taxes – Sheila Kennedy

A Bill Passes. Then What Happens?

Making policy–passing laws–requires a series of decisions. It begins with (and is often stymied by failure to reach) an agreement on the existence, nature and extent of the problem to be solved. When lawmakers do see the same problem, and agree on why something is a problem, they then have to come to some consensus on what action is needed to solve or ameliorate that problem. Then–in our age of “privatization”–they need to determine who should enforce the agreed-upon remedy. Should those empowered to deliver the new service or oversee compliance with the newly-passed regulation be government employees, or should that obligation be vested in the private or non-profit sector?

And finally, once the problem has been identified, a solution agreed upon, the means of enforcement determined, and the law passed, a sound policy process will vet how the new law performs–evaluate its effectiveness in actually addressing the original problem, and noting–and ideally correcting–any negative unanticipated effects.

This process will inevitably involve debate and discussion, and in an era of technological and social complexity, creating sound policy increasingly requires careful attention to sources of specialized expertise in the matter at hand.

Unfortunately, today’s Republicans and Democrats can’t even agree on what time it is, let alone what our actual problems are. The GOP buffoons who increasingly dominate America’s legislative chambers ignore virtually all the “grunt work” needed for sound policymaking. When they aren’t fundraising, preening for Faux News cameras or producing television ads blaming “others” for real and imagined social problems, they are using legislative tactics to block rather than produce policies.

(This is frustrating for all serious citizens, of course, but I spent the last 21 years of my career teaching policy, and watching the total abandonment of actual governance in favor of performative antics is beyond painful.)

It’s one thing to outline the steps of the policy process, as I’ve done above. But just as a (non-AI) picture can be worth a thousand words, a real-life example can be more illustrative than an abstract process outline. So let’s look at a tax bill that Trump still touts as evidence of…something.

As the Institute on Taxation and Economic Policy explains:

The tax overhaul signed into law by former President Donald Trump in 2017 cut the federal corporate income tax rate from 35 percent to 21 percent, but during the first five years it has been in effect, most profitable corporations paid considerably less than that. This is mainly due to loopholes and special breaks that the 2017 tax law left in place and, in some cases, introduced. Corporate tax avoidance occurs because Congress allows it to occur, and the Trump tax law in many ways made it worse.

Tax policy is one of many intractable dividing lines between Republicans and Democrats, and it is a given that the tax overhaul of 2017 was not a product of agreement over the nature of the problem. Republicans think the problem is that businesses have to pay too much; Democrats think the problem is that wealthy folks aren’t paying their fair share. Clearly, a tax cut for profitable businesses is not the result of agreement on the nature of the problem. But the linked report focuses on the part of the policy process that both parties–and the Keystone Kops in Congress–routinely ignore.

How is it working?

The Institute looked at taxes paid by profitable corporations.

The 342 companies included in this study paid an average effective income tax rate of just 14.1 percent during this five-year period, almost a third less than the statutory rate of 21 percent.
Nearly a quarter of the corporations in this study (87 companies) paid effective tax rates in the single digits or less during this five-year period.
Of these, 55 (16 percent of the total 342 companies) paid effective rates of less than 5 percent. This is particularly striking given that all these companies were profitable for at least five years consecutively. Companies paying less than 5 percent include T-Mobile, DISH Network, Netflix, General Motors, AT&T, Bank of America, Citigroup, FedEx, Molson Coors, Nike, and many others.
Twenty-three corporations paid zero federal tax over the five-year period despite being profitable in every single year. And 109 corporations paid zero federal tax in at least one of the five years.
At the other end of the spectrum, 50 corporations paid effective tax rates of more than 21 percent, but most of these companies were also the beneficiaries of large tax breaks because they were paying taxes from previous years that they delayed using depreciation breaks.

One obvious “fix” for this would be passage of the global minimum tax negotiated by the Biden administration that’s currently being blocked by GOP lawmakers more interested in currying favor with special interests than engaging in the policy process.

Americans deserve better.

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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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