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Ten tax tricks (non-rich need not apply)

by Linda Beale

Ten tax tricks (non-rich need not apply)

Back on tax day in April, Bloomberg.com ran a good story on the tax tricks the rich can use to reduce, defer or avoid altogether federal income taxation. Jesse Drucker, How to Pay No Taxes: Ten Strategies Used by the Rich, Bloomberg.com (Apr. 17, 2012).

As Drucker notes, the very very wealthy at the top of the income distribution have made out extraordinarily well in the last decade as to amount of taxes paid.

For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30 percent in 1995 to just over 18 percent in 2008, according to the Internal Revenue Service. And for the approximately 1.4 million people who make up the top 1 percent of taxpayers, the effective federal income tax rate dropped from 29 percent to 23 percent in 2008. It may seem too fantastic to be true, but the top 400 end up paying a lower rate than the next 1,399,600 or so.

They don’t even necessarily have to cheat to do it. They just use the tried and true tax reduction methods built into the system for their benefit–like “monetizing” their wealth through borrowings that they don’t pay back in their lifetimes, but are paid out of the estate (which can sell stocks with the step up in basis resulting in no taxes).

That’s because those figures fail to include the additional income that’s generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash.

The article lists ten common ways the rich avoid taxes.
(After the jump)


1. The no-sale sale (borrowing against stock, combined with puts and calls, so that the rich guy can either pay back the cash or hand over shares, years after the sale is actually conducted. (Drucker notes that Philip Anshultz used one of these deals and ended up with the tax court saying he owed $94 million in back taxes. But the deals are still going strong.)

2. the skyscraper shuffle (using tiered partnerships to borrow against partnership property, move the loan into a subsidiary and then distribute the subsidiary to liquidate a partner, letting him cash out of a real estate partnership and avoid taxation, retaining ownership of the entity with the cash and deferring taxes indefinitely)

3. the estate tax eliminator (leaving stock earnings to kids and avoiding the estate tax with a GRAT)

4. the estate freeze (using an intentionally defective grantor trust and debt to freeze the value of an estate–and avoid estate taxes on future appreciation–by moving assets out of the estate tax free for the benefit of beneficiaries and benefiting from valuation discounts due to the use of the trust)

5. The option option (receiving options rather than shares as compensation so that the tax bill won’t be due til the options are exercised)

6. the bountiful loss (purchasing identical underwater shares and using puts and calls to protect against any risk of further loss, and then selling the old shares to realize the loss–with just enough of a time window to avoid the wash sale rule–while retaining the same property in the form of the new shares)

7. the friendly partner (selling real estate by forming a partnership with the buyer, taking out a loan collateralized by the property, and ultimately distributing the cash to the seller who retains an interest in the partnership)

8. the big payback (buying various life insurance products that completely escape t income tax and, if owned by the appropriate type of trust, also the estate tax)

9. IRS Monte Carlo (converting traditional IRAs to Roth IRAs, especially in sets so that you can take advantage of the 21-month “change your mind” period selectively as it benefits you)

10. the venti (having a chunk of your big CEO compensation paid through a deferred compensation plan where earnings grow tax-deferred for years or decades).
What’s the moral of this tale? That Congress could easily stop every one of these tax avoidance schemes if it wanted to. And it should want to, so that the ultra-rich don’t continue to have access to schemes that allow them to avoid taxation that are simply not available to ordinary people.
http://ataxingmatter.blogs.com/tax/2012/05/ten-tax-tricks-non-rich-need-not-try.html

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American Enterprise Institute Economists Redux

by Mike Kimel

American Enterprise Institute Economists Redux

The other day I wrote a post about economists at the American Enterprise Institute (AEI), a prominent conservative think-tank. The post began with this paragraph from a story in the NY Times

Politicians sometimes say that lower tax rates lead to higher economic growth, which in turn leads to higher overall tax revenue. This may have been true in the early 1960s, when the top tax rate was 91 percent, but the top tax rate today is 35 percent. For decades, lower tax rates have led to lower government revenues, says Alan Viard, an economist at the American Enterprise Institute, a conservative policy group. “The Reagan tax cuts, on the whole, reduced revenue,” he explains. “The Bush tax cuts clearly reduced revenue. There is no dispute among economists about that.”

