Minor Thoughts from me to you

Archives for Tax Reform (page 1 / 1)

The Revenue Deficit From Progressive Tax Rates

The Revenue Deficit From Progressive Tax Rates →

Michael Solon, writing in the Wall Street Journal:

Why? A more progressive tax code now leverages the negative impact of slow economic growth. The share of all individual income taxes paid by the top 1% has risen to 41.8% in 2008 from 17.4% in 1980—but almost two-thirds of the income from the top 1% comes from nonwage income, including capital gains, dividends and proprietor's profits.

Individual income taxes as well as corporate taxes are now far more rooted in the shifting sands of volatile business income and capital profits rather than in the terra firma of wage income that stabilizes payroll taxes. From 1960 to 2000, payroll taxes were never lower than in the previous year, individual income taxes dipped only twice, and corporate taxes dropped 11 times. Since 2000, individual income and corporate tax revenues dropped five times, while payroll taxes fell twice. Not only do revenues from individual tax returns drop more often now. They fall more severely, with recent collapses of 14%-20% versus the 3%-5% range before 2000.

If "the rich" pay all of the taxes (and they pay a massive share in the U.S.) than tax revenues will be directly tied to the fates of the rich. Right now, the federal government needs high income earners to continue earning high incomes. As soon as the high incomes take a hit, tax revenue takes a massive hit.

We now have a government that has a massive incentive to ensure that "the rich" never see their incomes drop. We might have a more just government if we evened out the tax code, so that income taxes were spread more broadly and more evenly over the entire country instead of being concentrated over a very small portion of the country.

Romney's Tax Deduction Cap

Romney's Tax Deduction Cap →

The Wall Street Journal editorializes in favor of Mr. Romney's tax plan, arguing that it's both fiscally and politically feasible.

The Obama campaign and the press corps keep demanding that Mitt Romney specify which tax deductions he'd eliminate, but the Republican has already proposed more tax-reform specificity than any candidate in memory. To wit, he's proposed a dollar limit on deductions for each tax filer.

During the first Presidential debate, Mr. Romney put it this way: "What are the various ways we could bring down deductions, for instance? One way, for instance, would be to have a single number. Make up a number—$25,000, $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people. That's one way one could do it."

But details aside, the tax cap is a big idea, and potentially a very good one. The proposal makes economic sense to the extent that it helps to pay for lower marginal tax rates. Lower rates with fewer deductions improve the incentive for investing and taking risks based on the best return on capital rather than favoring one kind of investment (say, housing) over another. This would help economic growth.

The idea may be even better politically. The historic challenge for tax reformers is defeating the most powerful lobbies in Washington that exist to preserve their special tax privileges. Among the biggest is the housing lobby that exists to preserve the mortgage-interest deduction—the Realtors, home builders, mortgage brokers and the whole Fannie Mae gang.

But don't forget the life insurance lobby (which benefits from the tax exclusion on the equity buildup in policies), the tax-free municipal bond interest lobby, the charitable deduction lobby and more. Each one will fight to the death to preserve its carve-out, which means that reformers have to engage in political trench warfare to succeed.

This is one reason President Obama wants Mr. Romney to be more specific: The minute he proposed to limit the mortgage-interest deduction, the housing lobby would do the Obama campaign's bidding by running ads against Mr. Romney's plan. Mr. Romney is right not to fall for this sucker play.

Romney's Tax Cut

Romney's Tax Cut →

David Henderson rounds up links to various economists and think tanks that have studied the Romney tax plan. They all agree that it's not impossible, that it could work, and that it is very similar to the Simpson-Bowles plan (which President Obama summarily ignored).

After laying out the details of the Romney plan, Reynolds does a comparison:

When it comes to tax policy, the main difference between Romney's and Obama's National Commission on Fiscal Responsibility and Reform and Bipartisan Policy Center's Debt Reduction Task Force advisers is that Romney proposes 1) a slightly lower corporate tax rate, and 2) a much lower bottom rate of 8 percent rather than 12 percent. (The fact that there would be six rates rather than three is insignificant.)

