ataxingmatter

Should simplicity be a primary goal of tax reform?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

 

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

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

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

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

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

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

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

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

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

 

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The GOP Plan to Wreck Government Is Doing Great, Thanks Very Much

Both the rich and ordinary Americans misunderstand their economic interests

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.

The broad trend is clear from a diverse set of data. Median household income growth has badly lagged per capita GDP growth, corporate profits as a share of national income have risen, and stock markets have reached record highs.

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.

 Matt Iglesias, Vox.

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.  

 

Related articles

In Defense of Obama | Rolling Stone

tax breaks for wealthy; corporate tax shouldn't be reformed away; seed patents are a real scandal

No time for lengthy commentary today, but worth calling attention to some noteworthy items.

(1)  The CBO released a new report detailing the income groups that benefit most from the various tax expenditures in the internal revenue code. No surprise that it finds that those in the highest income brackets receive an enormous amount of (not-needed) money from these tax subsidies.  

As one blog put it: "a whopping $2 trillion of that goes to folks who make more than $450,000 a year. In other words, 17 percent of all tax breaks goes to the top 1 percent. $2 trillion is about double the 10-year cost of the sequester." Bill Scher, $2 Trillion Wasted in Tax Breaks for Wealthy, Campaign for America's Future.org (May 30, 2013).

The wealthy enjoy tax breaks that have no relation to anything they produce but do relate to the fact that they are the primary owners of financial assets, such as the preferential rate for capital gains and the preferential rate for corporate dividends.  They also benefit much much more from any tax break they get than others do, especially when it comes to the mortgage interest deduction, the charitable contribution deduction or the exclusion for interest on tax-exempt bonds.  That's because they have more expensive homes, get bigger mortgages, have more financial assets that they can contribute to their pet projects for a FULL deduction of value (not just, as with most other property contributions, for their actual investment), and are about the only purchasers of tax-exempt bonds (the rates for which are generally set to attract the wealthiest buyers) and always itemize, whereas 70% of Americans just take the standard deduction. 

This $2 trillion is an economic waste--for some, its just more money to "invest" in offshore bank accounts and tax scams; for others, it just feeds Wall Street's private equity funds and "private banks" with more cash for casino capitalism bets and takeover gambles. As John Kominitsky, a commenter on the blog, notes "This is the "capital" Wall Street sucks up to fuel their Speculation Casino of derivatives (CDO's) high-speed computer trading, outsized "executive bonuses", and tax dodging off-shore accounts."  So the tax breaks for the wealthy (costly to ordinary Americans who have to make up the tax money needed) feeds the Wall Street casino capitalism monster (costly to ordinary Americans who lose their homes and livelihoods as Wall Street banks require bailouts and private equity firms make megaprofits off firing people).

 (2) The New York Times is on a roll on tax issues, seemingly reading more deeply than it had been doing for a while.  Today's editorial makes the valid point that there is no justification in today's economy for abolishing corporate taxes even if they were replaced with something else.  See editorial, No replacement for corporate taxes: the system needs to be reformed, not abolished, New York Times (May 31, 2013).

The editorial calls the "tax cut crowd" out on one of the arguments I've lambasted here for years--the idea pushed by corporate lobbyists (and people like Tim Cook in his recent congressional testimony) that since there is a good deal of corporate tax avoidance, we should just cut corporate taxes way back or even eliminate the corporate tax altogether, since we'll "obviously" never get sophisticated companies to pay more.This is wacky.  Rewarding tax avoidance by eliminating the broken corporate tax system altogether gets it backwards, as the Times notes.  The editorial makes six important points.

1. the corporate share of taxes has steadily declined, while corporations' use of the good things that the nation provides--the "social and economic foundation on which corporate success is built"--continues apace.
2. Ending the corporate tax just rewards the wealthy even more (who own most of corporate stock) and results in heavier burdens on everybody else

And, I would add, everybody else will carry that burden either by paying a larger share of taxes paid or by suffering from reduction in government services of particular importance to them, such as lower funding for education, for aid to the poor, for research, etc.   The wealthy can buy themsevles whatever they want, so are now more willing to let government shrivel.

3. cutting out corporate taxes means increasing the deficit

4. There's no justification for cutting out corporate taxes in order to replace that system with another one, like a value added tax.  That implies that it is reasonable to favor publicly traded corporations with all the benefits of US government without any of the obligations to pay for that benefit.

This is particularly unreasonable given the Supremes' decision that corporations have a right to spend their money to influence election campaigns for real people, and the right-wing's attempt to make a scandal out of the IRS scrutiny of groups that use 501(c)(4) status to conduct politicking in order not to have to reveal their donors, frequently major corporate owners like the Koch brothers and MNEs like Exxon Mobil. The idea of eliminating corporate taxes and passing the burden to less able to pay individuals is just another piece of the corporatist, class warfare agenda.

5. It also doesn't make sense to scrap corporate taxes if we decide to get rid of the preferential rate for dividends.  There is ample reason for raising the tax rate on capital investment income--it mostly goes to the wealthy, so the preferential rates for the wealthy exacerbates the growing inequality in this country, though, as the article notes, there is little political will even among Democrats to set the system aright.  But even so, eliminating the capital gains preference doesn't support eliminating the corporate tax--corporations don't have to pay dividends and shareholders get to choose when to realize taxable gains. Getting rid of the corporate tax would exacerbate the problem of corporations and shareholders controlling tax revenues through personal decisions.