I noted that while Viard is right about tax cuts reducing federal revenue, he is wrong about “There is no dispute among economists about that.” As evidence, I pointed to a piece by his sometime co-author, Kevin Hassett and another by Glenn Hubbard, the first Chair of the Council of Economic Advisors under GW Bush. Both, I might add, are with the AEI (Hubbard as a visiting scholar). It wouldn’t take long to point to other quotes by other AEI economists disputing what Viard said is not disputable (and which, not incidentally, shouldn’t be disputable given the data.) At the AEI’s blog, James Pethokoukis responded to my post. There is no polite way to say this, so I’ll just state it as it is: his post is riddled with errors. Let me cover several of them. Of my post, Pethokoukis says this:

I have read it several times but I am not exactly sure of its Big Point other than to say nasty things about economists who either work at AEI or are affiliated with AEI. What I think author Ken Houghton is trying to say, maybe, is that supply-side economics doesn’t work.

There are three errors here, all of them concentrated in the last sentence:

1. The author of the piece is not Ken Houghton. It is Mike Kimel. As it says, “Posted by Ken Houghton” but “by Mike Kimel.”

2. The piece is not trying to say that supply-side economics doesn’t work. Alan Viard of the AEI is quoted as saying something which translates as follows: at least since Reagan took office, the tax cuts we have seen have led to lower revenues. I don’t know if Viard is willing to go further and endorse the implication of his statement about taxes and revenues, which is this: since the top marginal tax rate was at 70% before Reagan took office, and tax cuts from that 70% level and below have led to reduced revenues, if the Laffer curve is more than just a theoretical construct, unless we have a reason to believe that the last thirty two years of US history are an aberration, it turns out that we will not get an increase from revenue from a tax cut unless the top marginal tax rate is somewhere in excess of 70%. Like I said, that’s an implication of Viard’s statement.

That is not a point of the post, although in the post I did note that it seems Viard had seen data and was being honest about what the data stated. But that is only a point of the post in the sense that stating “the New York Times quoted AEI Economist Alan Viard” is a point of the post, which is to say, it isn’t a point of the post at all.


3. The point of the post is that while one AEI economist is willing to state the obvious about tax cuts, and though he may state that no economist disputes the obvious, his more prominent colleagues at the AEI do dispute what the data so obviously shows. I went further, and noted that Viard had to know that his own institute is a big part of the problem. Pethokoukis’ next sentence:

 “Supply-side economics is simply a school of economic thought that believes a) incentives matter, b) high tax rates are bad for growth, and b) inflation is fundamentally a monetary phenomenon.”

4. I’ll ignore the grammatical error toward the end of the sentence – there are enough substantive issues in the post – and merely point out: “incentives matter” is not something that defines supply-side economics any more than having two arms and two legs is a defining property of people of Swedish extraction.

I have yet to meet an economist of any stripe who doesn’t believe incentives matter, just as I cannot think of any country whose citizens don’t typically come equipped with four limbs. Its just that typically different schools of thought think incentives matter in different ways.

Let’s take Marxism as an example. I’m no Marxist, nor do I personally know any Marxists, but Marx can be summarized as: “those with capital have an incentive to exploit the workers to increase their profits, and the workers have an incentive to throw off their shackles, leading to a revolution. As long as there as a division of people due to ownership, those incentives persist. Peace, happiness, and prosperity can only exist by getting rid of those incentives, but only a revolution followed by a dictatorship of the proletariat can achieve that.” Now, whether Pethokoukis or I agree with this story (for the record, I don’t, and I’m pretty sure Pethokoukis doesn’t either), there is no question that incentives are part of the story. And I think I can show very clearly that supply siders treat certain incentives as egregiously as the Marxists do, but that’s for another post.

 “Back in the 1970s, Keynesian economists really didn’t believe any of that stuff and they dominated the economics profession.”

4a. This is kind of a continuation of the previous error, and it indicates Pethokoukis doesn’t understand the basic point that Keynes was trying to get across. I would assume that it isn’t controversy to say that Keynes General Theory, which is the basis for everything one can call “Keynesianism” can be summarized as follows: “When the economy slows, people buy less stuff, so manufacturers hire fewer people, pushing up unemployment and decreasing wages. This in turn slows the economy even more, leading to even more even pressure on employment and wages. But if the government were to start buying stuff, counteracting the reduction in demand from the private sector, it will decrease the pain companies feel, and thus decrease the layoffs and the downward pressure on wages, preventing the economy from getting worse and ending the recession sooner.”

If someone can tell that story in a way that doesn’t require both companies and workers to have incentives, I’d love to hear it. Alternatively, if someone can define Keynesian philosophy of any stripe in a way that doesn’t involve some variation of the story I just told, I’d love to hear that. FWIW, here’s Paul Krugman’s summary of the General Theory:

Stripped down, the conclusions of The General Theory might be expressed as four bullet points: • Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment • The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully • Government policies to increase demand, by contrast, can reduce unemployment quickly • Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach

Even if you prefer this formulation, its hard to say there aren’t incentives in the General Theory.

