Opinion

The Great Debate

Will conservatives embrace a consumption tax?

Headlines over the past couple of weeks have been dominated by reactions to President Obama’s new proposal for corporate tax reform. The optimism stems from the realization that practically all the major plans by Democrats and Republicans would move the U.S. tax code in the direction of a territorial-based system (in which a corporation is taxed on domestic, not foreign, income). Moreover, these plans all accept the premise that to make the U.S. code more competitive globally, the tax base must be broadened, and that means cutting deductions and preferences in exchange for lowering the top-line rate (i.e., down to between 25 percent and 28 percent from today’s 35 percent rate).

Even with this apparent consensus, however, it seems inevitable that actual reform will not occur until 2013. Perhaps more important, the way these issues play out in the coming months could very well shift the reform discussion from how to tax income to how to tax consumption for both individuals and corporations. Here are three developments to watch.

The politics require more “tax winners.” To get the corporate tax rate down to the new target range, Congress might have to cut both accelerated depreciation and the expensing of research and development. The difficult truth is that any revenue-neutral tax reform proposal would likely create as many (and maybe even more) losers than winners. In essence, a rate reduction to 28 percent might help a few industries, but slashing the deductions for capital spending or investment could end up raising the effective tax rate for even more companies.  The net effect could be a slightly smaller economy relative to its full potential, as new investment and the growth of the available capital stock could be restrained. In an effort to broaden the coalition and create more winners, Congress will probably have to consider cutting the top rate even further, then redefining what’s actually counted as corporate income.

The window is closing for piecemeal tax reform. The politics of trying to get a “win” by tackling just the corporate side of the code will fade — once again — as everyone begins to realize just how intertwined the individual tax system is with its corporate counterpart. The government’s share of corporate revenues comes from dollars that would have otherwise gone to one of the following: shareholders, management, suppliers, employees or customers. This Econ 101 point is perhaps best reflected by Greg Mankiw’s argument that “a corporation is not really a taxpayer at all. It is more like a tax collector.” The implication is that the individual tax code is fundamentally linked to the corporate side, especially if one prioritizes economic growth and the design of an efficient tax collection regime. After all, corporate tax revenue is only the third-largest source for the federal government (around 2 percent of GDP), behind the individual income tax (roughly 8 percent of GDP) and the payroll tax (which was about 6.5 percent back in 2006, before the crisis and the temporary rate cuts that were subsequently used for stimulus). A related point is that since the last tax overhaul in 1986, there has been a tremendous increase in the utilization of pass-through entities (i.e., LLCs and partnerships). Today, the U.S. has one of the world’s largest non-corporate sectors, with pass-through entities in recent years accounting for around 40 percent of total business net income.

Taxing savings and investment. The 2012 election is shaping up to mirror many aspects of the tax debate from 2003-2004. In 2003, President Bush advocated making dividends tax exempt if they were paid out of income that had already been taxed once at the corporate level. The law Congress ultimately passed brought the dividend rate down to 15 percent (the same rate as for capital gains). With personal tax rates on both forms of after-tax corporate income set at the same rate, a company could prioritize its business plan over tax management when deciding whether to retain or reinvest profits, distribute money as dividends, or pursue a stock buy-back. The arguments in favor of lower tax rates on capital generally follow the logic that the double (or higher) tax ends up distorting various investment- or savings-related decisions. From an economic-efficiency perspective, individuals and businesses should be encouraged to build resources and then be left to make the decision on their own whether to deploy their capital so as to maximize productivity and wage growth. Under the current tax regime, the government effectively has its foot on the scale by providing preferences for certain industries and biasing an investor’s decision-making process. (See an op-ed by Greg Mankiw for more.) The counterarguments are usually focused on issues of fairness. Critics are right to point out that the rich (and middle class) are initially the largest beneficiaries of low taxes on investment and savings, but this is because generally the poor don’t own equities that can appreciate or issue dividends. In part at least, this is why the 2004 Democratic nominee, Sen. John Kerry, decided to run on a platform that included repeal of the lower tax rate for dividends.

