ataxingmatter

Should simplicity be a primary goal of tax reform?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

 

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

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

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

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

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

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

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

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

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

 

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Senate Finance Leaders push "blank slate" to tax reform

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related articles

Orrin Hatch on tax reform at the ABA--a predictable right-wing rant

Why We Should Be Wary Of 'Blank Slate' Tax Reform

Why 'Blank Slate' Tax Reform Is A Bad Idea

Senate Invitation to Defend Tax Breaks Propels Lobbyists

Private prison firms, casino operators, and outdoor advertising as REITs--time to get rid of tax subsidies for RE industries

The Wall Street Journal reported Saturday on an IRS effort to police the misuse of REITs.  See A.D. Pruitt & Amos Sharma, IRS Puts Brakes on Corporate Push to Capture Real-Estate Tax Break, Wall St. J. (June 7-8, 2013), at B1.

A REIT is a "real estate investment trust", a special-status entity created by Congress in sections 856 -859 of the Internal Revenue Code to provide a way for ordinary retail investors to share in a big investment in real estate that would be impossible for them to do individually.  REITS avoid the corporate tax so long as they distribute most of their income as dividends to shareholders.

The Journal story notes that private prison operator Corrections Corp of America has already completed conversion to REIT status.  Now a flock of corporations operating various businesses that one wouldn't ordinarily think were intended to be covered by the REIT exception to corporate taxation are applying for REIT status--including Iron Mountain Inc. (document storage operator), Lamar Advertising Co. (outdoor billboards), Equinix Inc. (data-center operator), and Penn National Gaming Inc. (casino operator).  CBS  submitted a letter ruling request for its outdoor advertising division's bid for REIT status and an IPO, a move that would save it $145 million in 2014 taxes (and more in later years), according to Davenport Research, as reported in the Journal.

In addition to the distribution requirement, REITs avoid corporate taxation only if they satisfy a complex set of eligibility requirements, including the following gross income and asset requirements. 

• The first gross income requirement mandates that at least 95% of a REIT's gross income must come from dividends; interest; real property rents; gains from property sales; income or gain from foreclosure property; abatements and refunds of real property taxes; amounts received as consideration for entering into agreements to make loans secured by mortgages on real property or to purchase or lease real property;gain from disposition of a real estate asset (other than prohibited transactions). 
• The second gross income requirement mandates that at least 75% of a REIT's gross income be derived from rents from real property; mortgage interest; real property dispositions; dividends or gain from disposition of shares of other REITs; abatement and refund of taxes on real property; income and gain from foreclosure property; consideration for entering into agreements to make mortgage loans or purchase or lease real estate; certain gain from dispositions of real estate; and "qualified temporary investment income".  (The latter term is used for other types of investments that are used as temporary parking places for money.)
• The first asset test requires that at least 75% of the total assets of a REIT be represented by real estate, cash and cash items (including receivables) and government securities. 
• The second asset test requires that (i) no more than 25% of the assets represent other securities; (ii) no more than 25% of the total assets be represented by securities of taxable REIT subsidiaries;  and (iii) except for those taxable REIT subsidiary securities (I) no more than 5% represent securities of any one issuer;  (II) the assets do not include more than 10% of the voting power of any one issuer and (III) the assets do not include more than 10% of the value of any one issuer.

A special rule permits "timber REITs" for logging businesses where more than 50% of the assets are used in a timbering business.  And there are many more details to the rules than briefly outlined here.

Already, one can see two things about the REIT rules:

(1) that this is a very complex set of rules for which the discernible intent of Congress was to cover entities that made most of their money from being landlords--holding and leasing real estate;

(2) that the real estate (and logging) businesses undoubtedly lobbied hard to get this kind of break for their property businesses--a break that isn't ordinarily available for corporations that run grocery stores or distribution businesses or manufacturing businesses. 

Aside:  Real estate developers/owners/leasers are--like Big Oil and other natural resource extractive industries--businesses that exploit natural assets.  For reasons likely dating back to the very different circumstances at our founding when people tended to think of America as a vast frontier with almost unlimited resources which required incentives to get people to development them (and of course at the same time overlooking the Native Americans who were already there and using those resources quite differently), Congress has historically lavished largesse in the form of tax expenditure subsidies on businesses that exploit land and minerals and other natural assets.

So why would a prison operator like Corrections Corp of America or a casino operator like Penn National Gaming Inc. that have active business income from operating prisons and casinos be eligible for the REIT break if REIT status is supposed to be for landlords that get rent income?  It all depends on whether the business can successfully define its income as "lease" income from real estate (with incidental service income) rather than business income from providing services or running businesses(that take place on physical properties owned or leased by the companies).  The IRS has actually been rather flexible in its application of the REIT rules to date, considering cell phone towers "real property" for this purpose, etc.  As the journal notes, "some analysts argue that some companies are stretching the definition of landlord."   But "stretching definitions" is the key to the tax minimization game, and tax lawyers, accounting firms, and others will keep doing it unless Congress or the IRS narrows the definition (or eliminates the issue entirely).

 It seems quite appropriate that the IRS has launched a review "to define what type of companies can qualify as real-estate firms" for this purpose.  Even more appropriate is the House Ways and Means Committee's review of the wisdom of providing this preferential tax expenditure for any industry, even if they really are landlords.  The SEC has already noted that companies that hold lots of interests in real estate mortgage investment conduits (REMICs) might better be treated as mutual funds rather than REITs, for the safety of the financial system.  Id.  Rethinking REITs could lead to better securities regulation policy and better tax policy.  Elimination of this tax subsidy --which amounts to tax favoritism for  these real estate companies, casino and prison operators, and outdoor space advertising businesses--would be the fair thing to do.

Related articles

Equinix (EQIX) Comments on REIT Conversion, Expects Delay

Iron Mountain shares tank post IRS/Real Estate trust delay

REIT Conversion Risks Not Just for Iron Mountain

It's a REIT Bonanza Out There: Equity Volumes at Record Rates

Two REITs Set to Make Big Profits Off Retirement Boom Ahead

Why Congress Is Targeting These Dividend Favorites

The latest "golden fleece" award for a corporate subsidy: just another way to "rig the game for 'the haves'"

[edited to add reference to Bair op-ed  3:22 pm 022713]

Back when William Proxmire was a senator and the Senate sometimes actually tried to deal with facts rather than convenient or mythological fictions, Proximre created something he called The Golden Fleece Award to highlight instances of wasteful government spending.

Now, let it be said early on that waste is rather like beauty--its recognition rests in the eye of the beholder.  The Tea Party neocons see waste in most funding for science, whereas most intellectuals, academics and others see that as investment in the future--especially exploratory, speculative science testing the fringes of theory--which serves the public good.  Similarly, most of the "deficit hawk" crowd see waste in government safety net programs, or programs that might (if the conditions now were to last for 75 years) create a large obligation in the future, but don't see waste in military expenditures or 100 years of subsidies for multinational giants like Big Oil and Big Pharma.  Furthermore, the "starve the beast" crowd want to maintain most of the programs that give the plutocracy a powerful edge in the socio-economic world that tax so directly influences, while wanting to eliminate or substantially reduce most of the programs that barely offer some opportunity to the peasants whose productivity is usually the source of the economic gains of the plutocrats.

ASIDE:  remember that the deficit hawk crowd overlaps a good deal with the "starve the beast" crowd, which overlaps as well with the "starve the poor"  crowd.  The deficit hawk crowd thinks deficits are awful when Democratic programs create them (but generally didn't squawk at the upwardly redistributionist tax cut programs of the Bush years, or the constantly creeping upwards military-industrial subsidies, etc.).  The "starve the beast" crowd thinks most government programs that serve the public good rather than paving the way for the rich to get richer are bad.  And the "starve the poor" crowd condemn all except the most meager social justice and safety net programs on the grounds that they are paternalistic and keep "the 47%" from exercising personal responsibility.  Generally speaking, all of the above tend to disfavor downwardly redistributionist programs as "socialism" but favor upwardly redistributionist programs as "investments in the future" or  "just plain fair" or "job creating" or traditional (and on and on).

