It Isn’t Just Tax Rates…

If voters ever wrest America’s government away from the Keystone Kops who are currently hijacking it, we might see a return to thoughtful policy discussions.

By “thoughtful,” I mean good-faith debates over the best way to approach various governmental tasks, conducted by people who actually understand the role and operation of government–and want it to work.

In other words, people other than Matt Gaetz and Marjorie Taylor Green and their ilk.

As readers of this blog know, I spent 21 years teaching classes in Law and Public Policy. Those classes explored both government’s policy processes and the legal and constitutional framework that constrains those choices. Ever since 2016, and the election of a buffoon whose entire administration was blatantly and proudly ignorant of both, I’ve missed the exploration of genuine policy differences –and the approach taken by public servants like former Senator Richard Lugar, who often referred to policy differences as “something about which people of good will can disagree.”

I thought about the current absence of “good will” when I read this paper issued by the Brookings Institution.The paper addressed the thorny issue of taxes, and how the American tax system distinguishes between–and differentially taxes– sources of income.

As the paper begins,

In a famous conversation, the author F. Scott Fitzgerald is credited with saying that “the rich are very different than you and me,” to which Ernest Hemingway replied “Yes, they have more money.”

Our work highlights another key difference: the most affluent Americans not only have more income; they receive it—and pay taxes on it—in vastly different ways than the rest of us.

For policy makers concerned about long-term fiscal shortfalls and high levels of economic inequality, our work reinforces the notion that raising the tax burden on the wealthy requires a special focus on how those households gain wealth and skirt taxes. We highlight four ways to effectively raise taxes on the wealthiest Americans.

The research focuses on an issue that serious policymakers understand, but that all-too-often is missing from public conversations about taxes. Those conversations tend to feature politicians appealing to voters with unrealistic promises to reduce the “tax burden” or eliminate certain taxes. ( Worse, when most voters think about taxes, they focus primarily on tax rates–and a not-inconsiderable number of Americans fail to understand the way  marginal rates work. They think the highest marginal rate is applied to the taxpayer’s entire reportable income.)

The Brookings report focuses upon a related element of the tax system: the different ways in which we tax income generated differently.

Most Americans receive almost all their income through wages and retirement income (pensions, 401(k)s, social security, and individual retirement accounts). The most recent available IRS data (2014) shows that wages and retirement income made up 94% of adjusted gross income (AGI) for households in the bottom 80% of the income distribution. Even for households in the 98th to 99th income percentile, wages and retirement income accounted for 71% of AGI.

At the very, very top, though, these sources are less important, accounting for just 15% and 7% of the income of the top 0.01% and the top 0.001% of households, respectively. These households  receive most of their income from investments (interest, dividends, and especially realized capital gains) and businesses (including sole proprietorships, partnerships, and S corporations). These items constituted 82% of income for the top 0.01% and 88% for the top 0.001%, compared to just 7% for the bottom 80% of households.

These patterns are robust over time and data sources. And in practice, the tilt toward capital income at the top is even larger than these figures suggest because AGI does not include the massive unrealized capital gains and very sizable inheritances that accrue to many affluent households.

The researchers proceed to suggest changes to the tax code that would have the effect of reducing the disparities that have contributed to our current gilded age, and I encourage you to click through and see whether you agree or disagree with their particular policy recommendations.

My point in highlighting this study, however, isn’t to endorse–or rebut–particulars.

This research –and similar investigations of the economic realities of American governance–is a welcome reminder of the way lawmakers should conduct policy debates: examining the evidence (what are we doing now, and what are the outcomes of what we are doing?); highlighting problems that such examination discloses (here, the widening gap between the rich and the rest); and considering policies that might solve or ameliorate those problems.

Budgeting and taxation are complicated issues about which people of good will can differ. But instead of people of good will–and thanks primarily to gerrymandering,–we have elected profoundly ignorant (and arguably crazy) people who think they were sent to Washington to destroy the federal government.

I miss policy…

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The Philosophy of Taxes

It’s April. Tax month.

