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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Twitter Insiders--building substantial estates and escaping substantial estate/gift tax

The Wall Street Journal had a "tax report" in its weekend edition illustrating some of the devices used by the elite with sophisticated tax advisers to ensure that theiy can avoid paying as much estate tax as possible. See Laura Saunders. Tax Report: How Twitter Insiders Cut Their Taxes, Wall St. J. (Oct. 12-13, 2013), at B9.

Twitter chair Jack Dorsey (36) and largest shareholder Evan Williams (41) and CEO Richard Costolo (49) have been asiduous in "canny estate-planning moves" that "could save [them] a total of at least $115 million and perhaps far more."  Id. What are the devices listed?

1. The GRAT

The GRAT is a "grantor-retained annuity trust".  Dorsey apparently holds about one-tenth of his Twitter shares in such a trust, as does Williams.  GRATs are used to transfer appreciated assets to someone else, without paying tax on the appreciation.  The grantor/owner of the GRAT gets annual payments over the trust's life that add up to the value of the original contribution plus a formulaic "return" on that value at an interest rate specified by the IRS, currently around 2%.  If the owner outlives the term of the GRAT, he's gotten his original contribution (plus the formulaic return) back and any appreciation on the assets is transferred out of his estate to someone else (usually another trust on behalf of children).

Here's how Wikipedia describes a GRAT, in part:

it is possible that the actual interest earned on the assets will be substantially higher than the IRS theoretical interest. Thus at the end of the term, the value remaining in the GRAT may still be large, even though the initial IRS calculation suggests that it should have been zero. This remaining value is then passed on to the beneficiary without incurring a gift tax.

And, of course, the grantor's estate has only whatever remains of the original contribution value and annual payments.  That means substantial gift-and-estate tax savings.  The article estimates the tax savings for the GRATs listed in the Twitter IPO filing to be at least $113 million.

1. Gift Trusts

Gift trusts used by Williams for his Twitter shares may have been set up, the WSJ article suggests, to avoid potentially much higher estate and gift rates upon the expiration of the 2012 estate and gift tax regime.  [Congress rather foolishly failed to take the opportunity to reinstate meaningful estate and gift tax regimes, leaving the rich able to pay miniscule taxes (at a rate of 35%) even on humongous estates in excess of the substantial exempted amount.]  The article estimates a savings of about $3 million in taxes from the establishment of these trusts.

1. Single-Member LLCs

Williams also holds about a tenth of his shares through a single-member limited-liability company (LLC). Such an LLC is a "disregarded entity" for federal income tax purposes so that income on the shares are income to Williams.  But the legal entity has extraordinary tax avoidance ability for estate taxes.  Because the shares are held through an entity with limited marketability, the value of the entity is determined at a severe discount from the actual value of the shares held by the entity.  In the example in the article, if Williams gave shares directly to his children worth $1 million, there would be about $400 thousand of gift tax due.  But put the $1 million of shares in a single member LLC, and give the membership interest in the LLC to your child instead and suddenly  you can treat this indirect transfer of $1 million of shares as though it is worth, say, only $650 thousand, thus reducing taxes to $260 thousand. The kid can easily unwind whenever needed.  Voila--the government is left $140 thousand short but rich capitalist and kid have the same aggregate wealth as before!  The article adds another twist--let the gift trust buy those discounted LLC interests with an IOU, putting even more stock in the trust at below market value and further minimizing taxes.

Oh, and another caveat--these devices are used with the assets that "people know they won't need.'"  Id. Remember that these guys (and as usual, they are mostly guys) are worth many times more than ordinary Americans and so can "do without" several million dollars easily, compared to those ordinary Americans for whom their retirement savings in toto don't approach "several million."

So should these gimmicks for avoiding larger liability for estate tax work?  I don't think so--they are purely tax motivated, and they depend on tax rules that make them possible so it would be very simple for a functioning Congress to get rid of these planning techniques.  (Of course, we do not have a functioning Congress currently.  We have a Congress hijacked by extremists who don't give a damn about the future of the country and do give a damn about protecting the wealthy from paying taxes.)   The most worrisome of the devices is the "marketability" discount for LLC interests.  Congress could rather easily create rules applicable to gift and estate taxes that remove the possibility of market discounts for such LLC creations where membership interests are transferred to related parties.  It could similarly eliminate GRATs.  Remember, these  are essentially  entities that have no economic rationale other than tax avoidance purposes and are only utilized by wealthy capitalists in the elite top 2% of the distribution who are already extraordinarily favored under the estate tax. There seems to be no justification whatsoever for allowing them this ready-to-use method of avoiding taxation by creating GRATs or LLCs that hold the shares that are the real assets transferred. It's hard to see any justification for gift trusts, either.

 

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Senate Finance Leaders push "blank slate" to tax reform

  Senators Baucus and Hatch, the Chair and ranking minority member of the Senate Finance Committee, respectively, launched a bid for completing a Code reform before Baucus leaves office with a letter to Senators telling them that they should get their bids in within the month for any tax expenditures they want to preserve.  See Letter from Baucus and Hatch (June 27, 2013).

At first glance, this doesn't sound like a terrible idea. There are, indeed, too many tax breaks in the Code for huge estates, owners of capital, Big Oil, Big Pharma, "Non-Profit" hospitals, and corporate executives' deferred pay.  Wiping them away and then thinking through things fresh might be a part of a process for real tax reform that makes sense.

But it isn't clear that this duo can possibly carve a better system this way.  They have both already bought into the idea that the US has to "lower rates" to let Big Business be "competitive", an idea that ignores business reality and sets Congress up for a series of lobbying "auctions" (this tax break for that campaign contribution) [hat tip Evelyn Brody ].  They are both therefore part of the avid group of Big Business supporters who want to cut taxes, not raise revenues to deal with infrastructure needs, safety net needs, climate change, and the many other challenges that face a nation that has spent 40 years in the thrall of bankrupt Chicago School market theories that support winner-take-all systems.  Both have touted the idea that taxes should be "simpler''--as though having language that two-year-olds could read would be a reasonable way to ensure that the most sophisticated legal minds hired by the wealthiest Americans don't scam the system!  Remember that most of the complications in the Code are there to do two things--to provide special tax subsidies lobbied for heavily by Big Business (with a few for ordinary folk) and to prevent sophisticated (rich) taxpayers from ripping off the system as much as possible.

 Worse, these two have both already made it clear that the group they really want to hit are those who benefit from Social Security and Medicare expenditures--their goal isn't to make our social safety net sustainable through the centuries, but to cut holes in it so that the money can leak out in tax rate cuts to line the pockets of the wealthy heirs, the overpaid CEOs, and the banksters that caused the worst economic recession since the Great Depression, at great personal cost to millions of ordinary Americans who have lost their jobs, their homes, and their prospects for the future because of it.

