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The right’s smoke and mirrors scam about Social Security–it ain’t broke (unless China is too)

by Linda Beale

The right’s smoke and mirrors scam about Social Security–it ain’t broke (unless China is too)

We’ve noted in these postings the growing inequality between rich and the rest of us in America, and that is the appropriate backdrop against which to investigate further the right’s smoke-and-mirrors scams about tax policy and earned benefits.  Let me remind you with Kevin Drum’s Mother Jones article on The Price of Plutocracy: “For all practical purposes, every year about $700 billion in income is being sucked directly out of the hands of the poor and the middle class and shoveled into the hands of the rich.” (That sentence is illustrated with a great chart, with data drawn from Joseph Hacker of Yale and Paul Pierson of Berkeley, the authors of Winner-Take-All Politics, a book I highly recommend.)

The national debate about deficits has been part of a relentless push by the right to reduce as much as possible the New Deal earned benefit programs of Social Security and Medicare. The right twists the facts to suit the arguments it wants to make.  Krugman hones in on this issue, noting Dean Baker’s similar anger at the Washington Post’s inconsistency in considering Social Security in a recent article by Post writer Lori Montgomery, who seems to be miming for the hard right, anti-New Deal crowd in Washington .  See Krugman, Social Security, Bait and Switch, a Continuing Series, New York Times (Oct. 30, 2011).

Social Security is a program that is part of the federal budget, but is by law supported by a dedicated source of revenue. This means that there are two ways to look at the program’s finances: in legal terms, or as part of the broader budget picture.

In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.

Alternatively, you can think about Social Security as just part of the federal budget. But in that case, it’s just part of the federal budget; it doesn’t have either surpluses or deficits, no more than the defense budget.

Both views are valid, depending on what questions you’re trying to answer.

What you can’t do is insist that the trust fund is meaningless, because SS is just part of the budget, then claim that some crisis arises when receipts fall short of payments, because SS is a standalone program.  Id. (emphasis added).

Further, the right refers to these programs as “entitlements”, a term that is meant to dredge up resentments against those who have some rights to benefits from these programs.  The right uses “personal responsibility” and “entitlements” as though they refer to two non-intersecting worlds, whereas in fact the opposite is true.

Workers pay into Social Security to support current workers who paid into it in the past.  The trust fund was established, and amended with a good deal of actuarial research under Reagan in 1983, with the knowledge that the baby boom generation would be passing through and create a bulge of benefit needs and that US birth rates tended to be smaller now than they were a century ago.  In other words.  what is happening now in terms of the baby boomer population reaching retirement age and the decline in US birthrates was exactly the information on which the Social Security changes made in the 1980s were predicated.  Either we believe that these kinds of predictions are reasonable (in which case it is utterly silly to raise nightmare scenarioes about bankruptcy, because there is nothing of the sort) or we believe that it is impossible to predict for sure what will happen (in which case it is utterly silly to raise nightmare scenarios about Social Security bankruptcy, because GDP could grow just a little faster than predicted, easing all future problems, or boomer needs could grow just a little less than predicted, easing all future problems).  Either way, the crisis-bell ringing being done by the right as a way to attribute deficits to Social Security is a smoke and mirrors scam.

It is even more so since the Social Security trust fund is invested in US Treasuries and those Treasuries plus new tax funds coming in pay all the benefit costs.  Is the US going to default on Treasuries.  Well, if so, we have a bigger problem with Japan and China not liking that–not just the Social Security trust fund.  The hard right seems to think it is okay to play political games with US debt, but American citizens should be aware that this is what they are doing.

For a good overall exposition of these issues, see the article in  Salon by Gene Lyons, How the Rich Created the Social Security ‘Crisis’ (Nov. 3, 2011) (noting the “decades-long propaganda war against America’s most efficient, successful and popular social insurance program”).

[T]his is the beneficiaries’ money, invested by the Social Security trustees in U.S. Treasury bonds drawn upon “the full faith and credit of the United States.” Far from being “meaningless IOUs” as right-wing cant has it, they represent the same legally binding promise between the U.S. government and its people that it makes with Wall Street banks and the Chinese government, which also hold Treasury Bonds.

A promise not very different, the Daily Howler’s Bob Somerby points out, from the one implicit in your bank statement or 401K (if you’re lucky enough to have one). Did you think the money was buried in earthen jars filled with gold bullion and precious stones?  Id. (emphasis added).

One might add that many of our multinational corporations that are currently lobbying heavily for yet another tax break in the form of a “repatriation holiday” for their offshored, untaxed profits actually have the substantial portion of those profits invested in those same U.S. Treasury notes.  So, as ataxingmatter has noted before, much of that money is already in the US and repatriation will generally not be of much benefit merely from bringing cash back to go through the US economy.  As the article notes, allowing repatriation would lead to corporations dumping about a trillion of US Treasuries on the market, and likely cause a rise in the interest rate the US government must pay to borrow.  Not a win-win situation.  IN fact, clearly a loss for the US government and the majority of US taxpayers, both in Treasury interest rates and in lost corporate tax revenues.

 

originally published at ataxingmatter

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Infrastructure gamesmanship puts wealthy ahead of jobs, good bridges, and country

By Linda Beale

Infrastructure gamesmanship puts wealthy ahead of jobs, good bridges, and country

For those who are paying attention to the House and Senate these days, it seems like a frustrating exercise.  Mostly it is one of watching the “do-nothing” Republicans find excuses for never requiring millionaires and billionaires to pay their fair share of taxes while making up excuses for not doing anything of the varied real approaches to stimulating the economy in ways that will create jobs for ordinary Americans.

Take the vote on the infrastructure bills.  The Senate leadership asked the Senate to vote for funding $60 billion of much needed infrastructure projects (just a tip of the iceberg of everything that is needed to bring this country’s infrastructure into nonembarassment).  The GOP refused, because it was funded by a de minimis tax on millionaires.

There’s no end to things that can be said about this further evidence of the craven state of the GOP in the US today.  Political advantage for the wealthy class is to be given primary importance, no matter what happens to the vast majority of Americans and the country we all love.  Jim Maule has it right, in The Tax and Spending Stalemate: Can It Destroy the Nation?, MauledAgain (Nov. 7, 2011).

When partisan loyalties mean more than the nation’s well-being, when money means more to wealthy “world citizens” than does the long-term physical security of the nation, and when protection of millionaires who fund campaign treasure chests means more than the lives and safety of the rest of America, the literal physical survival of the nation is imperiled. …

[A]s long as this absurd tax and spending stalemate continues, where decisions are not made on the merits of the issue but on the partisan attachments of supposedly public servants, the nation and its infrastructure, the nation and the health of its citizens, the nation and its economy, will continue to stagnate, deteriorate, and crumble. The question now is how close we are to the point of no return.

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Nader Argues for a Financial Transactions Tax

by Linda Beale

Nader Argues for a Financial Transactions Tax

Ralph Nader provided an op-ed on the question of a financial transaction tax, “Time for a Tax on Speculation,” Wall St. Journal, A17 (Nov. 2, 2011).  He ties the need for the tax as a curb to speculation to the growing concern among ordinary Americans about corporate power and Wall Street excesses.

A financial transactions tax would impose a small charge on the value of stock, bond and derivatives transactions–probably somewhere around 0.25% to 0.5% (the latter is the figure pushed by Nader and groups like National Nurses United). Such a tax would raise a considerable amount of money and at the same time serve another important function–curbing speculative and high-frequency trading.

