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Everybody's Talkin' 'Bout Taxes--especially Wealth Taxes and Mark-to-Market of Capital Gains

Not surprisingly for those of you who are members of the ABA Tax Section, there is a meeting of that group next week in Florida when a thousand tax lawyers (give or take a few) will be talking about everything from basis to wealth taxes; GILTI, BEAT, Dual BEIT, to EITC.  Yours truly will be on a panel of the Tax Policy and Simplification Committee, meeting Friday morning, to discuss how the tax system should respond to the wealth gap.  Joining me on the dais will be Roger Royse (moderator and panelist), Rich Prisinzano from the Penn Wharton Budget Model, and Dan Shaviro, Wayne Perry Professor of Taxation at NYU and a blogger at Start Making Sense.  We'll talk about the income and wealth gap data, including the different perspectives of  Saez & Zucman, serving as wealth tax advisers to Senator and Democratic presidential candidate hopeful Elizabeth Warren; Penn Wharton Budget Model, applying a more standard budget model to determine harms and benefits of the Warren Wealth Tax; and Cato INstitute.  We'll also discuss Sen. Ron Wyden's proposal for a mark-to-market system of capital gains taxation (including a lookback charge of some kind for hard-to-value assets, Prof. (and former Cleary partner) Edward Kleinbard's Dual Business Enterprise Income Tax proposal, and other means of making the regular tax system more progressive such as rates, removing the capital gains preference, and reinvigorating the estate tax that has been the object of a GOP murder squad for the last 20-30 years at least.

Meanwhile, today in Florida there was a Tax Policy Lecture at  the University of Florida on Taxing Wealth, with Alan Viard, resident scholar at the American Enterprise Institute, David Kamin, Professor at NYU School of Law, Janet Holtzblatt, Senior Fellow at the Tax Policy Center, and William Gale, Arjay and Frances Fearing Miller Chair in Federal Economic Policy7 at the Brookings Institution. 

Last fall, the Tax Policy Center held a program on Taxing Wealth (webcast recording available at this link) with Mark Mazur, Ian Simmons, Janet Holtzblatt, Beth Kaufman, Greg Leiserson, Victoria Perry, and Alan Viard.  Sony Kassam from Bloomberg Tax served as moderator.  The link has a series of power point presentations from that meeting as well, for your edification.

Ian Simmons, for example, includes the letter from billionaires dated June 24, 2019, asking that "[t]he next dollar of new tax revenue should come from the most financially fortunate, not from middle-income and lower-income Americans."  Such a tax "enjoys the support of a majority of Americans--Republicans, Independents, and Democrats."  It's not a new idea, since all those millions of middle-income Americans who own their home "already pay a wealth tax each year in the form of property taxes on their primary form of wealth--their home."   The billionaires are asking "to pay a small wealth tax on the primary source of our wealth as well"--such as Elizabeth Warren's proposal, which would tax "only 75,000 of the wealthiest families in the country" (those with assets over $50 million) and would generate an estimated $3 trillion over ten years to "fund smart investments in our future, like clean energy innovation to mitigate climate change, universal child care, student loan debt relief, infrastructure modernization, tax credits for low-income families, public health solutions, and other vital needs."  All this is necessary because of the wealth gap: "[t]he top 1/10 of 1% of households now have almost as much wealth as all Americans in the bottom 90%." The signatories support a wealth tax because:

• it's a powerful tool for solving our climate crisis
• it's an economic winner for America through increased public investments
• it will make Americans healthier, addressing the difference in longevity (15 years) between the richest and the poorest Americans
• It's fair -- "[t]axing extraordinary wealth should be a greater priority than taxing hard work."
• It strengthens American freedom and democracy, since high levels of economic inequality lead to political power and pluotocracy and higher levels of distrust in democratic institutions
• It is patriotic -- 'The richest 1/10 of the richest 1% should be proud to pay a bit more of our fortune forward to America's future."

Janet Holtzblatt discussed whether wealth should be taxed, with a set of powerful powerpoint charts.  As she notes, there are a number of reasons to think taxing the wealthy is a good idea because it (slide 4) :

• curbs the accumulation of power that comes with the accumulation of wealth--and, I will add, this is power to get laws and regulations written in your favor, including tax laws, as well as power that allows pollution, rent-seeking, on-demand schedules for workers and other 'evils' that come with plutocracy
• ensures that the wealth pay their fair share of taxes
• finances new initiatives (child care, student debt relieve, climate change policies, housing initiatives)
• provides better data for research on wealth inequality

Those not supportive (or, as JH puts it, "less optimistic") suggest that (slides 5, 7)

• even with a wealth tax, the rich remain the richest and the most powerful
• incremental changes to current tax system would be more easily implemented
• wealth taxes would have a negative impact on savings, investment, entrepreneurship
• wealth taxes won't raise as much revenue as claimed
• OECD countries with wealth taxes haven't been all that successful (in 1990 12 had them, in 2018 only 3 still retained wealth taxes: Norway, Switzerland, and Spain)

There are lots of issues with wealth taxes: (slides 8-20)

• on what assets
• at what rate (tax burden will depend partly on rate of returns on investments
• using what exemption threshold (liquidity constraints at lower thresholds; taxing  middle income instead of wealthy)
• using what means to prevent tax avoidance (dependents' wealth with parents? include assets in family-run foundations? restrictive limits for trusts? exit taxes?)
• and tax evasion (enhance IRS enforcement, enhance penalties, enhance IRS access to third party data--but the wealthy have resources to battle IRS claims)
• assuming what actual amounts of tax revenues could be raised ("street fights over revenue estimates...among top public finance economists") (Slide 15)
  • how much wealth is there?  JH notes several 2016 estimates between 86.9 trillion and 101.2 trillion (slides 16-17) {Zucman  says just under $115 trillion]
    
    • Fed Reserve Survey of Consumer Finance ( 3 year intervals; leaves out Forbes 400 and some pension wealth)
    • estate tax data (adjusted for mortality probabilities and population)
    • income tax data (capitalized using assumed rates of returns)
  • how is that wealth distributed between the top 0.1% and the rest?  Bricker 2016 study estimates range from about 15% to 22%  (Slide 18)
  • how much wealth is hidden by "tax net misreporting rates"?  IRS 2016 misreporting: farms 71%; nonfarm proprietors 64%; CGs 27%; PS/SCorps/Estates/Trusts 16%  (slide 19)
  • how much tax revenues?  between 815 billion and  1.098 trillion between 2021-2030 (slide 22, Urban-Brookings TPC Microsimulation Model [ with lower thresholds and rates than those proposed by Warren]
  • who pays?  40,000 tax units in the top 1% minus the top 0.1%; 127,000 tax units in the top 0.1%,with those in the top 0.1% paying between 97% and 100% on the different options considered

Greg Leiserson discussed the idea of mark-to-market taxation (an idea that Ron Wyden has endorsed), in "Taxing wealth by taxing investment income: An introduction to mark-to-market taxation" (Sept 11, 2019).  The key to MTM taxation is that a tax is assessed annually on investments, whether or not they are sold or otherwise disposed of ('through a transaction that results in "realization" for federal income tax purposes).  The burden of such a tax falls predominantly on the wealthy, since those are the primary owners of bonds, stocks, real estate empires, and pass-through businesses that produce investment income, as well as the appreciation of those assets that is taxed currently as a capital gain on disposition.  Leiserson provides a chart (below) showing the nominal investment income of US households and nonprofits including an offset for inflation.

