Opinion

Felix Salmon

Chart of the day: U.S. taxes

Felix Salmon
Dec 6, 2010 15:44 UTC

Stephen Culp has another striking chart today:

US_TAXGDP1210.gif

This chart should be ingrained in the mind of anybody who cares about fiscal policy. The main things to note:

  • Federal taxes are the lowest in 60 years, which gives you a pretty good idea of why America’s long-term debt ratios are a big problem. If the taxes reverted to somewhere near their historical mean, the problem would be solved at a stroke.
  • Income taxes, in particular, both personal and corporate, are low and falling. That trend is not sustainable.
  • Employment taxes, by contrast—the regressive bit of the fiscal structure—are bearing a large and increasing share of the brunt. Any time that somebody starts complaining about how the poor don’t pay income tax, point them to this chart. Income taxes are just one part of the pie, and everybody with a job pays employment taxes.
  • There aren’t any wealth taxes, but the closest thing we’ve got—estate and gift taxes—have shrunk to zero, after contributing a non-negligible amount to the public fisc in earlier decades.

If you were structuring a tax code from scratch, it would look nothing like this. But the problem is that tax hikes seem to be politically impossible no matter which party is in power. And since any revamp of the tax code would involve tax hikes somewhere, I fear we’re fiscally doomed.

COMMENT

Two things I would like to point out about the chart. First half of employment taxes are paid by a corporation and all unemployment taxes are paid by corporations. If you changed this chart to reflect this fact you would see a different chart. Second if corporations paid all the taxes who would really be paying the taxes?

Posted by ghb | Report as abusive

Looking at the deficit commission’s tax plans

Felix Salmon
Nov 12, 2010 15:14 UTC

The WSJ does none of its readers any favors with its silly headline attempting to sum up the effects of the deficit commissions tax proposals. “Top Earners May Face Big Hit”, it says—which would surely be more accurate if the “May” was replaced with “Won’t”.

The piece begins:

A presidential panel’s draft overhaul of the tax system could hit higher earners hard, largely by wiping out deductions and investment breaks that tend to especially benefit those who make enough money to itemize their taxes.

For one thing, the draft is coming from the panel chairmen, not from the panel itself. And more generally, while it’s true that most people who itemize their taxes are high earners, it doesn’t follow that most high earners itemize their taxes, or get a huge benefit from doing so. Some are better off with the standard deduction, especially if they don’t have a mortgage; others are subject to the phaseout rule, and others still get hit by the alternative minimum tax.

On top of that, the chairmen aren’t really suggesting that all these “tax expenditures,” as they’re known, actually be wiped out. They’re actually suggesting something quite reasonable: that you start with a very simple tax rate, and then, if you find a tax expenditure you really believe in—the earned income tax credit, say—you pay for it by raising some or all of those basic tax rates.

That’s a great way of making the cost of these deductions explicit: you want generous mortgage-interest tax relief? OK, but your income tax is going up a penny.

But putting that to one side, the big question is whether the higher tax burden from the loss of deductions would wipe out the tax savings from lower income tax. The WSJ seems sure that it would:

Deductions and investment breaks… increase after-tax income for the top 20% of earners… by more than 10%…

Higher earners could stand to recoup some of that loss through several other proposed changes, notably lower marginal income-tax rates. The plan… would cap the top tax rate as low as 23%, down from the current top rates of 33% and 35%.

Really? High earners would only recoup some of that loss? If you’re currently paying income tax of 35%, that means your after-tax income before deductions is 65 cents on the dollar. If that’s raised by 10%, it becomes 71.5 cents on the dollar. On the other hand, if you simply pay income tax of 23%, your after-tax income is significantly higher, at 77 cents on the dollar.

Paul Krugman, for one, is convinced that the rich are going to be winners, not losers, here:

What the co-chairmen are proposing is a mixture of tax cuts and tax increases — tax cuts for the wealthy, tax increases for the middle class. They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.

It will take time to crunch the numbers here, but this proposal clearly represents a major transfer of income upward, from the middle class to a small minority of wealthy Americans.

In fact the two aren’t completely contradictory; it’s just that what the WSJ considers “Top Earners” have a large overlap with what Krugman considers “the middle class.” (Think people earning between about $120,000 and $350,000 per year.)

And Krugman isn’t giving the whole picture either. One of the best parts of the chairmen’s plan is the way in which it raises the tax rate on capital gains and dividends so that they’re simply treated as ordinary income. The very wealthy, who often live off capital rather than labor, would definitely be hit hard by that move.

The WSJ does have one fact on its side when it sees taxes going up rather than down on the rich: “the draft proposal recommends overall that taxes go up by $751 billion by 2020,” it says. But that’s a cumulative figure, not an annual figure. Overall, taxes would be unchanged in 2012, go up on a net basis by a mere $20 billion in 2013, and rise as far as $160 billion in 2020. That’s substantially less than the $241 billion the chairmen want to cut in discretionary spending this year: their plan concentrates much more on spending cuts than it does on higher taxes to achieve deficit reduction.