Americans are notoriously anti-tax. (In fact, “tax” may be the only four-letter word that only has three letters).  I’m no different; it’s  April, and I’ve  reluctantly remitted what I owed, while thinking about all the other things I could do with those dollars. But I also know  that reaction is intellectually indefensible, because taxes pay for the kind of world rational humans want to inhabit.

Taxes are the dues we pay for living in a civilized society.

Those well-to-do people protesting their tax burdens would never treat their country clubs and other membership organizations the way they treat/cheat their governments. (How would the Orange Menace react iff Mar-A-Lago members declined to pay their dues?) Those manicured golf courses need tending. The clubhouse roofs and mechanical systems require maintenance. The properly servile “help” won’t be there to bring you your Scotch and soda if they aren’t being paid. Etc.

The people who presumably understand the need to pay dues adequate to keep their clubs and organizations functioning need to acknowledge that–as members of the polity–they have similar obligations to their country.

I think we all agree that government should be efficient–that our tax dollars shouldn’t pay for (frequently hypothesized) “fraud and waste.” And it’s entirely legitimate to argue about whether we really need this or that government program. Most legislative efforts to ease the tax burdens of wealthy folks, however, are based on justifications that have consistently proved to be unfounded.

A recent article from Governing analyzed the effects of two decades of tax cuts in Ohio.

Tax reform is a politically charged issue, with conservatives saying lower income taxes help drive economic prosperity, and progressives saying tax cuts have functioned as handouts to the rich, while defunding crucial public services.

Despite those stark differences, both right- and left-leaning groups who spoke to cleveland.com said the impact of Ohio’s income tax cuts on the state economy overall throughout the past 20 years has been minimal.

“The theory behind it is that cutting these taxes will spur on extra growth and get extra investment,” said Jonathan Ernest, an assistant professor of economics at Case Western Reserve University’s Weatherhead School of Management. “You would expect after some number of years to start seeing growth, and we haven’t necessarily seen that.”

Ohio’s experience is not an anomaly, but–as with so many other elements of our highly politicized policy process–evidence has been swamped by ideology.

 We need to see the majority of anti-taxation arguments for what they really are: rejections of the importance–or even the existence– of the common good, and a disinclination to help maintain important social goods accessible to their fellow citizens. (Let’s call that disinclination what it is: selfish. It isn’t “self-interested,” because genuine, long-term self-interest requires the maintenance of a stable, flourishing society–and highly unequal societies are notoriously unstable.) 

Anti-tax Republicans push back against progressives who want to move the U.S. policy in the direction of Scandinavian countries–despite the fact that those countries score far higher on measures of happiness and social cohesion– by warning against “confiscatory” tax rates.

Actually,despite the mythology, Scandanavian taxes aren’t much higher than our own, once we combine Americans’ local, state and federal burdens–and their citizens get much more value for their money, including relief from the enormous costs of higher education and health care.

As the author of the linked article wrote,

US critics say that Swedes pay 56 percent — so the government takes over half of your money. This is not true — 56 percent is the marginal tax rate, i.e. what high earners pay on income over a certain amount in both state and local taxes. Only 15 percent of Swedes pay tax at this rate. It turns out the average Swede pays less than 27 percent of his or her income in direct taxes. As I’ve written elsewhere, my wife and I pay about 22 percent of our US income in taxes. Our Swedish income tax was 31 percent. So, yes, our income taxes in Sweden were higher than in the US, but we still paid less than one-third in tax.

And you get far more for your taxes than you do in the US. In Sweden, college is free and students get a housing stipend….

The 33 million Americans who are still not covered by health insurance don’t have much choice when they get sick, unless you think, “Your money or your life?” is a choice. Paradoxically it turns out the bloated, heavily lobbied, privatized US system spends more tax money ($4,437) per person than Sweden’s socialized health care ($3,184).

Eradicating medical and educational debt would do a lot more to boost America’s economy than adding tax loopholes for the wealthy.

