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

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

Background

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

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

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

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

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

Key Points from Dan Shaviro's Interview

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

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

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

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

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

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

 

Key Points from Timothy Smeeding's Interview

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

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

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

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

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

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

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

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

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

172 rightwingers on the Republican Study Committee want to "terminate" the tax code

Somehow it seems that the more absurd the congressional Republicans get, the greater their hubris and gall in proposing ideas that would hit government programs hard and create havoc for critically important government activities.

The latest is the right-wing "Republican Study Committee", a caucus of 172 of the far-right members of the GOP, and their "Fixing the Tax Code" release.  They argue, for example, for Goodlatte's bill to "terminate the tax code" in 2019 in order to "force" Congress to implement a new tax system by a firm deadline.  (Goodlatte, by the way, is a typical obstructionist right-winger Republican from Virginia who has evidenced numerous rather absurd positions in the past.  He should not be listened to by anyone.)  Their recommendations--more redistribution to the wealthy by lowering rates overall to 25% and cutting the tax on the types of income that the wealthiest Americans receive most of (capital gains and dividends) to a flat 15% rate.

This is, to put it bluntly, insane. 

• You don't set the way the tax code works by some a priori decision to lower rates so the wealthy pay less tax. 
• You determine how the tax code works, and how much revenue it should raise, by what kinds of obligations already exist that have to be paid and by considering carefully government programs and appropriate and fair ways to raise tax revenues to fund them.
• You can't "terminate the tax code" on a fixed date and expect anything other than anarchic chaos to result.  It is enormously hard to write a full tax code that adequately addresses all of the human activities (and entity transactions) that have to be taken into consideration.  To come up with the 1986 recodification of the tax code took a year and a half of concentrated work by a team of congressional taxwriters trying to reach a bipartisan result--something that hasn't existed for at least the eight years of the Obama administration.  And that group wasn't trying to completely redo the entire code.  It didn't "terminate" the existing code, but rather worked within that system to make determinations about provisions that were unworkable, outdated, or just plain bad. 
  • For example, it eliminated the capital gains preference, because it is clear that the characterization of income as capital or ordinary is one of the major complications of the code that allow for gamesmanship by rich people and support redistribution to the wealthy by privileging the type of income they mostly receive. Congress, of course, responded to intense lobbying by the wealthy and reinstated the privileged tax rate within 2 years (retroactively).

This is further evidence that the Republican majority in Congress is incapable of dealing with actual facts about how tax systems work, what revenues are needed, and what the needs in the U.S. are for revenues.

It also reveals the abject hypocrisy of the rightwingers in Congress.  They won't uphold their duty to "advise and consent" on a presidential nominee for the highest court in the land, because they want to be able to obstruct the appointment of anybody that isn't as right-wing as they are.  They claim it is because the people should have their voice heard by electing the next president (though that's just a sham argument--they want to obstruct things they don't like, whatever the Constitution should actually allow).

But they don't see any problem with a radical treatment of the tax code along the lines they want, even though they may not be in the majority of the Congress after this election.  Hypocrits.  Liars.  Self-serving corrupt ideologues.  That's what this right-wing caucus is all about.

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

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

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

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

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

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

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

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

***

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

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

 

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

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

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

 

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

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How should underpayment of employees affect tax policy?

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

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

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

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

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

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

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

and

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

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

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

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

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

 

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

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

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

The Tea Party's Disruptive Anti-Government (and anti-tax) Politics

The New York Times ran an interesting piece by Kim Messick on the Tea Party's psyche yesterday: Messick, The Tea Party's Paranoid Aesthetic, New York Times (Aug. 10, 2013).  It's worth trying to understand this political group's understanding of itself, since it " is a political movement ... that tries to shape the decisions of political actors — voters,legislators, pundits — into maximum coherence with its own agenda."  Id.  Its agenda is much influenced by the corporate funding that supports it but there is clearly something that holds the group together.  Messick says that they so identify their own ideas and values with the country that they see any divergence from those values and ideas as literally "unAmerican" and any evidence that the country supports things they do not support as evidence of a vast conspiracy causing the undoing of the true America.

In the case of the Tea Party, the content, though mostly political, is often religiously inflected. (A 2011 study ranked the predictors of Tea Party affiliation. The strongest was being a Republican. The second strongest? Believing that religion should play a larger role in politics.) There are invocations of God and His justice, historical interpretations (of the Constitution, say, or some program or proposal), evaluations of candidates for  office, and policy recommendations. (“Affordable Care Act bad! Tax and spending cuts good!”) These elements are then assembled in various ways to communicate the message an advocate finds appropriate for a given audience or occasion. I want to argue that we can discern in these messages a kind of master narrative, a collection of meanings that expresses the Tea Party’s sense of American history and of its own place within that history. It is this “story line,” I think, that explains the powerful appeal of the Tea Party movement to so many of its adherents, as well as its endorsement of a uniquely intransigent approach to the conduct of political affairs.

