Sunday, January 18, 2015

Trolling Democrats and Tax Reform

* Editor's note: First, below are some excerpts from an article at VOX written by Robert H. Frank and posted on January 16, 2015 (which is edited for length). It's about a new concept for taxation. If you have the time, read the entire article.

Inequality is very Wasteful

Fairness clearly matters, but focusing on it presupposes a zero-sum competition between different classes. That's consistent with the conventional view that inequality is good for the rich and bad for the poor, and so the rich should favor it while the poor should oppose it. But the conventional view is wrong. High levels of inequality are bad for the rich, too, and not just because inequality offends norms of fairness.

[Because we fret so much over "relative incomes" and hold "positional concerns"], we spend too much on houses and parties because, as individuals, we have no incentive to take account of how our spending affects others. The tax system offers a simple, unintrusive way to change our incentives. We could abandon the current progressive income tax in favor of a much more steeply progressive consumption tax. Here's how it would work:

People would report their incomes as they do now, and also their annual savings, as many now do for tax-exempt retirement accounts. Their income minus their savings is their annual consumption, and that amount less a large standard deduction would be their taxable consumption. For instance, a family that earned $100,000 and saved $50,000 in a tax year would have annual consumption of $50,000. If the standard deduction was $30,000, the family's taxable consumption would be $20,000.

The tax rate would start out low and would then rise steadily as taxable consumption rises. Under the current income tax, rates can't rise too high without choking off savings and investment. But higher marginal tax rates on consumption actually encourage savings and investment.

Many wealthy think higher taxes would make them less able to get what they want. But what happens when everyone spends less is very different from what happens when an individual spends less. In a society with a progressive consumption tax, the wealthiest drivers might buy a Porsche 911 Turbo for $150,000 rather than a Ferrari F 12 Berlinetta or more than twice that amount. But since everyone would be scaling back, that society's Porsche owners would be just as excited about their cars as Ferrari owners are under the current tax system.

There's another important dimension to the argument: a progressive consumption tax would generate additional revenue that could help pay for better roads. Under the current tax structure, the rich can afford their Ferraris but must drive them on poorly maintained roads. Can anyone doubt that the experience of a Ferrari driver on roads riddled with potholes would be less satisfying than that of a Porsche driver on well maintained roads?

My basic claim, in short, is that a simple change in our tax structure would enable us to put trillions of dollars a year to better uses without requiring painful sacrifices from anyone. On its face, this claim will strike most people as as implausible. Yet my argument in favor of it has few moving parts, and none of the premises on which it rests is controversial in the least. Everyone agrees that most income gains have been going to top earners, which has led them to build bigger houses. No one disputes that, beyond some point, across-the-board increases in mansion size don't make the rich any happier. Nor does anyone dispute that larger houses at the top have shifted the frame of reference that shapes the demands of those just below them, and so on, all the way down the income ladder.

Nor is there any dispute that the resulting financial squeeze on middle-income families has not only made it more difficult for those families to pay their bills, it has also made it more difficult for governments to raise revenue. And that, in turn, has led to a decline in the quality of infrastructure and public services. So despite their higher incomes, the rich are now worse off on balance. Their higher spending on cars and houses has simply raised the bar that defines adequate in those categories, while the corresponding decline in the quality of public goods has had significant negative impact.

The encouraging news is that the profoundly wasteful spending patterns caused by rising income inequality could easily be changed. But that's unlikely to happen until our political conversation begins to focus on inequality's practical consequences.

* Editor's note: Yes, it's only a fantasy. Progressives who caucus with the Democrats might go for it, but there's no way that Moderate / Third Way / Blue Dog Democrats (or any Republican) would ever reform the current tax code.

Obama and the Trolling Democrats are Talking Shit

Obama to Propose Tax Hikes on Wealthy, Breaks for Middle Class (January 17, 2015) --- "Under the plan, the capital gains tax would be raised from its current level of 23.8 percent up to 28. The plan would also strip a tax break, known as a "step-up," that allows heirs to avoid capital gains taxes on large inheritances. In addition, the plan would institute a new tax on the biggest financial institutions, basing the fee on liabilities in order to discourage risky borrowing. The administration says the fee would hit the roughly 100 banks that have assets of $50 billion or more. The president's plan would use revenues from those tax code changes to finance credits aimed at the middle class, officials said. That includes extending the earned income tax credits to families without children, which would benefit an estimated 13 million low-income workers, while also tripling the maximum tax credits for child care in low- and middle-income homes."

* Editor's note: There is no way in Hell the GOP Congress would pass a law like this, so Obama and the Democrats are talking shit. This article at the Nation about "trolling Democrats" (written prior to the Democrat's recent tax proposal) explains why:

"The Democrats are seizing on the opportunity to be progressive at a moment when it’s cheap and easy; being out of power (or in Obama’s case, term-limited) they won’t have to pay the price in campaign dollars or blowback that would come from pursuing these policies in an environment in which they could actually become law. After all, when Democrats controlled all of Congress and the presidency, it’s not like they made a move on paid sick leave or a financial transactions tax or any of a host of other ideas that would have helped out the middle class ... Now they can stoke the fire and garner the goodwill of the left, without having to deal with the downside."

* Editor's note: Most American voters (from liberals to conservatives) want a fairer tax code, but neither the trolling Democrats nor the cruel Republicans will ever do anything to change it. Our tax code has been rigged for the very rich ever since the first Gilded Age.

1 comment:

  1. LA Times: "The capital gains preference is gold, pure gold."

    The capital gains preference is uncapped. The larger the gain one reports, the greater the tax break — that differential between the 23.8% top cap gains rate and the 39.6% top marginal rate is gold, pure gold.

    There's another aspect that makes the capital gains preference entirely too profitable. Taxpayers can defer it indefinitely simply by deferring the sale of taxable assets [and] put off your capital gains liability for your entire life.

    Then comes the biggest loophole of all, the so-called trust fund loophole. This allows capital assets to be passed on to one's heirs at their appreciated value [and] the accumulated capital gains tax liability is utterly extinguished. Hundreds of billions of dollars escape capital gains taxation each year because of the 'stepped-up' basis loophole that lets the wealthy pass appreciated assets onto [job creators, such as Paris Hilton and Kim kardashian.]

    Sen. Orrin Hatch (R-Utah) claimed eliminating these all tax loopholes would hurt small businesses.

    But the Treasury estimates that 99% of the revenue raised by boosting the capital gains tax rate and closing the inheritance loophole would be paid by the top 1% — and four-fifths of it would come from the richest tenth of 1%.