That said, pointing out programs on which considerable money is spent without a showing of likelihood of success at a reasonably beneficial goal is often worthwhile. 

The Golden Fleece awards have been carried forward by Taxpayers for Common Sense, a 501(c)(3) organization that protrays itself as a "non-partisan budget watchdog serving as an independent voice for American taxpayers [with a] mission ... to achieve a government that spends taxpayer dollars responsibly and operates within its means."  It's goal is to "increase transparency, expose and eliminate wasteful and corrupts subsidies, earmarks, and corporate welfare, and hold decision makers accountable."  (from emailed release about the Golden Fleece award). 

More transparency, less corrupt subsidies, less corporate welfare, and more accountability are all important.  As Sheila C. Bair (former head of the FDIC from 2006 to 2011) put it in an op-ed in today's New York Times:

The yawning gap between rich and poor has been growing since the 1970s and reached a 90-year peak in 2007, just before the financial crisis.  The Great Recession narrowed the gap a bit, but now, once again, the richest Americans are vacuuming up what wealth is out there, a trend that Mr. [Emmanuel Saez, UC Berkeley economist] expects to continue.

...I fear that government actions, not merit, have fueled these extremes in income distribution through taxpayer bailouts, central-bank-engineered financial asset bubbles and unjustified tax breaks that favor the rich. ...

Skewing income toward the upper, upper class hurts our economy because the rich tend to sit on their money--unlike lower-and middle-income people. ... .[M]ore fundamentally, it cuts against everything our country  and my party stand for.  government's role shouldn't be to rig the game in favor of 'the haves' but to make sure 'the have-nots' are given a fair shot.

So the Golden Fleece target is worth considering. They picked "Department of Energy for Federal Spending on Small MOdular Reactors."  This is the nuclear-reactor-in-every-basement idea, for which another half billion dollars (in addition to $100 million already provided) in corporate welfare is planned.  The corporations, not the federal government, will own the R&D and licensing rights.  The government is, in other words, getting fleeced.

The federal government is in the process of wasting more than half a billion dollars to pay large, profitable companies for what should be their own expenses for research & development (R&D) and licensing related to “small modular reactors” (SMRs), which would be about a third of the size or less of today’s large nuclear reactors.

...

[Autumn Hanna, at Taxpayers for Common sense, said,] "Unfortunately, these technologies have an equally long tradition of expensive failure. If the industry believes in small modular reactors and a reactor in every backyard – great – but don’t expect the taxpayer to pick up the tab.”

The federal government already paid for a version of SMR R&D when small reactors were designed for the U.S. Navy’s nuclear submarine fleet. Now some highly profitable companies – including Babcock & Wilcox, Westinghouse, Holtec International, and Fluor Corporation -- are at the federal trough for another round of federal support for small modular reactors that could go into suburban American neighborhoods.  Id. (TCS release)

 This kind of tax expenditure subsidy for major corporations is just another example of corporatism in action in today's economy, often as part of a tax code that is rigged to favor the rich, from the preferential treatment of capital gains to the preferential treatment of fund managers' "carried interest" compensation income; from the subsidies provided for hugely profitable industries like oil and gas, pharmaceuticals, IT and real estate, to the subsidies provided to the rich through charitable contribution deductions for amounts they never invested.  It is a part of the growth of plutocracy and inequality, as big corporations, their managers and owners garner most of the productivity gains and use their lobbying prowess to ensure that they also garner incredible amounts of unnecessary financial support from the federal government through direct subsidies (Agribusiness payments to corporate farmers) or tax expenditure subsidies (percentage depletion allowance and "domestic manufacturing deduction" and R&D credit and active financing exception and the allowance of offshore captive reinsurance companies, etc.).  All this amounts to redistribution upwards to the wealthy and the multinational corporations that they mostly own--amounts funded by ordinary taxpayers.

 

 

Related articles

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TVA signs deal to explore small modular reactor

A Memory of Senator Proxmire

Westinghouse, others have big plans for mini reactors

The Inequality Gap

More on the Threat to Social Security and Medicare from the so-called "Fiscal Cliff"

In several posts recently I have discussed the harmful demands the right is engaging in related to the so-called "fiscal cliff" created by the original Bush tax cuts (set to sunset en masse), the artificial debt ceiling (used by the GOP to exact promises of spending cuts during a recession along with extension of unneeded tax cuts for the rich), and the ill-conceived notion that the U.S. military should continue to be funded at dangerously high levels that (i) ensure that the military-industrial complex will find a war or quasi-war in which to engage their newest toys while (ii) sucking resources from public infrastructure projects and education that are vitally needed to sustain our economy.  See, e.g., The GOP's extortion demands: cut Social Security or we'll shoot; If the Dems got backbone; Is it a fiscal cliff or merely a bump in the road; We face an 'austerity crisis' not a 'fiscal cliff. 

A. The Explanation.

At least the national media and a slew of bloggers are beginning to provide some background information to ordinary Americans on just what is driving the national discussion of "fiscal cliffs" and "austerity" demands.  See, e.g., Richard Rubin & Heidi Przybyla, Tax Pledges Confound Math as Obama Seeks Deal with Republicans, Bloomberg.com (Nov. 16, 2012) (noting that "The $607 billion fiscal cliff is the combination of tax increases and spending cuts that will take effect in January if Congress doesn’t act" and characterizing the positions of the parties as follows: "Republicans want to extend expiring tax cuts for all income levels and are demanding an overhaul in 2013 of entitlement programs and the tax code" while "Obama wants $1.6 trillion in higher taxes for top earners over the next decade, achieved through a combination of limits on breaks and higher tax rates on ordinary income, capital gains, dividends and estates"); Jackie Calmes, Demystifying the Fiscal Impasse that is Vexing Washington, New York Times (Nov. 16, 2012), at A19 (the online article is dated Nov. 15). 

[A] slew of tax cuts — $400 billion for 2013 — expire on Dec. 31: All of the Bush-era rate reductions; smaller tax cuts that periodically expire for businesses and individuals; and the 2-percentage-point cut in payroll taxes that Mr. Obama pushed in 2010....  Also, 28 million taxpayers — about one in five, all middle- to upper-income — would have to pay the alternative minimum tax in 2012.... That is because Congress has failed to pass an inflation adjustment....

***

An emergency unemployment-compensation program is expiring, which would save $26 billion but end payments to millions of Americans who remain jobless and have exhausted state tax benefits.

Medicare payments to doctors would be reduced 27 percent, or $11 billion, because this year Congress has not passed the usual so-called 'doc fix' to block the cuts....

The biggest cut would be $65 billion, enacted across the board for most federal programs over the last nine months of fiscal year 2013, from January through September.  This cut, known as the sequester, was mandated by an August 2011 budget deal between [President] Obama and Congress that ended [the GOP] standoff over raising the nation's debt limit.   Demystifying the Fiscal Impasse that is Vexing Washington

It is surely accurate that our still-weak economy would do better if we do not hit it too hard with decreases in government spending--especially decreases to government spending that supports the most vulnerable amongst us who need unemployment support in order to provide the basic necessities.  Similarly, it is surely true that some of the Bush tax cuts and the Obama payroll tax reduction are still vitally important to those in the lower 60% or so of the income distribution because of the slow growth in the economy.  We will want to find some resolution to the situation that accommodates the need to avoid a harmful austerity approach.

So the Times' explanation of the components of the so-called "fiscal cliff" is okay.  And it is reasonable in noting that the situation is currently "vexing" to Washington.  Similarly, the Bloomberg article succinctly characterizes the clear poles of the Democratic and Republican positions--a Democratic insistence on higher taxes paid by the rich, and a Republican insistence on so-called "tax reform" and spending cuts, aimed in particular at the earned benefit and safety net programs of Social Security, Medicare, and Medicaid. 

B. A Grand Bargain or a Devil's Bargain--How the Heck Did Social Security Even Get In the Picture?

Where the Times article fails is in its discussion of the "reasons"  for excessive worry about the "fiscal cliff" (if one can really call the GOP recalcitrance to immediately pass an extension of at least a good portion of the Bush tax cuts for individual taxpayers in the true middle class any form of reason).  