The key, says Messick, is Columbia historian Richard Hofstadter's description of paranoia in American politics (originally set forward in a 1963 essay):

The central image is that of a vast and sinister conspiracy, a gigantic and yet subtle machinery of influence set in motion to undermine and destroy a way of life. One may object that there are conspiratorial acts in history, and there is nothing paranoid about taking note of them. This is true… The distinguishing thing about the paranoid style is not that its exponents see conspiracies or plots here and there in history, but that they regard a ‘vast’ or ‘gigantic’ conspiracy as the motive force in historical events. History is a conspiracy, set in motion by demonic forces of almost transcendent power, and what is felt to be needed to defeat it is… an all-out crusade. The paranoid spokesman sees the fate of this conspiracy in apocalyptic terms— he traffics in the birth and death of whole worlds, whole political orders, whole systems of human values.  Id.

So Messick surmises that the intransigent, destructive tendency of the Tea Party to fight "to the death" against any policy or idea that it disagrees with stems from this paranoid identification of its own values as the only true American values, and any divergence from those values as a betrayal engendered by conspiratorial Others whose efforts to destroy the 'real' America must be stopped at all costs.

Tormented by difference, unable or unwilling to abide the fluidity of American identity, some persons anchor it in the racial, ideological, or ethnic features of their own community. This community then becomes “normative” for the nation as a whole; any threat to the former, any challenge to its prestige or authority, is automatically a threat to the latter.

***

The Tea Party’s paranoid aesthetic conveys this narcissistic view of itself and its role in our politics and history. ... This is the message paranoid narcissism ceaselessly delivers to its devotees. “The Others are irreligious, unproductive, licentious, treacherous. You are the rock on which this nation was built and you are the foundation on which it will rise again. You.  It’s all about you.”

***

[W]hen our identity is at risk — as it always is for the paranoid narcissist — there can be no room for compromise. The very suggestion is absurd: it amounts to the claim that we should accept being only partly ourselves. For the Tea Party, intransigence is another name for self-preservation.

If Messick is correct, we can count on this group to place itself and its own values above all else, to be willing to destroy in order to avoid having any bit of its view of the correct American way being undone. 

On tax issues, the Tea Party's ideas seem to be sharply influenced by the assumptions of personal decisionmaking and market "freedom" espoused by Chicago School economists.  Because Tea Party adherents define "freedom" in a unique way that disregards at least a century of developing understanding of the role of government in supporting the freedom of individuals to live a decent life, their views  on taxes tend to be anarcho-libertarian in nature--they see taxation itself as "theft by government" rather than the reasonable contribution of each citizen to the furtherance of a civilized society that supports all members and ensures that the basic institutions for a decent life are available to all.  This is perhaps the most threatening aspect of this religio-political group--their fervent ideological belief that they have the one view of the way America is supposed to work, and that progressive income taxation is anathema to that view.

It is not clear how one counters such religio-political fundamentalism.  Anyone who has ever tried to have a rational discussion of religious faith with a fundamentalist religious person knows that reason cannot penetrate such belief. Facts are generally irrelevant.  Any evidence that counters the exact specifications of the faith is treated as spurious.  The Tea Party adherents that I've met seem very similar.  It appears to be much more convenient for Tea Party adherents to close their minds to evidence than to question their ideologies or even to allow any adjustment to their "values" based on historical developments.

So the only defense appears to be making sure that this minority group never becomes a majority political group.  The filibuster in the Senate, in the context of Tea Party extremists, is a worrisome procedural tool that favors just such intransigent minorities.  We should get rid of it.  As for the House, perhaps the only answer is  engaged and energetic contesting of any election in which a Tea Party extremist has a chance.

 

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The Right cuts food stamps to pass corporate farm welfare--where's the sense in that?

The House has its priorities firmly in mind.  Those priorities involve making sure that the wealthy people and corporations keep their wealth while any and all possible cuts to any welfare or "entitlement" programs are made.

