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

Why Progressives Should Reject Social Security Cap Increases

The basic reason is simple: it undercuts the broader progressive agenda. Also it buys into a particular Right economic meme. Both are huge mistakes.

To understand this we need to step back and examine overall tax policy and tax progressivity. What should progressives want? Well I suggest that as a first step we restore top marginal income rates back to Reagan levels (50%) and extend them to all income including realized capital gains. And then as some potential second stop restore those top rates to Kennedy levels (70%). At this point the Federal government would have the funds to start addressing all parts of the progressive agenda from childhood education and health to retirement security in a direct way, that is we could once again engage in the New Deal and the Fair Deal in a quest to achieve the Great Society. Or in more restrained rhetoric start working on social democratic solutions to broad societal problems.

But if progressives and Social Democrats agree on this then proposals to lift current Social Security wage caps and/or extend FICA to all income starts crowding out any possibility to tax THAT SAME INCOME via changes in marginal rates. Moreover it floods cash into and through a Trust Fund system that doesn’t allow expenditures on anything other than the specific programs involved. With the result that the rest of the progressive agenda remains stymied by the crowding out effect even as the Right can ‘explain’ that ‘you can’t have nice things’ because all the money is going to Social Security. Thus proving that the whole program was ‘unsustainable’ to start with and that any extensions of it, say in the direction of Single Payer Health Insurance, is just foolish and ignorant.

The truth is that the actual cash flow issues facing Social Security are minor and manageable within its current structures. Indeed almost all that needs to be done for Social Security going forward can be addressed by policies focused on increasing real wage and labor share via minimum wage and wage theft/suppression enforcement and by embarking on a much needed direct expenditure on public infrastructure. After all 12.4% of every wage dollar funded directly by a bridge replacement projects and 12.4% of every wage dollar produced by the multiplier effects of those wage workers spending their remaining wages flows directly into Social Security anyway. Meaning that jobs projects ARE Social Security ‘reform’.

George Laffer wasn’t entirely crazy. There is a maximum rate of tax extraction that corresponds with the greatest growth of the economy. It would just seem that depending on how you structure the incidence of that tax between wage income and capital income the empirical data shows that rate to be closer to Johnson and Kennedy’s 70% than Reagan’s 50% then 35% or Clinton’s 40%. So lets get cracking on raising marginal tax rates. But that effort is only impeded by progressives explicitly endorsing ‘Social Security Crisis’ and sending any and all increased tax revenue through the Trust Funds.

This isn’t to say to neglect Social Security entirely. The DI Trust Fund needs an immediate boost in revenues and the OAS Trust Fund would well be served by a gradual increase in FICA rates (hi Coberly!). But that doesn’t require extending FICA to all income, that is simple overkill and overreaction to what Dean Baker and Mark Weisbrot appropriately named the Phony Crisis in their book back in 1999.

To me the broader progressive economic agenda is simple: Restore top marginal income tax rates to 50%, or better 65%. Pursue policies explicitly focused on increasing employment, real wage and so labor share. And then—. Well there doesn’t really need to be much more “And then”. Certainly not in regards to major adjustments in the structure of Social Security finance, that just will work itself out with the combination of higher employment at higher wages and maybe some tinkering with FICA rates under the current cap formula.

Progressive Taxation and MJ.ABW (More Jobs. At Better Wages). And oh yeah – leave Social Security alone (at least mostly). Cap Increases are just a diversion from the real progressive solutions to the total progressive agenda.

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Wow. Seriously, Chris Cillizza and Sean Sullivan? Seriously??

Am I misunderstanding (certainly a possibility), or do the Washington Post’s Chris Cillizza and Sean Sullivan write an entire article based on a really obviously ridiculous conflation of two separate concepts: what tax law is, and what tax law should be?

The article, titled “Mitt Romney was right (on taxes),” chastises the public for hypocrisy in believing, on the one hand, by wide poll margins, that people should do whatever they can to legally reduce their taxes as much as possible, yet on the other hand disapproving of politicians (especially wealthy ones) doing exactly that. These writers use two examples: the respective cases of Mitt Romney and Barack Obama, the latter who just released his newly-filed tax returns for last year showing that he and his wife paid federal income taxes at a rate of 18.4%.

About Romney, they write:

The two-time presidential candidate, whose considerable wealth made the release of his tax returns a focal point of the 2012 campaign, insisted that he paid what was required but no more.

“I pay all the taxes that are legally required and not a dollar more,” Romney said at a debate in January 2012 just prior to releasing his 2010 and 2011 returns. “I don’t think you want someone as the candidate for president who pays more taxes than he owes.”

Eighty-five percent of the American public should have agreed with Romney. But, of course, they didn’t. Romney was cast as trying to game the system for the benefit of he and his wealthy friends. In a February 2012 Washington Post-ABC News poll, two in three Americans said Romney did not pay his fair share of taxes (the public was split over the question in the fall). And a majority of voters in the 2012 exit poll said that Romney’s policies would generally favor the rich and he lost that portion of the vote overwhelmingly.

About Obama, they say, “The Drudge Report, a popular conservative-leaning aggregation site, quickly went with a banner expressing incredulity at the 18 percent rate. Conservatives on twitter were similarly disgruntled.”  As if it’s the general public rather than the far-right starve-the-beast crowd that’s shocked.  And as if it’s even clear that the Drudge Report writer’s incredulity is about Obama’s paying only the legally required amount rather than the lowness of the legally required amount.  The headline, which is not attached to a story, best as I can tell, but instead simply links to the Wall Street Journal news report about Obama’s tax return, reads, “Obama only pays tax rate of 18%?”

Well, yes.  That’s what Obama is actively trying to change: the lowness of the federal income taxes paid by the wealthy.

