Relevant and even prescient commentary on news, politics and the economy.

Tax cuts for jobs. NOT! Another tax cut that is not paying out

First a qualification. I am basing the following on info I found on the net. If the info is wrong, then I stand corrected as to who is or is not paying but not as to what happens when a large entity does not pay. The specific city and company are used purely for example purpose because of familiarity. What follows could be any municipality with a similar size company calling it home.
 
Lately in the city of my flower shop the big talk is a $10 million deficit in the school department. It’s a funny story. See, the department hired a couple people and these people, along with the help of the city council and the school committee the budget numbers became not real. They budgeted $59 million but have spent $66.6 million. The total $10 million is a 2 year deficit. The funny part…we had a surplus. Though, where the surplus went to no one knows. The school committee insists there was no funny business and even voted down an investigation. So, if there was no funny business, then who gained and what did they gain by covering up a deficit? What benefit is there about lying about a deficit?
 
Of course, this is also a state funding issue. You see, the city has the typical city size problems that the surrounding town do not have. This article notes:
 
 
“The committee chair pointed out that Lincoln has a budget of $48 million to educate half the students Woonsocket teaches with a mere $59 million.
 
“And they don’t have the special needs we have. They don’t even have a quarter of the IEPs we deal with,” she said.”
 
 
On top of this, we’re one of those states that has been passing ALEX type legislation. In particular we passed the one that thinks it is smart of a state to set a cap on how much a municipality can raise taxes in any given year. The city notes that default is an option, but is currently begging the state legislature to allow a supplemental tax bill.

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Defining Rich VI: 1936 tax tables

Today we are continuing to look at the historical tax tables to see how we viewed and possibly defined rich. I introduced this idea with my post: Defining Rich III.
 
I found a source for all sorts of historical data from the Census Bureau. You can down load it or the better way is to click on the PDF file which brings up the Intro and then click on any of the listings of the table of contents which takes you to that set of PDF data.  For this posting regarding income data I am using this section.
 
The average weekly income for all manufacturing was $22.82 per week on 39.1 hours work. The highest paid was printing/publishing newspapers/periodicals at $35.15 per week on 37 hours work. The lowest was cotton goods at $13.80 per week on 37.5 hours of work.
 
In the non-manufacturing sector the I calculated the average weekly income to be $23.76 on 40.28 hours of work. The highest earnings were electric power/lights manufactured gas at $31.70 per week on 40.2 hours work. The lowest was hotels at $13.97 per week on 48.3 hours of work. For the Walmart greeter retail trade-general merchandising it was $17.51 per week on 40.8 hours work.
 
There were regional differences also. The most glaring is the north/south difference. The hourly wage ranges from 12.5 cents to 19 cents less if you worked in the south. The greatest differences being between the East South Central and the Pacific North.

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Defining Rich IV: Corporate vs Personal Tax collection patterns 1934 to present

When I left this series in September, I had introduced the idea of looking at past tax tables as a means of understanding how We the People define rich. One specific note from history was a surcharge on top of themarginal tax rates to pay for the Great One (WWII). Obviously, that aspect of our moral character has gone right out the window.

Also for a brief period (1936 to 1943,on 6 occasions) business paid more of the income tax revenue collected than did people. I also noted that 1983 and 2009 the corporate share of income tax revenue was just over 6% of the totalrevenues (FICA included). Its lowest points. Reagan/Bush II. However, interestingly enough, Bush II did manage to get thecorporate tax collections as a percentage of personal collections(excluding FICA) up to 33.9%! Clinton only managed 26.6% in 1995. The last time we saw a ratio where corporate collections were in the30% range was 1979. In 1959 it was 47.1%. 1980 heralded the new standard of the mid to low 20% range. Of course Reagan wins thispersonal verses corporate relationship with a corporate total that is only 12.8% of the personal in 1983.