5. Most Keynesians do think higher tax rates slow economic growth. In fact, back to Keyenes…. the flip side of having the government step in and spend money when the economy is slow is that, according to Keynes, when the economy is running full speed, the government should cut back on spending raise taxes. One reason for raising taxes is to pay down the debt resulting from the deficit spending when the economy was in recession, but the other is to slow the economy to prevent it from overheating, thus prolonging the expansion. For what its worth, I personally don’t think slowing the economy to prevent overheating fits what data we have, but Pethokoukis wasn’ talking about me, he was talking about Keynesian economists in the 1970s.

 “Today, pretty much everybody believes incentives matter, high taxes rates hurt growth and inflation is a monetary phenomenon. ”

6. As I noted before, you could find that incentives matter in Marx and you could find it in Keynes’ General Theory, the sources of two schools of thought to which most supply-siders will agree they are in opposition, both of which predate supply-side economics. So the fact that pretty much everyone believes it today is a meaningless statement unless you can show that Marx and Keynes were exceptions – they just happened to believe something that the supply-siders would later believe, but virtually nobody else other than Marx and Keynes held that supply-sider belief prior to the supply-siders. Otherwise, we’re once again oohing and aahing over the fact that the overwhelming majority of Swedes have two arms and two legs.

7. I’m not sure what Pethokoukis is saying when he says that everyone agrees that inflation is a monetary phenomenon, or that it is a big deal that everyone believes it now, except that he is slightly misquoting Milton Friedman. That’s all very nice, but the belief that money affects inflation goes back a very long way. Lenin, for instance, talked about debauching the currency. Here’s Keynes, straight from the General Theory:

The view that any increase in the quantity of money is inflationary (unless we mean by inflationary merely that prices are rising) is bound up with the underlying assumption of the classical theory that we are always in a condition where a reduction in the real rewards of the factors of production will lead to a curtailment in their supply.

This doesn’t sound like someone who doesn’t believe that the quantity of money is unrelated to inflation. Its merely someone who believes that the quantity of money alone isn’t the only determinant of whether there is inflation – you aren’t going to have to fear inflation as much if there’s slack in the system. To provide an obvious example of what Keynes was talking about almost eighty years ago: I’m sure Pethokoukis knows how much the money supply has increased in this country since December 2007 and how little inflation we have had in that time.

 “Supply-side economics is just economics, really. We’re all supply-siders now.”

8. Oh, really? Well, as I noted above, Keynes agreed with the three beliefs that Pethokoukis ascribes to supply siders (incentives matter, higher tax rates slow growth, and inflation is a monetary phenomenon). Yes, he had a different view of incentives than Pethokoukis, and he had some caveats on when money doesn’t affect inflation as much, but for the most part, by Pethokoukis’ definition, Keynes was a supply sider, as are most of the folks he influenced. (I note that I personally would not qualify as a supply sider by Pethokoukis’ definition, which is to say, I don’t agree with Keynes on a key piece of that definition but that’s not the subject of this post.)

 “Oh, and the Laffer Curve? Just common sense.”

9. True. But common sense is often wrong. See, the dirty little secret of modern economics as practiced in the US these days is that if you apply the Laffer curve to US data, and by that, I mean, no cherry picking. Use the entire series of US government data going back to 1929, the first year for which official data exists, estimate revenues = f(top marginal tax rate, top marginal tax rate squared) you get a quadratic function as Laffer said. The only problem is – its upside down. Results are not different from what Laffer claimed, they are absolutely and precisely the opposite. Don’t take my word for it. Do it yourself. Anyone who took an intermediate level undergraduate econometrics course and has access to a spreadsheet can do it. “

Economic historian Bruce Bartlett calls the Laffer Curve “a generally accepted analytical device … [that is] a widely discussed subject in respected academic journals.” ”

10. Show me a group of physicists discussing phlogiston and I’ll show you a group of physicists who should be extremely embarrassed. As I said above, anyone who took an intermediate level undergraduate econometrics course and has access to a spreadsheet can fit a Laffer curve. It takes a bit more effort than that to check into whether phlogiston theory has anything to it.

 “In 1980, the top U.S. marginal income tax rate was 70 percent; today it is 35 percent. Yet the share of total income taxes paid by wealthier taxpayers has risen sharply. That is powerful evidence that the United States was on the wrong side of the Laffer Curve back in 1980. ”

11. What do the first two sentences have to do with the last sentence? The Laffer curve is not about the share of taxes paid by the wealthier taxpayers. As Pethokoukis himself wrote a few paragraphs earlier:

There are two tax rates that generate zero tax revenue, 0 percent and 100 percent. And in between, there is some tax rate which generates a maximum, non-zero amount of tax revenue. As tax rates rise from 0 percent toward that level, tax revenues increase both through higher economic growth and greater tax compliance. Once beyond that inflection point, higher tax rates generate less tax revenue.