[This tax] has the potential to curb risky speculative trading that contributes little real economic value.  The Capital Institute’s John Fullerton has stated that a financial speculation tax could have a significant impact on the high-frequency trading and other ‘quant’ trading strategies that now comprise an astonishing 70% of vastly bloated equity-trading volume.  Over the past few decades, trading volume has grown exponentially.  In 1995, the total shares of stock traded on the Nasdaq and the NYSE, not including derivates and other options, was 188 billion.  By the peak of the financial crisis, in 2008, this annual number had skyrocketed to three trillion.

*** Sen. Harkin, Rep. DeFazio and others in the past few years have proposed protecting ordinary investors from the direct effects of the tax by providing exemptions for mutual funds, retirement funds and for the first $100,000 in trades made annually by an individual

originally published at ataxingmatter

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The right’s nutty claims about job creation–Gingrich and the estate tax

by Linda Beale

The right’s nutty claims about job creation–Gingrich and the estate tax

The right is busy selling its program for enriching the rich to the working class.  As usual, the sales pitches are full of false and nutty claims pitched to fool hard workers who are uninformed about the facts.

Newt Gingrich, for example, pitched the claim that eliminating the estate tax that applies only to the biggest multimillion dollar estates–a large tax cut applicable only to the uberrich silver-spoon kids who do nothing to earn the largesse–will cause all kinds of wondrous economic changes.   See “To create Jobs, abolish the death tax now” (The Newt Gingrich Letter).

These claims are based on a  so-called “study” by the American Family Business Foundation (put in quotes, since this is a paid “study” by  a propaganda tank that asks family businesses of the kind that might have to pay the tax whether they would create more jobs if they didn’t have to pay the tax, and gets the not at all unsurprising self-serving answer that “oh yes, we’d have more jobs with fewer taxes”.)   So the study and Gingrich make pie-in-the-sky claims that

  • the US government would actually take in more tax revenues by getting rid of the millionaires & billionaires’ estate tax–even claiming a specific number of $362 billion more in taxes.  (It helps if the persons answering the self-serving survey give numbers that can be used to make these specific type of claims.)
  • Gross Domestic Product would increase by 2.26% just by eliminating the tax
  • New revenues from the “economic activity that would result from the elimination of the [estate] tax” would be twice as much as the revenue gained from the current estate tax;
  • the economic growth from eliminating the estate tax would “create thousands of new jobs as families kept more small businesses running through mutliple generations and shifted their efforts from avoiding estate taxes to investing in America”

Balderdash

Eliminating the estate tax won’t create new economic growth, new investment in jobs, save family businesses or divert monies now spent on tax evasion to worthwhile domestic investments.  Most of the claims in articles like Gingrich’s or in “studies” like the self-serving American Family Business Foundation are unfounded, based on absurd assumptions or simply made up.

  • Estate tax reduction or repeal doesn’t lead to growth.  We have cut taxes on estates enormously in the last decade and growth has stagnated, with none of the benefits going to the vast middle and lower classes.  There’s no empirical evidence supporting the self-serving claims that such a tax cut helps growth.  In fact, evidence on inequality in societies supports exactly the opposite conclusion–the more we allow spendthrift heirs to take over family fortunes tax free and accumulate even more wealth, the worse it is for economic growth and societal wellbeing.
  • Estate tax reduction or repeal doesn’t create jobs.  Money saved from taxes doesn’t automatically get plowed back into businesses in a way that creates jobs.  It’s more likely to get plowed into private equity funds (that strip companies of their employees and load them up with debt in order to resell them at great gain for the equity investors and great loss of jobs) or invested in emerging market economies to diversify portfolios.  Most use of excess funds by the wealthy, that is, benefits the wealthy at little or no good to society and in fact often with considerable harm to society in terms of job loss
  • Estate tax repeal doesn’t “save” family businesses, because they aren’t at risk from the estate tax in the first place.  Very Very few (if any) family businesses are lost to the estate tax.  There is a provision in the Code allowing installment payments over 14 years to ensure that family farms can stay in business by paying the estate tax out of annual incomes.  The argument about loss of family businesses is invented to appeal to those who do not understand the very limited number of estates subject to the tax in the first place (fewer than 2%).
  • Estate tax repeal doesn’t prevent sales of family businesses upon death of the founder–and those sales are often a good thing!  Many times, family businesses are sold upon the death of the founder because nobody in the family wants to run it anymore–they want to take their cash and go live their own lives.   That’s probably not a bad result for the economy–new management will tend to see opportunities that the old business had ignored.  All repeal of the estate tax would do would be to put more money in the hands of heirs who do nothing to deserve it.
  • Estate tax repeal isn’t needed to avoid “double taxation.”  Gingrich tries to make the case, quoting Petter Ferrara as follows:

“The [estate] tax taxes yet again a lifetime of savings and investment that has already been taxed multiple times.  It is double taxation on top of double taxation, which often forces loved ones left behind to sell the family farm, ranch or business to pay the taxes just when they are suffering from their loss the most.”

Not so.  Many estates have as their primary assets investment securities that represent considerable appreciation that has NEVER been taxed.  Elimination of the estate tax means that even this “last chance” for getting a single tax bite would be eliminated.  Many of the biggest estates represent passage of stock from one generation to another with almost no taxation along the way.  Whereas workers pay tax on every single dollar earned and have little ability to use their salaries as collateral for big investment plays, wealthy heirs of financial assets can use their assets as collateral for loans to “monetize” their wealth without taxation.  Most substantial family farms and ranches are now incorporated, with use of various schemes to zero out corporate income and pay no taxes (especially, e.g., depreciation of equipment and “salaries” for family members and corporate ownership of personal residences resulting in widespread ability to deduct personal expenses not possible to ordinary wage workers).  Double taxation is a fabricated myth for most of these estates.  As Leona Helmsley famously stated–only little people pay taxes.

And of course, as already noted, the sales are usually because they WANT to sell, since family farms have 14 years in which to use the income from the business to pay off any (usually small) estate tax due.  Remember that the effective estate tax rate is usually very very low, given the very large current exemption amount.  Only the estate above the multi-million dollar exemption amount is subject to tax, and the rate right now is inordinately low and there are numerous accepted and simple mechanisms, such as family limited partnerships and other devices, which result in much lower evaluations than fair market value under current warped rules.

Meanwhile, it is important to note the many beneficial effects of the estate tax:

  • the estate tax provides revenues to help combat significant budget deficits.  Those deficits have been substantially created by two problems–wars being fought without the normal tax increases to fund them, and tax cuts even when those cuts created hundreds of billions of dollars in annual deficits.
  • the estate tax is a slightly redistributive mechanism to counter the upwards redistribution that is the norm in our current economic system.  CEOs get golden parachutes for ruining companies, and bankers and managers take all the benefits of worker productivity gains.  Ordinary employees are denied the right to form a union by every employer trick imaginable and by the right’s unwillingness to let card check become law.  Workers therefore end up scraping by on a combination of devalued wages and debt.

Keeping the estate tax, and making it more progressive so that the estates of the uberrich are appropriately taxed under “ability to pay” concepts regarding the marginal utility of the dollar, is the fair thing to do. And it would have a stimulative effect on the economy by providing revenues for governmental infrastructure and other projects.  Counter to Gingrich’s claim, repealing the estate tax would be a further step backward  to the robber barons’ gilded age.  Let’s not take that step.

