ataxingmatter

Trump's "Give the Rich a Break" Tax Plan

National GOP leaders on Wednesday released a 9-page document that they called a tax "framework" (available here on the Washington Post site) describing in vague terms how they intend to cut taxes for the nation's wealthiest people while doing very little that serves the government needs. Overall, the GOP framework would amount to about $2.2 TRILLION in less revenue to support federal programs (like protecting the environment from corporate pollutants, supporting higher education loans for students, funding basic university research) (assuming $5.8 trillion loss to lowering rates and shift to territorial system and maybe $3.6 trillion recouped by eliminating as yet unspecified deductions).  See GOP proposes deep tax cuts, provides few details on how to pay for them, Washington Post (Sept. 27, 2017).

• They promise 3 rates (12%, 25% and 35%, without stating what the applicable income brackets for those rates should be).  That lowering of rates is primarily beneficial to the wealthiest, since the people who just barely get by on their wages (especially with the new corporate regime of calling people in for short shifts, as needed, rather than paying them a regular full-time job) are hit hardest by the payroll taxes that won't be lowered at all under this plan.  That is, ordinary wage-earners in the middle and lower classes are generally already taxed on a consumption basis--they spend what they earn and have little left for saving for the future.  They pay relative low income taxes but pay significant payroll taxes through withholding on their wages (with no deferral).  This is another excursion into the current GOP's 'alternative fact' universe, where huge tax cuts mainly benefiting the wealthy are sold as a 'simplifying' reform that will benefit ordinary people.

 

• Although the lowest rate is higher than the poorest wage-earning taxpayers pay now, the planners claim that this is still a tax cut because of the "doubling" of the standard deduction for those taxpayers that do not itemize.  However, the personal exemptions are eliminated, so that the combination of the standard deduction and the higher rate is likely to be at best a minimal cut for small families and an actual tax increase for larger families.  See, e.g., this article.

 

• They promise to eliminate the "alternative minimum tax", a tax provision that was enacted as a safety provision to ensure that wealthy taxpayers who can afford tax planning and generally can most easily benefit from the various loopholes and tax subsidies written into the code would pay some modicum of taxes rather than get off scott-free from any tax burden. The "framework" (page 5) claims that "it no longer serves its intended purpose and creates significant complexity."  It is admittedly somewhat complex, but not unduly so with modern tax preparation software which makes that complexity a minimal problem.  I have been required to pay the AMT, and it hasn't made my life or tax return filing more complex.  In fact, the people who owe the AMT should be paying more tax than they would pay without the AMT, and that means it is in fact serving its intended purpose of ensuring that taxpayers cannot aggregate too many of the various haphazard subsidies in the Code to permit them to essentially escape a reasonable tax burden on their economic income.  Elimination of the AMT is a tax break for the well-to-do:  Trump, for example, has had to pay the AMT (real estate developers are one of the much-favored groups in terms of various tax expenditures in the Code that benefit them).

 

• They plan to eliminate the estate tax--a tax that ONLY applies a low 35% rate to individuals who leave estates worth more than 5.5 million dollars or couples that leave estates more than 11 million dollars, and even then is often the only tax that the assets in those estates have ever been subject to, since these wealthy Americans are the ones most able to take advantages of various trusts and other loopholes and borrowing to ensure that they live as tax-free as possible off their assets during their lifetimes and pass them almost wholly intact to their heirs with stepped up basis to start the game all over again.  This is a tax break for the very wealthy and their silver-spooned heirs--especially lucrative for the multibillionaires who own (and live off of) most of the financial assets.

 

• They plan to give corporations an exceeding low statutory rate of 20%, even though the primary beneficiaries will be the owners and managers who already have enjoyed a hugely disproportionate share of corporate gains (compared to their workers) that has resulted in the cascading inequality of distribution of resources in this country, in part because the wealthy typically own most of the countries' financial assets and get a very low preferential capital gains rate on their income compared to the higher rate on wages paid by ordinary, non-wealthy wage-earners.  It is claimed that low corporate tax rates are necessary to allow corporations to be competitive, based on the statement that our statutory rate (the rate provided in section 11 of the Income Tax Code) reaches a maximum of 35% for the biggest companies.  But the majority of corporations--even highly profitable ones-- pay no income tax at all.  And those that do pay a corporate income tax pay an average effective tax rate (actual tax as a percentage of actual economic income) around 24% , at best, and that is not substantially higher than the corporate tax rates in other developed countries.  Further, most of those other developed countries do not depend solely on the income tax--they generally have some kind of value-added tax (a VAT) in addition to income taxes and often have various other taxes (such as a financial transaction tax).  Making claims about competitiveness based solely on the corporate income tax is, in other words, foolishly incommensurate and really says nothing whatsoever about ability to compete.

 

• Further, they plan to allow corporations to expense all investments, at least for the next 5 years, even though the economic reality is that expensing is an upfront subsidy since wear and tear is most significant at the back end of an investment, not the front end.  Expensing (see page 7 of the framework) will cost huge amounts of tax revenues.  It is just a way to reduce corporate taxable income (not economic income) even further, making the 20% rate on a lower amount of income produce even less tax revenues from corporations, which already pay a ridiculously low amount and are enjoying record high profits.

 

• The framework calls for changing to a territorial system (at a time when most U.S. multinationals have already used various gimmicks to 'offshore' their main profit-making IP) and lower taxes on U.S. multinationals.  The result will likely be significantly lower corporate tax payments from U.S. multinationals.  Further, unless the reorganization provisions and ability of U.S. multinationals to move active businesses overseas on a tax free basis is curtailed, these rules will likely encourage other companies to offshore even more of their active business assets.  It will favor multinationals over domestic corporations, pushing even more companies to move businesses overseas.