Now, powerful evidence against the Laffer curve is, in fact, is provided by Pethokoukis’ colleague Alan Viard of the AEI:

For decades, lower tax rates have led to lower government revenues, says Alan Viard, an economist at the American Enterprise Institute, a conservative policy group. “The Reagan tax cuts, on the whole, reduced revenue,” he explains. “The Bush tax cuts clearly reduced revenue. There is no dispute among economists about that.”

Well, for me this is just a hobby – I don’t get paid for this. I’ve already spent too much time at this and I have to get to work.

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Policymic debate is happening on increasing taxes for the rich

I want to pass this forum and debate along at Policymic to readers. There are a number of excellent people in the comments section as well.

There’s a great debate happening now between libertarian Harvard Professor Jeff Miron and Center for American Progress tax specialist Michael Linden on the hot topic of whether we should increase taxes on the rich:

http://www.policymic.com/group/showCompetition/id/1888.

Both have written 500-word articles and are now battling each other (along with others) via the debate stream.

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This is the reality of a real small business

 By Daniel Becker

This is a bit of an interlude in my writing regarding the income tax of yore. Though, this does involve taxation. This is also a continuation in my postings regarding real world small business experiences. Yes, you are going to get to read about a real situation that involves a real small business and tax policy.
Before I mislead anyone, the taxes of concern are not about income taxation. Your business has to actually have an income for that tax to matter. I’m not talking personal income. I’m not talking capital gains taxes. Darn few honest to goodness small businesses ever have to worry about that in their daily activities. Maybe in the end you will have some capital gains after you pay yourself back all the personal money you put into your small business. I’m not talking payroll taxes cuts. Yeah, on what was a $100,000 payroll you gain maybe a couple thousand dollars, but on what was a ½ million business that is now 55% of what it was with payroll adjusted to match, it means little. I mean, that business is sure going to be hiring new people with that!
 Oh, just in case you think I’m off the mark, consider this poll from 11/10.   In the poll, 90% hired what was needed or fewer than needed. The catch: Only 1% hired because of the a new tax break. 41% were to replace an employee. When asked why they hired fewer than needed: 79% worried that sales or revenue would not justify more employees. However, 13% did hire because business was better. The lucky ones. So go ahead, keep giving me tax cuts, blah, blah, blah and all that monetary relief because that US Chamber of Commerce sure represents my thoughts and desires. NOT! Idiots!
Some perspective on small business.

“In 2009,there were 27.5 million businesses in the United States, according to Office of Advocacy estimates.The lastest available Census data show that there were 6.0 million firms with employees in 2007 and 21.4 million without employees in 2008. “

I know it is soothing to croon over the days when the Dodge Brothers, Ford, Colt, Walton and Gates were small and became major examples for their time of the American Dream of economic power. But really, the truth is most small business were and are people earning a living on their own vs working for Microsoft (the definition of part time abuse) or Walmart or GM, or GE or Boeing… They were huge numbers of small local retail. All gone. Small local banks? Going. Small local agriculture (RI used to have a state fair), forget about it.  Look around.
So lets get to the heart of it. First a bright spot. The flower shop had it’s first month this year that was better than last year. August. No, I’m not assuming this is a trend and here is why.

The city of Woonsocket has lost it’s Walmart to the town of North Smithfield, it’s neighbor. Major tax hit to the city. N. Smithfield got the Walmart because it decided that building a 650K sq ft shopping development would offset their rising taxes. I mean really, when in the last 30 years have we seen big business pay enough in taxes such that they actually were paying for their presence? Cut, cut, cut has been their chant. So, I can expect my property and inventory taxes to rise unless something replaces that Walmart. Say the state stepping up. Which tends to happen via the state giving less to the towns like North Smithfield.
I wrote about this type of tax chasing in one of my first posts.

“You know what is missing in this discussion (a discussion happening in every town USA)? The question: Compared to what? What are we basing the above statements on? Is it simply that we have less money after the bills are paid? Well, from 1955 to 1998, GDP rose by a factor of 20. Tax burden as a percent of income rose by a factor of 26.7. But income for a family of 4, 2 people working (sound familiar) only rose by a factor of 11.5. From 1976 to 2001 the top 1 % share of income went from 8.6 % to 21%. Yes, we have less money at the end of the day. Unfortunately, not benefiting from the national wealth as we had in 1955 (when the tax burden was 18% of your pay and would be today if all was equal) is a national policy issue.”