Simulating the Economic Effects of Romney's Tax Plan

Simulating the Economic Effects of Romney's Tax Plan →

The Tax Foundation runs the numbers on Romney's tax plan.

The debate over Mitt Romney’s tax plan has largely revolved around the short term concerns of who gets what and how much, rather than the more long term concerns of economic growth, job creation, deficit reduction, and tax reform. This is unfortunate, especially in a time of record unemployment and debt levels. These serious issues have been put aside to focus particularly on the results of a single study by the Tax Policy Center (TPC), which finds Romney’s tax plan would require raising taxes on low- and middle-income earners to pay for tax cuts for high-income earners. However, to get there, TPC assumes that tax rates do not matter for economic growth, i.e., Romney’s plan to cut income tax rates by 20 percent across the board will have no effect on labor supply or saving and investment decisions. Only among Washington score keepers does such an assumption make sense, but it certainly has no credibility among academic economists.

So, what will be the effect of Romney's tax plan?

The results are considerably different from TPC’s. We find that fully 60 percent of the static revenue loss from Romney’s plan is recovered when the dynamic effects of economic growth are taken into account. We find that while the cuts in the individual income tax rates do not “pay for themselves,” they do grow the economy 1.8 percent over the long run. The biggest boost to the economy comes from the 10 point cut in the corporate rate, which grows GDP by 2.3 percent, the capital stock by 6.3 percent, and the wage rate by 1.9 percent. The corporate rate cut is so economically beneficial that it does pay for itself, when all federal revenue effects are considered. So does the elimination of taxes on capital gains and dividends for middle-income earners and the estate tax.

These benefits are widely shared. Every income group experiences at least a 7 percent increase in after-tax income.

That's reform I can get behind.

The Romney Tax Plan: Not a Tax Hike on the Middle Class

The Romney Tax Plan: Not a Tax Hike on the Middle Class →

Romney's tax plan is revenue neutral because he lowers rates while simultaneously eliminating exemptions, deductions, and other "giveaways to special interests". It's what I really want out of tax reform and it's one of the things that makes me look forward to a Romney administration.

Alex Brill, of the American Enterprise Institute, breaks down how the Romney plan would work and why the math, contra the Brookings Institute, doesn't point to a tax hike.

In summary:

Romney has proposed a bold tax reform that would broaden the tax base and lower statutory tax rates across the board. While maintaining preferential rates for savings and investment, his proposal repeals the tax expenditures that distort economic decisions and add complexity to tax returns.

Although Obama has no such plan for tax reform, his vision for the tax system appears clear. He has refused to endorse the recommendations of the Simpson-Bowles Commission, which would also have lowered statutory tax rates and broadened the tax base. Instead, his near-singular focus has been to raise statutory tax rates for high-income households and to leave untouched hundreds of special tax breaks for various political constituencies.

Three Policies That Gave Us the Jobs Economy

Three Policies That Gave Us the Jobs Economy →

Amity Shlaes on what sparked the job growth of the 1980's.

The era didn't start well. The mid-1970s were a dead period. Then suddenly, from 1977 to 1978, new private capital devoted to venture capital increased by 15 times, to $570 million in 1978 from $39 million the year before.

In 1977, public underwritings of firms with a net worth of less than $5 million amounted to a meager $75 million. By 1980 that figure was $822 million, as Michael K. Evans, founder of Chase Econometrics, points out. The venture-capital boom continued down the decades, serving computing, technology, biotech and many other areas.

But what caused this boom? Three policy changes. The first was a [capital gains] tax cut for which this newspaper campaigned. ...

A second policy change came in pension law. ...

A third factor, and one that ensured the boom would continue, was a law ... [that] clarified murky intellectual property rights so that universities and professors, especially, knew they owned their own ideas and could sell them. ...

The Buffett Rule is Unfair (and I Oppose It)

President Obama is proposing a new principle: the “Buffett rule”

President Obama on Monday will call for a new minimum tax rate for individuals making more than $1 million a year to ensure that they pay at least the same percentage of their earnings as middle-income taxpayers, according to administration officials.

