Taxes

The Left and its delusions

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Cross posted at my own blog.

I skim the Washington Monthly blog as a window on the thinking of the far left. They are more civil (except in comments) than the DailyKos but the mentality is the same. Today is a reasonable example. The topic is taxes.

Roll Call noted this morning that the Senate is moving towards “an epic election-year battle over Bush-era tax cuts.” That sounds about right.

The dispute helps capture exactly what the two parties prioritize right now — Dems want to keep lower rates for the middle class, while reducing the deficit by letting the rich go back to the rates they paid when the economy was healthy. Republicans want to hold the Dem proposal hostage, fighting tooth and nail for breaks for millionaires and billionaires, and adding $680 billion to the deficit the GOP pretended to care about for a while.

The “middle class” is a very elastic concept for them with the top income range going all the way down to $150,000 per year. Secondly, the group with incomes of $250,000 or more, the target class, consists of mainly small business people who are not incorporated and who file all income with a personal return.

There is also no concept here of who pays the taxes. Shouldn’t “tax cuts” be distributed to those who pay taxes ? Otherwise, it is just one more government handout to those who are nonproductive. Here is a look. The top 1% of income pays 40% of the income taxes. Hmmm That’s also about $410,000 per year, not $2 million.

The top 5% pays 60.63% of the income taxes. The threshold for the top 5% is $160,000. Well, what do you know ?

Billionaires need little help from Republicans but they do invest and are the source of most new jobs. The concern for “the deficit” on the part of Democrats may be translated as the left side of the entire argument about spending versus taxing. Republicans want to talk about cutting spending, especially tea party Republicans. I even have a compromise: Let the tax rates go back to the Clinton administration rates but let’s also go back to the number of government employees of the Clinton period.

[W]here would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year. But that’s the least of it: the policy center’s estimates say that the majority of the tax cuts would go to the richest one-tenth of 1 percent. Take a group of 1,000 randomly selected Americans, and pick the one with the highest income; he’s going to get the majority of that group’s tax break. And the average tax break for those lucky few — the poorest members of the group have annual incomes of more than $2 million, and the average member makes more than $7 million a year — would be $3 million over the course of the next decade. […]

Notice how the “richest” become those with incomes over $2 million when we are talking about one aspect of the issue but, when it is time to actually impose the taxes, the incomes shrink back down to $250,000 or, in some cases, it shriveles all the way down to $150,000 per year.

Midwestern centrists such as Sens. Kent Conrad (D-N.D.) and Evan Bayh (D-Ind.) have called for an extension of all of Bush’s tax cuts, including those benefiting individuals earning more than $200,000 and families earning over $250,000 annually.

Other Democrats say they would consider raising taxes on individuals and families earning below those thresholds, despite President Obama’s promise that middle-class families would not see their taxes increase.

Some liberals balk at the notion that families earning $250,000 or more belong in the middle class.

“Two hundred and fifty thousand dollars? Is that the top 1 percent of Americans, or half a percent? Come on!” said Sen. Tom Harkin (D-Iowa).

Harkin said he would be willing to extend the tax cuts for families earning $150,000 or less annually.

See how elastic that number is ? Families with a combined income of $150,000 are “rich.” We went from $2 million per year to $150,000 per year just like that!

Or we’re told that it’s about helping the economy recover. But it’s hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty, and aren’t likely to spend a windfall.

Did you notice that one ? Tax cuts “give” money to people who have “plenty.” Just keep repeating to yourself; it’s not your money. It’s the government’s money and they are “giving you some of it.” They used to call that “To each according to his needs.”

No, this has nothing to do with sound economic policy. Instead, as I said, it’s about a dysfunctional and corrupt political culture, in which Congress won’t take action to revive the economy, pleads poverty when it comes to protecting the jobs of schoolteachers and firefighters, but declares cost no object when it comes to sparing the already wealthy even the slightest financial inconvenience.

Once again, a translation. Schoolteachers “need” the money. Firefighters is just a cover. The “wealthy” (Those with over $150,000 per year income) don’t “need” the money.

Note, there is no concept of a private economy here. Nobody invests; nobody starts a business. The story of the 2001 tax cuts that Democrats want to repeal is here in more detail.

This is what socialism looks like in practice.

It isn’t easy being right all the time

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Dear Conservative/Libertarian Center-rightists,

I’ve been enjoying posting about swapping all income taxes for either one big, or a series of small, consumption taxes.

One of the most powerful arguments in my favor is the exceedingly strong likelihood that if we fail to bargain now (next 2-4 years), we will lose the entire battle and end up with ALL the taxes, and no reform of our obscene welfare system.

I’m proven right again, of course, by Republicans.

Voinovich calls for gas-tax hike.

Bargain now, while we are strengthening, or lose it all later.  For God’s sake conservatives, stop playing “not to lose” in a battle already lost.  Your only choice is to play to win.

An Interesting “Collapse” Hypothetical

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Dr. Paul Craig Roberts, the famous Reagan administration economist and now an embittered and cranky paleoconservative social critic, penned a short but intriguing American “collapse” scenario set in the near future. Some of what Roberts writes fits neatly with the thesis in Joseph Tainter’s The Collapse of Complex Societies:

The Year America Dissolved

….As society broke down, the police became warlords. The state police broke apart, and the officers were subsumed into the local forces of their communities. The newly formed tribes expanded to encompass the relatives and friends of the police.
 
