Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Deficit Hawk, Progressive Style, Part IIAs I wrote in Part I (Feb 3), the deficit hawks legitimately claim that huge deficits will hinder investment and kill jobs. But their solutions would make matters worse. What are those solutions? What are alternatives? A leading hawk, C. Fred Bergsten of the Peterson Institute for International Economics, proposes three control measures: containing Medicare and Medicaid costs, "comprehensive Social Security reform, including gradual increases in the retirement age and an alteration of the benefits formula" and a national consumption tax.The hawks are right that we need to control all--not just public--health care spending, but only as part of national health reform. They are wrong about Social Security, which does just fine under any reasonable projections. They're especially wrong about a consumption tax. A consumption tax is essentially a national sales tax. Why a consumption tax? Because, the argument goes, it will encourage more saving. More saving will engender more investment. Of course, as even proponents recognize, a consumption tax hits poorer people harder, because they consume proportionately more of their income. There's little evidence a consumption tax will encourage saving and investment, let alone productive investment. To see why, consider the main reason that U.S. saving and investment fell so low in recent years: the real estate bubble. Middle class homeowners thought they were saving through the appreciation of the land under their houses. So why put aside a portion of their wages? Banks and other investors thought they were investing by buying up high-yield mortgage-based securities. So why lend at lower returns to productive businesses? In fact, real estate bubble investments closely resemble investment in government debt: both are passive investments, parasites on the real economy. Here are three alternatives to the conservative hawks' program of entitlement-cutting and consumption taxes: 1. Cut military spending. 2. Restore progressivity of federal taxes and raise rates, and 3. At state and local levels, rediscover the original wealth tax--the property tax.  1. Cut military spending. Dollar for dollar, military spending generates the fewest jobs and creates the most waste. Even strong advocates of a second "stimulus" wouldn’t demand more military pork. Chart III (click to enlarge) shows military spending from 1940 to 2013, in 2005 dollars and as a percentage of GDP. Cutting military spending both absolutely and relative to GDP helped Clinton lower debt and stimulate the economy. Obama seems headed the other way. 2. Restore the progressive income tax system. Since World War II, the federal income tax system has both declined as a proportion of GDP, and grown steadily less progressive. Top rates of the official income tax have fallen from over 90% to 35%, and unearned income like capital gains gets special low rates or disappears into loopholes. Meanwhile the other income tax--the payroll tax supporting Social Security and Medicare--has grown larger than the official income tax itself! The payroll tax hits all earned income up to a cap, now $106,800. The payroll tax rate, 2% in 1937 at the start of Social Security, has risen to 15.3%. Some two thirds of American families pay more payroll tax than income tax. Chart IV (click to enlarge) shows how the payroll tax has overtaken the official income tax as a source of federal revenue.  Conservative economist Greg Mankiw wrote in a recent New York Times op-ed that "Higher tax rates mean reduced work incentives and lower potential output." That's true, but only at the lower end of the income scale, not the upper. (Can you imagine a CEO saying, "If you cut my pay by $1 million, I'll go home early on Friday"?) The payroll tax has become the ultimate killer of small business and low-wage jobs. Federal taxes as a percentage of GDP have hit a historic low, well under 20%. There's plenty of room to raise taxes and make the system much more progressive. To do so, we should: a. Reinstate high progressive rates for the regular income tax. b. Cut or eliminate payroll taxes at the lower end, and remove the cap.  3. At state and local levels, rediscover the property tax. The property tax? Despite much rhetoric to the contrary, the property tax really is a tax on property--including corporate property (about 50% of the base). It's a wealth tax, intrinsically the most progressive tax we have. Until World War II, it was the most important tax in the US. Since then, as Chart V (click to enlarge) shows, sales and income taxes have substantially displaced the property tax. But as also evident in Chart V, the property tax doesn't fall off in recessions as do income and sales taxes--if states had stuck with the property tax, as has New Hampshire, they wouldn't be in their present fiscal jam. As an added bonus, because the property tax hits land values, it checks the false savings of real estate bubbles--encouraging real saving!Conclusion: If we want to reduce debt, lessen inequality, stimulate small business investment and create jobs, here's how to do it: cut military spending; restore progressivity and raise rates in the income tax system; and resurrect the property tax. Politically impossible? Only if it's unthinkable! Labels: deficit, deficit hawks, Fred Bergsten, Greg Mankiw, income tax, military spending, payroll taxes Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Are Average Taxpayers Freeloaders?From Sam Pizzigati, at the online weekly Too Much, which is well worth a visit.Have Average Taxpayers Become Freeloaders? Opponents of the proposal for a 5.4 percent health care reform surtax on America's wealthy are getting desperate. They've even turned their fire onto middle-income Americans. By Sam Pizzigati | July 27, 2009 Friends and fans of privilege have been striking their indignant pose the last two weeks. They're shocked, simply shocked, that House Democratic leaders would dare advance a health care reform plan that sets a 5.4 percent surtax on households making over $1 million a year. Affluent Americans, flacks for grand fortune are fuming, already pay the bulk of the nation’s income taxes. They'll pay virtually all of it, these critics charge, if the surtax becomes law and Congress lets the George W. Bush tax cuts for the comfortable expire, as scheduled, after 2010. Amid all this, the most indignant of fortune's defenders now seem to believe, average Americans have become irresponsible freeloaders, ever eager, as conservative columnist Caroline Baum puts it, to "encourage their elected representatives to vote 'yes' on every new benefit that comes down the