This is the issue of small business. See, we are all just trying to earn an income. Just like the person who works for the multinational. The income is much less because business sales are down. So, how should I plan for the pending tax rise? Do not just give me an answer that involves further big business moving into the area, because as I showed in the post on property taxes and development, it’s not so simple as welcoming Mr and Mrs. big business into the neighborhood.

“But, for my purposes Smithfield (an abutting town) presented the most interesting data. They had a new retail development go in, but ½ the size of that proposed for my town. It’s citizens have seen since 1999 in sequence a 9.8, 4, re-val, 5.5 and 8.7 percent rise in the tax rate. It’s commercial development has been only 10% industrial. My town only had a 6.4% total rise in the same time span.”

Oh save me great god of the mega corporations from the evils of local taxation. Yeah, I didn’t think praying would work.
Next up involves a CVS move. CVS is headquartered in Woonsocket. It obviously has some new hot shot who has a better way. They are looking to own their stores and not lease. They are consolidating 2 stores into one bigger store on new property. Yes, about ½ the property was zoned commercial, the other ½ was residential (real houses on it) turned commercial. This is important, because the CVS consolidation will leave 2 existing commercial spaces empty. We’ll add them to the Walmart space and potentially the Lowe’s space as it is suppose to be moving to the new North Smithfield development which is built on what was 126 acres of woods.
Sticking with Woonsocket, the location of my flower shop, the city has managed to add to its commercial property stock while turning a good portion of it into none productive commercial property stock. How soon do you think those empty places will fill up? Don’t hold your breath.
Some more good news. I managed to cut a major expense for the shop just this June to the tune of $379/month. We were in a unique position in that they kind of needed us. It’s not going to happen again. $4548 per year. Nice. It’s the heating expense for a year assuming the speculators don’t get active again. Yep, get rid of those government regulations as they sure are doing me harm. NOT!
The plaza that one of the CVS stores is moving out of is a customer of ours. We do seasonal decorating for them. It is about $3900/yr. Well, we’re not decorating with mums this fall and Christmas looks to be out too. How much you wanna bet spring next year and for some years to come is out? Gonna bet enough to do Washington a favor and higher someone?
Are you seeing where all this is going? I saved us some big coin. I’m loosing the same amount. Now, this is not the first hit from a CVS decision. Some other person there decided to make it simple for them to pay for their flower needs by going with Pro Flowers instead of feeding the 4 local florists which they had done for decades. They think they are getting a 20% discount from Pro Flowers. Little 
do they understand the flower business. Not the first time mega corps thought they new more than the little guy. It represented about 2.4% of our business at the time. May not sound like a lot, but when you consider the extra business generated by CVS using one’s shop to send flowers, it becomes significant.
Let’s add a third issue. Refi. Time to take advantage of the low rates. The purpose is to improve, that is reduce your monthly cash outlays. But as any real small businesses owner learns, there is no such thing as a fixed rate. We have paid off 22.2% of the loan that combined the original purchase of the business and property with the rehab that needed to be done in 2004. We have about 36% of the tax appraised value in equity of the property.
Here’s the concern, do you take a 20 yr loan with a rate of between 5 to 5.5% to be reset in 5 years or do you take 6 to 6.5% to be reset in 10 yrs? Do I bet that in 5 years business is better because the economy is better which could also mean all that projected inflation do to the Fed monetary policy and at least protect my self for 10 yrs? Or do I bet that nothing will be much better and try to preserve my cash flow (in a small business it’s always about cash flow, accrual be damn) and go for the 5% figuring the Fed money flood won’t roost for at least another 5 yrs? Oh, the refi cost are going to run you about $4000. There goes that big saving from my hard nosed negotiations again.
Your facing tax increases beyond the usual but, not because the public employees are paid too much. Your running out of area’s to cut. Major corporation moves are working against you just as off shoring is working against the middle class, the very class of your concern as you are in it and draw your income from it. And all the policy talk being pushed has little to do with the issues that you are facing because the number one issue you are facing is a lack of a middle class.
Have you heard of the “hourglass strategy”? Look it up. Ah, no it’s not a strategy you can use, but is one that will work against you.

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Oh Yeah: Crowding Out Has Been a Huge Problem

Guest post by Steve Roth

Oh Yeah: Crowding Out Has Been a Huge Problem

Cross-posted at Asymptosissize=”2″>

Right-wing economists love to claim that government spending “crowds out” private spending, especially investment spending on fixed assets. It’s probably true at some level and in some situations.

