The Republicans' proposed tax legislation--whether the House or Senate version--is despicable. It will exacerbate the already devastating income and wealth inequality in this country, leave the federal government without adequate funds for real infrastructure and social safety net needs, and place in almost inviolable power the wealthiest oligarchs of the country (and even the good ones exert a power that no one should possess in a democracy).
My previous posts on this so-called "tax reform" "simplification" package (it is neither) have outlined a number of pernicious provisions in the bills. There are a few I haven't mentioned, such as the likely inclusion of taxation of tuition benefits to undergraduate and graduate students. That will have an immediate impact on education and on basic scientific research. Not surprising, given Paul Ryan, Donald Trump, and Mitch McConnell's aversion to fact-based science and intellectuals, but nonetheless devastatingly harmful to the country in loss of prestige for our universities, loss of the top minds to other countries, and loss of entrepreneurial and innovational thinking that will hamstring commerce and productivity. Another is the "new" talk in the House of lowering the tax rate on the weathiest bracket by as much as two and a half percentage points--adding to the largesse for the wealthy otherwise larding the legislation and making it even more obvious that the only Americans the Republican Party sees itself as serving are those with at least millions and probably billions of net worth. The Republican charade of right-wing "alternative facts" (shown most clearly by the Treasury Secretary's inability to provide a supported rationale for the absurd corporate and oligarch-favoring tax cuts) would have a destructive impact on the entire U.S. economy. And it is not simplification--it is a huge complication that is ripe for tax abusers to abuse the complicated categories of differently taxed income.
But today there is a ray of hope that this tax scam might just not get passed --or might get turned around very quickly if it does get passed. Doug Jones' defeat of constitutional scofflaw and likely multiple-sexual-predator Roy Moore should cause any thinking Republican in the House and Senate to take a step back and listen to the views of constituents across the country, where dislike of this tax legislation is the majority view. The #MeToo movement and its impact on powerful media and other industry harassers, together with the fact that Democrats and Independents got out the vote in Alabama and defeated Roy Moore -- and another 20,000 likely lifelong Republicans decided to write-in another Republican name other than Roy Moore--should tell current GOP congresspeople that "the times they are a changin' ". Reaganomics--trickle-down, supply-side tax policies--don't work. Kansas proved that, if anybody actually had any doubt before. If the Republican majorities in the House and Senate pass this " Class War" tax legislation--written and argued and honed to a tee to serve the wealthiest multinational corporations and individual campaign donors while stabbing the middle and low-income classes in the back--they will potentially pay a big price at the polls in 2018 and 2020. They will pay that price because their tax legislation will send the U.S. economy into another tailspin that will lead to cuts in the standard of living of ordinary people so people like the Trumps can have even more gaudy gold faucets in their many mansions.
I call on everyone who can to write and call Jeff Flake (Arizona)--ask him to stand on principle and vote against the end of the Obamacare mandate, the giveaway to the wealthy and big corporations, the ridiculous scammable complication of different rates for the same income depending on what job the taxpayer worked at or whether the taxpayer owned the business or was an employee. Ask him to vote down this despicable tax legislation for the good of the country and ALL the people. Do the same for Susan Collins (Maine), who already has expressed real concerns about the impact of the elimination of the health insurance mandate. Even her 'bargained for' (but not actually promised) two-year patch wouldn't do much good: millions of people, the most vulnerable amongst us, will lose health insurance and therefore health care if this tax legislation passes. And let Bob Corker (Tennessee) know how much we all respect him for actually standing firm against this tax legislation travesty--and ask him to stand even taller by resisting the pleas to compromise principles 'just to get a win for Trump'. Let's push our Senators and Representatives to stand tall for a sustainable economy based on fiscal responsibility (don't create a $1.5 trillion dollar deficit) and distributive justice (don't push the middle class into dead-end living conditions) and end the giveaways to the wealthy oligarchs.
I predict that if this bill passes the expected accounting for the Republican Party will come even sooner and with even more strength against those who supported Trump's daily vitriol of falsehoods and the Trump Administration's filling the DC swamp with those who put pollution, despoiling the environment, destruction of the wilderness and national public lands foremost on their agenda.
There's been a good bit written about the Trump tax cut framework released just over a week ago. Most of it points out, as I have here and here, the absurdity of the claims by Trump and GOP spokespeople that this isn't a tax cut aimed at benefiting the ultra wealthy. After all, even with few details and no attempt to deal with the really tough issues that would face real tax reform considerations, it is awfully clear that almost everything in the package is designed to make the wealthy even wealthier.
Just a quick review of the way the proposed tax cuts exclusively or primarily benefit the ultra wealthy:
elimination of the estate tax, which taxes fewer than 2% of the estates, those that have in excess of $11 million (the couples' exempt amount) and haven't used the various trusts and family partnerships to let even more estate value escape tax through valuation gimmicks
Not waiting on the tax cut proposal, Trump's Treasury secretary Steve Mnuchin announced in "Second Report to the President on Identifying and Reducing Tax Regulatory Burdens" (Oct. 2, 2017) a current step to let wealthy people continue to use valuation gimmicks to avoid a fair estate tax, through withdrawal of the Obama Administration's proposed regulation under section 2704 that would disregard the purported restrictions on certain family-controlled entities in setting estate valuations--a regulation clearly merited because of the ridiculous scams of putting assets in family partnerships in order to claim that they are worth 1/3 of their actual value, even though the partnership can be dissolved afterwards with the full value magically returning. (I'll deal with the regulatory changes in my next post.)
elimination of the AMT, which imposes tax when the taxpayer would otherwise benefit from a surfeit of regular income tax subsidies (loopholes, tax expenditures, deductions, credits). For a thorough analysis of the AMT, see A Taxing Matter series of 6 posts, beginning here.
reduction of the statutory corporate tax rate for the largest corporations from 35% to 20%, which benefits primarily the highly compensated managers (who receive substantial amounts of stock options as part of their compensation) and big shareholders (who tend to be mainly the ultra wealthy who own most of the financial assets) and does little or nothing to help small businesses, that already pay tax rates of 25% or less
creation of a single 25% rate for recipients of all business pass-through income (i.e., from partnerships), which benefits almost exclusively the ultra rich, since small business income is already taxed at 25% or less, while wealthy partners in real estate firms would be taxed at the highest individual rate under current law on their pass-through income, and
creation of full, upfront expensing, resulting in a non-economic windfall to businesses that will, again, mainly just increase profits passed on to their wealthy owners. (Although this is purportedly a five-year provision, everybody knows that is just a gimmick to pretend that its impact on the deficit is less than would be admitted if it were permanent. Everybody also knows that the intent is to make it permanent.)
But there are always journalists who try a little too hard to give obviously bad tax ideas a surface claim to reasonableness. Apparently, even James Stewart, who writes "common sense" entries for the business section of the New York Times, suffers this vulnerability. See, for example, his "Tax Cuts are Easy, but a Tax Overhaul? Three Proposals to Make the Math Work," New York Times (Oct. 6, 2017), at B1 (digitally titled "Tax Reform that doesn't bust the budget? I've got a Few Ideas, Oct 5, 2017).
I like the print title better, since the Trump Plan has clearly already ditched any real idea of "tax reform" for a wholesale attempt at trillions of dollars of tax cuts mostly benefiting the rich. There are other things that aren't so good about the article.