All you have to do is look at the right's emphasis on passing a farm bill (mostly aiding corporate farmers and gentlemanly nonfarmers) and on cutting food stamps to the nation's food-insecure. In June, the House proposed slashing $20 billion from food stamps and ended up passing a separate farm bill because it was so determined to cut aid to food-insecure Americans.  Now, the media is all concerned that a farm bill won't pass at all, because the right is insisting on doubling the cut to food aide--slashing $40 billion from the program.  See, e.g., Nixon, GOP Rush to Slash Food Stamps Puts Farm Bill in Jeopardy, (Aug. 1, 2013).

These proposed cuts are draconian.  As those legislators who took the "live a week on food stamps" challenge learned, it is extraordinarily difficult, time-consuming, and unsatisfying to try to find sufficient food on a budget of $3.00 a day. And there are literally millions of Americans without enough food to live decently, and millions whose well-being will be jeopardized if Congress does not fund food stamps at an adequate level.  Food stamp recipients already faced difficulties because of the expiration of the stimulus provisions.

A report released Thursday by the Center on Budget and Policy Priorities, which studies federal spending, found that the 47 million people who currently receive food stamps will see their benefits reduced in November because of an expiring provision in the stimulus bill passed in 2009 by a Democratic-controlled Congress.

The stimulus law provided a slight boost in benefits for all food stamp recipients as part of a bill to strengthen the economy and ease hardship on millions of unemployed workers.

According to the center’s report, beginning Nov. 1, a family of three will see a reduction of about $29 a month — $319 for the remaining 11 months of the next fiscal year. The report said the cut would result in an average of less than $1.40 per person, per meal.  Id.

 

We are the richest country in the world.  Twenty of the country's richest billionaires earned in 2012 as much money as is needed to cover food aid for food-insecure Americans who go hungry or eat poorly most of the time.  Food-insecure Americans lose focus and lose opportunities while those overpaid equity fund managers  whine over the unlikely prospect (unlikely because of all the heavy lobbying and the quid pro quo nature of providing campaign support to those in Congress who write the laws) of actually having to pay regular ordinary income rates on their overabundant take from the profits of other people's money that they manage (i.e., their compensation income, labeled carried interest). Everybody in Michigan pays a very low flat income tax, while underprivileged, unemployed and discriminated against blacks in Detroit scrounge for used metal to sell to buy food or pay the mortgage.  Ordinary people have been tossed out of their homes by the banks that were bailed out by the government, while the bank presidents and CEOs and directors and other managers continued business as usual with multimillion dollar salaries, stock options and other perks.

Poor people do not "deserve" to starve. Rich people do not generally "deserve" to be rich.  Yet flat tax schemeds and preferential taxation of capital income belie that wisdom by giving the rich a pass.  Democratic egalitarianism demands a change.  Those at the top have been getting richer and richer, but ordinary Americans have not.  It's time to reverse the redistribution direction.  Instead of redistributing resources upwards to the rich, we must move them down to the needy.

Watch the Bill Moyers program on hunger in America (linked at the bottom of the post).  If you do not wince with uncomfortableness at the way we Americans are dealing with food insecurity, you must have lost all compassion.

It is time, folks, to just say no to all this  brute capitalism, "free" market ideology that has given us an unequal society with high teenage pregnancy, low birth weight babies, high illiteracy, shorter life expectancy, high unemployment, low educational achievement and all the other indices of an underdeveloped country in the midst of enormous, even obscene wealth.  Say "NO" to the right's idea that poverty results from a lack of personal responsibility, rather than a lack of personal opportunity.  Say "NO" to the ideology of the self-described meritocracy that considers its own wealth and the poverty of others merited, rather than recognizing the increasing impact of the class status one is born into and the decreasing possibility of upward mobility in America.  Say "NO" to the failed pseudo-economic theories of Milt Friedman, Ayn Rand, Glenn Beck, and Karl Rove--the ideology of "free" markets and unfree persons, of "competitive capitalism" and uncompetitive positions defined by class status and money.  Say "No" to the politics of the right, that would privatize, deregulate, cut tax revenues and increase military expenditures, that would willingly support a government of largesse and entitlement for the rich and austerity and "personal responsibility" for the poor.

 

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Senators promised 50 years of secrecy on their tax reform proposals

There continues to be more blather about the need for "tax reform, and buddies GOP Dave Camp and skin-deep Dem Max Baucus seem to be intent on accomplishing something "big".  And that's what's worrying me.

