Rich People, Ballet, Taxes

Tim Lee says "we have to remember that many rich people give a significant fraction of their wealth to charity...some of us simply suspect that, on the margin, leaving a dollar in the pockets of a rich guy is more likely to lead to that dollar being used for a worthwhile purpose than giving that dollar to Congress to spend...it’s an important part of what drives anti-tax attitudes in broader electorate." Yep: They're not saying "don't tax me," they're saying "I believe these dollars would be better spent by wealthy individuals who really, really, really care about ballet."

But Tim's a stand-up guy, so if he says he believes this, then I believe him. But it seems bizarre. I know of a lot of right wingers who think a dollar left in a rich person's pocket will be more productively used than a dollar given to the government, but I don't know of any who say that that dollar is more likely to travel down the income ladder and guarantee health coverage to the poor, or pensions to the impoverished elderly.

Indeed, if you're searching for a substitute for the social safety net, much of the philanthropy that the rich engage in seems poorly targeted, to say the least. The Center on Philanthropy conducted a study on how much charitable giving was directed to helping the poor. They found that giving to help meet the basic needs of the poor is a mere 7.5% of total giving, while "other" donations that directly or indirectly help the poor are around 23%. The rest goes to alumni associations (a surprisingly huge money suck), arts and culture, and so forth.

Tax Time!

I largely agree with Steven Tele's critique of Michael Lind's tax plan: Big thinking on liberal tax reform should substantially change the tax code, and more to the point, simplify it. Extending credits to payroll taxes may be good for equity, but it's making the system ever more byzantine. This alternative proposal from Mike Graetz, however, is rather interesting:

a) Eliminate the income tax entirely for families earning up to $100,000, indexed for inflation.

b) Impose a flat rate tax on income above that level, at a rate of 20-25% (I lean strongly toward the upper end of the range).

c) Impose a VAT tax at a 10-14% rate.

d) Lower the corporate tax, aligning it closely to the new, lower income tax rates (while also forcing corporations to use the same accounting standards when they deal with the IRS and the SEC).

e) Mike would deal with the EITC's elimination by providing a refundable offset to the payroll tax. I think that my suggestions above could do roughly the same thing, or we could establish some compromise between what I want and what Mike wants.

I'd alter this substantially, noting that taxes would be done automatically for those making up to $100,000 (April 15th will be just another spring day, as the righties like to say), making the rates above $100,000 substantially more progressive, not lowering the corporate tax, and keeping the EITC as is. So maybe I don't much like Graetz's idea. But I do like VAT's, particularly of the sort that exempt the goods the poor buy the most (i.e, food). And more generally, Democrats need to get better at making the case for dedicated taxes, like a 4% VAT that pays for health care. Taxes shouldn't be giving money to the government for unspecified purposes. They should buy things.

The Politics of Taxes

Responding to a poll showing robust majorities support raising taxes on the rich in the US, Germany, the UK, France, italy, and Spain, Andrew Leonard writes:

For a citizen of the United States such as myself, who has watched Republican presidential candidates campaign, mostly successfully, on the holy writ of tax cuts for the rich since 1980, these poll results take on a dreamlike quality. What alternate reality is this, where the rhetoric of a quarter century is suddenly turned on its head? As recently as just a few years ago, if you tried to suggest that government should consider raising taxes on the wealthy, the notion was immediately dismissed as a throwback to the "failed redistributive policies" of the past. But now it's all the rage.

I don't have the numbers from the 80s in front of me (does anyone know of some good sites that allow you to compare historical poll data?), but in 1992, 77% of Americans thought the rich were paying "too little" in taxes, and I'd bet that number didn't dip below 50% in the preceding years.

It was never the populace dismissing taxes on the rich as "the failed redistributive policies" of the past -- it was the elite. In other words, the rich. And they happen to have a lot of power in our system -- and that power (and money) has gone, in no small part, to convincing Americans that their tax burden is too high, and that cross-the-board tax cuts are the only answer. But it's important to note that there's never been any campaigning on "tax cuts for the rich." There was just a lot of campaigning on tax cuts, and anti-tax sentiment, followed by policies that quietly amounted to tax cuts for the rich. And all of this was enabled by the media, which derided tax increases as failed redistributive policies, and happily pocketed tax cuts for themselves...