1) Stewart calls the Trump giveaway to the rich "the most ambitious attempt at tax reform in over 40 years." That's simply not correct, because it isn't an attempt at tax reform and it isn't really ambitious.
Ambitious? How can Stewart call a grab-bag of all the old GOP cuts-for-the-rich gimmicks "ambitious." Unless he thinks that conning typical Americans who don't understand much about taxes into thinking that this is a populist tax reform intended to help the middle and lower income classes and not drop more riches on the already rich makes it 'ambitious'.....
Tax reform? This isn't tax reform; it's just a series of tax cuts. The framework leaves any thinking about tax reform for somebody else to do--which means it really isn't intended to happen at all. Later in the article Stewart quotes Holtz-Eakin (right-wing tax cut advocate) and Kevin Brady (same) about the "ambitious" framework. They're gung ho. Brady says it's ambitious because they are trying to do what the 1986 reform effort did in several years in only a few months. Nope--they are not trying to do what the 1986 reform did. The 1986 reform was a fully bipartisan effort in both the House and Senate, with Packwood in the Senate and Rostenkowski in the House leading lengthy hearings and in-depth study of issues, along with a responsible and active Treasury and CBO providing in-depth analysis of impacts. Trump and the GOP now intend to pass a tax cut for the rich with only GOP support (unless Trump can bully some election-vulnerable Democrats into going along with the travesty). And they don't intend the kind of exhaustive study and consideration that would provide real information on who would benefit and who would be hurt. We've already heard that some GOP want to pay an outside (GOP-friendly) consultant to do the "dynamic scoring" and not the CBO, because they want to be sure that it predicts plenty of growth (a number that is easily manipulable, which is why 'single score dynamic scoring' is utterly absurd).
Tax reformwould look at the wasteful expenditures we make through the tax system to support old technologies that are clearly part of human-caused climate change, such as our continuing century-long subsidy of fossil fuel extraction, coal-based mountainside destruction, and environmental wildlands-destroying oil, gas, mineral and cattle leases.
Tax reformwould consider who has benefited most from the many loopholes and tax expenditures that we've riddled the original 1986 tax reform act with in the years of money-smoothed lobbying since--such as the reinstatement of the preferential capital gains rate within 2 years of the 1986 tax reform's well-considered removal of the preference, or the reinstatement of the absurd R&D credit when thorough study and consideration showed that it did not result in more research but merely more money (fungibly located, to the advantage of IP-intensive industries like pharmaceuticals and digital software firms).
Tax reform would have a target amount of revenue to raise with taxes, based on social, infrastructure, and other important spending and the debt service needs of the already incurred federal debt, rather than a mere pie-in-the-sky idea of a "dynamic scoring" that would "show" that trillions of dollars of tax cuts over ten years would magically pay for themselves through turbo-charged economic growth that none of the top economists think possible.
2) Stewart acknowledges that the framework appears to be a tax cut for the rich and that it appears to recklessly drive up the deficit and that it leaves the hard part for Congress to figure out (which loopholes to close and how to do it) while claiming huge benefits from corporate and business tax cuts that add to the huge corporate and business tax cuts enacted under Bush 2, many of which were made permanent under Obama. But he excuses all that with the cop-out phrase "this plan is just the opening salvo."
Opening salvo? Something that comes after years of GOP planning and saying they wanted to cut taxes on corporations, eliminate the estate tax, eliminate the AMT, cut taxes on high earners, move to a rate structure with fewer and lower rates, and move to much lower tax revenues by eliminating world wide taxation and adopting a territorial system --i.e., do all the things that this 'framework' does? That's just an "opening salvo"? I think that term casts what is going on here in much too friendly a light.
Opening salvo? when these planners have already said that they are convinced that dynamic scoring (i.e., counting your chickens (economic growth) before they hatch, even before there are any eggs to count) will solve all their problems because they ALWAYS assume that tax cuts to wealthy people will trickle down to everybody else and make the economy grow, even when every bit of evidence from history suggests that simply isn't the case, including the recent Kansas disaster?
3) Stewart claims that "substantial aspects" of the framework already have bipartisan support, by which he means the idea that "global competition" demands that we cut corporate tax rates and everybody agrees that companies should not be able to stash earnings overseas tax-free.
Bipartisan support? Of course, while there are various 'free-market' economists who make the argument that we need to cut corporate rates for competitive reasons, it can be argued that when 75% of corporations pay no federal income taxes whatsoever and when highly profitable companies have been able to increase their profits and when U.S. corporations pay a smaller amount of taxes as a portion of GDP than corporations in other advanced countries, global competition does not seem to be a problem. The problem is the loopholes in our system that allow multinational firms--especially those that depend on intangible intellectual property rights--to pretend to move those rights around and thereby claim that the profits from that intellectual property created here are earned abroad and not subject to U.S. taxation. We could deal with that, but the GOP in House and Senate aren't interested in asking those questions in ways that lead to effective answers. Democrats tend to be more interested in considering what the root problems are. So "bipartisan support" that appears on the surface is likely only skin deep.
Global competition? Right now, we already allow U.S. companies to move active businesses abroad tax free. We facilitate their ability to take advantage of low-tax jurisdictions to compete with U.S.-based companies! We give financial institutions a pass on the 'subpart F' provisions of the Code through the "active financing" exception. And the Mnuchin report on regulatory "burdens" indicated that the Trump administration will pull back on the anti-inversion regulations. We know things we can do to stop the way quasi-sovereign U.S. multinationals play various tax jurisdictions against each other. We could deal with that with a renewed emphasis on something other than the old 'transfer pricing' methodologies and with full taxation on taking business assets out of the country. We could clamp down on transfer of technology to China in exchange for China letting our multinationals into the markets there. So it is not really "global competition" but failure of this administration or this congress to focus on addressing remedies to problems.
4) Stewart claims that the framework's "doubling" of the standard deduction will allow "many more individual taxpayers ... to file a simple short-form return."
Doubling of the standard deduction? Looked at alone, it sounds good. But doubling the deduction while eliminating the personal exemption actually puts a cap on the amount of income exempt for low-income families, rather than increasing it. A family of 5 might well end up paying more in taxes out of an income already inadequate to provide a decent standard of living, especially when coupled with the 20% increase in the lowest rate, from 10% to 12%. Why does Stewart just repeat the (not necessarily correct) selling points for the framework without taking these issues into account?
Simple short-form return? having 4 rates instead of 7 and doubling the deduction while eliminating the personal exemptions is simplification on an inconsequential scale. The real complications are character of income (that nasty preferential capital gains rate, again), and whether something counts as income or not. The people on the low-income of the scale don't have simple returns because they have an Earned Income Tax Credit to calculate. People in the middle may have pensions, capital gains, income from investments of varying types, rental income, mortgage interest deductions, and various other items that requires a little more work. Many provisions have exceptions designed to aid certain kinds of businesses or small businesses, all of which add to complications while filling an important function. But let's also remember that tax preparation software has already made even complicated tax returns fairly "simple" to figure out--just enter the right numbers into the right places in the software. We don't need tax cuts for the rich to have a fairly simple tax return process for the majority of the people of this country. Most already claim no itemized deductions (nearly 70%, a fairly consistent number). Most can easily do their tax returns with cheap software. Most don't need tax cuts for the rich to facilitate their tax returns.
5) Stewart claims that "a lower rate for small businesses and pass-through entities, while more controversial, should promote economic growth." And he thinks that is the most important thing this framework does.