Mr. Obama, in a bit of political salesmanship, will call his proposal the “Buffett Rule,” in a reference to Warren E. Buffett, the billionaire investor who has complained repeatedly that the richest Americans generally pay a smaller share of their income in federal taxes than do middle-income workers, because investment gains are taxed at a lower rate than wages.

This argument, however, ignores the entire concept of double taxation. I oppose the Buffett rule because investment income is already taxed twice: once as corporate income and once as investment income. This means that investors are actually paying higher taxes than everyone else.

I’ll illustrate this by walking through a simplified example. I’m aware that this is a very, very, very simplified example. (For instance, it ignores corporate tax deductions and other “tax breaks”. It also ignores whatever “loopholes” Mr. Buffett is currently using to reduce his own personal tax liability.) I think the general idea is correct, however.

Let’s say Berkshire Hathaway earns a profit of $18,000,000 and wants to distribute the entire amount as dividends to its shareholders. And, for the purposes of extreme simplification, let’s say that Mr. Buffett is the sole shareholder.

First, Berkshire Hathaway must pay U.S. corporate income tax on the profits. Corporate income of $18,000,000 would be taxed at a rate of 35%. The remaining balance would be distributed as investment income, to Mr. Buffet. Mr Buffet will then pay a capital gains tax of 15% on that money. Here’s how that breaks down.

Type Amount
Corporate Income $18,000,000.00
Corporate Tax (35%) $6,300,000.00
Income to Distribute $11,700,000.00
Capital Gains Tax (15%) $1,755,000.00
Personal Income $9,945,000.00
Total Tax Paid $8,055,000.00
Total Tax Rate 44.75%

Now, let’s imagine that we implement the “Buffett Rule” and we require Mr. Buffett to pay a 35% tax rate on his investment income. Here’s how that breaks down.

Type Amount
Corporate Income $18,000,000.00
Corporate Tax (35%) $6,300,000.00
Income to Distribute $11,700,000.00
Income Tax (35%) $4,095,000.00
Personal Income $7,605,000.00
Total Tax Paid $10,395,000.00
Total Tax Rate 57.75%

This rule definitely forces Mr. Buffett’s taxes up, but he’s hardly paying the same rate as the rest of us. He’s now paying a total tax rate of 58% on his income—far more than the 35% rate that “we” pay.

If we wanted to aim for equal taxation (the supposed aim of the Buffett Rule), we need to aim at more fundamental reforms. For instance, how about eliminating the corporate tax rate and then taxing investment income at the same rate as personal income? That would eliminate all of the hanky panky that goes on with the corporate tax code and would, in one fell swoop, eliminate all of its deductions and loopholes. It would simultaneously increase the taxes directly paid by Mr. Buffett. Here’s how that breaks down.

Type Amount
Corporate Income $18,000,000.00
Corporate Tax $0,000.00
Income to Distribute $18,000,000.00
Income Tax (35%) $6,300,000.00
Personal Income $11,700,000.00
Total Tax Paid $6,300,000.00
Total Tax Rate 35.00%

Mr. Buffett is now paying the same rate as “we” do. That’s fair, isn’t it?

A Deficit Neutral Health Bill Isn't Enough

Greg Mankiw explains the spending problems with the healthcare bill through a short, imagined dialog between two friends. Here's the kicker:

Even if you believe that the spending cuts and tax increases in the bill make it deficit-neutral, the legislation will still make solving the problem of the fiscal imbalance harder, because it will use up some of the easier ways to close the shortfall. The remaining options will be less attractive, making the eventual fiscal adjustment more painful.

With the President's current budgeting trends (spend as much as you can, as fast as you can), we're facing an $11.3 trillion deficit by 2020. By that time, the federal debt will be a staggering $20.3 trillion. (The debt was $5.8 trillion at the end of 2008.)

It's not enough to be happy that we're maintaining the current levels of spending or -- even worse -- that we're managing to spend more in a "deficit neutral" way. It's serious business and it's time we stopped "kicking the can down the road to future generations", as the President likes to say.

Health care requires error free tax returns

This morning, the Wall Street Journal reported on another one of the goodies that's buried in the House healthcare "reform" bill. If the bill passes, the IRS will fine you for any mistakes you make on your tax returns.