Viva Le Tax Simplification

It may indeed be true that Wyden is exaggerating, and even a very smart tax reform will leave some number less than all Americans completing their taxes in under an hour, but that number could still be quite a bit larger than it currently is, which makes it a goal worth striving towards. And lord knows we're not near the upper end of easy tax payments. Not only is the structure itself overly complicated, but it's been two decades since the last significant clean-up of the tax code. The accumulated loopholes and detritus are long overdue for examination.

Additionally, tax simplification is the sort of policy which would make a great many people very happy at just about no extra cost to the government. Which makes it all the more important to do. Most of the great gains in policy are to be made addressing the needs of the worst off. But most of the votes come from the massive middle. For these folks, the country actually works fairly well, if not perfectly. To institute policy that will substantially improve their existences through material transfers is, given their size, prohibitively expensive and politically difficult. But policy can improve their lives in other ways.

To simplify their dealings with government and make their lives at tax time 2008 simpler than they were during tax time 2007 is both (conceptually) easy and substantively worthwhile. And it can be a good that increases middle class support for a policy that also includes more serious reforms that aid the poor, like simplification and unification of the forms that govern benefits (see Max Sawicky's proposal here), getting the IRS to do the taxes of 50 million Americans themselves (see Edwards' proposal here), or taxing work income at the same rate as wealth income (see Wyden's proposals here). Simplification can work in service of progressive reform.

And finally, the perception of a complex tax code is bad for liberals. The more folks look at the loopholes and exemptions and deductions and forms and judge -- correctly! -- that the system can be gamed by those with the money and time to cheat, the more they'll feel like suckers for paying their fair share, and the more receptive they'll be to tax cuts and the dulcet tones of Grover Norquist. A system that obviously treated everyone the same would leave fewer fols feeling like dunces for cooperating with it.

Leave The AMT Be

Daniel Gross writes:

The Republicans' main argument against Democrats is that they'll raise taxes by letting the Bush tax cuts expire in 2010. Fix the AMT now and it will simply allow Republicans to argue that the Democrats are raising taxes in 2007 and 2008, too. What's more, fixing the AMT permanently provides all the drawbacks of responsible tax cutting with none of the benefits. The point of fixing the AMT is to shield millions of Americans from future tax increases. But Americans, who are instant-gratification addicts, would sooner vote for somebody who cuts taxes by $1,000 today than for someone who spares them a tax hike of $2,000 tomorrow.

Would Democrats suffer political backlash? Probably not. The AMT's victims will be concentrated in states in which Republicans are not likely to be all that competitive in 2008. In the home of Bushenfreude, middle-class and well-off voters already tend to blame Bush and his Republican associates for everything that has gone wrong. And well they should, given the GOP's shocking fiscal irresponsibility under Bush. It would be easy to fault them for the AMT crisis, too.

When the crisis peaks, Democrats can offer their alternative: fix the AMT, which would then be hitting millions of middle-class voters by rolling back the Bush tax cuts on the very rich. That's a political argument they will win. What they shouldn't do is try to repair the AMT problem too soon, before the catastrophe next April. Fixing it before taxpayers feel the sting would be better fiscal policy—but lousy politics.

That's a plausible read. What worries me, though, is that rolling back the Bush tax cuts to do nothing save replace portions of the AMT is a revenue neutral strategy. Democrats need to actually raise revenues for things like health care -- and part of that may mean restoring the tax cuts under the rationale of channeling that cash towards universal coverage, as John Edwards is promising.

That said, Gross makes some good points on the politics of taxes. Waiting till next year, with the expiration of the Bush tax cuts and the roaring return of the AMT will allow for quite a bit of energy behind tax reform. That moment should be used not simply to fix the AMT, or to roll back the Bush tax cuts, but to actually reform the tax code, as needs to happen every couple of decades when the numbers of deductions and quirks and loopholes and cheats becomes too unwieldy. A more flexible, fair, and progressive structure would be good for the country's fiscal situation and good for progressive priorities into the future.