November 01, 2011 in Estate Tax, Job creation, Right Wing Rhetoric | Permalink

Technorati Tags: deficit reduction, estate tax, family businesses, family farms,Newt Gingrich

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the right’s smoke & mirrors scams about corporate tax "reform"

by Linda Beale

the right’s smoke & mirrors scams about corporate tax “reform”

One could get a pretty gloomy picture of the state of Social Security, and the need to “reduce entitlements” while at the same time hearing about the (faked) urgency of cutting corporate taxes in order to give our US multinationals an edge in global competition, if you pay much attention to the GOP presidential candidates talk and listen to their echo chambers in the right-dominated GOP factions in the House and Senate and their marketers in the Koch etc. funded propaganda tanks like the misnamed “Americans for Prosperity” (should be “Americans for prosperity for the have-mores”).

These same right-wing politicians and funders were gung-ho for two budget-busting manuveurs under George W. Bush–outrageous tax cuts of primary benefit to the rich (such as the gradual reduction of the estate tax to its one-year repeal in 2010 and its rebirth in 2011 at an absurdly low rate with an equally absurdly high exemption amount) and outrageous spending for more and more militarization of the US society (wars of choice in Iraq and Afghanistan, where hundreds of thousands have died but little in the way of lasting peace has been gained, and a gigantic “homeland security” apparatus that has eroded the civil rights of US citizens, including allowing one to be targeted and assassinated on solely the say-so of the executive branch without any of the due process protections supposedly guaranteed by our pre-Bush constitution). Cheney of course famously quipped that deficits don’t matter any more, when he was helping to push the $1.3 trillion 2001 tax cut that would give him and George W. huge tax cuts in the tens of thousands for 2001 alone. Then there was the 2003 tax cuts aimed especially at relieving the have-mores of taxes on the money their money earned (cutting dividend rates on corporate stock to the same low rates as net capital gains) and the 2004 tax cuts aimed especially at giving multinational corporations the many tax breaks they’d been lobbying for avidly for the last two decades, along with a “repatriation holiday” that allowed the ones who’d worked most assiduously to avoid paying US taxes on their profits from intangible intellectual property rights to spend the money on outsize managerial compensation and shareholder stock buybacks while firing regular employees with very little or even no tax consequences.

Now, the right wants to repeat all of that.

Dave Camp, minion of multinational corporations, is crafting a give-it-all-away package of so-called corporate tax reform that may cut back on loopholes but in the process will lower rates and allow multinationals to offshore money-making enterprises, with the results that even fewer multinationals will actually pay any federal corporate income taxes. (The text of Camp’s release about his corporate tax “reform” proposal is appended at the end of this posting). Camp calls for a 25% rate and a territorial tax system that would cut corporate tax revenues even further. The Joint Tax Committee has noted that cutting all the loopholes in a base-broadening attempt would allow lowering the corporate tax rate only to 28%. See Wall Street Journal report on the JTC report.

All of this is rationalized by the right as necessary to help US multinationals “compete” on the global stage.

You’d think that US corporations were slaving away under incredibly heavy US federal income tax burdens, but there’s no truth to that at all. Most of the griping about the corporate tax talks solely about federal statutory rates and not about either the effective tax rates (what corporations actually pay) or about the lack of most of the other kinds of corporate taxes paid by corporations housed in other developed nations (much higher Value-Added Taxes and excise and transfer taxes).

In fact, most US multinational corporations are not heavily taxed at all, and most of the smaller US corporations zero out their profits with shareholder “salaries” (deductible) and other often easily manipulated expenses (personal expenses of ‘family farmers’ whose homes and cars and everything else are “owned” by the family farm corporation, etc.). Citizens for Tax Justice has for several years looked at publicly reporting US corporations’ fiscal statements on taxes and profits to tell the real story about profitabilty and taxes. It’s not the story the Chamber, the National Association of Manufacturers, or the anti-tax, anti-government funded groups or the Koch brothers want known. But it’s the facts. CTJ’s most recent study makes clear that US multinationals have no trouble competing due to taxes. See the report: Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010.

As Andrew Leonard reports today, the study shows that 37 of the country’s largest corporations paid zero taxes in 2010.

In 2010, Verizon reported an annual profit of nearly $12 billion. The statutory federal corporate income tax rate is 35 percent, so theoretically, Verizon should have owed the IRS around $4.2 billlion. Instead, according to figures compiled by the Center for Tax Justice, the company actually boasted a negative tax liability of $703 million. Verizon ended up making even more money after it calculated its taxes.

Verizon is hardly alone, and isn’t even close to being the worst offender. Perhaps most famously, General Electric raked in $10.5 billion in profit in 2010, yet ended up reporting $4.7 billion worth of negative taxes. The worst offender in 2010, as measured by its overall negative tax rate, was Pepco, the electricity utility that serves Washington, D.C. Pepco reported profits of $882 million in 2010, and negative taxes of $508 million — a negative tax rate of 57.6 percent.

Andrew Leonard, America’s Corporate Tax Obscenity, Salon (Nov. 3, 2011). Four industries–finance, utilities, oil/gas/natural resources and IT– reap huge windfalls from the current corporate tax code. Those windfalls that aren’t likely to be eliminated in any “reform” that passes the right-wing Congress–just look at the current lobbying for maintaining the “active financing” exception for banks’ passive income, an exception that allows banks to defer taxation on their passive earnings, unlike most other industries.

There’s no way that a territorial tax system (that allows US corporations to continue moving active businesses offshore tax free and moving patents and other rights off shore to ensure that the income from the rights aren’t taxed in the US) combined with incredibly low rates will raise an appropriate amount of income from corporations. It is a giveaway to the corporations that think they have now bought Congress. At the same time, as the CTJ report authors note, most of these reform schemes actually will allow corporations to move even more jobs and businesses offshore. If we really wanted to enact good corporate tax reform, we’d remove the loopholes favoring big industries like Big Oil, get rid of the accelerated depreciation allowances that let companies expense long-term investments, require an “exit tax” of ordinary income on all appreciated assets and untaxed earnings whenever a corporation restructures itself into a foreign company or moves its active business assets abroad, and otherwise tighten up the corporate tax rules to ensure that corporations pay a fair share in taxes.

It is up to the people to show that they haven’t loss the power to take control in our democracy, but given the lack of understanding of tax and fiscal issues in this country, and the deep pockets of corporations to fund the Chamber and other group’s misleading information and distortion of facts on these issues, it is questionable whether US democracy can save itself.

Appendix: Camp release about proposal for corporate tax “reform”

Today, Ways and Means Committee Chairman Dave Camp (R-MI) unveiled an international tax reform discussion draft as part of the Committee’s broader effort on comprehensive tax reform that would lower top tax rates for both individuals and employers to 25 percent. In addition to rate cuts, the plan would transition the United States from a worldwide system of taxation to a territorial system – a move virtually every one of America’s global competitors has already made.

Camp unveiled the draft legislative language with a specific request – that employers, academics, practitioners and workers provide comment and add their voices to the legislative process.

Commenting on the release of the proposal as a part of his overall approach to comprehensive tax reform, Camp stated, “Instead of having laws on the books that encourage hiring U.S. workers, our outdated international tax system encourages employers to keep profits and jobs outside of America. If we are serious about creating a climate for job creation, now is the time to adopt tax policies that empower American companies to become more competitive and make the United States a more attractive place to invest and create the jobs this country needs.”