That much is obvious.  Obama campaigned on a promise to raise federal tax revenues obtained from the wealthy.  Romney campaigned on a promise to lower the tax revenues obtained from the wealthy, who are, y’know, jobs creators who took risks.  Risks!  Including, for many of them, such as Mitt and Ann Romney themselves and, especially, their sons, being born into a wealthy family.  Warren Buffett is not a politician, but it’s a safe bet that he paid no more income taxes than he owed under current tax law, even though he has been in the vanguard of high-profile people who openly plead with politicians to raise tax rates for the wealthy and also remove the outrageous loopholes available to them.

It’s also a safe bet–even safer than, say, betting on Berkshire Hathaway stock–that Warren Buffett has never had a retirement-savings account in a Cayman Islands bank that has between $20 million and $120 million (or the deflationary equivalent) in it, achieved almost certainly by stated initial gross devaluation of equities placed into the account.  And that he did not avail himself of the IRS’s 2009 tax amnesty program for people who were shielding income from the IRS in Swiss banks because he did shield income from the IRS in Swiss banks.  Romney likely did both, which probably is why he refused to release to the public tax documents that would dispel those inferences.  The only other reasonably possible motive for his failure to release those documents is that they would have highlighted the outrageousness of legal tax loopholes that Romney did not want to draw attention to–also a possibility, although, I suspect, not the actual, or at least not the predominant, one), but in any event not one that supports these journalists’ characterization of the public’s poll responses as hypocritical.

What’s really remarkable, in my opinion, is that at least one of these two Washington Post political writers, one of them very high-profile–and as a regular reader of their blog, The Fix, I suspect it is Cillizza, the high-profile one, rather than Sullivan–thinks that a poll question using the phrase “pay their fair share of taxes” references not preferred tax policy but instead actual, current tax policy. The poll question almost certainly was intended to reach, and was understood by the poll respondents to be asking, about the voter’s preferred tax law, not about how the voter thinks people should act, by choice, under current, existing tax law.  With the caveat, of course, that most people don’t think wealthy people such as the Romneys should violate tax law, as many, many people who followed the specifics of the Romney-tax-returns controversy last year did conclude.

There is, in other words, nothing even slightly hypocritical in believing that people are morally entitled to avail themselves of legal tax breaks but that tax law should be amended to remove some of those tax breaks, to raise tax rates on the wealthy, to tax investment income at the same or near-same rate as investment income, and to tax large estates.  Or to do at least some of these things.

The belief that the law in its current form does not exact payment of a fair share of tax revenues from the wealthy, and the belief that it’s fine for people to employ current tax law to lower their own taxes, irrespective of their views on what tax policy should be, are not contradictory. Unless, like one or both of these journalists, you think the phrase “fair share of taxes” means two distinct and contrary things at once.  But most people, I’m pretty sure, understand quite well what that phrase addresses.  And it’s only one of those two things, not both.

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Ok class, let’s review before the exam (election)

I’m sure you are all feeling kind of blah. You have this final exam for this session and I can tell by your performances on the quizzes that you are still confused. The problem solving portions of the quizzes have been very telling. So lets review.
 
You’re taxes are not too high. It’s your income that is too low! Remember this and you will be able to solve enough of the problems to obtain a passing grade and graduate. And class, no one running today for president gets this. It is why President Obama looked like such a dufus in the debate. Romney took a step to his left… right into Obama’s policy space. Where does one go to gain more space when they have walled up the door to the left of them as President Obama has?
 
Let’s get something real clear from the beginning. Unless you are acquiring the majority of your money from money YOU ARE NOT A CAPITALIST 
 
 
Second: A MARKET IS NOT AN ECONOMY.

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Romney and Private Equity’s Questionable Schemes for Paying Very Little Tax

by Linda Beale

Romney and Private Equity’s Questionable Schemes for Paying Very Little Tax

Presumably any American who wants to be informed is aware that GOP presidential candidate Mitt Romney‘s claim to business acumen resides in his experience at a private equity firm that made much of its money by ramping up debt at purchased firms and using that debt to repay whatever (usually relatively small) investment the equity firm partners made in what has come to be known as “LBO” deals (for “leveraged buyout”).  In LBOs, the equity firm investors almost always do well to exceedingly well, using mostly other people’s money.

Not so generally for the workers in the bought-out company.  The “rent” profits of the equity firm are often on the back of the workers, who may get fired in favor of outsourcing their jobs or get stuck in a rut, as productivity gains go to the new managers and owners and not to the workers.  At the least, the high debt load makes it very difficult for the company to succeed and certainly difficult for it to give its workers a fair shake.   Remember that one of Romney’s gaffs was to admit that he enjoys firing workers.
Why anybody thinks this kind of winner-take-all, leverage-’em-up mentality of private equity firms suggests the kind of leader desirable for a democracy that purports to provide genuine opportunity for all classes of citizens to live a decent life is beyond me.

But even if the very nature of the business and the common tools of over-leverage and “rent” profits for a very few already at the top don’t give voters cause for pause, then there are the many ways that private equity firm partners manage to avoid paying their fair share of taxes, which ensures that more of the tax burden falls on the less-well-off, that are worthy of consideration, even if candidate Romney has not (as his campaign claims) benefited from them personally.  That is because if Romney is elected president, his views on the acceptability of aggressive tax strategies of questionable legality will matter.  We should know what kinds of tax schemes are routine in the business that he touts as good evidence of his ability to serve as president of this nation–especially if some of them are obviously poor policy (the carried interest treatment) or highly questionable tax avoidance schemes (the management fee conversion waiver scheme).