The fact is that a net increase of $160 billion in 2020 is so small, compared to the overall tax base, and so far away in time, that it’s impossible to tell with any certainty at all who would be the winners and who would be the losers. Some taxes will go down, some deductions will go away, and other taxes will go up: it’s a complicated plan and the effect on various income strata is likely to depend enormously on how much any given taxpayer currently itemizes, and how much tax they currently pay on capital gains and dividends.

And the big picture is that the chairmen do not propose to reduce the deficit by raising taxes: indeed, they propose a hard cap on how much the government can get in tax revenue. This is a cost-cutting proposal, rather than a tax-hiking one. It also has zero chance of ever making it into law. But as an idea of where some kind of hypothetical bipartisan consensus might exist, the message is clear: no one’s interested in innovative new taxes, least of all a carbon tax. If the deficit’s going to come down, the technocratic elite wants to see that happen from spending cuts instead.

COMMENT

Yes, Dan, like mattski, I can’t agree with your view – I consider it part of the “free markets as religion” myth – that if we could only have a truly free market in health care in the US, costs would go down and the benefits would flow to all. In this view, it’s the gov’t regulation that’s the problem, rather than, for example, the immoral behavior of insurance companies which mutually agree to enact laws prohibiting int’l purchase of drugs, not to insure people who are sick and find ways not to pay insured people with valid claims. Anyone who looks at capitalism with clear eyes historically sees that corporations have always represented a pure profit motive only, and aren’t a good way to structurally embody humane values – they never have been. Structurally, by definition, they are capital looking for returns with very limited liability (responsibility) – organizations looting for booty based on projections of return on capital, restrained only by the particular morality of the people who happen to be in charge (until they’re fired for not generating enough profit) and by strong laws defending the common good – eg don’t poison the rivers, etc. For as long as capitalism survives in its current money-as-religion form, which I think may be shorter than most imagine, it will always be finding a balance between the free market ethic and “the nanny state” as you say. Without something like the nanny state, including, for example, unemployment insurance and social security in the US, capitalism might well already have been destroyed here – the people wouldn’t tolerate the uncaring brutality of its “dark side”. It might have been destroyed in the depression if FDR didn’t enact the very “nanny state” provisions that are now steadily being disassembled. Without doubt, I agree an overly intrusive state has a dark side too. But truly free and unregulated, intense concentrations of money and power build and corrupt the operation of the both gov’t and the “free” market itself and become monopolies under any form of gov’t. As Adam Smith himself said, paradoxically, monopolies distort and destroy the beneficial operation of free market capitalism. High prices don’t come from laws made by a gov’t that is “of, by and for the people” – they favor the businesses that charge the prices and pay politicians to have the laws enacted.

Anyway, the real problem is global overpopulation and diminishing resources. Seems like the generational issues will end up being an important side story, but the population/resource issues will likely begin to become more and more disruptive lead story before too long I agree with you, Dan, that the developed countries are in decline, but I don’t see why you don’t include the US in that pack of decliners – although our demographics are a little better. Yee gods! As of this week, the US is now printing 100% of the money it borrows out of thin air. Last week, Richard Fisher, head of the Dallas Fed, told us this kind of financial auto-erotic fraud has historically destroyed countries economies. The problem is not just funding gov’t deficits due to massive overspending on “nanny state” programs. It’s that capitalism actually needs nanny state programs to be acceptable to people – contrary to the popular myth, the free market alone doesn’t come close to supporting a good life for the vast majority of humans, particularly in a world of limited resources and growth. It’s brutal, as we’re all in the process of finding out, as gov’ts make a massive effort to blunt the impact with monetary interventions and nanny programs. The only solution is really going to be for the great citizens (geniuses, entrepreneurs and pirates) who have amassed great wealth to be forced to share their monopoly on the Earth’s wealth and resources more broadly while everyone collaborates to plan a sustainable future, or for everyone to hunker in their bunkers and prepare for anarchy. Based on current politics and the in vogue propaganda that somehow brutally capitalist free markets are uncorrupt and will take us to a humane and sustainable future, it’s difficult to be hopeful.

Posted by kelvinator | Report as abusive

Debt taxation datapoint of the day

Felix Salmon
Feb 8, 2010 22:58 UTC

I’ve been banging on for a while that one key cause of the crisis was the tax-deductibility of interest payments, and the incentive that allows companies to finance themselves with dangerous debt rather than safer equity. But I didn’t realize it was this bad. Pete Davis finds this table in an October 2005 CBO report, at the height of the debt bubble:

taxrates.jpg

It really is as bad as that: companies financing themselves with equity pay an effective tax rate of 36%, while companies choosing debt pay a negative tax rate of 6.4%. How is that even possible? The CBO report explains:

The effective tax rate on debt-financed corporate capital income is negative in part because accelerated depreciation and interest payments generate tax deductions in excess of taxable income, which leads to corporate tax refunds. Taxes paid by savers on interest received do not entirely offset those refunds; again, much of that interest income is received in various accounts in which it is not taxed.

In other words, companies lever themselves up so much that their interest payments are larger than their income, and so they get tax refunds and pay no corporate income tax. This can’t be healthy. And, sadly, it’s not going to change, either, Paul Volcker notwithstanding.

COMMENT

Does this analysis includes the fact that debt financing fees are amortizable whereas equity financing fees are neither amortizable or deductible. And, of course, equity financing fees are way higher as a % of capital raised.

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