As he notes, much of this income is taxed at preferential capital gains rates, and much of the income tax is deferred because capital gains and losses are generally taxed only when the asset is sold.  Deferral amounts to a reduction in taxes paid under time-value-of-money principles.  But yet another way in which owners of investment assets escape taxation is the estate tax: appreciation in property in the estate (such as unrealized capital gains from stock that has appreciated in value significantly over decades) is never taxed, since the heirs get a step up in basis to market value, so that if the asset were then immediately sold, there would be no gain remaining.

MTM taxation eliminates the deferral advantage.  MTM taxation combined with elimination of the preferential rate for capital gains would  eliminate the preferential treatment of capital gains that exists in current law.  Leiserson notes the difficulties for a MTM system: which assets are covered, rate of tax applied, and whether there are special rules for volatility. Further, "[i]f a comprehensive system of mark-to-market taxation is enacted, then there would be no unrealized gains at death going forward, because gains will have been taxed on an annual basis, including in the year the person dies" so long as the system applies over some transition period to gains accrued prior to enactment.  Otherwise, the system would have to tax gains at death (repealing step-up in basis rule) or at any other disposition, including gifts, to ensure fair and equal treatment.  He suggests other measures--such as limiting the home sales capital gain exclusion or requiring mandatory distributions of pension account balances above a threshold, that would be reasonable in a MTM context.

One difficulty with MTM taxation is valuation of assets that are not regularly traded.  Ron Wyden's proposal suggests a lookback charge--an additional tax payment for assets not subject to MTM taxation that is collected upon disposition to account for the deferral value while still relying on realization as a trigger for taxation. Wyden and Leiserson suggest different possible methods.  One is to take the gain upon sale and allocate it ratably to each year between purchase and sale, compute the tax on each year's income at the rate applicable in that year, and then calculate interest on those unpaid taxes for the years til payment. Unrealized gains would be deemed realized on death or gift and taxed accordingly.

Three key ideas here:

• To protect lower and middle income taxpayers from the tax, there could be a lifetime gain  exemption threshold ($0.5 million, say) that has to be reached before the rules apply or an asset value threshold ($2 million; $10 million, etc.).  Under the latter, taxpayers would fall into and out of the MTM regime as assets fluctuate.  (The asset approach is suggested by Wyden.)
• The revenue raised is significant though it depends on the particular model.  Leiserson suggests MTM combined with elimination of the preferential rate on capital gains "could easily raise $1 trillion over the next decade--and potentially much more."  He notes that just eliminating the preferential CG rate gives a much lower estimate--that's because of "the ease of tax avoidance under current law such as the ready opportunity to defer tax by not selling assets and potentially avoid tax entirely through step up in basis--all while simply borrowing against these same assets to finance any spending."
• "The wealthiest 1 percent of families holds 31 percent of all wealth, and the wealthiest 10 percent holds 70 percent of all wealth."  "The highest-income 1 percent of families receives 75 percent of the benefit of the preferential rates for capital gains and dividends under current law." The wealthiest 10% would bear the burden of MTM reforms.

 

Of course, while everybody is talking about taxes, some of that talk is the same old endless market fundamentalist myth (Reaganomics) about how tax cuts are what make the economy grow and will actually pay for themselves -- in spite of near 4 decades of evidence to the contrary, where highest growth rates have generally been in times of higher tax rates, with some consideration for stimulus impact of tax cuts after periods of recessions.  See, e.g., NY Times editorial, There's No Such Thing as a Free Tax Cut (Jan 22, 2020).  The op-ed notes that Treasury Secretary Steven Mnuchin "repeated the risible fantasy that the Trump administration's 2017 tax cuts will bolster economic growth sufficiently for the government to recoup the revenue it lost by lowering tax rates" [in the 2017 tax legislation] even though 2 years in, the "budget deficit has topped $1 trillion." This is because, as most of us who haven't drunk the Laffer-curve tax cut kool-aid know and the Times op-ed reiterates, "businesses responded to increased demand more than they did to the lower tax rates."  Nonetheless, we should not be surprised that the Trump Administration is talking about two "big ideas" for taxes if the man gets reelected:  1) cutting Medicare and Social Security: see, e.g., Trump Opens Door to Cuts to Medicare and Other Entitlement Programs, NY Times (Jan 22, 2020) and 2) passing another tax cut bill: see Steven Mnuchin Confirms Trump's New Tax Plan is Imminent, USNews (Jan 23, 2020).  Those two ideas go hand in hand. 

Though Trump doesn't dare state what he is really doing to his base, who he has deceived with typical right-wing rhetoric into thinking that he is trying to rightsize the economy to serve them when he instead engages in class warfare to stuff his own pockets, he is hip to hip with Newt Gingrich's desire to "starve the government" to create a huge deficit (we are up to $1 trillion in our new "gilded age economy") that then provides cover for the wealthy to suck in even more of the country's wealth by downsizing Medicare and Social Security, programs essential for those who are not among the wealthy. 

 

The Democratic Debate in Des Moines: progressive candidates on means testing versus universality

Dana Chasin at 2020 Vision does a good job of encapsulating key issues that surface in the Democratic debates. 

Let's get this out first:  most listeners will admit that the debates seem both too long and too short, as mentioned on Stephen Henderson's Detroit Today program this Wednesday 1/15 morning.  They are too short, because candidates are interrupted at the 30-second time limit and not allowed to develop nuanced, considered answers to questions.  They are too long, because they go on for 2 hours.  I'd add that they are problematic, because the media pundits have their own views of what creates energetic dialogue that makes good 'copy' for programming, versus the kinds of in-depth discussions about issues like climate change, health care, education, the Supreme Court, congressional oversight/checks and balances, tax policy, wealth inequality and income inequality, plutocracy and oligarchy, etc. that people want to hear.

One important distinction that Chasin notes for thinking about socio-economic programs is the distinction between means testing and universality.  A means-tested program is generally available to lower-income people and often phases out and is capped at some income level beyond which it is no available.  A universally offered program is one that is available to all, rich and poor alike.  So the Earned Income Tax Credit is a means-tested program that is capped (too low, in my view), and Social Security is a universally available program (though there is a graduated payout scale and the funding formula caps pay-ins to the program at a ridiculously low level that means the rich pay only a pittance into the program)

As Chasin notes also, the right tends to reject universally available programs as having unreasonably high costs and allowing for free-riders.  The left tends to favor universally available programs for ease of administration and--not noted by Chasin--for the collegiality and collaborativeness they can build in having rich and poor in a program together, where it cannot be dismissed as 'mere' welfare for the poor (which, as we know, often gets translated in the hands of the ultra wealthy like Mitt Romney into "handouts for 'takers' from 'makers')

Two points here about the two most progressive candidates, Bernie Sanders and Elizabeth Warren:

• "Sanders is the strongest proponent of universality. ... Sanders has maintained support for universal healthcare (in the form of single payer, Medical-for-all), higher education, and social security expansion." (quoting Chasin in a 2020 Vision emailing) 
  

  • Quote from Sanders at the debate:  "My democratic socialism says healthcare is a human right."