The Republicans have been arguing that we need tax reform to "simplify" the Code, but that's close to ludicrous.  Most of the complicating portions of the Code exist for two reasons:  (1) to provide some anti-abuse provisions to counter the tax avoidance techniques of wealthy, sophisticated taxpayers (including multinational corporations) and (2) to provide special tax subsidies through tax expenditures, again mostly for the wealthy (think capital gains preference) and industries with clout (consider the various subsidies for the natural resources extractive industries), accompanied by a few good ones that benefit the poor and marginalized individuals (such as the Earned Income Tax Credit).  We shouldn't get rid of the anti-abuse provisions or of those tax expenditures that support lower-income families or favor emerging industries like wind power.  That leaves getting rid of the subsidies for Big Oil, Big Pharm, etc as the only simplifying moves that make much sense.  Something tells me that's not what will come of the Camp-Baucus rewrite.

 The GOP also claim that "tax reform" (by which they invariably mean diminishing tax revenues though cutting tax rates for the wealthiest and corporations) will result in "supporting competition", economic growth and job creation.  These claims aren't supported by empirical evidence or, in the case of "supporting competition" aren't necessarily anything that tax writers ought to care about.  Yet the mantra of lowering corporate tax rates seems to be what is driving this effort--when corporations already pay an pittance of the tax revenues they originally paid, shifting more of the burden to the middle class.

Why do the Democrats support the idea that we need a major rewrite of the tax code?  Regrettably, for much of the same reasons.  They've been lobbied by the multinationals that want even lower taxes than they currently pay--those guys ALWAYS want lower taxes, no matter how much their share of tax revenues as a percentage of GDP has shrunk.  And the Dems have long bought into the Wall Street mythology that the market's high marks mean good times for all.  They are heavily influenced by Wall Street banksters who want low taxes and more speculative profits.  ( Obama is even considering that misogynist, mostly wrong economist Larry Summers to head the Fed, a move that should cause deep nausea among any thinking woman and anyone who understands the Fed's role in preventing another Great Recession catastrophe for ordinary Americans.  See Mark Thoma's, Larry Summers to head the Fed, WTF post.)  The Democrats, that is, are generally disregarding the reality of the role of corporatism, and corporate power, in America today and the way that results in declininng wages for ordinary workers and declining quality of life.  See Profits, Norms, and Power, July 20, 2013.

We should not be thinking about "major rewrites of the Code".  We should be thinking relatively small. Fix the obviously bad provisions.  My list would include considering the following:

•  Get rid of captive reinsurance companies and other transfer pricing silliness that allows MNEs to avoid US taxation, such as with legislation that refuses to recognize a sale of intellectual property to an offshore affiliate. 
• Eliminate deferral for offshore earnings altogether, not just for Subpart F earnings.
•  Install a financial transactions tax--it could raise billions while protecting the financial system and acting as a brake on speculative trading. 
•  Eliminate the preferential rate for capital gains.  At the least, eliminate the  treatment of "carried interest" compensation income to fund managers as partnership flow-through income.  Increase the estate tax, and making it a progressive rate that taxes gigantic estates at higher rates than small estates. 
• Eliminate the mortgage interest deduction for second homes. 
• Get rid of the like-kind exchange nonrecognition under section 1031. 
•  Make the reorganization provisions more restrictive, and eliminate any possibility of loss recognition on reorg stock exchanges. 
• Make any compensation over $1 million nondeductible, no matter how determined.  

These are just a few of the reasonable reforms that Congress could engage in now.  But lowering rates--not something we should even  be considering.  The United States is one of the lowest taxed, overall, of advanced countries.  Because we tax ourselves too little, we are not spending what we should be on public transportation, public education, and public infrastructure, and we are allowing too many important public services to be highjacked for private profit--from building decent housing for military on military bases to letting middlemen profits eat away at decent health care, compared to the single payer systems that every other modern advanced civilization enjoys.  We need to raise taxes, and we need to do so in a way that will redistribute economic resources to support public infrastructure needs and move away from oligarchic concentration.

The Baucus-Camp "blank slate" approach--now with this promise of 50 years of guaranteed secrecy for whatever particular senators support or don't support--is extraordinarily worrisome?  Secrecy to lawmakers is  travesty in a country that claims to be a democracy.  Legislation cannot be conducted behind closed doors where Senators are protected from exposure of their views.

Yet secrecy regarding senators views on tax reform is just what Baucus is promising.  See Offering 50 Years of Secrecy, The Hill (July 24, 2013).  [Hat tip Francine Lipman]

“The letter was done at the request of offices to provide some assurance that  the committee would not make their submissions public,” the aide said. “Senators  Baucus and Hatch are going out of their way to assure their colleagues they will  keep the submissions in confidence.”

Keeping the submissions confidential  for a half century, the aide added, was “standard operating procedure for  sensitive materials including investigation materials.”

