Happy Tax Day

First, let me apologize for the unusually long hiatus from the blog. I’m hoping to get back in to the swing of things here, so I’ll start off a little slow with a gentle reminder on the subject of taxes. Namely, people tend to be generally confused — sometimes willfully — by the term “income tax.” Consider this garbage from Scott Hodge, President of the Tax Foundation:

But that is no longer the case for a growing class of Americans for whom the price of civilized society has been reduced to zero because the tax code’s generous credits and deductions completely erase their income tax liability.

And for many of these nonpayers, civilized society actually pays them a hefty refund, which is not much different from a welfare check except that it’s run through the tax code instead of through the Department of Health and Human Services.

It’s true that a segment of the population pays no federal income tax, which is the federal tax applied to working income. Of course, this ignores completely the contributions to civil society made by people in lower income brackets through other payroll taxes like those for Medicare, Social Security, State, City and excise and sales taxes — all of which are broadly regressive since they are applied at a more or less fixed rate. When you look at all the full taxation spectrum, things are hardly so dire for those who pay income taxes.

This myth that a large swathe of Americans pay no taxes is absurd, but is also a byproduct of our needlessly complicated patchwork tax system.

Higher Taxes Better than Forced Charity

Kevin Drum points to a report in the New York Times that Goldman Sachs is weighing an increase in charitable giving requirements for its senior staff. Kevin poo-poos it:

I think it’s great if corporations support charities or set up charitable foundations of their own. It’s also great if corporations urge their employees to give to charity. But that’s as far as it goes. Charitable giving isn’t a smokescreen for indefensible behavior, and in any case it’s not charity if you’re forced to do it at the point of a gun. Bankers who make millions ought to feel obligated to give some back to the community, but if they don’t, that’s their business, not Goldman’s.

While I think Kevin is definitely right about the limited PR upside here, I think he’s wrong that “it’s not charity if you’re forced to do it at the point of a gun.” That is, I don’t think anyone in need really cares whether or not the food, shelter, or research money or whatever it is that benefits them comes from the end of a gun or not.

Anyway, anyone who hasn’t been lobotomized knows that’s not really Goldman’s objective here, so the debate as to whether Goldman’s charity is valuable irrespective of it’s intent is sort of moot. Rather, Goldman’s play here is much more of an attempt to “self-regulate” before the government, bowing to common sense and popular outrage, does something about an unsustainable situation. To wit, the issue isn’t just that bankers pay themselves obscene amounts of money, it’s that the pay and incentive structure of the banking industry encourages recklessness behavior that endangers the wider economy while providing dubious societal good.

While greater charitable giving requirements would provide some marginal good on the charitable perspective,  they wouldn’t do anything to address the incentive problem. Luckily for us — but not as much for banking executive —  we already have in a place a system called the “tax code” that can helps push income distribution in a socially beneficial way while also shaping incentive structures.

The situation that Goldman fears are regulations on payment structures that reduce incentives for reckless investment and changes to the tax code that significantly increase the marginal tax rates on the upper extremes of the income spectrum to something closer to our historical norm.

Taken together, these would policies would both limit behavior that endangers the economy and help ensure that at least some of banking profits are funneled into a socially beneficial direction.

(By the way, the most likely outcome of this policy is that Goldman just pays  even more to account for the difference of the charity requirement. After all, the banking industry has notoriously argued it must maintain absurd bonuses to preserve its talent. If Goldman starts lowering its real compensation levels, how can it retain talent?)

Inequality And You

Via Ezra Klein, the Center for Budget and Policy Priorities is doing a series on the growing problem of inequality. The results are truly arresting.

This is about as tangible an example as you can get of the phrase “it takes money to make money,” but of course, it’s also a reflection of policy choices and a culture that has conflated capitalism with morality. And as Ezra notes, the fact that the incomes of the top 1 percent have grown 256 percent really doesn’t even do the data service.

It’s easier, after all, to get large percentage changes on small absolute numbers. Increasing the salary of someone who makes $25,000 by 100% only requires another $25,000. If you make $725,000, however, a $25,000 raise is peanuts. It’s three percent.

This chart below illustrates the trend in dollar terms.

A lot of liberals immediately react to inequality as a moral quandry, in the sense that policy goals should be aligned to promote fairness. Of course, there is an obvious validity to this argument, but it’s also worth noting that in a system  where merely running for Senate costs tens of millions, growing gaps in inequality grossly skew political representation to favor the interests of the rich. And as inequality grows, so too will the political power of the mega wealthy and we’ll continue to see more and more narrow and parochial interest groups exert tremendous influence on policy matters that affect everyone (legislation to stave off catastrophic climate change comes to mind). Now, I don’t really envision a scenario where if the scope of economic growth isn’t widened, we’ll find ourselves enserfed to oil tycoons and bank executives, but we will continue to see our democracy increasingly distorted to serve the needs of a select few.

On Balance

Henry has a good post on how the need for health care reform overshadows the need to reign in long term deficit projections (which even David Brooks acknowledges the Obama Administration is concerned about). Henry was responding to an article by Jim Manzi arguing that deficit spurred inflation and higher expected tax rates will serve to inhibit future innovation. There are a number of ways in which to respond to this, but I’ll just make two quick points.

