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

Screw the Clinton tax rates. Lets party like it’s 1936!

 
Update: *Additional numbers added

Digby wrote a few days ago about the“grown-up” people coming to town to save America from the deficit. She listed a few of those people and their annual income.

 
Also, a few days ago the Senate had a vote on the tax cuts. Letting the Bush cuts go (I’m all for it and we can stop the payroll tax cut too as it is all stupid policy when the problem is declining wages/income going to labor) will return us to the Clinton years rates. People have noted just how little such a rise means to those at the top.
 
Well, in keeping with my define rich series and my series looking at the purpose of taxation, I thought wouldn’t it be interesting to see just what these 1%’ers might be paying if we went back to the beginning of the last great period of mass prosperity: 1936.
 
Yes indeedy, I say go for the brass ring. Let’s show our maturity and actually implement the lesson learned from our history, that period from around 1906 to 1932 and then 1936 to 1979.
 
While we’re at it, let us stop pretending that global trade is something new with an unknowable to man exotic force that we just have to accept as part of the expression of our DNA. There is RNA also (look it up).

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Payroll Tax Cut -Keystone vote up Saturday at 9 in Senate

by Linda Beale 

Payroll Tax Cut -Keystone vote up Saturday at 9 in Senate

Apparently, Senate leaders on Friday ironed out the difficulty between the GOP and the Democratic party.  The GOP got most everything it wanted, and the Dems got just barely more than nothing.  That’s the way “negotiating” seems to go in the Congress these days.  The right demands and demands and demands and gets most of it by obfuscating and obstructing.

This time the Dems were worried about not getting a spending bill.  So while the House passed a spending bill to carry the Federal Government through September 2012, the Senate caved on all the things they’d said they wouldn’t cave on–like the ridiculous provision for expedited approval of the Keystone Pipeline.  All to get just a 2-month extension of the payroll tax cut and expanded unemployment benefits–which the GOP knew it could not afford not to pass, no matter what.  And Obama has already flipped on his earlier looks-like-he’s-finally-figured-out-how-to-stand-tall position that he would veto any bill that carried the expedited Keystone approval provision.  See Steinhaur & Pear, Senate Agrees to a Two-Month Extension of the Tax Cut, New York Times (Dec. 16, 2011).
The GOP continues to call the Keystone pipeline project a “job creator”, even though it will create no more than 50 permanent jobs, at a considerable environmental cost.  Schumer calls the Keystone provision a “Pyrrhic victory” for the GOP, because he says Obama will not approve it if pushed.  That’s not so clear to me.  Schumer also spins the cave-in as a victory for Dems! saying that the GOP won’t have the leverage of the need to pass a spending bill when this issue comes back.  See  Rubin et al, U.S. Senate Leaders Agree on Two-Month Payroll Cut , Bloomberg.com (Dec. 16, 2011).
Again, past experience suggests this may be too rosy an assessment.  There were commentators who thought that surely the Congress would not pass further tax cuts after the 2001 tax cuts resulted in large deficits but instead we got the 2003 bill and the 2004 tax giveaway for corporations bill and many others, with the deficits mounting with each one.  One would have thought that the sunset of the various Bush tax cuts in 2010 would have been a perfect time for the Dems to develop a spine, but they didn’t.  And the Dems weren’t even able to pass a bill ending the carried interest subsidy for hedge fund managers, in spite of the Great Recession and the need to reign in financial institutions.
The Senate bill will apparently at least not include some of the bad stuff  that was in HR 3630 as passed by the House–it is “scaled back” so it looks like medicare premiums won’t rise for seniors, and  the GOP won’t win its attempt to end medicare’s coverage of outpatient rehabilitative therapy for stroke victims and medicare payments to doctors will not be affected.   Nor will it include the “extensions” of expiring tax provisions like the R&D credit or the active financing exception for the financial  industries’ deferral of its offshoreprofits.  Id.
The Senate bill will apparently be paid for by raising the guarantee fees for Freddie and Fannie, something that was included in HR 3630.  Id.  Vote is to take place at 9 am Saturday.
crossposted at ataxingmatter

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

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

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

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

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

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

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

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

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Long term fiscal problems 2007…PGL

Angry Bear PGL wrote this post in 2007 reflecting the shape of politics and media soundbites of this current and constant election campaigning over the current two years to 2012 elections:

In case Mr. Romney hasn’t seen my question. let me restate it. How will you address the long-run fiscal problem, that is, will you raise income taxes or will you impose that backdoor employment tax increase known as “entitlement reform”, which really means cutting Social Security benefits? Until Mr. Romney answer this question clearly let’s not pretend he has a serious position paper on taxes.

