Ezra Klein

The Politico reports that "Senate Budget Committee Chairman Kent Conrad predicted that the budget pressures will force action on a major overhaul of the current tax system by 2010 or 2011." You don't often hear that, so it's worth unpacking for a second.

Len Burman, Director of the Tax Policy Center, recently released a report that laid this thinking out well. There are, he argued, a handful of "action-forcing" events that are going to focus the political mind on the inane way we fund our government. The most important of these is the Alternative Minimum Tax. The AMT is a sort of parallel tax track that ensures the rich pay at least some taxes. It wipes out deductions and closes shelters. If you qualify, and it's more than your tax burden under the normal system, you pay it instead.

The problem is that it's not indexed to inflation. Every year, more and more taxpayers are exposed to it. And every year, Congress passes a temporary fix to extinguish the potential outcry. But if they every stop passing those fixes, the sudden transition in the tax system would be violent. Absent another change in the law, 55 million Americans will be paying the AMT by 2018.

The fix to that seems easy enough: Congress should just reform the AMT. But this is Congress. Nothing is ever easy enough.

Continue reading "WHY WE MAY NEED TAX REFORM." »

Posted by Ezra Klein at 3:15 PM | Permalink | Comments (12)

Some useful context on tax rates from The Washington Post:

As thousands of anti-tax protesters rallied across the nation yesterday and the president promised tax cuts for most, new data showed that the federal income tax burden is already hovering near its lowest level in three decades for all but the wealthiest Americans.

The nonpartisan Congressional Budget Office estimates that the average family forked over barely 9 percent of its earnings to the IRS in 2006, the most recent year for which information is available. The effective tax rate hit its all-time low in 2003 and has since crept up only slightly.

The piece goes on to mention this Gallup graph that made the rounds yesterday showing that people are pretty comfortable with their current income tax burden:

I was curious to see how closely those attitudes matched actual changes in the income tax. The graph goes back to the 60s while the CBO data goes back to 1979, but here it is anyway:

Draw a line and the trends follow: Taxes rates drift down and so too do the number of poll respondents who think their burden is "too high." You see a small jump in tax unhappiness during the Clinton years which also coincided with a small bump in tax rates for upper-income folks. But worth noting is that this graph really doesn't coincide with electoral outcomes. In 1992, people are very happy with their tax burden but George H.W. Bush loses. In 1996, Clinton gets reelected. In 2000, tax unhappiness doesn't deprive Gore of the popular vote. In 2008, everyone loves their low tax burden but John McCain doesn't win the election. People don't like paying higher taxes, but it's unclear whether it actually matters on the electoral margin.

Posted by Ezra Klein at 12:11 PM | Permalink | Comments (2)

I like the first sentence of the Center on Budget and Policy Priorities annual "Where Do Our Federal Tax Dollars Go?" report. "The federal government collects taxes in order to finance various public services." That's it. That's what taxes are. They're not "money the government takes from you," but money the government collects in order to fund the services and social priorities that we, as a people, have chosen and preserved through our political system. You might not like paying taxes. But that's not the government's fault. It's your neighbors fault. The government is just doing what your neighbors have told it to do.

CBPP, meanwhile, has a nice graphic clarifying how the government spends that money:

Over on Twitter, there've been a lot of tax-related jokes at the Teabaggers' expense. LizKulic says, "I pay taxes to fund medical research so fewer Americans die from potentially curable diseases." Matt Yglesias snarks, "My taxes pay for pirate-killing snipers." I noted the smoothly paved roads I biked over this morning. But at the end of the day, the graphic above shows what our taxes pay for: National defense, Social Security, Medicare, Medicaid, and so on. if you want to pay less in taxes than you have to want to receive less in those things and convince your fellow voters to demand the same. Taxes aren't a mystery and they're not a punishment. They're the price we pay for the things we've directed our government to buy.

Posted by Ezra Klein at 10:33 AM | Permalink | Comments (14)

Will Saletan has a weirdly phrased column on soda taxes that seems to imply some trickery in a fairly straightforward policy proposal. The idea behind soda taxes -- or similar taxes on harmful goods -- is that they raise revenue (good!) while discouraging something we want less of (also good!). This is in contrast to taxes that, say, raise revenue (good!) while discouraging work (income taxes) or the ability to buy toiletries (sales taxes).

So why soda? Well, one thing about the health care system: It doesn't make you all that much healthier. Estimates are that only about 10-15 percent of amenable mortality -- the fancy term for preventable deaths -- have anything to do with health care. The rest is nutrition and exercise and environment and stress and genes and much more. Public health types will tell you that taxing and scorning cigarettes has done more to make people healthier than anything that's gone on inside the walls of a hospital.

There's not a lot of disagreement that sugared soda makes you fat. The literature is pretty clear. The finding is pretty intuitive. Nor is there a lot of argument that we need to find some way of reducing diabetes and obesity lest our health system collapse under the weight of the costs. And nor is there a lot of disagreement over the fact that the government needs more revenue. So the question, given all that, is why it's better to tax something like work, which we want more of, rather than soda consumption, which we want less of. The fact that part of those taxes on work will go towards preventive health programs and chronic disease spending that will be less effective than just making soda pricier only further underscores the question.

Posted by Ezra Klein at 10:00 AM | Permalink | Comments (38)

Replying to my earlier thread on state and local tax rates, commenter Skwang asked, "Would it be possible to see a similar chart for some other OECD countries? Such as the UK, Canada, and (everyone's favorite country to compare to) France?"

Sort of! I don't have the data to make the exact comparisons, but a recent OECD release did have information on the share of market income held, and share of federal taxes paid, by the top 10 percent in various developed nations. The following graph shows the comparison:

You'll notice a couple things here: The first is that the United States has the most progressive federal tax system of any country on the chart. Indeed, in the OECD, only Ireland is more progressive than we are. That might change if state and local taxes were added into the mix, but I don't have the data to do that myself.

The second striking trend helps explain the first: The top decile accounts for a much greater share of the national income in the U.S. than in any other nation. Looking at this graph, the progressivity of the tax system appears tightly related to the inequality present in the country. Which isn't really a surprise: If the rich have all the money, then who else are you going to tax?

What you don't see in this graph is the "spending" side of the equation, which in Europe is rather more progressive than it is in the United States. Put simply, the middle class and the poor get a lot more for their tax dollars than they do here. It's thus not necessarily surprising that they're somewhat more willing to contribute them.

Robert Waldmann has some related observations. He argues, among other things, that Europe's regressive tax structures help explain the slow growth of recent years. I'm not terribly familiar with that argument, though I'd be curious to know how it accounts for the Nordic countries, which have, in recent years, seen relatively little tax inequality and extremely impressive growth.

Posted by Ezra Klein at 5:15 PM | Permalink | Comments (11)

So far, we've focused on federal tax rates. But there are also state and local taxes. And they tend to be much more regressive. And Catherine Rampell points out that the good folks at Citizens for Tax Justice have tallied up the burdens and produced this nice table:

Which allowed me, in turn, to produce this graph showing the relative progressivity and regressivity of the two tax burdens.

Federal taxes go up as you get richer. State and local taxes go down. That's not a surprise. State and local taxes, among other things, tend to be focused on sales taxes, and folks with less money spend a greater percentage of their income.

The upshot of all this is that when you take state and local taxes into account, the "share" of total taxes matches the "share" of total income pretty closely. The CTJ people have a graph on this:

That's rather different than the distribution you get when you're only looking at federal taxes. If you indeed instituted the calls to flatten out the federal tax distribution, the influence of state and local taxes would leave you with an incredibly regressive tax structure, not a slightly less progressive tax structure. Which is something to keep in mind next time you read a Wall Street Journal columnist attacking the soak-the-rich qualities of the federal income tax system.

Posted by Ezra Klein at 12:35 PM | Permalink | Comments (24)

Imagine a very tiny country. Very tiny. Five people. Four of them make $100 a year. One of them makes $1,000 a year. Tinyville, however, has a regressive tax code. The four poorest are taxed at 30 percent of their incomes. The richest is taxed at 20 percent. Here, essentially, is the taxation scheme in Tinyville:

The single richest resident thus accounts for a startling 62 percent of the country's revenues. But he pays a lower rate than his countrymen. Which gets to an issue that came up in comments yesterday: How do you assess tax fairness?

The metric I used was effective tax rate. Commenter JT insisted that that was bunk. "What is a comparison of share of income with effective federal tax rate supposed to mean?" He asked. "The relevant tax statistic with respect to SHARE OF INCOME is SHARE OF TAXES, not effective tax rate."

You often hear the term "tax burden." Not tax share, but "burden." It's a useful way of thinking about it: "Burden" is a relative experience. A strong person carrying a 50 pound bag may feel less burdened than a weak person carrying a 20 pound bag. Taxes are similar: Progressive taxation is based, in part, on the idea that the rich should pay more, but also on the idea that they can pay more.

Here's how that works out in real life: The average after-tax income of the average person in the middle income quintile is $52,100. That's down from about $60,700 after an effective federal tax rate of 14.2 percent. In the top quintile, the after-tax income is $184,400, down from $248,400 after a 25.8 percent effective federal tax rate. The rich person certainly pays more, both in absolute terms and as a share of income. But is their burden greater than the middle-income taxpayer left with $52,100? It's hard for me to see how.

In any case, here's an updated graph of tax rates. I've added share of taxes to the mix. But I've also added share of after-tax income to better illustrate the real-world hit different income quintiles are taking. As before, all data comes from the CBO.

And be warned: This isn't even the last tax graph I'll post today. You folks are so lucky to read this blog!

Posted by Ezra Klein at 10:30 AM | Permalink | Comments (29)

Picture an upside-down pyramid with its narrow tip at the bottom and its base on top. The only way the pyramid can stand is by spinning fast enough or by having a wide enough tip so it won't fall down. The federal version of this spinning top is the tax code; the government collects its money almost entirely from the people at the narrow tip and then gives it to the people at the wider side. So long as the pyramid spins, the system can work. If it slows down enough, it falls.

That's Ari Fleischer, the president of Ari Fleischer Communications, doing some communicating in today's Wall Street Journal. The op-ed is, for the WSJ, something of a genre piece: The poor don't pay any income taxes. The rich pay too many. "A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- pay 72.4% of the nation's income taxes. They're the tip of the triangle that's supporting virtually everyone and everything. Their burden keeps getting heavier."

Income taxes do tilt upward. But they're the progressive bit of the federal tax wedge. Other federal taxes, like the payroll tax and the excise tax, are not progressive. (And we're not even going to get into state income, which are frequently regressive) That's why CBO calculates something called the "effective federal tax rate." The EFTR is simply a households’ federal tax liability divided by its income. The four taxes that are included in the measure are the income, payroll, excise, and corporate taxes. And they give us a pretty good idea of whether the rich really are overpaying. The following graph matches each income quintile's effective federal tax rate with its percentage of the national income. See if you think the rich are getting a bad deal:

When you look at percentage of total tax liabilities, the rich do in fact bear a heavier burden. But it's because they have so much more money. They are not bearing a heavier burden as a percentage of their incomes. They're bearing it in relation to everyone else's incomes. Indeed, it's only because the sheer levels of income inequality in this country are frankly unintuitive that Fleischer can even write this sort of dreck. People hear that the top 20 percent pay almost 70 percent of the country's income taxes and nod their head. That's unfair! But it mainly seems unfair because people don't know the top 20 percent accounts for almost 60 percent of the national income.