To bridge the deficit, collect some taxes

By David Callahan

The views expressed are his own.

At a time when the U.S. government needs every dollar of revenue it can get, alarm bells should be sounding in Washington about a new IRS study showing that the Treasury is losing a fortune to tax evasion.

The study, released last Friday, found that the government missed out on $385 billion in uncollected taxes in 2006, the most recent year for which the IRS has complete data. If we extrapolate the IRS’s assumption that the U.S. government only collects about 85 percent of total tax liabilities, the revenue lost by the Treasury in the past decade exceeds $3 trillion.

That is serious money–nearly equal to all the new federal debt incurred during the Bush years. And without tougher action against tax cheats, the U.S. government stands to lose trillions more over the next decade.

from David Cay Johnston:

Time to junk income taxes?

This is America's 100th year for individual income tax, a system as out of touch with our era as digital music is with the hand-cranked Victrola music players of 1912. It is also the 26th year of the Reagan-era reform for both personal and corporate tax, a grand design now buried under special-interest favors.

With U.S. elections in November, and the George W. Bush tax cuts due to expire at the end of 2012, it's time for a debate that goes beyond ginning up anger over taxes and the superficial issue of tax rates.

It's time to consider whether to get rid of income taxes, personal and corporate. What are the strengths and weaknesses of our current system? Should we tax individual and corporate income -- or something else?

Occupy the tax code

By David Callahan

The views expressed are his own.

Chalk one up for Occupy Wall Street. Last Thursday, the New York State legislature voted to raise taxes on high-earners after Governor Andrew Cuomo reversed his longstanding opposition to such a move. Cuomo cited a large budget gap in explaining his about-face, but that gap is hardly new. What is: taxing the top 1 percent is far easier now than it was a few months ago.

The victory in Albany comes just as the Occupy movement finds itself in need of a second act. With the tents gone from Zuccotti Park – and encampments vanishing from other major cities, too – it’s time for the movement to get serious about influencing public policy. Pushing for higher taxes on the rich is a perfect focal point for new activism.

Next year will see the biggest tax fights in a decade. The Bush tax cuts are set to expire at the end of 2012 and President Obama is determined that the wealthy should pay higher rates. In addition, both parties want to reform the tax code – an overhaul that would trigger a struggle over the generous loopholes that now favor corporations and rich individuals.

from David Cay Johnston:

GOP inaction means higher taxes

The author is a Reuters columnist. The opinions expressed are his own.

Thanks to Republicans who signed Grover Norquist's pledge never to raise taxes, your taxes are automatically scheduled to go up in January -- unless you are a plutocrat.

The law that created the congressional super committee set a target of this week for reducing budget deficits. The committee failed to meet the target.

Republican members were willing to cut programs that benefit millions, but they would not raise taxes on the hundreds of thousands of families whose annual income is in the millions and, in a few cases, billions of dollars.

Why the GOP defends the wealthy

By David Callahan
The opinions expressed are his own.

With polls showing strong public support for tax hikes on the rich, Republicans should hardly relish a fight with President Obama over “class warfare.” And yet, for weeks, GOP leaders have been bashing the White House for a tax plan that affects just 2 percent of U.S. households and lets the rest of us off the hook.

How is this smart politics?

Maybe it isn’t, but sticking up for the rich is more popular than one might think – and not just in Palm Beach. America is a famously aspirational country and Republicans have long sought to ally themselves with that ethos. If you want to make a pile of money, the GOP is the party for you – or so they say. It vows to clear away barriers to getting rich, like pesky employer healthcare mandates and environmental rules, and let you keep more of your winnings.

Meanwhile, the conservative story goes, all the left cares about is social leveling. Democrats want to punish the successful in order to subsidize the losers, leading us toward a dreary future in which America’s hot shots no longer even make an effort and everyone ends up poorer. As Fox News puts it, Obama favors “takers” over “makers.”