Democrats and the AMT

I sort of wonder whether Tyler Cowen actually read this article on Democratic attempts to reform the Alternative Minimum Tax. Responding to the news that Democrats are "preparing legislation that would permanently shield all but the very richest taxpayers from the alternative minimum tax," Tyler writes, "this rather non-egalitarian policy, very costly in terms of revenue, is the Democratic attempt to reward their wealthy urban and suburban supporters...It was ugly what years and years of power did to the Republican Party. The particular interest groups will differ, but I do not understand why the progressives expect anything different better from the Democrats."

First, it's not costly in terms of revenue. As the article makes clear, the discussions now are how to actually replace AMT revenue. So the question is really what mechanisms they'll come up with to do that -- and for now, we simply don't know. Rahm Emmanuel, apparently, wants to replace it with new taxes on the rich. That would be all sorts of fine with me. It would be not only be more egalitarian, it would be more progressive. Alternately, using AMT repeal as a pretext for comprehensive tax reform would also be a damn good idea.

Moreover, the reason Democrats feel the political pressure to do this is a series of cynical fiscal decisions made by the Republicans. Bush's tax cuts dropped the tax rates without changing the AMT. Without them, 16 percent of Americans would have paid the AMT in 2010. With them, that number explodes to 33 percent. Here's how this looks:

Worse, the Republicans temporarily exempted millions of families from the AMT for the last few years in order to make the tax cuts seem more sustainable and remain more popular. But all their budget projections admitted the return of the AMT -- which will now be all the more onerous and surprising, and which unsuspecting taxpayers will be all the likelier to rebel against. Democrats, who actually want to keep their majority, have to do something about the various fiscal landmines Republicans have littered across the landscape. But the question of who benefits from their Democrats' proposed policy fixes can't actually be answered until we know what those fixes will be.

Baucus And Grassley Try To Screw Up The Country

Sebastian Mallaby's got a terrific column today blasting the the senseless, fiscally irresponsible team of Max Baucus and Chuck Grassley, who've decided to declare war on the Alternative Minimum Tax while eschewing any talk of replacing its $750 billion in revenues with anything new.  Baucus appears to think increased tax enforcement will make up the shortfall, which is akin to replacing your job income with change gathered behind the couch.  Grassley, meanwhile, is taking a brave stand against the economics of taxation: "It's unfair," he blustered, "to raise taxes to repeal something with serious unintended consequences like the AMT!"  I sort of hate to do this, Chuck, but remember those tax cuts?  The ones you voted for?  Here's what they did:

The AMT, which was created to ensure the rich couldn't deduct and shelter their way out of taxation, was created in 1969.  It kicks in when folks making above a certain income pay below a certain tax rate.  Not indexed for inflation, the share of the electorate paying the AMT grew over the past few decades.  Bush's tax cuts, however, sparked a massive drop in rates, bringing millions under the limits and exploding the AMT's reach.  Without them, 16 percent of Americans would have paid the AMT in 2010.   With them, that number more than doubles, to 33 percent.  This reckoning was put off the by tax cutters in the form of a temporary exemption from the AMT, an irresponsible little shell game meant to superficially improve the budget projections they used to sell the cuts, thus making them look more fiscally responsible.  That the  very same tax cutters -- like Grassley -- are now seeking the AMT's repeal without any replacement shows the depth and cynicism of their deception the first time through.  And here's the consequence:  In 2006, 3.5 million taxpayers paid the AMT.  In 2007, that'll shoot up to 23.4 million.

The hope of most policy wonks is that the AMT will provide the impetus for a wholesale restructuring of the tax code -- possibly in the direction of something like Ron Wyden's Fair, Flat, Tax Plan. Some even suggest that the AMT could be modified into the only tax rate and the words "Alternative Minimum" simply struck from the phrase.  There's some precedent for reform at this point in Bush's presidency: Ronald Reagan, weakened and looking for accomplishments by the last two years of his term, largely accepted a plan championed by Dick Gephardt and Bill Bradley which largely became the Tax Reform Act of 1986.  But what Baucus and Grassley are pushing isn't reform: It's fiscal demagoguery, and they should be roundly criticized for the offense.  Is it really so much to ask that the Chair and ranking member of the Senate Finance Committee betray a working knowledge of finance?

Taxing The Rich

At a New America event today, James Glassman (author of the hilariously wrong Dow 36,000) turned his characteristic insightfulness to inequality. "We've done all the redistributing we can do," he helpfully informed the audience. The poorest 50% only pay 3% in federal income taxes!