But if it was true for postwar America, you’d expect to see some evidence in the historical data, right?

Not so much:

Note: Government includes all levels — federal, state, and local.

The investment share of government, ex-defense, fell by 29% from the 60s to the 80s, while the share devoted to business increased 18% (28% from the 50s to the 80s) — the very period when the blossoming New Deal programs and Johnson’s Great Society were supposedly creating Leviathan, embodied.

Those changes in share percentages don’t really put across the magnitude of the change, though. Business investment started at a much higher level, so the absolute increase in business investment utterly dwarfs all the other changes.

Curiously (given the right-wing narrative) the business share flattened out once we started feeling the manifestly salutary effects of the Reaganomics world view. It actually declined slightly under Dubya and six years of unfettered Republican control. Go figure.

Defense investment has plummeted since the 50s (and — naturally — the 40s) — a 31% decline in its share from the 60s to the 80s, 58% from the 50s to the 80s, and 78% from the 50s to the 00s.

(Note: “domestic” assets are those located in the U.S. — except that government assets include U.S. military installations, embassies, and consulates worldwide. So this rapid decline may represent a worldwide construction binge in the 50s and 60s which was largely completed by the 70s. Defense investment generally includes much higher proportions of spending on structures — this was especially true in the 50s and 60s — compared to business investment, which devotes much, and increasingly, more to equipment and software.)

Wondering what caused Tyler Cowen’s Great Stagnation (the slowdown in economic growth since the mid-70s)? Here’s what looks like a smoking gun: Government investment spending as a percent of GDP fell off a cliff from the 50s/60s to the 80s — a 42% drop in sixteen years from ’68 to ’84, down 48% from ’58 to ’84. It’s been floating around that low level for the last 26 years.
Oh and for those who are curious, government consumption spending as a percent of GDP has been flat since the mid-70s.

The crowding-out theory of postwar America is in fact anachronistic by about six decades. When Simon Kuznets (who in the early thirties created the system of national accounts now used by every country in the world) published Capital in the American Economy in 1961, reviewing trends from 1869 to 1955, he cited the proportional growth of government investment as the dominant trend in capital formation over the decades he was examining.

The postwar trend has been in exactly the opposite direction.

I’m just sayin’: stopped clocks are wrong most of the time.

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Truth in Budget Numbers

by Linda Beale

Truth in Budget Numbers
crossposted with Ataxingmatter

Seems like everybody these days is into misrepresenting, distorting, or at least stretching the facts to suit the spin they want to give.

One issue that I raised in my snarky post on the 15th about the Budget commentary was the way most media has described the December 2010 Tax Relief ….and Job Creation Act.  As you will recall, that bill extended the Bush tax cuts for another two years, and most of the media talks about it as a “tax cut” bill.  But in fact that bill ended the “Making Work Pay” provision, a cornerstone of the Obama Administration’s attempt to make the stimulus package work for ordinary Americans.  The end of that provision resulted in a substantial tax increase for 51 million Americans in the lower income distribution.  See, e.g., Floyd Norris,  Some Taxes Went Up   (Feb. 4, 2011); Tax Policy Center, Table on the 2010 tax bill (Dec. 13, 2010).  When we talk about that bill, wouldn’t it be more accurate to discuss it as a tax bill that increased the burden on some of those in the most unfortunate circumstances, while giving substantial tax cuts to those at the top?

FactCheck.org, of course, spends its time looking for just those kinds of distorting statements and trying to set the record straight so that we are all talking about the same set of facts. 

They did an analysis of the “Budget Spin” that both sides put out surrounding the release of the President’s Budget.  Both sides get very bad grades.   Both sides misrepresent facts–neither Democrat nor Republican is immune.  And those misstated facts spread like wildfire over the net, as illustrated by Sarah Palin’s “mis-tweet” claiming that the White House is proposing a mere $775 million in cuts amounting to less than 1/10th of 1% of the deficit and linking to Glenn Beck’s right-wing website as proof. The truth is quite different–$33 billion in discretionary cuts for 2012, and the website link  from which she got her information was a mischaracterization of some examples offered by White House Budget Director Lew that was posted 5 days before the budget release. But Palin’s “mis-tweet” has been “re-tweeted” and that is the way misleading information is spread so easily on the net.

PS  if you enjoyed this you will also enjoy Floyd Norris on Life at the Dakota, noting the miracles (or at least, loopholes) achieved by someone with a mere $1.5 million in taxable income and outlays considerably greater just on housing…

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Deficit Hawks Down: The Misconstrued “Facts” Behind Their Hype

Reposted from New Deal 2.0 with permission from author.