The Ways and Means discussion draft would:

– Reduce the corporate tax rate to 25 percent – bringing it in line with the average of countries in the Organization for Economic Cooperation and Development (OECD). The Committee continues to examine base broadening measures that will replace the revenue foregone by reducing the corporate tax rate, so these measures are reserved in the discussion draft for future release.

– Shift from a worldwide system of taxation to a territorial-based system. The new plan:

* Exempts 95 percent of overseas earnings from U.S. taxation when profits are brought back to the United States from a foreign subsidiary.

* Includes anti-abuse rules to ensure companies do not avoid paying their fair share of U.S. taxes.

* Frees up existing overseas earnings to be reinvested in America after they are taxed at a low rate in line with current repatriation proposals.

* Makes American companies more competitive on the global stage with little or no impact on the federal deficit.

In advocating the need for international tax reform, Camp cited several reasons why current U.S. tax policies are putting American employers and workers at a competitive disadvantage:

– America will soon have the highest corporate tax rates in the industrialized world: Only Japan has a higher corporate tax rate than America, which has a combined federal-state rate of 39.2 percent – and Japan has already indicated its intent to lower its rate.

– Our “worldwide” system of taxation is a remnant from the Cold War: While it has been 25 years since Congress reformed the tax code, it has been almost 50 years since it undertook a bottom-up review of our international tax laws. In other words, our international tax rules were written when the United States accounted for 50 percent of the global economy and had no serious competition from others.

– American employers face double taxation compared to their foreign competitors: As a result of our “worldwide” system of taxation, when U.S.-based companies try to bring profits back home, they must pay U.S. taxes on top of the tax they already pay in the foreign market U.S. tax laws encourage investing in a foreign country instead of bringing profits back home: Because U.S.-based employers face additional taxes if they bring their overseas earnings back to invest in the United States, it is cheaper for these companies to reinvest profits overseas instead of creating jobs here.

– America is losing ground: In 1960, U.S.-headquartered companies comprised 17 of the world’s largest 20 companies – that’s 85 percent. By 2010, just six – or a mere 30 percent – U.S.-headquartered companies ranked among the top 20.

– Our foreign competitors are actively reforming their tax laws: Other countries are actively reforming their international tax codes – giving employers lower rates and moving towards a territorial tax system. Countries like the United Kingdom, Canada, and Germany, have recently lowered their tax rates to spur job creation and economic growth. Yet, America is sitting on the sidelines doing nothing. The United States cannot sit back and watch jobs go overseas because the tax code provides such perverse incentives.

originally published at ataxingmatter

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The Kimel Curve and the Kitchen Sink, Part 2: The Reagan Era to the Presen

by Mike Kimel

The Kimel Curve and the Kitchen Sink, Part 2: The Reagan Era to the Present

I often post about the relationship between the top marginal tax rate and economic growth, which I’ve noted can be described this way:

% change in real GDP from t to t+1 =

a + b*Top Marginal Tax Rate at time t
+ c* Top Marginal Tax Rate squared at time t

(I’ve modestly described that relationship as the “Kimel curve.”)

I’ve done this many times, and have added all sorts of things to the curve, but in every case, the results are more or less the same: the top marginal tax rate that maximizes growth is somewhere in the neighborhood of about 64%, give or take about 5%.

Its usually my practice to use all data available when I’m estimating that relationship. That means going back to 1929, the first year for which the BEA keeps data on real GDP. In part that’s because I get accused of cherrypicking if I don’t use all the data available. But lately I’ve started getting accused of somehow trying to bias results by using all the data available.

So I’m going to run a version of the model similar to the one I ran last week, but I’m going to start with data from 1981, which is when Reaganomics set in.

(More after the jump!)

The specific model I’m going to estimate is this

% change in real GDP from t to t+1 =

a + b*Top Marginal Tax Rate at time t
+ c* Top Marginal Tax Rate squared at time t
+ d* % of pop 35 – 44 at time t
+ e* % of pop 45 – 54 at time t
+ f* President is a Republican (Y/N) at time t

Here are the results:

Figure 1

A few things to note: the percentage of the population 35 to 44 is not significant, though it was significant when data going back to 1929 was used. Conversely, the percentage of the population 45 to 54 was not significant with data going back to 1929, but is significant here. What that tells me is that for much of the period from 1929 to the present, the percentage of the population 35 to 44 was one of the more important demographics for driving growth. However, more recently, the population 45 to 54 has become more important reflecting the reduced importance of manual labor.

The Republican dummy wasn’t significant when using data going back to 1929… and it isn’t significant in the more recent period either.

But what really matters, in my opinion at least, is this: the coefficients on the top marginal tax rate and the top marginal tax rate squared are both significant. The former is positive and the latter is negative. That means the Kimel curve applies to the period since 1981 to the present as well.

The growth maximizing tax rate obtained when using data for the period from 1981 on is 44%, about 20 percentage points below the top marginal rate obtained when using data going back to 1929. So, why the difference? I don’t know, but I have some ideas:

1. The period from 1981 on includes one observation where the tax rate was above 50% (i.e., 1981, when the economy was in a recession), several at 50%, and the rest below. The model simply hasn’t “observed” higher tax rates and the growth rates associated with those higher tax rates.

2. Prior to Reagan, the public was more accepting of the idea that tax rates should be higher. Reagan changed the zeitgeist. The government became the problem, not the solution, and taxes, well taxes came to be viewed as theft.

My guess is that its a combination of both factors. But even if you lean primarily toward the second reason, and assume the optimal tax rate has shifted down over time… its still well above where tax rates are now.

In fact, tax rates have been below 40% since 1987. The annualized growth rate in real GDP during the 23 years from 1987 to 2010 was 2.6%. The last time real GDP grew that slowly during a 23 year period was… well, who knows – it never happened before then in the time since the BEA has been keeping data. If you decide to, well, cherry pick and leave out the Great Recession… the annualized growth rates in real GDP from 1987 to 2007 was a hair over 3% a year. Previous to that, the last time annualized growth rates were that low for the same number of years occurred at the end of World War 2. Put another way… the period from 1987 on may have been a success in terms of keeping tax rates low, but it has been a failure in terms of economic growth, as the only time the economy has done worse was when it switched out of a command economy and went immediately into a recession. (I can’t help but notice that the only time when the economy did worse happened to come during what David R. Henderson refers to as the Post War Economic Miracle.) Better policy would get us faster economic growth and that would be good for everyone, even those paying the highest marginal rates.

Housekeeping… GDP data came from the BEA and tax rates came from the IRS.

A few other comments… the correlation between residuals at time t and time t+1 in the model estimated is about 16.5%. One could do other checks, but it seems very, very unlikely that autocorrelation is a problem here. Of course, we’re also missing some important variables… the fit could be a lot higher. I’ll start incorporating some of the suggestions I received from readers after the last post.

As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (kimel – note only one m) at gmail.com.

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Inequality–the facts speak for themselves (don’t listen to the apologists on the right)

by Linda Beale

Inequality–the facts speak for themselves (don’t listen to the apologists on the right)

Inequality is real, and it is growing. It is debilitating for democratic institutions, as the Supreme Court’s Citizens United case and its aftermath start to impact the federal elections and as the money from the Koch brothers, Walton heirs and others swings the debate with purchased sound bites designed to deceive and enable the “enrich the rich” winner-take-all economy created by right obstructionism (itself enabled by the relaxation of the filibuster rule that created a 60 vote requirement in the Senate and allowed an intransigent minority to prevent legislative enactments supported by a clear majority).