I was reminded of Glassman's by Mike's excellent comment on the inequality post from earlier today:

The cost of government should be funded in accord with the percentage of assets owned and earned. Here are increases in national debt for the past few years. Note, increasing national debt shows the full extent of deficit spending.
9/29/2006 $574,264,237,491.73

9/30/2005 $553,656,965,393.18

9/30/2004 $595,821,633,586.70

9/30/2003 $554,995,097,146.46

9/30/2002 $420,772,553,397.10

9/30/2001 $133,285,202,313.20

9/30/2000 $17,907,308,271.43

Here are the taxes paid by quintile.

Here is a pie chart of wealth distribution.

As you can see from this chart, the bottom 50% owns 2.6% of the wealth; they are therefore overtaxed because their tax burden is 3.4%. The top 10% own 69.9% and the remainder, the 40% between the top 10 and the bottom 50% own 27.4%. That totals 99.9% of American wealth. Note, the chart is dated 2001. Since then, the upper groups have gained wealth, the lower have lost.

There is a correlation between wealth owned and income earned, but note; there are families with great wealth and low income because the wealth is considered unearned: from stocks, bonds, and other sources aside from the weekly paypacket.

It is clear that the Federal taxes are too low by 575,000,000 in order to meet federal expenses and that the people owning America are drastically undertaxed because they are in no way paying their fair share, which is under 65% when it should be over 70%.

Therefore, all talk of the rich being overtaxed is bunk.

There's also, of course, payroll taxes, sales taxes, user fees, taxes on goods, and all the other regressive charges laid on by the government and helpfully forgotten whenever wingers want to make the point Glassman is. But as to his direct argument, Mike gets it right: We're not even taxing the rich in proportion to the share of the economy they control. Forget taxing them beyond it.

Laughing at Laffer

Via Mark Thoma, an IMF working paper studying flat taxes worldwide has just come out, and it's results aren't terribly encouraging for supply-siders:

there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the distributional effects of the flat taxes are not unambiguously regressive, and in some cases they may have increased progressivity, including through the impact on compliance; adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. Looking forward, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.

The Laffer Curve, folks will remember, is the idea that lowering tax rates increases economic growth and thus results in more tax revenue. In other words, tax cuts increase tax revenue. It never made much sense (save in regimes with truly exorbitant tax burdens), but conservatives predicated their support for tax cuts and a flat tax on the theory anyway. Now it's clear the theory is shite. On the bright side, another claim of flat taxers does look promising -- that if you make the tax easier to comply with, compliance will go up, and there will be more revenue because of decreased evasion.

The sterling reputation of flat taxes has largely come because money of the countries who adopted them saw rapid growth and success in the succeeding period. The authors of the study, however, don't think the flat tax deserves the credit:

The flat tax has commonly—almost universally—been adopted by new governments anxious to signal a fundamental regime shift, towards more market-oriented policies. In several cases, the signal appears to have been well-received. Where no such reputation needs to be acquired, the appeal of the flat tax is consequently less.

So the adoption of the flat tax has been a big signpost by new regimes claiming themselves free of old, anti-business nostrums and open for new investment.

Taxing the Rich Until They Don't Exist

By Neil the Ethical Werewolf

As you often read, the top tax bracket back in the late 40s and early 50s used to be high.  I mean, really high.  I'm talking about tax rates in the over-90% range.  And somehow, economic disaster didn't befall America.  Young liberal fellows like myself are often heard talking up Clinton and the 1990s as evidence that raising taxes makes for a happy economy (and obviously a low deficit), but look at the chart I've linked to and you'll see that the American economy did very well with much higher tax rates than we had even with Bill in charge.  The 1950s offer one example.  And the tax hike Bill brought us was nothing compared to the jumps we had in the past.  In 1916-1917, the tax rate on incomes over $2 million goes from 15% to 67%.  Granted, hardly anyone was making that kind of money.  But it's still quite a jump.

So when people ask -- "How are we going to fund free preschool and Medicare for all and all those other great liberal ideas?" -- shouldn't "raising the top tax bracket to something like 60%" be part of the answer?