Taxes and 2016: Some Choices

Although this won’t surprise most of you, do read the in-depth feature in the New York Times about how the mega-wealthy avoid paying taxes.

With inequality at its highest levels in nearly a century and public debate rising over whether the government should respond to it through higher taxes on the wealthy, the very richest Americans have financed a sophisticated and astonishingly effective apparatus for shielding their fortunes. Some call it the “income defense industry,” consisting of a high-priced phalanx of lawyers, estate planners, lobbyists and anti-tax activists who exploit and defend a dizzying array of tax maneuvers, virtually none of them available to taxpayers of more modest means. …

…Operating largely out of public view — in tax court, through arcane legislative provisions, and in private negotiations with the Internal Revenue Service — the wealthy have used their influence to steadily whittle away at the government’s ability to tax them. The effect has been to create a kind of private tax system, catering to only several thousand Americans.

These several thousand Americans making use of the private tax system are mostly supporters of Republicans, and donors within this group are behind most of the money going into conservative Super-PACs. A very small number of them are Democratic Party donors, however.

In the heat of the presidential race, the influence of wealthy donors is being tested. At stake are the Obama administration’s limited 2013 tax increase on high earners — the first in two decades — and an I.R.S. initiative to ensure that, in effect, the higher rate sticks by cracking down on tax avoidance by the wealthy.

While Democrats like Bernie Sanders and Hillary Clinton have pledged to raise taxes on these voters, virtually every Republican has advanced policies that would vastly reduce their tax bills, sometimes to as little as 10 percent of their income.

At the same time, most Republican candidates favor eliminating the inheritance tax, a move that would allow the new rich, and the old, to bequeath their fortunes intact, solidifying the wealth gap far into the future. And several have proposed a substantial reduction — or even elimination — in the already deeply discounted tax rates on investment gains, a foundation of the most lucrative tax strategies.

The article goes on to say that the wealthy are not so much buying politicians as they are buying policy. The “income defense industry” has been able to lower their tax bills from roughly 27 percent to less than 17 percent over the past 25 or so years. The industry has also managed to hobble the IRS from going after them, even as the Obama Administration has made closing loopholes a priority.

Again, although there are Democrats who have gone along with this, for the most part it’s the Republican Party that supports it.

While you are at the New York Times, be sure to read “$250,000 a Year Is Not Middle Class” by Bryce Covert. Hillary Clinton has pledged not to raise taxes on the “middle class,” which she is defining as anyone who makes $250,000 or less. Covert argues that those who make $206,568 or more are in the top 5 percent of earners; they are not “middle class.” Further, this pledge will prevent a Clinton Administration from being able to fund programs that really would help the actual middle class, such as paid family leave.

Bernie Sanders and Martin O’Malley both support a policy program that would provide paid family leave as a kind of social insurance, and this would be funded by a 0.2 percent payroll tax increase across the board. I’m seeing Hillary supporters gleefully pounce on this, saying Bernie would raise middle-class taxes and Hillary won’t. But it isn’t quite that simple, as Sanders also has pledged to leave all other taxes on people making $250,000 or less alone. Covert writes,

Mr. Obama, who also made a pledge not to raise middle-class taxes, has seen how limiting it can be. Early last year, he made an effort to levy some taxes on 529 college savings accounts, given that 70 percent of account balances in those and similar accounts are owned by families who make more than $200,000. The revenue from the tax would have been plowed into college subsidies that would reach low- and middle-income Americans.

It was a doomed idea. Some families with closer to median income do use 529 accounts. So adding a tax would, technically, increase some middle-class people’s burden, thus violating Mr. Obama’s promise. Backlash erupted not just from Republicans, but fellow Democrats, and he dropped the idea less than a week after floating it.

IMO this plays into the Republican talking point book about taxes, which says that taxes are an oppressive and horrible drain on the pockets of America, while expecting Americans to spend even more money to pay for things that a tax-funded program could provide cheaply is not.  (See also: health care.) It’s why we can’t have nice things. And it’s a notion supported by the income defense industry.

