taxation – Sheila Kennedy

A Rant About Taxes

In Red states like Indiana, legislators and business interests routinely spout–and clearly believe–a lot of persistent claptrap about taxes. Taxes are bad. They should be minimized whenever possible. They may be–like death–unavoidable, but that doesn’t mean we shouldn’t do whatever we can to avoid them.

Are there problems with this reflexive approach? Let me count the ways….

Being indiscriminately anti-tax is probably the most fundamental error in today’s political discourse. To state the obvious, governments need resources if they are to provide the services we demand. The proper way to approach any system of taxation is to ask, first of all, whether We the People are getting our money’s worth. Are we getting value for the dues we pay to live in a civilized society?

When people who can afford it decide to join a country club, they evaluate the appropriateness of the dues they will pay by considering the benefits of membership. When my husband and I decided to take the cruise we are currently enjoying, we focused on what was included in the (considerable) fare being charged. Yet, when it comes to taxes, people rarely focus on the variety and appropriateness of what our dollars are buying.

The proper questions are: how are public services being delivered? Are tax dollars being wasted on services we don’t need government to provide? In the alternative, is the failure of government to provide a particular service costing individuals far more than a collective approach would cost them? (Health insurance comes to mind…) Is there credible evidence of corruption or inefficiency we need to address?

Beyond that fundamental issue of value for our tax dollars, discussions of tax policy need to focus on the fairness and transparency of the system. The question shouldn’t be whether to impose, raise or lower taxes–the question should be how. What are the pros and cons of property taxes versus income taxes? What is the difference between a justifiable tax incentive and a politically-dubious loophole?

It is so much easier for politicians to rail against taxes and tax rates than to get “down in the weeds” of tax policy.

What triggered the foregoing diatribe was a recent commentary in the Capital Chronicle that focused on revelations from a recent hearing of the General Assembly’s State & Local Tax Review Task Force. The hearing was held to consider proposals (floated by legislators and at least one candidate for Governor) to replace the state’s personal income tax.

Testimony at the hearing pointed to the considerable downsides of that proposal–it turns out that, among other problems, eliminating state income taxes would put a greater burden on the Hoosiers who already pay the largest share of their income in taxes.

But national experts also laid out a framework that would give Indiana’s lawmakers the opportunity to rethink how the state’s tax and budget structure can unlock Indiana’s true economic potential and allow all Hoosiers to thrive.

Some of the testimony presented to the Task Force was truly jaw-dropping. For example, The Tax Foundation testified that at 7%, Indiana’s sales tax rate is tied for second-highest in the nation (behind only California), and that it is “definitely not possible” to properly eliminate or replace the individual income tax.

Furthermore, the Institute on Taxation and Economic Policy (ITEP) demonstrated that not only do lower-income Hoosiers currently pay nearly twice the proportion (12.8%) of their incomes in state and local taxes compared to the wealthiest households (6.8%), but that Indiana already has the 12th-most regressive state tax structure in the country.

ITEP also showed that eliminating the state income tax would provide a windfall of $33,964 for the top 1% of earners, but a mere $203 for the bottom 20% of Hoosier earners. Likewise, replacing half of the income tax with a 9.5% sales tax would still gift $29,507 to the wealthiest while causing a net $62 tax *hike* for 1 in 5 Hoosier families.

Legislators like to characterize a low tax rate as a magnet, insisting it will draw people and jobs to the state. But as the commentary notes,”Indiana’s tax system isn’t making the state competitive even in the Midwest, where Indiana is worse than average in the region for real median wages, unemployment rate, poverty, and low wage jobs throughout the economic recovery of the past three years.”

And women sure aren’t moving here for reproductive health care…

Again, the issue isn’t cost; it’s what value are we getting for our dollars?

As the commentary notes, Indiana could fully fund affordable housing programs, universal child care, and tuition-free technical education–all for less than the revenue that would be lost from the proposed, lopsided tax cuts.

Maybe it’s just me, but I’d rather pay dues to the club that keeps the roof repaired and the chef paid…

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Enforcing The Rule Of Law

Americans spend a lot of time arguing about legislation. For that matter, this blog is predominantly focused on what we call “public policy,” which is essentially a term meaning “laws and regulations.” What tends to get much less attention is an equally important aspect of the rule of law: enforcement.