The whole post is below the fold. (hat tip Daniel B)

Stephen Dubner says Mr. Romney does and points to a NYTimes oped written by Greg Mankiw as that position paper:

But perhaps the very most interesting thing about the Mankiw piece is the lead: “Do the rich pay their fair share in taxes? This is likely to become a defining question during the presidential campaign.” This is a classic in winking understatement, for Mankiw was not only an advisor to Bush, but is also (as duly noted in the bio on his piece) an advisor to Mitt Romney on Romney’s current campaign. I applaud Mankiw, the Times, and Romney for having the courage to produce what is essentially a position paper on taxation in the pages of the Times. As long as everyone’s cards are on the table, which they are here, I see no harm. But I sure would have liked to see the e-mails back and forth between the Mankiw and the Romney camp as the Times piece was being edited; and it sure will be interesting to see how this trenchant piece of tax commentary plays out in Romney’s campaign. I can just imagine one of his opponents whipping out the Mankiw article a few weeks or months from now and waving it in his face – “So the rich pay too much tax, huh?”

Doesn’t the suggestion that the rich pay too much in taxes imply that the middle class and the working poor pay too little? It does unless one thinks we ought to slash the budgets of things like the Defense Department – which is not going to happen if Mitt Romney has his way. The claim that Mr. Romney was courageous in producing a position paper on taxation is absurd on so many levels. Greg noted one:

No emails. No phone calls. No smoke signals. I am not an employee of the campaign. I am a Harvard professor, expressing my own views, sometimes publicly, sometimes privately to a candidate for President. After listening to a variety of advisers with various perspectives, Romney decides on his own what positions to take.

The other levels on which this statement about Romney’s courage is absurd goes to a couple of critiques of Greg’s “super-compelling” oped both noted by Brad DeLong. While I think Mark Thoma had a more compelling discussion of the fairness issue, my contribution, which Brad was so kind to highlight, goes to the simple arithmetic of the long-run budget constraint that Mr. Romney has yet to address:

And by looking at 2004, he is forgetting that the budget is not exactly in balance. Yes, the General Fund deficit was rather large so current tax obligations do not capture the cost of government as in all those deferred tax bills thanks to the Bush tax “cuts”. But one might try Greg did that the unified deficit is not that large … Greg leaves out the fact that we have a large Social Security surplus, which is the reason why he can argue that the “deficit” is not that large. Implicit in the use of this figure is the proposition that those payroll “contributions” we are making are NOT to become our retirement benefits down the road. As long as we are posing questions for political candidates, let’s pose this one for Mitt Romney (as Greg is one of his advisors): do you intend to slash Social Security benefits in the future as you continue to impose these employment taxes? After all, you want to maintain the Bush tax “cuts” and still have a large defense department.

In case Mr. Romney hasn’t seen my question – let me restate it. How will you address the long-run fiscal problem, that is, will you raise income taxes or will you impose that backdoor employment tax increase known as “entitlement reform”, which really means cutting Social Security benefits? Until Mr. Romney answer this question clearly – let’s not pretend he has a serious position paper on taxes.

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Joseph Stiglitz: Of the 1% by the 1% for the 1%

by Daniel Becker

This is an interview of Joseph Stiglitz on Democracy Now regarding his article in the current Vanity Fair.  He discuss the issue of income inequality, taxes, etc and how it has set us up to be less of a land of oportunity than what old Europe was.

A few quotes:

The question was, if people were getting rewards for contributing to our society, a theory that was in the 19th century called “marginal-productivity theory,” then you could say, “OK, those who contribute more should get more.” But what we saw in that crisis was that these titans of the financial industry got mega-bonuses while their companies were making mega-losses.

And with this one percent getting so much, there’s only one place really to get that extra revenue. The good news is it’s relatively easy. You have 25 percent—almost 25 percent of the income in the upper one percent, you raise their taxes by a few percentage points, and you get an awful lot of money.