6. We do need to reform corporate taxes--to prevent the ability of MNEs like Apple, Google and GE to pay ridiculously low or no US corporate taxes.  And that needs global cooperation.  So in the meantime we should require country by country reporting of profits and taxes.

 (3) This last item isn't a tax item, but it is something that is just about as pervasive as tax issues in our lives--the question of whether corporate giants should be allowed to "own" patents on living organisms, especially on self-replicating living organisms like seeds. 

I think the Supreme Court's recent decision in the Monsanto case is wrong. The current policy represents corporatism gone viral: it leaves farmers dependent on the few chemical giants that own the original genetically modified seed and all seeds that plants that sprout from it make.  It rips profits from farmers' hands and puts them in the hands of managers and shareholders of Monsanto and companies like it--a kind of class warfare by proxy. It leaves our agriculture, and our environment, at the mercy of a big corporation that has been steadily pushing us to overuse poisonous pesticides and herbicides that ruin our air, our water, and our land.  Congress needs to act to undo this patent determination.  See Kristina Hubbard, Monsanto's Growing Monopoly: what the Supreme Court got wrong: patents on self-replicating seed are unethical, dangerous and anti-competitive, Salon.com (May 30, 2013).

Related articles

$2 Trillion Wasted In Tax Breaks For Wealthy

NY Times on Corporate Tax Planning/Tax Avoidance

Wealthy benefit the most from top tax breaks, government study shows

Politicians' wealth and the tax policies they support

[edited to correct typos]

A story in the Boston Globe by Britt Peterson on Feb. 19, 2012 explored "Why it matters that our politicians are rich" (available here on Boston.com).  A key point--the four remaining GOP presidential candidates all are millionaires, with most making more than a million a year and worth multiple millions, while the median net worth of members of Congress is "$913,000, compared with $100,000 for the rest of us."  Id.  That should worry us because, as the article reports, studies have shown that rich people become more focused on their own well-being, less empathetic with the suffering of others, more likely to view their own wealth as due to merit (and others' lack thereof to reflect lack of merit), and ultimately "more callous, self-absorbed, and self-justifying than the people they represent."  Id.

In 2009, Michael Kraus, Paul Piff, and Dacher Keltner, all then of Berkeley (Kraus is now at University of California, San Francisco), published research that divided up sample groups by family income as well as self-reported socioeconomic status. People of higher socioeconomic status were more likely to explain success or failure as a result of individual merit or fault; lower-class people, on the other hand, felt less control in their own lives and were more likely to blame events on circumstance. In other words, higher-status people were more likely to feel that they’d earned their high place in society, and that poorer people hadn’t. 

***

More recently, similar research—involving not just surveys, but heart-rate measurements —has found that higher-status people tend to be less compassionate toward others in a bad situation than people of lower-class backgrounds.

***

The result of these differences, say researchers who work on money and social class, is that people who are confident in their status have a completely different worldview from those who lack that confidence: more self-involved, self-justifying, and even, as the dehumanization study suggests, crueler. And the higher up the spectrum you get, the stronger the effect . . ..

***

Power itself can trigger similar changes. . . . Gaining a sense of power, then, even if it happens through random selection in a lab, alters you on a very basic level, making you “less attentive to others, more free to act, and more free to act in a way that doesn’t take account of other people,” said Adam Galinsky, a psychologist at Northwestern’s Kellogg School of Management who has been studying the effects of power for a decade.  Id.

That sense of personal merit (and lack of responsibility in others) can lead to disastrous policy choices.  The "ownership society/personal responsibility" mantra of the Bush presidency justified heaping tax breaks on large corporations and their owners/investors at the top of the income distribution while preaching deunionization, privatization, and safety net withdrawal.  It permitted a method of bailing out "too big to fail" banks from the financial crisis they caused by profiting immensely from risky speculation (made possible by deregulation) in ways that didn't require a  clawback of the rentier profits received by the "ownership class," resulting in privatization of gains/socialization of losses.  In essence, the "ownership society/personal responsibility" mantra provides justification for class warfare on the middle class and poor who happen not to be as well-off as  the rich.

Similarly, Congress' inability to empathize with ordinary Americans has led to significant numbers of Congresspeople (particularly members of the GOP) who support privatization of Social Security, reduction of benefits under Medicaid and Medicare and unemployment insurance at the same time that they continue to argue for zero taxation on the unearned income of the rich. And each of the GOP presidential candidates reflects that overarching goal of reducing taxes on the ownership class.  See, e.g., Gingrich's "optional 15% flat tax" (zero tax on unearned income); Cain's 999 transitioning to a national retail sales tax proposal (a flat consumption tax that would be heavily regressive and leave rentier profits of the wealthiest essentially untaxed); Santorum's tax proposals (even less protective of the poor than Gingrich's), Romney's tax proposals (including zero taxation of estates, extraordinarily low taxation of corporations, etc.).   Rather than supporting a repeal of the "carried interest" loophole that allows private equity fund managers like Romney pay ridiculously low tax rates on their very high compensation income, these candidates and politicians support continuing the tax policies of redistribution upwards that have led to the decline of the middle class as the "ownership class" gathers for itself all the productivity gains of the economic system.