With the exception of policing–the enforcement of criminal laws–we tend to ignore the behaviors of those who have been authorized to enforce the laws once they’ve been passed. For one thing, it is much harder to ferret out the degree of enforcement. If Congress or a state legislature passes a measure, reporting that fact– or opining about its wisdom– is fairly simple. Figuring out whether the law is being fairly and evenly applied–or applied at all–requires considerably more effort.

Take tax law. Bills to raise or lower taxes receive widespread reporting and discussion. But enforcement–or the lack thereof–is equally important, and gets much less attention. When we are talking about taxes, however, there are two equally effective methods for reducing tax liability for the mega-rich: lower rates, and inadequate investigation and application of those rates. When staff levels at the IRS are kept too low, when the agency lacks the ability to audit more than a handful of returns, the millionaires and billionaires can be confident that the odds favor the significant success of various tax avoidance ploys.

President Biden has moved to beef up IRS’ staffing, which has been decimated by the former guy’s administration, and six former IRS commissions have applauded that move in a column for The Washington Post.They provide the context.

As former IRS commissioners, we know the challenges of administering the tax system, which has grown in size and complexity, particularly in recent years.

Yet, during the past decade, budget cuts have substantially diminished the IRS workforce. In real terms, the IRS budget is smaller than it was in 2010, and it has 21,000 fewer employees. The IRS has fewer auditors today than at any time since World War II. Moreover, the agency has struggled to keep pace as complicated tax structures, such as partnerships and pass-throughs, have grown in popularity. Workforce attrition has been most pronounced among agents who examine these complicated tax filings: Thirty-five percent fewer revenue agents handle these returns today than a decade ago.

Their essay goes on to remind readers that, despite its reduced workforce, the IRS has seen its responsibilities increase. The agency administers significant provisions of the Affordable Care Act, and during the pandemic, it has been the IRS that has delivered three rounds of federal payments to hundreds of millions of taxpayers. Now, the agency is preparing to deliver periodic payments of the recently-enacted expanded child tax credit.

Thanks to its expanding authority and reduced staffing, the former commissioners report that

There has also been a substantial decline in enforcement scrutiny of high-earners and large corporations with complex returns: Audit rates for millionaires have fallen more than 70 percent since 2011; audits of large corporations decreased from essentially 100 percent a decade ago to less than 50 percent, according to the most recent IRS estimates.

This situation is no fault of the IRS or its committed workforce, who are dedicated to fair implementation of the tax code and the strongest possible support for taxpayers. Provided appropriate resources, the IRS can make good on its commitments.

The former Commissioners agree that the changes and additional resources that President Biden proposes would “produce a great deal of revenue by reducing the enormous gap between taxes legally owed and taxes actually paid — much of it through increased voluntary compliance.”

The Biden proposal includes provisions on third-party reporting, leveraging information from financial services providers to learn basic information about account inflows and outflows. This information could assist taxpayers in filing accurate returns and help the IRS better focus collection efforts. Research shows that when the IRS has access to third-party reporting, compliance rates top 95 percent. Without third-party information reporting, compliance rates are below 50 percent. Reliable information is critical to an effective and fair tax system.

The statistics cited in the essay demonstrate the importance of effective enforcement. It isn’t simply tax rates that favor the rich–lax enforcement costs an enormous amount that the rest of us must make up. Estimates are that uncollected taxes from those sources are equal to the total taxes paid by the lower 90 percent of individual taxpayers.

It is long past time to give the IRS the resources it needs to ensure that corporations and billionaires pay their taxes. If enforcement is fair across the board, the rest of us will feel a lot better about paying ours.

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When Voters Can’t Connect The Dots…

Thousands–probably, millions–of words have been written about Republicans’ religious devotion to anti-tax beliefs. Unfortunately, that dogma is matched by a pervasive lack of understanding of how tax dollars are spent, and what citizens get for our money.

There are plenty of. wasteful programs, of course, not to mention subsidies that have long outlived whatever merit they may once have had. These wasteful and unnecessary programs allow politicians to make the case that all taxes are theft. It then follows that any and all efforts to reduce taxes are by definition laudatory.

Which brings us to Donald Trump’s recent plan to end or defer the payroll tax.

As a number of media sources have explained, payroll taxes support Social Security and Disability Insurance. Social Security’s Chief Actuary, Stephen C. Goss, evaluated the Trump proposal; he concluded that it would end Disability Insurance in mid-2021 and destroy Social Security by mid-2023.