Posted by Ezra Klein at 5:20 PM | Permalink | Comments (93)

[Obama's] agenda is a bold one in many ways. Yet his tax code would still look more kindly on wealth than Nixon’s, Kennedy’s, Eisenhower’s or that of any other president from F.D.R. to Carter. And only part of the reason for this is widely understood.

It’s well known that tax rates on top incomes used to be far higher than they are today. The top marginal rate hovered around 90 percent in the 1940s, ’50s and early ’60s. Reagan ultimately reduced it to 28 percent, and it is now 35 percent. Obama would raise it to 39.6 percent, where it was under Bill Clinton.

What’s much less known is that those old confiscatory rates were not as sweeping as they sound. They applied to only the richest of the rich, because yesterday’s tax code, unlike today’s, had separate marginal tax rates for the truly wealthy and the merely affluent. For a married couple in 1960, for example, the 38 percent tax bracket started at $20,000, which is about $145,000 in today’s terms. The top bracket of 91 percent began at $400,000, which is the equivalent of nearly $3 million now. Some of the old brackets are truly stunning: in 1935, Franklin D. Roosevelt raised the top rate to 79 percent, from 63 percent, and raised the income level that qualified for that rate to $5 million (about $75 million today) from $1 million. As the economist Bruce Bartlett has noted, that 79 percent rate apparently applied to only one person in the entire country, John D. Rockefeller.

Today, by contrast, the very well off and the superwealthy are lumped together. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change is especially striking, because there is so much more income at the top of the distribution now than there was in the past. Today a tax rate for the very top earners would apply to a far larger portion of the nation’s income than it would have years ago.

All that said, the concept of taxation has become completely unmoored from the social services and societal priorities it purchases. Taxes are spoken of almost as a "wealth penalty" of sorts: Politicians promise that the middle class and the upper middle class will be untouched. Taxes are a bad thing. The middle class doesn't deserve this bad thing. The rich, however, sort of do deserve it. They're rich.

That's fine so far as it goes, but it only goes so far. You could easily imagine a somewhat more regressive tax structure that leads to a more progressive country. That's the case in Europe where more regressive taxes fund a much more progressive welfare state. The middle class pays more in health care taxes but gets much more in services.

That "gets" part is crucial. And it gestures towards the problem with our debate over taxation: It's all about what we pay and never about what we get. Nobody wants to give money to Wal-Mart. But many people would like to give money to Wal-Mart in exchange for a large jar of pickles. Similarly, no one wants to give money to the federal government. But it's possible that many people would prefer to give $5,000 to the government rather than $7,000 to a private health insurer. Instead, we talk about rolling back the Bush tax cuts and changing the itemized deduction and the importance of never raising taxes on 95 percent of Americans. It comes off as taxation for taxation's sake, and politicians are reduced to targeting the rich because they're simply aren't that many of them.

Posted by Ezra Klein at 10:32 AM | Permalink | Comments (18)

Well, sort of. The Senate narrowly passed something called the "Deficit Neutral Reserve Fund for Estate Tax Relief." This did not reform the estate tax. Rather, it reserved the right to reform the estate tax at some later date. It's a budget gimmick, not a bill.

Reserve funds are odd birds. At the beginning of each year Congress passes a budget. The budget funds the various committees. A proposal that raises spending or cuts taxes outside the limits defined by the budget can be killed by a Senate point of order. A reserve fund basically reserves your right to lift your spending ceiling or lower your revenue floor for a certain purpose. A deficit-neutral reserve fund reserves your right to lift spending or lower your revenue floor in a way that doesn't harm the deficit.

That's what Kyl and Lincoln passed. If they can find hundreds of billions to fund a cut in the estate tax, they can then hold a vote to cut the estate tax. If they can't, they can't. More interesting, they have essentially admitted that they will need to fund it through cuts to entitlements. As Jim Horney, a budget expert at the Center for Budget and Policy Priorities, explained to me, "if you pay for a tax cut with another tax increase you haven't reduced revenues in net and you don't need a deficit-neutral reserve fund." To pass the estate tax reform, in other words, they'd have to cut hundreds of billions in spending from currently existing programs. Unless they're planning to chop apart the Pentagon, that means cutting entitlements. That means this isn't happening.

This was, in other words, a cost-free vote. Deficit-neutral reserve funds also serve a non-budgetary purpose: They allow you to insert a priority in the budget without actually passing or paying for it. Blanche Lincoln can now go to her constituents and explain that she built estate tax relief into the budget. That's true even as no one actually experiences any estate tax relief and the Senate does nothing to actually fund the policy. This proposal, in other words, was evidence that Blanche Lincoln, Jon Kyl, and 49 of their colleagues thought it extremely important to be on record supporting a $440 billion tax cut for the wealthy, not that they're actually going to pass the tax cut.

Posted by Ezra Klein at 2:29 PM | Permalink | Comments (16)

Fair enough. But then why vote -- on the very same day -- for the Kyl-Lincoln bill lowering the tax rate on estates over $7 million from 45 percent to 35 percent and reducing charitable giving? That's $250 billion more debt over 10 years. It's in direct conflict with Bayh's statement on the budget. It makes him look insincere.

The obvious answer is that it's important to wealthy contributors in his state. But Bayh doesn't face reelection until 2014. No one will remember -- much less contribute -- based on a vote in 2009. Nor is there a presidential run in his near future. And I simply refuse to believe that Bayh thinks it an important point of principle -- more important than debt reduction or health care -- that extremely wealthy Americans pay 35 percent, rather than 45 percent, on their estates.

Literally the only compelling justification I can come up with is self-interest: Bayh has a net worth estimated between $3 million and $14 million. That's the sort of thing that sensitizes you to the downsides of the estate tax real quick. But even that's not totally satisfying. Calls to Bayh's office went unreturned. And so I wonder.

Correction: Bayh is up in 2010, not 2014 as I mistakenly thought. It's not a particularly contested reelection. He has no serious challengers, a massive advantage in fundraising ($10,000,000 on hand, and that was in 2008, before he'd really started fundraising for reelection), full name recognition, solid approval ratings, and is running in a state that Barack Obama won. So I don't think it's plausible to argue that supporting Kyl-Lincoln is crucial to his reelection. But he might.

Posted by Ezra Klein at 5:10 PM | Permalink | Comments (29)

Speaking of crummy tax numbers, the Center for Budget and Policy Priorities catches the Tax Freedom folks touting the 20.2 percent "average federal tax rate." That's all well and good, except this is one of those times when average" means "less than 20 percent of the population." As the CBPP points out, the CBO data shows that more than 80 percent of taxpayers pay less than 20.2 percent. As a general rule, anytime someone uses an "average" when their data would be better expressed in terms of "median," it's time to get suspicious.

Posted by Ezra Klein at 5:08 PM | Permalink | Comments (7)

Rick Hertzberg notices some Republicans calling for a payroll tax cut amidst the stimulus and proclaims it a Good Idea. It is a good idea! And I like the endgame, too:

Liberals have been reticent, too. The payroll tax now provides a third of federal revenues. And, because it nominally funds Social Security and Medicare, some liberals regard its continuance as essential to the survival of those programs. That’s almost certainly wrong. Public pensions and medical care for the aged have become fixed, integral parts of American life. Their political support no longer depends on analogizing them to private insurance. Besides, the aging of the population, the collapse of defined-benefit private pensions, the volatility of 401(k)s, and pricey advances in medical technology mean that, no matter what efficiencies may be achieved, Social Security and Medicare will—and should—grow. Holding them hostage to ever-rising, job-killing payroll taxes is perverse.

If the economic crisis necessitates a second stimulus—and it probably will—then a payroll-tax holiday deserves a look. But it’s only half a good idea. A whole good idea would be to make a payroll-tax holiday the first step in an orderly transition to scrapping the payroll tax altogether and replacing the lost revenue with a package of levies on things that, unlike jobs, we want less rather than more of—things like pollution, carbon emissions, oil imports, inefficient use of energy and natural resources, and excessive consumption. The net tax burden on the economy would be unchanged, but the shift in relative price signals would nudge investment from resource-intensive enterprises toward labor-intensive ones. This wouldn’t be just a tax adjustment. It would be an environmental program, an anti-global-warming program, a youth-employment (and anti-crime) program, and an energy program.

If we had a serious public sphere in which legislators actually wanted to solve problems and were genuinely committed to the public policy ideas they claim to support rather than the industries that fund their reelection, this is the sort of discussion we'd see.

Posted by Ezra Klein at 10:45 AM | Permalink | Comments (16)

Megan McArdle on the public discussion about tax rates:

I also note, just as an aside, that the definition of "very rich" seems increasingly to be set at "just above the level a top-notch journalist in a two-earner couple could be expected to pull down".

Politics is a game with lots of rich people. Journalism is a game with lots of comparatively rich people. People in those professions know many other rich people. As you'd expect, the definition of "rich" has a tendency to shift in those circumstances: Most people tend to understand the word "rich" as "has a lot of money compared to everyone you know" rather than "has a lot of money compared to the median American." This was on particular display during the campaign, when ABC's Charlie Gibson called $200,000 middle class and John McCain defined "rich" as a yearly income of $5,000,000. In response, I made this graph, showing where the various definitions fell amidst the actual income distribution.

Megan also quotes David Leonhardt arguing that "today's tax code makes no distinction between income above $373,000 and income above, say, $5 million. Both are taxed at 35 percent." She argues that Leonhardt doesn't go far enough. "I don't see why we have tax brackets," she says. "They're inefficient, and a lot of them have pernicious marginal effects on those near the ceiling. Why not a continuously scaling function from negative (EITC) to some maximum? These days, people use either printed tax tables or tax software to prepare their taxes; this shouldn't present an undue hardship."

The tax rates, she continues, might engender controversy, "but the basic concept seems bipartisan." I agree.

Posted by Ezra Klein at 4:16 PM | Permalink | Comments (17)

Stephen Laniel comes up with a nice find: An old Larry Summers paper tentatively advocating a small tax on securities transactions. Co-authored with Victoria Summers, it's called When Financial Markets Work Too Well: A Cautious Case For a Securities Transactions Tax," and like most arguments for a securities tax, is pretty convincing. The abstract:

Unlike most major industrialized nations, the United States does not impose an excise tax on securities transactions. This article examines the desirability and feasibility of implementing a U.S. Securities Transfer Excise Tax (STET) directed at curbing excesses associated with short-term speculation and at raising revenue. We conclude that strong economic efficiency arguments can be made in support of a STET that throws "sand into the gears," in James Tobin's (1982) phrase, of our excessively well-functioning financial markets. Such a tax would have the beneficial effects of curbing instability introduced by speculation, reducing the diversion of resources into the financial sector of the economy, and lengthening the horizons of corporate managers. The efficiency benefits derived from curbing speculation are likely to exceed any costs of reduced liquidity or increased costs of capital that come from taxing financial transactions more heavily. The examples of Japan and the United Kingdom suggest that a STET is administratively feasible and can be implemented without crippling the competitiveness of U.S. financial markets. A STET at a .5% rate could raise revenues of at least $10 billion annually.

Summers, of course, hasn't said anything about this in public. I wonder if he still supports it. Someone should ask him.