"

Romney's Wall St. J. Interview with Gigot--Protecting the Rich

[edited to rephrase and correct typos 12/26/11 5 pm]

Joseph Rago and Paul Gigot interviewed Mitt Romney on his 'vision' for America--"On Taxes, 'Modeling', and the Vision Thing", Wall St. J. Dec. 23-24, 2011, at A13.  In it, Romney reveals the way patrician wealth has affected his values, casting President Obama as a "European social democrat" and suggesting that contrasts with his own belief in a "merit-based opportunity society--where people earn their rewards based upon their education, their work, their willingness to take risks and their dreams."  

Now everybody likes the idea of people being able to advance based on merit, rather than on crony capitalism, improper influence or whatever.   The problem with suggesting that America is a 'merit-based opportunity society' is that it isn't much of one anymore: America in this second Gilded Age is primarily a wealth-and-status-based opportunity society. 

• Education:  Even Romney admitted (obviously unintentionally) that wealth makes a real difference, since he noted that rewards depend in part on education.  People with wealth receive the finest educations from pre-K through post-graduate, getting preferences at the best children's academies in Manhattan and at the highest ranked universities like Harvard and Yale.  People without wealth lose out from the very beginning, with inferior schools that are no longer fully supported by the public, as charter and for-profit schools take over offering inferior educations that no patrician family would ever accept.  The poor and middle class take on enormous loans and work loads to finance even their public university educations, since state support has slipped down to a mere 20-30% of the cost of that education.  That makes study and grades and success much more difficult for them. 
• Working hard (with Contacts/Influence/lobbyists):  The wealthy are introduced early to the most important people of influence in society, like the Vanderbilts and the Astors of old, the private equity fund managers and the Wall Street bankers that can smooth their way through all the trials and tribulations of their 'work' careers--i.e., becoming owners of major league baseball team when you have no relevant experience (George W. Bush, with the aid of his papa and his papa's influential and rich partners) or setting up a venture capital fund (like Romney's Bain Capital). These connections ultimately permit the wealthy to mingle in a monied society that offers the right contact for every venture to succeed--including lobbyists to help a wealthy entrepreneur get his business going and ability to 'invest' in politicians who are willing to risk alienating the middle class to support preferential taxation of the rich. 
  • By the way, lots of the not-rich work quite hard, often at thankless jobs that provide no cushion to deal with life's difficult blows or at a job that, at minimum wage, still leaves their family below the poverty line.  Without the contacts and influence that smooth the way of the rich, there chances of moving up are much more limited.  If they persevere, have an entrepreneurial idea, and catch a break, they may be able to move beyond where they are, but they have to do a lot more than just 'work hard.'  
• Taking Risks (and Getting Subsidies and Preferential Tax Provisions):  The poor take a risk every time they get up in the morning--will their health hold out so they can keep working? will they be able to make it to their job in that car that needs a new starter? can they manage to arrange for someone to take care of their kids while they work or will they have to be "latch-key kids" yet another day?  But they don't usually have the kind of capital nest-egg to take a risk with in the way that Romney means it--the excitement of opening a new business demands from the poor and near-poor Herculean efforts to pull together family, friends, and workers to support their business ideas.  Those with money, on the other hand, have a head start on all of this.  Bill Gates' parents offered him an educated life of relative ease; he could 'play' in the garage on that dream of his rather than running heavy machinery or working behind a counter at a McDonalds.  And those with contacts and money are able (and willing) to hire the best lobbyists to ensure that they get all the tax-advantaged benefits and subsidies that they can finnangle (or buy) from local, state and federal legislators for their activities.  That includes favorable tax provisions that allow them to keep a significant percentage of their wealth (and to fight for even more favorable provisions), such as the carried interest provision that gave Romney a preferential rate on almost all of his compensation income, the preferential capital gains rate that gives all the wealthy a low tax rate on their income from trading stocks and bonds with each other, and the various ways that the tax code subsidizes the kinds of personal deductions that provide the most benefit to those with money--from the charitable contribution deduction (including the ability to give away stock and claim a deduction for its value rather than for your actual basis) and the mortgage interest deduction (for interest on home loans up to a million plus $100,000) to all of those provisions that allow the wealthy to retire well--pension plans, exclusion of life insurance benefits, etc.  Then there are the many subsidies they get various governments to provide for their businesses, presumably by using those long-term family/status connections to wine, dine and influence.  They include low-cost loans such as those enjoyed by Romney's Bain Capital for various businesses that Bain Capital was 'turning around'.  (Handily, they can make low-taxed profits for themselves even when their turnarounds fail, with all those subsidies, so that the taxpayer sometimes ends up paying  for their losses along with the fired workers.)  See the links provided in the posting yesterday on Romney's reluctance to release his tax returns, which discuss some of the subsidies and other benefits to Romney's business. 

That's not a merit-based opportunity society:  it's an influence-based society, where the poor and even most of the middle class are working against long odds to make headway. 

