they pick out quotes from famous people worth noting.  This time it's Richard Epstein writing for the Hoover Institution.  See Notable & Quotable, Wall Street Journal (June 21, 2013), at A13.  Epstein suggests that "[a]ll government actions should be examined under a presumption of distrust" which is why, he says, he has supported "constitutional regimes that afford strong protections to economic liberties and private properties."  Now, folks, you have to ask, what does "economic liberty" --or even "private property" mean.  For Epstein, it is a "natural right" kind of idea--the misguided, Friedman-derived notion that markets can run themselves, letting the powerful who own considerable private property succeed and the weak who don't fail. That kind of brute force capitalism encourages corruption, rentier profits (see Krugman, above), and a depressed, highly unequal society in which them that have gets and everybody else is either a peon or some kind of low wage earner in thrall to the titans of Big Business.  Epstein goes on to give an example of his belief in "economic liberty"--the veiw that "there is no coherent case for state intervention" to maintain a minimum wage.  This is the view of someone who might say "let them die" of a poor person unable to afford health care, or "let them eat cake" of a poor person unable to afford bread.  This is not "compassionate conservatism" but brute force capitalism.  It is the view that the wage will find its bottom based on the "neutral" market forces.  But neutral market forces don't exist.  They are shaped by the powerful and if you let the powerful take wages from ordinary workers to puff up their own profits, they will do so to the full extent of their market power.

Epstein then contrasts the lack of a need for the state to ensure a minimum wage, which would "degrade the efficiency of private markets" with the need for the state to "put in place institutions that limit aggression in both domestic and foreign affairs.  Unlike protecting the livelihood of ordinary Americans, "national security is an area where government may be appropriately feared, but is still desperately needed."  We shouldn't be so uptight about the FISA court's allowing the government to grab all kinds of privacy data, because Epstein is confident that the NSA data grab is not "an intolerable invasion of privacy."

I for one remain unconvinced that the incredible data-grab by all the federal spy agencies is an acceptable intrusion on individual liberties in the name of "national security."  And I am quite sure that the establishment of a minimum wage to prevent the huge imbalance of power in the work place from allowing owners to grab all the gains from production at the cost of workers is a very good kind of state intervention on behalf of ordinary folk.  Epstein has it backwards--his ideological blinders from Chicago School economic "theory" are showing and his "economic liberty" arguments translate into the same old class warfare approach of protecting the profits of the elite at whatever cost they may bring to the rest.

If  an increasing share of the economy driven by monopoly profits and increasing inequality from depressed wages and the impact of rent-seeking profits on business expansion are bad things, what might be considered reasonable policy steps to take to deal with this problem Krugman has pointed out and Posner has disregarded?  It seems to me there are several policy positions that noticing the damaging effect of rent profits should push for:  1) increase minimum wages, 2) enact "Medicare for all" so that all those who lose out in a monopoly-driven corporate environment have an opportunity for decent health care (and the monopoly power of insurers is removed), 3) reinvigorate anti-trust legal actions to break up huge corporate empires like Big Oil, Big Banks, Big Pharma, etc., and 4) reinvigorate labor law to protect workers and ensure that those who want to organize can do so easily (with card-check and similar provisions, similar to motor vehicle registration of voters.

 

Related articles

Paul Krugman: Profits Without Production

Friday Musings on Profits, Production, Trade, and Inequality

The importance of redistribution

Time to raise the minimum wage

Mark Thoma puts Holtz-Eakin on (figurative) hot seat

As most of the ataxingmatter readers know, I do not frequently applaud the economic punditry of those freshwater economists who think the way to deal with the problem of failed market fundamentalism policies is to double-down on those failed policies. 

I've noted that we tried that already.  We doubled down on  reaganomics policies of tax cuts/militarization/deregulation/& privatization throughout the Bush regime, and that got us into a witch's brew of problems. 