Posted by Ezra Klein at 4:12 PM | Permalink | Comments (4)

The other day, I was thinking that this blog needs more itemized deduction commentary. So! Obama's budget funds health care, in part, by limiting the tax deductions for charitable contributions made by the top 1.2 percent of taxpayers. Not eliminating the deduction, mind you. Limiting it. Before Obama's law, a dollar sent by a multimillionaire to his church or alma mater would knock 35 cents of his tax bill. Under Obamas's plan, it will save him 28 cents. (The deduction for the average taxpayer -- 10-15 cents depending on their bracket -- will not change.)

It's as Huey Long, or maybe Will Rogers, said: When socialism comes to America, it will be wrapped in a small reduction on the marginal tax offset the wealthy can receive from charitable giving.

The attacks on the plan have been predictable enough. This "raises the cost of charitable giving," says David Brooks. "It punishes civic activism." The defenses have argued the opposite: Nah uh! CBPP and others have earnestly run the numbers and explained that contributions would decline "only by an estimated 1.3 percent" and this would only affect "1.2 percent of U.S. households." Italics theirs. And it's probably all true.

But go back to Brooks' original point: This doesn't "raise the cost of charitable giving." It lessens the tax break that can be claimed in its aftermath. This doesn't "punish civic activism." It slightly reduces the degree to which the federal government subsidizes it. Does Brooks really want to hang the vibrancy of America's charitable culture on government tax policy rather than deeply rooted values or the lived experiences of Churchgoing Compassion Exurbanite Man or something? That's a level of esteem for the wise central planner that eludes even me.

Wherever you come down, this is not an argument over the worth of charitable giving. It is an argument over whether the rich should be able to save 35 cents rather than 28 cents on their taxes for every dollar they give to charity, or whether we should have universal health care. You may prioritize the tax break. But it's a question of whether the government subsidy is good, not whether charity is good.

Also: You know who else you should read on this? Mark Schmit. Smart cookie, that one.

Posted by Ezra Klein at 10:22 AM | Permalink | Comments (24)

This wasn't exactly unpredictable, but a group of Senate centrists are beginning to balk at Obama's budget. General grumblings over a big budget probably don't need to be taken seriously. The Senate is the Senate. It likes the quiet life, and gets cranky when asked to work on weekends. But Bayh and Nelson both voice specific complaints about the tax increases. “I have major concerns about trying to raise taxes in the midst of a downturn of the economy,” says Ben Nelson. Bayh agrees. "Before we raise revenue, we first should look to see if there are ways we can cut back on spending."

There are two issues here. The first is an empirical question about taxes. If the majority of Americans are facing a tax decrease, then are "taxes" going up? Revenues might be rising because the rich are paying more. But for most people, taxes are going down. I'd be interested to hear Nelson's answer.

The second is a question of tradeoffs: The tax increases in the budget pay for specific things, health care among them. So it becomes a fairly simple issue of tradeoffs. Does Ben Nelson think universal health care is more or less important than keeping itemized deductions for filers making $250,000 a year at 35 percent rather than 28 percent? Because that's the actual question at hand. No one is attempting to "raise taxes." They're attempting to "raise taxes in order to pay for things." The relevant question, then, is not whether Nelson opposes raising taxes, but whether he opposes raising taxes more or less than he opposes not having the thing the new revenues would pay for.

Posted by Ezra Klein at 1:07 PM | Permalink | Comments (12)

Jon Chait has a nice catch here.

I've seen a lot of dumb news reports in my life, but I'm not sure anything can quite match this one from ABC News. The premise of the report is this: Barack Obama plans to raise taxes on people who make more than $250,000, so the reporter has gone and found people who earn a little more than that sum who plan to decrease their income so that they come in underneath the magic line.

Now, the obvious objection here is that the tax code doesn't work that way. A tax increase affects the marginal dollar that a person gains. That's means only every dollar over $250,000 is taxed at a higher rate. Obama is not proposing a tax system whereby somebody who goes from $249,999 to $250,000 suddenly becomes poorer. Nobody has ever enacted a tax hike like that in the history of the United States.

But let's not just bash bad press coverage. The AP's Stephen Ohlemacher had a very good story on Obama's tax plans. The innovation? It explained how the plan would affect different families differently.

"A typical American family would get a tax cut under President Barack Obama's budget proposal, and their low-income neighbor would fare even better. Their wealthier counterparts, however, would face some steep tax increases, starting in 2011," he wrote. See? Not so hard. And later in the story, we get the numbers:

A typical family of four making $50,000 a year would receive a payment of $40, according to the Deloitte analysis. Before the stimulus package was enacted, that same family would have owed $760 in federal income taxes.

A similar family making $35,000 a year would get a payment of $4,100, an increase of $1,200. The median household income was $50,233 in 2007, according to the Census Bureau.

The stimulus package provided most working couples with a new tax credit of up to $800 for 2009 and 2010 — single filers get up to $400. Obama's budget proposal would make the credit permanent for families making less than $190,000 and individuals making less than $95,000.[...]

a typical family of four making $300,000 a year would see their federal income taxes increase by $1,100, while a similar family making $500,000 would get an $11,300 increase, according to the Deloitte analysis. Single filers with no children would be hit with even bigger tax increases.

That's how it's done.

Posted by Ezra Klein at 3:04 PM | Permalink | Comments (23)

Problem one, he says, is that "the size of the tax benefit is proportional to your debt." As such, "the deduction essentially encourages us to make leveraged bets on the swings of the housing market." The last few years haven't just been a gamble on housing. They've been a government subsidized gamble on housing, which has made the gamble bigger.

Problem two, he says, is that the deduction pushes up prices in constrained markets. Since you can't really build new housing stock in New York, subsidizing purchases just drives up prices. Rather than making housing more affordable, it makes sellers richer.

Problem three, and this is the big one, is that it's wildly regressive. Glaeser nods to new research from James Poterba and Todd Sinai showing that "the tax savings for households earning more than $250,000 is 10 times the tax savings for households earning between $40,000 and $75,000." And, renters, of course, don't get any of the subsidy, but they pay for it by paying higher taxes on other things.

Problem four is that the deduction encourages bigger homes, which are more energy intensive. "If global warming is a serious problem, then the government should be encouraging us to live in smaller, not bigger, dwellings," writes Glaeser.

Problem five is that the deduction doesn't even carry out its stated purpose of encouraging home ownership among those who couldn't otherwise afford it. The deduction is only available to those who itemize their taxes. Low-income folks often don't itemize. And so they don't get the deduction. So rather than encouraging home ownership, it encourages those who would buy a home anyway to buy a bigger home. And renters and low-income home-owners subsidize them.

Glaeser also has a nice policy proposal for this: "Enact legislation now that will gradually decrease the cap on the mortgage principal for which homeowners can deduct interest payments by $100,000 per year over the next seven years until it hits $300,000." Most homeowners would still get the deduction. In 2005, the median home price was $213,900. It may well be lower come next year. And though no one is arguing that this would be an obvious political winner, it's actually well-aligned with the current moment. We've learned, I think, that it's bad policy to encourage bigger bets on bigger mortgages for bigger homes under the idea that housing is always and everywhere a safe and desirable investment. Now we just need to reform the policies that do that.

Posted by Ezra Klein at 10:27 AM | Permalink | Comments (53)

Some surprising news out of the Department of Transportation today as Ray LaHood suggests that the Obama administration is considering taxing people based on how many miles they drive. A vehicle miles traveled tax, as the proposal is often called, has been under consideration in states like Rhode Island and Idaho and has, not surprisingly, proven pretty unpopular. First, it's a tax. Second, it requires the installation of a GPS chip to record miles driven and beam the information to centralized computers. Sorry, did that sound Orwellian? I meant a small transponder that informs the government of your driving habits.

Crap. This is hard to sell.

In the interview with the Associated Press, LaHood set the vmt in opposition to a gasoline tax, which he "firmly opposes," at least during the current recession. There's some logic to that. Gasoline is a very visible, and very unpredictable, cost. Every summer, particularly in recent years, the price of fuel becomes a tier one political issue, in large part because it rises so much from the winter. It's hard to imagine a gasoline tax being sustained. Vehicle miles traveled, by contrast, is both steadier and less visible. The orange line on the following graph is the price of gas while the red line is vmt:

Vehicle miles traveled just has that silky smoothness, you know? Which makes it less galling for taxpayers. It's also got a nice internal logic: LaHood is arguing for the tax in order to fund infrastructure -- and in particular, highway -- construction. The heaviest drivers -- both in terms of frequency and car weight -- exert the heaviest wear-and-tear on the roads. Why shouldn't they pay?

Posted by Ezra Klein at 7:58 AM | Permalink | Comments (50)

Posted by Ezra Klein at 11:54 AM | Permalink | Comments (22)

But would it be a good tax? Taxes do two things: They raise money, and they discourage activity. A tax on gasoline makes people use less gasoline. A tax on cake makes people eat less cake. So the question with a new tax is, at least in part, whether it's discouraging the right sort of thing. But that's rarely asked. And it's even more rarely understood as a benefit. Discouraging bad things is a good thing.

So take the transaction tax. A transaction tax would discourage stock and currency speculation. That's a good thing. It makes it harder to game the stock market based on trading tricks rather than the legitimate pricing of information and risk. That's good. Let's balance the budget on the backs of speculators.

A similar tax has been proposed on e-mail. If you had to pay .01 cents for every e-mail you sent, you'd hardly notice the quarter tacked onto your bill at month's end. But spammers would. Indeed, it would probably cripple their business. Which would mean fewer people are defrauded by spam and less useful e-mail is lost amidst the torrent of junk. Again, it discourages something we want discouraged. So too with the tax on soda in New York. They need revenues, and decided to get them by making it harder to do something people should be doing less of -- getting obese -- rather than making it harder to work. So too with proposed taxes on carbon. Conversely, the payroll tax hits the first $103,000 if income. What it's discouraging -- though the effect is very slight -- is working. That's not good. It may be necessary. But it's not good.

We are going to need more revenues in coming years. So thinking this way about taxes is a good habit. In recent elections, Democrats have bought heavily into a conservative tax paradigm that holds that taxes are too high and too complex and good policy solves those problems. That was as true for Obama's tax proposals as for Bush's. Democrats need to do better. And part of that is thinking more about what you tax, rather than how much you tax.

Related: What does a progressive tax policy look like?

Posted by Ezra Klein at 1:00 PM | Permalink | Comments (22)

Yves Smith has a nice post on the trouble with using tax cuts as your primary source of stimulus. "The problem with tax cuts," she writes, "is they may not be spent." Imagine a tax cut of $400 to a household that makes $120,000, that isn't unable to pay their mortgage but is anxious about the future. Will they spend it? Or save it?

If they save it, then the tax cut was wasted money, at least as far as stimulus goes. This is not an idyll worry. "We saw it, big time, with last summer's tax rebate. Gary Shilling did a detailed look at when the checks got in the hands of taxpayers versus changes in retail spending. He concluded that about 80% of the tax rebate was saved." Yikes. Conversely, the benefit to government spending is that the money gets spent.

There are a couple mitigating factors here. The first is that the government can only spend so much money so quickly. After the first couple hundred billion, you begin to run out of things you wanted to do. And some of that stuff might not even be good to do, like building endless new highways. If you need $800 billion in stimulus but governments can only quickly spend $300 billion, then a tax cut might be better than nothing.

The second is that we know how to target tax cuts such that they get spent. It's simple, really. Give the money to the poor. They, after all, need to spend it. They need to pay off debt and fix the car and send in the heating bill. The more progressive the tax cut is, the likelier it is to be used.