Under current law, taxpayers who lose an argument with the IRS can generally avoid penalties by showing they tried in good faith to comply with the tax law. In a broad range of circumstances, the health-care bill would change the law to impose strict liability penalties for income-tax underpayments, meaning that taxpayers will no longer have the luxury of making an honest mistake. The ability of even the IRS to waive penalties in sympathetic cases would be sharply curtailed.

Recent experience shows that Congress needs to be careful about imposing no-fault penalties. In 2004, Congress adopted very large automatic penalties for failures of taxpayers to attach a tax-shelter reporting form to their tax returns. While penalties make sense where a taxpayer deliberately fails to file a return, the approach here was too unforgiving.

The normal ability of the IRS to waive penalties was taken away. Predictably, the result was some taxpayers getting hit with penalties they didn't deserve.

Last June, the Small Business Council of America sent some compelling tales of woe to Congress, including one in which a 72-year-old owner of a coin operated car wash set up retirement plans for his seven employees and got socked for his good deed with a $900,000 penalty for not reporting the plans properly. The company and its owner are now headed for bankruptcy. In another case, a penalty of $100,000 each was imposed on the six minor children of an owner of a small business in Utah for not filing the right tax forms.

I think I'll call Congresswoman Baldwin's office. I'm very curious to know if she supports this measure; if so, why; or, if not, what she's going to do about it.

Taxing Paris Hilton

From Boston Gal's Open Wallet:

Today's Christian Science Monitor explains: Why the rich get the most tax goodies.

He suspects one reason Americans tolerate tax cuts favoring the wealthy is that many anticipate becoming rich themselves and thereby benefiting.

It is true that when I made the most (as an independent contractor) was also when I paid the least in taxes (write-offs, write-offs, write-offs!) Sometimes I wish the tax code could be written to heavily tax people like Paris Hilton - we could call it the "stupidly wealthy tax". Money generated from the Paris Hilton tax would directly fund educational programs with the goal to produce as many anti-Paris Hilton's as possible.

Well, the Fair Tax would certainly accomplish that goal. Err, the goal of taxing Paris Hilton, not the goal of funding educational programs to produce anti-Paris Hilton's. Still, by taxing consumption rather than income, the Fair Tax would certainly make rich playboys/ playgirls actually pay taxes for the first time in their lives.

Fortunately, the Fair Tax wouldn't just tax Paris Hilton. It would make all of us better off by removing all federal taxes (income, investment, capital gains, business income, etc) and replacing them with a single consumption tax. It would simplify the entire tax code and increase the tax base (tax everyone, not just those earning an income). It would make American exports cheaper. American made products and foreign made products would -- finally -- be taxed at exactly the same rate.

What's not to like?

Why the TPA Failed

Republicans in the Assembly and the Senate failed to pass the Taxpayer Protection Amendment. Owen looks at what went wrong.

The bottom line is, the Republican leadership in Madison failed to step up, fight hard, and actually promote conservatism. If we want to pass this thing, we'll have to keep fighting at the grassroots. The only way our "representatives" will pass this is if we force them to.

Irreducible Complexity?

The biggest problem with our current tax code is that it's too complex. Millions of hours worth of effort are wasted every year calculating who owes what, to whom, for what, in what quantities. Every year Congress makes the entire enterprise more complicated. For instance, after Hurricane Katrina, Congress wrote all kinds of breaks into the tax code for those who had been harmed by the hurricane or those who were helping those harmed by the hurricane. The result is a mess of new forms, qualifications, deductions, credits, required documentation, and -- most of all -- confusion.

It turns out that there's actually a very good reason for all of this confusion:

Three of the four top lawmakers on the Senate Finance and House Ways and Means committees, which are in charge of writing tax laws, pay professionals to file their annual tax returns with the Internal Revenue Service.

(The fourth files his own taxes every year.) Will any of the other law makers ever consider filing their own taxes?

"Absolutely not," said Rep. Jim McCrery (R-La.). "I'm not an accountant. I'm a lawyer."