Because of that double-down mentality, where the neos told us war was good and greed was good and where we applied the laughable, made-up-out-of-whole-cloth "Laffer theory" that told us there was no evil that tax cuts (especially for the rich and big corporations) couldn't conquer, the Bush regime very ably turned a budget surplus into a staggering deficit and a financil crisis that would guarantee more deficits and debt before we were done with it. 

We ended up with failed (de)regulatory policies.  They allowed Big Banks and their big moneymakers to speculate their way into phantom billions of profits (all soaked up by the big jefes/big moneymakers).  But instead, we got a near-breakdown of the financial system, that forced all us ordinary taxpayers to subsidize the Big Banks' losses without getting recompense from the banksters' earlier oversized payouts. 

We ended up with failed tax (cut) policies.  They cut taxes on big multinational corporations and the ultra rich, based on the claim that those are the "job creators" that we should reward.  But instead  they only ended up siphoning off needed revenues from programs that could build infrastructure and support quality education and research.  They privatized education by providing lots of federal loan money to students that went to for-profit schools, only to learn that those schools tend to be traps that don't educate but just take money for the profit of the "education" business.  They quit funding the stuff we need, so they could subsidize those that didn't need it.  And they kept the subsidy up--for Big Oil, for wealthy decedents--even when the money was just piling on for those that already had lots of it.

That's what makes the current ultra-partisan Congress and the constant right-wing talk of deficits and debt as justification for stripping the safety net (while still conferring outsize gains on the ultra rich and Big Business) so disgusting.  The right still  refuses to pay attention to facts and justifies this oft-discredited, clearly wrong-headed market-fundamentalist and class-warfare orthodoxy as "plain as day" correct thinking. 

ASIDE:  This seems sort of like the GOP's plans for gaining the loyalty of our increasing diverse electorate by being careful to package their mostly white, Friedman-orthodox, oligarchy-favoring policies in the sheep's clothing of multicultural spokespersons who avoid the "tell" of who they really are and use words that talk about ordinary people as though the policies were actually aimed at benefitting them.  Meanwhile they double-down on their claims that redistribution upward is all about job creation, and condemn those who talk about preserving the safety net by NOT reducing benefits as "socialists" who don't understand the American way. 

The American way they seem to be harking to is the era of the corporate titans of malfeasance that Teddy Roosevelt warned us against, who grabbed the gains of the market place well in excess of their productivity merit and didn't give a damn about the rest of us. (Take Leland Stanford and the building of the great western railroads, subsidized by vast land grants and other programs from the federal government.  Stanford was quite willing to let the Chinamen he hired to use their explosive expertise to carve out railroad tunnels live in hunger because he withheld their pay and die because of inadequate safety , but meanwhile he lived a life of luxury supported by his corporate structure that sent all the money supported by the government subsidies his way and none of it theirs.)

Douglas Holtz-Eakin is a prime example of doubling down on failed policies by ignoring the facts of recent experience.  See Holtz-Eakin, We have to get US government spending under control, guardian.co.uk (Feb. 14, 2013).  Mark Thoma does a good job of putting him on the hot seat and telling it like it really is.  Read it at Holtz-Eakin Tries to Scare You. Don't Let Him, Economist's View (Feb. 14, 2013).  Here's an excerpt

Holtz-Eakin (in the Guardian essay): "Debt reduction produces jobs and better economic growth."

Mark Thoma (in the Economist's View take-down): "[R]eading that last line, he has learned nothing from the failure of the confidence fairy to appear.  Waiting to fix the debt--a problem driven mainly by health care cost escalation that won't become severe for many years--is not risky, but his advice certainly is."

***

Holtz-Eakin (in the Guardian essay): "Down with the orthodoxy.  It is time to get the deficit under control."