The lengths  Baucus and Hatch have gone to reassure their colleagues underscores the  importance the tax-writers are placing on the blank slate, and shows they are  working hard to ensure that all 100 senators engage in the process.

 So the rationalization is that this will protect the Senators from exposure to lobbyists.  But if Senators don't have the guts to stand tall for what they believe in, what good are they?  Are they really hiding from lobbyists or are they hiding from their ordinary-folk constituents?  Lobbyists, after all, have many different avenues for influencing Senators--including the proximity to big money. Lobbyists will pursue legislators whether or not these written views are kept secret.

What about constituents?  Constituents often don't know what their Senators are really doing unless it's covered in the news.  Secrecy seems to have more to do with permitting Senators to pony up their favorite Big Money fundraiser's idea to be preserved, without constituents getting a whiff of the cozy relationship, than any other thing.

This kind of secrecy has nothing to do with "investigations" or "sensitive materials."  It's got to do with "protecting" congressional representatives from having the public know what they really think about critical tax issues (including ones that benefit themselves and their biggest donors).

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The American Legacy PAC robocalls using Newt Gingrich's "outrage" to sell the "Audit the IRS" campaign

I somehow am on a number of right-wing mailing and calling lists.  Don't ask me how that happened.  I do not hide the fact that my views about sustainable democracy and the harms of plutocracy/oligarchy put me to the left of the political spectrum.  I do not buy into Chicago School "efficiency" theory, which acts as though you can ignore the facts about what has happened in our economy so long as you can write a mathematical equation that looks pretty and comes out the other way.  I do not buy into tax policy discussions of  how "uncompetitive" we are because multinationals are oh so heavily taxed (ha).  I do not buy into the elite's view of itself as a meritocracy that has "earned" the millions and billions that top CEOs are paid while siphoning off tax money from infrastructure projects or firing workers or decimating pensions or destroying unions and continuing to pay their workers too little while paying themselves too much.

ASIDE:  did you watch the News Hour program about the way people who get more think of themselves, automatically, as "worth" more and therefore meriting what they got.  Researchers have run experiment after experiment in which the game is rigged--openly--in favor of one participant.  Nonetheless, that participant becomes convinced that he is "entitled" to the rewards he is winning compared to the "loser" on the other side.  That's a perfect illustration of what happens in the minds of the Romneys and Cheneys and others who amass great fortunes due to a combination of inheritance, fickle finger of fate, and tax subsidies that ensure that those that have get more (like the capital gains preference).  That group that gets more thinks of itself as entitled to more, as therefore better than others.  It is rather a small step to greed taking over and lack of compassion becoming the norm.

So I got a call Friday afternoon from the "American Legacy PAC."  The call turned to a recording by Newt Gingrich.  Here's a paraphrase of what it/he said:

I am outraged about the IRS's targeting of conservative and Tea Party groups.  The government lies about what it does, lies to cover up the lies, and then hides everything from the public.  This is endangering the country.  We have to act.  That's why I'm supporting the "Audit the IRS" campaign from American Legacy PAC.

Now, you can bet that nobody at American Legacy is going to shed any light on the matter, such as revealing that the BOLO list that included "Tea Party" and "patriot" also included "progressive" and "Occupy".  That left-wing groups got probing letters with questions to answer, too.  That in fact most Tea Party groups ARE political action groups and probably many of them do not deserve 501(c)(4) status.

And who is supporting the American Legacy PAC?  No mention of that on the phone call.  But if you look at the website, you see the kind of doublespeak that Gingrich has always used--talk about "American exceptionalism" and the "legacy" from our grandparents that is being lost due to action of the "elite."  Of course, here, legacy means "the way we've always done it--meaning the people with money control things".  And "elite" doesn't refer to what I mean by elite--which is those who hold the economic resources and financial assets that permit them to maintain dominance over political and judicial decisionmaking, but rather American Legacy uses the term to refer to the intellectuals that it doesn't like, who make up the left-wing of this country who are interested in a country that evolves and progresses, offering opportunity for all.

And the agenda is revealed in the page on the "Chamber of economic advisers", where Gingrich talks about needing to run government like a business and says:

Together we can get the American economy back on track. Unfortunately the answers coming out of Washington are more of the same….more borrowing from China….higher taxes on producers like you and a more intrusive federal and state government to hinder you from building your business. Together we can change that.

 Surprise!  Gingrich thinks government should be run like a business.  Baloney--there's nothing in common between government and businesses.  Government's print money, businesses can't.  Governments set borrowing rates, businesses can't.  Government's serve the least among them, businesses don't bother.  Government's are interested in the public good; businesses are interested in private wealth accumulation.  The problem with the US today is that we have had almost four decades of thinking that we need to think like that to run a government.  We've let infrastructure go to pot, let our support for basic scientific research almost grind to a halt, stifling the real entrepreneurial innovation.