First, the “pot of gold” driving innovation that Manzi mentions is entirely relative. While it’s true that those in the highest income bracket stand to have their taxes raised (to levels, I’ll add, considerably lower than those during the post-War growth period), it’s also true that those earners will still be the richest people in the country, and roughly by extension, the world. What this means is that goods and services targeting the upper echelon of earners will be forced to lower price to accommodate the slightly less insanely wealthy. Therefore, there will always be incentive to be richer than everyone else.

Second, there’s a broader discussion to be had about whether or not it should be the government’s role to focus primarily on shaping policy around the proclivities of businesses and entrepreneurs. Obviously, it would do America harm if incentives were so stacked against entrepreneurship that people simply stopped innovating in this country, but I don’t think anyone’s talking about that. Rather, the Obama Administration is seeking a corrective for the past several decades in which business priorities clearly exceeded the needs of the population at large. Businesses have different needs than people, and it’s taken for granted far too quickly that the government should obviously be in the business of creating incentives rather than ensuring the basic needs of its people. For an obvious example, consider global warming.

Like I said above, there are more ways to respond to this argument, but I’ll leave it at that for now.

UPDATE: One third point would be that theoretically, this “expected tax increase” that comes with deficits should apply to all deficit increasing activities. Strangely, not many conservatives advanced this argument during the debate about the Bush tax cuts.

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Don’t Stop Me Now

While we’re on the subject of taxes, it’s common to hear right wing carping about how the rich, like Atlas, shoulder the country’s tax-burden. For example, Robert Samuelson’s utterly delusional column from the weekend alleging the poor have unjustly outsized political influence (not true, surprisingly enough) breathlessly claims, “Sure, the wealthy extract privileges from government, but mainly they’re its servants. The richest 1 percent of Americans pay 28 percent of federal taxes, says the Congressional Budget Office.”

True enough, but this fails to mention that the top 1 percent is also enjoys roughly 19 percent of the national income. Ezra Klein explains:

In 1979, the top one percent brought home 9.3 percent of the national income — which is to say, for every $100 paid in wages, $9.30 went to the top one percent — and paid 15.4 percent of federal taxes. The ratio of tax share to income share was 1.65. Their tax burden was 1.65 times larger than their income share. In 2005, they brought home 18.1 percent of the national income — it had doubled — and paid 27.6 percent of federal taxes. The ration was 1.52. In other words, it has gone down. The rich pay less taxes as a share of their income than they did in the 1970s, and they control much more of the nation’s wealth.

So yes, it’s true that the top 1 percent pays 28 percent of federal taxes, but it’s also true that they pay less than middle class citizens in terms of total income even as their tax burden has gone down relative to the income they earn.

Oh woe is the plight of the top 1 percent of earners!

The Spread of Socialism

There’s been a lot of use of the word “socialism” to describe Obama’s tax policy, but as Matt Yglesias notes, it’s a pretty unremarkable position for a Democrat to hold.

Conservatives have really convinced themselves — or at least a lot of them have — that bog-standard left-of-center bromides about progressive taxation and broadly shared prosperity are, in fact, a form of wild-eyed radicalism.

Nevertheless, you can see what shape future conservative resistance will take:

Registered republican in San Francisco, 26. Imagine that. Rare breed.

What I don’t see discussed too much and what confuses me, is like a lot of people, the spread the wealth comment and Obama’s proposals are very troubling.

What scares me the most is what is going unquestioned, “I’m going to give 95% of America a tax cut”. Again, if, and I’m not sure what the real perecentage [sic] is, but if 25% of America already isn’t paying taxes, or if it’s 40%, then 40% of America is already paying taxes, then how are their taxes getting cut? For me, that passes a progressive tax system (which I don’t believe in anyways but can definitely be argued intelligently that it makes sense and is good for society as a whole) and moves into “redistirubtion of welath [sic]”

That’s where for me, spreading the wealth takes a different meaning, more than progressivism. It moves into the gov’t deciding on who gets some money, and why do they deserve this money? As someone who works hard, it’s a concept I just don’t understand, giving people “tax cuts” that don’t pay taxes.

But, look, if you actually believe that a progressive tax system “can definitely be argued intelligently”, then this argument is just stupid. No matter how much Republicans want to believe that those exempt from Federal income tax don’t actually pay taxes, you simply can’t change the fact they do. According to a report by the non-partisan Tax Policy Center, low-income Americans “pay federal payroll and excise taxes as well as state and local taxes.” What’s more, payroll taxes like Social Security and Medicare are actually regressive in nature as the “average tax rate falls as income rises.” Finally, excise taxes compromise a disproportionately higher amount of low-income workers’ wages than those of the wealthy. To suggest then, that 40 percent of Americans don’t pay taxes is just moronic.

What Might You Save?

There’s a cool widget on Obama’s website to show you how much you’d save in taxes under the Obama plan after you enter in some basic information. According the calculator, I’d save $500 under Obama’s plan and $0 under McCain’s. For those wondering, If you enter some rich folk data, the calculator meekly understates that “you will probably not get a tax cut under the Obama-Biden plan.”