Not surprisingly, their letter to fellow Senators starts with their claim  that the current Code is "broken" "riddled with exclusions, deductions, and credits", with the result that "[t]he complexity, inefficiency and unfairness of the tax code are acting as a brake on our economy." 

Now, there are problems with the Code, that I won't deny.  But this litany of evils is just what the lobbyists for the corporate and wealthy ordered--it buys into the attempt by free marketarian/Chicago School economists to paint taxes as evil, as sources of anticompetitiveness, as such dragging anchors on businesses and entrepreneurs that it holds back the economy and "forces" Big Business to offshore its work to cheaper labor elsewhere.  And it sets the stage for an outcome that removes anti-abuse provisions and decimates progressivity in favor of the "identity theory" notion of fairness--that you have to have a flat rate that treats everybdoy the same to be fair.

Why is the identity theory of fairness absurd?  Because it ignores context.  It is like saying an Ant is as big as an Elephant, by ignoring the relativeness of size which is essential to the notion of bigness/smallness.  In other words, we can't talk about "fair" without some idea of the scale on which fair is to be measured.  And saying that "taxing everybody at the same flat rate" is inherently "fair" (as the right-wing proponents of a flat national sales tax tend to do) misses the point of what fairness is all about! 

Then Baucus and Hatch turn to their concept of the "blank slate" and the appeal for senators to name their favorite tax expenditures (ie, their favorite pet interest groups).

We need your ideas and partnership to get tax reform over the finish line. In order to make sure that we end up with a simpler, more efficient and fairer tax code, we believe it is important to start with a "blank slate"—that is, a tax code without all of the special provisions in the form of exclusions, deductions and credits and other preferences that some refer to as "tax expenditures. This blank slate is not, of course, the end product, nor the end of the discussion.  Some of the special provisions serve important objectives. Indeed, we both believe that some existing tax expenditures should be preserved in some form. But the tax code is also littered with preferences for special interests. To make sure that we clear out all the unproductive provisions and simplify in tax reform, we plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.

Of course, this "blank slate" approach is a call to arms for all lobbyists, who have already begun aiming their impressive resources at their selected targets.  See  Politico, Tax Lobbyists Spring Into Action . 

But beyond that, note what it says about the provisions--it will keep those that encourage economic growth, increase fairness, or promote other policy objectives.  We already know what lobbyists say about all of the provisions that they favor for Big Business and Big Money--that if you don't give favorable tax provisions to all those wonderful (purported) job creators, the economy will crash.  And we already know who will use the "make the code fairer" arguments to support their views--it will be the right-wingers who want to eliminate social safety net provisions from the Code.  They have lots of money from the Koch brothers and other right-wing wealthy individuals and institutions and lots of paid "scholars" like Cato, and Heritage and all the others to push their views.  Tell me--just who is going to lobby for the real concept of fairness in the Code--like (i) getting rid of the preference for capital over labor, (ii) getting rid of tax favorable treatment for any deferred payment or pension plans that are available only to the top managers of firms, (iii) instituting a decent estate tax that begins to eat into the oligarchic dynasties that we've allowed to be created by such limp excuses for estate taxation (including not only much higher rates with more rate brackets, but also elimination of most of the gimmicks using trusts and partnerships and purported discounts; or (iv) creating a much more discriminating rate structure for the income tax that recognizes differences of income in magnitudes as they exist today , with rates for brackets that include half a mil to a mil, a mil to several mil, several mil to 20 mil, 20 mil to 80 mil, 80 mil to 150 mil....and on to the two billion mark?   And who is going to make the pitch that we have to raise more revenues in order to meet the needs of the aging baby boomer population as they retire with savings decimated by the Great Recession, homes lost to the lack of banking oversight, and facing significant increases in medical care costs?

It's pretty clear that neither Baucus nor Hatch has any desire to deal with real fairness issues, since that would require INCREASING THE PROGRESSIVITY OF THE CODE.  Note what they say to their fellow senators about the task ahead.

The blank slate approach would allow significant deficit reduction or rate reduction, while maintaining the current level of progressivity. The amount of rate reduction would of course depend on how much revenue was reserved for deficit reduction, if any, and from which income groups.

This phraseology reveals perhaps more than they wanted to reveal--first, that they are not even contemplating increasing progressivity, in spite of the past 40 years of reductions in progressive features.  And second, they really aren't planning to use elimination of tax expenditures to raise more revenues to make up for the absurd Bush tax cuts that they both helped put into place--note that they say the rate reduction will depend on whether any money is reserved for deficit reduction, providing a pretty strong indicator that there will be no revenues used for government and all the "reforms" would go to another foolish round of tax cuts.

Kitty Richards at ThinkProgress has some similar concerns about this "blank slate" announcement.  See Richard, Why we should be wary of 'blank slate' tax reform, ThinkProgress (June 27, 2013).  First, using the analysis done for the Simpson-Bowles "zero" plan (which was actually more protective of the lowest income than Baucus-Hatch have declared themselves to be), it would be very difficult to maintain progressivity (much less increase it as I have suggested is required) if base reduction is used to lower rates, since those who benefit most from lowering rates are the taxpayers with the most income. 

 The Tax Policy Center estimated the effects of the plan and found that it would have disproportionately increased taxes paid by low-income and middle-class families, not even taking into account the expiration of the Bush tax cuts for taxpayers making more than $400,000 per year legislated in last year’s “fiscal cliff” deal. If you compare average federal tax rates under the zero plan and under current law, the zero plan looks even worse – it would actually cut taxes for the top one percent by 10 percent, while more than doubling tax rates for the poor and increasing taxes on the middle class substantially.

Second, she adds, the Baucus-Hatch letter "treats decisions about revenue as an afterthought."  Yet revenue-raising is THE PRIMARY REASON WE HAVE TAXES. 

Congress should not be engaging in protracted tax reform negotiations that ignore the fundamental problem with our tax code: It does not raise sufficient revenue to fund the operations of government at appropriate levels in a sustainable way.

If Baucus and Hatch are interested in reforming tax expenditures, they should start by scaling back the biggest giveaways to corporations and the rich and devoting that revenue to repealing the sequester, not reducing tax rates for these same corporations and wealthy individuals.

Richards is right on in her critique.  We need to recognize the commitments we have to institutions and people, from infrastructure needs like roads and airports to wildfire prevention to climate change action to NIH and other support for basic scientific research on which rests most of the "entrepreneurial" innovations that the self-appointed meritocracy credits itself with.  That requires money, and money requires either printing more of it or more taxes.  More taxes from the wealthiest corporations and individuals also serves a secondary objective of increasing expanding opportunity and countering, to some small degree, the tendency for most government programs to function as upwards-redistribution paradigms that shift more and more resources to an oligarchic upper crust.