Tax policy matters to income inequality. For background on this, read The 30-year growth of income inequality, A Civil American Debate (Apr. 10, 2011) (providing two graphs showing the top tax rate over time the income inequality (the percentage of total income going to the top 10%), which shows that income inequality levels inversely track the top tax rate–as the rate increases, income inequality decreases). When top tax rates are lowered too much, they do not do their work in maintaining respectable limitations on income inequality. With the slide in economic fairness under reaganomics (privitization, deregulation, tax cuts–especially for the wealthy, and militarization), the US has now “two economies, a wealthy ‘top’ economy doing very well, and a ‘bottom’ economy for roughly the bottom 99% facing income stagnation, with dwindling wealth and resources.” The growth in income inequality shows that gains at the top dwarf, by any measure, those for everybody else.

Growth-in-income-inequality1

(Note: the most recent CBO report has slightly different numbers, but in the same range–close enough for our purposes.)

Even these solid income inequality facts are treated by the right as sound bites to be manipulated. An article in The New Republic debunks the American Enterprise Institute’s Jim Pethokoukis’s attempt to mask the facts. See Matt O’Brien, Is Income Inequality a ‘Myth’?, The New Republic (Oct. 31, 2011) (hat tip Mark Thoma) (discussing Jim Pethokoukis, 5 reasons why income inequality is a myth–and Occupy Wall Street is wrong, EnterpriseBlog, American Enterprise Institute (Oct. 18, 2011).

As O’Brien puts it, Pethokoukis’s article asserting that income inequality is a myth “suffers from the defect of having a tenuous relationship with reality.” Especially when, as Jared Bernstein noted, whatever the cuase for the increase in inequality (and there are several likely suspects), “the highest quality data that we have all show the same thing: significant increases in inequality.”

Petrhokoukis tries to suggest that the “move rightward toward a greater embrace of free-market capitalism” is proof that inequality hasn’t exploded in the reaganomics era because inequality should have led to “beleaguered workers unit[ing] and demand[ing] a vastly expanded safety net and sharply higher taxes on the rich.” He calls the “occupy wall street” protesters “radicals”–I guess because they are willing to sacrifice personal comfort to bring a non-violent message to the world through their signs and statements about the unfairness of today’s society with its gaping inequalities in income and wealth, resulting in an influential 1% that can arrange laws to suit them. He tries to argue that the very idea that “the rich are getting richer at the expense of the middle class and poor” is left-wing fantasy.

Of course, the dominance of the free-market mantra is actually proof of inequality, not evidence of some kind of notion of growing equality. The irrational adoption of Friedmania “free market” anti-factual policies has taken place due to the inordinate advantage enjoyed by the uberrich in promoting policies favorable to their own wealth and status in winner-take-all politics, enhanced by recent decisions granting state-created concessions (corporations) “free speech” rights to intervene in political campaigns in which corporations do not have a right to vote,

And the ability of the uberrich to buy policies that suit them means that legislation to re-empower unions as an antidote to plutarchy can’t get passed the “bought and paid for” legislatures. A majority of workers want to be able to unionize; a majority of Americans want higher taxes on the rich; a majority of Americans oppose the kinds of “bailout” policies for banks espoused by Bush where there was lots of taxpayer money and no accountability. The policies favored by the 99% aren’t enacted because of the power of money wielded by the 1%.

So what does Pethokoukis rely on to make his case? snips and snippets of the following:

  • Pethokoukis claims that income gains have been shared “fairly equally” among workers and managers.” While it is true that one piece of research suggests that the gap between productivity and wages may not be as high as commonly thought. Pethokoukis stretches (and abuses) that research in making his claim. There’s clearly a gap, it may be debatable what it’s exact size is, but there’s no debating the story of runaway wealth at the top of the income distribution.
  • Pethokoukis claims that after-inflation median incomes haven’t really stagnated in the last 30 years. He relies on a pair of Federal Reserve studies that use different numbers to jigger the after-inflation incomes produced by CBO. Voila–with these ‘adjustments’, the numbers don’t say what they appear to say. That’s not research–that’s fudging the numbers to get the desired result.
  • Pethokoukis asserts that better accounting for positive transfers (taxes, benefits, pensions, healthcare) and consumption would show there is no real inequality gap. While it is true that after-tax inequality is smaller than pre-tax inequality (thank goodness), it is not true that inequality is eliminated or even that as much inequality is eliminated as used to be. Taxes and benefits are less redistributive downwards than they used to be. and tax cuts have been primarily redistributive upwards. Even taking all benefits into account, inequality is increasing rapidly. As for consumption, the wealthy don’t have to consume as much of their income as the poor (increases inequality), and the poor and middle class had to borrow in order to maintain consumption (shows increases in inequality).
  • Pethokoukis claims that measuring inflation correctly shows inequality has been “roughly” unchanged. That’s ridiculous. Yeah, higher end goods show more inflation in price than the lower-end goods consumed by the growing class of poverty-striken Americans as Americans move from middle to lower middle and lower income groupings. The market can still function at the high end with price increases because the wealthy have more income to pay those inflated prices. The fact that the wealthy have more money to buy more inflated higher end goods doesn’t mean inequality hasn’t increased. Fewer middle class can shop regular goods and now have to shop for discounts. That’s more proof of inequality, not less (inequality still underlies the consumption patterns).
  • Petrokoukis asserts that the fact that most of the population has the ability to take advantage of technological advances (long-distance telephone calss, air condition, dishwashers, iPods, digital cameras and color TVs) means that inequality isn’t growing because “America is better off today.” Of course, this is a straw man argument. First, the growing numbers of American affordable gadgets doesn’t reduce the shame, humiliation and degradation of poverty for the growing numbers of Americans living in poverty. Every family will have some of those gadgets, just like poorer families after the advent of trains could enjoy faster transportation (on the few occasions they used it) by train than queens and kings had indulged in in the age of chariots. Doesn’t mean that inequality isn’t rampant, or that those technological benefits make up in any way for the substantial detriments of a highly unequal society where the benchmark norm is whatever everybody has access to and the relative comparison is in terms of what the wealthy have that others don’t have. What the wealthy have these days are not so much technological advantages (though those also exist in signficant degree and kind different from what the middle and poor classes enjoy) but advantages in terms of education, opportunity, jobs, access to power, access to influence, health care, travel, leisure, personal space, food, entertainment, etc. The suggestion that everybody has been so benefited by the gadget culture so that the huge problem of inequality should be ignored shows that somebody has lived on the “right” side of the tracks for so long that they cannot even comprehend what it is like to be on the losing side of the winner-take-all economy.

The concluding paragraph of the New Republic report sums it up.

Since 1979, incomes for the broader middle class increased 40 percent, while the top one percent shot up a staggering 275 percent. Conservatives can pretend otherwise, but the numbers won’t.

November 02, 2011 in Inequality of wealth or income, Right Wing Rhetoric |

originally published at ataxingmatter

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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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crony capitalism and casino capitalism–bad flavors for right or left, per Kristof and Stiglitz

by Linda Beale

crony capitalism and casino capitalism–bad flavors for right or left, per Kristof and Stiglitz

The Occupy Wall Street focus on “we are the 99 percent” juxtaposed with the CBO’s recent report on the growing inequality in America (see here) come at a time when the American right is pushing hard for policies, like Perry’s so-called “Flat Tax” and Cain’s so-called “FairTax”, that will exacerbate that inequality in a winner-take-all economic system that rewards the speculators and fat cats to the detriment of ordinary society.  Hopefully those first two items will cause ordinary folk to think twice before supporting that exacerbating trend on the right.  The right likes to disguise them as ‘folksy’ ‘down-home’ populism.  They aren’t.  They are wolves disguised in sheep’s clothing.