• "Warren's policy agenda includes programs that are both universal and means tested.  Warren's healthcare and free college program are universal.  Her childcare proposal is means tested. ... Warren stands apart from some of her rivals by providing explicit pay-fors, includer her two [per]cent wealth tax levied on the country's wealthiest households." (quoting Chasin in a 2020 Vision emailing)
  

  • Quote from Warren at the debate: "The lowliest millionaire that I would tax under this wealth tax would be paying about $19 million in the first year in taxes. If he wants to send his kid to public university, then I'm okay with that."

Bloomberg's Plan for Addressing Economic Inequality: not a wealth tax

A week ago (Jan 8, 2020), the New York Times described Michael Bloomberg's plan¹ for addressing the income and wealth inequality in the United States that has been a constant topic of discussion by Democratic candidates.  Briefly, as with the robber barons of Teddy Roosevelt's age, the wealth of the global commerce titans and particularly the private equity fund buyers and sellers of companies (and layers off of employees) has exploded over the last four decades in the US, beginning in earnest with Ronald Reagan's presidency.  Most of the benefits of productivity gains have gone to a very few people at the top, and the bottom 50% of the wealth distribution actually owns a smaller share of the nation's wealth than 40 years ago.  The top 1% have gained enormously, and the top 0.5% have been even more enriched.  We have ultra multibillionaires like Jeff Bezos who can pay $9 billion to his wife in a divorce settlement and still be the wealthiest man in the world with more than $130 billion in net worth.  He earns about $78.5 billion a year (counting value of his Amazon shares) or more than $6.5 billion a month² and thus exemplifies this new "gilded age" of ultrawealthy tycoons.  This exists at the same time that the Trump administration proposes work requirements that will eliminate food stamp aid for 700,000 of hungry Americans and, with other initiatives, will take  food stamps from 3.7 million beneficiaries who simply cannot get work that pays well enough to fund a sustainable lifestyle for themselves and their families.³  This will "save" the U.S. about $5.5 billion over five years--less than Bezos 'earns' in a month.  This disparity--$5.5 billion to feed 3.5 million hungry Americans versus provide a month's additional wealth for a person already wallowing in wealth like Jeff Bezos--is why it is clear that the US needs to figure out how to respond to the inequality crisis in order to protect American democracy and ensure Americans have a decent standard of living.

Bloomberg's plan seems to be a moderate stance like Obama and Biden that attempts to focus on factors other than the wealth gap and the accompanying power gap that wealth provides.  As the NY Times reports, he "frames the economic divide primarily in regional terms--and not along ... rich-versus-everyone-else class lines."¹  The Times article notes that his plan is not unlike the charge Obama gave to Joe Biden for the Middle Class Task Force.¹

Bloomberg's proposals for addressing the problem are similarly centered on things long discussed and tried that are difficult to do at a large enough scale to make any inroads into the inequality problem or the power gap problem. He is most definitely not proposing a wealth tax.  His proposals include a focus on education and skills training, infrastructure projects, and entrepreneurial training centers.  Although the GI Bill was a significant part of the post-WWII economic boom because it allowed vast numbers of returning veterans to get a college education, Bloomberg seems to be thinking more of apprenticeships and community colleges (training for a job) rather than university (training for a career and an approach to learning throughout life).  The Times notes his interest in raising the minimum wage to $15 an hour, expanding the Earned Income Tax Credit, and encouraging unions while disallowing noncompetes for low- and middle-income jobs. 

All those are minimal steps that any progressive candidate should take, but while they may have marginal impact on middle class mobility, they will not do much at all to ease the income and wealth gap that has been caused by technology, globalization, and financialization of the economy together that has measured success almost solely from stock market numbers and thus allowed corporate and private equity tycoons to garner the major gains in productivity over decades while paying their workers too little (or moving offshore to pay even less), combined with a tax system that privileges wealth, including, among a host of others, extremely favorable corporate tax provisions after the 2017 tax legislation, ridiculously low maximum rates on ordinary income, carried interest provision, section 1031 exchanges, section 1202 exclusion for gains on original issue small business stock, capital gains preference, and an absurdly low flat estate tax above a too-high exemption amount with a step-up in basis for heirs. 

Bloomberg is a billionaire who is at least aware that the inequality in this country is problematic and needs to be addressed.  But like most of the "have-so-much" class, he shows little interest in what is truly required--a shift in the direction of redistribution to balance the distorted seesaw of billionaires getting all the height and the rest sitting at the bottom.  FDR's New Deal is said to have worked because the robber barons were scared that the proletariat would rise up in support of communism--the so-called 'red scare' behind the success of social security enactment.  There may not be a red scare now (though the Trump campaigners try to paint democratic socialist programs as communism), but there is a real likelihood that the contrast--and possibly real class warfare-- between the squalor and despair of poor families who work hard but cannot fend for themselves and rich kids with silver spoons that only grow bigger and bigger  may eventually threaten the global nation of the plutocrats.⁴

 

1 Jim Tankersley, Michael Bloomberg's Jobs Plan is Focused on Place over Class, New York Times (Jan 8, 2020).

2 Hillary Hoffower, We did the math to calculate how much money Jeff Bezos makes in a year, month, week, day, hour, minute, and second, BusinessInsider.com (Jan 9, 2020).

3 Phil McCausland, Trump administration proposals could cause millions to lose food stamps, NBC News (Nov. 30, 2019) (discussing proposed changes to SNAP program that would impose stricter work requirements, cap deductions for utility allowances and 'reform' the way states automatically enroll families when they receive other aid).  See also

4. See, e.g., Chrystia Freeland, Plutocrats: The Rise of the New Global Super-Rich (2012) (described in The Guardian book review as "a necessary and at times depressing book about the staggeringly wealthy").  Freeland is neither Marxist nor socialist, and as I am reading the book, not evenappropriately skeptical of the amount of merit behind the plutocrats' self-claimed meritocracy.

Dan Shaviro (NYU) and Tim Smeeding (WISC) on NPR's Detroit Today Show

For those of you who may not have the opportunity to tune into Stephen Henderson's radio program Detroit Today on NPR, it might be useful to have a short summary of the January 9 discussion of the "wealth gap" from that program.