Also, too: Goats

Romney’s Tax Policies Are a Joke

Typical

A new study describing Mitt Romney’s tax cut proposals as an average tax increase for 95% of Americans is “a joke,” according to Romney adviser Eric Ferhnstrom. But policy aides offered no indication they plan to offer more details on Romney’s plan in order to clarify how it would be paid for and what they assumed its effects would be.

This goes on all the time in the Mittens camp. Someone will issue a criticism, with supporting data, of a proposed Romney policy and explain why that policy would have bad effects. And the Romney camp will just say “no, that’s a lie,” without offering a counter-argument.

In this case, what counter-argument the Romney camp offers is simply a fantasy.

Mitt Romney’s policy director Lanhee Chen claims that a new study showing 95% of Americans would see a tax hike under Romney’s tax reform plan is “biased” and fails to take into account the explosion of economic growth that will occur under Romney’s administration.

Bring on the Underpants Gnomes.

Very, very simply, Mittens is proposing across-the-board tax rate cut, plus elimination of some taxes that only the wealthy pay, plus increases in the defense budget, because spending more money on defense — whether the Pentagon needs it or not — proves you are Serious. And this will be revenue neutral, they claim, paid for by spending cuts and by eliminating some tax deductions, although he won’t say what would be cut or eliminated.

The Brookings Institute (and I’ve seen this elsewhere) look at this and say that the only way this would be revenue neutral is to eliminate tax deductions that benefit the Middle Class and cut spending on programs that benefit the poor and Middle Class, meaning that it would amount to an effective tax increase on most Americans.

Ezra Klein explains,

The Tax Policy Center bent over backwards to make Romney’s promises add up. They assumed a Romney administration wouldn’t cut a dollar of tax preferences for anyone making less than $200,000 until they had cut every dollar of tax preferences for everyone making over $200,000. They left all preferences for savings and investment untouched, as Romney has promised. They even tested the plan under a model developed, in part, by Greg Mankiw, one of Romney’s economic advisers, that promises “implausibly large growth effects” from tax cuts. The fact that they couldn’t make Romney’s numbers work even when they stacked all these scenarios on top of one another shows just how impossible Romney’s promises are.

The reason Romney’s plan doesn’t work is very simple. The size of the tax cut he’s proposing for the rich is larger than all of the tax expenditures that go to the rich put together. As such, it is mathematically impossible for him to keep his promise to make sure the top one percent keeps paying the same or more. …

… “Families with children currently receive 57 percent of the available tax expenditures examined in this exercise but 23 percent of the revenue reductions. Thus a reform that imposed an across-the-board reduction in tax expenditures would increase taxes much more on families with children than on childless adults.”

It’s obvious the Mittens crew hasn’t worked out how their promises will be filled. In fact, when asked for details, they say that’s up to Congress.

But asked on a conference call whether the Romney campaign would offer up any more details on how they believe their plan would work instead, policy adviser Jonathan Burks demurred, saying it would be up to Congress to help fill in the blanks.

“The governor’s plan essentially lays out the parameters that he wants to achieve: lowering the tax rate by 20 percent, achieving revenue neutrality, and maintaining progressivity and within that he would write a tax plan that achieves those goals,” he said. “So, it’s not a question of ‘today we have a 2000 page tax plan that could be scored.’”

In other words, he’s expecting the help to make it work.

Update: Krugman

And the Romney people respond with deep voodoo, invoking the supposed fabulous growth effects from his tax cuts. And who could argue? Remember how the economy tanked after Clinton raised taxes? Remember how great things were after Bush cut them? Oh, wait.

Senate Dems Grow a Pair

I need to interrupt our gleeful snarking about Mitt Romney and his money and point to something significant that has happened in the Senate:

Until last week Senate Democrats seemed to lack a majority of votes to extend the middle class tax cuts alone. That allowed Republicans to portray the battle as between President Obama and Congress. But that changed when Senate Majority Leader Harry Reid (D-NV) challenged Republicans to permit separate up-or-down votes on middle-income and high-end tax cuts, signaling he’s rounded up the votes to win. Republicans denied the offer.