Posted by Ezra Klein at 4:48 PM | Permalink | Comments (22)

James Joyner grabs some of Greg Mankiw's data on effective federal tax rates and notes that the top .01 percentile is paying 31.5 percent of their income in federal taxes while the middle quintile pays 14.2 percent. "President-elect Obama’s call for a massive tax cut aimed at the 'middle class' will be a neat trick, indeed," says Joyner.

There are lots of possible responses to this sort of thing (namely that if you include state and local taxes, the middle class pay a much higher rate than the federal numbers imply, while the rates of the rich barely budge), but in the current climate, it's hard to see where the anger will come from. The middle fifth of the income distribution begins at a yearly income of $34,738 per household. Assume they pay 20 percent in total taxes (it's probably a bit higher), and they're left with $27,798 to live on. That's fairly rough if you're raising a family. The top 0.01 percent, by contrast, begins at a yearly income of $20,471,271. Assume they pay, including state and local taxes, 35 percent of their income (they probably pay less), and they're living on a mere $15,353,453 a year. It's hard to imagine the electorate taking much pity on that sort of suffering.

Posted by Ezra Klein at 11:40 AM | Permalink | Comments (7)

And one more note on how Samuelson presented his data. "The richest 1 percent of Americans pay 28 percent of federal taxes, says the Congressional Budget Office," he wrote, as if that meant something. But the question with the top one percent is not simply how much they pay, but how much they make. If they make 50 percent of the national income, paying 28 percent of taxes is paying very little. If they make two percent of the national income, then their tax burden is heavy indeed. What they pay only makes sense if you know what they make. And this is true for historical comparisons too. You often hear conservatives argue that the rich pay a larger percentage of national taxes than they did in the 1970s, and that shows the system's progressivity. But the rich make much more money than they did in the 70s. The question is whether their share of the national income increased faster or slower than their share of the federal tax burden.

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.

This is worse than it even looks on first glance (and it looks quite bad). Progressive taxation rests on a simple theory: As you make more money, you can bear to pay a higher rate. That's how it differs from, say, a flat tax. A flat tax advocate would levy a 25 percent tax on Bob, who makes $50,000, and Russell Wordsforth Skotchpuckett III, who makes $500,000. They might even call that progressive. 25 percent of $500,000 is more than 25 percent of $50,000. The progressive taxer would scoff at this. Bob is left with $37,500 to live on. Russell Wordsforth Skotchpuckett III has $375,000. That's not an equal burden, much less a progressive one.

In other words, as the top one percent's share of the national income grew, their ratio of income-to-taxes shouldn't have simply stayed steady. It should have grown. Instead, it shrunk. Not only were they paying a lower share of federal taxes relative to their share of income, but it had gone down even as their ability to pay more had radically increased.

Posted by Ezra Klein at 12:09 PM | Permalink | Comments (22)

Kevin Drum is right to say that "[Obama's] cornerstone is a platform of huge tax cuts, which he's been publicizing with massive advertising blitzes in every battleground state in the country...I would really, really like to think that Obama has found the magic bullet for fighting the tax cut loonies at the Journal and the Club for Growth, but the evidence just doesn't back it up. Unfortunately for the cause of liberalism, he's chosen instead to cave in and fight entirely on their turf. This is almost certainly a tactically wise decision, but it's not something progressives should be very happy about."

If you look at the Obama campaign, the basic argument has been...tax cuts. Their biggest economic policy is a massive tax cut. Their health care argument has largely been a tax-based attack on John McCain. Their stimulus proposal was a tax cut. Now, these are not Republican tax cuts: They're decidedly progressive. The Obama campaign is taking advantage of the unequal distribution of wealth in this country, which allows you to drop taxes sharply on the vast majority of Americans while raising them modestly on a small minority and not blow a hole in your budget. They've realized, in other words, that cutting taxes on most people is what folks want in a tax cut. Aggregate revenues don't have to go down. And when the top one percent control 20 percent of the country's income, you can make up a lot of revenue by taxing them a bit.

But tactically smart though this decision may be, it's not exactly the sort of thing that pleases the Gods of Public Policy. This country needs more in the way of tax revenues. The Republicans have turned honesty on that score into a form of electoral suicide. The Obama campaign -- and thus the Democrats more generally -- have basically thrown up their hands and said "fine." If Republicans are going to demagogue taxes and make irresponsible cuts a constant feature of elections, then the Democrats will prove that two can play at that game. Politically, that may be wise. But it's going to make the eventual reckoning much worse.

Posted by Ezra Klein at 1:36 PM | Permalink | Comments (18)

Fedwatcher Tim Duy makes some good points:

I have to imagine the employees of Bear Sterns and Lehman Brothers are currently thinking that they clearly did not take on enough risk over the past several years. Lehman employees, in particular, were fed into the moral hazard grinder that was operational for a scant two days. How unfortunate. Which leads me to my most significant concern about Fed policy over the past year – the inconsistency. Facilitate the liquidation of Bear Sterns by backstopping $29 billion of questionable assets. Then, recognizing the moral hazard created by that move, let Lehman collapse. Then, recognizing the consequences of vanquishing moral hazard, effectively purchasing AIG. At this point, the endgame should be clear to policymakers – a taxpayer bailout. The bad assets need to be consolidated and eliminated. Congress needs to be working on a mechanism to make this happen, a new RTC. Any Congressional action needs to include a reevaluation of the state of financial regulation...I think we are now all realizing where we are headed. We are moving into the endgame, when Congress socializes the losses after privatizing the gains.

The the tax loophole that allows employees of private investment companies to classify their income as "capital gains" and thus pay 15% in taxes rather than 35% remains unclosed. Maybe one of Congress's policy responses should be to muster some nerve and equalize tax treatment. Forget moral hazard: I'd settle for some simple fairness. If they're going to rely on the tax system as an insurance plan, there's no reason they should be exempted from buying in.

Posted by Ezra Klein at 12:17 PM | Permalink | Comments (14)

It's a bit weird that the way the Tax Policy Center wants you to find their tables is by going to their web site and downloading a pdf document onto your computer which is composed of nothing but links to their tables on the internet. Anyway! TPC has just released an updated analysis of the candidate tax plans which takes into account new baseline numbers from the Congressional Budget Office. The basic lay of the land remains fairly similar. Obama will cut taxes for most taxpayers, and center his cuts on low- and moderate income families. McCain will cut taxes across the board, but focus his cuts on the rich and the wealthy. Here's what this looks like:

In other words, McCain wants to give money to the rich, Obama to the poor. Now, it could be that McCain is out of touch, and doesn't understand the effects of his own policy. Or it could just be that he thinks rich people need more money. Or it could just be that he's a liar and has some secret tax plan he's hoping to implement in office. Any of these things are possible. But let's cut the crap: McCain is going to blow a hole in the deficit in order to accelerate income inequality. It's incredibly irresponsible, and he should be hounded over it.

Posted by Ezra Klein at 4:59 PM | Permalink | Comments (65)

John McCain, still taking fire for saying "rich" begins at $5 million, has offered up a new definition of the term:

“I define rich in other ways besides income,” he said. “Some people are wealthy and rich in their lives and their children and their ability to educate them. Others are poor if they’re billionaires.”

But give McCain some credit: His tax plan does not want to tax the rich. Unlike in Obama's plan, there's not an arbitrary income inflection point at which juncture you begin paying more. Rather, under McCain's proposal, your tax burden becomes less onerous as you become richer (you all remember this graph, right?). So asking him to define where "rich" -- in the sense that you have enough money to pay a bit more back -- starts is a bit at odds with his stated views on the matter. Richness has no policy implications save that you get an even bigger tax cut, and so there's no real reason for McCain to understand the national income distribution in a manner consistent with crafting public policy around it.

Posted by Ezra Klein at 9:38 AM | Permalink | Comments (16)

Among the more interesting points in the Leonhardt piece is the idea that the last few decades of rocketing inequality have dramatically transformed the contours of taxation as a political issue. I've argued often on this blog that given how much income is concentrated in the hands of the rich, you can cut taxes for the majority of the country, raise taxes on a small slice of wealthy Americans, and raise revenue, even as the average American's tax bill goes down. As Leonhardt argues, the relentless march of wealth accumulation -- the rich getting much richer, year by year -- made this truer in 2008 then it was in 2007, truer in 2007 then in 2006, and a helluva lot truer in 2006 then it was in 1993.

Obama, Leonhardt says, understands this:

Politically, he is trying to drive a wedge through the great Reagan tax gambit...For the bottom 80 percent of the population — those households making $118,000 or less — McCain’s various tax cuts would mean a net savings of about $200 a year on average. Obama’s proposals would bring $900 a year in savings. So for most people, Obama is the tax cutter in this campaign...All told, Obama would not only cut taxes for most people more than McCain would. He would cut them more than Bill Clinton did and more than Hillary Clinton proposed doing. These tax cuts are really the essence of his market-oriented redistributionist philosophy (though he made it clear that he doesn’t like the word “redistributionist”). They are an attempt to address the middle-class squeeze by giving people a chunk of money to spend as they see fit.

He would then pay for the cuts, at least in part, by raising taxes on the affluent to a point where they would eventually be slightly higher than they were under Clinton. For these upper-income families, the Tax Policy Center’s comparisons with McCain are even starker. McCain, by continuing the basic thrust of Bush’s tax policies and adding a few new wrinkles, would cut taxes for the top 0.1 percent of earners — those making an average of $9.1 million — by another $190,000 a year, on top of the Bush reductions. Obama would raise taxes on this top 0.1 percent by an average of $800,000 a year.

Posted by Ezra Klein at 11:40 AM | Permalink | Comments (15)

1) New IRS data shows that the richest 1 percent garnered their highest share of the national income -- 22 percent -- in decades, and possibly since 1929. So for every dollar paid out in wages in 2006, more than one-fifth went to the top one percent.

2) "Meanwhile, the average tax rate of the wealthiest 1% fell to its lowest level in at least 18 years."

It's a good article. Meanwhile, I was just on MSNBC listening to folks quote McCain about the importance of not raising taxes. There are two ways to think about that comment. The first is as a fiscal absolute: We cannot raise taxes on anyone, anywhere, at any time, for any reason at all. It's right there in the Old Testament, next to the part on pork. The passage is Norquist 6:12.

The other way of thinking about taxes is in terms of absolute revenue. The rich have most of the income. They also pay most of the taxes. It's entirely possible, as we see from the Obama tax plan and the various analyses that have been done on it, to raise revenues while cutting taxes for most Americans. Currently, the rich are facing the lowest tax rates they've seen in 18 years -- which include the boom years of the 90s. They are also making more, relative to the rest of the country, then they have since the Great Depression. You can raise taxes on the rich while cutting them on the poor and middle class, and so far as most people experience taxation, you'll have just cut taxes. But you'll also be bringing in more revenue. Presumably, the media will call this a tax increase, and Repubicans will certainly call it a tax increase, even though, for most people, it will be a tax cut.

Posted by Ezra Klein at 4:52 PM | Permalink | Comments (23)

The Emanuel/Fuchs voucher plan (which I owe you guys my second post on) is funded by a value added tax, and in comments yesterday, Scott asked for an explanation of how such a tax works. I vaguely remembered writing such a post awhile back, and indeed I did! But looking back, it's confusingly written. I think I can do better.