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Paying Our Way

Complaining about taxes is more American than mom and/or apple pie. People clearly resent having to pay them, work hard at minimizing and/or evading them, and use sayings that yoke their payment to death (“nothing is sure but death and taxes..”)

Dissing taxes is just deeply embedded in the culture. That negativity obscures what would otherwise be obvious; taxes are the “dues” we pay for our membership in society.

I have always wanted to do a cost/benefit analysis, comparing what we get for paying those dues with what we would pay on the open market for the same services. (Garbage collection versus scavenger services, police versus private security, etc. etc.) I lack the data and the expertise to perform that analysis (how do I value paved roads or public parks?), but I look longingly at Scandinavian countries with tax burdens that are not–despite the mythology- much higher than our own combined burden, while relieving citizens from the costs of higher education and health care.

Admittedly, America’s tax system is manifestly unfair–and for the obscenely rich who can afford the very best accountants and lawyers, U.S. taxes are easy to evade.

If taxes are–as I insist–our dues for membership, the assessment of those dues should be equitable–and the system should be transparent enough to persuade taxpayers that everyone is paying a fair share. As economists and pundits never tire of pointing out, the American tax system is both ridiculously complex and wildly tilted in favor of the wealthy.

One of the most vocal of those critics is Robert Reich. Reich was Labor Secretary under President Bill Clinton; he now teaches at Berkeley, and he is among the many economists who have pointed out the folly of those repeated tax cuts for the rich.  Such cuts remain a GOP article of faith, despite the fact that the supposed benefits of such cuts have never materialized.

Last year, Reich penned an essay advocating increased taxes on the rich, and providing 7 ways those taxes might be levied. As he said in his introductory paragraphs

Income and wealth are now more concentrated at the top than at any time over the last 80 years, and our unjust tax system is a big reason why. The tax code is rigged for the rich, enabling a handful of wealthy individuals to exert undue influence over our economy and democracy.

Conservatives fret about budget deficits. Well, then, to pay for what the nation needs—ending poverty, universal health care, infrastructure, reversing climate change, investing in communities, and so much more—the super-wealthy have to pay their fair share.

Reich followed up with “seven necessary ways to tax the rich,” including such items as repealing the Trump tax cuts, imposing a wealth tax on those he designated as the “super wealthy”, raising the top marginal rate, taxing stock transactions (he says a tax of just $1 per $1,000 trade would raise $777 billion over a decade), and closing various loopholes.  (Just closing the carried interest loophole is estimated to raise $14 billion over a decade.)

Biden has already taken one of the seven steps Reich enumerated–giving the IRS sufficient funding to conduct audits and go after the federal income taxes currently being evaded by the rich. He calculates that just going after  the richest 1 percent would generate $1.75 trillion over the decade.

As Elizabeth Warren has long argued, a wealth tax imposed on the super-wealthy should be a no-brainer.

Wealth is even more unequal than income. The richest 0.1% of Americans have almost as much wealth as the bottom 90 percent put together. Just during the pandemic, America’s billionaires added $1.3 trillion to their collective wealth. Elizabeth Warren’s proposed wealth tax would charge 2 percent on wealth over $50 million and 3 percent on wealth over $1 billion. It would only apply to about 75,000 U.S. households, fewer than 0.1% of taxpayers. Under it, Jeff Bezos would owe $5.7 billion out of his $185 billion fortune—less than half what he made in one day last year. The wealth tax would raise $2.75 trillion over a decade, enough to pay for universal childcare and free public college with plenty left over.

I’m not so naive as to think these changes to the tax code would make the rest of us sing happy songs as we paid our taxes, but a system where everyone is obviously paying a fair share would go a long way toward mollifying a lot of us.

I’m also not sufficiently naive to think that these changes have a chance in hell of passing a GOP-majority House.

Eventually–if the culture wars subside, and we elect people actually interested in governing–we might emulate countries with better cost/benefit ratios.

We can hope…

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GOP’s Targeted Messages

Republicans’ skill in “messaging” has been a consistent theme of comments on this blog.