 

• And they intend to preserve the R&D credit (see page 8 of the framework) -which was eliminated in the 1986 tax reform and then reinstated  on a piecemeal basis over multiple years due to pressures from corporate lobbyists.  There is no evidence that the R&D credit, rather than the more legitimate business deduction or capitalization for research expenses, produces more research.  And Congress has done nothing--in spite of years of pushing for making the R&D credit permanent--to establish that it provides any actual economic growth benefit.   It just provides an upfront dollar for dollar reduction in taxes compared to the deduction's lesser benefit.  And there is no evidence that the credit has resulted in more money being put into research.  Research intensive businesses with good leadership invest in research whether or not they get a special tax benefit because otherwise their busienss will die.  (Of course, businesses with no attention to anything other than the bottom line may make bad decisions:  one reason the pharmacology industry has been lagging is that they have tried to merely buy others' research rather than doing it themselves, and like the infamous purchaser of Epipen, they have simply gorged themselves on exploitative prices because of their monopoly on a particular drug.)

 

• They plan to have income from "pass-through" entities like partnerships taxed at very low rates to the individuals, who already enjoy exceedingly low rates on their gains from corporate stocks and other financial assets (the preferential capital gain rates) and will receive even more cash out of their corporate stock ownership with the even lower proposed statutory rate on corporate stock.  This plan for pass-throughs, by the way, will continue to lavish tax benefits on an already super-coddled wealthy class--those who run real estate development businesses through partnership structures (the Trump empire, for one), those who run hedge funds (some of the wealthiest individuals in the country) and those who run master limited partnerships (fossil fuel tycoons).

 

• They say they will "simplify" taxes--which should mean eliminating most or all of those absurd provisions that have grown over the years to clutter the tax statute with special subsidies (that, again, mostly benefit the wealthy).  But there is no indication that the GOP has any intent to eliminate any of the special giveaways.  With real simplification that made economic sense, the framework would call for things such as
  • eliminating the preferential capital gain rate (that benefits the wealthy who own the vast majority of the capital assets)
  • eliminating the section 1031 "like kind exchange" rules (that allow wealthy real estate developers to trade properties for significant gains but defer tax on those gains indefinitely, often til death when the step up in basis allows their heirs to inherit and start the game all over again)
  • eliminating the various preferences for fossil fuels that have been in the code in one form or another for years, giving oilmen their wealth while subsidizing the most polluting kind of fuel extraction and use (all the while with their lobbyists arguing against significant long-term subsidies for more environmentally friendly wind and solar)
  • phasing out the mortgage interest deduction--at least for mortgages at more than the average national housing price-- so that multimillionaires cannot get the benefit of the interest deduction on $1.1 million of mortgages, again, a provision that primarily benefits the wealthy in the top 20% of the income distribution, and
  • eliminating the provision in the charitable contribution provisions that allows wealthy shareholders to donate certain assets for  a full fair market value deduction rather than a basis deduction--thus significantly reducing the overall income tax they owe.

But of course--although most academic research suggests that a mortgage interest deduction serves no legitimate purpose, the GOP 'six' indicate they will retain it, because it "help[s] accomplish important goals that strengthen civil society as opposed to dependence on government:  home ownership".  Fact is, countries without a mortgage interest deduction have just as high rates of home ownership, and the economic effect of the deduction (especially in its current form) is to favor purchase of ever larger homes by those taxpayers in the upper income distributions.  

As with so much else from the man currently holding the office of President, what is said (paraphrasing) --that the wealthy will not get a tax cut and the poor and middle class will get big tax cuts --can't be trusted.   Like so much else, Trump says he is "very good at it", but then he thinks he is good at everything and is inevitably shown to be fairly ignorant of the issues that matter. The framework, like everything else the GOP has proposed this year --including repeal of the Affordable Care Act; defunding of Medicaid; withdrawal of scientific information about climate change from the EPA website, reduction in the size of existing national monuments meant to protect the land for all of us --is designed to benefit the GOP establishment's wealthiest donors who continue to call the shots on tax and economic policies.

And of course the claim that this 'framework' can result in "the simplicity of a 'postcard' tax filing for the vast majority of Americans" is absurd.  The complexities of accounting for various income sources and the heightened complexities that most low-income Americans face in claiming the Earned Income Tax Credit will remain, even if rates are reduced and the standard deduction replaces the standard deduction and personal exemptions.  The claim (page 4 of the framework) that "typical families in the existing 10% bracket are expected to be better off under the framework due to the larger standard deduction, larger child tax credit and [unspecified] additional tax relief that will be included during the committee process" seems clearly wrong for many if not most of those taxpayers in that lower bracket. 

 And their posturing that this "reform" is to benefit "small businesses" is equally absurd.  The main beneficiaries of the pass-through rate will be the huge joint ventures, master limited partnerships, real estate partnerships (like the Trump companies), and hedge funds whose owners will enjoy a reduction in their tax rate on that income from 39.6% to 25%.  Most actual small business owners are already paying tax around the 25% rate.

The proposal will not end incentives to ship job and capital overseas (see page 3 of the framework on goals)--those gimmicks with transfer pricing of intangibles will continue, as any lowering of the corporate tax rate here to 20%, which is below the international average of 22.5% (according to the report--it may well be too low a figure), will push other countries to lower their rates as well.  It is a corporate lobbyist's ideal playground--playing one country against the other to push the "race to the bottom" faster and faster and continue the quasi-sovereign hegemony of multinational companies around the world.  If we want to end the corporate inversions and the transfer pricing gimmicks, we know various ways we could do that, including changing transfer pricing mechanisms in ways that various academics have recommended.   Congress hasn't really wanted to, since their wealthy corporatist donors wouldn't like it.

What reveals the hypocrisy of the GOP is their sudden switch from deficit hawks during the Obama administration, which made it harder to get a decent stimulus package through Congress and to promote funding for desperately needed infrastructure projects, even when interest rates were incredibly low, to a willingness to incur significant deficits in order to debt- fund even more tax cuts for the wealthy on top of the Bush-era tax cuts that led to a switch from federal surplus to federal deficits and more debt. As Ed Kleinbard so aptly states, "The Republican tax "plan" is a deficit-busting mess, and it would slash the President's taxes", Vox.com (Sept. 28, 2017).