Democrats hardened their position this week as party’s fourth-ranking Sen. Patty Murray (WA) vowed that Democrats won’t permit the lower rates for the rich to continue beyond their Dec. 31 expiration date, even if Republicans repeat their 2010 strategy and block tax cuts for the middle class if the wealthy don’t also get a full break.

Democrats scoffed at the Republican attacks Tuesday and pressed their advantage.

In other words, they are calling Mitch McConnell’s bluff. They will allow ALL Bush tax cuts to expire rather than extend the tax cuts for the wealthy.

Senate Republicans are frantically claiming the Dems are playing Russian Roulette with the economy, or saying they are holding the economy hostage. Of course, Dems say the same thing about Republicans.

Polling on what the public thinks is all over the map, btw. A recent McClatchy-Marist poll says that 52 percent of Americans want all tax cuts extended, while a recent Pew poll said they favor ending tax cuts for the wealthy by 2 to 1. I suspect the way the question is framed makes a big difference.

Taxing Issues

The Hill reports that Democrats in Washington may go after the “carried interest” tax loophole that gives preferential tax treatment to private equity executives. Some of them are even planning to push for a “Buffett rule” that anyone making seven figures a year pay at least 30 percent in taxes.

A recent CBS News/New York Times poll says 55 percent of Americans think the rich are not paying their fair share of taxes, and 52 percent think capital gains and investment income ought to be taxed at the same rate as wages. This is fruit ripe for plucking, one might say.

For years, the dominant argument on tax reform involved lowering marginal rates and closing loopholes. But the “loopholes” most likely to be targeted, Dems realized, are credits and deductions that benefit the middle class. (Oddly, after decades of alleged loophole cutting, GM still didn’t pay taxes last year. Funny how that works.)

The Bush tax cuts are set to expire at the end of this year, so you know this is going to become a big campaign issue. For too long Republicans have gotten away with demagoguing the tax issue. But now recent events and public opinion favor Democrats. They’re coming to bat with the bases loaded, so to speak.

From the far reaches of the Crazy Land Fringe, Grover Norquist says that if the Bush tax cuts expire, President Obama could be impeached.

NORQUIST We’re focused on the fact that there is this Damocles sword hanging over people’s head. What you don’t know is who will be in charge when all of this will happen. I think when we get through this election cycle, we’ll have a Republican majority, [though] not necessarily a strong majority in the Senate, and a majority in the House. The majority in the House will continue to be a Reagan majority, a conservative majority. Boehner never has to talk his delegation going further to the right.

If the Republicans have the House, Senate, and the presidency, I’m told that they could do an early budget vote—a reconciliation vote where you extend the Bush tax cuts out for a decade or five years. You take all of those issues off the table, and then say, “What do you want to do for tax reform?”

Then, the question is: “OK, what do we do about repatriation and all of the interesting stuff?” And, if you have a Republican president to go with a Republican House and Senate, then they pass the [Paul] Ryan plan [on Medicare].

NJ What if the Democrats still have control? What’s your scenario then?

NORQUIST Obama can sit there and let all the tax [cuts] lapse, and then the Republicans will have enough votes in the Senate in 2014 to impeach. The last year, he’s gone into this huddle where he does everything by executive order. He’s made no effort to work with Congress.

Overlooking the technicality that the House impeaches, not the Senate — the time has come to round up all of Grover Norquist’s whackjob ideas and drown them in a bathtub. He wants to make 2012 about tax cuts? Bring it on.

Here’s Your Wealth Redistribution

Eric Cantor found the courage to speak at the University of Michigan to an audience limited to 250. And he boldly spoke out in favor of being fair to his owners the rich.

“Social justice is about fairness. Fairness is making sure that we afford opportunities for everyone to pursue their happiness,” Cantor said. “There are several folks that have stood up to say tax the rich. That that’s somehow fair.”

“That all we have to do is redistribute the wealth and we can create the American dream for more.” he continued. “That doesn’t work… wealth distribution doesn’t work.”

Interesting if he really said “wealth distribution” instead of “redistribution,” and James Fallows shows us that wingnuts are no slackers when it comes to wealth distribution.

Um, This Is Not “Turning the Tables”

From the Washington Post, “McConnell Turns the Tables on Budget Vote“:

Two can play this budget game.