One of those skills is the ability of the GOP to tailor its communications–telling one group of people one thing , while assuring a different group (wink, wink) that the party has absolutely no intention of doing precisely what it is promising others it will do.

A recent illustration can be seen in an exchange between Rick Scott (The Florida Senator with a private-sector history of engineering Medicare fraud) and Mitch McConnell, aka the smarter but most evil man in America.

Recently, Scott  unveiled an 11-point plan that he identified as the GOP’s agenda–the party’s “to do” list once it retakes control of Congress. As Dana Milbank introduced a discussion of Scott’s plan in the Washington Post,

Suppose, for a moment, that the head of the Democratic Senatorial Campaign Committee, the group overseeing the 2022 campaigns of all Democratic senators and Senate candidates, announced that Democrats, if they keep congressional majorities after November’s elections, would enact a plan that would raise taxes on working families more than $1 trillion over 10 years.

Further suppose that this top Democratic official also pledged that the Democratic majority would “sunset” laws that provide Americans with Social Security and Medicare, military retirement benefits, veterans programs, unemployment compensation, student loans, deposit insurance and more. Additionally, the Democrats would require U.S. businesses to shut down $600 billion a year in foreign trade and abandon countless billions in overseas investments.

The cry from Republican officials and the Fox News echo chamber would be deafening. Socialism! Defund! Tyranny! They might not even have time left to blame President Biden for Russia’s Ukraine invasion or high gas prices.

Of course–as Milbank proceeds to document–that’s really a description of the bulk of the Republican agenda Scott outlined. (Anti-gay, anti-CRT measures comprise most of the rest.) It is worth noting that Scott is hardly a “rogue”–he heads the National Republican Senatorial Committee. However, the agenda he unveiled was so politically toxic that McConnell disavowed it.

Scott’s plan would eliminate (sunset)  all federal legislation over five years. Scott assures voters that “worthy” laws would then be reenacted; presumably, policies that Republicans find  “unworthy” would stay dead. As various pundits have pointed out, that would probably mean the end of Social Security, Medicare, Medicaid, and numerous other social programs that offend today’s GOP.  

As Milbank writes,

Don’t just take my word for it. Here’s how McConnell recently described the Scott plan: “We will not have as part of our agenda a bill that raises taxes on half the American people and sunsets Social Security and Medicare within five years.”

About that provision raising taxes on half the American public: Analysis of Scott’s tax plan by the Brookings Tax Policy Center and the Institute on Taxation and Economic Policy found that the “Republican plan would raise taxes by $100 billion a year, or more than $1 trillion over the standard 10-year budgeting time frame. Almost all of it would be shouldered by households with income of $100,000 or less.”

As a column in Common Dreams explained, Scott introduced his tax proposal by saying “All Americans should pay some income tax to have skin in the game, even if a small amount. Currently over half of Americans pay no income tax.”

To the mega-rich Scott — and his fellow Americans of ample means — this proposal no doubt seems entirely reasonable. To Americans who understand how our overall tax system works, Scott’s proposal just seems cruel.

All Americans, for starters, pay some taxes. They have “skin” in the game. They may not pay any federal income tax. But if they work, they pay federal payroll tax. If they don’t work, they still pay sales tax on goods they purchase. They face other state and local taxes as well.

Analyses of the plan found it would “increase taxes by more than $1,000 on average for the poorest 40 percent of Americans.”

“Low-income families with children would pay the most,” notes the Tax Policy Center analysis, “Achieving Scott’s goal would slash their after-tax incomes by more than $5,000, or more than 20 percent.”

Meanwhile, points out a Patriotic Millionaires analysis, those “uber-wealthy Americans who avoid federal income tax thanks to a series of loopholes that allow them to claim little to no income” would continue to face no more than a minuscule tax on their mega millions under the Scott “11 Points.”

“In the end,” the Patriotic Millionaires sum up, Scott’s plan amounts to “a wink and a nod to his wealthy donors to keep stealing.”

No wonder McConnell wanted to shut Scott down–the official GOP message machine keeps telling people that Republicans will cut taxes. Poor people don’t understand that only wealthy folks will see those cuts–and that they are the ones who will pay for them.