A VAT is a sales tax, but rather than being collected only from the consumer, it's collected at each step in the production process. The Congressional Research Service -- which has a nice backgrounder document on the tax (pdf) -- offers up this chart, which will help illustrate the next paragraph:

Alright, so we're making widgets. And our widget has four stops before it gets to the consumer. There's the transformation of raw materials into usable form. Producer does that, and sells the resulting product to Manufacturer for $200. Manufacturer takes those materials and transforms them into a delightful widget, selling the widget to Wholesaler for $500. Wholesaler does whatever it is that Wholesalers do, marks our increasingly road-weary widget up to $750, and sells it to Retailer. And Retailer, finally, jacks it up to $1,000 and sells it to you.

Now imagine a 10 percent value added tax. At each step, these companies will pay a 10 percent tax on the difference between what they bought and what they sold -- in other words, the "value" they added to the product. So for Producer, they started with 0, and sold a product for $200. 10 percent of $200 is $20, so they pay $20. Manufacturer bought for $200 but sold for $500. The difference there is $300, so they pay 10 percent of $300, which is $30. The wholesaler tacked on another $250 to the total cost, so they pay $25, and so on.

Continue reading "HOW DOES A VALUE ADDED TAX WORK?" »

Posted by Ezra Klein at 8:17 AM | Permalink | Comments (22)

Megan Carpentier makes a good tax plan point over at Glamocracy. "In the end," she says, "despite the stereotype that my taxes should go up under a Democratic tax plan and down under a Republican, it seems that Obama's tax plan is most likely to lower my tax bills and McCain's plan will do little or nothing at all for me."

There's this idea out there that Democrats raise taxes and Republicans lower them. That's broadly true when you're talking about aggregate government revenues. It's less true when you're talking about any individual American's tax burden. If the government funded itself by asking everyone to send $5 in an envelope, with no differentiation for income or wealth, then raising or lowering taxes would raise or lower everyone's taxes.

But they don't do that. Rather, wealth is unequal, and taxes are unequal. Just as a small sliver of the population controls a massive amount of the national income, so too does the same sliver pay the lion's share of the taxes. In recent years, their tax burden has been easing even as their incomes have been rising, but in absolute terms, the folks with the bulk of the money are still the folks paying the bulk of the taxes. Democrats often raise taxes on these folks -- who are often called "the rich" -- which means raising taxes on 2 percent or 5 percent or 10 percent of the population, depending on how you're counting. But in increasing the burden of the rich, they're often able to lower it on the poor and working class. So even as revenues go up because Bill Gates' bracket is raised to 41 percent, the tax burden of 60 percent of the country might go down. The government takes in more money, but the median American pays less in taxes.

Posted by Ezra Klein at 9:45 AM | Permalink | Comments (22)

Justin Fox argues that taxes are going to go up in the next couple of years because of entitlement spending. Contrast that with McCain's view, often implicit, that they can go down because of entitlement cuts (which he calls "reform."). And he's right, if you could massively cut entitlements, spending would go down. But that's the black box at the center of the McCain agenda: Entitlement reform. When asked about it, he professes relative equanimity to the end result, and swears hell hand it over to a bipartisan congressional commission. But no congressional commission is going to cut Medicare in order to fund tax cuts. And no conceivable Congress would pass such a recommendation. So the question then becomes, in the absence of entitlement reform, what does McCain think we should do? Raise taxes? And if not, what will he do?

The funny thing about the McCain campaign is that it's known for giving the press more access than any other campaign in history, but there are all sorts of crucial, fundamental questions like this, and no one has ever forced him to answer them. All we get is airy promises that he'll encourage Congress to "act in a bipartisan way to extend [Medicare's] solvency for twenty-five years without increasing taxes and raising premiums only for upper income seniors. Their success [will encourage] a group of congressional leaders from both parties to work with my administration to fix Social Security as well, without reducing benefits to those near retirement." Extending solvency without raising taxes means -- guess what!? -- cutting benefits! Even if you can slow the growth of health spending you can't make that magic trick work without cuts. And preserving Social Security benefits for those near retirement means -- guess what!? -- cutting it for those retiring down the road! Unpopular! McCain can no more enact this vision then he can make Skittles rain from the sky. But if he can't enact this vision, then the numbers in his agenda don't add up. And we'll have to, as Fox says, raise taxes. Too bad McCain won't give "his friends" any straight talk on that.

Posted by Ezra Klein at 2:02 PM | Permalink | Comments (17)

While the rest of the party fixates on the Clinton v. Obama deathmatch, CAP's Wonk Room has been doing quietly doing the spadework on McCain's actual proposals. The results aren't pretty. His tax plan, in particular, deserves recognition for being literally more regressive than Bush's, and blowing an even larger hole in the budget. To dramatize the point, the good folks at CAP have created a nice little graphic showing the difference between what McCain -- a self-proclaimed budget hawk -- wants to cut, and how much he actually makes up:

I mean, give the guy credit, that's almost a tenth of the way there. Which is like (carry the two, ignore the one, forget the decimal point), I don't know, just about there, right? Surely enough to be called a deficit hawk, and to have the media credulously relay your intent to balance the budget.

Posted by Ezra Klein at 4:41 PM | Permalink | Comments (8)

Martin asks, "This weekend, Chris Wallace on Fox interviewed Sens. Schumer and Durbin. He noted that Sen. Obama wants to raise the capital gains tax, but that 50% of the people who get taxed make $50,000 or less, therefore making this a middle class tax hike. Is this true? Are they playing with the numbers?"

I can't tell you exactly which number set Chris Wallace is working off of, so I'm not really in a position to say whether exactly 50 percent of those getting taxed make under 50 percent. But there's definitely some trickery going on here. Lots of ordinary Americans have money in the stock market through pension funds and the like. But they have very, very little of it. A share or two of stock, a bit of property. In 2005, the wealthiest one percent of Americans received almost 70 percent of long-term capital gains, and paid 72 percent of the capital gains taxes. What Wallace is trying to do is confuse the issues of eligibility and exposure. Lots of Americans might end up paying a minimal amount of the capital gains tax, but the real exposure is among the wealthy. Citizens for Tax Justice has a nice breakdown of how much the various income brackets made in capital gains in 2005, and I've turned their numbers into a helpful graph. What I want you to remember when reading this graph is that the numbers are in dollars. The X axis -- the bottom -- tells you what bracket we're talking about, but the numbers show average dollar amounts for that year.

That group there in the middle? The so-called average taxpayers Wallace is so concerned about? They make, on average, $176 from capital gains in a given year. They will pay next to nothing. The Top 1 percent makes $232,000! The capital gains tax, in other words, is a tax on people with capital gains. Those people are overwhelmingly the rich, and the rich are overwhelmingly the ones who pay the tax. The fact that lots of Americans have nominal holdings is effectively meaningless here. Wallace is just using them to mislead as to the tax's true target.

Posted by Ezra Klein at 4:01 PM | Permalink | Comments (32)

As it's April 15th, todays chart of the day is going to have to be tax related. And where better to start than with a nice breakdown of where your taxes are going, courtesy of the fine folks at CBPP:

CBPP explains the data further, but in a broad way, that's the size of it: Pensions, health care, and defense all eat up roughly equal amounts of the budget (and the majority of defense spending was not Iraq or Afghanistan related -- those ventures cost a "mere" $125 billion in 2007). Payment on the debt ate up about $237 billion. Now, I'm not against deficit spending per se. But it's not clear to me that taking out loans to finance a senseless war was really the best use of our resources....

Posted by Ezra Klein at 11:28 AM | Permalink | Comments (7)

Over at TaxVox, Howard Gleckman makes one of my favorite points:

Don’t expect carbon taxes to both dramatically reduce greenhouse gases and serve as a cash cow for government. They might succeed at one or the other, but not both....Government can always slash consumption by raising taxes so much that the product becomes unaffordable. But it rarely does so. Instead, it often boosts these levies just high enough to generate lots of tax revenue without discouraging too many people from buying the evil weed or the daemon rum. After all, if people really stopped consuming, the tax well would dry up.

In general, there are two types of taxes: taxes that fund things, and taxes that stop people from doing things. Taxes that fund things cannot be taxes that stop people from doing things, as if people stop doing the thing, there will be nothing to tax.

Posted by Ezra Klein at 1:37 PM | Permalink | Comments (18)

There's been some argument over how to treat John McCain's policy ideas. Some folks hold that they're terrible and should be opposed. Others think they're terrible, but more than that, they and make no sense, and McCain clearly doesn't mean them so they should be ignored. This, I think, is the take of most of the media, which assumes that, on domestic policy, McCain is pandering to his base and shouldn't be taken seriously. But, at the end of the day, these are his policies, and she should be forced to stand by them. It's not for the media to decide that he's a) lying and b) that's okay.

Take McCain's tax policy, for one. He wants to repeal the Alternative Minimum Tax ($430 billion in lost revenue over 10 years), cut the corporate tax rate from 34 percent to 25 percent ($995 billion lost over 10 years), and end taxation of corporate investment in technology and equipment ($745 billion over 10 years). In addition, he's going to make the Bush tax cuts permanent. We're now talking a revenue loss of over $3 trillion. How's he going to fund his wars?

What's even more remarkable, though, is how regressive McCain's cuts are. They're more regressive, by far, than the Bush tax cuts. The Center for American Progress just released a report showing how much of each set of cuts goes to each income quintile, and I've put the results into a graph for you. McCain is in blue, Bush is in red.

On foreign policy, it's become common to say that McCain is like Bush, only more so. What's impressive is that he's proving that true on domestic policy, too. And yet despite the $3 trillion+ hole he's blowing in the deficit, the media regularly reports that McCain is a deficit hawk. Why? Because he doesn't like earmarks ($18 billion per year). Quite an age we live in, where fiscal responsibility is paying for about 1/20th of your spending. This guy is the Republican nominee for president. It's time the media began asking him how he's going to pay for all his spending. If he's going to cut Medicare and Social Security -- the only expenditures large enough to support this plan -- let him say so. That, supposedly, is the virtue of McCain, that he says stuff like that. But it's a bit dumb for the media to be all excited about a guy who answers your questions and then not actually ask him the hard questions.

Posted by Ezra Klein at 3:10 PM | Permalink | Comments (15)

I tuned in to last night' Politico interview of Barack Obama just in time to see him give a final answer on taxes. The hosts were pressing him on whether he was a tax cutter or a tax raiser, and he, in true Obama fashion, rejected those labels, and said the question, to him, was whether we were raising taxes on those at the top or those at the bottom.

Fair enough, but that's still weak ground to stand on. I want a Democrat willing to say that the question is, "what are we paying for? And what do we need to pay for?" The tendency to speak of taxes as an unpleasant surcharge exacted for the government and spent on...well...who knows, is poisonous. Within that mindset, folks probably prefer if you take the cash from the rich and not from them. But if Obama is going to be the transformational, Reagan-style pol he presents himself as, he's going to have to grow comfortable speaking positively of the role of government, and selling some of his initiatives as good ideas worth paying for. It's worth it to have effective responses to natural disasters, worth it to have a modern national infrastructure, worth it to have national health care, worth it to have more than one safety inspector examining Chinese goods, worth it to invest in medical and scientific research, worth it to enact universal pre-kindergarten. Indeed, many of these priorities are not only worth the cost, but they're actually good investments. They're a damn good deal. And Democrats need to grow comfortable making that case. The Republicans have succeeded in moving the tax debate onto grounds of "who pays," and "how much." Democrats need to remember to ask, "what for," and "what if we don't?"