Lower rate for small businesses? Who is kidding who. Most small businesses are just that--they are SMALL in assets and in revenues, and they are NOT taxed at the 35% statutory rate that applies to corporations that have more than $18 million in taxable income (note--taxable income of 18 million means gross revenues of many more millions). Most small businesses are taxed at 25% or less already!
Lower rate for pass-through entities? The main pass-through entity is a partnership, and there is no current rate for partnerships to pay tax, because their income, gain, loss, deduction and credit items pass-through to the partners, who take them into account on their tax returns and pay at whatever rate the partners pay based on their total taxable income 'picture'. Creating a flat rate of 25% for pass-through income won't benefit small business proprietors, who already pay a lower rate in most cases. But it will hugely benefit wealthy partners in real estate development partnerships and similar companies that would have otherwise been paying tax at the 39.6% rate and under this would pay tax at only 25%.
Promote economic growth? What about this is in any way empirically supported as promoting economic growth--especially the broad-based, raising- all-boats type of economic growth that actually goes to the middle and lower classes and has a multiplying effect on growth because of the increased demand that creates more business that creates more jobs, etc.? There's really no support for these long-term GOP tax cut proposals to actually do anything about creating jobs and creating sustained economic growth that will actually help the middle and lower income groups. Cutting corporate taxes mainly puts more money into the pockets of corporate managers already paid in 12-15 million a year and more. Cutting the tax on recipients of partnership pass-through income mainly puts more money into the pockets of the real estate developers and hedge fund managers and joint venture capitalists who already earn tens or hundreds of millions annually. None of those profits will necessarily remain in this country (they are likely to be used to expand in China). And again, Kansas. The Kansas "experiment" in drastic cutting of business taxes was supposed to prove, once and for all, that the GOP ideology of tax cuts that pay for themselves was not an Arthurian legend based on Arthur Laffer's absurd napkin theory but a real, empirically provable, workable way to jumpstart huge economic growth. After finding the state swamped in deficits and facing reduced growth from the predictable decline in state services, even the GOP members of the Kansas legislature recognized that taxes had to be raised. And they did it over Gov. Brownback's veto.....That says a whole lot about cutting taxes that the Trump framework people will, of course, call 'fake news' (their favorite term for dissing any facts they find inconvenient).
OKAY, I know. I've already got 5 items picked for discussion and I've not even gotten to Stewart's three ideas for making the absurd Trump tax framework "add up mathematically." That's because he assumes away many of the problems with the framework, making it easier to claim he's found a solution to the deficit issues.
6) Stewart takes the framework at its word but disregards the state and local tax deduction (likely to be heavily lobbied against) and the expensing (costs $220 billion for just 5 years and would be much more costly than that when made permanent). He's willing to buy the idea of a budget resolution that says it is okay if the tax cuts result in a $1.5 trillion revenue shortfall over ten years (i.e.,, okay if tax cuts for the rich create an additional $1.5 trillion deficit), on the assumption that drastically faster economic growth will make up much of the difference. As he puts it, "that's a debatable proposition, but for purposes of this discussion, let's accept it."
A budget resolution for a $1.5 trillion cost over ten years to tax cutsthat likely will cost $3 trillion to $7 trillion? How is just "accepting" that reasonable, or common sense? Sounds nutty to me. Especially in light of the arguments that the GOP has made in the past (and can be expected to make again in the near future, in part justified by the deficits created by their tax cuts for the rich) for decreasing funding for Medicaid, Medicare, Social Security and any other programs for the vulnerable based on their "worry" about deficits and debt.
Accepting an assumption of economic growth at sustained high rates that are much higher than experienced even during periods of economic stimulus from federal spending? Not just "debatable" but outright "unreasonable."
7) Finally, Stewart gets to his "three ideas". Based on his conclusions in item 6, he assumes that he needs to find just $1.1 trillion over 10 years to make the framework workable. (You already know that I think that it is ridiculous to assume away huge portions of the problems with the framework, so I won't reiterate more than in this sentence.) How does he propose bridging the gap and raising the $1.1 trillion? With some ideas that progressives have been proposing for the last 40 years.
A tax bracket of 44% on the top 0.1% of taxpayers who have more than $2.1 million of adjusted gross income would raise about $300 billion over 10 years.
This wouldn't be near enough to compensate for the huge tax breaks that go mostly to these same taxpayers, but it is something that should be added to at least clawback some of the largess to the rich. The rich received tax cuts from Reagan and Bush 2 that have drastically lowered their share of taxes paid. They would receive another wallopingly huge gift of tax reduction from the Trump framework. Probably the rate ought to be higher (a number of rates at 40%, 44%, 48% and 55% rate, for example, for various levels of income).
Stewart says raising rates would "raise issues of fairness" by penalizing earned income (i.e., for those CEOs and hedge fund managers who make $300 million or $700 million annually in compensation) while leaving passive investment income that is subject to a capital gains preferential rate untouched. Yeah, that's a problem, but it is easily solved. Eliminate the preferential capital gains rate, which just favors the very rich anyway, isn't justifiable under any of the reasons put forward for it, and was eliminated in the well-considered 1986 reforms (before the lobbyists got to Congress and got them to un-eliminate it). Even Holtz-Eakin acknowledges that raising capital gains rates to the same as ordinary income rates would be reasonable.
Tax capital gains at death, he says, because they are taxed preferentially (if at all) during the owner's life and there is no justification for allowing them to pass from generation to generation without ever being taxed.
Hard to disagree with this idea. There is no justification for allowing appreciation to pass untaxed to heirs, with or without an estate tax. This is something that should be enacted (without the elimination of the estate tax) because most estates haven't been taxed at all, and most estates of the ultra wealthy have huge appreciation that horribly exacerbates inequality when it passes to heirs (who did nothing to earn it, in many if not most cases) with bump up in basis and no taxation of the gains. Combine that with the way such assets permit borrowing during life, to be paid off by sale of a few assets at death at no taxable gain, and you have the ability of the ultra-wealthy to live off their assets with almost no taxation during their lives or in their estates (especially if the estate tax is eliminated) or in the hands of their heirs. As Steve Rosenthal puts it in commentary to Stewart in the article, "to take away the backstop of the estate tax without a tax on capital gains at death is crazy." Couldn't say it better myself.
Stewart says Congress could exempt "family owned farms and small businesses." Yeah, it could. But it shouldn't. Those family-owned farms may be huge corporate entities, not 'small' in any sense of the word. They can afford to pay tax on gains that haven't been taxed in a lifetime. Any exemption should be minimal (maybe exempting gains on assets of $1 million or less, like the pre-Bush estate tax exemption amount).
Curb the deduction for corporate interest expense. This is another workable idea, since debt remains one of the ways that corporations finagle where income goes and where deductions are generated, in spite of the various existing provisions for limiting deductibility of corporate interest payments.
Most GOP proposals, as Stewart notes, couple reductions in interest deductions with elimination of taxes on interest income. That is not necessarily a sound approach, and you can bet that the real estate industry (among others) would huff and puff and blow the straw house of limitations away in no time. Just look at the "at risk" rules under section 465, which were intended to prevent taxpayers from using nonrecourse debt to create basis to allow utilization of phantom losses, as originally enacted in 1976. It just took another session of Congress to get a loophole that essentially swallowed the rule, allowing "at risk" treatment of "qualified nonrecourse financing" for real estate projects. So any reductions to the deficit here would likely be temporary at best. And there are other real estate tax expenditures that should be attacked, too, like the section 1031 like-kind exchange rules that favor in particular real estate developers by allowing deferral of gain when trading properties (even when it is actually getting cash that a middleman holds, and then buying another--a far cry from the original intent of the section).