1. Carried Interest   (More after the jump)

The best known way private equity firm partners reduce taxes is by earning their compensation in the form of “carried interest” and claiming that such profits should be treated the same way a real capital investment in a partnership is treated, even though it is awarded as compensation for their purported management expertise and work and not as a return on an actual investment made.   That is, they claim they are profits partners in the firm and that their compensation is a distribution of the partnership’s profits (usually from gains on sales, and hence eligible for preferential capital gains) to them rather than compensation income.  As such they benefit from the extraordinarily preferential rate for capital gains in the current law as enacted under the Bush administration (generally 15%).  Carried interest is the primary reason that candidate Romney has to pay such a very low rate of taxes on his income from his business.

The Internal Revenue Code (the codification of the federal statutes governing the federal income tax) does not include a specific provision governing profits interests and indicating that such “profits” partners should be treated as actual partners in a partnership (without that partnership interest itself being subject to tax as compensation) entitled to receive capital gains distributions.  Accordingly, as one partnership tax treatise puts it, the tax treatment of a transfer to a “service partner” of a “profits interest” for services “has been uncertain” because “[n]o provision of the Code specifically exempts from taxation the receipt of any partnership interest in exchange for services.”  Willis & Postlewaite, Partnership Taxation, 6th ed, at 4-124.    There is some case law about profits interests, but those cases made it even less clear how and when such interests should be taxed.

Finally, the Service resolved the issue with administrative authority (heavily lobbied for in the interests of equity partners and real estate profit partners, in particular) in Rev. Proc. 93-27 (and later proposed regs and other items) that does not treat the issuance of a compensatory “profits interest” as  a taxable event in most instances.  The main reason for the treatment may well be the so-called “Wall Street Rule”–once incredibly wealthy taxpayers hire sophisticated, high-priced lawyers to produce opinons supportive of a taxpayer-favorable interpretation and then operate as though the Code blesses a particular activity, it is hard for tax administrators to issue regulatory authority that treats that activity differently.

2, Management Fee Conversion Waivers
But there is another lesser-known aspect to the compensation that private equity fund partners earn for their services in their private equity firms–the management fee.  Most explanations describe this as  compensation paid for services that is subject to taxation at the ordinary rate (just like a secretary’s wages would be).  But that disregards a practice that exists among a significant number of equity firms (the Times article linked below says about 40% in 2009) that are willing to take aggressive positions to avoid paying taxes and can afford to pay the tax professionals to provide a way to do it–the management fee waiver conversion scheme.

The conversion of management fees from ordinary income to capital gains is purportedly accomplished by “waiving” the fees (not necessarily across-the-board throughout the life of the firm, but often selectively and on a quarter-by-quarter basis),  Instead of getting fees, the partner claims they are “converted” to a share of related profits –i.e., they become an additional carried interest–and hence eligible for treatment as (deferred) capital gains from the firm. 

Some tax professionals think this conversion waiver works.  Much of this is again the “Wall Street Rule”–the claim that lots do it, the IRS has known about it, and oh it should be justifiable because now the “fee” is (sort of, maybe, kinda) at risk.  It is not really at risk in the way we ordinarily think of investment risk, since these are pre-tax dollars — the managers are not putting after-tax dollars at risk like any other investor is doing.  And as Vic Fleischer commented to the Gothamist blog, “there is a tension between economic risk and tax risk …. The way Bain set it up there’s not much risk at all, so it’s hard to see how this income should receive capital gains treatment.”  Christopher Robbins, NY AG: Bain Capital and others may have skirted tax law, the Gothamist (Sept. 2, 2012). 

I’d guess  that most professionals do not think the conversion scheme works, at least not in most instances.  This would be especially true for those who consider that interpretations of the law should further coherent bodies of law that work as fairly as possible.  And even more tax professionals likely think that the partnership rules should be adjusted to ensure that it doesn’t work, since otherwise we are perpetuating inequities in the tax system that favor the already incredibly rich.

The conversion waiver issue has come to the attention of the public now because the New York State attorney general is investigating private equity firms who may have engaged in this conversion waiver practice.  See Nichnolas Confessore et al, Inquiry on Tax Strategy Adds to Scrutiny of Finance Firms, New York Times (Sept. 1, 2012) (noting that the AG’s subpoenas, issued by the AG’s Taxpayer Protection Bureau, cover firms like Kohlberg Kravis, TPG Capital, Apollo Global, Silver Lake and Bain, and that Bain partners may have saved more than $200 million in federal income taxes, $20 million in Medicare taxes).
It’s not clear on what grounds the New York AG is investigating this issue, which appears on the surface to be primarily a federal income tax issue.  It could be some sort of state-law fraud claim but it could also be a claim that underpayment of state taxes routinely results from the filing posture taken,  Equity partners in firms using the conversion waiver would presumably be able to save on state income taxes through either rate preferences and/or deferral, depending on the state and how much the state’s laws build on the federal filing.  Though New York State does not have a preferential rate for capital gains, if the timing of reporting the income is set by the conversion waiver, the deferral would amount to a significant state tax savings that deprives New York of needed revenues.

[Aside:  By the way, some of the information about the management fee conversion waiver first came to broad public attention in connection with Bain and the trove of documents released at Gawker.com.  See John Cook, The Bain Files: Inside Mitt Romney's Tax-Dodging Cayman Schemes, Gawker.com (Aug. 23, 2012) (noting that the huge cache of Bain financial documents "shed a great deal of light on those finances, and on the tax-dodging tricks available to the hyper-rich that [Romney] has used to keep his effective tax rate at roughly 13% over the last decade”).   These documents, and the further analysis articles available at the Gawker.com site, are worth considering for their own revelation of what Romney’s real business is like and how that does (or doesn’t) suggest he can help our economy as president–it is a business where “opaque complexity” allows the “preposterously wealthy” to engage in “exotic tax-avoidance schemes”, according to the Gawker.com article.  (I have not yet personally perused much of the 950 page trove on Gawker.)  That said, Romney’s campaign issued a statement indicating that the candidate has not benefited from the conversion waiver practice.  We have not, of course, seen enough of Romney’s tax returns and supporting information to be able to judge this matter independently.  The focus on the conversion waiver thus provides yet another reason why candidate Romney should release 10 years of tax returns as other candidates have done.]