And surprise.  Gingrich wants low taxes and deregualtion.  That's not anything new.  It's Reagan's deregulation, militarization, privatization and tax cut mantra all over again.  It didn't work and the Great Recession of Bush's presidency--including the trillions of dollars of debt to bail out the financial system that Gingrich keeps trying to blame on Obama--is a big piece of the proof that it didn't work.

American Legacy is just an effort to get knee-jerk conservatives to plunk up more money to support more of the right-wing effort to continue to keep their "scandal" in the news media.  The news media loves it--nothing like a "scandal" (even if not real) to sell ads.

Remember, folks.  There are thousands of good public servants working at the IRS who are overworked, understaffed and underresourced.  They face highly sophisticated taxpayers and lawyers, supported by much more resources, on a daily basis. They are lobbied by former IRS employees who move to lucrative jobs and use their contacts to talk the continuing employees into seeing their (clients') perspective about tax issues.  Theirs is a constant struggle to do the right thing with too little time, too little respect, and too much of this kind of made-up scandalmongering that benefits most of all Big Business and its owners who want to "starve the beast", cut taxes, and cut safety nets.

I am disgusted with Gingrich's "outrage".  And I don't think we need to audit the IRS.  I'd like to see an audit of the TIGTA--Russell George who didn't even mention in his report that the IRS had used liberal terms as screening devices as well as conservative terms.  Guess what, that matters!

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Senate Finance Leaders push "blank slate" to tax reform

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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"Getting Rid of the IRS"--Detroit's Nolan Finley's wrong solution to the wrong problem

I suppose it shouldn't be surprising that the mostly-to-the-right Detroit newspapers would have a center-page opinion piece calling for the elimination of the IRS, that ages-old mantra of the radical right and of those corporate-backed propaganda tanks and radical-liberatarian idea pushers like Cato and Heritage Foundation and Claremont and many of the Tax Party groups, etc.  But this one is so bad that it is necessary to call it out for what it is--a bunch of hog-wash.  See Nolan FinLey,  Let's Get Rid of the IRS, Detroit News (June 10, 2013).

Finley starts out with a presupposition that the scandal-mongering about the IRS is not only completely accurate (which it isn't--liberal and conservative groups were selected for scrutiny, and scrutiny was called for in respect of groups that had "tea party" in their names, since most of them were in fact mainly doing politicking) but that it was also "obvious[ly]" done from at the orders of Obama operatives to aid the President's election chances (which is completely unfounded conspiracy-mongering speculation).  He states that "the IRS has been caught red-handed targeting conservative political groups for special scrutiny in what seems obvious was an attempt to aid the reelection bid of President Obama."

An initial scaffolding of distortions and malicious speculation cannot bode well for any opinion piece.  So it isn't a surprise that the rest of the piece doesn't hold water, either.  He calls the required statutory scrutiny of applicants for 501(c)(4) status a "dragnet"--failing to even acknowledge that the statutory requirement states that such groups must be "exclusively" operated for social welfare purposes and that it is in fact through administrative dispensation via interpretative regulations that the IRS applies instead a "primarily" for social welfare purposes test, thus permitting (too much) politicking as long as it isn't the primary activity.

He goes on to claim that use of the term "patriot" as a screening filter for politicking groups implies that "the United States government finds something sinister in patriotism".  Again, that's a ridiculous association of what may possibily have been a perfectly reasonable though politically unwise filter term--i.e., if there are lots of groups with "patriot" in their names that do a lot of politicking, then it is a reasonable term to pick for giving those groups extra scrutiny to see if they do too much politicking, though the expectation that conservatives would rise up in arms if those types of groups receive extra scrutiny should have been a red flag cautioning against use of that term in spite of its usefulness.

Then Finley asserts that this conspiracy-theory thinking provides "more than enough reason to jettison plans to make it [the IRS] the enforcement arm of Obamacare."  Now, it is true that the IRS has so many different federal programs that it has to oversee that it is almost impossible for it to do an appropriate task of doing so.  Congress has loaded it with tasks (including all the tax expenditure programs embedded in the federal income tax code) and consistently underfunded it so that it is usually understaffed and overstretched.  But the answer to that is not to take away a task that it is perhaps best suited for out of all the agencies, but rather to fund the IRS appropriately so that it can do the tasks assigned to it by Congress.  Finley completely ignores the underfunding problem, since--as revealed later on--he really wants to decimate or eliminate the IRS entirely.