And there's not much evidence that Romney recognizes this fundamental difference in existence of the well-off and the not-so-well-off here in America.  Take the Gigot story's discussion of tax policy and what kinds of "reforms" Romney supports.  The Journal apparently thinks Romney is too timid on 'risk-taking' because he didn't espouse the kind of tax agenda that the Journal supports--moving to a consumption tax--like the national sales tax-- that shifts most of the tax burden to ordinary folks (since they will pay tax on most or all of their  income since they spend most of it on food, shelter, clothing and other necessities) and leaves a zero percent tax rate on the capital gains, dividends, and other income from capital that makes up most of the income of the wealthy and little of the income of everybody else.  Why, the Journal notes, Romney's plan merely calls for extending the Bush tax cuts, cutting the statutory corporate tax rate from 35% to 25%, and eliminating capital gains and dividends taxes only for those who make $200,000 or less.  Romney won't even say he supports a consumption tax til he's studied it more, though he likes the purported "simplicity" of a flat tax.    Romney also says he likes "removing the distortion in our tax code for certain classes of investment".  This means that Romney does not understand the real economics of the consumption tax and the so-called 'flat tax', both of which result in taxation of 100% of the income of the poor and near poor and most of the middle class while leaving the rich with a minimal tax burden.  Any system for alleviating that burden (such as a low-level exemption at the bottom of the income scale) would thrust a truly burdensome recordkeeping requirement on those least able to cope with it.  Especially for versions that merely zero out the tax rate on income from capital, distortions would be magnified: the categorization of income into different types is one of the primary distortions in our system, and any plan to eliminate taxes on one type of income while retaining them on another increases distortions rather than removing them!

What about Romney's saying he won't propose cuts in individual tax rates for those making more than $200,000?  The Journal seems to think that is rather cowardly, since such a proposal accepts President Obama's linedrawing on where rate cuts might be reasonable.  Now, aside from the failure to consider dropping the entire bunch of Bush tax cuts and letting all the rates go back to the level that they were when Bush took office (which might well be the best tax reform the Congress could do at this point), Romney should be commended for at least recognizing that the wealthy have gotten a fistful of tax gifts from the Bush individual tax cuts (and, indirectly, from the various corporate tax provisions that have allowed companies to pay less and less into the federal fisc) and for not wanting to proffer even more. 

But here's the rub.  Romney doesn't recognize the damage from the wealthier among us continuing to get even wealthier while the vast majority suffers stagnation and decline:  as the concentration of income increases at the top and inequality becomes the defining characteristic of this society, opportunity for all is threatened as is democracy itself.  Tax policies that could serve as a deterrent to that wealth buildup at the top--e.g., a stiffer, progressive estate tax, a financial transactions tax to discourage trading and capture a tiny amount in connection with those secondary market trades amongst the wealthy, and bracket expansions that would create a more progressive set of tax rates for the highest income that would distinguish between those who have $400,000 a year and those who have $2 million a year--aren't even on Romney's radar screen.  He's content with the current system's distribution, one that is highly favorable to the wealthy.  As a recent FED Finance and Economics Discussion Series article made clear, inequality has made permanent inroads and tax policies haven't done much to dampen them.  See Jason DeBacker et al, Rising Inequality, Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006.

Romeny's made it clear that he isn't about to challenge the status quo of an easy tax life for the wealthy.  Here's what he said to the Journal on the question of making sure that the wealthy never see any kind of a tax increase.

"My intent is to simplify our tax code and create growth, and so I will also look to see whether the top one-half of 1% or one-thousandth of 1% or top 1% are still paying roughly the same share of the total tax burden that they have today.  I'm not looking to lower the share paid for by the top."  Wall St. J., Dec. 24-25, 2011, at A13 (quoting Romney).

So after a decade of cutting taxes on the wealthy and passing more and more provisions that benefit the wealthy in particular either directly or indirectly, Romney declares today's status quo as the perfect state for things to be in--the current low taxes on the wealthy, in perpetuity, are his goal.  And while we may applaud him for not intending to lower taxeds further on the wealthy, it is hard to see how continuing current tax policy towards the wealthy makes sense for the fisc or for democracy.   Carried interest--won't be taxed under Romney as the ordinary compensation that it is.  Mortgage interest deduction on million-dollar loans--won't be pulled back to a more reasonable amount such as the interest on a loan that is 80% of the value of the median-priced US home.  Charitable contribution deduction for value rather than basis in stocks contributed--won't get rid of that one.  Establishment of new brackets to recognize the drastic expansion of incomes at the top so that those with progressively more income are paying progressively more in taxes--won't happen under Romney.  Why?  Because he is going to make sure that the top 1%, the top 1/2%, the top 1/1000% don't pay less, but also don't pay a bit more in taxes than they are paying now, this perfect state where the GOP wants to cut people off Medicaid to save money, turn Medicare into a 'premium support' system that will shift more and more of the burden of health care in one's old age to the vulnerable elderly with a pension they can't count on and a Social Security system that the GOP is trying to ensure that they can't count on.