There are two additional readable pieces on this conversion waiver issue, plus a scholarly article that anyone wanting to better understand the details can peruse.  Vic Fleischer, a tax prof at Colorado who made his original contribution to academe by writing about carried interest, has an article that sets out the issues well, with an example contrasting the significant difference in after-tax results for a real investor compared to a profits-interest purported investor.  See Victor Fleischer,What’s at issue in the private equity tax inquiry, DealBook, New York Times (Sept. 4, 2012). See also Brian Beutler, Did Bain Capital Execs Break the Law Using a Common Tax Avoidance Strategy? Talkingpointsmemo.com (Sept. 3, 2012). The academic piece is Gregg Polsky, Private Equity Management Fee Conversions (Nov. 4, 2008).  The following two paragraphs are from the conclusion to that piece.

In fact, there are strong arguments that it is not. While managers argue that the safe harbor in Rev. Proc. 93-27 applies to the additional carried interest, there are both technical and conceptual claims to the contrary. Without the protection afforded by Rev. Proc. 93-27, the additional carried interest would be taxable upon receipt if it has a market value capable of determination. Both the context in which the additional carried interest is issued and the specific design features of the typical additional carried interest support the view that additional carried interests are significantly easier to value than prototypical profits interests.Under existing case law, this would mean that the additional carried interest is taxable upon receipt as ordinary income to the extent of its fair market value.

The IRS also has strong arguments under section 707(a)(2)(A), which recasts transactions that are artificially designed as partnership transactions in order to obtain tax benefits, such as character conversion. In the context of fee conversions, the most critical fact that favors section 707(a)(2)(A) re-characterization is the manager’s very limited exposure to risk. As a result, section 707(a)(2)(A) likely applies to fee conversions. If so, the manager’s attempt to convert the character of their management fee income would be thwarted.

cross posted with ataxingmatter

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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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Romney’s Wall St. J. Interview with Gigot–Protecting the Rich