The Times article asserts that the "main disagreement" between Dems and Republicans is merely the question of extending the Bush tax rates for the top 2 percent of taxpayers.  That is a considerable understatement, one that results in part from the way the media reduces complex issues to easily retained soundbites, in that it ignores the considerable disagreement about whether and to what extent there should be any changes at all to the various earned benefit programs. 

The  article author appears to operate on an unstated assumption that because President Obama seemed ready to trade off changes in Social Security, Medicare and Medicaid benefits for higher taxes on the very richest of the rich in August of 2011, he will still enter into such a "Grand Bargain" to avoid the so-called "fiscal cliff."  Progressives hope, at least, that Obama will not fall prey to those same conclusions: Obama is now in a position of considerable leverage, and he must recognize that he cannot allow the Democrats to be extorted into a Devil's Bargain to reduce Social Security, Medicaid, and Medicare benefits in exchange for the pittance of slightly higher taxes on the upper crust.

The article goes even further astray at the end with its label of a "two-part deal" as the "best-case outcome".  It claims that "[m]any budget experts and economists are hoping for a two-part deal.  The first part would extend many of the tax cuts and repeal the automatic spending cuts to avert the changes scheduled after Jan. 1.  But it would be contingent on the second part: a framework for reducing projected long-term deficits by overhauling both the tax code--to raise revenues--and entitlement programs--chiefly Medicare and Medicaid, whose rising costs in an aging population are unsustainable."  Id.

Of course, here the "many" is simply put out there without any context, so one can't challenge the statement as accurate or inaccurate.  The right-wing has a stable of market fundamentalist economists who want to see earned benefit programs reduced, and there are certainly the Blue-Dog Dems and a number of others (like the Bowles Simpson group) who go along with that with little questioning of the ultimate negative impact on quality of life and decency of those determinations.  Overall, there is considerable parroting of the right-wing rhetoric that suggests that these vitally important programs have to be overhauled, rather than recognizing that it is the factors that lead to ever-increasing costs for medical care in the United States that must be addressed.  And it mistakenly suggests that there is a consensus in that regard. This is a perfect example of the way today's journalists buy into the rhetoric that is promoted (at great expense) without questioning the fundamental presuppositions underlying it.  In fact, the sequester deal did not touch Social Security, Medicare and Medicaid because there was no consensus that these programs should be reduced.  And the election results demonstrate that there is no consensus now that these program benefits must be reduced, though there is likely a consensus that health care costs in this country are increasing well beyond what is reasonable.  It is absolutely critical that the distinction be made.

So let's take these issues into consideration here.

C. Thinking about the two key components of the so-called "fiscal cliff"--tax cuts and spending cuts.

1. The Bush tax cuts, job creators, and uncertainty

The right has, not unexpectedly, argued that not extending all of the tax cuts--including those that amount to significant dollars for the wealthiest upper crust--will create a dire situation since, the right argues, the wealthy are the "job creators".  There is no empirical evidence supporting the idea that tax cuts for the upper crust do anything to create jobs: most jobs are created by small businesses, and those with incomes above $250,000 make up only about 3% of small businesses. 

Others argue that the uncertainty of letting the Bush tax cuts expire on December 31 is itself a dire blow to the economy.  But in the same breath, the media and most members of the Democratic and Republican parties acknowledge that they do not disagree on the need to extend the tax cuts for the middle income group at this time--the Democrats because they recognize that the tax cuts are still needed at a time of continuing slow growth out of the Great Recession caused by the profligate regulatory and tax policies of the Bush years, and the GOP because they recognize that they have no opportunity for an electoral majority if they continue to ignore the middle class. 

Thus,  savvy political advisers note that allowing the Bush tax cuts to expire and then enacting judiciously selected tax cuts targeted at the middle class (perhaps similar to the Bush tax cuts for the lower income groups or perhaps more carefully selected and without the many corporate tax giveaways) are fairly sure things, so that the arguments from uncertainty reduce to the same-old right-wing scare tactics.

2. The sequester, military spending, health care costs, and the importance of Social Security, Medicare, and Medicaid

Some conclude that neither side wants the sequester, with its domestic spending cuts and military cost-cutting, to go into place.  This, too, may be incorrect and overly simplistic. 

Many progressives recognized that we have a substantial imbalance in spending, in which we neglect public infrastructure (roads, bridges, public transportation especially rail and inter-and intra-city rail) and human capital development (funding for public education and for basic research) while pushing money at the military-industrial complex.  The latter step merely encourages the military to find ways to use the military investment it makes--i.e., more money essentially fosters war-mongering simply by providing plenty of the tools to carry it out through exorbitant expenditures on the military.  Letting the sequester take place is probably the only way that our dysfunctional Congress--with far-right-wing/Tea Party dominance in the House and the minority-control rule through the filibuster in the Senate--will be able to undo the disastrous emphasis on military spending above everything else that began with Reaganomics.  

Accordingly, a better course might be to let the sequester take hold, too, and then selectively undo cuts that jeopardize sound government--such as cuts to research, centers for disease control, public transportation, public infrastructure, education, and funding of public pension obligations.  Surely the right recognizes that Americans are not happy when lax regulation results in deaths from medical care because Congress was lobbied out of regulating compounding pharmacies or deaths from bridge collapse because Congress refused to spend sufficiently on upgrading our antique transportation infrastructure or continually falling behind in research on Alzheimers and cancer and the many other modern afflictions because Congress has been so stingy with federal funds supporting basic research at our research universities.

OF course, we know from the election that today's GOP sees no problem with cuts to various domestic programs that the Dems (and many ordinary Americans) hold dear--the right's admitted goal since Reagan has been to reduce the size of government, on the ill-founded belief in market fundamentalism that private markets can do everything better.  

But we have years of evidence that disproves that belief, and progressives must start publicizing the absurdity of the right's claims about market fundamentalism and the right's denials about basic scientific theory.  Climate change is real, and investments will be required to protect our great cities.  Social Security is not bankrupt, and there is no reason that it cannot continue for years (even indefinitely) without reducing benefits.  Markets like medical care simply don't work without governmental intervention because Big Pharma, Big Insurance, and Big Med (especially for-profit hospitals, nursing homes but also too highly compensated doctors combined with too lowly compensated aides and other assistants) exercise near-monolithic control of access and pricing, rendering the health care "market" dysfunctional, and government intervention will be required to create health-care delivery systems that serve the people. 

(Even those who ascribe to Milt Friedman's views of how markets work--views which in my view are based on unrealistic and overly simplistic assumptions that leave out most of the truth of human behavior in order to arrive at neatly mathematical formulas--recognize problems with the health care market where physicians operate in a structure of monopolistic competition.  In Capitalism and Freedom, Friedman noted that state licensing acts as a barrier to entry that gives physicians considerable market control, thus resulting in rent profits.  Friedman's market fundamentalism solution would be to allow anyone to practice medicine without a license, thus creating consumer "choice."  Query whether anyone without considerable wealth would actually prefer a return to those "quack" days of frontier medicine where such a market existed or would rather have a version of today's regulated system of health care professionals with both affordability and competence. I argue that the latter is both preferable and attainable.  See below.)

The following provides some of the factual evidence for the importance of government intervention in the medical care market--European and Canadian health care, which are generally forms of government single-payer or single-payer/single-provider care, and Medicare, which is a form of government single-payer care, are both considerably less costly and substantially more universal in coverage than the standard, private market U.S. medical care model.   See, e.g., the OECD's comparative statistics on medical care provision in the US compared to OECD countries and Canada, available here (see statistical spreadsheet here).