So I cannot think this Baucus-Hatch initiative augers well for the country.  I wish Baucus had used his imminent retirement to step back and consider what his legacy could be for a better world, rather than continuing to lie in bed with the lobbyists of the corporate elite.  What we need to do first is very simple--get rid of the multiple giveaways to big corporations, revamp the estate tax to make it heftier, and eliminate the many tax expenditures that are mainly for the wealthy (deductions of mortgage interest on second homes, deferred compensation schemes, etc.  

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Gay Marriage Decisions-- As Expected, A Step Towards Full Civil Rights for Gays

 In 5-4 decisions in which Justice Kennedy, as considered likely, joined the Court's liberal wing to form a majority as against the Scalia-Thomas-Roberts-Alito rightwingers, the Supreme Court delivered its opinions in the two gay marriage cases before it this term.  They are-Hollingsworth v Perry (rejecting an appeal of the lower court decision overturning California's Proposition 8, on technical jurisdictional grounds), and US v. Windsor (affirming the unconstitutionality of Section 3 of DOMA (the federal "defense of marriage act" ) that forbids the federal government from treating as married spouses for any federal law purposes those gay couples that are legally wed in their state jurisdictions).

The Windsor case was on appeal from the Second Circuit, which applied heightened scrutiny to find unconstitutional DOMA's denial of the marital exemption to a same-sex surviving spouse of a marriage that took place in Canada and was recognized in New York where the couple lived at the time of the spouse's death. 

The limitation of lawful marriage to heterosexual couples, which for centuries had been deemed both necessary and fundamental, came to be seen in New York and certain other States as an unjust exclusion. Slip op. at 14.

The jurisdictional issue in Windsor was not a hangup for the Court.  As I had indicated in the BNA Webinar on the two cases prior to the decision, the US retained a sufficient stake in the matter--relying on INS v. Chadha, the Court found that the government's refusal to pay the tax refund, even after the Justice Department's decision not to defend such cases,  provide an existing Article III "case or controversy" before the Second Circuit and before the Supreme Court. 

The judgment orders the United States to pay money that it would not disburse but for the court’s order. The Government of the United States has a valid legal argument that it is injured even if the Executive disagrees with §3 of DOMA, which results in Windsor’s liability for the tax.  Slip op. at 8. 

There was merely a prudential hurdle to overcome, and here prudence argued for a decision, given the extensive amici briefings on both sides, including the House-leadership organization's briefing adverse to the Executive.

BLAG’s sharp adversarial presentation of the issues satisfies the prudential concerns that otherwise might counsel against hearing an appeal from a decisionwith which the principal parties agree. Were this Court to hold that prudential rules require it to dismiss the case, and, in consequence, that the Court of Appeals erred infailing to dismiss it as well, extensive litigation would ensue. The district courts in 94 districts throughout the Nation would be without precedential guidance not only in tax refund suits but also in cases involving the whole of DOMA’s sweep involving over 1,000 federal statutes and amyriad of federal regulations.

The constitutional holding in Windsor is a narrow reading of the equal protection afforded by the Fifth Amendment's extension to the states.  Writing for the Court and joined by Justices Kagan, Sotomayor, Breyer, and Ginsburg, Justice Kennedy recognized that states have historically been allowed to define marriage--subject to Congressional restraints as in Loving v. Virginia's rejection of miscegenation laws--and noted that DOMA intervened to take away a protected status provided by those states that had recognized gay marriage--this was both the Congressional purpose and the effect of the law.  Because it creates two-classes of marriages within a state that recognizes one class of marriage, and forces couples to treat their relationship one way for state purposes and another for federal purposes, it violates the most basic principles of equal protection.

Today twelve states and the District of Columbia recognize same-sex marriage.  This decision gives same-sex married couples in those states equal treatment under federal law with married couples. 

Here the State’s decision to give this class of persons the right to marry conferred upon them a dignityand status of immense import. When the State used its historic and essential authority to define the maritalrelation in this way, its role and its power in making the decision enhanced the recognition, dignity, and protectionof the class in their own community . ... What the State of New York treats as alike the federal law deems unlike by a law designed to injurethe same class the State seeks to protect.

***

This status is a far-reaching legal acknowledgment of the intimate relationship between two people, arelationship deemed by the State worthy of dignity in the community equal with all other marriages. It reflects both the community’s considered perspective on the historicalroots of the institution of marriage and its evolving understanding of the meaning of equality.

***

DOMA seeks to injure the very class New York seeks to protect. By doing so it violates basic due process and equal protection principles applicable to the Federal Government. See U. S. Const., Amdt. 5; Bolling v. Sharpe, 347 U. S. 497 (1954). The Constitution’s guarantee of equality "must at the very least mean that a bare congressional desire to harm a politically unpopular group cannot" justify disparate treatment of that group.

 ***

The Act’s demonstrated purpose is to ensure that if any State decides to recognize same-sex marriages, those unions will be treated as second-class marriages for purposes of federal law.This raises a most serious question under the Constitution’s Fifth Amendment.

***

Under DOMA, same-sex married couples have their lives burdened, by reason of government decree, in visible and public ways. By its great reach, DOMA touches many aspects of married and family life, from the mundane to the profound.

***

Though Congress has great authority to design laws to fit its own conception of sound national policy, it cannot deny the liberty protected by the Due Process Clause ofthe Fifth Amendment.

 ***

 This requiresthe Court to hold, as it now does, that DOMA is unconstitutional as a deprivation of the liberty of the person protected by the Fifth Amendment of the Constitution. The liberty protected by the Fifth Amendment’s DueProcess Clause contains within it the prohibition against denying to any person the equal protection of the laws

But there is a huge problem looming because of the failure of many states to recognize same-sex marriages performed in other states even though they recognize all other marriages performed in those other states.  Section 2 of DOMA--which allows states to refuse to recognize sister-state marriages--in flagrant violation of the normal rules of comity between states--was not at stake here and thus its repeal remains for future cases. This means that there will be considerable uncertainty --and much bigotry and discrimination against gay couples for some time as those states that have enacted discriminatory constitutional or statutory provisions against gays continue to deny marriage rights to gay married couples when they move  into them, and perhaps prevent them from retaining custody of their children or being able to legally divorce their spouses or will estates to their spouses.  These problems will be resolved, at least for now, under each states "conflict of laws" provisions, with the overlay of the state's constitutional prohibitions, where existing, on recognition of same-sex marriages.  This will cause harmful suffering to gay couples, so one would expect that there will be litigation on this issue soon.  The Court's opinion regarding the many problems that would be created by extended litigation over the legality of DOMA section 3, across 1000 federal laws, shows that factor weighed heavily in its prudential decision to consider the constitutionality of Section 3.  Perhaps it failed to adequately consider what it would mean to fail to carry the point further to a repudiation of same-sex marriage bans under a full Equal Protection holding.  After all, the Court, citing Loving v. Virginia, acknowledged that

State laws defining and regulating marriage, of course, must respect the constitutional rights of persons.