When those of us who are fortunate enough to still be employed look at our pay stubs, we see hefty deductions for FICA. Most of us have undoubtedly thought about how nice it would be to have those dollars right now. Reasonably informed adults, however, who realize that they will need Social Security at some point, understand that deferring instant gratification is in their long-term best interests. (It’s true that some small portion of the population would be able to invest on their own behalf, but since most people couldn’t or wouldn’t, massive poverty among the elderly would result.)

Those who don’t know what the payroll tax deduction pays for see it as just another tax to attack.

I understand that tax policy can be complicated. When I pontificate about Americans’ lack of civic literacy, I’m not suggesting that we all need to know the ins-and-outs of the various ways government assesses us to pay for services–but it would be helpful if people recognized that we need to pay for services that are widely popular and obviously needed at the local, state and federal levels.

Actually, it would be more than helpful if Americans could agree on the essential components of both our physical and social infrastructure. At the local level, there’s a public outcry if streets, roads and bridges aren’t properly maintained. Whatever our concerns about policing, a vast majority expect local government to provide for public safety. Most of us think cities should provide public transit, garbage and snow removal, and a variety of other services.

Survey research leaves no doubt about the popularity of federal social welfare programs like Social Security and Medicare. Survey research also tells us that far too many Americans fail to connect the dots between the taxes they pay and the services they demand.

Should thoughtful and competent individuals and organizations monitor government. programs to ensure that our tax dollars are being wisely and appropriately spent? Absolutely. Are there programs that should be eliminated? You betcha! But ensuring the efficiency of public administration is a far cry from across-the-board anti-tax dogma–and a very far cry from uninformed and dangerous efforts to keep today’s dollars by selling the future short.

As usual, Trump and his administration are counting on the ignorance of his supporters. And to be fair, eliminating the payroll tax is (marginally) less dangerous than drinking bleach…

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Telling It Like It Is: Election Version

In a riff on the title of the book What’s the Matter with Kansas, Ron Klain’s recent column for the Washington Post was “What’s the Matter with Florida?”

The column could have more accurately headed “What’s Wrong With America’s Electoral ‘System’?” Note the quotation marks around the word system; they’re there because (much like the situation with health care), we don’t have anything that remotely deserves the word “system.”

As the New York Times reported just last Sunday in an article about voting glitches,

Though it wasn’t a 2000 redux, the 2018 midterms exposed persistent problems and the haphazard way the voting process was administered across the country. In Arkansas, three-member boards handle elections at the county level, while in Connecticut all 169 towns and cities use their own registrars.

The inherently political nature of running elections can call into question some officials’ decision-making.

Klain served as general counsel for Al Gore in that 2000 recount effort in Florida; he says he’s often asked why these problems keep happening in Florida.

Part of what we are seeing now in Florida, as we did in 2000, is the product of factors specific to the state: persistently weak election administration in key counties, perennially close and hard-fought elections, and a colorful group of political players that seems ripped from the pages of a Carl Hiaasen novel. But the most important thing to know about what’s happening in Florida is that it has little to do specifically with Florida at all.

Take a step back and look at the big issues playing out in Florida, and what you’ll see, instead of Florida’s foibles, are three critical challenges to American democracy as a whole.

It’s hard to argue with the negative effects of the three challenges Klain identified in his column: we allow “interested” officials to supervise elections; we entrust the electoral process to amateurs and incompetents; and state election systems are poorly run and underfunded.

The recent midterms especially highlighted the first of these. As Klain notes,

Florida’s chief law enforcement officer, Gov. Rick Scott, who is also the Republican nominee in the Senate recount, is in a position to allege crimes by election officials, attempt to seize voting machines and dispatch state troopers to try to intervene in the post-election dispute. But a similar spectacle has been unfolding for months next door in Georgia.

As chief of election administration in Georgia, Secretary of State Brian Kemp— who is also the Republican nominee for governor, in a vote also being contested — stalled more than 50,000 new voter registrations, supported closing more than 200 polling places in predominantly minority areas and purged 1 in 10 Georgia voters from the rolls. In Kansas, Secretary of State Kris Kobach — again, also the Republican nominee for governor — employed many of the same tactics as Kemp, and fell just short of being elected.

These are egregious conflicts of interest, but such conflicts are only slightly less concerning when partisan officials not running for office oversee elections. Those officials have, as the saying goes, “a dog in the fight,” and significant incentives to game the process to favor their political party.

The clusterf**k in Florida also illustrates Klain’s other points: the machine recount in Palm Beach County was hampered because old machines overheated from processing so many ballots; and 30,000 ballots in Broward County recorded votes for state agriculture commissioner but not the U.S. Senate. That weird result turned out to be the result of a poorly designed ballot. More incompetence in the state of the hanging chad….