Why the wealthy don’t object to Obama’s “class warfare”

By David Callahan
The opinions expressed are his own. 

Here in the egalitarian paradise of the United States, there is apparently nothing worse than “class warfare” – which is why Republicans are trying to affix this damning label to President Obama’s new plan to raise taxes on the rich. One hitch, though, is that the billionaire Warren Buffett is not alone in his willingness to pay higher taxes. Many other wealthy Americans are also ready to see their taxes go up. The battle over taxes, its turns out, is not just between the rich and everyone else; the upper class itself is divided on this issue. That is good news for Obama, who’ll need all the help he can get to enact deficit reduction that balances spending cuts with new revenue.

Various wealthy Americans have praised the President’s tax plan since it was unveiled Monday. “It’s time for millionaires – like me and the ones in Congress – to step up to the plate and start paying their fair share,” said Guy Saperstein, a wealthy lawyer who is part of a group called Patriotic Millionaires for Fiscal Strength. Dallas Mavericks owner Mark Cuban, not exactly known for his noblesse oblige, chimed in, writing on his blog right after Obama’s speech that paying taxes is the most “patriotic thing you can do.”

Obama’s call for higher taxes on the rich is not new. He pledged repeatedly to raise taxes on high earners during his 2008 run for President – and won the vote of these same Americans, those making over $200,000, by a comfortable margin.

Mindless tax slogans dominate our debate

By Robert Frank
The opinions expressed are his own.

What do the following slogans have in common?

“All taxation is theft.”

“It’s your money and you know how to spend it better than any bureaucrat in Washington.”

“It’s unjust to tax some people more heavily than others.”

“Taxing the rich kills the geese that lay the golden eggs.”

Although each has been repeated so often by conservatives during recent decades as to have acquired an air of settled truth, each is also either clearly false or conveys no useful information. A more troubling shared feature of these slogans is that they are causing serious harm. Their enthusiastic embrace by Tea Party members and large
factions of the Republican Party now threatens to transform the United States economy, once the envy of the world, into an economic backwater.

Let’s consider them in turn.

“All taxation is theft” is easily the most mindless of the batch. Functionally, it’s equivalent to the “It’s your money…” entry, since the ostensible point of each is that meddlesome government officials shouldn’t be allowed to confiscate the hard-won fruits of our own talent and effort. But there isn’t much economic value to confiscate in countries that lack well-defined and enforced systems of property rights and the public infrastructure required for highly developed and specialized markets. None of that could exist unless government could levy mandatory taxes. No informed person would seriously consider living in a society whose government lacked that power—think Somalia, or the Sudan—even apart from the concern that it would quickly be conquered by an army supported by a neighboring country’s mandatory taxation.

from Reuters Money:

Budget wars: The middle class loses big time

President Barack Obama talks about the budget in the White House press briefing room in Washington, April 5, 2011.   REUTERS/Larry Downing Now that federal government shutdown has been averted, it's a good time to examine what's at stake for most of America in the crucial next round of budget talks.

Not doing anything to reduce the size of government debt will be catastrophic. Not much quibble there. But acting hastily and cutting the wrong things can be even more costly to social and economic welfare.

Neither the Republican nor the Democrat's budget plans for 2012 will meet the major challenge of sustaining social programs while cutting the most egregious waste.

from Reuters Money:

Deficit cutting need not be cruel

SPAIN-ECONOMY/Congress needn't be cruel to be kind in cutting the U.S. budget deficit while saving popular programs like Social Security and Medicare.

That's not to say that taxes don't need to rise, deductions pared and giveaways to corporations eliminated. That all needs to be considered, although the recent deficit commission report doesn't do the dirty work in an equitable manner. It places far too much emphasis on paring Social Security benefits, a system that works and won't be in deficit mode for several decades.

There's plenty of pain to go around in the deficit commission's proposal. The most compelling trade-off is based on the idea that lowering personal income-tax rates will achieve some long-term economic stimulus. That thinking hasn't worked in the past and won't work now.

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