Stewart, at the end, takes a victory lap, because these three provisions, if enacted, could conceivably raise enough revenues to close the (assumed) $1.1 trillion gap. The problem --this is very misleading for typical readers. It looks like he is presenting the "tax cuts for the rich" framework as a workable plan that can be easily paid for and that is promising in terms of economic growth potential. As you can see from my analysis, I think the framework itself is not a workable plan, it cannot be easily paid for, and it does not hold out a real promise of economic growth.
As noted in my last post, part of the fanaticism that is surging in the current obstructionist Congress relates to taxes (quel surprise...). The JEC ran a hearing on Wednesday targeting "complexity" in the tax code as a source of humongous problems. The clear intent of the GOP in control is, and has been for some time, to pile in on the "blame the IRS" and "get rid of the government beast" bandwagon in order to keep money rolling in to the hands of the rich and prevent any action on public or human capital infrastructure, climate change, or any other reasonable programs that our government should be developing to deal with the many problems in today's world.
But as I also noted in that post, holding up "simplicity" as a reasonable goal for tax policy is intended to deceive. Simplicity is generally important only for tax provisions that are most likely to impact the poor or near poor; it is for all practical purposes an unimportant target for thinking about the appropriate tax provisions for the wealthy and corporate/business elite. That is because (as I said in that post):
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.
But just as the Walton and other rich families' money has been spent for years to make ordinary Americans believe that family farms are threatened by the federal estate tax (a fallacious myth); so too has considerable money from wealthy families, spent through the conduit of various propaganda tanks, been used to convince ordinary Americans that it is government, the IRS, and a complex tax code that form the core of their problems in making a decent living in today's society. That, too, is a fallacious myth. It is the wealthy families and owners of corporate stock, who have garnered all the benefit of workers' productivity over the last few decades and have allowed wages to stagnate so they can grab their "rentier" profits, who carry most of the blame for the precarious situation of America's middle class. It is the greed-above-societal-good policies practiced by so many of the wealthy owners and managers of American businesses and lobbied for in Congress, and so easily bought into by those in the majority in today's House and Senate (most of whom belong to the same elite).
Piling onto the complexity bandwagon today was another right-wing group: the National Taxpayers Union Foundation. Like so many other right-wing propaganda tanks, the NTUF claims that it is "a nonpartisan research and educational organization dedicated to helping Americans of all ages understand how taxes, government spending, and regulations affect them." (quoting from the language in the identifying box at the bottom of the NTUF push-out email). Balderdash. It is a propaganda tank with an ideological agenda that is dedicated to supporting ideas like Laffer's fantasytaxcutland where every tax cut leads to thousands of new middle class jobs or Mitt Romney's silverspoonland where those born with a silver spoon in their mouths are the "makers" and ordinary Americans working for stagnant wages in dead-end jobs to make the bosses of silverspoonland even richer are just "takers".
But guess what--the NTUF has come out with a new "study" on "Tax Complexity 2016: The Increasing Compliance Burdens of the Tax Code". It repeats the garbage about 6.1 billion hours "complying with the tax code". Of course, anytime you get a paycheck or anytime you maintain a record of your expenditures and revenues if you run a sole proprietorship or if you are just keeping personal records, you are also spending time "complying with the tax code", and if you take a population of 350 million people many of whom get a paycheck every 2 weeks and spend money on transactions that may be deductible on a weekly basis, that alone amounts to a substantially large amount of time, but being able to count something doesn't mean that what you are counting is significant. So what, should be the response to the "estimates" of 6.1 billion hours spent complying with the tax code. But of course all these propaganda tanks also add a dollar sign to that time--coming up with $234 billion (based on average salaries and benefits for private sector workers--which would include all those multimillions paid to CEOs for their 35-hour weeks)--again, a MEANINGLESS figure. These kinds of aggregated numbers from "averages" that are picked out of thin air should not be relied on to tell us anything other than somebody is trying to impress us with big numbers that may or may not be realistic (and probably aren't). So they admit that the IRS estimate is of an AVERAGE of 13 hours for preparing federal income tax forms. I spent about 8 hours this year since I keep books fairly carefully on my activities through my checking account, etc. And I probably have more complex taxes than many, since I have rental property in New York State and royalties from textbooks I've written and some consulting fees occasionally. The 13 hour "AVERAGE" includes the time that it would take to gather records and prepare information for a multimillionaire businessperson with various businesses and investments and travels --i.e., the Bill Gates, Warren Buffetts, and Mitt Romney's of the world. The AVERAGE is meaningless. Multiplying that average by the number of taxpayers--as NTUF does, to come up with 1.9 billion hours--results in an impressively big number, but that number is also meaningless. It is a guess, it is a mix of people who spend 30 minutes with people who spend 40 hours or more, and it says absolutely nothing worthwhile about whether there is a "problem" of complexity with the tax code.
The NTUF makes a big deal about the number of pages of helpful guidance provided by the IRS in terms of instructions. It says it is just awful that "the instructions for the basic 1040 forms and schedules increased by 2 pages to 211. [whereas] in 2000, there were [just] 117 pages of instructions." In other words, like the "average" number of hours spent filing, the number of pages of instructions is set forth as empirical evidence of what the NTUF sees as awful complexity.
Now, remember, the NTUF is part of that same radical right-wing element that has treated the IRS as evil and pushed Congress to cut its budget. Congress has in fact cut the IRS by about $1 billion over the last five years, including a reduction in staff by about 17,000. And at the same time, Congress has loaded the IRS with more functions (monitoring the Affordable Care Act added huge workloads on overstressed IRS employees). Yet Congress wants the IRS to do more without doing anything that Congress doesn't like (with the result that Congress has pursued witchhunt "investigations" of the scrutiny of "tea party" and "progressive" titled organizations' applications for coveted tax-exempt status, for which the law says that NO political activity is permissible); and yet do an even better job at guidance than it is currently doing. The current House passed a bill on Thursday that says no one in the entire IRS can receive a bonus --no matter how hardworking, underpaid, and understaffed IRS employees are--until "customer service is improved". But the bill doesn't restore the cut from the IRS budget that has caused it to cut back in services to taxpayers. The bill is just one of six anti-IRS measures passed this week mostly along party lines. See Jackie Calmes, I.R.S. Fights Back Against House Republicans' Attacks, New York Times (Apr. 21, 2016). As Lawrence Gibbs (a Nixon administration IRS man) says in the article: I just don't think it's in our country's best interest" "to create a disrespect for our tax revenue system."
Further, remember that very few taxpayers need to look at the majority of items in the instructions. If you don't run a home office, you needn't look there. If you don't have any kind of capital gains income (which most ordinary workers don't), you don't need to look there. If you don't have passive activities, forgeddabout the passive activity loss schedule. If you don't own your home, you won't have mortgage interest to worry about (and even if you do, very few of you will need to figure out whether your interest on a $1.1 million loan is all deductible or not). So the instructions are doing exactly what the House has just told the IRS it must do--providing better service to taxpayers for those that need specific guidance on specific items. The fact that the number of pages in the instructions increased from 117 to 211 is neither inherently good nor inherently bad, but it is likely good because it is likely that the instructions provide better guidance for taxpayers than was available in 2000.