Klain’s most important point, in my view, is the following:

But again, that’s not just in Florida. While some election misadministration (such as inadequate numbers of voting machines in targeted areas) appears to be a deliberate effort to suppress the vote in minority communities, much Election Day mayhem is caused by systems that are poorly run and underfunded.

No matter how much we hail democracy on the Fourth of July, come November, elections are just another government service: In communities where thin budgets and lax leadership produce scant bus service, slow ambulance response times and unkempt parks, we should not be surprised to find confusing ballots, bad instructions at the polls and slow vote tabulation.

For the past 40 years, Americans have been beating up on the very idea of government. We have voted for people whose proudest “qualification” is that they know nothing about public service, and for people who insist that taxation is “theft” rather than the dues we pay for civilization. We lionize the small percentage of our population who have the means to retreat into gated enclaves and provide for their own comfort and safety.

We the People no longer support government’s most basic obligation: to provide an adequate physical and social infrastructure administered by competent public servants.

It shows. And not just during elections.

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Smoking and Drinking

Have you ever wondered about the disparity in the way the law treats alcohol, tobacco and marijuana?

As any police officer will attest, a nasty drunk is far more dangerous than someone zoned out on “weed.” As the scientific literature will confirm, tobacco is many times more harmful than marijuana. Not only has the belief that marijuana is a “gateway drug” proved bogus, but for adults, it is less harmful than either smoking or excessive ingestion of alcohol. (No one has ever died of a marijuana overdose, although if your preferred method of indulging is brownies, I suppose the resulting obesity might get you.)

People with addictive personalities will abuse whatever is at hand–alcohol, drugs, even glue. Should we outlaw glue?

The history of America’s war on drugs is too labyrinthian and too racist to recount here, and there are plenty of books and articles on the subject if you are interested in the whole sordid story. Suffice it to say that our mindless war on weed has made the once-profitable cultivation of hemp illegal, prevented study of marijuana’s medicinal value, and not-so-incidentally ruined countless lives (mostly African-American; black people are almost four times more likely to be arrested for marijuana possession than whites, even though both groups use the drug at roughly the same rate.).

But attitudes are finally changing.

In 1969, according to the Pew Research Center, 84 percent of Americans thought the drug should be illegal; by 2015, that number had fallen to 44 percent.

After Colorado became the first state to legalize marijuana, policymakers began to seriously consider a number of issues–especially pot’s potential to generate tax revenue.

Legalization raises a number of questions with policy implications. For example, how can it be taxed? In 2015, Colorado raised $135 million in taxes and fees from legal sales. Another important question: Will states that stop arresting people for selling or having marijuana save money on policing and reduce their incarceration rates? Some 620,000 people were arrested for marijuana possession in 2014, according to the FBI; young minority men were disproportionately targeted. Will more children take to smoking weed? As laws relax and the stigma associated with marijuana recedes, people may use more.

A study from Australia suggests some answers to those questions. The authors looked at what consequences we might expect if marijuana were regulated like alcohol and sold to people above the age of 21. They extrapolated their analysis to include the United States, a country with similar cultural behaviors and economies. Here are some of their findings:

The U.S. could raise between $4 billion and $12 billion annually by taxing legal marijuana. These numbers are based on a tax levy of about 25 percent, which is what the state of Colorado charges.
When people have more access to marijuana (through legal and illegal means) more people use it.
Currently, 17 percent of Australians say they do not use cannabis for fear of legal repercussions; 90 percent of those say that access is not the reason.

Access is evidently not a problem for people in either country; several years ago, an American study found that teenagers in Maryland could obtain illegal marijuana (and other drugs) much more easily than they could obtain legal but regulated alcohol. Legalization and regulation similar to that currently in place for liquor stores would probably reduce today’s easy availability.

The authors determined that a tax rate of 25% wasn’t high enough to incentivize a black market. One of the (many) negative consequences of drug prohibition is the fact that it makes an illegal market profitable.

In the U.S., tobacco and alcohol interests have powerful lobbies, so those substances are legal even though they do far more harm than marijuana.

Just to be clear, I don’t advocate prohibition for any of these; we’ve seen how well that works. Substance abuse is a public health problem; it shouldn’t be a matter for the criminal justice system.

Wouldn’t it be nice if we based public policy on evidence and analysis, rather than moralism and money?

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