One other very interesting aspect ofour tax history using the same table is that from 1934 to 1983 when tax revenue from personal collections became less than the year prior, this was only for one year with the exception of 1945/46. Corporate revenue follows the same pattern except for 3 periods where there was a decline for 2 years running: 1946/47, 1958/59 and1961/62. From 1983 until 2001 the personal revenue is more every year than the year prior. It’s like a switch was thrown after 1983. The corporate revenue declines twice for 1 year each in this 1983 –2001 span; 1990 and 1999. Starting in 2001, the decline in revenuecollections for both personal and corporate last for 3 years running;2001 to 2003 and 2008 to 2010. Someone threw a double pole switchhere. We’ll have to wait to see for 2011.

Obviously, from this bit of history we can see a few trends at least. We have been reducing the burden on corporations as paying their share for the use of the commons. From1984 to 2000 the personal collections never declined yet thecorporate did twice. Prior to 2001, our tax tables and all their loop holes produced a fairly stable ever rising stream of revenue. However, after 2001, the stability is less in that any time there isa reduction in revenue collections, it lasts 3 times longer. Finally, except for 2005 to year ending 2007, since 1980 we think that corporations should only pay between 20 to 26% of what We thePeople pay in to our government.
I mention all the above because it isevident that more than just the marginal rates are changing and, as far as my assessment of these changes go, they are leading us to anever less stable adjusted gross income base for then calculating the tax due. That is, the base has been adjusted such that it is moresensitive to down turns in the economy. Prior to the Reagan taxrevolution, both the personal and corporate base were fairly evenlysensitive with the corporate being maybe a little more sensitive.
For 50 years (1934 to 1983) there wereonly 3 periods in which the corporate collections were less for 2years in a row and none of them were the back to back Reaganrecessions. After 1983, the base for personal taxation has changedsuch that it is not effected by any recession. However, thecorporations got relief twice. Considering that from 1934 to 1982there are only 2 recessions listed by NBER as lasting more than a year (1973/75and 1981/82, 16 months each) 1 year of less revenue does not seembad. However, for the last 2 recessions, the revenue collectionshave been less each year for 3 consecutive years for both thepersonal and the corporate collections even though the latestrecession is listed as lasting 18 months.
Withinthis 3 year pattern, we also see that the declines are greater. Fromthe high to the low for 2000 to 2003, by 2003 personal collectionsare 79% of the high and corporations are 63% of their high. For thepresent recession personal became 78.4% of the high and corporationswas 62.9% of their high. Even in 1983, when Reagan wins thepersonal/corporation differential the declines were only 97% personaland 75.2% corporations. For another perspective, that 2 year declineof personal revenue collections for 1945/46 the personal declinedonly to 81.7% of the high. During this period the corporations onlydeclined for 1 year (1947) to 72.5% of the high. In 1947, corporaterevenue collections were 48% of the personal collections. In 2000,the peak corporations revenue was 20.6% and in 2008 it was 26.6% ofthe personal revenue collections.
Obviously we made more than marginalrate changes after 1980. We changed the way the base is calculatedsuch that corporations paid significantly less as a share of thetotal income taxes and was more tied to a change in the economy suchthat corporate taxes due were less during a recession where as thepeople had no reprieve. How’s that for fairness? Then came Bush II. The base changed even more… so such that now the decline inrevenue collected lasted longer than the recession and the declineswere greater.
We do not just need to raise the rates,we need to return to a broader base. That is, when all thedeductions are done, the adjusted gross income needs to be higher. On the other hand, what we are seeing here could be the results ofthe massive shift of income up the line combined with the decreasedrates. Considering this history, the cry to lower rates and get ridof loop holes just will not work. This is a cry for flattening theincome tax, which is what we have been doing since the 60’s which wasaccelerated since Reagan. It will create a tax base that is moreunstable and thus runs even greater deficits during times of economicdecline not to mention the overall decline in total revenue collectedduring good times. And, it totally ignores the issues of equality ofpower along with the concept of the commons. You know, that We thePeople premise.