Well, buddy, I think you should feel the pain that American taxpayers feel. I propose -- beginning next year -- that all Congresspeople and Senators be required to fill out their tax returns by hand. No calculators. No computers. No tax advisors. No visits to H&R; Block. Furthermore, any errors will be prosecuted to the full extent of the law. And why not -- they're writing laws that all Americans are expected to follow fully. It's only fair that they themselves face the same expectations and the same penalties for failure.

As for not allowing the lawmakers to have any help when filing their taxes, just consider it an incentive to simplify the tax code. After all, not everyone can afford fancy software of expensive advisors. If the people that write the code (who are supposedly experts on the topic) can't follow the code, maybe the code needs to be changed. Left to its own devices, I don't expect Congress to ever simplify the tax code. But maybe if we make them feel the full and undiluted pain of the tax code, they'll see the light.

Union Opposition

Owen reported on two form letters that were sent to the state legislature, criticizing the Taxpayer Protection Amendment. One form letter was signed by leaders of city governments, the other was signed by leaders of county governments. Fortunately, my neither my alderman nor my County Board Supervisor signed it.

The more interesting part of this entire deal is that form letters were drafted by AFT-Wisconsin.

AFT-Wisconsin is a labor organization representing 17,000 public and private employees in the state of Wisconsin. Formerly called the Wisconsin Federation of Teachers (WFT), AFT-Wisconsin is the Wisconsin chapter of the American Federation of Teachers. Started primarily as a teachers' union with 1,400 members in 1933, AFT-Wisconsin has grown exponentially and today represents many diverse professionals with over 500 job classifications

In other words, people who work for the government are writing letters for other people who work for the government to sign. These letters say that the government should be able to raise taxes whenever it wants by however much it wants. That sounds to me like they're probably more interested in protection their jobs and their easy access to my pocketbook than they are in actually governing responsibly.

Furthermore, I think their worries about the TPA rolling back our basic services are a load of hooey. The TPA, sad to say, won't roll back any spending. It will just limit the rate at which spending can increase in the future. And, yes, it will allow spending increases. Just not huge ones. Unless you ask the taxpayers first. If they approve it, then it's all right. So why the long faces? Are they afraid to actually ask the taxpayers before increasing taxes? No, the TPA will not impose spending cuts. No, the TPA will not stop spending increases. All the TPA will do is slow down spending increases. Is that such a bad thing?

For the convenience of anyone else reading from Madison or Dane County, I've included the full list of Madison / Dane County signatories. If your alderman or county supervisor is on the list, I'd highly recommend giving them a call and expressing your displeasure. As Owen says, these are people are worthless local officials who are so terrified of having to ask the taxpayers when they want to blow the taxpayers' money. On the other hand, you might want to thank them all for providing such a handy list of people to vote against in the next election.

Representing Madison:

Dave Cieslewicz, Lauren Cnare, Austin King, Mike Verveer, Tim Gruber, Brenda Konkel, Ken Golden, Paul Van Rooy, Noel Radomski.

Representing Dane County:

Jane Licht (Register of Deeds), David Gawenda (Treasurer), Brett Hulsey, Robert Fyrst, Barbara Vedder, Kyle Richmond, John Hendrick, Don Eggert, Dave de Felice, Duane Gau, David Worzala, County Supervisor, Mark Opitz.

The Need for Tax Reform

I saw this article earlier in the day and wanted to blog on it. Unfortunately, getting my wisdom teeth pulled and being on pain meds made blogging a risky proposition. Owen (of Boots and Sabers) wrote that the study mentioned in the article confirms the need for the Tax Protection Amendment. He said exactly what I wanted to say:

I read this study and said, "huh"¦ $5,200,000,000 less in government spending"¦ that would be nice.... $5,200,000,000 additional money in the economy.... that sure would help create jobs and raise our standard of living..." 3.8% growth is STILL faster than the rate of inflation. Most Wisconsinites haven't been getting a 3.8% raise every year for the last 20 years. In fact, personal income only went up by about 4.5% since 1990, so to increase government by 5.3% just seems criminal. Government has been increasing in size faster than the ability of the citizens to pay for it.

This entry was tagged. Tax Reform Wisconsin