Most tax "simplification" promoted by lobbyists won't create growth--it is much more likely to result in tax loopholes that the wealthy can drive a truck through.  Refusing ever to increase taxes, even on the ultra-rich who can clearly afford to pay more (without really noticing the difference in spending power) won't create growth--it most likely will result in a stagnant economy where the burdened middle class gradually falls into the ranks of the New Poor. 

Perry Proposes (no surprise) a flat tax...

Rick Perry, one night after what has been termed an 'invigorated' debate performance, has climbed on the flat-tax bandwagon (presumably meaning a flat-rate consumption tax a la the national retail sales tax idea).  See Tumulty, Rick Perry to Announce Flat Tax as Part of Economic Plan, Washington Post (Oct. 19, 2011).

See prior posting on ataxingmatter regarding Cain's 9-9-9 plan and generally about the flat tax, here and here and here and here and here and here and here and here and here and here.....

Put briefly, having as the sole source of revenue for the federal government's environmental protection, disease control, anti-trust, bank regulation, securities regulation, tax enforcement, consumer protection, military and defense functions a regressive national sales tax that would stifle the consumerism that accounts for about 70% of our economy would likely be quite harmful to the U.S. economy and to the overwhelming majority of Americans who earn less than $100,000 a year.

tax cuts and deficit commissions

The game continues, as Republicans hold out for tax cuts for the wealthy (who are garnering increasing amounts of the total income) and various "deficit commissions" put out austerity plans that all call for cutting Social Security benefits and Medicare benefits.

Alice Rivlin, who spoke here at my campus some time ago, seemed clearly to have cutting Social Security and Medicare in mind even then.  See Alice Rivlin on Financial Reform and Deficits, ataxingmatter.  She is now "trying to stir a debate" about a national sales tax, according to Bloomberg.  Przybyla, Rivlin Proposes 6.5% National Sales Tax as Part of Deficit-Reduction Plan, Nov. 17, 2010.  See also Jackie Calmes, New Deficit Reduction Plan from Bipartisan Group, NY Times, Nov. 17, 2010.

Now Rivlin is one of those Clintonites who is a right-center Democrat and, like so many of the Clinton and Obama advisers, close to the banking elite as a former Federal Reserve vice chairperson.  She claims her plan would be good for the country, but it isn't so clear to me.  Growth for growth's sake, we learn, doesn't work very well.  Tax cuts for businesses don't necessarily translate into US economic growth--they may just lead to higher executive compensation and bigger buybacks of shares for shareholders.  Tax cuts for the wealthy don't lead to more jobs:  the claim that "small businesses" are helped when their owners aren't forced to pay the piddling (for them) additional taxes that would be due if the Bush cuts for the wealthiest were not renewed is a farce--there are very few businesses that even fall into the wealthy owner category, and those businesses aren't likely to invest a penny more in jobs just because their owners get even wealthier with bigger tax cuts.

The Rivlin plan is a combination of significant tax cuts (lowering corporate rates, even though corporations' effective tax rates are already at the international norm and perhaps lower if all is taken into account), freezing domestic spending (even though the unemployed, underemployed and vulnerable elderly and poor will need more support, not less, and even though infrastructure projects require additional funding and everything from education to food and drug inspection to disease control are already short-staffed); limit federal spending on health care for the elderly while raising Medicare premiums, eliminate most deductions and credits, cut the Social Security benefits (changing the cost-of-living adjustments and reducing growth in benefits for the top 25% of beneficiaries), give a one-year Social Security payroll tax holiday (aimed, I wager, to make Social Security look like it is insolvent and therefore in need of cuts and privatization), and add a national sales tax of 6.5% (terribly regressive).

The claim is that this combination of tax and spending cuts with the sales tax will increase economic growth and therefore create jobs.  I'm not convinced. 

Even Bloomberg's reporter recognizes that the real purpose of these sorts of trial balloons is to "paint[] an even starker picture of the measures needed to tame the debt" and thereby "sell unpopular remedies".    Aha.  The real purpose for Rivlin's new visibility is as the "bad cop" of the bad cop-good cop act that has as its goal to sell Americans on the need to end Social Security as we know it, to cut back on our societal commitment to provide decent medical care to the aged, and to carry out even more tax cuts for the benefit of our growing oligarchic class.  Yet the Social Security funds--paid in by workers and their employers--have been used to reduce the federal operating deficit for years, a process that was carred to extremes under Bush to fund the Bush tax cuts and the Iraq and Afghanistan wars.

 
Source: OMB via Huffington Post

Why doesn't Rivlin just support changing the current funding mechanism for Social Security so that it will be a tax on 100% of wages and on capital gains, as is Medicare?  Why not support nonrenewal of the tax cuts for the wealthiest Americans?  Why not support continued tightening of the corporate tax code, including restrictions on tax-free reorganizations that permit US multinationals to grow bigger and richer and more powerful (and too big to fail)?  Why not recognize that the deficit isn't nearly as bad a problem as the increase in inequality in our country and the potential for an oligarchic takeover of our society? 