Mark Thoma (in the Economist's View take-down): "The notion that we are responding in the same way as in the 60s and 70s, and that we are faced [with] the same type of shock (that require[s] the same types of policies)--an oil price shock and other large supply-side distrubances from demography that we faced then--is wrong and he ought to know that."....."The 'pundit orthodoxy' he disses is from Paul Krugman.  Kind of funny, given how wrong Holtz-Eakin has been relative to Krugman ... but Krugman can speak for himself, and has, on how wrong the 'we're about to become Greece!!!' crowd has been.  There is, however, one thing he [Holtz-Eakin] is correct about.  Holtz-Eakin is right to say we shouldn't listen to some pundits, especially those like himself who have been so wrong about how events would unfold at every step along the way."

Holtz-Eakin does a lot more in the Guardian article that is just plain bad, such as claiming that the so-called  Affordable Care Act "entitlement" will contribute to the so-called "entitlement problem," which will contribute to the "serious" problem that the "deficit orthodoxy" won't acknowledge.  He then hammers on the right-wing orthodoxy's pet do-away-with-it-if-we-can projects--Social Security, Medicare, and Medicaid, suggesting that "serious debt reform" requires "serious entitlement reform."  

As I noted in another recent post, right-wingers like Holtz-Eakin love to talk about safety net programs as "entitlements", whereas they talk about entitlements for the rich and MNEs, such as the percentage depletion allowance, the preferential capital gains rate, and the various subsidies that have handed outsize profits to big banks as though they were rightfully merited acknowledgements of the good those institutions do the rest of us! The talk about these safety net programs, when entering into a right-winger's discussion of fiscal issues, is always lopsided.  It is always how we need to cut back on them, and never about how we need to consider if the programs are worthy, the funding currently provided needed or even currently inadequate, and, if the answer is yes, what means make sense, in a sustainable democracy to serve the people, to ensure the ongoing viability of the safety net.  Not reducing benefits but increasing revenues and decreasing rent-profit-taking. 

So  Holtz-Eakin fails to acknowledge that actually the Affordable Care Act is a first step in addressing otherwise mushrooming health care costs which occur because we treat health care as a ripe field for rent-seekers to make rentier profits rather than acknowledging (like other advanced countries) that health care is at least a quasi-public good that must be heavily regulated to ensure accessibility.  And like all the right-wingers pushing the hand-wringing worry over deficits for which their own policies are the primary cause, Holtz-Eakin suggests that the core of what we have to do is, quelle surpise, "spending cuts and deficit control", since "doing nothing or worse, increasing spending, is a profoundly anti-growth strategy."

This is the doubling-down on failed policy orthodoxy that Americans should reject out of hand.  Spending cuts and efforts at "deficit control" that focus on taking away health care and pension benefits from retirees and others dependent on the safety net are perfect prescriptions for disaster.  We aren't Greece.  But if the right-wingers like Holtz-Eakin get their way, we will be.

 

Related articles

The Inequality Gap

Noted for February 15, 2013

An Orthodoxy of One

Douglas Holtz-Eakin Stops Being an Economist

Are lower taxes on "savings" good for the economy? Heritage, CRS and the "Matthew Effect"

[Hat tips to Ann Murphy (for pointing out the Heritage release to the tax prof listserve) and to Calvin Johnson, Edward Kleinbard, and Martin McMahon for permitting me to build a post around their contributions to the interesting exchange on the listserve.  I hope they will forgive any error I may have made in those instances where I paraphrased rather than using direct quotes.]

The Heritage Foundation put out a press release just a few days ago contesting the results of a Congressional Research Service study about the benefits from lowering tax rates.  See Curtis Dubay, Congressional Research Service Wrongly Implies Lower Tax Rates Don't Strengthen Economy, Heritage Network "The Foundry" (Sept. 17, 2012).  The idea--clearly implied by the title of the release--is both to discredit the CRS, a long-admired non-partisan research organization funded by Congress, and to bolster the right's longstanding argument that tax cuts are almost always good for the economy.