A day after Senate Majority Leader Harry Reid (D., Nev.) put Republicans on the spot by saying he will bring the House Republicans’ budget proposal up for a vote, Senate Minority Leader Mitch McConnell (R., Ky.) turned the tables by exercising his legislative prerogative to call for a vote on President Barack Obama’s budget.

The two votes amount to legislative brinkmanship by both party leaders. Mr. Reid wants to put Republicans on record supporting legislation authored by House Budget Committee Chairman Paul Ryan (R., Wis.) that would eventually transform Medicare and Medicaid. Mr. McConnell, meanwhile, wants to force Democrats to vote on a plan that rolls back Bush-era tax cuts for people who make more than $250,000 and ignores many of the long-term costs driving the deficit.

Oh, snap, Mr. McConnell. Of course, a significant “cost” driving the deficit are Bush’s tax cuts, a fact Republicans refuse to acknowledge. But perhaps Mitch missed hearing about some recent polling

Alarmed by rising national debt and increasingly downbeat about their country’s course, Americans are clear about how they want to attack the government’s runway budget deficits: raise taxes on the wealthy and keep hands off of Medicare and Medicaid. …

… On tackling the deficit, voters by a margin of 2-to-1 support raising taxes on incomes above $250,000, with 64 percent in favor and 33 percent opposed.

Independents supported higher taxes on the wealthy by 63-34 percent; Democrats by 83-15 percent; and Republicans opposed by 43-54 percent. …

… Voters oppose cuts to those [Medicare and Medicaid] programs by 80-18 percent. Even among conservatives, only 29 percent supported cuts, and 68 percent opposed them.

Vote away, Senate.

What Small Government Looks Like

Via Paul Krugman, small government and Colorado Springs. The city’s voters rejected a tax referendum needed to cover a budget gap caused by the recession. So, essentially, the city is shutting down services.

More than a third of the streetlights in Colorado Springs will go dark Monday. The police helicopters are for sale on the Internet. The city is dumping firefighting jobs, a vice team, burglary investigators, beat cops — dozens of police and fire positions will go unfilled.

The parks department removed trash cans last week, replacing them with signs urging users to pack out their own litter.

Neighbors are encouraged to bring their own lawn mowers to local green spaces, because parks workers will mow them only once every two weeks. If that.

Water cutbacks mean most parks will be dead, brown turf by July; the flower and fertilizer budget is zero.

City recreation centers, indoor and outdoor pools, and a handful of museums will close for good March 31 unless they find private funding to stay open. Buses no longer run on evenings and weekends. The city won’t pay for any street paving, relying instead on a regional authority that can meet only about 10 percent of the need.

The article also says residents distrust the city government and don’t believe their tax dollars are being spent wisely. But this level of cuts in services is not caused by overpaying a few people or leaving the lights in the library turned on too long.

Thomas Levenson (via Monica Potts) writes,

This is, among other things, what folks like Megan McArdle never seem to get — not merely that governments do things that (a) private entities won’t and or can’t and (b) that are necessary if you are, say, going to have thousands or millions of folks living in close proximity to each other, and (c) those things that need to be paid for — by the people in common, that is to say, by government — include a bunch of stuff essential for a sound economy and any chance of achieving what is commonly thought of as the American way of life.

These cuts probably will hurt business, including tourism. The right-wing model that sees the public and private sector perpetually at odds with each other is a denial of the basic fact that those miraculous free markets wouldn’t exist without governments that provide stuff like roads, bridges, street lights, law enforcement, a stable banking system, garbage pickup, etc., and these are things that have to be paid for somehow. And unless we want to go to a system in which all roads are toll roads, houses burn until the firefighters are paid (it’s been done), and street lights are all coin operated, this means government does these things through tax money.

Levenson is right — “The core Republican idea is destroying the American way of life.”

California’s Dreaming

I can’t say I have a first-hand feel for what’s going on in California, since I live on the opposite edge of the country, but here’s the story:

Yesterday California voters defeated ballot proposals to deal with the state’s financial problems. These included a spending cap, extending tax increases, borrowing against lottery revenues and tapping dedicated funds.