Total Healh Care Spending Per Person, 2010: US (8233); OECD avg (3268); CA (4445)

Total Health Care Spending* as Share of GDP, 2010: US (17.6); OECD avg (9.5); CA (11.4)

Pharmaceutical Expenditure* Per Person, 2010: US (983); OECD avg (496); CA (741)

Practicing Physicians Per 1000 Population, 2010: US (2.4); OECD avg (3.1); CA (2.4)

Practicing Nurses Per 1000 Population, 2010: US (11.0); OECD avg (8.7); CA (9.3)

Physician Consultations Per Person, 2010: US (3.9); OECD (6.4); CA (5.5)

Medical Graduates Per 100000 Population, 2010: US (6.6); OECD (10.3); CA (7.2)

*expressed in dollars adjusted for purchasing power parities (rates of currency conversion that equalise the cost of a given 'basket' of goods and services in different countries)

The U.S. medical care market's high costs are attributable to a variety of factors, but perhaps the most significant is the potential for "rent" profits to Big Med, Big Pharm, and Big Insurance. 

Note that the right's "reaganomics" rhetoric has been that we have to reduce the size of government by cutting government costs specifically for the social justice programs that serve a majority of our citizens, particularly in their old age.  The right's most important priority for reductions in government services, that is, are reductions to the earned benefit programs that it calls "entitlements" (a term that it does not extend to the various tax expenditures that provide all kinds of gravy for the upper crust and multinational corporations like Big Oil, Big Pharma, Big Banks, etc.).  The right wants to reduce the deficit on the hides of the poor, the elderly and those who have little besides Social Security and Medicare for retirement (because of their reasonable reliance on their availability to buffer the viscisitudes of private markets in their old age).  So the right proposes either privatizing ("voucherizing" Medicare; "optionalizing" Social Security) or shifting programs to the States (where reductions in Medicaid funding for the poor can be hidden more easily) and/or reducing benefits by increasing the age for eligibility and decreasing potential payments.  In other words, the right treats a problem caused by the unduly high costs of a wacky, quasi-monopolistic, market-based medical care system as best solved not by bringing the costs down the way every other civilized peer nation has done, but instead by preventing the majority of Americans from having access to decent medical care if they are poor or old and dying or physically handicapped or otherwise unable to afford private insurance.

 *****

After all, as Robert Reich argues, the "fiscal cliff" and "looming budget deficits" aren't the worst of our problems. 

The central problem of our economy is widening inequality. It's reducing the purchasing power of the vast middle class on which job growth depends, and turning the economy into a speculative casino for multimillionaires and billionaires.  It's also undermining our ability to turn the economy around, as those millionaires and billionaires subsidize politicians who refuse to raise taxes on the wealthy and seek to cut spending critical to the middle class and the poor.  Robert Reich, Stop income inequality!, Salon.com (Nov. 15, 2012) (formatting changed).

The more I think about this, the more I am convinced that, as Kenneth Thomas says, Democrats Should Just Sit Back and Ride Over the Fiscal Cliff (in a post at Middle Class Political Economist, republished on BusinessInsider.com, here). 

[The fiscal cliff] is the combination of spending cuts and tax increases set to take place on January 1 based on several different laws.  Estimates of the consequences run as high as $800 billion next year, or 5.2% of the country's $15.29 trillion gross domestic product in 2011.  Yes, that would mean a recession, with obvious consequences for the middle class.  But this is only true if we did nothing after January 1, and that's not going to happen.  Id.

Base Broadening as a means of tax reform

The Congressional Research Service recently released a report by Jane Gravelle and Tom Hungerford on The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening (Mar. 12, 2012).  Tax Base Broadening is the proposal often put forward by those who say we can and should lower rates across the board (also reducing progressivity by limiting the number of rate brackets to two or three) and pay for it by removing some of the tax expenditures and subsidies in the tax system, such as the home mortgage loan interest deduction or certain health benefit provisions.

IHere's an excerpt from the summary of the report.

Congressional interest in a major reform of the individual income tax that would broaden the base and use the additional tax revenues to lower rates and/or reduce the deficit has increased. ...  One way to broaden the tax base is to eliminate or reduce tax expenditures, which have been in the tax code since the passage of the progressive income tax in 1913. An understanding of four complex issues surrounding tax expenditures is necessary for an informed debate over broadening the tax base. First, tax expenditures affect the economic behavior of taxpayers (efficiency effects). Second, changing tax expenditures will change the distribution of tax benefits, and the distribution of after-tax income (equity effects). Third, changes to tax expenditures could change
the administrative burdens on taxpayers and the Internal Revenue Service (IRS). Lastly, many tax expenditures are popular among taxpayers and voters. Each one of these issues presents challenges to broadening the tax base, which could be difficult to overcome.

There are over 200 separate tax expenditures, which are projected to total over $1.1 trillion in FY2014. The revenue loss of all tax expenditures, however, is highly concentrated in a relatively small number—the largest 20 tax expenditures account for 90% of the total revenue loss of all tax expenditures. This amount is equivalent to 74% of the total FY2014 revenue from individual income taxes....

[T]ax expenditures are divided into seven major categories: saving, business investment, consumption, owner-occupied housing (which is a combination of an investment choice and a consumption choice), labor supply, government programs (which in many cases would have no behavioral effects but are simply income transfers), and a category termed structural (which provides benefits based on family circumstances rather than affecting behavior). 

The analysis in this report suggests there are impediments to base broadening by eliminating or reducing tax expenditures, because they are viewed as serving an important purpose, are important for distributional reasons, are technically difficult to change, or are broadly used by the public and quite popular. Given the barriers to eliminating or reducing most tax expenditures, it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening. This amount could have a significant effect on reducing the FY2014 budget deficit—reducing the projected $345 billion deficit by 30% to 43%. This additional tax revenue, however, is equivalent to about 6% to 9% of projected FY2014 individual income tax revenue, and, consequently, would not allow for significant reductions in tax rates (about a one or
two percentage point reduction for each bracket).

The conclusion of the report seems realistic given the current dysfunctionality of Congress--it would be highly unlikely that core reforms could be made to raise sufficient revenues to support a large rate reduction, though some elimination of problematic tax expenditures would be a good move towards reducing our structural budget deficits.  Let's eliminate the long-term subsidies for the extractive industries that have given subsidized profits for oil and gas barons and get rid of other provisions that haven't served the purpose claimed for them, like the research & experimentation credit (any business can deduct real research expenses; the credit is just a way to cut corporate taxes for heavily lobbying industries like Big Pharma, IT and others).  But let's acknowledge that the current  right-wing fad idea to reduce tax rates even more and pretend to pay for it with uny base broadening isn't going to work.

I find base broadening proposals for tax policy reform amiss for three other important reasons. 

• First, we already collect less tax as a percent of GDP than historically; thus,we need to raise more tax revenue rather than maintain revenue neutrality with the current too-low tax system, especially by increasing the take from corporate taxes (the 'tax shelter problem') and by reducing the ability of service partners to game the system (the 'carried interest' problem). 
• Second, most ideas for base broadening and rate lowering end up resulting in more rate lowering than base broadening, because the lobbyists get to work immediately on reinstating the provisions that have been eliminated to broaden the base while simultaneously arguing that letting the rates go back up would be a growth-killing tax increase.  Accordingly, base broadening won't work unless there is a firm will to maintain a broader base and take the political flack that the lobbyists will release.  This Congress isn't anywhere near having that kind of will, and if it does, it is more likely to reduce important social programs (Medicare, health care, education, etc.) and leave the notoriously inefficient subsidies for oil and gas, Big Pharma and other lobby-hard favorites in place.
• Third, much of the assumptions about tax efficiency are questionable--we actually understand the interactive effects of the tax system very poorly, and don't know when a tax change will affect a person's decisions to work, not work, spend, not spend, or otherwise respond to the tax change.  So it is more likely that ideology will drive the decisions, rather than an unbiased approach founded on reasonable research to determine which provisions really work to do what they were claimed to be enacted to accomplish.  And given the current lopsided representation of right-wingers in Congress (compared to the population at large), that means that right-wing rhetoric rather than considered policy determinations will likely drive any "base broadening" tax reform that does take place.
• Fourth, many of those who argue for base broadening may be planning to use this as one more way to reduce or eliminate spending on important safety net provisions like Medicare, Social Security, unemployment compensation and others.

