REPUBLICAN HYPOCRISY ON THE FEDERAL DEFICIT

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

The Republican Party is guilty of lots of hypocrisy these days, some of it new and some of it old. One of the older elements that’s resurfacing today is concern about the federal government’s annual budget deficit and its overall accumulated debt. One of my real frustrations with the mainstream media is that they rarely call out Republican hypocrisy. They typically report the Democratic and Republican rhetoric as a he said / she said conflict without any historical or factual context.

Therefore, I was pleased to see a front-page story in the Boston Globe on 9/17/21 explicitly calling out the Republicans’ current hypocrisy on the federal deficit. The title and subtitle, no less, highlighted the hypocrisy: “Democrat in office, GOP focuses on the debt; But true to form, Republicans were silent as Trump ran up spending.” [1] What follows is a summary of the article.

Republicans are trying to build support for their opposition to President Biden’s and congressional Democrats’ infrastructure investment bills by saying they’re concerned about the federal budget deficit and overall debt. This is hypocritical because congressional Republicans remained largely silent as the debt grew by $8 trillion (40%) under President Trump in just four years. It’s also inaccurate because the Democrats are planning to pay for most if not all of the costs of the bills with tax increases on wealthy individuals and corporations, along with other revenue increases, so the deficit and debt would not grow as a result.

The hypocrisy is quite blatant because congressional Republicans pushed through a tax cut in 2017 that increased the debt by about $200 billion a year. Trump’s hypocrisy was stunning, given that he had promised during his campaign to balance the federal budget in four or five years. Instead, his four budgets ran deficits of an average of $2 trillion per year! Voters appeared to believe his campaign promise, in part because the mainstream media didn’t provide the context that would have shown it was a lie, particularly in the context of his other promises.

Republicans are saying they won’t vote to increase the federal government’s ceiling on its total amount of debt. However, they raised or suspended the debt ceiling three times when Trump was president. Moreover, most of the increase in the federal debt that has occurred since the debt ceiling was last raised in 2019, occurred under President Trump. Republicans are resurrecting their opposition to increasing the debt ceiling that they exhibited when Obama (a Democrat) was president. Then, they pushed the government to the brink of defaulting on its debt, which would create an unprecedented economic crisis.

This hypocritical opposition to increasing the debt ceiling and to increased spending because it might increase the annual budget deficit reflects a 40-year pattern of Republican presidents and congresspeople creating large budget deficits and then leaving a fiscal and economic mess for Democratic presidents to deal with and clean up. Brian Riedl, a senior fellow at the Manhattan Institute (a conservative, free-market think tank) and a Republican economic and tax policy expert, is quoted in the article as saying, “Republicans are absolutely guilty of hypocrisy in that they focus on the debt during Democratic presidents and then run up spending during Republican presidents.”

[1]      Puzzanghera, J., 9/17/21, “Democrat in office, GOP focuses on the debt,” The Boston Globe

HOW THE GOVERNMENT CAN SUPPORT THE ECONOMY AND WORKERS

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

Effective governments are critical components of our societal infrastructure. They are needed to combat public health threats such as the coronavirus, to keep people safe, and to provide a safety net for workers and families in economic hard times, among other things. Government programs and actions can provide important supports for our economy and its workers. Economic growth and workers’ pay and employment are inextricably linked as consumer spending, i.e., workers spending their pay, is what drives our economy, representing about two-thirds of all economic activity.

My previous two posts (here and here) focused on efforts to undermine and weaken government. They outlined negative effects of weak government infrastructure and of privatization of public sector work. This post highlights the benefits of government action.

The “Biden Plan,” as the President calls it, uses aggressive federal government action to combat the coronavirus and to stimulate the economy. The first piece of it was an aggressive effort to get people vaccinated along with other steps to reduce the impact of Covid on people’s health. The second major piece, the American Rescue Plan (ARP), was passed in March 2021 and provides $1.9 trillion to combat the pandemic and its harmful effects on workers, businesses, and the economy. It strengthens our healthcare system; provides funding for schools, housing, small businesses, and local governments; and supports low- and middle-income workers by extending unemployment benefits and providing monthly support checks for families with children.

Given the popularity of the American Rescue Plan (75% of voters like it) and support from local and state governments (including a number of Republican governors), it wouldn’t seem to be a partisan issue, but every Republican member of Congress voted against it. Every President, Democrat or Republican, from WWII to 1980 used government actions to support the economy and workers, and to ensure that the rising tide did indeed lift all boats somewhat equitably. [1]

However, since 1980, Republican ideology has opposed such government action, taking the position that government action is unnecessary because the private sector, stimulated by tax cuts, will meet society’s needs even in the face of crises and economic recessions. This ideology claims that cutting taxes, particularly for wealthy individuals and corporations, will stimulate the economy, generate growth that will more than make up for the revenue lost due to the tax cuts, and that benefits will “trickle down” to workers.