The dollar had collapsed as world reserve currency in 2012 when the worsening economic depression made it clear to Washington’s creditors that the federal budget deficit was too large to be financed except by the printing of money. With the dollar’s demise, import prices skyrocketed. As Americans were unable to afford foreign-made goods, the transnational corporations that were producing offshore for US markets were bankrupted, further eroding the government’s revenue base.
 

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Swapping a VAT for failing income tax is good policy

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Check out Bruce Bartlett on the VAT here. Rather than surrender, as Bartlett does, why not win?
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Premise 1 – As our Federal government runs away from the entitlement mess they themselves created, some states are starting to see bankruptcy looming on the horizon. As the left clamors for tax increases to feed the beast, the right sits back and says “no” to everything, ignoring the fact that the left is going to get their tax increases by simple operation of time and demography. This may be good strategery in the short term, but the right is setting itself up for miserable failure, as they will forced to become the “tax collector for the welfare state.”

Premise 2 – The reliance on the income tax as a revenue generator has failed miserably. First, the right, since the 1980s, has been so successful in removing much of the working poor and middle class from the tax rolls. This makes much of the electorate immune to what is now pretty much a siren song for “tax cuts.” This has resulted in dramatically weakening one of the right’s most powerful political tools.

Second, the income tax is a horrible way to collect revenue. When times are good, only the rich now pay, and when times are bad, revenues collapse, as we can see in places that rely on the steeply progressive income tax (CA and National Budget). Add to this fact the negative impact that progressive income taxation has on investment and incentives, and you have a very destructive tax.

Premise 3 – The right, and this includes the libertarian and conservative think tank sector as well as the Republican party, is making a substantial strategic error in ignoring the potential (political and economic benefits) of a massive tax swap. By dissing every proposal for revenue increases (and No, tax cuts aren’t going to work with a $1.4 trillion deficit and a hangover from a 25 year spending/debt/tax cut binge), the right is falling for the trap of arguing for tax cuts for a shrinking class of people while arguing against a superior policy – namely broadening the tax base and making everyone pay for the welfare state that still has substantial political support.
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If the above premises are substantially true – and I can make an extended and extensive case that they are – then our “center-right” leadership is failing us in merely saying “no” to all tax proposals, and gambling on the ability to drag this cycle of stupidity around one more time.

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Taxes and the (Sporting) Rich

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The core principles of a well designed tax system are to 1) raise the dollars that are intended 2) not drive non-economic behavior.  In the case of state taxes, there is an additional difficulty because high-income earners can often choose where they want to live and state tax rates are one of the few items that they are under their control, all else being equal.  For example, it is no accident that the hedge fund industry sprung up in (relatively) lower tax Connecticut than in brutally high New York City (which has both city and state taxes at incomes that are progressive and rise with your income), and now that income has permanently migrated away from NYC.

For sports figures, there are two elements to taxes; if you are on the road you have to pay taxes in all of the cities you visit at local rates.  These dollars are collected and I’m sure all the major sports leagues have processes to ensure that this occurs (through withholding).  Athletes are high profile individuals and they will be spotted if they don’t comply with a policy that is otherwise observed only in the breach (the fact that if you spend more than a few days in a state you need to pay taxes on the apportioned days at local rates).

Thus half of your taxes as a sports star depend on the cities you visit and half depend on your “local” city.  Beyond that, any endorsement income you earn (which is a much greater component for many athletes) is taxed at your “home” rate.  It is no accident that Tiger lives in Florida where there is no state income tax.  He would have been insane to set up shop somewhere like NYC.

This article in the WSJ is titled “LeBron’s Tax Holiday” and it describes the tax benefits from living in Florida compared to other states.  While there is tax information in the article I am choosing just to use the excellent resources at The Tax Foundation where on this page you can see rates by state.

– Ohio 5.925% on all income beyond $200k
– New York State is 7.85% on all income beyond $200k plus 1.7% for NYC and it gets complicated… so let’s just say the burden is beyond 10%
– New Jersey 8.97% on all income beyond $500k
– now if he chose to be like the hedge fund people and live in Connecticut (hard to believe, but more efficient from a tax perspective) he’d be taxed at 6.5% above $500k (but he would still pay taxes at NYC rates at all home games so he’d only be better off for endorsement income)
– California 10.55% on all income beyond $1M
– Illinois 3% (NOTE this is one of the FEW things that Illinois does correctly, and our legislature seems committed to raising this rate since we now have the worst credit rating in the nation)
– Florida has NO state income taxes

If you took the “advanced” class you might want to locate yourself in a state with low taxes and then near a conference with other states that had local taxes; perhaps a league heavy in Texas cities and Florida cities would compete for the tax-savviest athletes.  Stay out of NYC and NJ and ALWAYS California.  This would give you the “home” bonus and also the “road” bonus.

This could have been a “teaching opportunity” on the effect of high taxes (that are controllable, Federal taxes are inescapable) but it was mostly lost in other elements of the public spectacle.

Cross posted at LITGM