But before you get to excited aboutthis suggesting or, that I am saying that the poor need to pay moretaxes and the rich are over taxed consider the tax table from 1936,its lowest income tax bracket is 4%. This is on an income up to$4000. Let’s bring that forward to 2010 using my favorite money converter. CPI states that $4000 is now $60,400. Today’s rate for $16,750 to $68,000 is 15% instead of 4%. Of course,I like the unskilled labor and nominal GDP/capita numbers of $145,000and $275,000 respectfully.

Alright, I’ll be fair. The lowest rate in1967 is 14% for up to $1000. That figures to 2010 of $6540 CPI,$6670 unskilled and $11200 nominal GDP/capita. Though, the $4000 in1936 is $9640 in 1967 which puts one in the 22% bracket ofthat year. Using the $12000 for the top of that 1967 bracket brings us to$78,300 CPI adjusted gross income for 2010. $78,300 puts one in the25% bracket for 2010. Obviously another issue we have here when itcomes to setting up marginal rates based on historical records is howmuch the base (adjusted gross income) is effected by how the CPI iscalculated. Any way you figure it, we have been pushing the marginalrate higher and deeper into the lower end of the income pool.

Ok, onto the fondly remembered tax yearof 1936. Next post.

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Robert Reich’s After Shock and Corey Robin’s Freedom Arguments

by Linda Beale

In earlier posts on ataxingmatter (here and here), I reviewed Robert Reich’s 2010 book, After Shock, and wrote about his suggested cures for the problems made most visible in the 2007 crash and the Great Depression that followed.

The gist of the book is summed up in the following quote:

“[L]eft to its own devices, the market concentrates wealth and income–which is
disastrous to an economy as well as to a society.” at 59

Corey Robin writes in the Nation about the same problem, Reclaiming the Politics of Freedom, The Nation, Apr. 26, 2011. But he notes that harping on the distributional inequality doesn’t resonate with voters. If the left wants to influence policies and capture the hearts of voters, he suggests, it needs to demonstrate that this distributional mayhem, which leaves everybody but the rich vulnerable, has even broader consequences that reach to the very fundamental creation myths of our society–the desire to be our own masters, to free ourselves from a tyrannical monarchy and colonial overlords who seemed to want to dictate how we could work, what we could drink, and where we could live. That is, to make what we are saying comprehensible at the “yeah, that’s what counts for me” level, we need to connect to America’s own Founding Moment. We need to “reclaim[] the politics of freedom.”

And I think he is correct. Because the problem we are facing today, with corporate lobbying and campaign contributions reinforcing the elite class’s wining and dining of politicians, is more than the dysfunction of the economy. Yes, there is too much money at the top where there is not enough ability to spend it. Yes, there is too little money at the bottom where there is no way to provide for basic needs. Yes, there is barely enough in the middle, resulting in stagnation in local businesses who don’t have enough customers to sell to and can’t afford to give credit to those who want to buy.

It is not just that banks, connected to power through their managers and shareholders, are able to speculate with other people’s money (our money!) in the international derivatives casino and then push their losses off on us. It is not just that corporate bosses rake in as much in a day as many of their workers make in an entire year of hard labor. It is not just that we can no longer talk to anybody local when there is a problem with our phone or our order from a company. It is not just that ordinary people are ignored, disregarded, almost shunned, because the elite really are only comfortable in the company of other elites. It is not just that we can’t get an appointment with a doctor unless we have (expensive) health insurance, or can’t get that crown we need on the broken tooth because it costs as much as some of us make in half a year.

No. These things are real, they affect us every day, they make us angry every day because we recognize our powerlessness to deal with the highly impersonal Big Business world that has been fostered by the four decades of reaganomics’ deregulation, privatization, tax cuts and militarization. But still, the problem goes much deeper than these things.

Our very freedom is threatened. When we are economically powerless, we are also powerless in our lives because we lose our freedom to make choices that are right for us.