The result is that gay marriage is recognized  in the 12 states and the District of Columbia that have official recognized gay marriage either through legislation or court action (and, under Hollingsworth v Perry, now also in California), and that couples married in those states can now file joint returns, inherit an estate from a spouse without paying any estate tax and otherwise enjoy the special privileges (or, in some cases, burdens) provided to married couples under federal tax law and all other federal laws.

Regretably, but as expected, the Court did not reach the question of whether state-law prohibitions of gay marriage violate the Equal Protection Clause.  This will await another day with a proper case challenging a state ban on same-sex marriage, perhaps after a number of states reverse their current constitutional amendments discriminating against gays by treating the privileges of marriage under state law as available only to a man-woman couple. Perhaps the varied views of the right-wing--a dissent by Chief Justice Roberts, a dissent by Justice Scalia in which Justice Thomas joined (and Roberts in Part I), and a dissent by Alito in which Justice Thomas joined in Parts II and III--augers well for a gradual withering away of the "traditionalist" (and religious fundamentalist) views supporting a same-sex marriage ban.

Some celebration is in order, as indeed took place across the country today, regarding this additional step toward erasing the kinds of bigotry that have been a stain on the country's belief in liberty for all since its inception.  See Joy, and Dismay, as the Supreme Court rules, New York Times (June 26, 2013) (slides).

But the country's religious right will undoubtedly try to minimize the freedoms for gay and lesbian citizens as much as possible in the course of the state-by-state battles to come over recognition of gay marriage.  The right claims that this is a matter of religious freedom, but it is in actuality a matter of religious imperialism--an attempt by conservative Christians to hoist their church's definition of marriage onto the laws of the land for everyone in the country, no matter their own religious persuasion or lack thereof.  The fundamentalist view that only men and women can marry should have no legal status.  Let those churches whose hierarchies accept that ideological position adopt that position as their church policy, but let them not succeed in forcing others to accept their  views about gay and lesbian citizens and what constitutes a family.

Ross Douthat's commentary in the Times discusses this religious issue.  See Religious Liberty and the Gay Marriage Endgame, New York Times blogs (June 26, 2013). Douthat supports the idea that these kinds of rights should be developed on a state-by-state basis, as a social experiment.  I must admit I find that approach disgusting.  If we were to say today that segregation or slavery or anti-semitism could be incorporated in state laws on a state-by-state basis to allow the dissenting minority who wanted (and still want, in a dismaying number of cases) to treat African Americans or Jews as inferior citizens without too much community disruption, no one would accept it.  Why is it that people who claim to be thinkers--like Ross Douthat and the four right-wing Justices of the Supreme Court--continue to act like treating gays and lesbians as inferior citizens with second-class privileges is okay?

Note that the idea, discussed by Douthat, that there is a "religious issue" and that churches will have to incorporate their schools differently to "protect" them is a result of the growing false understanding of the Constitution's guarantee of religious freedom, fostered by politicians too willing to kow-tow to religious hierarchies and a Supreme Court overladen with a strongly religious majority who have long failed to understand the Constitutional framework for what it is--a protection for individual practitioners, not for religious institutions.  Neither churches nor their businesses nor their organizational charities (i.e., church-run schools, hospitals and similar subsidiary institutions) merit religious protection from anti-discrimination laws intended to protect individual rights to religious freedom: by definition, if the institution is given "freedom" to impose its ideologies on individuals, the individuals themselves have lost those freedoms.  These are individual rights, not institutional or corporate rights.  Thus, to protect the individual's right to freedom of religion, a religious institution should not be permitted to force an institutional employee--other than perhaps its management personnel who have supervisory rights to hire and fire and penalize employees and are the carriers of the religious dogma "torch"-- to practice the dogma of the institution on birth control, gay marriage, divorce, or any other aspect of the religious dogma.  

I thus find the statement of Ben Domenech, editor of The Transom, who is quoted in Douthat's commentary, quite offensive--he says that states will need to "alter their laws accordingly to protect religious organizations, businesses, mosques and churches, and prevent community clashes as best possible."  The Constitution doesn't protect "religious businesses" and cannot put avoiding community clashes above protecting the religious liberties (or nonreligious views) of all Americans.

Someday the Court will correct its error on this point, but one suspects that will be far in the future.

Too bad that the Supreme Court voted the other way on the Voting Rights Act--a decision that essentially disregarded both Congress's role under the Civil War amendments and Congress's 2006 analysis of the need for continued oversight, especially in the states currently within the coverage.  Note that the law provided for states to be brought within the coverage or exempted from the coverage, so the Roberts Court's right-wing activist decision was an unjustified effort to find a way to favor Southern (and Republican) states.  Scalia's dissent in the Windsor case--in which he argues that the Court owed respect to the legislative branch (see exceprt, below) stands in sharp contrast to the willingness of the Court to override Congress's renewal of the Voting Rights Act upon the basis of an extensive record of hearings and evidence as to continuing discrimination against minority voters in those Southern states, where poll places are moved to inconvenient locales and ID forms are required that may be difficult for minorities to obtain.  In Windsor, Scalia claims that "democratically adopted legislation" like DOMA should be upheld by the Court, but in the Voting Rights Act case the majority ran roughshod over such legislation in a situation where Congress's role is mandated by the amendment itself.

We have no power to decide this case. And even if we did, we have no power under theConstitution to invalidate this democratically adopted legislation. The Court’s errors on both points spring forth from the same diseased root: an exalted conception of the role of this institution in America.  J. Scalia dissent in Windsor, Slip Op. at 1.

 While I disagree with Scalia's view expressed in his dissent that there was no standing in Windsor, I do think he makes some very good counterarguments to the arguments in Alito's dissenting opinion about jurisdiction, which would recognize the BLAG (purportedly a bipartisan house legislative group, but in the Windsor case, only 3 Republican leaders of the House authorizing a "defense" of Congress's actions in enacting DOMA) as a rightful adversary at the Court in a case such as Windsor.  Scalia accurately sinks daggers into Alito's trumped up theories of Congressional prerogative to litigate against the Executive whenever it doesn't like the way the Executive carries out Congressional duties.

 

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Kevin Brady's misleading Wall St. Journal op-ed

Today's Wall Street Journal features an op-ed by Kevin Brady, right-wing Texas Republican who chairs the notorious "Joint Economic Committee" that has been a notorious producer of anti-tax propaganda-driven studies over the years of Republican hegemony in the House.  See "Tax Reform Needs Accurate Tax Tables", Wall Street Journal (May 6, 2013), at A15.

The op-ed spends a lot of time denouncing information about tax rates.  It suggests that the entire US tax system is far too progressive in nature, because "one of the most salient characteristics of the U.S. tax code [is] the decreasing share of taxes paid by the bottom 50% of taxapyers and the increasing share of taxes paid by the upper 1%."  Of course, Brady mentions nothing about the accelerated growth of inequality of income in that same period, resulting in the upper 1% controlling so much more of the U.S.'s wealth and income compared to that bottom 50%.  In fact, the upper group pays less than it should given the enormously increased bite of wealth and income, a fact that Brady conveniently overlooks.