The NTUF complains that most filers use a professional or tax prep software. Of course, that's a good thing. If you can hire a professional and not bother yourself, why not? If you can buy and use tax prep software (which the IRS would have been able to provide for free to filers except that Congress passed a law preventing it from doing so, protecting the megacompanies like TurboTax that profit off converting the statutes to easy-to-use software), why not? That makes it not a burden but a breeze to file your tax returns. So NTUF complains that H&R Block's "average fee" went up (adjusted for inflation--which they don't do when it doesn't help their point) 3X what it cost in 1980. Gee, my cable bill from Comcast has gone up that much in the 9 years I've had the service. Sounds like tax prep is much less inflated than most IP-based 'stuff' is these days.....
The NTUF complains that the individual mandate penalty for not getting insurance coverage is "growing costlier: this will rise starkly in 2016 to $695 per adult". Yeah, of course it is. That was the way it was structured in order to ensure that a diverse population was covered, bringing the costs of coverage down for everybody. Another "so what" number. And it has nothing whatsoever to do with complexity--except for the fact that we are doing health coverage through a system that functions like a tax but an odd one, rather than through universal, single-payer, government-provided health care or by expanding Medicare for all, which would be much simpler since there is already a well-established regulatory framework.
Not surprisingly, the NTUF complains (it is, after all, an ideological propaganda tank, so one expects this) that the employer mandate part of the Affordable Care Act "is expected to" force businesses to "shed employees or switch to part-time employees due to this compliance burden." As usual, the facts don't support this "expect[ation]." In fact, experience under the ACA has shown that businesses and individuals have on the whole realized that the ACA is better than the health care world before the ACA.
The NTUF complains about taxpayer services--less ability of the IRS to respond to phone calls and to answer written correspondence in a timely manner. This has NOTHING TO DO WITH COMPLEXITY and EVERYTHING TO DO WITH THE RIGHT'S PUSH TO EVISCERATE THE IRS BY CUTTING FUNDING, CUTTING EMPLOYEES, DESTROYING MORALE, AND HAMSTRINGING THE ORGANIZATION TO MAKE TAX COLLECTION AND ENFORCEMENT EVEN HARDER TO DO WELL.
*****
One good thing about this theater-of-the-absurd presidential primary season is that many ordinary Americans seem to be waking up to the fact that the system as run by the elite establishment isn't set to work for them and that you cannot simply trust what establishment organizations (and propaganda tanks funded by the elite) say. Complexity of the tax code is NOT our major problem. Hopefully this awakening public will recognize this propaganda for what it is--an attempt to mislead ordinary Americans into thinking that they should blame all their ills on government and the tax system, rather than on the right-wing majority in Congress that has worked for four decades to tilt the tax system in favor of the rich.
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):
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.
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
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.
It must respond when a loophole is exploited by closing the loophole.
It must do so in a way that permits the voluntary compliance system to function as well as can be given resources available.
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
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.
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)
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)
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.
Senators Baucus and Hatch, the Chair and ranking minority member of the Senate Finance Committee, respectively, launched a bid for completing a Code reform before Baucus leaves office with a letter to Senators telling them that they should get their bids in within the month for any tax expenditures they want to preserve. See Letter from Baucus and Hatch (June 27, 2013).
At first glance, this doesn't sound like a terrible idea. There are, indeed, too many tax breaks in the Code for huge estates, owners of capital, Big Oil, Big Pharma, "Non-Profit" hospitals, and corporate executives' deferred pay. Wiping them away and then thinking through things fresh might be a part of a process for real tax reform that makes sense.
But it isn't clear that this duo can possibly carve a better system this way. They have both already bought into the idea that the US has to "lower rates" to let Big Business be "competitive", an idea that ignores business reality and sets Congress up for a series of lobbying "auctions" (this tax break for that campaign contribution) [hat tip Evelyn Brody ]. They are both therefore part of the avid group of Big Business supporters who want to cut taxes, not raise revenues to deal with infrastructure needs, safety net needs, climate change, and the many other challenges that face a nation that has spent 40 years in the thrall of bankrupt Chicago School market theories that support winner-take-all systems. Both have touted the idea that taxes should be "simpler''--as though having language that two-year-olds could read would be a reasonable way to ensure that the most sophisticated legal minds hired by the wealthiest Americans don't scam the system! Remember that most of the complications in the Code are there to do two things--to provide special tax subsidies lobbied for heavily by Big Business (with a few for ordinary folk) and to prevent sophisticated (rich) taxpayers from ripping off the system as much as possible.
Worse, these two have both already made it clear that the group they really want to hit are those who benefit from Social Security and Medicare expenditures--their goal isn't to make our social safety net sustainable through the centuries, but to cut holes in it so that the money can leak out in tax rate cuts to line the pockets of the wealthy heirs, the overpaid CEOs, and the banksters that caused the worst economic recession since the Great Depression, at great personal cost to millions of ordinary Americans who have lost their jobs, their homes, and their prospects for the future because of it.
Not surprisingly, their letter to fellow Senators starts with their claim that the current Code is "broken" "riddled with exclusions, deductions, and credits", with the result that "[t]he complexity, inefficiency and unfairness of the tax code are acting as a brake on our economy."
Now, there are problems with the Code, that I won't deny. But this litany of evils is just what the lobbyists for the corporate and wealthy ordered--it buys into the attempt by free marketarian/Chicago School economists to paint taxes as evil, as sources of anticompetitiveness, as such dragging anchors on businesses and entrepreneurs that it holds back the economy and "forces" Big Business to offshore its work to cheaper labor elsewhere. And it sets the stage for an outcome that removes anti-abuse provisions and decimates progressivity in favor of the "identity theory" notion of fairness--that you have to have a flat rate that treats everybdoy the same to be fair.
Why is the identity theory of fairness absurd? Because it ignores context. It is like saying an Ant is as big as an Elephant, by ignoring the relativeness of size which is essential to the notion of bigness/smallness. In other words, we can't talk about "fair" without some idea of the scale on which fair is to be measured. And saying that "taxing everybody at the same flat rate" is inherently "fair" (as the right-wing proponents of a flat national sales tax tend to do) misses the point of what fairness is all about!
Then Baucus and Hatch turn to their concept of the "blank slate" and the appeal for senators to name their favorite tax expenditures (ie, their favorite pet interest groups).
We need your ideas and partnership to get tax reform over the finish line. In order to make sure that we end up with a simpler, more efficient and fairer tax code, we believe it is important to start with a "blank slate"—that is, a tax code without all of the special provisions in the form of exclusions, deductions and credits and other preferences that some refer to as "tax expenditures. This blank slate is not, of course, the end product, nor the end of the discussion. Some of the special provisions serve important objectives. Indeed, we both believe that some existing tax expenditures should be preserved in some form. But the tax code is also littered with preferences for special interests. To make sure that we clear out all the unproductive provisions and simplify in tax reform, we plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.
Of course, this "blank slate" approach is a call to arms for all lobbyists, who have already begun aiming their impressive resources at their selected targets. See Politico, Tax Lobbyists Spring Into Action .