Background

Tax lawyers have traditionally talked of the "tax gap"¹  and frequently mentioned the growing "income gap" between the top 1% of the income distribution and the remaining 99%, but the "wealth gap"² discussion among tax lawyers, tax policy thinkers, economic analysts and indeed progressive legislators about the relative net assets of different segments of the population has become increasingly important as people have recognized the trend of increasing wealth for the top 0.1% in the US and stagnating wealth for most of the US population.  The wealth gap is even more significant when race/ethnicity is taken into account: the 400 wealthiest families in 2015 owned as much as the country's entire African-American population plus 1/3 of the Latino population.⁴  The median white household in 2011 had about $111 thousand in wealth, while the median black household had $7 thousand and the median Latino household had $8 thousand, with the impact of slavery and post-WWII homeownership policies being the underlying source of most of the disparities.³ See also How Ameria's Vast Racial Wealth Gap Grew: By Plunder, New York Times, Aug. 14, 2019.  The generational wealth gap is also worrisome: older Americans' wealth grew between 1989 and 2013 but all other age groups had their wealth decline.³  The gender wealth gap underlies the power distinction that lies at the bottom of the MeToo movement: women earn less than men for the same work at the same level, and they save less and are more likely to live in poverty in old age.

That means that children in this country born to families in the top 10% of the wealth distribution have enormous advantages from birth:  they are essentially guaranteed the best medical, educational, and institutional support imaginable, with every opportunity for learning and advancement laid before them.  Their parents can afford to ensure they are able to get into top colleges (e.g., Harvard alumni preferences for their children), meet the "right" people for success in their preferred field (the "connections" that wealthy families build), take a preferred non-paying internship in another city with family funds supporting living expenses and more, all the way up the ladders of success.  Children born into families in the bottom half of the wealth distribution face a struggle at every point along that ladder:  schools that are inadequately funded after decades of Republican concentration on assessment and hurdles rather than support and educational opportunities; lack of exposure to different possibilities and the people who can open doors into those possibilities; lack of funding to make it possible to accept an opportunity when it presents itself.

These wealth disparities don't just impact these choices--they also affect aging parents who have inadequate retirement savings, young adults who have inadequate resources to deal with sudden medical emergencies, or aspiring students who get tangled in the payday loan vicious cycle of ever-escalating interest payments. And the wealth gap is compounded by at least three key components of the US federal tax system: 

1. the income tax system that claims to be progressive yet has income tiers that ignore the escalating heights of the highest paid corporate managers, university presidents, and other high-income labor and a capital gains preference that privileges ownership over labor;
2. the estate tax system that has been a GOP target for decades that has too low a rate on too little income of the dynastic estates that the run up in wealth over the last four decades has created while passing the estate along to heirs without taking any tax bite because of the absurd step-up in basis rule;
3. the cap on the social security tax that requires even the poorest laborer to pay in while letting the CEO earning a $10 million annual salary pay on only a pittance of the total compensation.

The wealth gap has in some sense always existed, but it is increasing⁵ and today begins to look like the Gilded Age before the Great Depression.  While the tax system isn't solely responsible for the increasing wealth gap in this country, it has played a significant role in aggravating the problem and thus deserves focussed attention as a matter of tax policy.

Key Points from Dan Shaviro's Interview

Dan noted that the wealth gap had its beginning in the 19th century when the government didn't respond to increasing disparities.  The progressive era under Roosevelt and Wilson, then the New Deal era under FDR did see some reduction in the wealth gap, much of which could be attributed to the reduction in wealth because of the stock market crash and the Great Depression.

As wealth increases, power increases.  Even proposals that have huge public support are rejected by Congress--including the idea that corporations and the wealthy should be taxed more.

Finding policies to ameliorate this current situation is not easy.  There are a variety of ideas--Warren and Sanders have proposed wealth taxes, though there are  constitutionality concerns that might defeat such a tax given the current conservative Supreme Court.  And a wealth tax won't solve all the problems of inequality. Other ideas include more progressive income taxes or a mark-to-market system of taxing appreciation of capital assets.

The reasons for attempting to address the wealth gap are many, and include the need for better transportation, health care, education, end of life and geriatric care, etc. 

We live in a capitalist system, but markets don't work well for addressing all problems.  In particular, they don't work well for the kinds of things that are so important like health care and education. 

Any transition, of course, will be very difficult.  The top 10% own 77% of the wealth while the bottom 50% own less than 2%.  Those with financial wealth live very well indeed, since that wealth isn't taxed til it is used and may never be taxed.

 

Key Points from Timothy Smeeding's Interview

Understanding the wealth gap is critical, because wealth provides a "cushion for consequential life moments" such as when a parent covers a child's tuition or supports the child in their first apartment in a different city.

Deciding how to respond to the wealth gap is difficult, but various possibilities exist, including a wealth tax, a reinvigorated estate tax, elimination of the capital gains preferential rate compared to ordinary income, elimination of the carried interest provision that allows private equity managers to be compensated with capital gains at a 23.8% rate rather than a 38% plus 3.8% rate and avoid paying social security taxes, elimination of the one-time exclusion for capital gains on sales of residences, etc

There are many important institutional advantages that can better lives as well, especially providing access to health care and to university education.

Responding to a question about labor, Smeeding notes that unions will be important in areas such as the public sector, nursing, education.  But in the corporate context, an important change might be to consider bringing a labor voice to corporations' Boards of Directors.  Other possibilities are to reward corporations that reward their employees:  a tax break that goes only to corporations that raise their employees' wages, for example.

¹ Generally speaking, the tax gap is the difference between the tax burden owed and tax liabilities acknowledged and paid and thus provides some understandable standard for judging trends in compliance by taxpayers with their federal tax obligations. It is calculated periodically by the IRS and published on the website.  See The Tax Gap;  IR 2019-159 (Sept 26, 2019),  The 2019 document provides estimates for tax years 2011 through 2013 and shows an estimated average gross tax gap of $441 billion per year which, after enforcement efforts and late payments, yields a fibure of $381 billion a year.

² See, e.g.,  Lola Fadulu, Study Shows Income Gap between Rich and Poor Keeps Growing, With Deadly Effects, New York Times (Sept. 10, 2019) (summarizing research from the U.S. Government Accountability Office in August 2019 entitled Retirement Security: Income and Wealth Disparities Continue Through Old Age);  St. Louis Federal Reserve Bank Open Vault Blog, What Wealth Inequality in America Looks Like: Key Facts and Figures (Aug 14, 2019) (showing income distribution from 1989 to 2016 (before the impact of the highly distortive 2017 tax legislation) skewed to favor the top 10% of income earners at the expense of the bottom 90%).

³ See, e.g., Amelta Josephson, What is the Wealth Gap? SmartAsset.com (Jul 23, 2019) (noting that the CBO's 2013 wealth data showed a figure of $67 trillion for total family wealth, with the top 10% of families holding 76% of that total wealth (and having incomes of $942,000 a year or more).

⁴ See, e.g., Institute for Policy Studies, 2015.

⁵ See, e.g.,  Pedro Nicolaci da Costa, America's Humongous Wealth Gap is Widening Further, Forbes (May 29, 2019). Noting that "distribution is everything" in response to proclamations that the economy is healthy because of stock market trends or eomployment numbers, the article states that "a steady economic expansion and historically low jobless rate can mask deep inequalities in income and wealth that leave American families in vastly different financial situations."  It relies on a recent Federal Reserve Bank (Fed) report that shows that the poorest 50% are "getting crushed" by "rising inequalities."  The increase in net worth since 1989 (growing almost 4X the prior figure) has accrued mostly to the top of the distribution, with the bottom 50% seeing essentially zero net gains in wealth over 30 years.   Figure 2 from the article is duplicated below.