What reveals the GOP hypocrisy even more is their presentation of this framework without any appropriate CBO or Joint Committee on Taxation analysis.  And statements by Senator Bob Corker (Tenn) in connection with scoring tax reform that they don't trust the CBO, implying that the GOP should go to a private (pro-GOP) source for "dynamic scoring" so that it will show the results they want--is truly worrisome.  See The sudden and regrettable demise of the CBO, USNews.com (Sept. 21, 2017).  It disparages the nonpartisan professionals in the Budget Office while showing that the GOP is willing to do practically anything to further the lie that their budget, with  huge tax cuts proposals for the wealthy, will miraculously result in widespread economic growth that will float even poor folks' boats. 

We already know that tax cuts do not have the miraculous growth effect that they claim.  Kansas actually engaged in an "experiment" to prove that tax cuts would stimulate growth.  Even the state's GOP legislature recognized the utter failure of the claim, as the state's economy sank under the burden of the tax cuts.  Kansas actually voted to end the experiment and raise taxes!

And of course we have experimented this way nationally with various Republican administrations.  Reagan cut taxes drastically in his first year in office, caused huge deficits and then increased taxes every year of his term afterwards.  The cuts ended up most especially benefiting the wealthy, because the tax increases took the form of higher payroll taxes and other means of hitting lower-income folks that didn't bother the wealthy.  George H.W. Bush promised not to raise taxes, but recognized that he could not keep that promise and run the government appropriately. If we are going to spend billions on continuing to buy arms and military planes we don't need (a silly idea, but one that seems ingrained in the GOP mentality), then we have to have more money to fund things we really do need, such as a fair medical care system for the most vulnerable (Medicare) and funding for basic research that corporations don't want to pay for (NSF and NIH, among others).  George W. Bush cut taxes on the wealthy and corporations, fulfilling corporate lobbyists wish lists that had been circulating for 20 years, including creating a 'tax holiday' for corporations to repatriate untaxed profits that they had offshored at a very low rate.  All that was promised to drive economic growth, but of course it didn't.  As with the similar idea in this year's "reform" talk, the 2004 tax holiday provided a way for corporations that had engaged in various gimmicks to move their profits overseas to low tax jurisdictions (even while the money is often in U.S. banks) to bring it back to the US at low or no taxes and then use it to do stock buybacks that benefited their wealthy shareholders with big boosts of income taxed at preferential capital gains rates.  Most of those corporations did not use those funds in any way to create job--in fact, some of the biggest so-called repatriators laid off employees at the same time.  The tax holiday merely gave even more of a tax subsidy to unpatriotic corporations that were willing to scam the system by pretending to sell their invaluable IP to offshore subsidiaries, and then even higher payments to the CEOs for raking in more cash.  In other words, the tax holiday was a great exercise in supporting the creation of an even greater inequality gap.  Historical trends are fairly clear on this.  The U.S. economy has thrived more under Democratic presidents who have increased taxes and has turned to deficits more under Republican presidents who have cut taxes.

What we should do at a minimum is increase the amount that corporations pay into the federal government, so that a higher percentage of our GDP is paid in corporate taxes, as in other developed countries.  And we should add a financial transactions tax, at least, to the mix while eliminating the preferential capital gains rate and the like-kind exchange provision. 

Funding the government so that it can deal with the hundreds of billions in financial aid needed in Texas (Hurricane Harvey) and Florida (Hurricane Irma) and Puerto Rico (Hurricanes Irma and Maria) while at the same time starting to handle some of the deteriorating federal roads, railways, bridges and other infrastructure throughout the country would be the best way to ensure that we could continue the economic growth begun under the Obama administration. That funding would require REAL tax reform:  eliminating the preferential capital gains rate, eliminating the many loopholes by which highly profitable corporations manage to pay almost no federal income tax, and creating a significantly higher graduated rate structure for taxing estates (while eliminating the step up in basis).

(Of course, we should also recognize that spending the hundreds of billions annually on defense does much less to defend America and make it great than spending a higher proportion of that money on education, infrastructure, and other ways to increase opportunities for all.  Let's get rid of the militaristic jingoism that keeps the U.S. armament industry rolling in cash and start funding scientific and health research through NSF and NIH.  That is the way we created a thriving middle class after the second World War and the way to support continuing innovations that will make a difference in our lives and economy into the future.)

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Should simplicity be a primary goal of tax reform?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

 

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

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

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

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

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

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

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

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

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

 

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

Bernie Sanders at The Monitor Breakfast

In an extraordinarily frank breakfast exchange with journalists, Bernie Sanders answered a number of questions about his views and the direction he thinks the country needs to move.  As usual, the press tended to ask "horse-race" questions rather than substantive ones. But Sanders responded with substantive answers, not the "gotcha" answers (about other candidates) that journalists' questions encourage (and that many politicians seem quite satisfied to work into their press encounters).

Having indicated that he thought it was time the US made some progress towards meeting the needs of ordinary working Americans, such as universal single-payer health care along the lines of our current Medicare program for seniors, and maternity/paternity and medical leaves for ordinary wage-earners, Sanders was asked if he would pay for those benefits, at least in part, with higher taxes.  He answered forthrightly that taxes would need to be increased, especially for the extraordinarily wealthy and corporations.  He noted the immense inequality that ordinary Americans face today, an inequality that steals away opportunities and makes daily life a hard grind for so many people. Just twelve (12) of the richest Americans saw an increase in their wealth over the last two years of a whopping $154 billion--that's more than the entire wealth of a majority of Americans.  Corporations offshore their assets and avoid taxes with "rent" profits accruing to them while, again, ordinary Americans don't even get decent living wages.  Hedge and equity fund managers who benefit from the "carried interest" loophole generally pay a lower rate of taxes than truck drivers.  See, e.g., Sanders' website post on how the richest .0001% pay their taxes.  These privileged elites need to be asked to step up to the plate and pay their fair share to support necessary programs. 