 Finley talks about the IRS as "an institution America no longer trusts"  because it is "the most feared agent" and on "that has proven itself willing to manipulate the levers of government to achieve a political end."  Again, many problems in this rhetoric. 

• If the IRS is actually the "most feared" (I personally suspect the CIA and FBI and NSA would come in ahead in that race, but haven't seen any actual empirical study on this issue)--even after the enactment of three laws pulling back on its power to enforce and essentially hamstringing its employees with the "ten sins" provisions included in the 1998 act (see earlier post)-- it is because for decades the right-wing propaganda tanks and media have been pushing distrust of the IRS and of taxes and of government generally.  People are influenced by that constant cry of "bad guy" based on blowing up of individual anecdotes into massive (presumed) patterns.
• And the claim that the IRS "has proven itself" using its power for political purposes is simply unfounded.  There is no "proof" of the assertion made by Finley.  He is merely playing the Bill O'Reilly game of asserting speculation--or even worse, falsehoods,-- as fact in order to buttress his own personal vendetta against the IRS and its employees.  Most IRS employees are civil servants, not political appointees.  I've known quite a few Republican IRS employees in my years as a tax practitioner, and have considered writing about what I consider a related problem -- that  too many IRS employees are too willing to court the pleasure of taxpayers such as big multinationals or large law firms or accounting firms that may well become their future employers or clients when they leave the Service.

 Now Finley hits his stride with his real objective--arguments for disbanding the IRS, eliminating the income tax, and replacing it with a (regressive and hard to enforce) national sales tax.

The most fitting punishment would be to disband the IRS. And junk the income tax, too. Mike Huckabee, former governor of Arkansas and now a TV talk show host, is urging Congress to replace the income tax with a national sales tax. You’d pay tax on the money you spend instead of the money you earn.That would eliminate the need for an IRS that audits tax returns, hands out non-profit status and enforces a tax code that is egregiously complex and unfair. Id. (paragraphing removed).

 Finley reveals his true ignorance here (if he hasn't done for most readers already).  Let's just consider first some of the ancillary issues around "disbanding the IRS".

• Because the IRS does function as the major enforcement agency for many things besides the income tax, Congress would have to undertake a comprehensive analysis of all of those activities and assign them to some other agency.  In all likelihood, that other agency would lack agents with expertise to handle the assigned task, and the result would be essentially a transfer of those currently staffed with the activity to the other agency, requiring considerable time to merge functions and perhaps failing to do it well enough to maintain current operating efficiency, much less improve it (just as huge mergers or consolidations of businesses often go awry). 
• Further, the time to do the study, legislate the transition, and implement the transition would require continued operation of the current agency and the replacement agency, duplicating costs at a time when conservatives like Finley claim they want to cut wasteful government spending.
• The Internal Revenue Code is not really "egregiously complex."   

1. Read earlier posts on the right's tendency to overstate (by tens of thousands of pages) the "size" of the Code and to treat "size" as an appropriate substitution for any analysis of complexity. 
2. Only 30% or so of individual taxpayers itemize, and itemization is the primary complexity faced by individual taxpayers.  Most of those who do itemize are in the relatively wealthy part (upper 30% )of the income distribution, and most of those who have difficult and complex decisions to make are the very wealthy who have expensive tax experts to do their work for them.
3. Most of the complexity in the Code stems from two factors--(a) tax expenditures (subsidies) that benefit (substantially, in most cases) particular types of wealthy and business taxpayers lobbied for by those taxpayers and (b) anti-abuse rules necessitated by the clever tax strategies invented by the wealthy taxpayers' (especially corporate and business taxpayers') expensive tax experts.
4. It is naive to think that any tax system--whether income or excise or transfer or territorial or worldwide or sales or VAT-- could be "simple" for wealthy individual and corporate taxpayers with a global playing field and incredible sums able to be spent on avoidance and at the same time generate sufficient revenues to provide for the most basic of public goods and services, including a decent safety net for those caught in vulnerable positions by age, illness, or other lack of privilege.

5. Most sales tax systems include incredible arrays of exemptions (for example, for non-profit groups and charities) and exclusions (for "necessities" where the sales tax could make a difference between life and death for those living in poverty) and special provisions (lobbied for by particular industries).  A VAT (if that were the form required) would in all likelihood require the same complexities about what is income or not that an income tax requires.  A VAT or a national sales tax would require a mechanism for enforcement of collection not unlike the IRS's function and a mechanism for tracking individual's payments not unlike the IRS's current function.  It would not permit the elimination of audits of tax returns (just different kinds of returns), handing out nonprofit status (just a different rationale and basis) or enforcing a complex tax code (just a different one). 