In Crony Capitalism Comes Home, New York Times (Oct. 26, 2011), Nicholas Kristof notes the “alarmist view” of Occupy Wall Street rampant among the media and the elitist critics of the movement–one that sees the protesters as “half-naked Communists aiming to bring down the American economic system” or “a ‘mob’ trying to overthow capitalism.”  He rightly responds that it is instead a movement that “highlights the need to restore basic capitalist principles like accountability.”

[I]n recent years, some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us.

***

The American critique of the Asian crisis was correct. The countries involved were nominally capitalist but needed major reforms to create accountability and competitive markets.  Something similar is true today of the United States.

***

Capitalism is so successful an economic system partly because of an internal discipline that allows for loss and even bankruptcy. It’s the possibility of failure that creates the opportunity for triumph. Yet many of America’s major banks are too big to fail, so they can privatize profits while socializing risk.

***

[Mohamed El-Erian, chief executive of Pimco] told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality.  “You cannot be a good house in a rapidly deteriorating neighborhood,” he told me. “The credibility and the fair functioning of the neighborhood matter a great deal. Without that, the integrity of the capitalist system will weaken further.”

Kristof and El-Erian are correct.

The movement in the US over the last few decades has made crony capitalism possible by pretending that abstract economic theories about “free markets” developed by Milt Friedman and his Chicago boys and based on unreal assumptions about human behavior should not only be consulted for setting fiscal policy but are the “God’s Truth” bible from which such policies should be derived.  This has led to the capture of the markets by big money.  Swarms of lobbyists for Big Oil/ Insurance/ Banks/ Pharma draft the laws that apply to their industries then work with the agencies to draft favorable interpretations into the regulations and then use powerful firms funded by business coalitions like the U.S. Chamber of Commerce, National Association of Manufacturers or supported by “business-funded so-called ‘think tanks’ to exploit the courts (packed by the right in the four decades since Reagan) to push industry favorable policies no matter the ‘externalities’  for people’s lives, the environment, other priorities, and individual freedoms.

Crony capitalism doesn’t hold capitalists accountable for what they do.  We put minimal if any restraints (tax law, anti-trust law, patent  law) on business monopolization and business consolidation and business ability to use the power of money to influence the work of legislators, executives and courts.  We allow private equity funds that buy, fire, and sell at great profits to themselves but at great cost to communities, not just in jobs lost, but also in abandoned buildings left to be handled at the taxpayers’ expense and polluted waterways, ground and air left to be cleaned (if at all) at taxpayers’ expense.  Wal-Mart moves from one address to another across the street and a short hop down the road, because it gets a new tax rebate from the county over the line and leaves behind the community that gave it a tax rebate for the first store, without ever providing the financial benefits the rebate was intended to buy and leaving behind the pollution, waste and destruction of an empty shell megabuilding (real life anecdote from Champaign, Illinois).

Crony capitalism results in excessive inequality (witness the way the managers and owners have accrued all the productivity gains of the last decade) and excessive inequality furthers crony capitalism.

[Lawrence Katz, a Harvard economist, says that] excessive inequality can have two perverse consequences: first, the very wealthy lobby for favors, contracts and bailouts that distort markets; and, second, growing inequality undermines the ability of the poorest to invest in their own education.  “These factors mean that high inequality can generate further high inequality and eventually poor economic growth.”

This is very similar to what Joseph Stiglitz has been telling us for some time.  In his 2010 book, Freefall, Stiglitz recognized that America’s economic crisis stemmed in part from unfounded faith in Econ 101.  :

Modern economics, with its faith in free markets and globalisation, had promised prosperity for all. The much-touted New Economy – the amazing innovations that marked the latter half of the 20th century, including deregulation and financial engineering – was supposed to enable better risk management, bringing with it the end of the business cycle. If the combination of the New Economy and modern economics had not eliminated economic fluctuations, at least it was taming them. Or so we were told.

The Great Recession – clearly the worst downturn since the Great Depression 75 years earlier – has shattered these illusions.  (This and the following excerpts are from the extract of his book, Why we have to change capitalism, The Telegraph)

Saying that does not make anyone “against capitalism”.  It just means that we must open our eyes to understand the potential that unfettered capitalism has for highly negative destruction.  As Stiglitz says, “markets lie at the heart of every successful economy but … [they] do not work well on their own.”  We have to let government work to correct the imbalances that otherwise result from unfettered capitalism–especially the kinds of imbalances that start to grow when casino capitalism is let loose by socializiation of losses and privatization of gains resulting in enormous inequality within the society.

Economies need a balance between the role of markets and the role of government – with important contributions by non-market and non-governmental institutions. In the last 25 years, America lost that balance, and it pushed its unbalanced perspective on countries around the world.  The current crisis has uncovered fundamental flaws in the capitalist system, or at least the peculiar version of capitalism that emerged in the latter part of the 20th century in the US.

***

[A] closer look at the US economy suggests that there are some deeper problems [than just the ones resulting from our current financial crisis and recession]: a society where even those in the middle have seen incomes stagnate for a decade, a society marked by increasing inequality; a country where, though there are dramatic exceptions, the statistical chances of a poor American making it to the top are lower than in “Old Europe.”

Stiglitz concludes, as many of us have, that this crisis should be taken as an opportunity to ask what kind of society we would like to have and to make the changes necessary to ensure that we are on the right path.

We have gone far down an alternative path – creating a society in which materialism dominates moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community and have led to rampant exploitation of unwary and unprotected individuals and to an increasing social divide.

***

The model of rugged individualism combined with market fundamentalism has altered not just how individuals think of themselves and their preferences but how they relate to each other. In a world of rugged individualism, there is little need for community and no need for trust. Government is a hindrance; it is the problem, not the solution.

But if externalities and market failures are pervasive, there is a need for collective action, and voluntary arrangements will typically not suffice.

The government plays an important role in restraining the “dark angels” of capitalism and allowing the “good angels” to operate for the benefit of society.  Without government as an enforcer of accountability and trust, some version of crony capitalism and its brute-force harm to those who lose out in the struggle for wealthy is inevitable. 

This crisis has exposed fissures in our society, between Wall Street and Main Street, between America’s rich and the rest of our society. While the top has been doing very well over the last three decades, incomes of most Americans have stagnated or fallen.

We need to keep this in mind, as we deal with the myriad proposals coming from the right to continue the trend of unfettered markets, crony capitalism and winner-take-all policies.  Deregulation for Big Banks/Oil/Pharma et al will not create jobs, tax cuts for the wealthy will not unleash broad-based growth, and larger inflows of lobbyists [see, e.g., Eggen & Farnam, Lobbyists playing key role in 2012 fundraising, Wash. Post (Oct. 27, 2011)] into even our political decisionmaking processes made possible by the Citizens United case will not provide ever more “free speech” for everyone.  These are excesses of brute-force capitalism exercised in a plutarchy, not evidence of a sustainable democracy.

The answer is what might be called “mitigated capitalism”–an economy that can benefit from the incentive power of capitalism, but that limits and restrains its excesses through reasonable social welfare programs and safety nets for those that are left behind in one way or another, strong emphasis on providing public education and other systems that allow individuals to take advantage of opportunities to advance themselves, and strong enforcement of laws that protect the public commons (natural resources, air, water, land, and the public square) for the public.  The progressive income tax–a system that taxes every person on their income from whatever source (capital or labor)–and the estate tax–a system that redresses the inability of the tax system to capture the appreciation of capital resources during a person’s lifetime–are key ingredients of the tax answer to preventing crony/brute-force capitalism’s sway.