As to specifics of how those taxes should be increased, Sanders noted that he hoped to release a tax reform proposal soon.  It would include, he said, a transaction tax on Wall Street business, an end to multinational corporations' ability to avoid taxes through moving business into tax havens, and a more progressive income tax (see, e.g., this post on his website).

I will add here that these are many of the reforms that this blog has argued for over the years.  Clearly, the right-dominated tax cut regimen of the Reagan years, the Gingrich Contract on America, the absurd Grover Norquist "never a tax increase" pledge, and the numerous revenue reduction acts passed in the Bush I and Bush II years--and of the Republican-dominated Congress and state houses during Obama's presidency--has been one of cutting taxes for the rich and big business and increasing them (if finally deemed necessary to increase revenues after cutting spending past the bone) on working people through regressive payroll, sales and excise taxes.  It is time for us to return to a truly progressive tax system that asks as much of the rich as it does of the working poor.

Watching the hour-long exchange is well worth your time.  It is also surprisingly refreshing to see a politician respond carefully and thoughtfully with forthright answers that do not pander to billionaire interests or Wall Street. 

You can click on the video below.

 

  

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Both the rich and ordinary Americans misunderstand their economic interests

Both the rich and ordinary Americans misunderstand their economic interests

There is class warfare going on, right now, all across this country.  It's highlighted by the election gimmicks and gambits of those on the right who claim to be supporting ordinary Americans but whose real intentions show in the results. And it is ultimately a sad statement about Americans' understanding of what is required for a sustainable economy that supports decent lifestyles for all.

Let's start by looking at the maps resulting from studies of well-being that identify the states where people are not at all well-off, such as the 2013 survey done by Gallup Healthways, available here.  Those poor states are the reddest of the red belt in Mississippi, Tennessee, Florida and elsewhere across the Deep South--places where I grew up in a decidedly Republican household that bought the GOP economic fallacies hook, line and sinker, and places where today's populations are worse off in terms of the various measures of economic well-being and happiness than the more progressive northeast and west.  

Isn't it likely that the anti-government, low-tax and pro-wealthy/pro-big business policies of the GOP politicos that have run these states for several decades have something to do with these negative results, and that the more progressive policies in the northeast and northwest are reflected in the much more positive results in those areas? 

Yet rural, southern populations continue to proudly proclaim their allegiance, against their own economic interest,  to ill-fated Reaganomics that favors tax cuts (for the wealthy and big business) coupled with  use of  old-time, regressive consumption taxes (toll roads, sales taxes and property taxes),  privatization of public functions (e.g., charter schools managed by for-profit, nontransparent corporations), socialization of losses, militarization, and de-regulation. 

The results are harmful at national and state levels, as those same right-leaning voters suffer from poor K-12 education, low-quality public services including neglected roadways, nonexistent or outdated public transportation systems, inferior safety nets, inferior health results, lower literacy rates, higher teenage birth rates, less access to universities, and, yes, fewer and lower-paying jobs.

Of course, those in the top 5% like to think of themselves as suffering, and therefore see any demands for increased minimum wages (that they consider cutting into their ability to capture more and more (rentier)  profits beyond their already unreasonable percentages) as "class warfare."  See, for instance, this Wall Street Journal video "Do You Make $400,000 a Year But Feel Broke?" from September 5, 2014 depicting the purported hard times for a couple in Chicago making $400,000 a year, buying a $60,000 car every four years, paying a mortgage on a $1.2 million house along with $25,000 a year in maintenance and , entertainment ($10,000 a year) going on vacations ($25,000 a year), club dues ($12,000 a year), and paying for their children's sports ventures ($10,000 a year). These and other  "necessities" and (purportedly reasonable) discretionary expenditures take all of their after-tax money. 

Given that perspective, no wonder those in the top have so little consideration and sympathy for ordinary Americans who have incomes in the $50,000 to $60,000 range, much less for the poor who struggle to put food on the table and heat in the furnace!  They can't even imagine such limited lives. With the growing inequality in this country, the gap between the upper class and the rest of us is increasingly wider.

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

Outside the sphere of political debate, you also see the real world impact of inequality. Merrill Lynch recommends an investment strategy to its clients based on the growing economic clout of plutocrats, Singapore Airlines is now selling $18,400 first class cabin tickets, and observers think Apple is going to start selling a $10,000 watch. Conversely, Walmart is now primarily worried about competition from dollar stores. The executives at these companies are not hysterical liberals trying to drum up paranoia about inequality, they are trying to respond to real economic conditions — conditions that have entailed very poor wage growth paired with decent returns for those proserous enough to own lots of shares of stock.

 Matt Iglesias, Vox.

The ability to care about those so distant from the well-heeled in-group appears to be diminishing as the gap between the well-heeled and the rest of us widens.  Those super-wealthy corporate managers and CEOs and super-rich shareholders are not likely to recognize in themselves the greed and exploitation of others that their excess returns on capital represent.  As Mitt Romney made so clear, rich folks (i) think of themselves as "meriting" their outsized incomes, in spite of the fact that they often start out with silver spoons and garner greater returns than ordinary folks simply because they have larger capital portfolios to start with and can't possible achieve a level of productivity of 100s times that of ordinary workers, as current CEO pay-levels claim under "free market" theory; and (ii) find it much easier to blame the misfortune of ordinary Americans on their purported laziness and "lack of personal responsibility."  (See earlier Taxing Matter posts on Romney's self-justifying 47% remarks during his presidential campaign.)

