Orwellian tax talk

October 11, 2011

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

Political tax talk is becoming Orwellian: Secrecy is Democracy. Auditors Reduce Collections.  Tax Cheats Will Be Caught With Fewer Auditors.

Let’s start in Kansas, where the Lawrence Journal-World broke the news on Sunday that economist Arthur Laffer, father of curve-on-a-napkin tax policy, is advising the state on a new tax structure. The news is not so much that Laffer is getting $75,000 of taxpayer money, but that Governor Samuel Brownback wants advice only from business leaders; no wage earners allowed behind these officially closed doors.

In Albany, state tax authorities issued a statement asserting they already were pursuing the real estate tax cheats I wrote about last week. Never mind the statistics and lack of public enforcement actions. Maintaining this facade will be more difficult going forward as 300 newly pink-slipped auditors turn a drip of leaks into a stream.

Will Governor Andrew Cuomo, who wants to be president and has declared his eternal allegiance to lowering taxes on the richest New Yorkers, keep looking the other way? Will Lieutenant Governor Bob Duffy, who wants to be governor, mimic the boss?  How long will only the little people of New York feel the full force of tax law enforcement under these two Democrats?

That question is a bit more pointed for Eric Schneiderman, the New York attorney general.

Assemblyman William Colton, an eight termer from Brooklyn, sent fellow Democrat Schneiderman a letter, and a copy of my column, asking for action. Will Schneiderman insist he can only act with Cuomo’s cooperation, as his office hinted last week? Or will Schneiderman add a sharp edge to his carefully polished image as a tough law enforcer?

In Washington the mantra that spending, not revenue, is the problem was repeated endlessly last week. The idea that cutting tax rates, especially at the top, will pave a path to renewed prosperity is promoted by just about everyone in national politics except President Barack Obama and the few Capitol Hill Democrats who do not fear liberal as a political epithet.

Fact is, falling revenue is a problem. In fiscal 2011, which ended on Sept. 30, federal income tax revenues were smaller than in 2001, a recession year when the George W. Bush tax cuts began.

In fiscal 2001 the individual income tax brought in $994.3 billion and in just-ended fiscal 2011 it brought in an estimated $956 billion. That’s 4 percent less money before taking into account 10 years of inflation.

Per capita the federal income tax brought in 31.5 percent less in real terms in 2011 than in 2001.

The dominant political response to the fall in tax revenues? More tax cuts.

Bipartisan support is building for reducing corporate tax rates by at least 10 percentage points, from 35 percent to 25 percent or less. So is support for allowing repatriation of profits for companies that shifted them overseas to reduce taxes. The last time Congress did that, in 2004, it was sold with a promise it would create 660,000 jobs. Instead the benefiting companies fired more than 100,000 workers, several studies have shown.

There is also a bipartisan plan to further reduce already enfeebled tax law enforcement. The Senate plans to cut the IRS budget by $450 million, the House of Representatives by $600 million, meaning firing thousands of auditors.

Fewer auditors will not benefit the vast majority, whose taxes are taken out of their paychecks before they get their money. But it will give aid and comfort to high-end tax cheats, who rely on complexity, secret offshore accounts and lack of political will to chase them.

If cutting the government revenue department makes sense, then why not go whole hog and get rid of the IRS? That is what Herman Cain, a top rival for the Republican nomination, promises if voters send him to the Oval Office.

Cain’s 9-9-9 tax plan would scrap the current tax code and replace it with 9 percent levies on corporate profits, on income and on spending. The already rich would only be taxed on their spending since capital income would be tax-free, part of the little known flat tax premise that labor should be taxed, but taxing returns to capital discourages saving.

Under Cain’s plan, employers could not deduct the cost of wages paid to workers, not exactly a job creation scheme. Edward Kleinbard, the former chief of the Congressional Joint Committee on Taxation, said the Cain plan is effectively a 27 percent payroll tax.

Cain’s plan also imposes a one-time 9 percent tax on existing wealth, which may surprise his wealthy friends. He also would double-tax interest income, though, as Kleinbard noted, that must be a mistake.

Under Cain’s plan workers would have far less to spend after taxes. Cain insists that critics don’t understand. But as the chart illustrates, rich investors would pay less, helping their wealth snowball. The Cain campaign did not return calls seeking more information.

Give Cain credit though. Unlike Governor Brownback he is operating in the open. Unlike Cuomo, Duffy and Schneiderman, he is out front.

Unlike Orwell’s Winston Smith, no one from the Ministry of Love will turn you in for beatings until you accept that 2+2=5. The oligarchs and their elected enablers are just trying to convince you that tax deals made in secret are democratic, lower tax rates mean more tax revenue and that the ministries of tax are doing all they can to find the cheats. (Editing by Howard Goller)


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no tax no government pure anarchy we want… viva mexico… perry presidente and cocaine will be our national drug… love endless freedom and wild capitalism… chimichangas for everyone…

Posted by Ocala123456789 | Report as abusive

Very good article. I wonder ,though, how many of your ignorant fellow Americans will read it !