 So my preferred reform involves a few simple ideas:  1) let the Bush tax cuts expire as they are slated to do; 2) reinstate the estate tax at the 2001 rates, except with a $2 million exemption that is indexed to inflation; and 3) eliminate the preferential rate for capital gains and all of the provisions in the Code that deal with capital gains rates; and then 4) wait a while till the system is back in better balance and do tax the right way--ask what we want our government to spend money on, figure out how much money that will take to do it, and then set the tax system so that it collects the right amount of money.

Graphs Show It Clearly--the richest are much richer and most of us are poorer

David Cay Johnston has employed a couple of key graphic images that tell a significant story about the way that US laws have favored the rich--including tax administrative procedures that have reduced real audits of the rich and tax laws that have cut the top rates significantly and cut the rates on the "favorite" form of income of the rich to extraordinarily low rates.  See David Cay Johnston, The rich get richer, reuters (Mar. 15, 2012) (noting that the figures he uses here, in 2010 dollars, are from an analysis of IRS data by Emmanuel Saez and Thomas Piketty). [hat tip Francine Lipmann and Tax Prof]

The 1934 economic rebound was widely shared, with strong income gains for the vast majority, the bottom 90 percent.

In 2010, we saw the opposite as the vast majority lost ground. National income gained overall in 2010, but all of the gains were among the top 10 percent. Even within those 15.6 million households, the gains were extraordinarily concentrated among the super-rich, the top one percent of the top one percent.

So while the Great Depression acted as a leveler, the cascading impact of tax and other fiscal policies that are extraordinarily favorable to the rich was little influenced by the Great Recession.  Here're the two telling graphs from the article.

Johnston notes that the story in numbers for adjusted gross income is discouraging: 

Saez and Piketty show that the vast majority’s average adjusted gross income, of which wages are just a part, was $29,840 in 2010. That was down $127 from 2009 and down $4,842 from 2000.

Most shocking? The average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966.

At the top, the super-rich saw their 2010 average income grow by $4.2 million over 2009 to $23.8 million. Compared to 1966 their income was up on average by $18.7 million per taxpayer.

The graphic illustration shows just how much the inequality we see today is from the richest of the rich getting an indecent proportion of income growth. 

Is this a problem that needs fixing?  Yes, it clearly is.  We have long recognized the importance of a society where everyone takes part and everyone has at least the minimum essentials for a decent life and a chance for improvement. 

A society where a very few "elite" at the top garner all the benefits of the system and more and more of the income for themselves is not a sustainable society--the top becomes predatory, willing to take gains no matter what the cost to everyone else.  It is the kind of attitude that many who are familiar with Wall Street banks have criticized as endemic to Wall Street culture--and one that was revealed even more starkly by the resignation from Goldman of a star banker who publicly criticized the current culture at Goldman that believes in profits for the firm at the sacrifice of the good of the customer.  See Greg Smith, Why I am Leaving Goldman Sachs, New York Times Op-Ed (Mar. 14, 2012).  Shareholders obviously agree with Smith that the "profit for the firm above care of the client" mentality is wrong.  See Christine Harper, Goldman Roiled by OpEd Loses 2.2 Billion for Shareholders, Bloomberg (Mar. 15, 2012). 

[Goldman is worried--I got a release from a PR firm suggesting that Goldman's profit-making is a boon to the economy and gives its clients great trust in the firm.  I read it and thought--hmm, misses the point.  Smith isn't condemning profit-making per se.  He is condemning profit-making at all costs, and in particular the "greed is good" type of profit-making that creates conflicts of interest with the client that is purportedly being served but would as soon eat a client as eat a steak, if money could be made for the firm (and the trader's bonus) that way.]

If we want the kind of society that gives everyone a chance to have a decent education, we have to quit running down public schools and diverting public monies to support private religious schools.   Hold schools accountable, but quit the wasteful focus on testing and assessment.  Do a little assessment and a lot more teaching.

If we want a more equal society, then we have to change our tax laws so that they don't favor the rich over everybody else.  Reduce the interest deduction, so that leveraged buyouts aren't a way to take a stable working company, make a huge profit by borrowing, and then dump it (either in bankruptcy or out of it, but nonetheless yoked with the debt that got the private equity firm rich).  Get rid of provisions that are primarily beneficial to the wealthy--reinstate a hefty estate tax, eliminate the preferential rate on capital gains, reinstate the phase out of deductions at high income levels, increase the top income tax rate (let the Bush tax cuts lapse in toto or at least for the top earners), phase out the accelerated depreciation schedules, bonus depreciation and expensing provisions, and otherwise return our tax system to a saner progressive model that can support the important basic research at universities and basic public infrastructure development that are the real keys to economic growth.

The right has bamboozled the public with its tiresome but endless class warfare rhetoric pushing corporatist policies that claim that tax cuts for wealthy corporations and wealthy individuals are the way to boost growth and help the majority of Americans have good jobs and decent wages.  It's a lie.  The way to do that is by moving to a more progressive tax system and providing more government funding for basic research (NIH, NSF, etc.) and for public infrastructure (mass transportation, rails throughout America and its inner cities, urban development).  
 

The Budget Crisis: OMB Watch's Analysis of Ryan's path to mediocrity proposal

OMB Watch provides another progressive perspective on the ideology driving the Ryan budget proposal.

Like all congressional budget resolutions, House Budget Committee Chair Paul Ryan's (R-WI) fiscal year (FY) 2012 Budget Resolution is not simply a chart of preferred spending and revenue levels, it's also a political statement guided by ideology. And Ryan's ideology demands that the federal government divert ever increasing sums from middle- and low-income families to big business and high-income families.

Importantly, they note that the call for cuts to programs that serve the more vulnerable amongst us is justified by an arbitrary decision to cap federal revenues at a level guaranteed to create deficits unless there are significant spending cuts.  This is the "starve the beast" idea at its culmination.

On the revenue side, Ryan's budget revolves around locking down federal revenues to below 19 percent of gross domestic product (GDP). While this number is the average for the past 30 years, it has consistently lagged federal spending, resulting in the steep deficits we see today. In order to maintain this deficit-inducing level, Ryan's plan calls for cutting income taxes for high-income earners from today's top marginal rate of 35 percent to 25 percent. (Interestingly, the last time we saw federal budget surpluses, between 1998 and 2001, the top marginal rate was 39.6 percent.) Ryan plans a similar giveaway to corporations, slashing the corporate tax rate from 35 percent to 25 percent.

Pay-fors for the big tax cuts to Big Business and the wealthy?  Well, those should come partly from those pesky large subsidies in the Code, right?  But Ryan avoids naming any of those.   My guess is that he knows the GOP isn't serious about eliminating large tax expenditures that primarily benefit the wealthy and Big Business, such as (i) active financing exception for overseas finance subs, (ii) deferral for multinational corporations' active business income, (iii) mortgage interest deduction that primarily gives huge tax cuts to elites with million-dollar homes, (iv) charitable contribution deduction that lets the wealthy donate stock and take a deduction for its value rather than for what they actually paid for it and have invested in it, etc..  And besides, even if he thought that the GOP might have to eliminate a very few of those nice juicy wealthy-friendly provisions, he isn't about to name them and then get a well-funded lobbying group working against him on this.  The GOP has benefitted much too much from having those well-heeled lobbying groups for Big Business and wealthy families (like the Walton heirs) on their side, along with the right-wing purported "think" tanks like Cato, American Enterprise, Tax Foundation, etc.....

The proposal also indicates that "large" tax expenditures should be eliminated to pay for tax cuts for the rich. It states that "deductions, credits and special carve-outs" in the corporate tax code should be modified to pay for tax cuts for businesses. Notably left out from the discussion of removing these tax code "distortions" is any identification of which tax expenditures Congress should nix. Far from being bold, Ryan's proposal ducks these critical questions, shifting the heavy lifting and political daring to the tax writing committees, staving off attacks from powerful special interests that will no doubt flex their campaign contribution muscles to retain their federal largesse.

Not really cutting the rich doesn't mean that the GOP won't carry through with cutting the vulnerable.  Ryan is quite willing to list specifics here--after all, the poor and the young and the unemployed and the underemployed don't have much way to work together to have their voices heard (especially in those states where the GOP's anti-union drive is squelching unions).