Aren't jobs the real need, whether or not we do something now or later to limit the deficit?  Shouldn't we spend money to create jobs, if we have to?  Infrastructure and education are two public goods that the government can fund while at the same time creating jobs.  We can worry about the deficit later.  Or we can just decide not to renew any of the Bush tax cuts.  Nobody was clamoring for tax cuts when the Republicans pushed the first through in 2001, so let them go and we'll all be back more or less where we were then.  We'll manage.   If you don't think so, look at this Tax Policy Center (Urban Institute/Brookings Institution) analysis of the impact of the expiration of the 2001-2003 Tax Cuts.  Extending the cuts would result in an average effective tax rate reduction for all taxpayers of 2.7 percentage points ("current policy") compared with letting them expire ("current law").  Renewing the cuts gives the biggest cuts, both in dollar and percentage points, to the highest income taxpayers.

 

 

If raising taxes on the rich is not possible politically now and raising taxes on the middle class possibly hard on the recovery, then at least do nothing other than extend them for a year or two while the country gets back on its feet.  And then let them go, along with a repeal of the preferential rate for capital gains and the extension of Social Security to full income.  Problem solved, and people put back to work. 

Meanwhile, the Republicans are intent on letting the deficit go wherever so long as they can get the tax cuts they want most--for the wealthiest taxpayers amongst us. See, e.g., MichaelTomasky's Blog, Tax Battle Lines Drawn (Nov. 17, 2010).   Camp, Republican from Michigan, says the GOP would be "foolish" to go along with any idea to renew tax cuts for 80% of Americans without giving a tax break to the wealthy at the same time.  Everybody knows that the GOP wants to make those Bush tax cuts that were designed to expire into permanent reductions in tax revenues.  See e.g. (but note my "caution" below),  Will Obama Extend the Bush Tax Cuts?, Human Events (Nov. 16, 2010) (indicating that "Republicans said they are still determined to make all of the Bush tax cuts permanent, rejecting White House overtures to decouple the top rates for a shorter extension").  And the biggest beneficiaries are the GOP's primary backers--the wealthy and big business--not the jobless.  See, e.g., "GOP to Jobless: Drop Dead", Washington Post (Nov. 16, 2010).

(CAUTION--the "human events" blog just cited is a right-wing propaganda sheet scattered with contextually faulty or otherwise typically misleading statements , such as claiming that the scheduled expiration of the Bush cuts "could plunge the economy into another recession" or quoting Michael Steele in saying that the Republicans are fighting to "permanently stop the Democrats' tax hikes" --even though, of course, the scheduled expiration of the Bush tax cuts was designed by the Republicans as a way to fool the people about the actual multi-trillion-dollar cost and if the expiration of the Bush cuts according to schedule is a tax hike (which I'd dispute), it is a Republican one and not a Democratic one). 

Polls fairly consistently show that Americans think at least the cuts for the wealthy should expire and possibly the cuts for all of us.   A recent poll shows that about a third of Americans think we shouldn't renew any of the tax cuts, and another third think that at least we shouldn't renew the tax cuts on the wealthy--that means that there's a 2-1 vote against renewing the tax cuts for the wealthy.   See Steinhauser, Do Americans Want to Extend Tax Cuts for the Wealthy?, CNN Politics, Sept. 14, 2010.  As noted in that article, another poll  (Gallup/USA Today)showed 44% want to roll back the cuts for wealthy Americans and 15% want the cuts to expire for everybody (including wealthy Americans), so also a 2-1 vote against renewing tax cuts for the wealthy. 

And rightly so.  Because there is no way that renewing the tax cuts will be a significant stimulus to the economy nor any way that failure to renew them will hurt "small businesses".  See, e.g., Fisher, The Economics of Extending Bush's Tax Cuts.  On the other hand, not renewing the cuts for the wealthy would do wonders for the economy--it would give us about $800 billion over ten years, "enough to pay for all veterans' hospitals, doctors, and the rest of the Veterans Affairs health system, plus the United States Coast Guard, plus the Food and Drug Administration, plus the operation and maintenance of every single national park for the entire 10-year period--with more than $100 billion left over." Id (quoting Michael linden at the Center for American Progress).

GOP Rep. Ryan's "Budget"

Rep. Ryan has proposed a budget that purports to present better solutions than the Dems have proposed.  But it fails miserably.  It privatizes social security, at a huge cost to the government to backstop market failures, and provides enormous tax cuts for the wealthiest Americans and corporations.  it is corporatism at its worst.

For a great point and counterpoint, you can read

•  the Center for Budget and Policy Priorities' analysis of the Ryan plan, Ryan Budget's radical priorities provide the largest tax cuts in history for the wealthy, raises middle class taxes, ends guaranteed medicare, privatizes social security, erodes health care
• Ryan's response Rep. Ryan Responds to CBPP's Analysis of Road Map for America's Future, and
• the CBPP's "gotcha" response to Ryan's response: Ryan's Response to Center's Analysis of Roadmap is Off Base. 

It is refreshing to see the Center call a spade a spade. The Ryan budget would provide immense tax cuts to the wealthy by eliminating all investment taxes while increasing the consumption taxes that are very regressive for poor and middle class Americans, for whom every penny counts.  And even with the cut in benefits and higher taxes on ordinary folk, the huge tax breaks for the rich would cost the country dearly, leaving the country in much worse shape than would result from making the irresponsible Bush tax cuts permanent. Ryan's attempt to hide and obfuscate what his budget proposal really does shouldn't pass muster, but it will take strong analyses like the CBPP's to force people like Ryan from faking it with misleading statements about their own policy proposals. 