The GOP Tax Bill Disses the Working Class

Here's something about the GOP House and the GOP Senate:  they each passed tax bills (supposed to come out in a "conference" agreement sometime today) that diss the United States' working class taxpayers.  White or black, Christian or Jew or other, citizen by birth or naturalized citizen--workers are treated as an inferior "taker" class and owners are treated as a superior "maker" class--the same old GOP class warfare that has been evidenced in Republican-driven tax legislation for decades.  That shows in the provisions that have been discussed quite a bit already, even though there is no official distributional analysis and even though the Treasury Department put out a one-pager claiming to provide an analysis showing huge economic growth would eliminate any deficits (based on both the tax "reform" legislation and promised cost-cutting "reforms" to Medicare and Social Security):

• the  significant reduction in impact of the estate tax,
• the huge reduction in the statutory corporate tax rate of most benefit to officers/shareholders (it was 35%, it will be 21% under the conference agreement, apparently, even though the "effective" corporate tax rate ranged from negative to around 24-25%--essentially more favorable than many of our fellow advanced economies' corporate tax rates);
• the territoriality of the corporate tax (generally, zero tax on foreign earnings of U.S. companies);
• immediate expensing of company investments (a five year provision that allows companies huge tax benefits for those five years);
• the elimination of the corporate alternative minimum tax (AMT), at a cost of about $250 billion in revenues.
• the reduction in the top rate for wealthy individuals (from 39.6% to 37%),
• the substantial reduction in the  State and Local Tax Deduction for workers (thus changing entirely the economics of paying for a house already purchased, while allowing sole proprietors, partnerships and other "owners" of equity in businesses the ability to deduct such State and Local Taxes in full);
• a larger standard deduction but the elimination of personal exemptions;
• a larger child tax credit that only becomes refundable over time (limiting how much it helps the poor) but is available to wealthy households (starting to phase out at half-a-million of income!);
• the only slight reduction in the ability of wealthy individuals to take advantage of the mortgage interest deduction (reducing the debt limit to $750,000 instead of $1,100,000)
• the elimination of the corporate AMT (which cuts taxes for wealthy shareholders/owners/managers) but the retention of the individual AMT (which primarily affects the upper middle class and not the wealthiest taxpayers under the current rate bracket system);
• the elimination of the Affordable Care Act mandate and penalty (which reduces the amount of Medicaid and insurance subsidy funds for poor and middle-income taxpayers, as well as guaranteeing the deconstruction of the health care system for 13 million or more Americans by 2027 and  increasing insurance premiums for upper-middle-class taxpayers); and
• the opening of the Arctic National Wildlife Refuge to rape by fossil fuel oligarchies (a piddling amount of revenue, but sufficient to buy off the principle-less Sen. Lisa Murkowski from Alaska );
• making the corporate tax changes permanent (and effective without any transition period) while making the individual tax cuts other than benefits for the wealthy like the estate tax changes temporary.
• (just to name a few).

When the health care mandate removal is combined with the other provisions,  "On net, the poor would actually lose out in all years once this effect is taken into account."  Dylan Matthews, The Republican tax bill that could actually become law, explained, Vox.com (Dec. 14, 2017).  The following Tax Policy Center graph from the Vox article (using the Urban-Brookings Microsimulation Model) shows that by 2027 the top 0.1% end up doing much better (average tax cut for the top 0.1 percent is $221,550 a year).  The bottom 20% do worse while the middle--the second and third quintiles--have a very insignificant plus (average tax cut of the third quintile is $490).   Within the third or middle quintile, more than 62% of taxpayers that earn between $54,700 and $93,200 would see their taxes go up, "[b]ut only about 0.1% of the very richest one-thousandth of Americans would see a tax hike."  Id.  Early gains--though small, intended perhaps to benefit the GOP in earlier votes--don't last because the individual cuts aren't permanent.  A change to chained CPI for indexing brackets amounts to a tax increase on individuals, while the permanent corporate tax cuts mean rich and very rich do well while middle and upper-middle lose out. 

 

Maybe the most damnable characteristic of these House and Senate provisions, other than the sheer favoritism for the already wealthy, is the favorable treatment in determining the rate at which income is taxed for "owners" compared to the disfavored treatment for taxation of workers' wages.  As the Tax Policy Center notes, the Senate version of the tax bill "would reduce taxes on business owners, on average, about three times as much as it would reduce taxes on those whose primary source of income is wages or salaries."  Paul Krugman, Republicans Despise the Working Class, NY Times (Dec. 15, 2017), at A27.  And this dissing of the working class goes along with treating partners in real-estate partnerships (like the Trump family and many other real estate developers) with kid gloves:  "a partner in a real estate development firm might get a far bigger tax cut than a surgeon employed by a hospital, even though their income is the same." Krugman, Republicans Despise the Working Class, NY Times (Dec. 15, 2017) (quoting Howard Gleckman at the Tax Policy Center). 

The Vox article describes the pass-through provision as part of its "here's who would be better off" section:

Pass-through companies, like the Trump Organization, which get a new deduction reducing their tax burden. The House-Senate compromise bill allows people with pass-through income to deduct a portion of that income from their taxes; the deduction is reportedly for 20 percent of pass-through income, less than the 23 percent under the Senate-passed bill.  Dylan Matthews, The Republican tax bill that could actually become law, explained, Vox.com (Dec. 14, 2017).

Note that this is an off-the-top reduction of what would otherwise be personal taxable income taxed at the taxpayer's individual tax rate.  Workers who are paid wages get no such break. And wealthy people will use good lawyering and tax planning to organize their businesses so that their income is counted as pass-through income rather than wages. This is just a continuation of a trend of favoring passive ownership of capital in this country.  See, e.g., the Berkeley Blog, Wealthy investors to win bigly with Republican tax plan ( Nov. 9, 2017).

Imagine a company where two siblings as owners and a third sibling is the principal employee.  They all receive about the same income from the company--for the worker bee, as wages and for the other two, as a profit share.  The worker bee does all the creative thinking and working.  So the two owners pay tax under this provision on 20% less income than the worker bee.  And this is true in an economy in which economists are generally agreed that pass-throughs are currently taxed favorably, taking everything into consideration, and "don't need another break".    Dylan Matthews, The Republican tax bill that could actually become law, explained, Vox.com (Dec. 14, 2017).  This pass-through provision is as clear a snubbed nose to all those who work hard to earn a decent living as one can imagine.  Fact is, the "owners" are often the takers, and the "workers" are the makers.