In exchange for these tax cuts, spending for the old, the young, the poor, and the sick would be lopped off by two-thirds. Ryan laments the notion that the current social safety net is a "hammock, lulling able-bodied citizens into lives of complacency and dependency," while worrying about Medicaid health care providers "fleeing the system to escape endless red tape and underpayments." His solution is to apply the same failed "get-back-to-work-you-lazy-bum" policy that ended the old income assistance program and created Temporary Assistance for Needy Families (TANF).

In fact, the welfare reform of the 1990s that is approvingly cited in the budget plan did nothing to curtail poverty, and it only managed to reduce welfare rolls by forcing low-income parents to take low-wage jobs A similar approach to health care, nutrition, and housing assistance will likely result in only cutting families off from these vital programs when they need it the most.

Headlining the section of Ryan's proposals to "strengthen the social safety" are $771 billion in Medicaid cuts. Ryan's plan would convert this low-income health care program from a system in which states and the federal government share costs into a block grant program that would allow states to abandon the eligibility and benefit guidelines currently in place. Ryan argues that relieving states of this "one-size-fits-all" approach would result in significant cost savings, allowing states to pay for higher-quality care. But this is just window dressing beautifying almost $800 billion in health care cuts to low-income families that will ultimately result in poorer health outcomes for millions of people.

Nutrition and housing programs are also prominently featured on Ryan's chopping block. Ryan is clear that far too many people have access to the Supplemental Nutrition Assistance Program (SNAP, formerly "Food Stamps") and housing assistance. Applying a circular logic, Ryan insists that without kicking people out of these programs, the expenditures will be so great that people will have to be kicked out of these programs. Thus, he is just doing what will have to be done eventually. Yet cuts to health care, nutrition, and housing for low-income families is the bedrock on which Ryan builds his tax-cutting and corporate support programs.

OMB Watch points out that Ryan's plan is really a "two-fer"--it manages to take away from the vulnerable (the young, the poor, the elderly) even while giving to Big Business by letting corporations skim off the cream from the federal funding formerly dedicated to the vulnerable.  Here's where the Reagonomics mantra of privatization comes in--tax cuts with privatization is just another way of saying let's convert this funding for the poor into a subsidy for Big Business.

Ryan's plan was formulated with the goal of allowing private corporations greater access to federal funds. At the front of this effort is a form of privatizating Medicare. He calls for use of “premium supports,” which means Medicare would be changed from an entitlement with defined benefits to an insurance system in which the government provides a fixed sum of money to individuals to buy coverage. The phrase “premium supports” is used because “vouchers” doesn’t poll very well today. But a rose by any other name is still a rose. By giving vouchers to seniors to pay for their own health care, Ryan's plan would insert a middleman between patients and health care providers, giving health insurance companies the ability to skim untold billions in federal health care spending.

Ryan's plan would also voucherize federal jobs programs by doing away with them and creating a "career scholarship" program that would have the effect of giving for-profit colleges a bigger bite of the national education and training budget. And although having little, if any, impact on the budget, Ryan's proposal calls for gutting the recently passed Wall Street reform – a boon to big banks who loathe the legislation – and removing sensible oil drilling regulations despite last year's BP disaster in the Gulf of Mexico.

But if you think that this means an open look at the way we waste billions annually on militarization (one of the other four cornerstones of  privatization, deregulation, militarization and tax cuts  that make up the GOP's radical reagonomic agenda for continuing the devastation of the American economy that began when Reagan took office), think again.  Eisenhower's view that we had to maintain a military-industrial complex but should be very wary of its power has been translated with reaganomics into the view that we should constantly feed the military-industrial complex because it is the friend of the rich and Big Business, and we need never hold it accountable for anything. 

Security spending, however, would go untouched compared to President Obama's budget request, increasing compared to the Congressional Budget Office (CBO) baseline. This aspect of the budget proposal makes it a rarity among the many floating around Washington – the president's deficit commission plan is clear in its call for "equal percentage cuts from both [defense and non-defense]". The Pentagon awards hundreds of billions of contracts to private corporations every year. Cuts to the Pentagon's budget as deep as those to non-security programs would have significant impacts on the bottom lines of the nation's biggest businesses. The Ryan budget keeps the taps wide open and continues to pump billions of dollars of federal funds to these contractors.

So the Ryan budget is a disaster.

Despite claims to the contrary, Ryan's proposal would increase the debt in its first ten years. According to the CBO's analysis of Ryan's plan, in the first ten years after the enactment of his proposal, debt held by the public would actually increase compared to doing nothing. Under the hood of this clunker of a plan are draconian cuts to non-security spending that are less than the tax cuts that would be handed out to the rich and big businesses. The real cost savings in Ryan's plan come after the ten-year budget window that budget resolutions typically address. In 2022, the Medicare voucher system comes into effect, which essentially shifts health care costs from the government to senior citizens. In short, even with drastic spending reductions, the first ten years of Ryan's budget have no positive fiscal impact, while the out-years look improved because of radical Medicare cuts.

This is the budget of Big Business and the anti-government crowd. Ryan's budget doesn't dial back the laundry list of national priorities so much as it simply hacks away at the amount of resources devoted to accomplishing them. And in areas where he can, he opens them up to private corporations to skim funds as they flow from the Treasury to the provisioning of services. For what's left of programs operated by the federal government, Ryan's budget leaves a fraction of the funds necessary to implement an effective social safety net, protect the public, and invest in the economy as businesses and the wealthy contribute less.

Post-Election Blues: the GOP, Dems, and Corporatism

One of the worrisome results of the 2010 mid-term elections is the increasingly radical fringe that is now installed in the House (and in state houses and in some Senate seats).  Witness the possible head of the House Energy and Commerce Committee, Shimkus of Illinois (Republican), who has asserted that it's a waste of time and effort to worry about global warming, because he happens to believe that God has promised not to flood Earth and so it just won't happen.  See Stromberg, In the GOP's House, God Won't Allow Global Warming?, Washington Post, PostPartisan (Nov. 12 2010).  (This is like the wishful thinking that the biggest oil spill in history hasn't really done any harm to the oceans--ignoring, of course, our inability to measure the impact in most cases, our ignorance of the long-term effect of the dispersant chemicals used, and our willful blindness to existing problems on beachers, in marshes and in the warmer waters near the mainland.)  Instead, Shimkus and his ilk will likely try to use the House's investigative powers to put a stop to sound regulatory advances at the Environmental Protection Agency and other departments.  

Meanwhile, the irreality train of Sarah Palin's influence on right-wing politics rolls on forward, with her infomercial running on "The Learning Channel" (a clear misnomer in this case, unless learning how insipid Palin and her family can be counts as "learning") as a backdrop for her continued influence in the 2011-12 Congress and the 2012 presidential election.  This is a person who takes pride in meaningless homilies, quit the only challenging job she has ever held when it either got too stressful (various ethics challenges) or not remunerative enough (various fashion challenges), has a hit-or-miss education that she hasn't bothered to improve with self-educational efforts (like reading 2-3 of our major national papers or reading various nonfictions works, etc.), and is content using the "sling dirt whether true or not, support it with lots of corporate money, and hope some of it sticks" techniques developed in the Reagan campaign and perfected by Bush's "turd blossom" karl Rove.  Americans will continue to hear that "real Americans" care about the things Palin cares about and that the cures for what ails us are more of the same policies that made us sick in the first place, stated as simplistic slogans that evoke dreams of personal liberty and frontier rigor, and nightmares of government corruption and Pentagon $7000 toilets.  As a fellow blogger Maxine Udall has noted:

Whether we like it or not, our technical solutions are competing in a morality play scripted by interest groups and mama grizzlies who in 25 words or less conflate small government and something they imagine to be "free markets" with individual liberty, a key justice principle. Most sound techocratic solutions are difficult to convey, must less motivate, in 25 words or less (and the motivation is often moral as well as technical: more for most, more for less, prices as reliable signals of marginal social cost, reducing unemployment, increasing inflation to discourage saving and stimulate spending ... you get the idea). But the larger problem, I think, is that allegedly "amoral" economists view the moral sequelae of sound economic policy, such as banksters' gains (at taxpayer expense), as "side issues" that are irrelevant to restoring the economy, while some of "we the people" view it as one of the most important issues. We end up with....the Tea Party (or, at least, with a large portion of the population who are extremely resentful and angry at being unemployed and underwater while the economy romps upward at least for those whom we bailed out).  Technocratic Solutions and Moral Dilemmas  (the preceding, by the way, is just a very small excerpt of an interesting piece on the problem with what I have called "mathaholic"  economics and the failures of the Chicago School's approach to setting policy based on a theory so infused with unrealistic assumptions that the policy prescriptions amount to suggesting that Alice drink a counter-potion to undo her shrinking in size and fall through the rabbit hole).