Romney’s Wall St. J. Interview with Gigot–Protecting the Rich

[edited to rephrase and correct typos 12/26/11 5 pm]
Joseph Rago and Paul Gigot interviewed Mitt Romney on his ‘vision’ for America–”On Taxes, ‘Modeling’, and the Vision Thing”, Wall St. J. Dec. 23-24, 2011, at A13.  In it, Romney reveals the way patrician wealth has affected his values, casting President Obama as a “European social democrat” and suggesting that contrasts with his own belief in a “merit-based opportunity society–where people earn their rewards based upon their education, their work, their willingness to take risks and their dreams.”  
Now everybody likes the idea of people being able to advance based on merit, rather than on crony capitalism, improper influence or whatever.   The problem with suggesting that America is a ‘merit-based opportunity society’ is that it isn’t much of one anymore: America in this second Gilded Age is primarily a wealth-and-status-based opportunity society. 
  • Education:  Even Romney admitted (obviously unintentionally) that wealth makes a real difference, since he noted that rewards depend in part on education.  People with wealth receive the finest educations from pre-K through post-graduate, getting preferences at the best children’s academies in Manhattan and at the highest ranked universities like Harvard and Yale.  People without wealth lose out from the very beginning, with inferior schools that are no longer fully supported by the public, as charter and for-profit schools take over offering inferior educations that no patrician family would ever accept.  The poor and middle class take on enormous loans and work loads to finance even their public university educations, since state support has slipped down to a mere 20-30% of the cost of that education.  That makes study and grades and success much more difficult for them. 
  • Working hard (with Contacts/Influence/lobbyists):  The wealthy are introduced early to the most important people of influence in society, like the Vanderbilts and the Astors of old, the private equity fund managers and the Wall Street bankers that can smooth their way through all the trials and tribulations of their ‘work’ careers–i.e., becoming owners of major league baseball team when you have no relevant experience (George W. Bush, with the aid of his papa and his papa’s influential and rich partners) or setting up a venture capital fund (like Romney’s Bain Capital). These connections ultimately permit the wealthy to mingle in a monied society that offers the right contact for every venture to succeed–including lobbyists to help a wealthy entrepreneur get his business going and ability to ‘invest’ in politicians who are willing to risk alienating the middle class to support preferential taxation of the rich. 
    • By the way, lots of the not-rich work quite hard, often at thankless jobs that provide no cushion to deal with life’s difficult blows or at a job that, at minimum wage, still leaves their family below the poverty line.  Without the contacts and influence that smooth the way of the rich, there chances of moving up are much more limited.  If they persevere, have an entrepreneurial idea, and catch a break, they may be able to move beyond where they are, but they have to do a lot more than just ‘work hard.’  
  • Taking Risks (and Getting Subsidies and Preferential Tax Provisions):  The poor take a risk every time they get up in the morning–will their health hold out so they can keep working? will they be able to make it to their job in that car that needs a new starter? can they manage to arrange for someone to take care of their kids while they work or will they have to be “latch-key kids” yet another day?  But they don’t usually have the kind of capital nest-egg to take a risk with in the way that Romney means it–the excitement of opening a new business demands from the poor and near-poor Herculean efforts to pull together family, friends, and workers to support their business ideas.  Those with money, on the other hand, have a head start on all of this.  Bill Gates’ parents offered him an educated life of relative ease; he could ‘play’ in the garage on that dream of his rather than running heavy machinery or working behind a counter at a McDonalds.  And those with contacts and money are able (and willing) to hire the best lobbyists to ensure that they get all the tax-advantaged benefits and subsidies that they can finnangle (or buy) from local, state and federal legislators for their activities.  That includes favorable tax provisions that allow them to keep a significant percentage of their wealth (and to fight for even more favorable provisions), such as the carried interest provision that gave Romney a preferential rate on almost all of his compensation income, the preferential capital gains rate that gives all the wealthy a low tax rate on their income from trading stocks and bonds with each other, and the various ways that the tax code subsidizes the kinds of personal deductions that provide the most benefit to those with money–from the charitable contribution deduction (including the ability to give away stock and claim a deduction for its value rather than for your actual basis) and the mortgage interest deduction (for interest on home loans up to a million plus $100,000) to all of those provisions that allow the wealthy to retire well–pension plans, exclusion of life insurance benefits, etc.  Then there are the many subsidies they get various governments to provide for their businesses, presumably by using those long-term family/status connections to wine, dine and influence.  They include low-cost loans such as those enjoyed by Romney’s Bain Capital for various businesses that Bain Capital was ‘turning around’.  (Handily, they can make low-taxed profits for themselves even when their turnarounds fail, with all those subsidies, so that the taxpayer sometimes ends up paying  for their losses along with the fired workers.)  See the links provided in the posting yesterday on Romney’s reluctance to release his tax returns, which discuss some of the subsidies and other benefits to Romney’s business. 
That’s not a merit-based opportunity society:  it’s an influence-based society, where the poor and even most of the middle class are working against long odds to make headway. 
And there’s not much evidence that Romney recognizes this fundamental difference in existence of the well-off and the not-so-well-off here in America.  Take the Gigot story’s discussion of tax policy and what kinds of “reforms” Romney supports.  The Journal apparently thinks Romney is too timid on ‘risk-taking’ because he didn’t espouse the kind of tax agenda that the Journal supports–moving to a consumption tax–like the national sales tax– that shifts most of the tax burden to ordinary folks (since they will pay tax on most or all of their  income since they spend most of it on food, shelter, clothing and other necessities) and leaves a zero percent tax rate on the capital gains, dividends, and other income from capital that makes up most of the income of the wealthy and little of the income of everybody else.  Why, the Journal notes, Romney’s plan merely calls for extending the Bush tax cuts, cutting the statutory corporate tax rate from 35% to 25%, and eliminating capital gains and dividends taxes only for those who make $200,000 or less.  Romney won’t even say he supports a consumption tax til he’s studied it more, though he likes the purported “simplicity” of a flat tax.    Romney also says he likes “removing the distortion in our tax code for certain classes of investment”.  This means that Romney does not understand the real economics of the consumption tax and the so-called ‘flat tax’, both of which result in taxation of 100% of the income of the poor and near poor and most of the middle class while leaving the rich with a minimal tax burden.  Any system for alleviating that burden (such as a low-level exemption at the bottom of the income scale) would thrust a truly burdensome recordkeeping requirement on those least able to cope with it.  Especially for versions that merely zero out the tax rate on income from capital, distortions would be magnified: the categorization of income into different types is one of the primary distortions in our system, and any plan to eliminate taxes on one type of income while retaining them on another increases distortions rather than removing them!
What about Romney’s saying he won’t propose cuts in individual tax rates for those making more than $200,000?  The Journal seems to think that is rather cowardly, since such a proposal accepts President Obama’s linedrawing on where rate cuts might be reasonable.  Now, aside from the failure to consider dropping the entire bunch of Bush tax cuts and letting all the rates go back to the level that they were when Bush took office (which might well be the best tax reform the Congress could do at this point), Romney should be commended for at least recognizing that the wealthy have gotten a fistful of tax gifts from the Bush individual tax cuts (and, indirectly, from the various corporate tax provisions that have allowed companies to pay less and less into the federal fisc) and for not wanting to proffer even more. 
But here’s the rub.  Romney doesn’t recognize the damage from the wealthier among us continuing to get even wealthier while the vast majority suffers stagnation and decline:  as the concentration of income increases at the top and inequality becomes the defining characteristic of this society, opportunity for all is threatened as is democracy itself.  Tax policies that could serve as a deterrent to that wealth buildup at the top–e.g., a stiffer, progressive estate tax, a financial transactions tax to discourage trading and capture a tiny amount in connection with those secondary market trades amongst the wealthy, and bracket expansions that would create a more progressive set of tax rates for the highest income that would distinguish between those who have $400,000 a year and those who have $2 million a year–aren’t even on Romney’s radar screen.  He’s content with the current system’s distribution, one that is highly favorable to the wealthy.  As a recent FED Finance and Economics Discussion Series article made clear, inequality has made permanent inroads and tax policies haven’t done much to dampen them.  See Jason DeBacker et al, Rising Inequality, Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006.
Romeny’s made it clear that he isn’t about to challenge the status quo of an easy tax life for the wealthy.  Here’s what he said to the Journal on the question of making sure that the wealthy never see any kind of a tax increase.
“My intent is to simplify our tax code and create growth, and so I will also look to see whether the top one-half of 1% or one-thousandth of 1% or top 1% are still paying roughly the same share of the total tax burden that they have today.  I’m not looking to lower the share paid for by the top.”  Wall St. J., Dec. 24-25, 2011, at A13 (quoting Romney).
So after a decade of cutting taxes on the wealthy and passing more and more provisions that benefit the wealthy in particular either directly or indirectly, Romney declares today’s status quo as the perfect state for things to be in–the current low taxes on the wealthy, in perpetuity, are his goal.  And while we may applaud him for not intending to lower taxeds further on the wealthy, it is hard to see how continuing current tax policy towards the wealthy makes sense for the fisc or for democracy.   Carried interest–won’t be taxed under Romney as the ordinary compensation that it is.  Mortgage interest deduction on million-dollar loans–won’t be pulled back to a more reasonable amount such as the interest on a loan that is 80% of the value of the median-priced US home.  Charitable contribution deduction for value rather than basis in stocks contributed–won’t get rid of that one.  Establishment of new brackets to recognize the drastic expansion of incomes at the top so that those with progressively more income are paying progressively more in taxes–won’t happen under Romney.  Why?  Because he is going to make sure that the top 1%, the top 1/2%, the top 1/1000% don’t pay less, but also don’t pay a bit more in taxes than they are paying now, this perfect state where the GOP wants to cut people off Medicaid to save money, turn Medicare into a ‘premium support’ system that will shift more and more of the burden of health care in one’s old age to the vulnerable elderly with a pension they can’t count on and a Social Security system that the GOP is trying to ensure that they can’t count on.
Most tax “simplification” promoted by lobbyists won’t create growth–it is much more likely to result in tax loopholes that the wealthy can drive a truck through.  Refusing ever to increase taxes, even on the ultra-rich who can clearly afford to pay more (without really noticing the difference in spending power) won’t create growth–it most likely will result in a stagnant economy where the burdened middle class gradually falls into the ranks of the New Poor. 