I take it California voters want to hear some better proposals for dealing with their $21.3 billion budget deficit — something along the lines of mugging the Tooth Fairy.

Jim Christie writes for Reuters:

“The public is under the delusion that they can have everything — have potholes filled, new freeways, a good education system — but they aren’t willing to pay for it … A lot of critical services are going to be cut and there will be serious consequences,” said Jim Hawley of the Elfenworks Center for the Study of Fiduciary Capitalism at St. Mary’s College of California.

There is talk of California getting a cash bailout, along the lines of what’s been thrown at Wall Street. I’m inclined to say no. If the citizens of California are not willing to tax themselves to save their own state, I think they should live with the consequences. This is not like a business failure, in which the bad decisions of a few executives cause a ripple effect of more failure that impacts many blameless people.

Juliet Williams writes for the Associated Press:

Political observers say Schwarzenegger and lawmakers will have little choice but to go after even politically sacred programs such as schools. …

… The choices facing the governor and Legislature are daunting,” said Jack Pitney, a political science professor at Claremont McKenna College in Southern California. … Many Californians have been hearing about the state’s budget problems but have yet to feel the severity of the crisis. That will soon change, Pitney said.

“For a lot of people, the budget’s been an abstraction. But with the next round, there will probably be serious consequences, particularly in the schools,” Pitney said.

Last week, the governor said he will consider shortening the school year by seven days, laying off up to 5,000 state employees and taking money from local governments, which likely would translate into cuts to police and firefighting services.

Only 19 percent of California’s voters bothered to vote, Williams says.

Michael Finnegan writes in the Los Angeles Times that voters share the blame for the California’s dysfunction.

Nearly a century after the Progressive-era birth of the state’s ballot-measure system, it is clear that voters’ fickle commands, one proposition at a time, are a top contributor to paralysis in Sacramento. And that, in turn, has helped cripple the capacity of the governor and Legislature to provide effective leadership to a state of more than 38 million people.

Clogged freeways, the decline of public schools, an outdated water system and a battered economy are just a few of the challenges demanding action by state leaders. Instead, they are consumed by yet another budget crisis, one that voters worsened Tuesday.

“No one’s really stepping back and confronting the harsh realities that face our state in a critical sense, because of constraints put on our elected leaders,” said Mark Baldassare, president of the Public Policy Institute of California. “We’re unable to focus on the long term and the big picture at a time when we desperately need to do so.”

Finnegan’s analysis is very good; I recommend reading all of it.

It’s worth remembering that the Reagan Revolution effectively began in California with the passage of the infamous Proposition 13, which capped property tax rates. Once upon a time California was considered one of the best-run states in the nation, and with the best public school system. In the 1960s California’s schools were ranked first in the nation. Now they are ranked at number 48. Way to go, California.

Update: Via John ColeMegan McArdle writes,

There is a surprisingly sizeable blogger contingent arguing that we have to bail them out because however regrettable the events that lead here, we now have no choice. But actually, we do have a choice: we could let them go bankrupt. And we probably should.

I am not under the illusion that this will be fun. For starters, the rest of you sitting smugly out there in your snug homes, preparing to enjoy the spectacle, should prepare to enjoy the higher taxes you’re going to pay as a result. Your states and municipalities will pay higher interest on their bonds if California is allowed to default. Also, the default is going to result in a great deal of personal misery, more than a little of which is going to end up on the books of Federal unemployment insurance and other such programs.

But on the other hand, Megan argues, if we bail out California, it would amount to shoveling money into a bottomless pit, and ultimately we’re not helping California by enabling the “lunatics in Sacramento.” But in California’s case one can’t just blame Sacramento. California voters and the referendum system have made the state ungovernable. And I’d like to point out that many other states allow referendums without being as irresponsible as California has been.

Update: Rightie bloggers are rejoicing this outcome and see it as validation of conservatism. Just wait until the 2010 midterms! Allahpundit laments that voters “love their government goodies even though they manifestly can’t afford them.”

“Government goodies,” of course, are things like decent public schools, a criminal justice system, firefighters, bridges that don’t fall down, etc. America used to be able to afford those things. “Used to,” as in “before Reaganism.”