 

And then there are the right-wingers arguing for a full austerity budget in the US, which supports, primarily, the idea of cutting Social Security and Medicare benefits while letting military costs continue to rise unabated and for reducing corporate taxes so that Big Business (read--U.S. multinationals) can "compete" more successfully globally without the "burden" of US taxes.  See my earlier post on the Peterson-Pew "deficit crisis" mentality and the Bowles-Simpson commission.  And then look at Robert Samuelson, How to Avoid Japan's Economic Mistakes, Washington Post (Nov. 15, 2010).  Samuelson asserts that the time for stimulus is long past and the only thing to do is to get the private sector going.  He claims to base this urgent assertion on Japan's experience, when it continued to borrow to fund public spending, but overall growth has been anemic.  He asserts Japan's problem is two fold:  1) a "dual economy" where robust exports had to make up for anemic domestic consumption, an economic model which folded with the yen's appreciation in the 1980s and 2) an aging, declining population with low wages and insecure jobs.

His prescription of course, is the same old right-wing prescription--less regulation, more support for big business to remove "uncertainties" (which has become a euphemism for lowering taxes/helping US MNEs to "compete").

So Japan's economy is trapped: A high yen penalizes exports; low births and sclerotic firms hurt domestic growth. The lesson for us is that massive budget deficits and cheap credit are at best necessary stopgaps. They're narcotics whose effects soon fade. They can't correct underlying economic deficiencies. It's time to move on from the debate over "stimulus."

Economic success ultimately depends on private firms. The American economy is more resilient and flexible than Japan's. But that's a low standard. Neither the White House nor Congress seems to understand that growing regulatory burdens and policy uncertainties undermine business confidence and the willingness to expand. Unless that changes, our mediocre recovery may mimic Japan's.

Samuelson conveniently skips over three important things--two a big difference between the US and Japan, and the other a similarity.  First, Japan had a historically high savings rate and, though that has gone down with Japan's economic decline, it meant that Japan didn't have the kind of domestic spending pattern that could sustain a low-export economy for any length of time.  So making interest rates low didn't help, and government spending couldn't be sufficient to overcome.  Second, the US has already embarked on various "quantitative easing" solutions that should have a positive impact--the loosening of the money supply will provide more money floating through the economy, allowing private and public job creation to take place more easily. 

Third, both countries share the stagnation of middle class wages--and what is worse in the US is that we have at the same time huge increases in inequalities as the "investor/manager class" continues to reap all the rewards of the economic system and be favored by the tax system so that it reaps most of the subsidies provided that way as well (the huge part of the benefit of the extra large housing mortgage interest deduction is enjoyed by the wealthiest Americans, who itemize and who have sufficiently large and numerous homes to easily use the full deductible interest limitation of $1.1 million combined acquisition and home equity loans; the benefit for various manager-level retirement plans is enjoyed primarily by the rich; etc.).  Until that problem is resolved, it will be unlikely that the US will recover the kind of broad-based growth that provides a sustainable economic environment and quality of life for all.

The reason all of this is worrisome, of course, is that the two-party system (with the avid assistance of the Tea Partiers) is heading towards unanimity on the biggest problem facing us at this time, and their answer is the wrong one, one that fails to understand the long-term damage to the economy of rampant increases in inequality along with stagnation or worse for the middle class.

 The problem is the corporatist agenda--"Big Business" using its money and power to write the laws to suit it, and the owners and managers of Big Business using their money and power to ensure that all of the rewards of the economic process go to the top, while programs intended to buffer the ill winds that blow for the middle class and low income Americans are decimated.  (An agenda made all the more easy because of the right-wing-dominated Supreme Court's recent decisions, including Citizens United.)  Money has become the be all and end all of politics, and Big Businesses--especially the big financial institutions-- generally have the money to buy the politicians and the laws that they like.  Courts and legislatures favor business over individuals.

Obama is not apart from this--he has never been a real progressive, and his policies are in the same tepid, center-right position that Clinton occupied or even slightly to the right.  As a commenter on a Washington Post article on Palin's TV infomercial noted,

[Obama largely] insists on continuing Bush's policies, or insufficiently curbing them. It is policies that serve the rich that are destroying us; these are policies that are traditionally identified with the Republicans, but in recent decades, the Democrats have learned to bow and scrape for big money from the lobbyists and either party is as abjectly servile to the wealthy as the other.

*****

[T]hose managing [Palin] as a media creation are using her to push the perceived center further to the right than it already is, which will allow real candidates for the Republican nomination to recycle the radical orthodoxies of the far right and still seem "moderate." Candidates for the Democratic nomination will be required to similarly hew further right, so as not to seem like the "socialists" or "communists" they have already been labeled by the rightwing lunatic fringe.

Palin makes big bucks and doesn't have to actually learn or do anything, while becoming the philosophical lodestar for the right, and our entire political system is transformed into a battle not between left and right but between right and extreme right.  Robert 1014

There is no reason to expect that tax cuts for the wealthiest 20% of the country will do anything to support job creation for the rest of us or to help stem the tide of the recession.  But the GOP will push for tax cuts for their primary constituents no matter what the cost. There is no reason to think that changing our tax system to assist US multinationals in grabbing a larger market share in Asia or Africa in the name of "competitiveness" will do anything to help ordinary Americans in the middle class here at home.  But both parties will continue the disastrous mix of tax cuts for corporations and policies that pull back on anti-trust and make unionization more difficult in the name of helping companies compete.   Obama and the mostly spineless Dems who don't ever stand up for their purported policy positions--whether in contesting the appointment to the Supreme Court of radical rightwingers like Alito and Roberts or in battling with the GOP for a public option in health care reform or in fighting to preserve a highly progressive income and estate tax--will likely just roll over and play dead while the wingnuts on the right move our country more and more into the radical right of the Bircher Society, Clausen, and Milt Friedman's radical "free market" agenda that socializes losses and privatizes gains.

The hypocrisy of most deficit discussions

Congress seems incapable of setting aside electioneering rhetoric and talking straight about taxes and deficits.  The GOP claims that it thinks deficits are bad things while at the same time it proposes no spending cuts (except to important safety net programs) and does propose further tax cuts.

Just a bit of background on tax cut rationales and deficits.

Back in the old days of the Bush regime, the tax cutters tended to claim that tax cuts would create jobs and raise (not lower) government revenues.  They didn't.  The Bush administration had anemic job growth, certainly seeing no boost from the humongous tax cuts enacted in 2001, 2003, and 2004 (and smaller cuts throughout the term).  And we have enough experience with tax cut programs from Reagan to Bush I to Bush II to see that revenues do not miraculously go up when the taxing provisions that are intended to raise revenues are cut back.  Sometimes there are a few localized effects--such as increased selling of capital stocks to take advantage of a new and lower rate because it is expected that higher rates will have to be enacted later.  But tax cuts cut revenues.

Further, in spite of the GOP attempt to label the Dems as the tax-and-spend party, the GOP turned out to be the tax-cut-and spend-anyway party.  Government grew under Bush, even while revenues shrank.  The war in Iraq, for example, resulted in huge expansions of military and defense costs, and the homeland security apparatus, much of it intrusive of our private liberty and ineffective at dealing with terrorists, piled on additional government bureaucracy and costs.

If you cut revenues without finding appropriate government programs to cut, then you will increase government borrowing and increase government deficits.