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Beale debates Cato’s Edwards on the right’s "flat tax"–New Hampshire Public Radio

by Linda Beale

Beale debates Cato’s Edwards on the right’s “flat tax”–New Hampshire Public Radio

Last Wednesday (Oct. 26, 2011), I debated the Cato Institute’s tax policy guru Chris Edwards about the right’s various “flat tax” (FairTax, 9-9-9, USA Tax, consumption tax) proposals, on New Hampshire’s public radio station’s hour long program “The Exchange”, hosted by Laura Knoy. You can catch the program on the NHPR site, at “The Flat Tax is Back” (Oct. 26, 2011). (The live format is an initial discussion in response to the host’s directed questions, followed by call-ins from the public.)

I argued, as you might expect from my previous postings on this matter, that the various proposals for some form of VAT/consumption/wage-based/flat tax do not make sense at a time of inordinate income and wealth inequality in the United States. Consumption taxes are regressive, and most proposals from the right–including Herman Cain’s three step progress, with 9-9-9 as the midpoint, towards a national retail sales tax, and Rick Perry’s proposal for an ‘option’ of a 20% national sales tax–simply will make the rich richer and the poor poorer. They are terrible ideas at any time as a substitute for both the somewhat progressive income tax and the somewhat equalizing estate tax. They are especially terrible ideas in a period when inequality has returned roughly to the same level as it was in the Gilded Age and when plutarchy threatens to devour our democracy.

Edwards made some rather inconsistent statements–including acknowledging that all of these proposals call for elimination of tax on all income from capital and from all estates, and then a later statement that the flat tax would be fair because it would tax people alike on their total income! He also relied on straw man arguments–another favorite of the Cato Institute representatives that I have seen before, used to divert attention from the fact that they cannot really answer the real question at issues. Chris relied on the laughable Laffer-curve based argument of which Cato is inordinately fond and which has been adopted and repeated ad nauseum by the right, that tax cuts result in greater revenues to the rich that result in enhanced job growth. I reminded him and listeners that our greatest growth was from WWII to 1981 when we had very high tax rates, demonstrating clearly that high tax rates do not cause weak growth. (Of course, 1981 is the critical time, because the Reagan cuts ushered in the right’s reaganomics dominance with tax cuts, deregulation, militarization and privatization that led us to the current Great Recession–aided in part by the weak-kneed Democrats who went along rather than standing up for worker rights.) Chris’s response to the empirical evidence that tax cuts do not lead to broad-based growth or job creation was “we can’t ever go back to the high rates of the 1970s again.” Of course, that was a straw man argument. Nobody is arguing for 90% rates. I am arguing, however, that the flat tax–with its zero percent rate on most of the income of the uberrich and its very low rates on the rest of their income–will hurt the poor because it is distributionally unfair, and hurt the economy generally because it will lead to revenue shortfalls that will force spending cuts to programs that matter to the wellbeing of society.

Anyway, listen to the program. Your thoughts welcome in comments to the blog. (And sorry for miffing my chance at the “last word” at the end of the program. It was an instance of getting tangled up in what I wanted to say and ultimately failing to make the point with any power at all. What I was aiming for was something along the lines of the following:

Reagan passed the 1981 tax cuts, and then Congress realized what a problem the resulting deficits would be so was energized to pass increases in taxes. Problem was, most of the cuts favored the rich (were cuts in income taxes and in depreciation expenses providing cuts in income taxes, etc. ) and most of the increases disfavored the poor (i.e., were regressive payroll taxes). IN 1986, however, there was a broad process of Congressional review, resulting in the 1986 tax reform act that eliminated (for a very short time, as it turned out) the category distinction between capital gains and labor income. That was a major, good innovation that grew out of a sustained, measured, thoughtful though imperfect process. There is no indication that election of more hard right candidates will lead to any such similar reform process today. If elected, the hard right candidates are likely to push for, and may get, tax changes that continue to enrich the rich, like the flat tax or 9-9-9 tax plans being put forward by Perry and Cain.

originally published at ataxingmatter

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Kudlow’s Komedy Kapers (Cross-post)

Brad DeLong asked a few days ago who he should be reading on a daily basis. Following is a cross-post from my nominee, The Hunting of the Snark:

Kudlow’s Komedy Kapers

Larry Kudlow is worried that Obama is ruining the economy.

Larry Kudlow
August 5, 2011 4:30 P.M.

More Obama Spending Won’t Do It
And stocks know it.

There he goes again.

Because quoting Reagan is cool.

Out on the campaign trail, President Obama is proposing more federal spending as his answer to sluggish growth and jobs. That won’t do it, Mr. President.

Yes, when the private sector doesn’t provide jobs, don’t look to the government to provide jobs. That just won’t do it, Obama. That just…won’t….do!

He wants more infrastructure spending, undoubtedly in the form of an infrastructure bank. That’s a terrible idea. It’s borrowed from Latin America, where bloated and corrupt bureaucratic construction agencies have helped bankrupt any number of countries in the past.