And as Ezra Klein notes, one of the long term problems of this kind of legislative nonsense is that people will lose faith in the legislative process itself.  Klein, Discrediting the Legislative Process, Wash Post Mar. 19, 2010.  When winning an election becomes more important than serving the people, and getting people to support something even though it is not in their interest leads politicians to misrepresent and make claims that simply are not valid, we have a problem.  It is not that government is too big.  It is that the wrong people are being elected to hold office.  It is, putting it mildly, ridiculous for the ranking minority member of the Budget Committee to make outrageous claims about solving the deficit problem with a budget that has the federal government bailing out all American retirees if their privatized social security accounts lose money, lowering taxes on the wealthiest Americans by millions annually, while raising taxes on ordinary workers by significant amounts.

Fair Tax? Huckabee's win in Iowa requires more discussion of his tax proposals

Mike Huckabee won the Iowa Republican caucuses last night, as certainly most everyone knows by now.  Many may not realize, however, that Huckabee has taken a position in favor of the so-called "fair tax" (a national sales tax, which is claimed to be feasible at a 30% tax-exclusive rate) and also claims that adopting a national sales tax will permit abolishing the IRS.  His website proclaims the possibility of an IRS "going-out-of-business sale."

For background information, you can see various earlier "consumption tax" posts about the issues here, and in particular my most recent post on the "Fair Tax" at this link.

The problems with the tax reform Huckabee supports are legion.  The rate is unrealistic (even when expressed appropriately as a tax-exclusive 30% rate rather than as a 23% tax-inclusive rate).  It would have to be much higher to account for the many items that won't be taxed (imputed rents, government expenditures), the rebates for a poverty-level consumption, the "reimbursements" to states to act as the federal tax collectors, and the loss from non-compliance by taxpayers and by withholding agents. 

The idea of abolishing a federal tax agency is unrealistic.  States cannot be forced to be the federal tax collectors, and their taxes are quite different from the proposed tax, so something will have to give.  Most likely result--a new federal IRS-like agency that works on sales tax issues, audits, collection and enforcement to replace the current federal IRS. 

States also are likely to increase their use of income taxes.  So we might (might but likely not) get rid of the income tax in order to have a consumption tax (more likely we'd add a consumption tax component to federal taxation).  But states would likely (probably) increase their reliance on income taxation.  The result would be increased audit and enforcement issues at the state level, replacing possibly somewhat laxer audit and enforcement issues at the federal level.  Not much of a gain for individual taxpayers.

Sales taxes are regressive.  Income taxes can be (and ours is) progressive.  The majority of Americans have long supported progressive taxation and have recognized that it is unfair to expect lower-income families to bear a  proportionate share of the tax burden.  The "fair tax" supposedly deals with this through rebating a poverty level amount to every single household (even Bill Gates would get one).  But that's both arbitrary and complex.  Children don't count for as much as adults.  Single parents get the shaft compared to married couples. The amount won't cover real needs for poor and almost poor families since the poverty threshold is a 1960s number that doesn't really cover today's needs. 

And the transition problems are enormous.  People who've saved under one system would be taxed when they spend it under the new system, unless some kind of very complicated tracking system were initiated. Either fairness or simplicity would be thrown out the window, no matter what.

Of course, Huckabee doesn't get the description of the "fair tax" right, even given what the "fair tax" purports to be.  He says, for example, that it is a tax on wealth.  Not so.  It is a tax on expenditures (consumption).  (He says that later too.)

So did Iowans just not understand what Huckabee was talking about?  Or did he just come across as folksy and down to earth, so they voted for that?  Or did his use of his "Christian conservatism" win the day for him (see his website about his belief that faith belongs in politics)?  I suspect it was some combination of all three.  And each one of those possibilities is very disturbing.  The first means that Americans continue to be too darned ignorant about policy issues that really matter.  The second means that Americans learned nothing from the disaster of the Bush presidency, when a "good ol' boy" from Texas was elected with almost non-existent credentials for leading a superpower mainly because he projected a "just one of the folks" image (which was put on for the cameras--he's a rich kid, after all).  The third is very worrisome--religion has taken an unprecedented role in public affairs under Bush, and Americans don't seem to heed the lessons that our founders paid particular attention to--that governments should stay out of religion and religion should stay out of government.

I'm crossing my fingers that this was a fluke and that Americans will know better than to buy this kind of tax hokem as the symbol of the regime change we need.

Note (added 1/7/08):  See Tom Redburn, Huckabee's Tax Plan Appeals, But Is It Fair?, NY Times, Jan. 6, 2008.

Hoover Institution's Henderson wants to use the AMT "crisis" to convert the regular tax to a flat tax

Supply-side economists think they've figured it all out.  They (apparently) really think that people make decisions about accepting promotions and moving to rural areas based on whether the federal income tax is flat or progressive.  I've always doubted the economists'  conclusions based on the wealth-maximizing version of the motives behind human behavior, and I especially doubt them when it comes to tax policy, because tax never stands alone and is so intertwined with everything else--what kinds of goods and services the state provides, what we view as our obligation to help those with less, whether we think government is a better regulator of the public good than private, profit-making interests, and so on.