Posted by Ezra Klein at 10:16 AM | Permalink | Comments (20)

One bit about this election that's been bugging me is the timidity of the Democrats on taxes. So, I wrote a column on it:

Progressives have been so thoroughly bludgeoned on taxes that they've lost all appetite for engaging the issue. The Democrats running for president (with the exception of Mike Gravel who is, embarrassingly, a FairTax advocate) all have tax plans, but none do much beyond simplifying the filing system and offering the middle class some "tax relief." Both are potentially worthy goals, but they approach the discussion on firmly conservative terms: Taxes are too high, and they are too complicated.

Posted by Ezra Klein at 3:33 PM | Permalink | Comments (26)

That pictures comes from the web site of Americans for Fair Taxation, the group behind Mike Huckabee's beloved FairTax. The "pimps-will-pay" argument commands a surprisingly prominent place within their mythology, and, through that, has become a featured riff in Mike Huckabee's stump speech. The idea that pimps might pay a bit more of their income in taxes under a FairTax scheme is, I'll admit, true, if rather irrelevant. Many of their other arguments, however, are relevant, but not true, as I explain in today's column, which starts:

"When the FairTax becomes law," Mike Huckabee promises, "it will be like waving a magic wand releasing us from pain and unfairness." That's quite a tax policy. I've always found sales taxes to be more like a magic wand imbuing me with lots of pennies, even though the sweater clearly said $25.95.

And let's be clear. That is what the "FairTax" is. A sales tax. A big one. The magical tax fairy is going to float down from her wondrous revenue castle and, with a click of her enchanted rates calculator, eliminate all federal income and payroll taxes. But she will leave in its place a hefty sales tax affecting everything you purchase (save educational spending). For every dollar you spend, you will pay an extra 30-or-so cents in "FairTaxes." It's like the worst magic trick ever.

Posted by Ezra Klein at 11:04 AM | Permalink | Comments (27)

I'll have more to say on the FairTax soon, but here's a Treasury Department analysis laying out the distirubtion of federal taxes under the current system, and under the FairTax:

So it's true, in a very limited way, that the FairTax is progressive -- those making less than $15,000 (and $24,000 if you include payroll taxes) would pay less. But it is also regressive. Those making above $200,000 would pay a lot less. It's the middle class who'll get slammed. The broad group between $24,000 and $200,000 would shoulder a heavier tax burden, larely so the rich can pay less. That's "the FairTax." That's the tax Huckabee "loves because it's so progressive."

Posted by Ezra Klein at 5:10 PM | Permalink | Comments (22)

Over at Slate, Steven Landsburg strongly defends Mike Huckabee's "FairTax," not really on its own grounds, but on the grounds of sales vs. income taxes.

With an income tax, you pay up front. Earn a dollar in 2008, and you'll pay 20 cents tax in 2008. (Actually, you'll pay more, of course; I'm assuming a 20 percent tax rate for the sake of illustration.) With a sales tax, that 20 cents sits in your bank account earning interest until the day you spend your earnings. Let me say that again: Your pretax earnings sit around collecting interest until the day you withdraw and spend them. Where have we heard that before? It's exactly what happens when you invest in a traditional IRA!

So, one way to mimic the effect of a sales tax is to let you deposit every dollar you earn directly into an IRA. As far as your family—or any family—is concerned, the effects are identical. A sales tax is the exact equivalent of an income tax with a provision for unlimited IRA contributions (and no withdrawal penalties). The merits and demerits of the Huckabee tax plan are identical to the merits and demerits of a vastly liberalized IRA policy.

Posted by Ezra Klein at 2:00 PM | Permalink | Comments (48)

It's really not useful to talk about tax burdens and only assess federal taxes, not state levies. People often do it, in part because it's far, far easier to calculate federal income brackets and payroll percentages rather than the shifting set of income taxes, sales taxes, and user fees that define state-level revenue collection, but you actually need to figure out a way to put them in there, or at least give a nod towards their existence. Otherwise, you have a very partial data set, which can offer up a pretty misleading impression as to the progressivity and distribution of the tax burden. For instance: Mankiw says that while the tax burden is historically low, it's lower for the poor than the rich. At the federal level, that appears to be true. But when federal tax receipts are low, states compensate with their own revenue sources. And those sources -- ranging from sin taxes to sales taxes -- tend to be regressive. So it's entirely possible that, in the aggregate, the low tax burden is more regressive than it would if simply plugged into the federal distribution. On the other hand, maybe that's not true. Point is, we need to incorporate the state data, as without it, we're missing a huge piece of the picture.

Posted by Ezra Klein at 9:04 AM | Permalink | Comments (13)

That's a post title that can only make my audience think, "wheeee!" I await my inevitable MTV Reality Show. Even so, though I'm convinced that singling out particular goods for taxation is probably a tough policy to sustain, there's no doubt that consumption taxes -- which the high-performing Nordic countries already have -- are perfectly plausible. And they can be made progressive, ratcheting up the rates as the level of consumption increases. The economist Robert Frank, in fact, has an idea for doing exactly that. Families would report not only their income, but their savings. Subtract the one from the other and you'd get their consumption. Rates would start low. As spending increased, so would the tax. It's not a terribly hard thing to do, nor a tough tax to administer -- indeed, if you simplified the code and took out some of the deductions, it would be far easier. And, particularly at the high end, it would dampen the incentives for ever more consumption, while increasing the attractiveness of savings and investment.

That would be a good thing. We currently have a system that incentivizes pretty damaging positional competitions. We know, for instance, that housing is a positional good -- that consumers see the size of other houses as a critical factor when evaluating their own purchase. And we amplify this impulse. The mortgage deduction is a regressive deduction that incentivizes larger and larger houses. As the rich take advantage of it, the near rich have their frame of reference shifted, and stretch their mortgages to keep up, as does the group right under them, and on, and on, and on. And, particularly with the staggering jump in inequality, which has given the rich astonishing amounts of money to blow, we know that they're setting off expenditure cascades all over the economy, in everything from housing to cars to Viking stove tops.

It may be that we want to encourage that through our tax code. But I don't really see why. The income tax, in theory, raises revenue sustainably, has a progressive structure, and is aimed at an inelastic enough need (more money) that it doesn't create very large disincentives. But there's nothing more "natural" about taxing income than consumption. And if you think it would be good for our tax system to put some soft disincentives on high-bracket spending, then a consumption tax is smart way to go. For those interested, Robert Frank has a full explanation of the proposal, and the rationale for it, here. Warren Buffett proclaims his support for a progressive consumption tax here. It's worth talking about.

Posted by Ezra Klein at 2:10 PM | Permalink | Comments (27)

Via Nick Beaudrot comes a very good idea from professional rich guy Mark Cuban: A bling tax. It would essentially act as a consumption tax effecting luxury goods above a certain value. As Cuban says:

If Warren [Buffett] wants to buy or build a yacht for a hundred million dollars. Nail him with a 10pct federal tax surcharge. If I want to buy a Gulfstream Jet for 40mm dollars. Nail me with a 10pct federal surcharge above and beyond current taxes. There are plenty of items, from jewelry to 100k plus cars to 10mm dollars or more first, 2nd and 3rd homes. If you can afford to buy these kind of goodies, and choose to, cough it up.

Will i avoid the Gulfstream or Warren the Yacht because of the surcharge ? Will I drive a used car instead of my new expensive Lexus Hybrid. Nope. You are rich when you know that money is no good unless you can enjoy it. No one on the Forbes 400 or near by is going to let a 10 percent more increase in the cost of a luxury item get in the way of enjoying the lives they have always dreamed of.

Posted by Ezra Klein at 1:14 PM | Permalink | Comments (38)

Tim Lee says "we have to remember that many rich people give a significant fraction of their wealth to charity...some of us simply suspect that, on the margin, leaving a dollar in the pockets of a rich guy is more likely to lead to that dollar being used for a worthwhile purpose than giving that dollar to Congress to spend...it’s an important part of what drives anti-tax attitudes in broader electorate." Yep: They're not saying "don't tax me," they're saying "I believe these dollars would be better spent by wealthy individuals who really, really, really care about ballet."

But Tim's a stand-up guy, so if he says he believes this, then I believe him. But it seems bizarre. I know of a lot of right wingers who think a dollar left in a rich person's pocket will be more productively used than a dollar given to the government, but I don't know of any who say that that dollar is more likely to travel down the income ladder and guarantee health coverage to the poor, or pensions to the impoverished elderly.

Indeed, if you're searching for a substitute for the social safety net, much of the philanthropy that the rich engage in seems poorly targeted, to say the least. The Center on Philanthropy conducted a study on how much charitable giving was directed to helping the poor. They found that giving to help meet the basic needs of the poor is a mere 7.5% of total giving, while "other" donations that directly or indirectly help the poor are around 23%. The rest goes to alumni associations (a surprisingly huge money suck), arts and culture, and so forth.

Posted by Ezra Klein at 12:24 PM | Permalink | Comments (15)

I largely agree with Steven Tele's critique of Michael Lind's tax plan: Big thinking on liberal tax reform should substantially change the tax code, and more to the point, simplify it. Extending credits to payroll taxes may be good for equity, but it's making the system ever more byzantine. This alternative proposal from Mike Graetz, however, is rather interesting:

a) Eliminate the income tax entirely for families earning up to $100,000, indexed for inflation.

b) Impose a flat rate tax on income above that level, at a rate of 20-25% (I lean strongly toward the upper end of the range).

c) Impose a VAT tax at a 10-14% rate.

d) Lower the corporate tax, aligning it closely to the new, lower income tax rates (while also forcing corporations to use the same accounting standards when they deal with the IRS and the SEC).

e) Mike would deal with the EITC's elimination by providing a refundable offset to the payroll tax. I think that my suggestions above could do roughly the same thing, or we could establish some compromise between what I want and what Mike wants.

I'd alter this substantially, noting that taxes would be done automatically for those making up to $100,000 (April 15th will be just another spring day, as the righties like to say), making the rates above $100,000 substantially more progressive, not lowering the corporate tax, and keeping the EITC as is. So maybe I don't much like Graetz's idea. But I do like VAT's, particularly of the sort that exempt the goods the poor buy the most (i.e, food). And more generally, Democrats need to get better at making the case for dedicated taxes, like a 4% VAT that pays for health care. Taxes shouldn't be giving money to the government for unspecified purposes. They should buy things.

Posted by Ezra Klein at 11:17 AM | Permalink | Comments (19)

Responding to a poll showing robust majorities support raising taxes on the rich in the US, Germany, the UK, France, italy, and Spain, Andrew Leonard writes:

For a citizen of the United States such as myself, who has watched Republican presidential candidates campaign, mostly successfully, on the holy writ of tax cuts for the rich since 1980, these poll results take on a dreamlike quality. What alternate reality is this, where the rhetoric of a quarter century is suddenly turned on its head? As recently as just a few years ago, if you tried to suggest that government should consider raising taxes on the wealthy, the notion was immediately dismissed as a throwback to the "failed redistributive policies" of the past. But now it's all the rage.

I don't have the numbers from the 80s in front of me (does anyone know of some good sites that allow you to compare historical poll data?), but in 1992, 77% of Americans thought the rich were paying "too little" in taxes, and I'd bet that number didn't dip below 50% in the preceding years.