The op-ed also talks only about the income tax rates, thus appearing to suggest that the income tax is the only relevant portion of the U.S. tax system and that rates, rather than base, are the most significant factor.  In fact, there are a range of taxes--income, estate, payroll, excise/sales taxes.  Regrettably, the income, estate and payroll taxes are much too lenient on the highest paid groups.  

The shrinking of the income tax rate structure (from many different rate levels in the 1970s to our minimal group of rate brackets today) is highly favorable to the highest income group.  The rate levels off at less than half a million, while the highest paid CEOs are making 20-30 or 40 million a year.  As a result, those in the top 1%--and especially those in the top part of that 1%--are taxed at the same rates as people who make a "mere" $400,000 a year.  Further, the base on which that rate is applied to determine tax liability is notoriously laden with tax expenditures that primarily benefit that same group at the top, beginning with the charitable deduction for non-taxed appreciation and continuing through Roth IRAs/ IRAs /generous pension plans to too-high mortgage interest deductions and others.  Only those in the top 30% even bother with itemizing deductions.  And among those, it is those at the top who garner the enormous benefits of deductions from those tax expenditure provisions.

The estate tax is similarly designed to provide special benefits to the wealthy--from the lack of a progressive rate structure that ensures that the wealthiest tycoons who've amassed fortunes from loopholes like the carried interest provision will pay peanuts on an estate hardly taxed during their lifetimes,  to the various gimmicks for evading and deferring estate taxes-- including various kinds of trusts,"family" partnerships  and irrational "discounts. 

On the other hand, the sales tax is a mere gnat for the wealthy while its expansion cuts into essential living expenses for the growing legions of the poor and nearly poor.  The payroll taxes for the working poor and the middle class take a significant bite out of their labor's rewards, while the wealthy CEOs and directors pay Social Security only on a miniscule portion of their wage income. 

But Brady's most misleading statements are those that repeat the tax-cutting mantra that the GOP has pushed for well-nigh four decades now, beginnning before Reagan but put into overdrive during the George W. Bush administration--the idea that tax cuts stimulate economic growth, and especially that tax cuts on the capital income of the wealthy will stimulate growth, create jobs, and increase wages for the majority of Americans who are not wealthy.  Here's what Brady says (notice how the statement presupposes the truth of his claim):

The most important defect of tax-distribution tables is that they cannot help one to assess how proposed tax changes will affect economic growth.

Suppose Congress eliminated the double taxation of capital income by doing away with taxes on capital gains and dividends at the individual level.  Current tax distribution tables would depict this change as a reduction in progressivity due to the large share of capital gains and dividends attributable to the top income quintile.

But doing away with taxes on capital gains and dividends would significantly lower the after-tax cost of capital for new business investment in buildings equipment and software.  New business investment increases the demand for and productivity of labor, driving real wages higher. 

For households in the bottom 50% of the income distribution, the benefits are significant but indirect--more jobs at higher real wages.  Id.

The fact is, we have been following this agenda of reducing taxes on capital income for decades.  The result has been an unprecedented growth in inequality and the continuing decline of wages for the vast majority of Americans who work for their income.  The right's "philosophy" of low taxes on capital and high taxes on labor doesn't work and never will.  Brady doesn't appear to much care --his arguments seem designed to justify the right's continuing push for policies that create an oligarchic elite served by an increasingly indebted worker class with few employment rights as the courts favor Big Business over the people this country was founded to protect.  Brady's op-ed, in other words, is just another volley in the right's class warfare against American workers.

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Fixing Sequestration (for the rich only)

Once again, Congress has demonstrated that it notices mostly what affects rich people and can't quite identify with ordinary Americans.  And that it will not pass either spending laws or tax laws (which include a wealth of spending laws through the tax expenditure mechanism) that equitably deal with the misallocation of resources between the wealthy few and the rest of us.  Tax policies operate for the high and mighty:  once again, inequality is the real characteristic that matters.

The sequestration--a response to the GOP-led desire for austerity, shrinking government, and otherwise ensuring that rich people and major businesses don't have to pay much in taxes--was ridiculous from the outset because it cut programs across the board, at a time of significant unemployment, without prioritizing programs that support the safety net or ensure education (like Head Start) or protect critical infrastructure or other needs.  The only reasons it made some sense was that (1) it would finally lead to some cuts in our engorged military spending and (2) it should have permitted Congress to develop enough spine to refuse to make the Bush tax cuts permanent for anybody but those ordinary Americans making $100,000 or less. 

But we all know that latter wise move didn't happen.  Congress made the ridiculous-when-they-were-enacted and more-ridiculous-still-when-they-were-made-permanent Bush tax cuts permanent for the vast majority of Americans, leaving only a smattering of wealthy Americans subject to imperceptibly higher taxes.  Businesses got another extension of the equally wasteful Bush tax cuts enacted in the Bush Administration's giveaway mode--the R&D credit (often enacted retroactively like this extension was, whose ostensible purpose is to incentivize US-based research, which a retroactive credit by definition cannot do), the active financing exception for the Banksters that got us into the Great Recession to start with, and all the rest.

So we ended up with across-the-board cuts that could not reasonably be expected to work out well for the economy--especially when Keynesian theory (the only kind of economic theory that hasn't been roundly disproven by actual facts) suggested that we should be continuing to increase government spending to make up for the gaps in the economy from MNE hoarding of their cash offshore and consumers drawing back because of the steady decline of their spending power from job cuts and real salary decreases.  IN fact, these damaging cuts were never actually expected to go into effect--Dems hoped (rather naively) that the sequester would force Republicans to support more reasonable tax increases.  Repubs hoped (rather reasonably, in retrospect) that they could blame any problems on the Dems and claim credit for protecting ordinary Americans by not increasing taxes, and of course they've been claiming for the last months that any complaints about the problematic impact of the sequestration cuts are "exaggerated," and "they have relished the success of forcing visible spending cuts on a Democratic administration."    Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, Salon.com (Apr. 26, 2013). 

Few in Congress were ever willing to stop the gravy trains for the rich--carried interest for private equity, publicly traded "master limited partnerships" for oil and gas pipeline companies that are excepted from the ordinary treatment of publicly traded partnerships conducting businesses as corporations subject to an entity level tax; so many tax expenditures that favor Big Business that very few companies actually pay any tax on their huge profits; the assignment of income benefit of a stuck in the last century transfer pricing tax system that allows some of today's biggest companies (Google, Microsoft, etc.) to transfer their indispensable intangible properties offshore to avoid US taxation of profits attributable to the support provided by this country, while nonetheless retaining 100% ownership and control; and of course the biggest boondoggle of them all, the preferential rate for capital gains coupled with an absurdly lenient estate tax, that together allow the rich to live richly during their lifetimes and then pass their estates with negligible tax cost and substantial tax benefits (from the "step up in basis at death" that, for example, allows heirs of master limited partnership interests to restart the perpetual tax-free profits machine).