  • we lose our rights to bargain with our employers (look at how Wisconsin and Ohio have treated their public employees or how WalMart treats its workers and anyone who talks unions),
  • we lose the power to improve ourselves by pulling ourselves up by the bootstraps through publicly funded education from grade school through university,
  • we are dominated in the marketplace by powerful businesses that use automated systems to turn us off, ignore our calls and letters seeking redress for a mischarge or a poorly done job,
  • we lose our jobs, are forced to accept paycuts or furloughs, when the company claims times are tought, yet we watch the same public companies to pay their CEOs millions more

Our freedom to improve ourselves, freedom to choose the kind of work we want to do, freedom to prepare for our retirement and then retire with some security about our future, freedom from worry about whether or not a catastrophic medical emergency will eat up all our savings and leave family without an adequate living–all these freedoms are being threatened today by the concentration of wealth in the hands of an elite few who thereby become emplowered to set the market terms as they choose.

The idea of the “free market” is a bill of goods sold to replace the real concepts of freedom we should be considering. Markets, of course, can only function well for the people where government constraints prevent the owners and managers from setting all the terms to suit themselves, leaving externalities of their profitmaking to be borne by the people. literally ripping them off. The sloganeers have persuaded ordinary Americans to think that the American Dream of freedom is encapsulated in that little bitty notion of a “free market” so that they will unknowingly throw away the big idea of freedom–the freedom to set one’s own course in life, in a cooperative society that works to provide those tools.

The reason we need a progressive tax policy–including at the least progressive tax rates with brackets that reach much higher into the stratosphers of the ultra rich (55% for those making $1 million or more annually) ; elimination of the capital gains preference (so that all income is taxed under the same rate structure); and an estate tax with bite (meaning a graduated rate that protects a reasonable nest egg for the next generation while serving as one method of limiting the concentration of wealth)– is to ensure the freedom of each and every one of us, from rich to poor, from newly arrived immigrant to elderly Native American.

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David Cay Johnston on Stiffing the Working Poor

by Linda Beale

David Cay Johnston on Stiffing the Working Poor
crossposted with Ataxingmatter

David Cay Johnston, former New York Times tax reporter and now a columnist at Tax Analyst’s Tax Notes, writes this week about  the way both the Obama White House and the Republican party conspire to provide every-increasing benefits through the tax system to some while stiffing the working poor.  Download David Cay Johnston. Obama and the GOP United Against the Working Poor. TN 14Feb11.

The beginning paragraphs make the critical points.

The tax compromise passed in December has been hailed everywhere as a payroll tax cut combined with an extension of the Bush tax cuts, despite the fact that it raised taxes on a third of Americans. The killing of Obama’s Making Work Pay tax credit, which the White House called the biggest middle-income tax cut ever, and the replacement of it with the Republicans’ payroll tax cut raised taxes on single workers whose wages come to $20,000 or less and married couples with less than $40,000 in wages. That’s 51 million taxpayers, the Tax Policy Center estimated.

[Two-thirds of the poorest quintile had a tax increase of $134 (about 1.3% of total cash income), whereas] at the top, just 1.8 percent of the top 1 percent ([those with] more than $564,600) were hit with a tax inrease.  Just 1.3 percent among the top tenth of 1 percent ([those with] more than $2 million) got a tax hike.  These best-off one in 1,000 Americans got a tax cut worth on average $45,000 each, all financed with borrowed money.

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Mark Cuban Makes the Key Point

Ken Houghton remembers that Warren Buffett famously groused that he pays a lower percentage of his income in taxes than his secretary. Or the person who will come up with an actual cure for a cancer.

Mark Cuban takes this one step further, pointing out the obvious: if we want to promote investment, “we should tax the trader/speculator more heavily than the investor.[emphasis his]”

When you make the tax rate the same for short-term investment as long-term—and lower than that on income—you create the perverse incentive to taking profits in the short-term, making the “capital” investment equivalent to a Demand Deposit account. If you want to reward capital investment, it needs to be truly treated as capital. Cuban notes:

The government should raises taxes significantly on profits from short term capital gains on the sale of public stocks, indexes, commodities, futures held for 24 hours or less and extend the length of time required to qualify for Long Term capital gains and reduce the tax rate on Long Term gains.