The attempt to skewer the CRS focuses on the correlations the CRS report uses between top marginal income and capital gains rates and economic growth rates, from which the study concludes that lower rates do not in fact correlate with stronger economic growth.  (See extensive work in this area, looking at the correlation between rates, growth and party administrations, in Presimetrics, a book by one of my fellow Angry Bear bloggers.) 

 Heritage claims that the correlations "prove nothing" because of "the economy is more complicated".  To make any analysis, Heritage seems to be saying, you have to take the entire gamut of potentially influencial factors into account, and then you have to also be aware that no two eras are ever the same.  In short, Heritage seems to be arguing that there is no way to do an analysis, and therefore the rough correlations shown by the CRS study should be disregarded.  Even if that were true, it would amount to a pretty flimsy claim on the other side--i.e, it would amount merely to the claim that Heritage thinks the problem is so overwhelming that the conclusion that tax cuts have a harmful effect on the economy can't be considered completely substantiated.  A pretty flimsy excuse for a release with the title provided.

But Heritage goes further with its own statements. 

Of course, if you tax income, investment, and savings less you'll get more of them and the stronger growth that comes with the increase in these activities.  And if you raise tax rates on those most able to react, then the reactions will be that much more pronounced.  Upper-income taxpayers have the most capacity to adjust their behavior; by shifting the composition of their labor income to avoid tax, to shift the composition of their investments to avoid tax, or to shift away from work effort toward leisure.

It is vital that the public, the media, and, most importantly, policymakers don't fall for misleading analysis. ... the economy is in bad shape and will remain that way unless and until it gets better policy from Washington.  One of those policy improvements would be lower tax rates through tax reform.  Id.

Note that Heritage hasn't shown that the CRS conclusions are wrong, nor has it shown that the CRS methodology is so deficient that the conclusion isn't a useful, "rough justice" conclusion based on the emprical data that exists, even though it does not (and cannot) consider the entire universe of factors at play in the economy and even though no study can compare a tax year with such tax cuts to the same tax year without such tax cuts.  As Edward Kleinbard, Professor at USC's Gould School, notes, "The alternative to the 'weak' correlation that [Heritage] criticizes is no correlation at all. Why is that useful?" (quoted from an email exchange with permission). 

Calvin Johnson, the Andrews & Kurth Centennial Professor of Law at the University of Texas, notes that there are really only four reactions to cutting taxes on capital income (the main way generally proposed for reducing taxes on savings): 

1) reductions in savings as people hit their targeted fund levels for things like retirement, purchases, emergencies sooner;

2) increases in borrowings to fund investments that benefit from the cut taxes on investment income;

3) moving capital from other investments to the tax-advantaged forms of investment; and

4) saving more because of the tax incentive.

Heritage, Johnson says, wants to claim that item 4 is the typical response, but the evidence suggests it is mostly the first three.  And because of that, the economy goes "in the wrong direction"--"the private reaction is close to zero or negative" and "the deficit is dissavings dollar for dollar", so that "the overall impact is strongly negative."  Calvin Johnson (paraphrased and quoted from an email exchange with permission) .  Johnson has been writing about needed reforms to the tax system for some time, including comments on overly generous incentives for savings, through the "Shelf Project", a series of articles in Tax Notes that discuss potential ways that Congress could adjust the federal income tax laws to create a simpler, fairer and more efficient tax system and still raise the much-needed revenues for infrastruture and other programs.

There is pretty good evidence that Johnson's first item--targeted savings for precautionary needs and for targeted purchases and retirement--covers the main reason that people save.  The Federal Reserve underwrites a triennial survey of consumer finances.  The most recent study is reported in Bricker, et al, Changes in U.S. Family Finances from 2007- to 2010: Evidence from the Survey of Consumer Finances, Federal Reserve Bulletin Vol. 98, No. 2 (June 2012). 