But hark, what is this?  The reductions caused by the sequester affected the ease with which rich people can get on a plane and fly to their business and vacation destinations!  Such suffering.  So incomprehensible how we could allow it.  The Senate swiftly moves into action--this was something they hadn't anticipated--that the sequester could actually bother some of their own class.  Suddenly, They acted.  In just a short time last night, with unanimous consent, the Senate voted to "let the FAA transfer some money from the Transportation Department to pay air traffic controllers."  See Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, Salon.com (Apr. 26, 2013).  The House was expected to act today.

At the beginning of the sequester, most of the Republican politicians who had pressed for even much larger cuts, insisting there was much dross in the federal government, pooh-poohed any complaints that the sequester was leading to real pain for ordinary Americans.  That story changes only when the rich feel any squeeze at all.  As Pareene implies in his story, the media is too much of the time an unquestioning go-along in this conning of the American people:

the story of Congress hurriedly making sure the well-off minority of Americans who fly regularly don’t get briefly inconvenienced — while ignoring the costs of brutal cuts on programs for low-income Americans facing housing or hunger crises — is treated as a wonderful and encouraging display of bipartisanship.

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Baucus Will Not Run in 2014 (yay!)

Max Baucus announced to his fellow Senators today that he will not seek re-election to the Senate in 2014.  He has been the top Democrat on the Finance Committee since 2001.  See Senate Finance Chairman Max Baucus Won't Run Again in 2014, Bloomberg.net (Apr. 23, 2013).

As someone who thinks that Baucus has been a hindrance to progressive reform of the tax code and financial regulation, I must admit that I do not find his retirement a loss.  His chairmanship of the Finance Committee has been marked by a failure to understand the most important issues related to federal income and estate taxation and by adoption of positions that are too favorable to Big Money and Big Business (especially Big Banks).  He has been tone-deaf, in other words, to the class warfare waged by the right against the middle class and the resulting growth in inequality in the country that has been worsened by the current tax provisions that support redistribution upwards to the very wealthiest owners of financial assets and businesses.  In particular, he has failed to use his position to push for reasonable reform of the capital gains preference and the wealth-favoring versions of the estate tax passed by the Bush administration.  He has refused to consider a reasonable financial transactions tax. In fact, Baucus was too willing to go along with the initial passage of the Bush tax agenda in 2001-2004, and he did nothing to ensure that the Bush tax cuts would fade into oblivion on the sunset date.  In fact, he worked to make permanent almost all the Bush tax cuts and supported the corporate-friendly "extension" of the broad menu of corporate tax cut provisions (including a retroactive extension of the R&D credit, which cannot possibly serve the purpose it is claimed to serve when enacted retroactively).  The tradeoff provided only token items on the progressive menu. 

Of course, the Republicans will cast Baucus' choice to retire as a reflection of problems for Democrats.  See the Bloomberg News article cited above, in which Rob Collins of the National Republican Senatorial Committee says as much.  I suspect that Baucus knew he would be targeted by liberal Democrats for his failure to vote for gun control and for his failure to support progressive tax policies. 

That said, he remains as Finance Chair through 2014, and he has said he intends to produce a rewrite of the tax code.  He is the wrong person to do that, and so it is important that other Democrats relegate him to a position of less influence in order to come up with more progressive changes than he would support.

Is Ron Wyden (who would become the most senior member of the Finance Committee when Baucus leaves) capable of carrying the banner of progressivism?  His emphasis on "tax simplification" is worrisome, because it suggests that he does not understand the relationship between complexity in the tax code and sophistication of taxpayers to whom the complexity applies.  The main reasons for complexity are two-fold:  (i) existing tax rules are expanded to cover abusive schemes developed by sophisticated tax advisers (attorneys and accountants), and (ii) existing tax rules are riddled with exceptions to provide subsidies (tax expenditures) favoring industries represented by heavy lobbying.  To the extent that tax simplification reduces the anti-abuse rules needed to prevent various tax scams and manipulation, simplication is a policy mistake.  To the extent that simplication results in changes to the tax expenditures, it can be useful  but it is often also mistaken, because the easiest way to "simplify" such rules is to expand them to cover even more of heavily lobbied-for industries.  Wyden needs to expand his understanding of the relationship between simplification as a goal and fair allocation of resources to the extent that resource allocation is handled through tax expenditures in the Code, reasonable rules to ensure that the most sophisticated taxpayers pay their fair share, and fair distribution of the tax burden.  Baucus did not serve the publci well in regards to these issues.  Let's hope that Wyden does better.

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The Inequality Gap

Robert Reich, former labor secretary, has some worthwhile advice for the President's State of the Union address:  he notes that the focus should be the "central issue you want the nation to help you take action on".  That's "not immigration, guns or the environment" (though "[a]ll are important") but rather "joblessness, falling real wages, economic insecurity, and widening inequality" . See Robert Reich, Memo to Obama: Focus on the inqueality gap, Salon.com (Feb. 11, 2013).

He's right.

"It's the economy, stupid", that old slogan from the Clinton campaign days, goes only so far.  It doesn't tell us, for example, what parts of the economy are most important--is it the stock market's well-being, and indirectly the fortunes of the very few at the top of the income distribution who own significant amounts of those items being sold on the market?  Or is it the unemployment data, with its distressing litany of continuing failure of our economy to provide decent jobs for ordinary people?  Is it the way that corporate owners and managers can use the powers of government to make unionization difficult and thereby make it much easier for corporate management and shareholders to retain all the productivity gains while workers wages stagnate (everything from Wal-Mart's tendency to tear down union fliers in worker areas (based on my personal observation) to the CEO's determination to beat unions down any way possible (see the New York Times story in the 2/12 edition, At Cablevision, Norma Rae's Been Escorted Outside, New York Times (Feb. 12, 2013), at A23, regarding Cablevision's firing of two  dozen employees for being off work, after claiming to have an "open" management that invited worker conversations yet allowing those same employees to cool their heels for 40 minutes waiting to talk to him and then walking out and firing them for not being on the job)?  Or is it the general optimism of the upper class, who can pass on untaxed estates to heirs who will get those stocks at stepped up basis and renew the cycle of monetization without taxation for their own account?

Stock market statistics mostly tell us about the upper class, along with the upper part of the middle class that has some share of that bounty:  they don't tell us about how well the economy is serving others, unless the general well-being of corporate America spills over to the general well-being of average Americans.  It doesn't do that in an era of push-down on unions to ensure that workers have no voice, push-back on taxes to ensure that the wealthy managers and owners not only get all the productivity gains but have to pay too little in taxes to support the system that made those gains possible.  Mostly, stock market statistics tell us about how the privileged are maintaining their privilege, as their ownership of most of the financial assets continues to mean their heightened influence over most laws and their garnering of most of the gains that do take place.