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Games Republicans Play With Taxes

Media sources have begun warning of a “tax nightmare” ahead for April–filing delays and other administrative headaches , delayed refunds and a variety of mistakes likely to make us crazy.

“Things might be more challenging even than what we anticipate — and what we anticipate is very, very challenging,” a Treasury official told Axios, using the phrase “death spiral” to refer to one set of issues.

Why the warning? Why the situation? Funding. Actually, the lack of adequate funding.

The IRS raises the money America needs. According to official reports, the IRS collects 95 cents of every dollar in federal revenue. So you would think that giving the agency the resources to do its job, and do it efficiently and well, would be a high priority.

It isn’t. Instead, the agency is routinely described as being “in crisis.” Its budget has declined by 20% since 2010, while the number of taxpayers has increased by 19%.

The agency relies on software built in the 1960s, and it is facing a big backlog of paper filings including 6.2 million unprocessed 1040 forms.It doesn’t even have scanning technology– humans open the mail and manually enter information into its system.

According to one report, last year the agency answered only 29 million of the 282 million phone calls it received. And although the vast majority of taxpayers got their refunds fairly promptly last year, the agency was depending upon a significant increase in funding
from the Biden administration’s Build Back Better legislation.

Good luck with that.

So–why has Congress gutted the IRS? Pro Publica tells us in the subhead:

An eight-year campaign to slash the agency’s budget has left it understaffed, hamstrung and operating with archaic equipment. The result: billions less to fund the government. That’s good news for corporations and the wealthy.

The article begins with an example of what we are losing–money that must be made up by law-abiding taxpayers. Us.

In the summer of 2008, William Pfeil made a startling discovery: Hundreds of foreign companies that operated in the U.S. weren’t paying U.S. taxes, and his employer, the Internal Revenue Service, had no idea. Under U.S. law, companies that do business in the Gulf of Mexico owe the American government a piece of what they make drilling for oil there or helping those that do. But the vast majority of the foreign companies weren’t paying anything, and taxpaying American companies were upset, arguing that it unfairly allowed the foreign rivals to underbid for contracts.

Pfeil and the IRS started pursuing the non-U.S. entities. Ultimately, he figures he brought in more than $50 million in previously unpaid taxes over the course of about five years. It was an example of how the tax-collecting agency is supposed to work.

But then Congress began regularly reducing the IRS budget. After 43 years with the agency, Pfeil — who had hoped to reach his 50th anniversary — was angry about the “steady decrease in budget and resources” the agency had seen. He retired in 2013 at 68.

Because the cuts have come over an 8-year period, the utter collapse of the agency has escaped widespread notice. But at this point, according to Pro Publica, the bureaucracy is on life support, and America is losing tens of billions in revenue. (ProPublica estimates a toll of at least $18 billion every year, but admits that the true cost could easily run tens of billions of dollars higher.)

Tax obligations expire after 10 years if the IRS doesn’t pursue them. Such expirations were relatively infrequent before the budget cuts began. In 2010, $482 million in tax debts lapsed. By 2017, according to internal IRS collection reports, that figure had risen to $8.3 billion, 17 times as much as in 2010. The IRS’ ability to investigate criminals has atrophied as well.

And who stands to benefit? Need I share the following paragraph?

Corporations and the wealthy are the biggest beneficiaries of the IRS’ decay. Most Americans’ interaction with the IRS is largely automated. But it takes specialized, well-trained personnel to audit a business or a billionaire or to unravel a tax scheme — and those employees are leaving in droves and taking their expertise with them. For the country’s largest corporations, the danger of being hit with a billion-dollar tax bill has greatly diminished. For the rich, who research shows evade taxes the most, the IRS has become less and less of a force to be feared.

There is much, much more at the link, and it is all depressing. The GOP’s constant insistence that all of America’s ills can be solved with tax cuts is dishonest–and stupid–enough. But tax cuts aren’t the only way the party plays tax games to help its donors–and screw over the rest of us.

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