It was never the populace dismissing taxes on the rich as "the failed redistributive policies" of the past -- it was the elite. In other words, the rich. And they happen to have a lot of power in our system -- and that power (and money) has gone, in no small part, to convincing Americans that their tax burden is too high, and that cross-the-board tax cuts are the only answer. But it's important to note that there's never been any campaigning on "tax cuts for the rich." There was just a lot of campaigning on tax cuts, and anti-tax sentiment, followed by policies that quietly amounted to tax cuts for the rich. And all of this was enabled by the media, which derided tax increases as failed redistributive policies, and happily pocketed tax cuts for themselves...

Posted by Ezra Klein at 3:59 PM | Permalink | Comments (8)

It may indeed be true that Wyden is exaggerating, and even a very smart tax reform will leave some number less than all Americans completing their taxes in under an hour, but that number could still be quite a bit larger than it currently is, which makes it a goal worth striving towards. And lord knows we're not near the upper end of easy tax payments. Not only is the structure itself overly complicated, but it's been two decades since the last significant clean-up of the tax code. The accumulated loopholes and detritus are long overdue for examination.

Additionally, tax simplification is the sort of policy which would make a great many people very happy at just about no extra cost to the government. Which makes it all the more important to do. Most of the great gains in policy are to be made addressing the needs of the worst off. But most of the votes come from the massive middle. For these folks, the country actually works fairly well, if not perfectly. To institute policy that will substantially improve their existences through material transfers is, given their size, prohibitively expensive and politically difficult. But policy can improve their lives in other ways.

To simplify their dealings with government and make their lives at tax time 2008 simpler than they were during tax time 2007 is both (conceptually) easy and substantively worthwhile. And it can be a good that increases middle class support for a policy that also includes more serious reforms that aid the poor, like simplification and unification of the forms that govern benefits (see Max Sawicky's proposal here), getting the IRS to do the taxes of 50 million Americans themselves (see Edwards' proposal here), or taxing work income at the same rate as wealth income (see Wyden's proposals here). Simplification can work in service of progressive reform.

And finally, the perception of a complex tax code is bad for liberals. The more folks look at the loopholes and exemptions and deductions and forms and judge -- correctly! -- that the system can be gamed by those with the money and time to cheat, the more they'll feel like suckers for paying their fair share, and the more receptive they'll be to tax cuts and the dulcet tones of Grover Norquist. A system that obviously treated everyone the same would leave fewer fols feeling like dunces for cooperating with it.

Posted by Ezra Klein at 1:05 AM | Permalink | Comments (26)

Daniel Gross writes:

The Republicans' main argument against Democrats is that they'll raise taxes by letting the Bush tax cuts expire in 2010. Fix the AMT now and it will simply allow Republicans to argue that the Democrats are raising taxes in 2007 and 2008, too. What's more, fixing the AMT permanently provides all the drawbacks of responsible tax cutting with none of the benefits. The point of fixing the AMT is to shield millions of Americans from future tax increases. But Americans, who are instant-gratification addicts, would sooner vote for somebody who cuts taxes by $1,000 today than for someone who spares them a tax hike of $2,000 tomorrow.

Would Democrats suffer political backlash? Probably not. The AMT's victims will be concentrated in states in which Republicans are not likely to be all that competitive in 2008. In the home of Bushenfreude, middle-class and well-off voters already tend to blame Bush and his Republican associates for everything that has gone wrong. And well they should, given the GOP's shocking fiscal irresponsibility under Bush. It would be easy to fault them for the AMT crisis, too.

When the crisis peaks, Democrats can offer their alternative: fix the AMT, which would then be hitting millions of middle-class voters by rolling back the Bush tax cuts on the very rich. That's a political argument they will win. What they shouldn't do is try to repair the AMT problem too soon, before the catastrophe next April. Fixing it before taxpayers feel the sting would be better fiscal policy—but lousy politics.

That's a plausible read. What worries me, though, is that rolling back the Bush tax cuts to do nothing save replace portions of the AMT is a revenue neutral strategy. Democrats need to actually raise revenues for things like health care -- and part of that may mean restoring the tax cuts under the rationale of channeling that cash towards universal coverage, as John Edwards is promising.

That said, Gross makes some good points on the politics of taxes. Waiting till next year, with the expiration of the Bush tax cuts and the roaring return of the AMT will allow for quite a bit of energy behind tax reform. That moment should be used not simply to fix the AMT, or to roll back the Bush tax cuts, but to actually reform the tax code, as needs to happen every couple of decades when the numbers of deductions and quirks and loopholes and cheats becomes too unwieldy. A more flexible, fair, and progressive structure would be good for the country's fiscal situation and good for progressive priorities into the future.

Posted by Ezra Klein at 11:04 AM | Permalink | Comments (14)

I sort of wonder whether Tyler Cowen actually read this article on Democratic attempts to reform the Alternative Minimum Tax. Responding to the news that Democrats are "preparing legislation that would permanently shield all but the very richest taxpayers from the alternative minimum tax," Tyler writes, "this rather non-egalitarian policy, very costly in terms of revenue, is the Democratic attempt to reward their wealthy urban and suburban supporters...It was ugly what years and years of power did to the Republican Party. The particular interest groups will differ, but I do not understand why the progressives expect anything different better from the Democrats."

First, it's not costly in terms of revenue. As the article makes clear, the discussions now are how to actually replace AMT revenue. So the question is really what mechanisms they'll come up with to do that -- and for now, we simply don't know. Rahm Emmanuel, apparently, wants to replace it with new taxes on the rich. That would be all sorts of fine with me. It would be not only be more egalitarian, it would be more progressive. Alternately, using AMT repeal as a pretext for comprehensive tax reform would also be a damn good idea.

Moreover, the reason Democrats feel the political pressure to do this is a series of cynical fiscal decisions made by the Republicans. Bush's tax cuts dropped the tax rates without changing the AMT. Without them, 16 percent of Americans would have paid the AMT in 2010. With them, that number explodes to 33 percent. Here's how this looks:

Worse, the Republicans temporarily exempted millions of families from the AMT for the last few years in order to make the tax cuts seem more sustainable and remain more popular. But all their budget projections admitted the return of the AMT -- which will now be all the more onerous and surprising, and which unsuspecting taxpayers will be all the likelier to rebel against. Democrats, who actually want to keep their majority, have to do something about the various fiscal landmines Republicans have littered across the landscape. But the question of who benefits from their Democrats' proposed policy fixes can't actually be answered until we know what those fixes will be.

Posted by Ezra Klein at 12:49 PM | Permalink | Comments (14)

Sebastian Mallaby's got a terrific column today blasting the the senseless, fiscally irresponsible team of Max Baucus and Chuck Grassley, who've decided to declare war on the Alternative Minimum Tax while eschewing any talk of replacing its $750 billion in revenues with anything new.  Baucus appears to think increased tax enforcement will make up the shortfall, which is akin to replacing your job income with change gathered behind the couch.  Grassley, meanwhile, is taking a brave stand against the economics of taxation: "It's unfair," he blustered, "to raise taxes to repeal something with serious unintended consequences like the AMT!"  I sort of hate to do this, Chuck, but remember those tax cuts?  The ones you voted for?  Here's what they did:

The AMT, which was created to ensure the rich couldn't deduct and shelter their way out of taxation, was created in 1969.  It kicks in when folks making above a certain income pay below a certain tax rate.  Not indexed for inflation, the share of the electorate paying the AMT grew over the past few decades.  Bush's tax cuts, however, sparked a massive drop in rates, bringing millions under the limits and exploding the AMT's reach.  Without them, 16 percent of Americans would have paid the AMT in 2010.   With them, that number more than doubles, to 33 percent.  This reckoning was put off the by tax cutters in the form of a temporary exemption from the AMT, an irresponsible little shell game meant to superficially improve the budget projections they used to sell the cuts, thus making them look more fiscally responsible.  That the  very same tax cutters -- like Grassley -- are now seeking the AMT's repeal without any replacement shows the depth and cynicism of their deception the first time through.  And here's the consequence:  In 2006, 3.5 million taxpayers paid the AMT.  In 2007, that'll shoot up to 23.4 million.

The hope of most policy wonks is that the AMT will provide the impetus for a wholesale restructuring of the tax code -- possibly in the direction of something like Ron Wyden's Fair, Flat, Tax Plan. Some even suggest that the AMT could be modified into the only tax rate and the words "Alternative Minimum" simply struck from the phrase.  There's some precedent for reform at this point in Bush's presidency: Ronald Reagan, weakened and looking for accomplishments by the last two years of his term, largely accepted a plan championed by Dick Gephardt and Bill Bradley which largely became the Tax Reform Act of 1986.  But what Baucus and Grassley are pushing isn't reform: It's fiscal demagoguery, and they should be roundly criticized for the offense.  Is it really so much to ask that the Chair and ranking member of the Senate Finance Committee betray a working knowledge of finance?

Posted by Ezra Klein at 9:31 AM | Permalink | Comments (24)

At a New America event today, James Glassman (author of the hilariously wrong Dow 36,000) turned his characteristic insightfulness to inequality. "We've done all the redistributing we can do," he helpfully informed the audience. The poorest 50% only pay 3% in federal income taxes!

I was reminded of Glassman's by Mike's excellent comment on the inequality post from earlier today:

The cost of government should be funded in accord with the percentage of assets owned and earned. Here are increases in national debt for the past few years. Note, increasing national debt shows the full extent of deficit spending.
9/29/2006 $574,264,237,491.73

9/30/2005 $553,656,965,393.18

9/30/2004 $595,821,633,586.70

9/30/2003 $554,995,097,146.46

9/30/2002 $420,772,553,397.10

9/30/2001 $133,285,202,313.20

9/30/2000 $17,907,308,271.43

Here are the taxes paid by quintile.

Here is a pie chart of wealth distribution.

As you can see from this chart, the bottom 50% owns 2.6% of the wealth; they are therefore overtaxed because their tax burden is 3.4%. The top 10% own 69.9% and the remainder, the 40% between the top 10 and the bottom 50% own 27.4%. That totals 99.9% of American wealth. Note, the chart is dated 2001. Since then, the upper groups have gained wealth, the lower have lost.

There is a correlation between wealth owned and income earned, but note; there are families with great wealth and low income because the wealth is considered unearned: from stocks, bonds, and other sources aside from the weekly paypacket.

It is clear that the Federal taxes are too low by 575,000,000 in order to meet federal expenses and that the people owning America are drastically undertaxed because they are in no way paying their fair share, which is under 65% when it should be over 70%.

Therefore, all talk of the rich being overtaxed is bunk.

There's also, of course, payroll taxes, sales taxes, user fees, taxes on goods, and all the other regressive charges laid on by the government and helpfully forgotten whenever wingers want to make the point Glassman is. But as to his direct argument, Mike gets it right: We're not even taxing the rich in proportion to the share of the economy they control. Forget taxing them beyond it.

Posted by Ezra Klein at 5:11 PM | Permalink | Comments (28)

Via Mark Thoma, an IMF working paper studying flat taxes worldwide has just come out, and it's results aren't terribly encouraging for supply-siders:

there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the distributional effects of the flat taxes are not unambiguously regressive, and in some cases they may have increased progressivity, including through the impact on compliance; adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. Looking forward, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.

The Laffer Curve, folks will remember, is the idea that lowering tax rates increases economic growth and thus results in more tax revenue. In other words, tax cuts increase tax revenue. It never made much sense (save in regimes with truly exorbitant tax burdens), but conservatives predicated their support for tax cuts and a flat tax on the theory anyway. Now it's clear the theory is shite. On the bright side, another claim of flat taxers does look promising -- that if you make the tax easier to comply with, compliance will go up, and there will be more revenue because of decreased evasion.