This is well noted in a post on Economist's View (Mark Thoma), embedding a post by Miles Corak on Free Exchange about research on inter-generational social mobility.

The real lesson from the historical research is not that there is anything inevitable about a low degree of inter-generational mobility, or that it signals more persistence than other research. The most privileged will do everything they can to perpetrate their status across generations, and in past eras the structure of labor markets and public policies permitted, and in some measure continue to permit, a non-level playing field.

I've long argued that the way to evaluate the economy is in terms of how well it is serving ordinary people who make up the middle class (roughly defined as the middle three quitiles of the income and wealth distribution)  and how adequate is the safety net it provides for those who make up the lower class (the bottom quintile of income and wealth).  What matters is economic sustainability, in terms of  adequacy of those many intangibles by which we measure quality of life--like accessible quality health care, accessible quality education, accessible quality jobs, decent wages for decent work.  That means that government's intervention in the economy will need to be on the side of the little guy, ensuring that resource allocation isn't so skewed to the already rich that we become an oligarchy where most of us live off crumbs and a few of us live like kings.  If we want a sustainable economy and sustainable democracy, democratic eqalitarianism demands that governments temper market forces with protections for underdogs, providing counterforces to the redistribution upwards tendency of brute force capitalism.

Today, the rise of the US oligarchy and the frightening power of wealth in determining how laws work have put us in a terrible situation:   "debtor prisons, once a relic of the 18th century, are making a frightening comeback in the U.S. justice system."  Alex Kane, Miss a traffic ticket, go to jail?, Salon.com (Feb. 11, 2013).

So an appropriate slogan for progressives today should be something along the lines of "It's the inequality, stupid."  And that certainly doesn't mean more of the same old failed GOP policies that favor the wealthy, mistakenly labeled "job creators" by the GOP in its constant effort to undo unions (witness Michigan's disastrous anti-union legislation or Cablevision's determination to aid anti-union forces and squelch union activists), favor capital over labor (from the problematic preferential rate for capital gains to the ridiculous "carried interest" taxation of the compensation payments to so-called profits partners (a category of "partner" for tax purposes not provided for in the tax code but essentially an invention of Wall Street) to the squandering waste of an estate tax and charitable contribution deduction that favor meritless accession to and use of untaxed wealth and pushes the burden for government revenues to laborers instead).  And it certainly doesn't mean more of the same "deficit hawks, austerity mavens, trickle-down charlatans, and government haters who have commanded center stage for too long."  Memo to Obama: Focus on the inqueality gap, As Reich says:

The President should make it clear that any Republican effort to hold the nation hostage to the GOP's ideological fixation on the budget deficit and a smaller government will slow the economy, likely pushing us into another recession.  And that those most imperiled are the middle class and the poor. 

He should emphasize that the real job creators are not the rich but the vast majority of ordinary Americans whose purchases give businesses reason to add jobs.  And that if most Americans still cannot afford to buy, the government must be the spender of last resort.  Id.

Reich goes on to make some specific policy suggestions for acting to reduce inequality.  These include

• reversing the impact of the reinstatement of the higher Social Security tax rate by exempting the first $20,000 of income from the tax and lifing the ceiling on income subject to it;
• reviving government-run work corps, like the WPA and CCC, "to put the long-term unemployed directly to work"
• raising the minimum wage
• imposing a 2% tax surcharge on wealth in excess of $7 billion to be dedicated to education
• Cutting corporate and military welfare
• not cutting public investments or safety nets
• giving tax credits for actual job creation
• supporting states that rehire teachers, firefighters police and social workers.  Id. (quoting and paraphrasing).

Sounds like a pretty good plan.   As Corak noted (in the Economist's View post cited above):

[D]ynamic labor markets offering new opportunities to the population as a whole, progressive public policies of relatively more benefit to the relatively disadvantaged, and strong families with growing incomes and human capital will lead to much more mobility than aristocrats of a pervious era could ever have imagined.

And the Reich plan is certainly better than what most of the GOP-led state experiments like Michigan are coming up with, which read like a plan for even more redistributing upwards to the top few, including:

• eliminating income taxes in favor of regressive sales taxes,
• eliminating business taxes in favor of regressive user fees (a GOP-led Michigan "upward" redistribution "innovation"),
• pushing hard against unions  (a GOP-led Michigan "innovation"),
• reducing safety net support like Medicaid (being considered in Michigan),
• taxing vulnerable seniors on pension income (another of Michigan's recent "innovations"),
• cutting support for state universities while reallocating the support that remains to those that serve the upper class rather than underprivileged who will generally need to borrow more and take longer to succeed (another of Michigan's redistributionist efforts).

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Intangible assets hard to tax--France has an idea...

One of the ways that technology-based businesses like Big Pharma and Big IT companies dealing primarily with intangible assets (patents, copyrights, licenses, information databases) escape paying much in taxes anywhere is their ability to move those assets around almost costlessly and to claim whatever site seems most convenient as their home jurisdiction.  Not having any "real" property within a jurisdiction can seem to render them invisible to taxing systems.

One example in this country is the way that online sales networks have tried to avoid state taxes by having no physical assets in the state and claiming not to 'do business' in the state.  Recently, states have been wising up, in part due to an intensive lobbying effort aimed at pointing out the inherent unfairness in taxing only local businesses with physical stores while their main competitors rake in the tax-free dough.

Another example is the way that multinational enterprises (MNEs) with mostly intangible valuables claim to "sell" their essential intangible patents to offshore affiliates in low-tax jurisdictions, thus claiming to move valuable income-producing assets offshore.  Since they would in fact never actually sell such essential property to a competitor, the "transfer pricing" mechanisms that the US uses to police such deals by attempting to require a "market price" are  inadequate, resulting in offshoring of profits.  Offshore captive insurance companies operate similarly, with premiums paid to offshore affiliates permitting an undeserved decrease in domestic taxable income.

"Google generates more than $30 billion a year in advertising revenue, including an estimated €1.5 billion, or $2 billion, in France. Yet, like other American Internet companies, it pays almost no taxes in France."   Eric Pfanner, France Proposes an Internet Tax, Jan. 20, 2013.  France, frustrated with its current inability to tax such MNE IT giants like Google, Facebook and Microsoft, is considering new ways to attack the problem.   A report commissioned by President Hollande suggests a tax on internet data collection.  See id.  Data collected by these companies, the report says, is the "raw material" of the digital economy and is insufficiently captured by current economic analysis. 

(ASIDE:  Of course, almost nothing is sufficiently captured by current economic analysis, since economists mostly still operate with the wacky theoretical models that assume everything is at equilibrium (which it never genuninely is), and that every actor is rationally maximizes his own greedy objectives (which is never true either).  There are various other problems with the current popular "free market" economic theories, but those suffice to suggest that most politicians are being rather silly when they go to most economists for advice on how to structure their tax systems or how to make their economies work better--particularly if those economists ascribe to the Friedman school's notions of "free market" dogma.)