 

PS. The Vox article suggests that the corporate tax break is justifiable, based on the GOP "economic theory" that claims that a lower corporate tax rate will "spark so much additional investment in the United States that it would bid up wages and leave the middle class better off through its indirect effects."  Id.  This is just another way to state the "supply-side" "trickle-down" theory that has been relied on  for decades by right-wingers but has never been shown to be justified empirically.  In 2004, the GOP made the same claim for its "repatriation tax holiday" for multinational corporations, claiming that the low tax would allow those corporations to invest and expand, leading to job creation.  It didn't.  It led, instead, to share buybacks and more money for the shareholders.  In fact, a large number of repatriating corporations that did share buybacks with the money also laid off thousands of workers.

PSS.  The Vox article also suggests that the limitation of the state and local tax deduction for individual taxpayers (but not for businesses) has a "reasonable case" supporting it.  Sure, the benefit of the state and local tax deduction is regressive, in that higher income taxpayers in larger houses with larger property taxes and larger incomes get more of a deduction.  And yes, it tends to benefit those states with higher state income taxes that are used to develop infrastructure and education.  But that misses several points in response.  First, for people at the upper-middle income bracket, the Alternative Minimum Tax generally limits the availability of the state and local tax deduction.  Second, people who currently own homes and are paying taxes on those homes and living in states with higher taxes likely took the availability of a property tax deduction into account in determining what they could pay for their home: the bill does nothing to provide a reasonable transition for these folks that takes their expectations into account.  Third, when the GOP is trying to counter a Democratic president, it always makes the argument that it makes more sense to support states in allowing them to experiment with different ways of raising revenues and supporting their economics.  That's what the "blue" states have done:  they have recognized that having higher taxes allows development of infrastructure, support for education, funding for research and other priorities, and these expenditures have created a more sustainable economy and better standard of living in those states--exactly what the "state experimentation" is supposed to do.  Yet the GOP provision on state and local taxes is now justified as a way to undo the benefit for "rich" states without doing anything to help the "poor" states.  (In fact, Ryan and McConnell have made it clear that their goal is to harm the poor states by reducing funding for Medicaid, Medicare and Social Security on which those states in particular depend.)

 

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The Republican Party's Heartlessness--the Casualty Loss Provision of the purported "tax reform" legislation

The GOP is cruising towards passage of its class warfare tax legislation that continues the long trend of Republican tax policy to redistribute upwards to the very rich.  The legislation, however, is supported by a small minority of the American public (latest polls put support for the tax legislation at less than 30%). See, e.g., Allan Smith, Polls show key Republicans could get whacked by the tax bill, Business Insider.com (Dec. 4, 2017). That's astonishing when you consider that one provision in both the House and Senate bills that is used as a "revenue raiser" to pay for the huge tax subsidies to corporations and wealthy taxpayers will be especially hard hitting to lots of middle class and lower-income people, including many who voted for Trump.

The legislation will gut the "casualty loss" provision that currently allows taxpayers to deduct losses from hurricanes and fires and other accidents and forces of nature, to the extent those losses aren't covered by insurance (after a $100 per loss limitation).  Thus, people who were flooded by Harvey can claim casualty losses on their 2017 tax returns for amounts not covered by insurance.  People who lost their homes in the fires that raged earlier this fall in northern California can claim casualty losses on their 2017 tax returns for amounts not covered by insurance.  But, as Bob Cesca notes for Salon.com, As L.A. Burns, Republicans Vote for a Tax Hike on the Victims (Dec. 8, 2017).  See also Thomson Reuters Tax & Accounting News, 2017 Tax Reform: proposed individual tax changes in the 'Tax Cuts & Jobs Act' (Nov. 3, 2017) and Sally Schreiber et al, Details of Tax Reform Legislation Revealed, Journal of Accountancy (Nov. 2, 2017) (noting that the personal casualty loss is repealed, except, in the House version, for such losses associated with special disaster relief legislation--which requires congressional action for each one); Tony Nitti, Senate Releases Tax Bill: Here's How It Compares to Current Law & the House Plan, Forbes.com (Nov. 10, 2017).

You have to wonder just how the Republican Party and Trump administration became so completely heartless.  And why they think that Americans won't notice that they only care about multimillionaires in the "one percent".

Hope Lives: Pressing Collins and Corker and Flake on Tax Bill

The Republicans' proposed tax legislation--whether the House or Senate version--is despicable.  It will exacerbate the already devastating income and wealth inequality in this country, leave the federal government without adequate funds for real infrastructure and social safety net needs, and place in almost inviolable power the wealthiest oligarchs of the country (and even the good ones exert a power that no one should possess in a democracy).

My previous posts on this so-called "tax reform" "simplification" package (it is neither) have outlined a number of pernicious provisions in the bills.  There are a few I haven't mentioned, such as the likely inclusion of taxation of tuition benefits to undergraduate and graduate students.  That will have an immediate impact on education and on basic scientific research.  Not surprising, given Paul Ryan, Donald Trump, and Mitch McConnell's aversion to fact-based science and intellectuals, but nonetheless devastatingly harmful to the country in loss of prestige for our universities, loss of the top minds to other countries, and loss of entrepreneurial and innovational thinking that will hamstring commerce and productivity.  Another is the "new" talk in the House of lowering the tax rate on the weathiest bracket by as much as two and a half percentage points--adding to the largesse for the wealthy otherwise larding the legislation and making it even more obvious that the only Americans the Republican Party sees itself as serving are those with at least millions and probably billions of net worth.  The Republican charade of right-wing "alternative facts" (shown most clearly by the Treasury Secretary's inability to provide a supported rationale for the absurd corporate and oligarch-favoring tax cuts) would have a destructive impact on the entire U.S. economy.  And it is not simplification--it is a huge complication that is ripe for tax abusers to abuse the complicated categories of differently taxed income.

But today there is a ray of hope that this tax scam might just not get passed --or might get turned around very quickly if it does get passed.  Doug Jones' defeat of constitutional scofflaw and likely multiple-sexual-predator Roy Moore should cause any thinking Republican in the House and Senate to take a step back and listen to the views of constituents across the country, where dislike of this tax legislation is the majority view.  The #MeToo movement and its impact on powerful media and other industry harassers, together with the fact that Democrats and Independents got out the vote in Alabama and defeated Roy Moore -- and another 20,000 likely lifelong Republicans decided to  write-in another Republican name other than Roy Moore--should tell current GOP congresspeople that "the times they are a changin' ".  Reaganomics--trickle-down, supply-side tax policies--don't work.  Kansas proved that, if anybody actually had any doubt before.  If the Republican majorities in the House and Senate pass this " Class War" tax legislation--written and argued and honed to a tee to serve the wealthiest multinational corporations and individual campaign donors while stabbing the middle and low-income classes in the back--they will potentially pay a big price at the polls in 2018 and 2020.   They will pay that price because their tax legislation will send the U.S. economy into another tailspin that will lead to cuts in the standard of living of ordinary people so people like the Trumps can have even more gaudy gold faucets in their many mansions.