The sterling reputation of flat taxes has largely come because money of the countries who adopted them saw rapid growth and success in the succeeding period. The authors of the study, however, don't think the flat tax deserves the credit:

The flat tax has commonly—almost universally—been adopted by new governments anxious to signal a fundamental regime shift, towards more market-oriented policies. In several cases, the signal appears to have been well-received. Where no such reputation needs to be acquired, the appeal of the flat tax is consequently less.

So the adoption of the flat tax has been a big signpost by new regimes claiming themselves free of old, anti-business nostrums and open for new investment.

Posted by Ezra Klein at 12:13 PM | Permalink | Comments (16)

By Neil the Ethical Werewolf

As you often read, the top tax bracket back in the late 40s and early 50s used to be high.  I mean, really high.  I'm talking about tax rates in the over-90% range.  And somehow, economic disaster didn't befall America.  Young liberal fellows like myself are often heard talking up Clinton and the 1990s as evidence that raising taxes makes for a happy economy (and obviously a low deficit), but look at the chart I've linked to and you'll see that the American economy did very well with much higher tax rates than we had even with Bill in charge.  The 1950s offer one example.  And the tax hike Bill brought us was nothing compared to the jumps we had in the past.  In 1916-1917, the tax rate on incomes over $2 million goes from 15% to 67%.  Granted, hardly anyone was making that kind of money.  But it's still quite a jump.

So when people ask -- "How are we going to fund free preschool and Medicare for all and all those other great liberal ideas?" -- shouldn't "raising the top tax bracket to something like 60%" be part of the answer?

Posted by at 3:57 AM | Permalink | Comments (50) | TrackBacks (1)

Apparently, the Wall Street Journal has been using Sweden's elimination of the estate tax to make the "even-the-Marxists-are-doing-it" argument for repealing our own. Putting aside the fact that Sweden is not often used as exemplar of the sort of taxation system the WSJ would like, liberals should offer a trade: we'll do what they did if we can do what they do:

But let’s say [the Wall Street Journal is] right, at least about Sweden, and U.S. tax policy should become more like Sweden’s. In that case, the United States would repeal the estate tax. But if death would "no longer be a taxable event," accumulating wealth would become a taxable event—annually. Unlike the United States, Sweden imposes a tax of 1.5% each year on the net worth of single-adult households in excess of 1.5 million kroner (or about $198,500), and above 3 million kroner for couples.

Okay, I'll buy that. Conservatives have been very effective at using the estate tax's counterintuitive nature to bury it in the thunderdome of public opinion. Democrats might want to think up similar strategies. Because it's hardly a tricky argument to say that the key to a healthy economy are the correct incentives for growth and innovation, not past fortunes and unearned inheritance. A small tax on wealth that could be channelled towards modernizing schools, subsidizing Pell grants, and freeing business from health care's onerous costs (by nationalizing it, naturally) is a perfectly intuitive way to approach taxation. Think The Wall Street Journal would agree?

Posted by Ezra Klein at 4:03 PM | Permalink | Comments (24)

Brad Plumer's got a very strong post poking holes n the supposed magic of "The Flat Tax". Read it. And remember this -- there's nothing complicated about taxation. You make X dollars a year, you multiply that by the percentage you should pay, and you mail off a check. See? Easy as pie. It's not paying taxes -- getting exemptions and credits and deductions and so forth -- that's complicated. So when Republicans begin advocating for flat taxation, call it what it is: an assault on the progressivity of the system. They don't want taxes to be easier, they want them lower on the rich and higher on the poor. This debate isn't about simple taxation, it's about simple fairness.

Posted by Ezra Klein at 2:25 PM | Permalink | Comments (69)

By Neil the Ethical Werewolf

One of the coolest things about this blog is its emphasis on making complex policy issues accessible to those who never had a chance to learn Tiger-Style Wonk Fu from the ancient masters. As my duty to Ezra's dojo, I here present a list of three things that one can do to reduce people's taxes -- giving them refundable tax credits, giving them nonrefundable tax credits, and giving them tax deductions. I've listed these from best to worst, in order of how much they do to help the poor. What are they, you ask? And why does anyone need to know about them? Patience, Grasshopper: look below the fold and you shall understand.

Continue reading "The Ancient Wisdom of Refundable Tax Credits" »

Posted by at 1:58 PM | Permalink | Comments (13)

This Business Week editorial is about the best thing I've yet read on Bush's upcoming tax reform (italics mine):

one of the mandates President Bush gave to the tax panel was that its recommendations should raise about the same $2 trillion that the feds currently collect annually. That means any changes will shift, not lift, the tax burden. So there will be winners and losers aplenty. Should we eliminate all taxes on capital assets like stocks or bonds, stimulating investment but giving the wealthy a windfall? Will Americans accept an easy-to-understand flat tax or consumption levy if the cost is the end of deductions for state and local taxes or home mortgage interest? And which business taxes may have to be increased by $600 billion over the next decade so the unpopular alternative minimum tax for individuals can be eliminated?

Such tough choices are sure to elicit howls of protest from the public and business, each eager to protect existing tax preferences. That's why the Bush Administration should be preparing a fallback plan of less ambitious tweaks to the current system, such as partial AMT relief, and moves to improve tax fairness, such as tilting savings incentives more toward lower-income groups. The Treasury should also launch a big effort toward tax simplification. There are myriad confusing, often overlapping tax policies -- for instance, there are currently more than a dozen tax-advantaged savings incentives -- so simply bringing some order to them would go a long way toward making Apr. 15 easier to stomach.

Ideologues will surely call this small thinking that misses an opportunity to impose some much-needed discipline on our runaway federal budget. But tax policy shouldn't be used as a backdoor means to effectively starve government. If Americans want smaller government, they should demand that their elected officials show fiscal discipline and curb spending. Taxes then can easily be lowered.

I'm a bit confused as to where he wants to go with this. Clearly, given the timing, Republicans want to focus the 2006 election on taxes, their strongest issue. But how? Assuming Bush really does pick from the menu his commission offers, all choices will be revenue-neutral. That means, as Business Week says, that he can shift the burden, but not change it. We know he's not going to ask the rich to shoulder more nor push it on the back of corporations, so where does it go, the middle class? If he eliminates loopholes in a simplification effort, won't he have have to raise tax rates? If he endorses a consumption scheme, won't he be slaughtered over the 20%-30% sales tax it'd mandate? Won't tiny changes be too small to act as an effective issue in 2006?

He could, of course, ignore his commission, but that'd be a strange move too, and with deficits as they are, congressional and public appetite for tax cuts don't make for a straight shot. So where are the politics of this? According to polls, they're in raising rates on the rich. But that doesn't help Bush at all. He may, in the end, follow the Homeland Security Strategy and endorse something broadly popular with a single provision that Democrats can't swallow, thus destroying their support and putting them on the wrong side of a key issue. But tax theatre ain't nearly so compelling as terrorist theatre, and I can't imagine the weakened Bush we see now could make it work.

So where does he go?

Posted by Ezra Klein at 9:20 AM | Permalink | Comments (17)

In their special report on tax politics, the American Prospect made a good point.  Considering the current fiscal situation, Democrats are going to have to learn to advocate for higher taxes again.  Yes, it sucks to be the grown-up after the Republicans have crayoned over the budget's walls and urinated on the fiscal sofa, but somebody has to do it if our revenues are to be brough in line with the sort of progressive role for government we envision (and that George Bush, through NCLB and the Medicare drug benefit, has helped actualize). 

Generally speaking, we rhetorically approach this through soaking the rich.  Most everything advocated by a Democratic candidate last year was supposed to be paid for through rolling back the tax cuts on the wealthy.  Not even raising their taxes, just rolling back the decrease.  That won't cut it.  As someone in the blogosphere said (I forget who), you can't pay for everything through the estate tax, you can't fund all dreams on the backs of the rich.

And that, to some degree, has been the Democrats' problem.  But it seems to me that the solution is realizing you can fund something through the estate tax, through rolling back the tax cuts, and through other targeted and non-targeted tax increases.  Indeed, the Democrats are really in trouble when asking for broad-based, vague tax hikes.  If you nail everyobdy and don't tell them what it's for, don't be surprised when folks would prefer not to pay.  But dedicated revenue streams are another story.  What if we reinstituted the estate tax and dedicated it to Social Security?  What if we rolled back the tax cuts and put half the revenue towards the defict and half towards shoring up Medicare?  What if we instituted a VAT to fund universal health care, or raised taxes on everyone by 2% (or some amount) to institute single-payer health care?

Continue reading "Two Cents on Taxes" »

Posted by Ezra Klein at 11:47 AM | Permalink | Comments (26) | TrackBacks (1)

On my own blog, I never got around to commenting on the post where Ezra argued against the libertarian who said:

Let's talk about health care for a minute. Health care is certainly a need, but it is not a right. And all the high sounding rhetoric in the world that says otherwise is baloney. Rights don't involve, involuntarily, the assets of others. Any 'right' to health care would make exactly that sort of demand on the assets of health care workers.

Don't let libertarians get away with this. It's really hard to defend a notion of rights that doesn't involve, involuntarily, the assets of others. Consider the right to vote. For you to exercise this right, there need to be voting machines and ballots and people hired to count the ballots. Keeping a poor person from voting because he didn't have money to contribute to these things would still violate his right to vote. For his rights to be respected, others' assets would have to be deployed. Or consider criminal justice. For property rights to be respected, victims of theft need to have their property returned to them, and criminals must be punished. This process requires lots of assets which the victims might not have. In short, the libertarian restriction on rights can't be maintained.

--Neil the Werewolf

Posted by at 7:11 PM | Permalink | Comments (16)

I thought I might chase The Ethical Werewolf's notes on The People's Money with a snapshot of The People's Debt.  I've been following this story for several months, and I've noticed that it doesn't get much air time.  The essence is simple.  Assume the Republican Party makes all of its recent regressive tax changes permanent (but does not go farther down that path) and then only increases discretionary spending with GDP (by among other things, not debt-financing colonial adventurism).  By 2040, almost every penny that the Federal Government takes in goes just to pay the interest on the national debt.  For those who are curious about what that looks like, there's a chart below the fold.

That's not my opinion.  That's the opinion of the General Accounting Office, based on a middle-of-the-road set of assumptions.  And yet, the Republican Party talking points are that Social Security is bankrupt because in 2042, the Social Security Trust Fund will be depleted, and the amount of money then coming in earmarked for Social Security will only be enough to pay between 70% and 80% of the then-scheduled payments (again, based on a middle-of-the-road set of assumptions).

If the Republicans can't tell the difference between these two situations (and apparently, they can't, or they'd be far more worried about the General Fund than Social Security), they really shouldn't be trusted with the The People's Money to run the government.  Frankly, The People should probably think twice about whether the Republicans can even be trusted with The People's Ten-spot to buy The People a six-pack at Circle K.

- paperwight

Continue reading "The People's Debt" »

Posted by at 5:57 PM | Permalink | Comments (16)

Kevin and Duncan* both point out that the VAT (see post below) is somewhat regressive. True 'nuff. So why do it? Mostly because it's safer than the alternatives. Reasoning below the fold.

Continue reading "A Bit More on Taxes" »

Posted by Ezra Klein at 11:33 AM | Permalink | Comments (11)