The study shows that saving for "liquidity" (emergency expenditures, illness, etc.) ranked first in 2010,at 35.2% and saving for retirement ranked second, at 30.1%.  Saving for specific targeted purchases, homes, and education amounted to another 17.1 %.   In contrast, saving for investment was a piddling 1.2% and saving for "no particular reason" (which may be the kind of savings we would expect from high income families with more money to spend than they can easily spend) garnered only 1.4%.   Id. at 16 (Table 3).

Note, too, that Heritage only offers in substitute to the CRS's study the same tired and untrue economic theory it has always relied on (like the infamous Laffer-curve, a theory that essentially speculates about the great benefit from lower taxes based on "free market" assumptions).  Heritage is left with merely asserting a claim that "lower tax rates" in and of themselves will lead to a better economy.

Martin McMahon, the Stephen C. O'Connell Professor of Law at the University of Florida, notes that this is "poor theoretical economics at best."   Ed Kleinbard adds that these types of theoretical arguments are "like a biologist studying the mating rituals of butterflies along a highway median--likely as not, the new dance you observe is just a downdraft from a passing tractor-trailer."  (quoted with permission).

McMahon goes on to say:

[The Heritage release] incorporates only the substitution effect, and ignores the income effect.  It is based largely on what I refer to as an 'attractive nuisance' in tax policy analysis.  That [attractive nuisance] is a model of a commodity tax on which the purchaser is indifferent between apples and oranges until a tax is levied on one and the preferences shift because prices shifted.  The proponent then trades 'apples and oranges' in the model for 'consumption and savings' and 'leisure and work' [to reach] the conclusions that are reflected in the paragraph above [i.e., the first quoted paragraph from the Heritage release]. ... But in the translation, the income effect is ignored as are exogenous constraints on substituting consumption for savings and leisure for labor.  The data bears out the CBO and has for decades.

Heritage's real gripe is that the real world does not behave the way the model that it prefers to believe is true [says it should].  (quoted from email exchange with permission) 

Marty McMahon has also been writing about this topic for some time.  A good place to start your reading is "The Matthew Effect and Federal Taxation,  45 Boston College L. Rev. 993 (2004) (available on SSRN, here), for which the abstract notes:

This article first examines in detail the increasing concentration of income and wealth in the top one percent, and particularly within much narrower cohorts near the top of the top one percent, that has occurred over the past twenty-five years. It demonstrates the strong Matthew effect in incomes in the United States over that period. The super-rich are pulling away from everyone by so much and at a rate so fast that the fact that incomes of many households at the bottom and in the middle have stagnated, or even fallen in constant dollars, has been obscured by ever increasing per capita income.

The article then examines changing effective federal tax rates over the last two decades of the twentieth century. By the close of the twentieth century the tax system was not raising revenue as fairly and was doing less to mitigate inequality than it had in the middle of that century. Tax legislation in the twenty-first century continued this trend by providing tax cuts very disproportionately in favor of those at the top of the income pyramid with very small tax cuts going to everyone else.

The article then demonstrates that economic theory does not support the argument that the tax cuts were necessary to spur incentives to save and invest and to work, and that the empirical evidence of the effect of tax cuts on savings and investment clearly contradicts the claims made by supporters of the tax cuts. It examines the rapidly growing body of economic literature supporting the thesis that economic inequality impedes economic growth rather than fostering it, and concludes that because the tax cuts increase inequality, they probably impede economic growth.

This is worth repeating:  tax cuts to spur savings (such as preferential rates for capital gains and other tax programs that reward investment) don't really work.  They tend to increase inequality.  Inequality tends to impede economic growth.  So tax cuts to foster savings tends to do more harm than good. 

In fact, in a review of the research literature and empirical studies regarding taxes and savings (see id. at 1080-89, in particular 1084-89 on savings), McMahon shows that "an increased yield to capital might actually decrease household savings.  Over the long term, the United States personal savings rate has varied inversely with the yield to capital."  Id. at  1086 (emphasis added).  And even investment increases from tax cuts only help the US economy if they are invested domestically--a proposition that is highly uncertain given today's international financial markets; otherwise "the benefits of increased wealth ... would inure only to savers, the owners of capital" and not to U.S. workers.  Id. at 1087.