But that means the rich (and the GOP most closely aligned with big business and big capital) often support policies that can only lead to greater income and wealth inequality, fewer and fewer Americans able to enjoy a decent, sustainable lifestyle, and the growth of a very small oligarchic elite.  Those policies include making it harder for poor people to vote (justified on the basis of non-existent voter fraud), making it harder for middle class and poor people to go to college (less state monies to universities, less grants and more (profitable-for-big-banks) loans), making it harder to support a family (less public transportation, lower wages, more jobs outsourced, refusal to fund Medicaid expansion, yammering for the repeal of the Affordable Care Act even though the US's market-based health care system is less efficient, more costly, and lower quality than single-payer systems in most other advanced countries), etc.  The long-run result of these pro-elite pro-corporate policies may well be social chaos, as the rich oligarchy faces off against a suffering and shrinking middle class and a grievously disadvantaged lower class.  That may not be so far away as many of us once thought, given the rapidly growing wealth inequality and the more radical right-wing policies that have moved into the GOP mainstream in the form of Rand Paul and other free-marketarian extremists who denigrate government and want to remove the social-economic safety nets put in place under the New Deal.

They denigrate government, that is, except when they recognize that they need it, such as when the ebola crisis erupted.  Suddenly, they want a Center for Disease Control that really functions well, even though they have pushed government spending down. And they want a TSA that can screen arriving passengers, even though they hated the TSA before.  And they wanted the President to appoint an "Ebola Czar", even though they scoffed at the idea of administrative officials appointed to oversee important areas before.  They want a vaccine for ebola, but they have made it much harder to accomplish because of their constant push for "reducing government" and cutting research funding (making one of their pet projects to seek out what they think are silly projects that have been funded by the federal agencies).

The free market, in other words, is claimed to be the be all and end all -- until push comes to shove and it is obvious that market forces require government intervention.

Consider the compaign for governor here in Michigan.  In his ads, current GOP governor Rick Snyder claims to be a hands-on non-partisan fiscally responsible type who cares about everybody in Michigan.  Those ads brag about how Snyder cares about senior citizens and education --using the (meager) increases in "meals on wheels" to claim that Snyder has made life better for senior citizens, and the state's increase in support for purportedly public charter schools.  Behind that facade of political PR is a deeply partisan governor who has consistently supported the elite rich capitalists over the majority of Michiganders who are ordinary salary earners working hard (or working hard to find work).

• Snyder signed a "free rider/right to freeload" bill permitting non-union workers in a unionized environment to free-ride on union contracts without paying their share of the costs of the contracts they benefit from and prohibiting unions from using paycheck deductions to collect union dues.  That kind of legislation, sought by the elite owners of capital who benefit from paying lower non-union wages, is (mis)labelled by the pro-wealthy right as "right to work".  It is really a "right to freeload" law since the union rules it replaces never required anyone to join a union and always allowed workers who benefitted from a collective bargaining agreement to pay only the 'fair share' payment of the considerable costs of negotiating an agreement and supporting workers in grievances rather than support all union activities.  As a result, workers can now pay nothing yet call on the union whenever they have a grievance against their employer.  The goal of such laws is to eliminate union support for workers and thereby increase the power of capital owners, so it is particularly sad to see how many workers are fooled into supporting these "right to freeload" laws.
• Snyder supported Michigan legislation that gave big businesses a huge tax cut, while supporting another bill that gave seniors a huge tax increase by taxing their (often meager) pensions.  No wonder the wealthy who own most of the financial assets in the country and benefit from the decades of lobbying by right-wing propaganda tanks against buinsess and capital taxation think he's a good friend. 
• And of course, much of Snyder's 'support' for education has been cuts to state funding for Michigan universities (especially Wayne State, which serves the predominately Democratic southeastern region of the state) that has affected the state's economy in real ways, as students have to pay more of the cost and universities have less funding for research that directly impacts economic development.  Snyder has also supported an unprecedented increase in charter schools in a system that provides no accountability, doesn't provide improved educational results, and siphons off public dollars for private profits, through the mechanism of private charter management corporations that run the purportedly "public" charter schools.
• Snyder doesn't think we need increases in the minimum wage, and his administration has generally shown little interest in figuing out how to help minimum wage workers revive from the Great Recession.  For example, his administration has done nothing to deal with the myriad fly-by-night companies that cheat workers coming and going on wages. 

ASIDE:   Here's one real-life tale illustrating the problem.   I know personally of a man in Michigan hired by a Michigan-registered cleaning corporation that had contracts with at least  two major national corporations to clean stores in southeast Michigan.  The cleaning company claimed that the man was "in training" and therefore not required to be compensated after two weeks of full-time working for the company, including being locked inside a cavernous store overnight to do a major cleaning job. The company refused to pay for the next two weeks, claiming that "corporate headquarters" had made an error and would straighten it out in the next paycheck a month later.  The man ultimately was paid only  a couple of hundred dollars for that entire month, because the company  produced a purported check stub showing a paycheck even when the man representing the company acknowledge that paycheck had never been issued to the man.  The company paid the man on a "piecework" basis for cleaning stores, claiming that a 30,000 square foot store with public restrooms could and should be cleaned for $25(that's mopping, vacuuming, and cleaning toilets) and that the work could be done in one hour!  The company required the man to pick up cleaning equipment and the company van at the "corporate headquarters" (many miles from his home and many miles from each of the stores to be cleaned) but claimed that it did not have to pay the man for the 3-4 hours per day that he had to spend to drive the company van and equipment to and from various worksites.   The man quit, but has never gotten the company to issue the paycheck that he never received and has never received pay for the many hours spent working for the company moving its van and equipment.  

 

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Carried Interest -- a tax privilege for the rich whose end time has come

I should have written about this long ago, but a recent "dealbook" by my former colleague Steven Davidoff, A Chance to End a Billion-Doillar Tax Break for Private Equity, New York Times (Oct. 23, 2013) reminded me of the import of a recent court decision--Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013), --important for its implications for the private equity industry's privileged "carried interest" tax treatment (income to managers currently treated as preferentially taxed capital gains rather than ordinary compensation income) and the assumed treatment of the pension obligations of employees of companies taken over by those funds (ability of private equity funds to disavow a company's pension obligations to its ordinary workers through bankruptcy). 