David Henderson at the Hoover Institution is one of those supply siders who believes the arguments (at least, the "moderate claims") --that a flat tax can lead to "more work and more output" while giving "lower-income people a disincentive to advocate [for] more federal government programs, because they will see themselves as paying for those programs" and because "taking roughly the same percentage from everyone's income is more fair."  See David Henderson, Don't Abolish the AMT [instead, change it to a flat tax], Wall St. Journal, May 2, 2007, at A21.  [Aside-- Henderson, like many supply-siders, claims that empirical studies prove supply-sider claims, but doesn't honor his readers by indicating what studies he is resting his views on.]

Henderson advocates letting the AMT downward creep continue, while moving the rates to a low 20% flat tax, so that over time we are (almost?) all moved to a flat tax system instead of the regular, progressive tax system.   He would prefer to lower the exemption amount now, but is satisfied to let it creep downward so that more and more people are paying the "flat tax" rather than the progressive tax.  He doesn't approve the progressive reform of establishing a reasonable income threshold for the AMT that is indexed for inflation. 

The progressive reform is the right one--it lets the AMT continue to do what it does well--ensure that high-income taxpayers are not able to avoid paying their fair share--while at the same time protecting ordinary taxpayers who have already been taxed through the wage-withholding system from having to pay a small additional amount through the AMT because of its broadened base.

One of the big problems with Henderson's favored result--a flat tax where everybody except those under the exemption threshold pays a tax around 20%--is that, in spite of Henderson's claims that a 20% flat tax on almost everybody can be revenue-neutral, such a tax cannot fund the government programs that we all know are necessary, resulting in lower quality of life.  Look at the information that has come out of the recent pet food contamination problem--we have now learned that the FDA has too few inspectors to keep up with the amount of imported foodstuffs, and that factories in China routinely add plastic garbage to food ingredients like wheat and rice gluten to make their exported food even cheaper (and incidentally more toxic and less nutritious).  Does anybody really want to pay less taxes in order to have to take the risks of food contamination that would result from cutting back on FDA enforcement even more?  How about the Center for Disease Control and other similar federal agencies funded with tax dollars?  The fact is, countries with much higher taxes than in the US (which is, in many ways, already a tax haven) have both a higher standard of living and a better quality of life measurement.

Another problem with the flat tax approach is that it is based on a distorted view of what government is all about--most flat taxers (and Henderson appears to be in that majority group, though he couches his arguments in terms of revenue-neutrality) want to downsize government and privatize its functions to the greatest extent possible.  Note Henderson's comment that "lower-income people" will have a "disincentive" to advocate for government programs because they'll be paying for them.   That carries a presupposition that government programs are bad and "disincentivizing" advocacy for government programs is good. What a perverse view of government that is.  We need, instead, to help people understand how important it is to be able to act together through an institution rather than individually on matters that we as individuals cannot possibly address, like poverty, health care, sustainability of quality of life in the face of globalized financial markets, and global warming.

Furthermore, the flat tax will inevitably shift the burden of whatever government we do have onto those least able to pay for it and most in need of governmental help.  This is an inevitable result of eliminating progressivity in the system and placing more and more of the tax burden on ordinary people--by far the vast majority of Americans--who labor to earn their livings rather than earning their incomes from capital.

Note that the AMT does not treat capital gains as an AMT adjustment; they are still taxed at extraordinarily low preferential rates.  Certainly, it is clear that if Henderson had his way, the new, flatter, lower-reaching AMT would become the main tax system and one would assume Henderson wouldn't add capital gains back in to make the preferential rate an AMT preference item.  Although Henderson doesn't address capital gains in this opinion piece, I suspect he would argue that capital gains should not be subject to taxed at all.  In that case, Henderson's "flat tax" world would become one in which tax is exclusively imposed on those who labor for an income.

Henderson claims a 20% flat tax could be revenue-neutral.  But that assumes that it would be politically feasible to get rid of a few additional deductions still not treated as preferences under the current AMT.  The home mortgage interest deduction is the elephant in that room.  I'd support eliminating that (just as I'd support treating the capital gains preference as an AMT add-back), but I doubt if it stands a chance politically.  The political difficulty of eliminating various deductions is one reason a flat tax rate would in actuality have to be much higher--probably around 40% or more-- to be revenue neutral or else the flat tax would result in huge cutbacks to government revenues.

Eliminating progressive taxation is already underway with the movement--funded almost entirely by hugely wealthy families--to eliminate or downgrade the estate tax.  Even the democrats don't seem to understand that we need to leave the estate tax in place.  An exemption amount of $2 million is plenty--it exempts anybody that we should have any concerns about, and it taxes those who otherwise will escape paying income tax most of their lives (because they don't sell appreciated securities) and then escape tax again at death.  We don't need to use the AMT--which was intended to catch some of these higher-income Americans who weren't paying their fair share--as a way to let even more of them off the hook for their fair share.  That's just plain wrong-headed.  Americans have always considered that people should pay tax according to their ability to pay. 

REVISED 5/4/06