October 27, 2011 in Chicago School/Freshwater Economics, Debunking the Reagan “Free Marketarian” Myth, Democratic Egalitarianism, Estate Tax, Inequality of wealth or income, Occupy Wall Street, Sustainable Economy, Tax Policy | Permalink

Technorati Tags: brute-force capitalism, casino capitalism, crony capitalism,Freefall, Joseph Stiglitz, mitigated capitalism, Nicolas Kristof, plutarchy

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Perry’s Flat Tax and other "bold reform" ideas in context of the richer 1%

by Linda Beale

Perry’s Flat Tax and other “bold reform” ideas in context of the richer 1%

The hard right candidates of the GOP are competing to set forth plans that demonstrate their utter and complete loyalty to the right’s  “make the rich richer and make businesses less accountable” economic program.
This program involves the tired and failed policies of Reaganomics, just magnified:

  • more tax cuts for the wealthy (zero direct taxation of their primary source of income–making money off money, and –to the extent that the incidence of corporate taxes says that corporate taxation should be attributed to shareholders–reducing those taxes as well);
  • elimination of earned benefits for the rest of us (assuring huge revenue shortfalls to the federal government and no dedicated funding of programs, along with dedicated axing of benefits through the ‘deficit/debt’ scare tactic);
  • deregulation of everything to do with business or capital (gutting EPA, Dodd-Frank, Sarbanes-Oxley, and every other regulatory agency no matter the impact on the economy or on ordinary Americans, thus encouraging a return to  speculative frenzy that allows socialization of losses/privatization of gains);
  • privatization wherever possible (Perry’s plan for privatization of whatever Social Security remains after the afore-mentioned gutting; privatization of schools, firefighters, bridges, highways, etc.); and
  • continued militarization.

Michael Kingsley noted that the “economic growth” rationalization of the various flat tax plans that shift the tax burden to the middle class while granting enormous tax cuts to the wealthy is merely “hope masquerading as theory.”   See Kingsley et al,Flat Tax Proposals are Perpetual Fount of False Promises: View, Bloomberg.com (Oct. 24, 2011) (“This hope masquerading as a theory has dominated conservative economic thinking for three decades, despite all evidence to the contrary”).
Perry’s flat tax proposal is right on track with the right’s apparent goal of enriching the rich and shrinking Social Security and Medicare and other federal government’s programs for the well-being of its citizens.   He offers the so-called “Flat Tax” as an option, part of his “cut, balance, and grow” economic ‘plan’.   He says it’s a “bold reform.” Opel, Perry Calls His Flat Tax Proposal ‘Bold Reform’, New York Times (Oct. 25, 2011).
Perry’s plan involves devastating federal program cuts including cuts to Social Security and Medicare for current and future recipients, as well as a ‘cart before the horse’ constitutional amendment –a ‘balanced budget amendment’ that would, for example, prevent us from borrowing cheaply even if it were to pay for a temporary surge in costs for Veterans’ medical care due to the cohort of soldiers returned from Iraq and Afghanistan.  The proposal entails an unfounded assumption that reducing federal spending from about 24% of GDP today to around 18% of GDP within a decade would be reasonable, given the lingering costs of the Iraq and Afghanistan wars,  expenditures to make up for the drain on our military, the ongoing costs of the financial crisis sparked by deregulation and the ‘too big to fail’ phenomenon, etc.   Perry has argued against “arbitrary cuts” to defense spending while at the same time calling for enormous tax cuts for the wealthy.
Perry says his system is “fair, simple, and flat”.  In fact, it is none of the above.

So perhaps it is time to discuss two questions about Perry’s tax plan: (1) just what is this “Flat Tax”? and (2) what would be the distributional, administrative, government and other impacts of this new system of taxation (option to choose between the current income tax and the ‘Flat Tax)?
Regarding the nature of the Flat Tax, it is probably helpful to point out what it is not, since most Americans do not understand how it would work.

  • The “Flat Tax” is not flat, since it has two rates: it will have an exemption amount of some sort for the poorest taxpayers, just as our income tax provides a standard deduction and personal exemptions (and other provisions, like the Earned Income Tax Credit) to ensure that the poorest Americans do not have to pay the income tax. 
  • The “Flat Tax” does not eliminate all deductions: it will leave deductions for charitable contributions (highly favorable to the rich who are the ones that make the most such contributions) and mortgage interest (also favorable to the rich, who have the most expensive homes and get the full amount of the interest deduction even with a flat tax), and some health and child care expenditures. 
  • The Flat Tax is not just a “single rate” income tax since it is not tax on all types of income:  it will be a tax on wages that are not saved (so for the majority of Americans, a payroll tax or a tax on consumption).  The primary source of income for the rich –money earned by money–would not be counted. 
  • The Flat Tax is not a ‘postcard filing’ tax, Perry’s assertions aside (that “taxes will be cut on all income groups in America” and that taxes can be filed on a post-card size form).  The rich will pay much less, some in the middle class may pay less but only after fiddling with both forms, and the rest will not likely pay less.  The form still will require figuring out what counts as income and when it counts and what type of income it is for anybody in the middle class that might be in either one (lots of filler pages behind that “flat rate” times “taxable income” calculation).

Regarding the feasibility of the “Taxpayer Choice” system of income taxation and Flat Tax:

  • The system would lower taxes for the rich (and some others), with no benefit for the poor and lower middle class, so neither simple nor distributionally fair.
    • About 50% of American families pay no federal income tax anyway or pay less than the 20% rate of the “Flat Tax”.  Those families would have no benefit from the Flat Tax so for half of Americans, no benefit from the option.  But Perry –who says he is “dismayed at the injustice” of Americans who don’t pay any income tax (but do pay payroll and excise taxes) won’t achieve his goal of changing the fact that poorer Americans don’t pay the income tax.  They don’t under our current system because we have designed the stnadard deduction, personal exemptions and earned income tax credit to provide a minimal standard of living.  They won’t under Perry’s system because they can still file under the current system.
    • The wealthy would pay substantially less under the Flat Tax, since their main source of income–income from capital–won’t be taxed at all.  They’ll choose the Flat Tax for a substantial tax cut.
    • Assuming that the system provides an annual choice for taxpayers, it creates a nightmare.  There will be some in the upper middle class  who will have to calculate their taxes both ways and choose the most beneficial.  For some, there may be some tax benefit to the Flat Tax, but their taxes will be that much more complicated and their benefit will be minimal compared to the tax cut received by the wealthy.
    • If it doesn’t permit an annual choice, taxpayers may inadvertently find themselves locked into the clearly wrong system for them–leading to distrust of government, and a sense of lack of fairness in a system that provides a trap for the unaware.
    • The differential treatment of income  depending on its character under the Flat Tax option (zero taxed income from capital and fully taxed income from wages) will be yet a further impetus to tax evasion  and unfair taxation of workers compared to owners–i.e., it is both untenable and unfair.  (This was the reason that the 1986 TRA under Reagan eliminated the category distinction.)
    • Len Burman describes it as “political pandering at its worst.”  Perry Offers Tax-Cut Choice, BusinessWeek (Oct. 26, 2011).
  • The system will result in huge decreases in revenues.
    • The upper middle class and wealthy will choose the most beneficial tax (zero taxation of capital income, still get the mortgage interest and charitable deductions which are the biggest tax subsidies against their taxable income)
    • This will result in substantial decrease in tax revenues, leaving the government wither with huge deficits funded by further borrowing, or the necessity of making huge cuts in long-respected government programs like consumer protection, mine safety, worker safety, food safety, environmental protection and basic research funding for the humanities and sciences
    • The revenue shortfalls will inevitably call for shrinking the parts of government that the right that passes the bill doesn’t like–i.e., New Deal social welfare programs, EPA, etc.  It will make it well nigh impossible for the government to uphold its promise to pay for earned benefit programs like Social Security and Medicare.
    • That impact is an intended result of the revenue shrinkage built into the Flat Tax plans.
  • The choice of tax systems will require duplicate tax administration as well (adding costs).
    • Advocates of Flat Taxes/ VATS/ FAIR Taxes (national sales taxes) claim that their plans will all be “simpler” because of the single rate.  They disregard the facts
    • All of the complexities of the income tax remain for both the income tax and the Flat Tax–what is income, what character is the income, when is it income, is an item deductible or not (charitable contributions can really be quid pro quos, etc.).
    • Having an option means generating an entirely new set of forms, guidance, regulations that underpin the statute, audits, administrative determinations–essentially a new division of the IRS to cover the new option
    • Couple that with the right’s antagonism to the IRS generally and one can expect an underfunded IRS that has trouble enforcing either the income tax or the Flat Tax.
    • Underfunding of enforcement (exaggerated by the right’s demonization of government generally and the IRS specifically) will incentivize tax avoidance behavior–sophisticated, wealthy taxpayers will game the flat tax system in particular by recharacterizing ordinary expenditures as deductible savings or taxable compensation as excludible capital income.
    • Federal revenues will likely decrease even further because of the enforcement problems.
  • The compensatory benefit–the claim that the Flat Tax (and accompanying deregulation of financial institutions and major corporations through the repeal of Dodd-Frank and Sarbanes-Oxley) will unleash pent up investment and create a burst of economic growth that creates jobs is simply unfounded in fact.
    • We’ve tried this philosophy for four decades (since Reagan) and it hasn’t worked–it is not the wealthy elite who create jobs; it is the consumers, whose demand creates the potential for business expansion, that create jobs.  See, e.g., James Livingston, It’s Consumer Spending, Stupid, New York Times (Oct. 26, 2011); Steven Strauss, Actually Tax Cuts Don’t Seem to Have Much Impact on Economic Growth, Huffington Post (Oct. 25, 2011) (noting that “ideology is a poor substitute for pragmatic approaches to complicated problems. In fact the evidence that tax rates influence economic growth in any way is equivocal at best. A myriad of other factors are involved. Simply reducing tax rates, and primarily for the wealthy, may hinder — rather than enhance our economic recovery”).
    • And most of the countries held up as models for how wonderful the “flat tax” is in boosting their economy do not actually provide solid evidence for that.  Many flat taxes are in fact flat INCOME taxes, not just wage or consumption taxes.  Countries like Hong Kong, which had a flat tax and managed quite well for a while, benefited from the extraordinary circumstance of acting as the intermediary between communist China and the capitalist world–so that any tax would have raised sufficient revenues on the kinds of deals going through the city-state.  (And, as my colleague Mike McIntyre just reminded me, Hong Kong also benefited from an early real estate bubble like the one that gave this country a spurt of growth that looked like it was connected to the Clinton and Bush tax cuts but was actually connected to rampant speculation with easy money.)
    • There is no investment need in businesses that can’t be met currently by the vast resources of unspent cash held domestically (as well as offshore).  Corporations are not cash strapped–they are hoarding cash because they don’t have customers for their products.
    • The “Econ 101” Chicago School theory on which the idea of an economic boom from putting more money in the hands of the monied rests is incomplete and just plain wrong. It is based on unrealistic assumptions about human decisionmaking, “efficiency” and “welfare”.  Under that theory of efficiency, the marginal utility of the dollar is essentially disregarded.  Under that theory of welfare, if the rich gain all the benefits of the economy as they have for the last decade, that’s an aggregate increase in welfare so all is fine.  Again, this type of economic analysis is just “hope [for booming economic growth] masquerading as theory.”
    • The facts are different.  Empirical studies show decisively that increasing inequality is extraordinarily harmful to economic growth.  When the top 1% are better off and the 99% are suffering, the society suffers.  See The Spirit Level, Wilkinson & Pickett, or the work of Saenz & Piketty on inequality.  See also Benjamin Friedman’s book on the importance of broad-based economic growth to a sustainable economy.
    • In fact, the shortfalls in government revenues will lead to cuts to social welfare programs and to government spending on everything from infrastructure to disease control and food safety.  As to Social Security, Medicare and Medicaid, Perry himself suggests raising the retirement age, changing age eligibility for Medicaid, and introducing an income factor in determinating eligibility for these earned benefits.  These kinds of changes and governmental program cuts will have a ricocheting bad effect on the entire economy that is likely to throw the economy back into recession.  Indirect impacts including firing of government workers will add to the detrimental impact on the vast majority of Americans in the middle and lower classes.

Perry’s system also gets rid of the Estate tax.  All told, the right’s slogan here might as well be:  Make the Rich Richer! (no matter who else is hurt).
Note that this is all happening in a context where the rich are getting much richer, and everybody else is barely hanging on.  See, e.g., Pear, Top Earners Doubled Share of Nation’s Income, Study Finds, New York Times (Oct. 26, 2011).  The article reports on the CBO’s Oct. 25 report that the top 1 percent more than doubled their share of the nation’s income over the last three decades of the ascendancy of hard right economic ideas.  Their income increased an astounding 275% between 1979 and 2007.  Meanwhile, the bottom 20% had only an 18% gain in all those years–and in fact their share of the national income dropped from 7% to a measly 5%.  This is because government policies that can counter the upwards redistribution of income from everybody to the rich have been weaker since Reagan–“the equalizing effect of federal taxes was smaller” as the progressive income tax has become less progressive in nature and more federal revenues have been raised by the regressive payroll tax.  See also One Percenters’ Income Nearly Tripled in Last Three Decades: CBO, Huffington Post (Oct. 26, 2011) (noting that the US ranks alongside Uganda and Rwanda in terms of the gap between rich and poor, and adding that inequality at that level is “likely holding back the economic recovery”). The Perry and Cain plans would exacerbate this trend.  If we are almost at plutocracy (rule of the wealthy) now, we will surely be there if any of the hard right tax plans are put into effect.
Perry’s system dramatically changes the corporate income tax to favor multinationals–20% rate, removal of various deductions, almost tax-free repatriation of foreign earnings, and a territorial tax system.  Incredible breaks for the multinationals who are moving jobs offshore as fast as they can.  The right’s slogan here might as well be:  Give It Away to the Multinationals! (so they can move everything offshore).
Makes one think that Charles Pierce is correct when he says that these Flat Tax (Perry), FairTax (Cain) and VAT (Cain) plans are just an “unwieldy parade of hackneyed talking points (Kill the Estate Tax and Save the Family Farm!) and tired applause lines (The Job Creators Are Uncertain!).”  See Ken Houghton’s link on Angry Bear, here.  I only wish I were as certain about the chances of the right’s not being successful at enacting some form of flat/”fair”/VAT tax as Pierce is.
http://ataxingmatter.blogs.com/tax/

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