As Davidoff notes, private equity managers claim that changing the carried interest privilege would result in less investment and ultimately harm economic growth.  That's an argument long used by the right to justify the capital gains privilege, but certainly controversial (at least), since uninvested money will earn even less than invested money that is taxed at a slightly higher rate. Given the hugely outsized earnings by equity fund managers--in the hundreds of millions and even billions annually--it seems unlikely that a higher tax rate would sharply reduce investment.  They'd still have after-tax income equal or more than most CEOs.  And as I've noted frequently here, getting carried interest taxation right would be at least one step towards ensuring that the tax system performs its most important justice function by reducing, rather than exacerbating, the income inequality dynamic that harms the kind of broad-based economic growth that underlies a sustainable economy.  See, e.g., works on income inequality and the problems of unequal wealth distribution for sustainable economies by Benjamin Friedman, Piketty & Saez, Kate Pickett and Richard Wilkinson  (e.g., The Spirit Level: Why Equality is Better for Everyone (2009)).

The Sun Capital case arose out of the takeover of Scott Brass, a manufacturing business, by Sun Capital Partners, a private equity fund that buys out distressed companies for restructuring and resale (often involving firing workers and using bankruptcies to disavow pension obligations).  As Davidoff summarizes:

About a year after the takeover, Scott Brass sought bankruptcy protection.  Sun Capital sued the comapny's pension fund, the New England Teamsters and Trucking Industry Pension Fund, seeking a judgment that it was not liable for $4.5 million of the company's pension.  Under the pension laws, Sun Capital would be responsible for this amount if Scott's employees were under the control of Sun and the funds were engaged in a 'trade or business.' The pension fund argued that the Sun Capital funds were liable because the funds were engaged in the trade or business of operating Scott.  Sun Capital argued the opposite, saying that it was merely a passive investor.  A Chance to End a Billion-Doillar Tax Break for Private Equity 

The court concluded that the private equity fund was engaged in a trade or business for purposes of the Employee Retirement Income and Security Act (ERISA), rather than merely a passive investor in the business that it took over, Scott Brass, Inc.  Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013).

This decision could clearly "make it harder for private equity funds to walk away from the unfunded pension liabilities of companies they have bought if the company goes bankrupt."  Vic Fleischer, Sun Capital Court Ruling Threatens Structure of Private Equity, DealBook, New York Times (Aug. 1, 2013).  And it is "not a big leap to argue that the fund was [also] engaged in a trade or business for tax purposes."  Id. 

No one disputes that the general partner (or its affiliated management company) often gets highly involved with the fund's portfolio companies.  In Sun Capital, for example, the management company weighed in on the portfolio company's personnel decisions, capital spending and possible acquisitions.  The critical question is whether the general partner's activities can be attributed 'downward' to the fund--that is, from the partner to the partnership.

***

...[T]he court noted that Scott Brass Inc. paid fees to the general partner of the fund for the management services it provided.  Those fees were then used to offset part of the 2 percent annual management fees that the limited partners normally pay to the general partner.  The court explained that these fees thus 'provided a direct economic benefit' that 'an ordinary, passive investor would not derive: an offset against the management fees it otherwise would have paid its general partner.' ...

...But even without a management fee offset, limited partners generaly derive an economic benefit from the activities of the general partner. ...  Sun Capital Court Ruling Threatens Structure of Private Equity.

 

If the Treasury and IRS (or courts) were to conclude that the trade or business determination for ERISA should carry over to tax, a number of tax consequences could well follow that would upend the current highly favored tax treatment of private equity fund investors and investor/managers.

• foreign investors in a private equity fund could be treated as having income that is "effectively connected" with a U.S. trade or business, resulting in being subject to tax on that effectively connected income;
• tax-exempt investors in a private equity fund could be treated as having trade-or-business income, resulting in application of the UBTI (unrelated business taxable income) rules that would subject the normally tax-exempt investors to tax on that income; and
• private equity fund managers' profit shares ("carried interest") could be treated as ordinary income from sales in the ordinary course of business (bought out and restructured companies) rather than as capital gains income from a passive investment.

Will Treasury grab this lifeline for eliminating the privileged private equity tax treatment?  Remains to be seen.

 

PS.  If private equity funds are really trades or businesses, then isn't a private "credit fund" really a banking business that should be regulated as such?  See, e.g., Manning, Exclusive: Florida Private Equity Fund Expands, Plans to Offer Credit, Tampa Bay Business Journal (Oct. 28, 2013).

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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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The Countermajoritarian Difficulty and Congressional Ethics--Ending the Shutdown

[Edited to add Marcotte article on role of fundamentalism in Tea Party politics.]

We have seen congressional ethics probes of Congressmen for exacting quid pro quo bribes from businessmen or for conflicts of interest or apparent failure to pay personal taxes.  What about failing to perform their most fundamental duty--to protect the integrity of the U.S. democratic process and constitutional system?

It seems to me that people like Paul Ryan, Ted Cruz, Michele Bachmann, and the rest of the Tea Party acolytes in Congress are committing an ethical violation even more severe than money-corruption.  They are sacrificing the economic stability of the country and the individual lives of hundreds of thousands of its citizens to the altar of their own  personal  religio-political dogmas.   [For a discussion of the role of fundamentalist religious dogmas in Tea Party politics, see, e.g., Marcotte, Christian delusions are driving the GOP insane, Salon.com (Oct. 10, 2013).]  They are willing, that is, to extort the vast majority of citizens of this country--anyone who doesn't agree with them--in order to get their way on something in which they are a minority of a minority.

In an increasingly unequal society in which Congresspersons are part of the "have-more" group and many, many Americans are not, the impact of their extortion is severe human suffering and permanent damage to the U.S. economy.

Democracies have to deal with something that has been called the "countermajoritarian problem"--the need to pay attention, in some situations, to the needs of a minority as against the wishes of a majority.  In the US, this has generally come about as the U.S. Supreme Court interprets the protections of the 13th, 14th and 15th amendments to the Constitution to require the protection of the rights of ethno-social minorities to the vote, public accommodations, marriage, and other rights taken for granted by the majority against the will of a majority to suppress those rights.