But beyond that, note what it says about the provisions--it will keep those that encourage economic growth, increase fairness, or promote other policy objectives. We already know what lobbyists say about all of the provisions that they favor for Big Business and Big Money--that if you don't give favorable tax provisions to all those wonderful (purported) job creators, the economy will crash. And we already know who will use the "make the code fairer" arguments to support their views--it will be the right-wingers who want to eliminate social safety net provisions from the Code. They have lots of money from the Koch brothers and other right-wing wealthy individuals and institutions and lots of paid "scholars" like Cato, and Heritage and all the others to push their views. Tell me--just who is going to lobby for the real concept of fairness in the Code--like (i) getting rid of the preference for capital over labor, (ii) getting rid of tax favorable treatment for any deferred payment or pension plans that are available only to the top managers of firms, (iii) instituting a decent estate tax that begins to eat into the oligarchic dynasties that we've allowed to be created by such limp excuses for estate taxation (including not only much higher rates with more rate brackets, but also elimination of most of the gimmicks using trusts and partnerships and purported discounts; or (iv) creating a much more discriminating rate structure for the income tax that recognizes differences of income in magnitudes as they exist today , with rates for brackets that include half a mil to a mil, a mil to several mil, several mil to 20 mil, 20 mil to 80 mil, 80 mil to 150 mil....and on to the two billion mark? And who is going to make the pitch that we have to raise more revenues in order to meet the needs of the aging baby boomer population as they retire with savings decimated by the Great Recession, homes lost to the lack of banking oversight, and facing significant increases in medical care costs?
It's pretty clear that neither Baucus nor Hatch has any desire to deal with real fairness issues, since that would require INCREASING THE PROGRESSIVITY OF THE CODE. Note what they say to their fellow senators about the task ahead.
The blank slate approach would allow significant deficit reduction or rate reduction, while maintaining the current level of progressivity. The amount of rate reduction would of course depend on how much revenue was reserved for deficit reduction, if any, and from which income groups.
This phraseology reveals perhaps more than they wanted to reveal--first, that they are not even contemplating increasing progressivity, in spite of the past 40 years of reductions in progressive features. And second, they really aren't planning to use elimination of tax expenditures to raise more revenues to make up for the absurd Bush tax cuts that they both helped put into place--note that they say the rate reduction will depend on whether any money is reserved for deficit reduction, providing a pretty strong indicator that there will be no revenues used for government and all the "reforms" would go to another foolish round of tax cuts.
Kitty Richards at ThinkProgress has some similar concerns about this "blank slate" announcement. See Richard, Why we should be wary of 'blank slate' tax reform, ThinkProgress (June 27, 2013). First, using the analysis done for the Simpson-Bowles "zero" plan (which was actually more protective of the lowest income than Baucus-Hatch have declared themselves to be), it would be very difficult to maintain progressivity (much less increase it as I have suggested is required) if base reduction is used to lower rates, since those who benefit most from lowering rates are the taxpayers with the most income.
The Tax Policy Center estimated the effects of the plan and found that it would have disproportionately increased taxes paid by low-income and middle-class families, not even taking into account the expiration of the Bush tax cuts for taxpayers making more than $400,000 per year legislated in last year’s “fiscal cliff” deal. If you compare average federal tax rates under the zero plan and under current law, the zero plan looks even worse – it would actually cut taxes for the top one percent by 10 percent, while more than doubling tax rates for the poor and increasing taxes on the middle class substantially.
Second, she adds, the Baucus-Hatch letter "treats decisions about revenue as an afterthought." Yet revenue-raising is THE PRIMARY REASON WE HAVE TAXES.
Congress should not be engaging in protracted tax reform negotiations that ignore the fundamental problem with our tax code: It does not raise sufficient revenue to fund the operations of government at appropriate levels in a sustainable way.
If Baucus and Hatch are interested in reforming tax expenditures, they should start by scaling back the biggest giveaways to corporations and the rich and devoting that revenue to repealing the sequester, not reducing tax rates for these same corporations and wealthy individuals.
Richards is right on in her critique. We need to recognize the commitments we have to institutions and people, from infrastructure needs like roads and airports to wildfire prevention to climate change action to NIH and other support for basic scientific research on which rests most of the "entrepreneurial" innovations that the self-appointed meritocracy credits itself with. That requires money, and money requires either printing more of it or more taxes. More taxes from the wealthiest corporations and individuals also serves a secondary objective of increasing expanding opportunity and countering, to some small degree, the tendency for most government programs to function as upwards-redistribution paradigms that shift more and more resources to an oligarchic upper crust.
So I cannot think this Baucus-Hatch initiative augers well for the country. I wish Baucus had used his imminent retirement to step back and consider what his legacy could be for a better world, rather than continuing to lie in bed with the lobbyists of the corporate elite. What we need to do first is very simple--get rid of the multiple giveaways to big corporations, revamp the estate tax to make it heftier, and eliminate the many tax expenditures that are mainly for the wealthy (deductions of mortgage interest on second homes, deferred compensation schemes, etc.
I suppose it shouldn't be surprising that the mostly-to-the-right Detroit newspapers would have a center-page opinion piece calling for the elimination of the IRS, that ages-old mantra of the radical right and of those corporate-backed propaganda tanks and radical-liberatarian idea pushers like Cato and Heritage Foundation and Claremont and many of the Tax Party groups, etc. But this one is so bad that it is necessary to call it out for what it is--a bunch of hog-wash. See Nolan FinLey, Let's Get Rid of the IRS, Detroit News (June 10, 2013).
Finley starts out with a presupposition that the scandal-mongering about the IRS is not only completely accurate (which it isn't--liberal and conservative groups were selected for scrutiny, and scrutiny was called for in respect of groups that had "tea party" in their names, since most of them were in fact mainly doing politicking) but that it was also "obvious[ly]" done from at the orders of Obama operatives to aid the President's election chances (which is completely unfounded conspiracy-mongering speculation). He states that "the IRS has been caught red-handed targeting conservative political groups for special scrutiny in what seems obvious was an attempt to aid the reelection bid of President Obama."
An initial scaffolding of distortions and malicious speculation cannot bode well for any opinion piece. So it isn't a surprise that the rest of the piece doesn't hold water, either. He calls the required statutory scrutiny of applicants for 501(c)(4) status a "dragnet"--failing to even acknowledge that the statutory requirement states that such groups must be "exclusively" operated for social welfare purposes and that it is in fact through administrative dispensation via interpretative regulations that the IRS applies instead a "primarily" for social welfare purposes test, thus permitting (too much) politicking as long as it isn't the primary activity.
He goes on to claim that use of the term "patriot" as a screening filter for politicking groups implies that "the United States government finds something sinister in patriotism". Again, that's a ridiculous association of what may possibily have been a perfectly reasonable though politically unwise filter term--i.e., if there are lots of groups with "patriot" in their names that do a lot of politicking, then it is a reasonable term to pick for giving those groups extra scrutiny to see if they do too much politicking, though the expectation that conservatives would rise up in arms if those types of groups receive extra scrutiny should have been a red flag cautioning against use of that term in spite of its usefulness.
Then Finley asserts that this conspiracy-theory thinking provides "more than enough reason to jettison plans to make it [the IRS] the enforcement arm of Obamacare." Now, it is true that the IRS has so many different federal programs that it has to oversee that it is almost impossible for it to do an appropriate task of doing so. Congress has loaded it with tasks (including all the tax expenditure programs embedded in the federal income tax code) and consistently underfunded it so that it is usually understaffed and overstretched. But the answer to that is not to take away a task that it is perhaps best suited for out of all the agencies, but rather to fund the IRS appropriately so that it can do the tasks assigned to it by Congress. Finley completely ignores the underfunding problem, since--as revealed later on--he really wants to decimate or eliminate the IRS entirely.