Deficit Hawks Down: The Misconstrued “Facts” Behind Their Hype
by James K. Galbraith

Economist James K. Galbraith attends a Pete Peterson-funded road show.

The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

Mr. Bixby began by describing the public debt as “the defining issue of our time.” It is, he said, a question of “how big a debt we can have and what can we afford?” He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change. Oddly none of those issues were actually mentioned by anyone, all evening long.

A notable feature of Bixby’s presentation were his charts. One of them showed clearly how the public deficit soared at the precise moment that the financial crisis struck in late 2008. The chart also shows how the Clinton surpluses had started to disappear in the recession of 2000. But Mr. Bixby seemed not to have noticed either event. Flashing this chart, he merely commented that “Congress took care” of the budget surplus. Still, the charts did show the facts — and in this respect they were the intellectual highpoint of the occasion.

A David Walker speech is always worth listening to with care, for Mr. Walker is a reliable and thorough enumerator of popular deficit-scare themes. Three of these in particular caught my attention on Wednesday.

To my surprise, Walker began on a disarming note: he acknowledged that the level of our national debt is not actually high. In relation to GDP, it is only a bit over half of what it was in 1946. And to give more credit, the number Walker used, 63 percent, refers to debt held by the public, which is the correct construct — not the 90+ percent figure for gross debt, commonly seen in press reports and in comparisons with other countries. The relevant number is today below where it was in the mid-1950s, and comparable to the early 1990s.

But Mr. Walker countered that fact with another, which I’d never heard mentioned before: in real terms he said — that is, after adjusting for inflation — per capita national debt is now twice what it was back then.

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The problem is that real per capita national debt is a concept with no economic meaning or importance. (No government agency reports it, either.) Even in the private sector, debt levels matter only in relation to income and wealth: richer people can (and do) take on more debt. Real per capita national income is well over three times higher today than it was in 1946 — so how could it possibly matter that the “real per capita national debt” is twice as high?

Next, Mr. Walker made a comparison between the United States and Greece, with the implication being that this country might, some day soon, face that country’s interest costs. But of course this is nonsense. Greece is a small nation that has to borrow in a currency it cannot control. The United States is a large nation that pays up in a money it can print. There is no chance the markets will mistake the US for Greece, and of course they have not done so.

Finally, Mr. Walker warned that “foreign lenders… can’t dump their debt but can curb their appetite” for new US Treasury bonds. This was an oblique reference to the yellow peril. The idea, when you think about it, is that the Chinese central bank will acquire dollars — which it does when China runs an export surplus — and then fail to convert them into Treasury bonds, thereby choosing, voluntarily, to hold dollars in cash, which earns no interest, instead of as Treasury bills, which do. Mr. Walker did not try to explain why this would appeal to the Chinese.

Walker closed by calling for action tied to an increase in the debt ceiling; specifically for a hard cap on the debt-to-GDP ratio with “enforcement mechanisms,” which could include pro rata cuts in Social Security and Medicare benefits and tax surcharges. He did not specify whether the cap should apply to gross federal debt or only to that part of the debt held by the public (a number which the Federal Reserve can change, any time it wants, by buying or selling public debt). When pressed, in the question period, he would not even say what he thought the cap should be.

I waited for Ms. Rivlin to add something sensible. But she did not. Apart from some platitudes — she favors “serious tax reform” and “restructuring Medicare” — her interesting contribution was to restate Mr. Walker’s comment about “foreign lenders,” who might say “we’re not going to lend you any more money.” That this would amount to saying “we’re not going to sell you any more goods” seems — from a question-and-answer and brief exchange afterward — genuinely not to have crossed her mind.

The Fiscal Solutions Tour comes with a nice brochure, and even (in my case) with a flash drive containing Mr. Bixby’s powerpoints. But does Mr. Peterson think he’s getting his money’s worth? The President, in his State of the Union, mostly ignored him. The Bowles-Simpson effort (which he paid for in part) and the closely allied Rivlin-Domenici plan are fading from view. And as the House Republicans forge their own course, demanding radical spending cuts right now — for political rather than economic reasons, which they don’t even bother to explain — the tired and shabby arguments of these old deficit-worriers hardly seem connected, any more, to the battles at hand.

James K. Galbraith is a Vice President of Americans for Democratic Action. He is General Editor of “Galbraith: The Affluent Society and Other Writings, 1952-1967,” just published by Library of America. He teaches at the University of Texas at Austin.