It’s also borrowed from Roosevelt, but we all know how he secretly created the Depression by spending money.

He wants to lengthen 99-week unemployment insurance, although numerous studies have shown that continuous unemployment benefits are associated with higher unemployment.

I want to bronze that comment and turn it into an ashtray. Numerous studies have show that UI is associated with high unemployment! Obviously, the only solution is to stop handing out UI, and then we’ll have no more unemployment.

And he wants to extend the temporary payroll tax credit, which is not a permanent reduction in marginal tax rates, has no incentive effect, has not worked so far, and is really a form of federal spending — not real tax relief.

How the rich suffer so from their high taxes.

Earlier this week, when he signed the debt-ceiling bill, the president ranted on about the need to raise tax rates on successful earners, investors, and small businesses. He’s trying to bring back tax hikes as part of the phase-two special committee seeking additional deficit reduction, even though his own party rebuffed him on this in the late stages of the debt talks. All this is a prescription to grow government, not the economy.

Reagan actually raised taxes when it was necessary while Obama is just talking about raising taxes, but as we all know, the Reagan years were a bit of a blur for Kudlow.

What the economy needs, Mr. President, is a strong dose of new incentives, with pro-growth tax reform that flattens marginal rates and broadens the base for individuals and businesses. This includes moving to territorial taxation that ends the double tax on foreign earnings of U.S. companies. Plus, we desperately need a complete moratorium on federal regulations. As Sen. Barrasso recently noted, the government put out 379 new rules on business in July alone, amounting to $9.5 billion in additional costs.

Because US companies pay far, far too much in taxes. Just ask the Center On Budget and Policy Priorities (CBPP).

The U.S. corporate tax burden is smaller than average for developed countries.[1] Corporations in 19 of the member states of the Organization for Economic Co-operation and Development paid 16.1 percent of their profits in taxes between 2000 and 2005, on average, while corporations in the United States paid 13.4 percent.

Nevertheless, some have argued that U.S. corporate tax rates unduly burden U.S. companies by pointing to the country’s top statutory tax rate, which is 35 percent. For example, a recent Wall Street Journal editorial calling for corporate tax cuts noted that this is the second highest top statutory tax rate among developed countries.[2] While true, this gives the false impression that the corporate tax burden is greater here than in other developed countries. Because the U.S. tax code offers so many deductions, credits, and other mechanisms by which corporations can reduce their taxes, the actual percentage of profits that U.S. corporations pay in taxes — or what analysts refer to as their effective tax rate — is not high, compared to other developed countries.

Because the average U.S. corporate tax burden is low, many economists believe a revenue-neutral corporate tax reform that reduces statutory corporate tax rates, while broadening the tax base by eliminating costly tax breaks, could improve economic efficiency and likely benefit the U.S. economy.

Kudlow:

None of these pro-growth reforms are in sight. So the stock market is going through a nasty 10 percent correction over fears of another recession (and European debt default).

That’s definitely not a recession reading.

Yes, you read that right. Kudlow says we are not in a recession. From an earlier post

No Recession

Strong profits, easy money, and Tea Party gains argue against it.

Stocks and bond yields are sinking as Wall Street disses the debt deal and instead focuses on a likely double-dip recession.

Everyone is gloomy. But is this pessimism getting a little overbaked?

Granted, the economy is sputtering, with less than 1 percent growth in the first half of the year. But if there is a recession in the cards, it will be the first time one occurs when the yield curve is steeply positive (an ultra-easy Fed) and corporate profits are strong.

And since we do have ultra-easy money and strong profits, I don’t believe we’re heading into a recession. Nor do I believe stocks will continue to swoon.

The principal reason for the sub-par first-half economy is the rise of inflation, which severely damaged real incomes and consumer spending. We experienced a mini oil shock, which has dampened the whole economy. Actually, it’s worth remembering that oil shocks and inverted yield curves, along with falling profits, are the most important leading indicators of recessions. We don’t have this right now.

Back to the present:

But at least we got some good news on jobs. The July jobs report came in stronger than expected. It’s not great. But at least nonfarm payrolls increased 117,000 — as the prior two months were revised upward by 56,000 — while private payrolls gained 154,000.

That’s definitely not a recession reading. But neither is it a strong performance. If the economy were really rebounding, we would be creating 300,000 new jobs a month.

In the report, the unemployment rate slipped to 9.1 percent from 9.2 percent. But that’s mostly because nearly 200,000 workers left the civilian labor force. Another negative is the household employment survey, which fell 38,000 in July after dropping nearly half a million in June. That survey measures job creation among small owner-operated businesses or the lack thereof.

Yet when looking at the new jobs report, along with reasonable gains in chain-store sales and car sales, plus the ISM Purchasing Managers reports (which stayed above the 50 percent line), I repeat my thought that we are not headed for a double-dip recession.

The US New and World Report begs to differ.

According to the latest figures, the U.S. economy created 117,000 new jobs, causing the unemployment rate to drop slightly, from 9.2 percent in June to 9.1 percent in July. But, as Jeff Cox writes over at CNBC, “there is far more than meets the eye” to this bit of economic good news, which is certainly nothing to cheer about.

The U.S. Bureau of Labor Statistics breakdown says there were 139,296,000 people working in July, compared to 139,334,000 the month before, or a drop of 38,000. That’s because, as a number of labor economists point out, the disparity is the result of something the government calls “discouraged workers”—people who don’t have jobs but were not looking for work during the reporting period.”

This is where the numbers showed a really big spike—up from 982,000 to 1.119 million, a difference of 137,000 or a 14 percent increase. These folks are generally not included in the government’s various job measures,” Cox wrote, adding that if you count those people as part of the workforce, the job creation and drop in unemployment disappear.