Is the kind of thing the Tea Party/GOP coalition is doing in Congress today in line with this tradition of respecting "discrete and insular" minorities that might otherwise suffer inappropriate and harmful discrimination and lack of parity?  The simple and obvious answer is no.  In fact, just the opposite, as their dogmatic stance is wreaking severe harm on the most vulnerable amongst us and threatening the fragile recovery from the Great Recession that already dealt a blow to the 99%. Besides, rural, less educated voters, many from the South, have for many years exercised considerable outsized political power because of (among other things) their ability to elect senators representing many fewer people than for urban metropolises. In fact, the Tea Party/GOP coalition has wielded over the last forty years considerable power to veto most progressive ideas through the use of the "filibuster" in the Senate, which makes it easy for a small minority to require a super-majority to pass any legislation. Thus, we get the ongoing cycle of the right's anti-"entitlement" sloganeering that supports farm subsidies  (representing a corporate farm entitlement for the wealthy) while cutting food stamps (especially necessary for urban poor), huge increases in military activity (wars in Iraq and Afghanistan and "enemy combatants" jailed forever at Guantanamo without due process, and all those military- related expenditures) and corporate tax avoidance, for which they are willing to sacrifice research funding, education funding, and the safety net provided by Social Security, Medicare and Medicaid.  

Yet in spite of that filibuster and the enormous power allowed under the democratic process to such strong minority voices, a much weakened form of health care reform (not even including a public Medicare-for-all option) passed through the democratic process and became law.  So the economic terrorists in the Tea Party/GOP coalition--aided by  House follower-in-chief John Boehner--refuse to end the extortion and let a "clean" continuing resolution make it to the House floor.  If a clean bill came to a voite, it' appears clear that Democrats and less extreme Republicans would pass it to put the government back fully in business.  Instead, Boehner apparently cares more about his "leadership" position than the good of the country and is willing to allow the radical right to continue to extort the nation to get their way.  Shouldn't that be an ethical violation in itself?  

Even if not an ethical violation, it clearly is a perversion of the kind of situation in which the "countermajoritarian" interests of the Civil War constitutional amendments are intended to operate.  Real people are suffering.  Native Americans are confined to even greater poverty on tribal lands.  Families that are dependent on federal programs of various kinds are desperate.  Food-insecure people and federal employees on furlough are worrying about mortgages, tuition, and where the next meal will come from. And it gets worse the longer it goes.  

One has to wonder--do these Tea Party/GOP activists have no shame?  Can they not see the individual harm they are doing to people all over the country, while they continue to get paid or are so rich that they can give up their pay to charity and pat themselves on the shoulder that they are now "suffering" along with the poor?  Are their egos so large that they care only about their own "rapture" (as Michele Bachmann indicated recently) rather than about the daily suffering they are causing?

IT IS TIME TO END THE GOVERNMENT SHUTDOWN AND INCREASE THE DEBT CEILING WITH CLEAN BILLS.  THE SHUTDOWN SHOULD END WITH NO CONCESSION TO THE TEA PARTY MINORITY EXTORTIONISTS.  THE DEBT LIMIT SHOULD BE INCREASED FOR AT LEAST A YEAR, TO REMOVE THE POTENTIAL FOR ONE CRISIS AFTER ANOTHER AS IDEOLOGUES IN THE TEA PARTY TRY TO SHOVE THEIR VIEWS DOWN THE COUNTRY'S THROAT.

If you agree, you can sign a petition (circulated by Barbara Boxer, Dick Durbin, Tom Harkin, Mazie Nirono, Mary Landrieu, Patrick Leahy, Claire McCaskill, Patty Murray, Jack Reed, Brian Schatz and Mark Udall) to Republican leaders to end the government shutdown.

End the Shutdown

The devastating effects of the GOP’s government shutdown are real -- and they'll only get worse the longer this goes unresolved.

This entire debacle could be over in a few minutes if House Republican leaders would just agree to bring a "clean" budget -- one that funds the government without killing Obamacare -- up for a vote.

Sign the petition to Speaker John Boehner and House Republican leaders: Bring the Senate-passed budget to the floor for a vote -- and end this government shutdown, right now.

 

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How should underpayment of employees affect tax policy?

In a pre-Labor Day blogposting, Robert Reich wrote about the brute capitalism results for many employees today--a full-time job that doesn't play a living wage.  Walmart was his example--"America's biggest employer" where a "typical employee is still paid less than $9 an hour."  See Reich, Wal-Mart's typical employee is paid less than $9 an hour, Salon.com (Aug. 30, 2013) (posted originally on Reich's blog).

Wal-Mart has used its market clout to shut out labor unions and bring the retailing sector down to its self-defined low.  I've written before about my own personal experiences in talking to Wal-Mart employees about unions and encountering abject fear that the employee would lose his or her job if any Wal-Mart supervisor were to be aware of the discussion, being told that Wal-Mart supervisors routinely enter employee rest areas and tear down any materials discussing advantages of unionization, and seeing the evidence of anti-Union and pro-owner sentiment in the way huge profits are channeled to managers/owners while workers are paid a mere pittance of what would be a decent wage.  Wal-Mart documents revealed several years ago that it was intentionally refusing to provide health coverage becuase it was cheaper for the "company" (managers and owners) to push employees off to Medicaid and other government assistance.

That is brute capitalism at work--ensuring that the few at the top receive all the benefits of profit-making and productivity gains, while the average workforce is paid too little to provide a decent living for a single person, much less a family.

So what does this have to do with tax policy, you say?   Reich is making an argument for an increase in the minimum wage to $15 an hour and greater recognition of workers' rights.  Those are worthy objectives, and I fully support them.  You could add better enforcement of anti-trust laws.  In general, we should be asking ourselves why we allow one retailing giant to become so huge that it encompases distribution networks, warehousing, sales and manufacturing contracts around the globe that ensure that workers in China or Bangladesh manufacturing clothing for the company are making it on very little money and that workers in the US who sell that same clothing (or otherwise work in stores) are similarly poorly situated.  