This raises a very important point that I raise in my article, which is that much of the wealth of this one percent comes not from hard work, not from innovation, but from good investments in Washington, investing in political capital.

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Can Either James Kwak or Mark Thoma Build This Model?

Update: Brad DeLong looks at the data and suggests that the problem may be that the current President is as innumerate as the previous one.

Mark Thoma quotes James Kwak:

So no, I don’t think Obama is abandoning his principles for political advantage; I think these are his principles. And while I’m upset at him, I’m upset at him for being wrong on the policy level, not for abandoning anything or selling out…I always thought Obama was a moderate who looked like a progressive.

I’m with Kwak on that; it’s one of the reasons I supported the relatively-more-progressive Hillary through the primaries.*

Where I’m less sanguine is the base from which Mark let him start:

Obama is certainly in a decent position politically, and I would bet on him to be reelected comfortably in 2012.

In 1996, Bill Clinton had the advantage of Bob Dole—the 1996 equivalent of Newt Gingrich—being his opponent. Dole had been a known quantity to voters for over a decade (“Do you want Grits and Fritz or a Ford Dole?”) who supported Clarence Thomas, talked about Hideo Nomo of the Brooklyn Dodgers, and fell off the front of a stage—and still garnered more than 40% of the vote, losing the popular vote by only slightly more votes than Ross Perot won. And that was after the advantage of a virtually-uncontested primary, which Mr. Obama may not enjoy.**

Kwak later backtracks a bit:

I think two years would be enough time for labor markets to recover if we could expect policy supporting employment along the way. But we are likely to get just the opposite, deficit cutting measures and other policies that work against employment and hence work against electoral success for the Democrats. Toss in a compromise on Social Security that angers the Democratic base, a possibility that cannot be dismissed as Obama follows up on what appears to be a successful move to the center, and the future does not look as bright. Obama may think he is playing the game well now, but the game is far from over.

This is at least far more accurate than the declaration that Obama won when his opening g4 was followed by the Republican’s e5. And Thoma follows up with his expectation of Obama’s next move being f3:

That would put an end to any stimulus due to the tax compromise. Stimulating the economy was never the intent of the GOP when they agreed to the tax compromise, it was all about the estate tax and tax cuts for the wealthy. They will do what they can to decrease government spending over the next two years, starting in January, and if they are successful it will reverse any benefit the economy might have received from the compromise.

Given that we all agree on the likely next two years, it would be nice to see an economic model from either Mark or James Kwak that justifies the expectation that Obama is in a position “to be reelected comfortably in 2012.”

At the very least, I want to offer to bet with Mr. Kwak, at even odds, with proceeds to go to the charity of the winner’s choice. Here’s my choice.

*The other being that she would know from the start that she was hated, and be ready for bear at the outset. (As an aside: sorry, Scott, but hiring Mark Penn, while a mistake, is not a revelation of policy preferences. Or, if you want to argue it is, tell us what replacing Howard Dean and the 50-State Strategy with Tim Kaine and Suborning Democrats such as Sibelius and Napolitano into the Administration is.)

**I say this not only because I would like to see him challenged—his doing a Specter in 2011 is about the only hope for my grandchildren—but also because it makes sense to prepare the field for 2016 and beyond. It would be dumber of the Democrats not to have someone challenge him in the primary, leaving only HRC and Joe Biden as probably 2016 candidates, than it would be to unite behind him in the hope that Republicans nominate someone who is unelectable a la Dole in 1996.

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Simon Johnson on the apparent new deal in politics

Baseline Scenario links to Simon Johnson’s thoughts on current practice of politics. Well worth the time to read and comment.

Delusions Of Fiscal Grandeur
by Simon Johnson

If you honestly believe that investors will happily buy up any amount of US government debt (at low interest rates) for the indefinite future, then relax.  The tax deal passed yesterday should make you happy.

But if you fear that the US will soon be tested by financial markets – just as the eurozone is being tested today – then please read my column,”Voodoo Economics Revisited“, which is now on the Project Syndicate website.  There is a well-established tradition in the Republican Party of thinking that tax cuts cure all ills; many in the Democratic leadership have apparently now fallen into line.  We need to think hard about what our fiscal crisis will look like – and who will end up being hurt the most.

Another link to the column: http://www.project-syndicate.org/commentary/johnson15/English

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