 Finley's ignorance is further revealed by his claim that a "similar outcome" (disbanding or making the IRS much smaller) could be achieved by "vastly lowering current income tax rates in exchange for eliminating all deductions and credits" because there would be "no reason to examine returns."

• lowering rates doesn't achieve anything but less revenue--which will have to be made up for in other ways (adding complexity) or by further hardship on the already suffering ordinary people of this country who bore the brunt of the Great Recession, the foreclosure crisis, the unemployment crisis, and the corporatisation of education that has paid administrators twice or more what they are worth while cheating professors, teachers and students;
• eliminating all deductions and credits might simplify somewhat the income tax, but at the cost of considerable unfairness in many cases--for just a few obvious examples, removing the foreign tax credit for taxes paid to other countries would result in some instances in "double taxation" of the same revenue by the US and the other country; removing the "standard deduction" and "personal exemption" would undermine a universal view that the income tax shouldn't reach the amount necessary to maintain a barely sustaining level of income for food, shelter and clothing;
• even if it were possible to "lower rates and eliminate all deductions and credits", it wouldn't be possible to get rid of the IRS or eliminate audits or curtail enforcement or reduce the tax code to something a kindergartner could understand--a critical question for the Code is "what is income"--and therein lies a huge portion of the complexity and most of the ways that taxpayers have found to abuse the rules by claiming "phantom" losses.  (Note that Finley doesn't talk about removing elections, exemptions, and exclusions--was that intentional?)  There would still be the same need for returns, audits, and enforcement, and there would still need to be all the procedural provisions for litigation and regulations and penalties and interest on overdue taxes.  There would be rules still for all the different types of entities (much of the complexity of the Code lies in the rules for permitting partnerships to have considerable flexibility in their allocation of income and losses among the partners).  Certainly Finley wouldn't suggest that the tax code should get to tax gross income and taxpayers be required to forego claiming any losses!

Finley ends with what he thought was a question requiring an obvious answer of "none"--essentially asking that if we can eliminate the IRS and get rid of the health care "entitlement", "what's the downside?"

The answer is not the one he so ignorantly professed to believe.  The downside is huge, and there is little upside.  Finley disregards the growing inequality in this country and the continuing poverty in what is still the richest country in the world.  He doesn't care, apparently, that his "solution" would create even more problems for the poor, as programs that they depend on administered through the IRS-such as the Earned Income Tax Credit and the standard deduction and personal exemptions--would be eliminated with his proposal.  Further, without a tax collection and enforcement agency, much of the good done by the federal government would wilt on the vine--from the Centers for Disease Control to the NIH and the Smithsonian, from transportation safety to education funding, and even the right's much beloved military.  We simply can't and shouldn't get rid of the IRS--every advanced country in the nation has a bureau that collects and enforces the tax laws.  We could get rid of the particular health care reform enacted as Obamacare, but we shouldn't --rather, we should continue to improve it, ultimately instituting Medicare for all and removing the rent-seeking profiteers from the picture except for those who have so much money that they can afford to buy luxury health care.

Finley's proposal amounts to more hot-air from the right about their favorite target--taxes and tax enforcement--that would have regressive results lopsidedly benefiting their favorite beneficiaries--the wealthy and Big Business (owned mostly by the wealthy).  Apparently, people like Finley really want a country where brute market forces allow a few to reap all the benefits and the many to suffer, resulting in a classed society with the few living in relative splendor and the rest living off the dregs.  That would be the result of most of these proposals for turning to a regressive sales tax and shutting down federal tax enforcement, making such proposals a form of class warfare pure and simple.

(if you don't believe me about "rent-seeking profiteers" in the health care business, read Saturday's New York Times story about the way Questor--a Big Pharma company--has reaped huge profits by essentially building a monopoly power over an immune-disorder drug called Acthar and now intends to purchase a competitor's potential threat (selling for tens of thousands less) because  a US startup wanted to make it available cheaply in the United States.  Questor bought Acthar in 2001 when it was selling for just a few hundred dollars a vial.  By 2007 questor had increased the price to almost $1500 a vial.  And in 2007, Questor increased the price in a single jump to $23,000 a vial--yes you read that number correctly.  This is the perfect example of the fact that the right's beloved "market" doesn't work if the government doesn't provide the right framework--in this case, enforcement of anti-trust laws much more stringently than has been done in the last few decades as anti-trust has practically dropped from the national vocabulary.)

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