Posted by Biscayne | Report as abusive

More evidence for the above (based on impartial hard data from taxpolicycenter.org and the US Bureau of Labor Statistics):

http://www.slyman.org/blog/2011/07/reaga nomics-and-prudent-taxation/

Posted by matthewslyman | Report as abusive

It figures. You knew when Glass-Steagle was repealed and capital gains went to 15% that a tremendous amount of value was about to be sucked out of the system. With a gross income of just over $50k/yr, before overtime, I am relegated to swilling state approved beverages. My defered income in the form of pension has no form. The only thing the president of the country is good at is promising to give more to those who do less. I can imagine there are those in this world who are just rolling all over the floor laughing their butts off over, S&L, Enron and now Tarp.

Posted by mdblitz | Report as abusive

“Cain’s plan also imposes a one-time 9 percent tax on existing wealth, which may surprise his wealthy friends.”
Ha ha, so its really a 9-9-9-9 plan, that would be a surprise. Actually a wealth tax isn’t a bad idea if its taken in annual increments (I’ll leave it to Calvin Johnson and Alan O. Dixler to explain why its constitutional).

James Bowery has suggested a net asset tax with a floating rate tied to 3 month Treasuries rate, 0.02% currently. However as economy improves, the CBO expects 3 mo T-bill rate to rise to 5.0% by 2016 (and stay there). Let’s see, 10% owns 2/3rds of $60T in household wealth. With a $40T tax base, a net asset tax of .02% raises $8 billion, less than is collect now by alcohol taxes, while a NAT rate of 5% would raise $2.0 trillion, slightly more than is presently raised by income tax and FICA combined. Now THAT’S a counter-cyclical fiscal policy! Here’s the sneaky part of Bowery’s idea, the tax rate would never get to 5.0% (Tsy would still get the money), since there’d be an awful lot of wealthy people with an incentive to step into the 3 month T-bill auction every Monday to “bid down” their own tax rate.
http://majorityrights.com/index.php/webl og/comments/doing_the_basic_math_for_net _asset_tax_as_proposed_by_bowery_in_1992  /

Posted by beowu1f | Report as abusive

http://online.wsj.com/article/SB12356155 1065378405.html?mod=djemEditorialPage

What would you propose, Mr. Johnston? ALL income should be taxed at a flat rate. NO income should be taxed twice. I’m middle class and am not enamored of the 999 plan as it basically amounts to a VAT. I feel a VAT, on top of our income tax, is pretty much a foregone conclusion unless a flat tax system is adopted.

Auditors don’t keep the ‘rich’ from protecting their wealth as the Laffer curve dictates. All the auditors, the SEC, etc. didn’t catch Madoff until he’d bilked thousands out of Billion$. Elimination of the current tax code and abolishment of the IRS have to be the first step to a real solution.

TARP, stimulus and most likely stimulus 2: all passed by Democrats and the Occupy Wall Streeters demand Barry’O be handed another term?!. Until taxes are simple enough that everybody can understand them, we’ll all continue to be the rubes chanting class warfare/envy that the likes of Obama and Boehner dream of.

Posted by murzak | Report as abusive

Mr. Johnston, YOu should point out how the current tax structure on short term capital gains, derivatives, private equity, and investment real estate have changed the US financial markets into a speculators nirvana. The current boom/bust nature of the US equity markets for the past 25 years and now since 2008 the incredibly volatile credit markets are all due to the incredibly low tax rates that short term traders enjoy.

It makes no sense that the US tax code ties short term capital gains to an individual’s marginal income tax rate (generally 28%). Prior to the Reagan tax changes top marginal rates could be has high as 70% – which provided a huge difference between short term and long term capital gains taxes. Today’s rates are so close (28 vs. 15) that there is no incentive for holding investments long term – and thus you have a trader’s market, not an investor’s market.

Also since the Reagan tax changes, derivatives have grown exponentially throughout our financial markets. Why? Because of the extremely low tax rates on futures and index options coupled with the deduction for margin interest (leverage). IN short the US tax code is geared to benefit the speculator, and doesn’t reward the long term investor.

Finally, the real estate bubble has a lot to do with the 1031 exchange which allows investment real estate gains to be 100% deferred indefinitely if the proceeds are piled back into another piece of real estate. There is no economic rationale to give real estate such a favored tax preference and distorts the whole US economy.

Occupy Wall Street should be chanting: 80% Tax Rate on Short Term Gains!! That will get the US back to investing in its people, rather than speculating…

Posted by Acetracy | Report as abusive

Your figures are part of the double speak. You list per capita income tax, but half the country pays no income tax at all. Herman caine is right. Our constitution is suppoed to guarantee equal protection under the law. Our current system of income tax is antithetical to this equality. Each of us should be allowed to excercise the talents and gifts given us. some will make more money. welcome to teh real world.

Posted by zotdoc | Report as abusive

So raising taxes is going to create new jobs? How exactly? Hiring more governent employees and workers for short term projects? The increases in tax rate will encourage further job cuts and eliminating/ delaying expansion of companies.

Mr. Johnston, the Left’s plan is as flawed as those you critiqued. Why cannot you see this?

Posted by quattro4 | Report as abusive

Help me understand. Deficit hawks in Europe denounce Greece for lax tax-collection practices. Conservatives in this country welcome the axing of enforcement employees from the IRS. If tax-collection is bad, Greece is good. Right?

Posted by zipkin119 | Report as abusive