But the question I am raising is the connection between such company policies and tax policy.  I think there is a strong argument that we should consider at least the following principles, coupled with a stronger (more progressive and higher rates) corporate tax to ensure the rules have some bite:

1) our tax rules should discourage companies from ripping off workers to overreward managers and owners.

2) our tax rules should work to ensure that people in the lowest income brackets don't have to carry the burden of paying taxes on their meager incomes

and

3) our tax rules should shift the incidence of tax to those at the top who control their own salaries and away from those at the bottom who have practially no say on what they work for.

We could go part way towards accomplishing the first with a strict limitation on deductible compensation.  That might perhaps deny a deduction to executive pay that is more than 30 times the pay of the average worker as well as impose a cap above which no pay is deductible in computing the company's taxes.

We could make our rules work better to accomplish the second point by extending the personal exemption and standard deduction to ensure that some measure (2X?) the federal poverty amount is entirely exempt from federal income or payroll taxation.

Finally, we could accomplish the third point by creating a more progressive income tax structure that identifies several additional brackets at the high end (distinguishing between those who earn not quite a million and those who earn multi-millions and those who earn billions) and a more progressive estate tax structure that exempts a core amount (smaller than the high exemption recently made permanent) and then imposes a graduated tax on the excess.

If we don't begin to address the issue of hardworking Americans who cannot get by on a single job by amending our policies (including tax) to make the existence of a highly privileged upper class and a highly disadvantaged underclass the most important topic for government to address, I fear this country is in for a rude shock.  Infrastructure expenditures will continue to dwindle especially in poorer areas,  Education will continue to be moved to easily quantifiable but not so likely to be enduringly useful online instruction under the pressure from the "accountability gurus" (who want to evaluate out of existence public teacher unions, without knowing what makes a good educator) and the likes of the (also non-educator) Bill Gates and his ilk.  The wealthy will continue to live in more and more secluded and luxurious gated communities separate from the hoi-poloi of the middle and lower classes.  Generally speaking, brute capitalism and bogus "free market" theories of economics and tax will continue to leave more and more of our citizens underprivileged, hungry, lacking in education, and turning to whatever avenue for changing their lives remains open (including crime).

 

Megan McArdle (one of those Bloomberg economists who tends to write in support of right-wing economic ideas) recently argued that Wal-Mart can't pay the good wages that Trader Joe's or Costco pays because (i) it is simply too big, with too much merchandies, to make the kinds of profit it expects doing so, and (ii) it has a low-income customer base who can't afford to buy anything except the cheap stuff it provides [produced in unsafe conditions by a non-unionized labor force].  See Megan McCardle, Why Wal-Mart Will Never Pay like Costco, Bloomberg.com (Aug. 27, 2013).  

Megan thus supports my argument that we should never allow one retailer to grow to such huge consolidated form (antitrust needs to be reinvigorated to battle giants like WalMart).  But Megan misses Henry Ford's key insight--if you want your workers to buy your good product, you pay your workers well, and their business will further your business.  Wal-Mart has done exactly the opposite--it has driven out stores that paid workers better (and added to localities' environmental problems in spades), in order to drain off huge profits for its owners and top managers while using every technigue in the book to block workers' unions and prevent workers from getting paid decent wages for what they do, forcing workers to only be able to buy from the Wal-Mart type distribution network (Wal-Mart and "dollar store" or other cheap merchandisers who pay their staff very little).  

Whether we think about this in terms of the growing inequality in this country that stifles economic growth for all in the long run, or the class warfare that the right has been engaging in for at least the decades since Reagan was elected President, or the corporatism (derived in large part from the "free market" rhetoric) that has taken over most American institutions, we should recognize that Wal-Mart and other big companies like McDonald's and the other fast-food chains have built a business model that is detrimental to ordinary Americans for the benefit of the few ("the 1%" of the Occupy Wall Street rhetoric).  And we should start considering ways to counter the these harmful developments.  In particular, we should ensure that companies pay their workers a living wage and we should protect those workers at the bottom of the income scale from having to give up any of that wage in payroll or income taxes.

The Elderly May Not Be As Taxing As Generally Thought

One of the common assumptions about health care costs (and the costs of benefit programs like Medicare) has been that the increasing life spans of Americans will result in significantly greater health care expenses.  It is common knowledge that much of the highest cost medical care occurs near the end of life, as the elderly need more medicines and assistance in daily living.  So speculation has suggested that as Americans live longer, health costs will increase correspondingly.

A recent study provides a glimmer of good news--apparently, most of the highest medical care costs occur in the last year of life, even for those that are living longer.  That means that the longer lifespans aren't translating into more time in intense medical care, but rather more years of generally healthy and active lifestyle followed by a similar duration of end-of-life care.  See Michael Fitzgerald, Old Age May Not Ruin Medicare Budgets After All, Salon.com (Aug. 22, 2013).

What should that information mean for policy makers?  It seems to support the progressive, social justice goal of ensuring that we have a system for universal health care coverage like "Medicare for all".  Under democratic egalitarianism, a combination of general revenue support and additional premium payments from those who have the ability to pay provides a means for decent protection of all of our citizens and the creation of a just society.   By asking those with the ability to pay to carry more of the burden, such a system ensures adequacy for all even in times such as ours when there is extraordinary inequality of wealth or income.   Our forebears handled that kind of situation through one-on-one charities, back when communities were much smaller and people knew that they depended on their neighbors for help in tough times, so were willing to help out when they were able.  The modern version of that neighborly compassion is a government that creates safety net programs for all of its people, with public programs in those areas where a profit motive interferes with the creation of adequate, sustainable, just programs for everyone.  Education and health services are clearly two key areas where people acting together through government create fairer and more adequate systems that serve all of the people.

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

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

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

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

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

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

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

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

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

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

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

 

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