I call on everyone who can to write and call Jeff Flake (Arizona)--ask him to stand on principle and vote against the end of the Obamacare mandate, the giveaway to the wealthy and big corporations, the ridiculous scammable complication of different rates for the same income depending on what job the taxpayer worked at or whether the taxpayer owned the business or was an employee.  Ask him to vote down this despicable tax legislation for the good of the country and ALL the people.  Do the same for Susan Collins (Maine), who already has expressed real concerns about the impact of the elimination of the health insurance mandate.  Even her 'bargained for' (but not actually promised) two-year patch wouldn't do much good:  millions of people, the most vulnerable amongst us, will lose health insurance and therefore health care if this tax legislation passes.    And let Bob Corker (Tennessee) know how much we all respect him for actually standing firm against this tax legislation travesty--and ask him to stand even taller by resisting the pleas to compromise principles 'just to get a win for  Trump'.  Let's push our Senators and Representatives to stand tall for a sustainable economy based on fiscal responsibility (don't create a $1.5 trillion dollar deficit) and distributive justice (don't push the middle class into dead-end living conditions) and end the giveaways to the wealthy oligarchs.

I predict that if this bill passes the expected accounting for the Republican Party will come even sooner and with even more  strength against those who supported Trump's daily vitriol of falsehoods and the Trump Administration's filling the DC swamp with those who put pollution, despoiling the environment, destruction of the wilderness and national public lands foremost on their agenda.

The Utterly Terrible GOP Tax "Reform" Scam

The Republicans in the House and Senate continue on their downhill rush to pass their so-called "tax reform" plan before the holiday break.  It's a mad rush to nowhere, a corrupt process of "please the oligarch" that will cause a huge deficit increase (on the scale of $1 to $1.5 TRILLION over ten years) and be used by the Ryan, McConnell and Trump cadre of liars to justify a domino effect of Medicare, Medicaid, and Social Security cuts.  It is class warfare of the one percent against everyone else.  And it is being sold to the American people with a litany of falsehoods.

Almost all the provisions in the bill are designed to be generous to the ultra wealthy and stingy to the middle class and poor. 

Corporations and their owners and managers--among the wealthiest people in the country--get the only permanent tax breaks.  It's done in the name of competitiveness, but that's bunk.  It essentially encourages corporations to continue to move profits out of the US because foreign profits are taxed at zero while US profits are taxed at 20%.  It pretends that the multiple tax breaks for big corporations are necessary (under disproven trickle-down and supply-side theories) to lead to more investment in business in the US and to more jobs and higher pay for workers.  But in fact corporations are enjoying record profits under current law and they aren't using those record profits to pay their workers more or to create more jobs or even necessarily to invest in the US.  Mostly they are just doing share buybacks for shareholders (ie, owners/managers and other shareholders) that include the  wealthiest people who own the most corporate stock.  That's because it is demand, not capital, that determines what business expansion is needed and results in labor shortages that give workers leverage to demand more pay.  Tax cuts for corporations just add to the already existing capital glut.

The estate tax cut (elimination in the House bill; doubling the exemption to levels that only the very few multi-billionaires will pay any at all in the Senate) ensures that the wealthy will pay almost no tax at all.  They borrow against their wealth while alive.  Their estates pay no tax on the accumulated wealth when they die.  Their children inherit with a "step up" in basis so they get a huge windfall.  And their children can pay off the parents' debt by selling a few items (because of the basis step-up, with no taxes either) and live on their windfall without ever lifting a finger to do any real work.

Individual workers really lose out in these bills.  Under the House bill, the rate on the lowest wage earners is INCREASED 20%--from 10% to 12%.  And all of the 'tax cuts' for ordinary taxpayers sunset after a few years, while the corporate cuts are permanent.  Shows where the GOP loyalties lie--not to the worker base that put them in office, but to the wealthy oligarchs like the Koch Brothers who donate to the GOP political campaign chests.

The pass-through provisions (a 23% "deduction" from income before tax is one version)--along with the ability of businesses but not individuals to deduct state and local taxes--are a great boon for wealthy owners of real estate partnership interests, like the Trump family.  But they make no sense at all.  The more different kinds of income categories that are created with different rates, the more you empower the wealthy to gamesmanship with the tax system.  That's what this legislation does in spades.

And after the American people spoke up in Town Hall after Town Hall that they wanted the Affordable Care Act health insurance system protected, the Senate's version of the so-called "tax reform" bill (developed in utter secrecy by Republicans bargaining with Republicans as though nobody else counts) eliminates the individual health insurance mandate (and accompanying penalty).  Without that, the entire idea of affordable insurance through government-operated exchanges fails, because the only people on those exchanges will be those who are sick enough or old enough or vulnerable enough to realize that they will need health insurance soon.  Insurance works by diversification of risk--that's why the Republican insurance plan in Massachusetts, the model for Obamacare, called for an individual mandate and penalty.  Without that core feature, the exchanges can't work because the risk isn't sufficiently diversified.  The Republicans who are trying to gut Obamacare know that, and apparently they don't care that this particular "tax cut" will in fact cost more than 8 million Americans the possibility of having affordable health care, likely leading to early deaths for a large number of that group.  They don't care, I guess, because "those people" are less likely to be wealthy and less likely to vote Republican.  If you are so blinded by partisan fealty that you no longer care about legislating for the good of the nation, you descend to the garbage dump level of this Republican tax bill.

Of course, the elimination of the individual tax cuts, the expansion of the real-estate-industry favorable tax cuts, the inclusion of what can only be called a 'mock' provision to deal with carried interest (it doesn't), the elimination of the medical expense deduction (in the House bill) that will leave the disabled, the injured, and the elderly in dire straits, the decimation of the casualty loss provision that helps ordinary people recover from natural disasters, the huge cutback to the state and local tax deduction for individuals (while continuing to allow it for all businesses)--all these provisions prove that Republicans don't care a fig about ordinary people.  We won't be spending money on basic scientific research (needed to be competitive in a global marketplace and needed to save lives from cancer and other diseases).  We won't be spending money on infrastructure (needed to have safe roads, trains, airports. etc).  We won't be spending money on  education (other than Betsy DeVos's favored religious charter schools that teach falsehoods on a daily basis).  We won't be creating a sustainable economy that serves all of our citizens.

Oh, but we will be decimating the environment, as Trump's lineup of industry trolls continues to reduce wilderness areas, as Lisa Murkowski sells her tax and healthcare vote to get to open pristine and irreplaceable Arctic wildlife refuge to the oil and gas fossils that have grown obese off 200 years of government subsidies (see The tax bill is bringing drilling in the Arctic National Wildlife Refuge closer than ever, Vox.com (Nov. 28, 2017)), as Zinke reduces FOR THE FIRST TIME EVER national monuments set aside by other presidents so that those obese coal and oil and gas guys can get even wealthier (see Zinke backs shrinking more national monuments and shifting management of 10, Washington Post (Dec. 5, 2017)), as Pruitt ensures that nobody at the EPA does anything to protect the air, water and land from industry pollution, see Goodby science, hello industry, LA Times editorial board (Nov. 6, 2017). .....

The passage of a tax bill that will create an additional one-to one-point-five trillion-dollar deficit is proof that the Republicans don't care if they destroy this country in their effort to return to the Gilded Age of the past (or, in Roy Moore's definition of the time that America was great, the slavery era when (white) families stayed together and were able to sell black babies away from their black mothers (or half white babies away from their raped black mothers)).