Finley talks about the IRS as "an institution America no longer trusts" because it is "the most feared agent" and on "that has proven itself willing to manipulate the levers of government to achieve a political end." Again, many problems in this rhetoric.
If the IRS is actually the "most feared" (I personally suspect the CIA and FBI and NSA would come in ahead in that race, but haven't seen any actual empirical study on this issue)--even after the enactment of three laws pulling back on its power to enforce and essentially hamstringing its employees with the "ten sins" provisions included in the 1998 act (see earlier post)-- it is because for decades the right-wing propaganda tanks and media have been pushing distrust of the IRS and of taxes and of government generally. People are influenced by that constant cry of "bad guy" based on blowing up of individual anecdotes into massive (presumed) patterns.
And the claim that the IRS "has proven itself" using its power for political purposes is simply unfounded. There is no "proof" of the assertion made by Finley. He is merely playing the Bill O'Reilly game of asserting speculation--or even worse, falsehoods,-- as fact in order to buttress his own personal vendetta against the IRS and its employees. Most IRS employees are civil servants, not political appointees. I've known quite a few Republican IRS employees in my years as a tax practitioner, and have considered writing about what I consider a related problem -- that too many IRS employees are too willing to court the pleasure of taxpayers such as big multinationals or large law firms or accounting firms that may well become their future employers or clients when they leave the Service.
Now Finley hits his stride with his real objective--arguments for disbanding the IRS, eliminating the income tax, and replacing it with a (regressive and hard to enforce) national sales tax.
The most fitting punishment would be to disband the IRS. And junk the income tax, too. Mike Huckabee, former governor of Arkansas and now a TV talk show host, is urging Congress to replace the income tax with a national sales tax. You’d pay tax on the money you spend instead of the money you earn.That would eliminate the need for an IRS that audits tax returns, hands out non-profit status and enforces a tax code that is egregiously complex and unfair. Id. (paragraphing removed).
Finley reveals his true ignorance here (if he hasn't done for most readers already). Let's just consider first some of the ancillary issues around "disbanding the IRS".
Because the IRS does function as the major enforcement agency for many things besides the income tax, Congress would have to undertake a comprehensive analysis of all of those activities and assign them to some other agency. In all likelihood, that other agency would lack agents with expertise to handle the assigned task, and the result would be essentially a transfer of those currently staffed with the activity to the other agency, requiring considerable time to merge functions and perhaps failing to do it well enough to maintain current operating efficiency, much less improve it (just as huge mergers or consolidations of businesses often go awry).
Further, the time to do the study, legislate the transition, and implement the transition would require continued operation of the current agency and the replacement agency, duplicating costs at a time when conservatives like Finley claim they want to cut wasteful government spending.
The Internal Revenue Code is not really "egregiously complex."
Read earlier posts on the right's tendency to overstate (by tens of thousands of pages) the "size" of the Code and to treat "size" as an appropriate substitution for any analysis of complexity.
Only 30% or so of individual taxpayers itemize, and itemization is the primary complexity faced by individual taxpayers. Most of those who do itemize are in the relatively wealthy part (upper 30% )of the income distribution, and most of those who have difficult and complex decisions to make are the very wealthy who have expensive tax experts to do their work for them.
Most of the complexity in the Code stems from two factors--(a) tax expenditures (subsidies) that benefit (substantially, in most cases) particular types of wealthy and business taxpayers lobbied for by those taxpayers and (b) anti-abuse rules necessitated by the clever tax strategies invented by the wealthy taxpayers' (especially corporate and business taxpayers') expensive tax experts.
It is naive to think that any tax system--whether income or excise or transfer or territorial or worldwide or sales or VAT-- could be "simple" for wealthy individual and corporate taxpayers with a global playing field and incredible sums able to be spent on avoidance and at the same time generate sufficient revenues to provide for the most basic of public goods and services, including a decent safety net for those caught in vulnerable positions by age, illness, or other lack of privilege.
5. Most sales tax systems include incredible arrays of exemptions (for example, for non-profit groups and charities) and exclusions (for "necessities" where the sales tax could make a difference between life and death for those living in poverty) and special provisions (lobbied for by particular industries). A VAT (if that were the form required) would in all likelihood require the same complexities about what is income or not that an income tax requires. A VAT or a national sales tax would require a mechanism for enforcement of collection not unlike the IRS's function and a mechanism for tracking individual's payments not unlike the IRS's current function. It would not permit the elimination of audits of tax returns (just different kinds of returns), handing out nonprofit status (just a different rationale and basis) or enforcing a complex tax code (just a different one).
Finley's ignorance is further revealed by his claim that a "similar outcome" (disbanding or making the IRS much smaller) could be achieved by "vastly lowering current income tax rates in exchange for eliminating all deductions and credits" because there would be "no reason to examine returns."
lowering rates doesn't achieve anything but less revenue--which will have to be made up for in other ways (adding complexity) or by further hardship on the already suffering ordinary people of this country who bore the brunt of the Great Recession, the foreclosure crisis, the unemployment crisis, and the corporatisation of education that has paid administrators twice or more what they are worth while cheating professors, teachers and students;
eliminating all deductions and credits might simplify somewhat the income tax, but at the cost of considerable unfairness in many cases--for just a few obvious examples, removing the foreign tax credit for taxes paid to other countries would result in some instances in "double taxation" of the same revenue by the US and the other country; removing the "standard deduction" and "personal exemption" would undermine a universal view that the income tax shouldn't reach the amount necessary to maintain a barely sustaining level of income for food, shelter and clothing;
even if it were possible to "lower rates and eliminate all deductions and credits", it wouldn't be possible to get rid of the IRS or eliminate audits or curtail enforcement or reduce the tax code to something a kindergartner could understand--a critical question for the Code is "what is income"--and therein lies a huge portion of the complexity and most of the ways that taxpayers have found to abuse the rules by claiming "phantom" losses. (Note that Finley doesn't talk about removing elections, exemptions, and exclusions--was that intentional?) There would still be the same need for returns, audits, and enforcement, and there would still need to be all the procedural provisions for litigation and regulations and penalties and interest on overdue taxes. There would be rules still for all the different types of entities (much of the complexity of the Code lies in the rules for permitting partnerships to have considerable flexibility in their allocation of income and losses among the partners). Certainly Finley wouldn't suggest that the tax code should get to tax gross income and taxpayers be required to forego claiming any losses!
Finley ends with what he thought was a question requiring an obvious answer of "none"--essentially asking that if we can eliminate the IRS and get rid of the health care "entitlement", "what's the downside?"
The answer is not the one he so ignorantly professed to believe. The downside is huge, and there is little upside. Finley disregards the growing inequality in this country and the continuing poverty in what is still the richest country in the world. He doesn't care, apparently, that his "solution" would create even more problems for the poor, as programs that they depend on administered through the IRS-such as the Earned Income Tax Credit and the standard deduction and personal exemptions--would be eliminated with his proposal. Further, without a tax collection and enforcement agency, much of the good done by the federal government would wilt on the vine--from the Centers for Disease Control to the NIH and the Smithsonian, from transportation safety to education funding, and even the right's much beloved military. We simply can't and shouldn't get rid of the IRS--every advanced country in the nation has a bureau that collects and enforces the tax laws. We could get rid of the particular health care reform enacted as Obamacare, but we shouldn't --rather, we should continue to improve it, ultimately instituting Medicare for all and removing the rent-seeking profiteers from the picture except for those who have so much money that they can afford to buy luxury health care.