Like the financial transaction tax, which would help to stem rampant speculation by the big banks that puts world economies at risk, a  data collection tax on the big data companies would offer some help in stemming the rampant speculation by those companies in personal data.  Such data collection may well also prove to put economies--and individuals--at considerable risk, as genetic information, interconnected banking and investment strategies and other data is reached, stored and used. 

And like the financial transaction tax, a data collection tax is not likely to work very well without OECD cooperation among advanced countries.

These are the kinds of issues that Congress should be discussing when they talk about "tax reform"--NOT how to lower the corporate tax rate in the US, which is fine where it is; NOT about how to provide more tax expenditure subsidies to corporations that are already making huge profits (like Oil, Insurance, etc.) but rather about how to ensure that the externalities like pollution, catastrophic risk, and other ills that Big Business has been so good at shoving off on the rest of us get paid for out of business income and how to use the tax system more effectively to cause the economy to work for ordinary folk rather than to cater to the wealth accumulation of the very small percentage at the very very top.

If we want an economy that works well, we should stop the current s0-called "tax reform" train that is being run by lobbyists for Big Business and doesn't even begin to consider the appropriate paramenters.  Instead, Congress should make a priority the consideration of real reform ideas like the following:

1.  eliminate the capital gain preference and increase the estate tax:  the combination of preferences for capital income and capital wealth unfairly allows the wealthy to accrue income at very low rates with assets that also permit them to monetize their assets while retaining them to pass along to their heirs at very low rates of taxation.
2. use the tax code to discourage conglomerate formation and pseudo monopoly formation (limit rather than extend tax-free reorganizations);
3. discourage  tax-subsidized speculation in real estate by eliminating section 1031 nonrecognition "like-kind exchanges";
4. push for more prudent banking and financial systems (enact a financial transactions tax; treat most derivatives as bets rather than financial transactions);
5. require more responsible citizenship from big MNEs (treat any offshoring of business assets as a fully taxable event; disallow offshoring of key patents and other intangibles to affiliates by treating such transactions as disregarded for federal income tax purposes)
6. protect personal privacy while also ensuring that IT companies pay a reasonable amount of tax on their profits (tax collection of personal data)
7. end tax expenditure subsidies for hugely profitable enterprises that are also highly culpable of offloading pollution impacts (and climate change impacts) onto the general public, like Big Oil and Big Gas
8. protect workers by reforming the labor laws to ensure that no state can deprive public workers of their rights to bargain collectively and  at the same time reform the tax laws to limit deductibility of pay for top administrators by tying the limit on deductible pay to the average pay of the company's non-administrative workers (nothing deductible in excess of 10 times the average pay for non-administrators, for example);

 

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McConnell Tossing the Gauntlet on Debt, Taxes and the GOP's dream of dismantling Social Security and Medicare

Pretty much as I predicted, Obama's failure to go over the fiscal cliff--instead "negotiating" and settling for a half-assed deal that hardly got rid of any of the stupidities of the Bush tax cuts--convinced the Republicans that they can play their brinkmanship game on the debt ceiling debate yet again and perhaps finally get the Democrats to undo their own most significant programs of the last 100 years--Social Security and Medicare.

What we ought to be doing is cutting the military/defense and corporate welfare budgets.  And then increasing taxes--with (1) new layers of tax brackets and tax rates corresponding to our new levels of income inequality, so that multimillionaires are taxed at a higher rate than mere millionaires and billionaires are taxed higher than multimillionaires and (2), at the least, legislation to eliminate the farce of the so-called "carried interest: privileged compensation taxation for LBO managers, who get mostly preferential capital gains for their "services" in buying companies and loading them with debt that makes the managers but not the workers wealthy.

But the Democrats somehow still thought they would get some kind of credit, even from the staunchest of the right-wingers, for being "bipartisan" and working out a "deal" to avoid the "fiscal cliff."  So they made the ridiculous Bush tax cuts permanent, except for those in the upper-upper crust making three times as much as anybody in the middle class.  And they made the estate tax cut even larger than it was--with a $5.2 million exemption (double for a couple) and only a 40% rate.  Inequality will continue to grow at accelerated rates.  And they extended the litany of truly egregiously stupid corporate tax breaks, like the bonus depreciation/expensing provisions that ultimately permit corporate multinational giants a NEGATIVE effective tax rate (read Cary Brown on the way noneconomic frontloading of expensing amounts to nontaxation under time value of money principles).

The GOP however is currently running deranged.  The party that purports to care about fiscal conservatism only wants to fund more military and make sure that vulnerable elderly don't get as much in their Social Security checks and have to pay even more for their health care.  McConnell--the MINORITY leader in the Senate--has pronounced his party's views on the matter:  "The tax issue is finished."  Brian Knowlton, McConnell Takes Taxes Off the Table in New Talks, New York Times (Jan 6, 2013).

Folks, the stuff about the debt ceiling and the need to cut benefits under Social Security and Medicare is baloney.  The US government isn't a family--it's a sovereign regime .  We should learn from the Euro nations that are embroiled in a self-defeating austering regime that leaving citizens suffering while trying to toady to big business is a recipe for disaster.

President Obama had damn well better take Social Security and Medicare off the table as well as any corporate tax reductions.  Get rid of corporate loopholes and let corporate tax revenues INCREASE.  It is the only way left to try to re-balance an economy that is skewed in favor of the uber-rich and the multinational corporations and against ordinary Americans.  Oh, it would also help to move to single-payer single-provider health care and get profit-making out of what should be an important human right.

And are we "spending way too much" anyway, as McConnell declares?  Surely not, since we are only spending on things that the Congress has voted to spend on.  If McConnell wants to spend less, let him propose a spending cut and put it to the vote.  If it fails, then he should vote the taxes or borrowing needing to pay for the spending Congress has legislated.

So, just as my advice in the "fiscal cliff" debate was to go over the cliff, let the Bush tax cuts expire, and then put in place some decent cuts for the REAL middle class (those making less than $100,000 a year), my advice here is to go over the "sequester cliff" and let the across-the-board cuts, with the first real cuts to the military in decades, take place.  We should damp down our military zeal and start to put our money where it will build good schools, good colleges, good public transportation, and ultimately good jobs.

As for the debt ceiling, the best thing would be for the Senate to eliminate the filibuster rule (or at least make the right-wingers do a physical filibuster) and eliminate the debt ceiling.  It is an artifact of a different age, and is meaningless.  Think about this.

1) we have spending bills that require us to spend X dollars

2) we have tax bills that only raise X-Y dollars.

3) we have a governmental obligation to pay the X dollars that we spend to those who provide the goods and services amounting to X dollars.

4) Therefore we have a governmental obligation to borrow the Y dollars that we don't raise with taxes.

 

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