What is the Republican response to the deficit and mal-distribution problems created by such a huge tax cut for the already wealthy?

1) The tax cut will pay for itself.  This is trickle-down gobbledy-gook.  The vast majority of economists and tax experts are quite clear that this is simply not a supportable claim.  It's pie-in-the-sky ideology with no basis in fact when there have been a number of attempts to find such a basis.  It wasn't true for Reagan, back in an economy for which tax cuts held much more promise of economic stimulus than they do for our current situation.  The Kansas experiment shows this trickle-down reasoning is without foundation. Russell Berman, You Better Learn Our Lesson: Kansas Republicans say they are worried that Congress and the Trump administration will repeat the mistake they made in enacting budget-busting tax cuts, The Atlantic (Oct. 11, 2017).  But Treasury has now put out a one-page analysis--compared to the careful, extensive, fact-based analyses usually prepared to support well-researched tax proposals--saying that the GOP plan would produce record growth and that growth would pay for the tax cuts.  See Alan Rappeport and Jim Tankersley, Treasury Defends Tax Plan Cost with One-Page Analysis (Dec. 11, 2017).  Event the speculative Treasury 'defense' assumes away half of the deficit with legislative cuts that aren't even on paper yet.  It's pure fiction.

2) Medicare, Social Security, Medicaid (the "entitlement" programs) will have to be cut to make up for any deficits.  That, of course, is the underlying plan. See Jeff Stein, Ryan says Republicans to target welfare, Medicare, Medicaid spending in 2018, New York Times (Dec. 5, 2017).  Create a deficit and use it to 'starve the government' to justify cutting any programs that don't serve the oligarchs.  Most of that minority of people who voted Trump into the presidency (assuming there wasn't a good bit of ballot falsification, which I think went on in Detroit to not count everyone's ballot) will suffer from this--they depend on Social Security when they retire and on Medicaid when they become incapacitated in their old age and need nursing home or assisted living care.  Under the Republicans, we'll return to the "good old days" of the Great Depression when old folks became homeless and the government didn't have to bother with caring about the vulnerable.

We all should be hitting the phones and telling every GOP member of Congress that they are not there to protect their wealthy donors: they are there to protect us and ensure that the economy is sustainable and viable for all of us.  This tax legislation stinks. Tell Congress to ditch it in the sewers where it belongs.

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The Long Game of Republican Economics

The Tax-Cut Framework Won't Create Jobs and Digs the Inequality Ditch even Deeper

Marcus Ryu, a self-described Silicon Valley entrepreneur who created, with others, a company now worth $5 billion on the New York Stock Exchange, argues in today's Op-Ed section of the New York Times that "Tax Cuts Won't Create Jobs", NY Times (Oct. 9, 2017), at A23 (the title in the digital edition is different from the print title:  Why Corporate Tax Cuts Won't Create Jobs).  He is right.

The tax cuts proposed in the framework set out by the Trump administration and Republican leaders in Congress claims to be pursuing economic growth that will benefit ordinary people (Trump's purported base).  These claims are based in part on claims that  U.S. taxpayers (individual, corporate and individual who owns businesses through partnerships) are much more heavily taxed than taxpayers in other advanced countries.  Trump often points to the statutory tax rate for corporations (35%), which is higher than the statutory rate in most other advanced countries. But Trump usually ignores the fact that the vast majority of corporations (including very profitable U.S. multinationals) pay no or much lower taxes, in part because of the many loopholes and deductions that reduce the income that is taxed.  When one considers the nation's GDP and the percentage of GDP paid in taxes, it is quite clear that the U.S. is actually one of the lowest taxed of developed countries, which often have income taxes, corproate income taxes and value-added taxes (which the U.S. does not have), as well as specialty taxes such as financial transaction taxes (which the U.S. does not have).  See, e.g., Business Insider, Is the U.S. the highest taxed country? (Sept. 6, 2017).

"[T]he most comprehensive measure by which to judge Trump's claim, combining corporate and individual taxes paid, is tax burden as a percentage of gross domestic product. It compares how much money in a country is put toward taxes with the economic output of the country.  By this measure, the US has the fourth-lowest tax burden of any OECD country, with only South Korea, Chile, and Mexico ranking lower." [emphasis added]

  Trump has claimed that the proposed cuts in the Trump tax-cut "reform" framework don't benefit the wealthy and don't benefit him but are for the middle class and those with less wealth and income.  The only way that claim would work would be if tax cuts that are clearly targeted at the rich (elimination of the estate tax, elimination of the AMT, drastic cut in the rate at which wealthy partners pay taxes on partnership income shares, drastic cut in the corporate tax rate  when most of the benefit of tax cuts to corporations is used to pay dividends or do share buybacks for the wealthy managers and shareholders) had such a dramatic impact on overall economic growth and on sharing of the benefit of the tax cuts with ordinary workers that it made up for the fact that almost all of the benefit goes directly to the very wealthy and almost all of the negative impact (via additional borrowing and deficits) will result in fewer benefits from the poor.  That positive balance is so unlikely from these tax-cuts-for-the-rich that they appear to be just another of the many Trump lies intended to mislead the American people.  See, e.g., Business Insider, Trump tax reform plan just got its first brutal review showing how it would benefit the rich and almost no one else (Sept.  2017) (noting that "Americans among the top 1% of earners would see the bulk of the plan's benefits, while lower- and middle-class Americans — even most upper-class people — would see few benefits," citing the Tax Policy Center's study of the framework).

Marcus Rye sets out a number of key ideas in his op-ed.

First, "lower tax rates will not motivate more people to start companies."  That is because most people who start a company do so because they have an idea, they want to strike out on their own, or they are ambitious for fame and fortune generally.  Research on the 1986 significant changes to marginal tax rates shows that those changes did not induce higher-income people to work longer hours.

Second, existing companies won't shy away from a promising investment because of the tax rate on potential gain.  Company leaders are motivated to expand if possible, and "lowering the corporate tax rate isn't going to make us create jobs any faster."

Third, tax cuts just "increase our post-tax profitability, which effectively transfers money from the federal government to our shareholders."  The result is a bump in the share prices but no long-term impact on operations or employment plans.  It doesn't even make it easier to raise cash for expansion, since companies are having no trouble getting capital now because of low interest rates. 

Fourth, the tax-cut proposal demonstrates shoddy business reasoning.  It "wish[es] away huge tax-revenue shortfalls with stupendous growth projections."  No well-run business would do that kind of shoddy planning.

Fifth, "by 2027, when [the tax cuts] are fully phased in, four out of every five dollars ... will flow to the top 1 percent, an egregious wealth transfer to those who least need it."

Finally, "tax cuts that deepen our already severe inequality in income and wealth are not in the long-term interests of any citizens, not even the very wealthy. Extreme inequality is corroding our civil society, poisoning our politics, and undermining our effectiveness as a nation.  This is an extremely hard problem to solve, but when you're in a deep ditch, the first thing to do is to stop digging."

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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