Finley's proposal amounts to more hot-air from the right about their favorite target--taxes and tax enforcement--that would have regressive results lopsidedly benefiting their favorite beneficiaries--the wealthy and Big Business (owned mostly by the wealthy). Apparently, people like Finley really want a country where brute market forces allow a few to reap all the benefits and the many to suffer, resulting in a classed society with the few living in relative splendor and the rest living off the dregs. That would be the result of most of these proposals for turning to a regressive sales tax and shutting down federal tax enforcement, making such proposals a form of class warfare pure and simple.
(if you don't believe me about "rent-seeking profiteers" in the health care business, read Saturday's New York Times story about the way Questor--a Big Pharma company--has reaped huge profits by essentially building a monopoly power over an immune-disorder drug called Acthar and now intends to purchase a competitor's potential threat (selling for tens of thousands less) because a US startup wanted to make it available cheaply in the United States. Questor bought Acthar in 2001 when it was selling for just a few hundred dollars a vial. By 2007 questor had increased the price to almost $1500 a vial. And in 2007, Questor increased the price in a single jump to $23,000 a vial--yes you read that number correctly. This is the perfect example of the fact that the right's beloved "market" doesn't work if the government doesn't provide the right framework--in this case, enforcement of anti-trust laws much more stringently than has been done in the last few decades as anti-trust has practically dropped from the national vocabulary.)
I can't resist pointing readers to tax professor Jim Maule's excellent post chastising everybody--from those obviously slanted propaganda-tank tax gurus Chris Edwards (you all know him as the purported tax expert from the right-wing pseudo-libertarian Cato Institute, whose other associate, Dan Mitchell, makes similar ridiculous claims in touting the purported "Laffer Theory" about how tax cuts restore tax revenues--I should note that I debated Chris in the run-up to the 2012 elections on Herman Cain's ridiculous tax "plan") and Steve Malanga (you all know him as the purported tax expert from the right-wing Manhattan Institute) to generally reasonable Taxpayer Advocate Nina Olson--about their ridiculous claims of a tax code that runs to the tens of thousands of pages. See James Maule, Code-Size Ignorance Knows No Bounds, MauledAgain (June 5, 2013).
Many of those claims about a giganormous Code that is pressing down on taxpayers from the sheer weight of its pages stem from three facts: (i) that the CCH looseleaf service itself notes that the service (in 20-odd volumes, with extensive and often duplicative annotations to cases, private letter rulings, notices, and various legislative history and rev.proc and rev.rul. items as well as the actual current Code provisions and regulations promulgated thereunder) runs more than 70,000 pages; (ii) that it is very useful to propaganda tanks and others bent on painting a negative picture of IRS tax enforcement and collection and taxes in general to portray the rules as so complex and lengthy that no one in their right mind could think it appropriate; and (iii) people without those bad propaganda intentions frequently serve as shilling boom-boxes for those (false) claims, because they don't stop and think or do their own homework. So the claims are repeated, over and over, and --as psychologists have shown--once something is repeated often enough, it gets to be accepted as fact even by those who should know better.
What people need to know --besides the obvious one fact that Congress, not the IRS as often insinuated in those blogposts condemning the length of the "code", writes the tax laws--is that:
(1) the CCH tax service includes more extra "stuff" that tax practitioners find very useful to help interpret the actual statutory language and the regulations promulgated thereunder than actual Code and Regulations! The tax code itself is relatively short--you can read it quicker than most good novels. (Additionally, the regulations have a lot of specifics applicable to particular types of taxpayers and situations, but even they aren't tens of thousands of pages long. And the page counts also depend greatly on the size of print on the page, folks. Word counts are much more meaningful.)
(2) most of the complexity that actually exists in the Code affects only the 3 in 10 taxpayers who "itemize" their deductions on their tax returns--and then, mostly the ones in the very tip-top of the distribution--the 1 in 10,000 who have lots of complexity in doing that itemization; and
(3) most of that complexity is necessary to prevent abuses by those who can hire very expensive lawyers, accountants and banks to set up schemes to avoid (or even evade) taxes.
Max Baucus announced to his fellow Senators today that he will not seek re-election to the Senate in 2014. He has been the top Democrat on the Finance Committee since 2001. See Senate Finance Chairman Max Baucus Won't Run Again in 2014, Bloomberg.net (Apr. 23, 2013).
As someone who thinks that Baucus has been a hindrance to progressive reform of the tax code and financial regulation, I must admit that I do not find his retirement a loss. His chairmanship of the Finance Committee has been marked by a failure to understand the most important issues related to federal income and estate taxation and by adoption of positions that are too favorable to Big Money and Big Business (especially Big Banks). He has been tone-deaf, in other words, to the class warfare waged by the right against the middle class and the resulting growth in inequality in the country that has been worsened by the current tax provisions that support redistribution upwards to the very wealthiest owners of financial assets and businesses. In particular, he has failed to use his position to push for reasonable reform of the capital gains preference and the wealth-favoring versions of the estate tax passed by the Bush administration. He has refused to consider a reasonable financial transactions tax. In fact, Baucus was too willing to go along with the initial passage of the Bush tax agenda in 2001-2004, and he did nothing to ensure that the Bush tax cuts would fade into oblivion on the sunset date. In fact, he worked to make permanent almost all the Bush tax cuts and supported the corporate-friendly "extension" of the broad menu of corporate tax cut provisions (including a retroactive extension of the R&D credit, which cannot possibly serve the purpose it is claimed to serve when enacted retroactively). The tradeoff provided only token items on the progressive menu.
Of course, the Republicans will cast Baucus' choice to retire as a reflection of problems for Democrats. See the Bloomberg News article cited above, in which Rob Collins of the National Republican Senatorial Committee says as much. I suspect that Baucus knew he would be targeted by liberal Democrats for his failure to vote for gun control and for his failure to support progressive tax policies.
That said, he remains as Finance Chair through 2014, and he has said he intends to produce a rewrite of the tax code. He is the wrong person to do that, and so it is important that other Democrats relegate him to a position of less influence in order to come up with more progressive changes than he would support.
Is Ron Wyden (who would become the most senior member of the Finance Committee when Baucus leaves) capable of carrying the banner of progressivism? His emphasis on "tax simplification" is worrisome, because it suggests that he does not understand the relationship between complexity in the tax code and sophistication of taxpayers to whom the complexity applies. The main reasons for complexity are two-fold: (i) existing tax rules are expanded to cover abusive schemes developed by sophisticated tax advisers (attorneys and accountants), and (ii) existing tax rules are riddled with exceptions to provide subsidies (tax expenditures) favoring industries represented by heavy lobbying. To the extent that tax simplification reduces the anti-abuse rules needed to prevent various tax scams and manipulation, simplication is a policy mistake. To the extent that simplication results in changes to the tax expenditures, it can be useful but it is often also mistaken, because the easiest way to "simplify" such rules is to expand them to cover even more of heavily lobbied-for industries. Wyden needs to expand his understanding of the relationship between simplification as a goal and fair allocation of resources to the extent that resource allocation is handled through tax expenditures in the Code, reasonable rules to ensure that the most sophisticated taxpayers pay their fair share, and fair distribution of the tax burden. Baucus did not serve the publci well in regards to these issues. Let's hope that Wyden does better.
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