Other signs of continued weakness in the recovery include that the percentage of long-term unemployed remained unchanged in July and that the labor force participation rate has continued its downward trend since the beginning of the recession, dropping 0.2 percentage point to 63.9 percent in July. This is, the Congressional Joint Economic Committee reports, “the lowest labor participation rate in the United States since January 1984.” [See a collection of political cartoons on the economy.]

Addressing the weak numbers, the White House continues to point fingers almost everywhere except at itself—which is where the blame belongs. President Barack Obama, who, along with congressional Democratic leaders, promised that unemployment would not exceed 8 percent as long as the stimulus package was approved, has yet to explain how he could have been so tragically wrong.

The great thing about being a conservative is that no matter what it happening, it proves that their economic theories are correct. Kudlow:

Over two years of so-called economic recovery, growth has averaged about 2.5 percent. It fell to less than 1 percent in the first half of this year, largely from a commodity-price shock that included oil-, gasoline-, and food-price spikes. That price shock resulted mainly from the Fed’s QE2 depreciation of the dollar — a big mistake. It eroded real consumer incomes and spending.

Let’s ask Economist Online what it thinks about the dollar.

Put dollar depreciation in historical perspective

It’s a brand new year. I thought I’d have some big-picture review of what’s going on in the world economy today. Here is my first piece on US dollar.

The graph below will scare you a lot…in fact, the dollar index fall from 115 in 2002 to mid 70s at the end of 2007, that equals a 33% drop.

Hmmm, a sharp drop, isn’t it? But wait a minute, have we witnessed the similar happened before? Let’s look at the following graph and have some historical perspective. From 1985 to 1989, the trade-weighted dollar index actually had a bigger fall, from 145 to 90, almost down 38%, and it fell even further until 1995.

Holy Dollar Depreciation, Batman! It fell even more under Reagan than it did during Obama!

Kudlow:

Lately, the dollar has stabilized and energy prices have come down quite a bit. That will reduce inflation and support better consumer spending. Businesses are already highly profitable and cash-rich. They are investing some of that, but not nearly enough to create sufficient new jobs. Who would, with all these Washington policies?

It’s not lack of demand, it’s politics!

Finally, the Fed remains ultra-easy with excess liquidity and a zero interest rate.

So it looks to me like we will return to the sub-par 2.5 percent growth trend rather than dip back into recession. However, at this pace, unemployment may hover around 9 percent right up to election time next year.

More spending won’t do it Mr. President. Tax and regulatory incentives will.

Cut taxes and regulations and watch the economy boom–for the very rich. Who are doing quite well now as it is.

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Optimal Tax Rates for Generating Economic Growth According to Barro-Sahasakul Tax Data

By Mike Kimel

Optimal Tax Rates for Generating Economic Growth According to Barro-Sahasakul Tax Data

This piece is a bit more wonky than what I normally post.

I recently re-read “Macroeconomic Effects from Government Purchases and Taxes” by Barro & Redlick. I was struck by how different the conclusions they make about taxes are from what you get if you simply make a bar chart of the top marginal rate at any given time versus the growth rate over the next year.

Now, obviously, Barro & Redlick take a completely different approach… but at the bottom of everything is the data set they use (see Table 1 of the above referenced paper and this explanation of the “Barro-Sahasakul” data set). To cut to the chase, they use estimates of the average marginal tax rates paid by taxpayers rather than the top marginal rate that I used in the bar chart referenced above. Their overall marginal rate is made up of not just federal tax rates, but also social security tax rates, and even estimates of the state tax rates. It should be noted the Barro is an average rate, and since the average includes non-filers (who pay zero), the Barro rate is often well below the top marginal rate. The top Barro rate is 41.8% which occurred in 1981 (compared to top marginal rates of 90%+ from 1951 and through 1963). The Barro rate is also not correlated with the top marginal income tax rate (correlation going back to 1929 is -30%).

A lot of work clearly went into producing this overall marginal rate (I’m going to call it the “Barro tax rate” for simplicity). But does it explain economic growth rates any better than the top marginal rate?

I ran a quick and dirty regression…

Growth in real GDP from t to t+1 = f(Barro Tax Rate, Barro Tax Rate Squared, Top Marginal Income Tax Rate, Top Marginal Income Tax Rate Squared)

Data ran back to 1929, the first year for which real GDP was computed by the BEA. Top marginal rates came from the IRS Statistics of Income Table 23. And the Barro Tax Rate came from Table 1 of the Barro & Redlick paper. Since Barro rates are computed only through 2005, that’s when the analysis stops.

Results were as follows:

Figure 1

(Note… the errors got big during leading up to WW2, but I don’t think that invalidates this quick and dirty look.)

Here’s what I get out of this:

1. There is definitely a quadratic relationship between tax rates in one period and real economic growth the next.
2. If you’re going to pick either the Barro rate or the top marginal income tax rate, go with the latter. Its clearly better at explaining economic growth rates.
3. There may be something to be said about using the Barro rate and the top marginal income tax rate together. They do explain different things.

If you compute the “optimal tax rate” – the rate that maximizes economic growth implied by the regression – you get a Barro rate of 25% and a top marginal income tax rate of 64%. The optimal Barro rate was last seen in 1966, when the top marginal rate was 70% and the bottom rate was 14%. I’m guessing from this, and from looking at the Barro rate series, that this would imply that if you want to maximize growth, the top rate should be raised to about 64% and the tax burden on folks at the lower end of the income scale should be lowered. I’m not sure Barro would be pleased with these results.

I may return to this, but my next post should be the next in the series on GDP growth and the S&P 500.

As always, if you want my spreadsheet, drop me a line with the name of this post. I’m at my first name (mike), my last name (kimel – with only one m) at gmail.com. BTW… this spreadsheet contains a lot more wonky goodness!

Thanks to Sandi Saunders for getting me started wading through this particular pile of weeds.

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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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