It might be difficult to reduce the already-less-than-minimal tax rate on long-term gains. (Last time I checked, the capital gain on a five-year investment is taxed at 8%.) But it would be no problem at all raising the rate on short-term trades back to where it should be—above that of ordinary income tax rates. And even a budget-balancing approach would leave plenty of room to lower the rate for legitimately long-term holdings.

Cuban makes the connection: one of the reasons the tax incentives need to be moved is the perversion they have made of Corporate Governance:

[Raising taxes on short-term trades and lowering them on long-term investments] will also reward companies that act in the financial interests of long term holders and their employers. I think the impact on the economy would be far fewer layoffs as CEOs find themselves with more shareholders who think long term rather than short term. Believe it or not, there are shareholders who are fine with companies not beating their numbers if the company is making progress towards a clearly defined goal….Taxation can change the focus on public companies and stock trading. That would be a great thing for the economy.

Cuban notes that there is still the major problem of misaligned incentives in Executive Compensation (economist’s version here [PDF, subscription required]):

CEOs…are so focused on marking to market their own personal stock portfolios, they emphasize stock performance over doing the right thing for the company.

Amazingly, this is exactly the problem that standard economic theory claims “professional” management solved. I hope this one makes it into John Quiggin’s book.

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Wyden’s Proposal for taxing oil and gas speculators

Ron Wyden, Democratic Senator from Oregon who serves on the Senate Finance Committee and the Energy Committee, is generally considered a liberal, though with a mixed bag of positions that hardly qualify on all grounds. He is against the estate tax and favors lowering rates of capital gains taxes, neither of which makes sense, from my perspective, in an economy already tilted to favor capital (and hence those in the upper distributions) and in need of revenue. His positions on the environment have been fairly consistently progressive. Back in 2004, for example, he worked on legislation to “get tougher” on responses to oil spills and get kinder in expediting loans to people impacted by those spills. See this press release. He has supported the US addressing CO2 emissions even if the big economies of China and India don’t (S. Con. Res. 70, May 15, 2008).

So what happens when you put tax policy (where I’m not terribly impressed with many of his positions) together with environmental policy (where he seems to have a fairly decent record)?

Today, Wyden introduced a bill (S. 1588) that deals with both of these issues. It would end a tax break currently enjoyed by speculators who trade in oil and gas. They’d have to pay tax at the ordinary income rates, rather than getting the preferential capital gains rates (o% for the first two income brackets, then 15%). This would be achieved by treating the gains as short-term capital gains (or losses) even if they would be treated as long-term under other provisions. Gains in trading by tax-exempt investors–e.g., Harvard’s endowment and similar funds– would be taxed as unrelated business income.

What’s the rationale? “To amend the Internal Revenue Code of 1986 to provide the same tax treatment for both commercial and non-commercial investors in oil and natural gas and related commodities, and for other purposes.” The first section has a short title that perhaps reveals more–it is the “Stop Tax-breaks for Oil Profiteering Act” (STOP Act). The bill also calls for a study of commodities exchanges and the effect of tax policy on the demand and price of commodities, and particularly of oil and gas.

I’m no expert in this area, but this sounds at first impression like a good idea. Wyden’s point is that those who use such fuels in their businesses have to purchase those commodities and treat any profits on related trading as ordinary. But speculators pay lower capital gains rates on trading profits, which may well mean that their trading distorts the market and raises prices.

Of course, I’ve long argued for eliminating the capital gains preference altogether, either through repeal of the provision in the regular tax or adding it as an adjustment in the alternative minimum tax. While I’d rather there be a wholesale change–to remove all the characterization games that taxpayers play and to help move the tax system towards a fairer one that does not give such inordinate preference to owners of capital over workers, these commodities trades may be an appropriate target, especially given their likely impact on pricing in an era when we can expect increasing oil and gas scarcity.

Any thoughts?

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