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Declining Progressivity in US Taxes

by Linda Beale

Maybe at this juncture, when Congress is beginning to talk about what to do about the sunsetting Bush tax provisions, it’s an appropriate time to remind ourselves about our historic commitment to progressivity in our tax system. A good source for thinking about this is an article by Tom Piketty and Emmanuel Saez, How Progressive is the U.S. Federal Tax System? A Historical and International Perspective, 21 J. Econ. Perspectives 3 (2007).

What they show by looking at income and taxes over the period from 1960 to 2004 is revealing. While our system remains progressive to some extent, the progressivity has declined significantly. This is primarily, they say, because of the cuts in the corporate tax and the estate tax–taxes that impact the very wealthiest more than others because of their high ownership of financial assets. Our concept of distributive justice has always demanded that we should determine the tax burden based on individuals’ relative abilities to pay–that means that those with lots more should pay proportionately more of their income, since those with very little need all of their income just to meet daily needs, and those with considerable wealth won’t even notice whether they have another few dollars or not.

The decades since Reagan took office have taken a huge toll on that sense of shared commitment. Fueled by a religious-like belief in the mathematically elegant but unrealistic assumptions of the “free market” economists from the Chicago School (see Yves Smith’s book, Econned, for a good take-down of the freshwater economists), the GOP in Congress passed huge tax cuts for the wealthy accompanied by increasingly heavy payroll taxes for others at the same time that spending continued apace–in fact, Reagan, Bush1 and Bush2 all greatly increased the military budgets and the Bushes embarked on wars of choice that imposed significant budgetary demands. The wealthy have fought for laws that favor them–deregulation, zero capital gains taxation, lower corporate taxes, the ability to offshore businesses and assets freely, privatization of social security and other programs (that would put more dollars under direct control of investment bankers and insurers), and lowering of individual tax rates and provisions that phased out deductions for the wealthy (like the phase out of the itemized deduction, which was repealed under Bush, etc.).

There are some really great graphs in the article–so look at it rather than just reading these excerpts. But if you only have time for excerpts, here are some key ideas.

Progressivity of the overall tax code has unambiguously declined in the United States and in the United Kingdom. The average share of income paid by those at the very top of the income distribution has dropped substantially. Id. at 21

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Large reductions in tax progressivity since the 1960s took place primarily during two periods: the Reagan presidency in the 1980s and the Bush administration in the early 2000s. The only significant increase in tax progressivity since 1960 took place in the early 1990s during the first Clinton administration. Id. at 23

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many of the recent tax provisions that are currently hotly debated in Congress, such as whether there should be a permanent reduction in tax rates for capital gains and dividends, or whether the estate tax should be repealed, affect primarily the top percentile of the distribution—or even just an upper slice of the top percentile. This pattern strongly suggests that, in contrast to the standard political economy model, the progressivity of the current tax system is not being shaped by the self-interest of the median voter .12 Id. at 23.

12 Permanent reductions in dividend and capital gains combined with a repeal in the estate tax would certainly reduce the current progressivity of federal taxes and favor large wealth holders. The Alternative Mininum Tax, which is not indexed for inflation and hits more and more tax filers, will mostly increase tax burdens on the upper middle class but will not affect much the top 0.1 percent.

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The federal individual income tax is the largest tax, typically collecting 7–10 percent of GDP in most years since the 1960s. Individual income taxes declined sharply from 2000 to 2004 following the tax cuts of the Bush administration, falling from 10.3 percent of GDP in 2000 to 7.0 percent of GDP in 2004. The payroll tax financing Social Security and Medicare has increased significantly, climbing from about 2 percent of GDP in the 1960s to 6.4 percent of GDP by 2004. The corporate income tax has shrunk dramatically: it was typically 3.5– 4.0 percent of GDP in the 1960s, but had fallen to 1.6 percent of GDP by 2004. The estate and gift tax has always been very small relative to the other taxes, although it is important for distributional analysis because it disproportionately affects those with higher incomes. The estate tax collected about 0.6 percent of GDP in the 1960s, and 0.25 percent of GDP in 2004.

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The greater progressivity of federal taxes in 1960, in contrast to 2004, stems from the corporate income tax and the estate tax. The corporate tax collected about 6.5 percent of total personal income in 1960 and only around 2.5 percent of total income today. [emphasis added] Because capital income is very concentrated, it generated a substantial burden on top income groups. The estate tax has also decreased from 0.8 percent of total personal income in 1960 to about 0.35 percent of total income today. As a result, the burden of the estate tax relative to income has declined very sharply since 1960 in the top income groups.

[Hat tip to fellow Angry Bear rdan for reminding me about this article.]

crossposted at ataxingmatter

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