 

The Supreme Court's corporate monsters--if money buys them "free speech" rights, can it help them avoid giving others human rights?

The Supreme Court decided in Citizens United that corporations could intevene to influence elections--giving money and aide to their selected candidates.  This was an inordinate broadening of corporate "personhood", claimed to be necessary under the warped First Amendment precedents of the Supreme Court that count "money" as speech and thus consider that  limitations on money spent to influence elections as a limitation on speech.

Yet most economists and tax professors argue against the corporate tax--which has been in place longer than the individual income tax--on the grounds that taxes distort and that the claimed "double taxation" of corporate income distorts the allocation of capital.   See, e.g., Tax Foundation, 2004 paper on integrating corporate and personal income taxes; seminal 1985 integration piece from NBER.  Much of the argument boils down to an a prior assumption that "only people can pay taxes."  

(Of course, we used to think that only people could engage in campaign speech or bribe politicians for quid pro quo policies or otherwise influence the course of society.  We were naive.) 

As a result of this "received wisdom" about economics and corporate taxes--mostly based on the mathematically correct but practically challenged Chicago School approach to understanding economic systems (by assuming away most of the real world, including life, death, and everything in between)-- corporate lobbyists and their allies in Congress have been pushing for decades to eliminate corporate taxation through integration of the corporate and individual tax schemes or at a minimum to drastically reduce the liability of corporations for federal income taxes. 

Every presidential candidate has one scheme or another to reduce corporate taxes, with even Obama falling prey to the continuing influence of the Wall Street facilitators like Timothy Geithner in the Treasury and Larry Summers.  See Citizens for Tax Justice, President's Framework Fails to Raise Revenue (pointing out that there is no reason not to fix the loopholes in corporate tax to help address the deficit without having to lower corporate rates, and noting that although Obama at least called for making his rate reduction framework for so-called corporate tax reform revenue neutral, his plan fails to raise about a trillion dollars to make up for the corporate taxes that it gives up).  As CTJ notes, many organizations have called for the opposite--to raise revenues from corporations that have been paying very little in taxes, especially since the 2003 Bush "reforms" that granted most of the items on corporations' wish list for tax cuts.

Last year, 250 organizations, including organizations from every state in the U.S., joined us in urging Congress to enact a corporate tax reform that raises revenue. These organizations believe that it’s outrageous that Congress is debating cuts in public services like Medicare and Medicaid to address an alleged budget crisis and yet no attempt will be made to raise more revenue from profitable corporations.  Id.

Nonetheless, most candidates call for making the corporate income tax territorial and thus making it even more lucrative for US multinationals to move more of their corporate businesses (and jobs) abroad.  Most call for reducing the rates on corporations to a historically unprecedentedly low level--making it even more likely that the US trade deficit and corresponding budget deficit will continue to grow, even at a time when these self-nominated fiscal "conservatives" are claiming that the current deficit requires monumental sacrifices from ordinary people in the way of reduced medical care and old age security (the effort to cut back drastically on the benefits payable under  Medicare and Social Security).  Most treat the owners of corporate equity as though they were some kind of revered engine of growth, when in fact they are usually merely rich people who are interested in reaping as high a profit as possible from sales of corporate shares but very little interested in entrepreneurship, and as likely to engage in quick trades (the profits of which go into their pockets and not into the working capital of the corproations) as to hold long-term based on analysis of corporate business fundamentals.  Most don't accompany their form of integration with eliminating the category distinction between capital gains and ordinary income. 