Now, deficit increases make sense sometimes.  When the economy is in a slump, it means that private spending is down, so government spending is needed to move it out of the slump.  A deficit that is caused by increased government spending that helps the economy by restoring jobs and getting the economy moving again is a deficit that will be reduced as the economy grows, people with jobs pay taxes, and government spending that was used to supplement inadequate private spending can be cut back.  Infrastructure spending provides that kind of a stimulus--building systems that will last for years now, to create jobs and stimulate the economy serves the public interest now and for the long term. See, e.g., Laurence Seidman, Reducing Future Deficits While Stimulating Today's Economy, 7 Economists' Voice Art. 2 (Sept. 2010).

But the deficit created by the Bush tax cuts doesn't make sense.  It is based on "trickle down" economics--the view that if the rich get richer, everybody else will do well too.  But that hasn't been the case.  Since 1980, the rich have gotten immensely richer, but most Americans have hit stagnation, with real wages not sharing at all in the productivity gains that have made corporate managers multimillionaires.  The productivity gains, that is, have gone to the people at the top, and the people at the top have horded them, supporting tax policies that give themselves huge tax cuts.

Tax cuts--especially for the wealthiest people and corproations--do not make sense.  That money is as likely to be invested overseas as in the US, and overseas it does nothing but contribute to the job drain.  Corporations purchasing new equipment wiht the 100% expensing may buy that equipment from China or India or Korea--again, pushing jobs overseas and doing nothing to stimulate the local economy, but costing the government the tax expenditure that could have been used for public infrastructure projects instead.

And now to the current situation as the "Senate G.O.P. Digs In to Keep Tax Cuts"

The income tax provisions passed during the Bush regime were almost all temporary provisions--they were passed with a sunseting provision so that they expire at the end of 2010, and the law as it was prior to the Bush administration retakes its place as the applicable law.  The question now is whether new laws should be enacted along the same lines.

When the Bush cuts were enacted, the arguments were that tax cuts would lead to more revenues (they didn't), that there was a surplus to return to the people (there wasn't--by the time the GOP Congress enacted the 2001 tax cuts, there was already a deficit), and that the tax cuts would stimulate the economy  so that it would grow really fast and create large numbers of new jobs (it didn't--job growth was anemic).

Remember, folks, there was no huge public outcry for new tax cuts when the Bush regime passed the 2001 cuts.  And the cuts were made temporary BECAUSE of the huge cost of extending them for more than ten years, which would have made the deficit creation impact too obvious.  This was policy pushed by the right, not by the public.  Does the fact that the teapartiers are now part of the anti-government, anti-tax hollering mean that people really want to retain the super-low taxes of the Bush period no matter what?  I doubt it.  Remember those teapartiers who want the government to stay away from their Medicare and Social Security?  How about Center for Disease Control--would anyone want there to be no federal vaccine programs for highly contagious diseases?  How about National Science Foundation--would people want basic scientific research to cease in the US, so that all our brightest young minds would go to China or India for education and work, leaving us with no innovation?  How about emergency response funding--do we not want the Federal Government to be able to send people, supplies and support to Katrina-type events?  What about keeping the food supply safe? the water supply?  medicines?  All of these things are "we the people" acting to do things that need to be done through the Federal Government.

John Boehner, the House Minority Leader and generally not a very astute person to trust with developing tax policy, had actually admitted to some rational thinking on the expiring Bush tax cuts last Sunday on Face the Nation.  He acknowledged that he could support a new tax cut for the middle class, even if the wealthy didn't get one.  Daniel, Boehner says he'd support a middle-class tax cut, YahooNews.com (Sept. 12, 2010).  Of course, he resorted to the old "class warfare" attack--according to the GOP, anybody who doesn't give a tax cut to the rich every time they give some kind of break to the poor is engaging in class warfare. 

Aside on "class warfare":  But of course, the GOP has supported numerous tax breaks that are primarily for the rich--or only available to the top 40% of taxpayers--and never admit that is class warfare.  e.g., the deduction for home mortgage interest on mortgages up to a million dollars, which is available only to those who itemize --about 30% of taxpayers, and of those 30%, is of the most benefit to the richest minority who pay higher rates and thus get a larger deduction, or the exclusion for municipal bond interest, which is used by the wealthiest taxpayers who have most of the financial assets, etc.

Progressives would argue that class warfare is represented by the corporatist agenda that extracts all productivity gains for managers and owners and leaves workers without even the pension promises that were made when workers accepted lower wages for higher pension benefits, or the policies that make it extraordinarily hard for workers to form a union, which would give them some semblance of equality of bargaining power with the concentrated power of megalithic multinational corporations, or the "globalization" policies that lead to free trade agreements that impose no protections for our own workers or our environment, etc.

The reasonableness represented by Boehner's concession lasted all of a microsecond.   Boehner's deputy, the House Republican whip, got out the word on Monday that the Republicans would only be content with a bill that enacted new tax cuts for the wealthiest as well as the most vulnerable--anything else, he says, is a "nonstarter."  And Mitch McConnell, the Senate Republican leader, proposed legislation for new tax cuts that would be the same as the Bush tax cuts for everybody.  See Herszenhorn, Senate G.O.P. Digs In to Keep Tax Cuts, NY Times, Sept. 13, 2010.

The cost of enacting new tax cuts that provide the same revenue reductions as the Bush tax cuts will be enormous.  It will cost $700 billion over ten years for the new tax cuts for the wealthy and a total of $4 trillion over ten years to extend all of the Bush tax cuts.

McConnell's argument is that it would hurt economic growth and job creation to tax the ultra wealthy now.  But that's a sham argument.  The wealthy are likely to save, not spend, any extra monies from a new tax cut.  Or invest it overseas.  Or just buy some more stock on the secondary market--making a bank or another wealthy person even wealthier.  They aren't likely to start a new company or directly invest in a new startup just because they get a little more spare change from a tax cut.  They'd either be doing that already or not doing it at all.  And McConnell, as the Times piece notes, isn't offering either specific spending cuts that won't hurt the economy nor other sources of revenue to make up for the additional $700 billion needed to give these multimillionaires another tax break in addition to all of the breaks targeting the wealthy already in the Code.

What about McConnell's argument that the Obama regime has spent the last two years putting the government in charge of everything?  Note he included student loans.  Just a reminder about the FACTS about the student loan issue.  We used to have a direct loan program.  It actually made money for the government.  But due to funny accounting procedures that were used for such loans, the books didn't look like the loans were making money for the government.  That's because they were counted as "pure" expenditures, and not as loans that included an obligation for the borrower to pay the money back to the government with interest.  So they made money, but looked like they didn't make money.  The GOP seized on this, and under Reagan changed the program to a "guaranteed loan" program.  The same universities would do the work, but the banks would get a significantly larger interest rate than the government had gotten for acting as a middleman but bearing no losses.  In other words, the GOP privatized the loan program, ensuring banks a "cut" of profits, and providing for the government to pay the banks for any losses they might incur--privatization of gains, socialization of losses.  There was less money to lend, since the banks were getting the interest income and paid by the government if there were losses.  The government was losing money instead of making money.  But it LOOKED LIKE the government was smaller.  And the GOP bragged about its new privatized loan program.  As years went on, people argued for a return to the direct loan program.  This was especially true when banks managed to get students to consolidate old loans and retain their higher subsidized rate even when they were supposed to reset the rate to a lower rate.  So Clinton inaugurated a small direct loan program.  And we have moved from there forward, saving the government money and providing students with a cheaper loan program.  The only losers in the direct loan program are the banks who no longer get their "entitlement" "welfare" handout from the government.  And McConnell condemns the Dem for that change, hoping that Americans will be gullible enough to be fooled into thinking that the direct loan program represents an awful invasion into private commerce, instead of a reasonable and wise use of government funds to provide students the opportunity to have a college education.

By the way, Lieberman is, as usual, supporting the GOP platform on taxes with a statement that "the more money we leave in private hands, the quicker our economic recovery will be."  When private spending has declined, that statement is not only likely wrong, it misses the fact that without government spending there is likely to be no recovery.