pike." Fulminates David Harsanyi, a Denver Post columnist outraged by the health surtax notion: "President Barack Obama once promised to spread the wealth. How about spreading the responsibility, as well? Let the everyday citizen feel the cost of these gazillion-dollar legislative miracles." In reality, of course, everyday American citizens are pulling their weight and then some. They actually pay a higher share of their incomes in taxes—total taxes, not just federal income tax—than super rich Americans. Maverick billionaire investor Warren Buffett has been trying to make this point for some time now. He and his fellow billionaires, Buffett notes, pay taxes at a lower overall rate than their receptionists do. Two years ago, Buffett bet a million dollars to back up that proposition. He challenged any billionaire in the Forbes 400 to prove him wrong. So far not one has. Those Forbes 400 billionaires and their cheerleaders live in a fantasy land where average folk who work hard enough can always "succeed" and get rich. In our real world, here early in the 21st century, average people work hard and watch the rich get richer. The latest evidence of this dynamic comes from an enterprising Wall Street Journal analyst who just completed some fascinating crunching of payroll data from Social Security. "Executives and other highly compensated employees now receive more than one-third of all pay in the U.S.," the Journal's Ellen Schultz observed last week, and that's without counting billions in executive pay "that remains off federal radar screens that measure wages and salaries." Schultz defines as "highly compensated" any employed American who this year will take home over $106,800. That income figure represents the 2009 Social Security payroll tax ceiling. Any wage or salary income under that figure faces Social Security payroll tax. Any income above doesn't. Back in 2007, the payroll tax ceiling stood at $97,500. In that year, only 6 percent of Americans collected paychecks over the ceiling. But this affluent 6 percent took in 33 percent of America's total pay. Five years earlier, in 2002, Americans making more than the federal payroll tax ceiling collected only 28 percent of the nation's pay. Over the five years than ended in 2007, the Journal's Schultz goes on to add, earnings for the top 6 percent jumped up twice as fast as earnings for the bottom 94 percent. This growing inequality in the rewards from work has no legitimate justification. Absolutely no evidence exists to indicate that earners currently in the top 6 percent are working more productively than earners in the bottom 94 percent than they did five years ago, or 50 years ago for that matter. This growing inequality in the rewards from work, on the other hand, does have consequences. Here's one: In 2007, America's top 6 percent collected a whopping $1.1 trillion in earnings not subject to payroll tax. The payroll tax break for high-income earners, the new Wall Street Journal analysis estimates, is now costing the federal Treasury $115 billion a year. But the Journal's focus on the top 6 percent doesn't tell the full story. America's most affluent 6 percent haven't all been prospering at the same rate. In fact, most top 6 percent income-earners have more in common with those below them than those above. Between 2000 and 2006, data from economists Emmanuel Saez and Thomas Piketty document, America's top 1 percent saw their incomes increase eight times faster than the next most affluent 4 percent. These particular Saez-Piketty figures don't count income from capital gains, the profits from the buying and selling of stock and other assets. Capital gains income goes overwhelmingly to the richest Americans—and none of it faces Social Security payroll tax. Read the rest of the article. Labels: income inequality, income tax, Sam Pizzigati, wealth inequality Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Plunging State Income Tax RevenuesAn interesting piece from Mish's Global Economic Trend Analysis (a blog).States in Deep Trouble Over Plunging Income Tax Revenues The Nelson A. Rockefeller Institute of Government has issued a State Revenue Flash Report discussing an across the board enormous drop in personal income tax revenues. Total personal income tax collections in January-April 2009 were 26 percent, or about $28.8 billion below the level of a year ago in states for which we have data. In April 2009 alone (April being the month when many states receive the bulk of their balance due or final payments), personal income tax receipts fell by 36.5 percent, or $18.2 billion. There are numerous tables in the report worth a look. In fact, the entire 9 page PDF is worth reading in entirety. States most dependent on Personal Income Taxes 68.5% of Oregon's Tax Revenue from PIT. Collections off 27.0% 57.2% of Massachusetts' Tax Revenue from PIT. Collections off 28.5% 55.9% of New York's Tax Revenue from PIT. Collections off 31.8% 47.5% of California's' Tax Revenue from PIT. Collections off 33.8% 52.4% of Connecticut's Tax Revenue from PIT. Collections off 25.9% 52.7% of Colorado's Tax Revenue from PIT. Collections off 25.4% Arizona's collections were down a whopping 54.9% depending 25.3% on Personal Income Taxes. South Carolina, Michigan, Vermont, Rhode Island, New Jersey, Idaho, and Ohio are also in deep trouble. 20 states depending on personal incomes taxes for > 25% of total taxes were down 20% or more on collections. This is a very grim report on state finances. Here's the original post. Labels: income tax, recession, state budget shortfalls Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Most Positive View of Income Taxes Since 1956A recent Gallop poll shows Americans have a more positive view of income taxes than they have had in recent years (and the general view is more positive than you might have thought).In response to the question, "Do you consider the amount of federal income tax you have to pay as too high, about right, or too low?", a majority (51%) thought it was either too low or about right (with 48% saying that it was about right):  Meanwhile, in response to the question, "Do you regard the income tax you will have to pay this year as fair?", a solid majority continued to say that it was fair:  I am not quite sure what to make of the fact that the percentage of people saying that their taxes are "fair" is ten to twelve points higher than the percentage of people saying that the amount they pay is "about right." Gallop claims that people are more likely to think that their taxes are "fair" during wartime. Go figure. --CS Labels: Chris Sturr, Gallop, income inequality, income tax, taxes, war Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