Most  "corporate reform" plans call for continuing most of the absurd provisions that have larded the pockets of corporate management over the last few decades, such as

• accelerated depreciation and expensing (including all the depletion allowances for the heavily subsidized oil and gas extractive industry, even while it complains about the petty little incentives put in place in recent years for environmentally sound energy generation--accelerated expensing creates "phantom" deductions that reduce taxable income well below economic profits), and
• the  "research & development" credit, which was first enacted as a stimulus that was to be in place for a very short period of time but has been extended in fits--even retroactively for several years--as corporations demand making every single "stimulus" tax break they get permanent. 

(As readers of this blog know, I see little merit in the R&D credit.  Corporations can already deduct way too much "phantom" expenses--excess interest expense that allows them to operate with too much leverage, facilitating equity firm buyouts by leveraging up the purchased entity to pay off the equity strippers.  Further, as with so many of the GOP's favorite programs of tax subsidies for multinationals and the upper crust, it hasn't bothered to conduct studies to see if the R&D credit indeed results in more research done in this country.  Clearly, a retroactively enacted credit does NOT incentivize research.  Probably the times it's been enacted without being retroactive haven't either--it takes extensive labs and equipment to do research, and such labs and equipment have to be purchased far ahead of when they pay off.  Most of the R&D that the credit supports is likely to be of the "tweak-a-patent" variety that seeks merely to find a way to extend a monopoly profit from a particular profit--something the patent law should frown upon.)

So the drumbeat for lower corporate taxes--at a time when corporations are paying less as a proportion of GDP than they did in the time of our most sustained economic growth--continues unabated from the right joined by only slightly less enthousiastic accompaniment at the White House and think tanks like the Tax Policy Institute.

Meanwhile, the Supreme Court, having anointed corporations with a kind of personhood that lets them intervene in elections even though they have no vote, has taken for consideration a case that challenges the rights of individuals to hold corporations accountable as people are held accountable for human rights violations.  The case is Kiobel v Royal Dutch Petroleum (2d Cir. 2010), in which Nigerian plaintiffs seek to hold Royal Dutch/Shell liable for violating the Alien Tort Statute (“ATS”), 28 U.S.C. § 1350, which upholds international norms of human rights. The Second Circuit held that US courts cannot entertain such suits, holding that jurisdiction under the Alien Tort Statute against corporations requires an international norm approving sanctioning corporations for torts and that requires more than the mere fact that most countries treat corporations under their domestic law as capable of committing torts.   The court in the Second Circuit opinion makes a point much like economists tend to make about taxes--essentially implying that "only people commit heinous acts". 

From the beginning, however, the principle of individual liability for violations of international law has been limited to natural persons—not “juridical” persons such as corporations—because the moral responsibility for a crime so heinous and unbounded as to rise to the level of an “international crime” has rested solely with the individual men and women who have perpetrated it.  Second Circuit in Riobel.

 

 

While people are the "deciders" of corporate decisions, nonetheless the corporate form permits corporations to engage in conduct that individuals alone cannot engage in--from amassing huge resources to carrying out massive enterprises that pollute and steal human dignity.  To ignore that reality of corporate wrongdoing, especially in an age that has anointed corporate personhood with rights that seem furthest from ones that corporate entities should be permitted to enjoy, would be folly. 

For further discussion of the implications of the case, see Peter Weiss, Should corporations have more leeway to kill than people do?, New York Times (Feb. 24, 2012).

Suffice it to say that this case raises the specter of full-blown corporatism overtaking the entire U.S. economic and social system.  If the Supreme Court accompanies its "personhood for free speech/election intervention rights" with "not people so can't be touched for human rights violations", there will be even fewer ways to hold multinationals accountable, and they will forge even stronger relationships with autocratic dictators who treat their citizens like slaves and their environments like garbage pits.   Meanwhile corporations will continue to intervene in our elections at will (usually the will of their ultra-wealthy managerial class), using the extraordinary power of the resources at their command.  

We will all be the worse for any decision that would allow multinationals to expand their quasi-sovereign rights without saddling them with a strong obligation to comply with international norms respecting human rights.  Rights without obligations are invitations to corruption.