Republican Presidents Reagan, George W. Bush, and Trump all cut taxes and in every case the economy did NOT boom, tax revenue did NOT grow, and workers did NOT benefit, but the deficit DID grow substantially. Republicans’ concern about the federal government’s deficit seems to only apply to Democratic initiatives. Moreover, Republican President George H. W. Bush promised not to raise taxes when he ran in 1988, but when the previous Reagan tax cuts led to dramatic growth of the  deficit, Bush raised taxes to reduce the deficit – for which he was basically disowned by the Republican Party.

According to Republicans, the American Rescue Plan and any government actions like it will (supposedly) kill economic growth and job creation, leading to high unemployment and growing deficits.

However, recent economic data show that Republican predictions have NOT come true. Rather, the data show growth in the number of jobs, falling unemployment, increased pay for workers, a growing economy, and a falling deficit. This provides solid validation for the government actions President Biden and Democrats in Congress have taken in response to the pandemic and its negative effects on workers and the economy. By the way, economic and job growth also occurred after Democratic President Clinton raised taxes. Moreover, the resultant increase in revenue and economic growth made the deficit disappear! Both the current experience and that under President Clinton clearly debunk Republican fear mongering about tax increases, a strong safety net, and government intervention in the economy.

Perhaps convinced by these data, 19 Republicans in the U.S. Senate (out of 50) along with all 50 Democrats voted for a $1 trillion infrastructure bill that will make major government investments in roads, bridges, railroads, mass transit, water systems, pollution clean-up, and high-speed Internet access among other things. This spending over the next ten years is projected to create 3 million jobs.

However, Republicans are still unified in opposition to an additional $3.5 trillion infrastructure bill that would address climate change and more directly support workers and their families through funding for education, health care, housing, paid family leave, elder care, early education and child care, and making the temporary child tax credit of the ARP permanent. This last provision alone is projected to cut child poverty in half – disproportionately benefiting children of color – and would keep families with children from slipping back into poverty if the temporary ARP child tax credit were allowed to expire. The climate change investments in clean energy and reduction of carbon emissions are likely to save trillions of dollars in damages and mitigation measures that would occur if climate change continues unabated.

In response to Republicans’ concerns about the costs for the infrastructure bills, Treasury Secretary and former Chair of the Federal Reserve Janet Yellen said: “My largest concern is not: What are the risks if we make these big investments? It is: What is the cost if we don’t?” [2]

I encourage you to let your U.S. Representative and Senators, along with President Biden, know that you support government investments in our infrastructure to support a strong economy, and workers and their families as well.

You can find contact information for your U.S. Representative at  http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1]      Richardson, H. C., 8/10/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/august-10-2021)

[2]      Richardson, H. C., 8/10/21, see above

WE NEED SOLID GOVERNMENT INFRASTRUCTURE Part 2

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

Governments are critical components of our societal infrastructure. Effective governments are needed to deliver the services, supports, and public amenities that Americans want and need. For 40 years, small government advocates – led by Republicans but with the acquiescence or assistance of many Democrats – have successfully shrunk and weakened government infrastructure and capacity. (My previous post focused on the targeting of public employees.)

One reason for the attacks on government infrastructure has been to privatize government functions so the private sector can make profits by performing work previously done by public employees. This has always been justified by the claim that the private sector will do things more efficiently and save taxpayers money. However, numerous real-life experiences have shown that this is often not the case.

The Internal Revenue Service (IRS), the nation’s tax collector, is a classic example of the harm that results from privatizing and weakening public infrastructure. In 2004, President G. W. Bush privatized the efforts to collect hundreds of billions of dollars owed to the IRS, claiming the private sector would do a better job. The private collectors brought in $86 million from the easy to win cases. The IRS then brought the work back in-house and its agents collected about $140 million in just a few months from more difficult cases that the private collectors had skipped over. This experience demonstrated that privatizing the collection of owed taxes was inefficient and a waste of money. [1]

Nonetheless, the Republicans persisted in slashing the budget, staff, and enforcement capacity of the IRS. From 2010 to 2018, the Republicans slashed the IRS’s budget by 20% and its staff by 22%. The number of audits of taxpayers with over $1 million in income dropped by 72% and money collected from audits dropped by 40%. Now, President Biden is proposing increasing funding for the IRS and its enforcement activities, which will more than pay for itself in increased tax collections. (See my previous post on the IRS for more details.)

Other examples of privatization that have been problematic include:

  • Privatized prisons and detention centers are less safe, less secure, and more costly than government-run facilities. (See my previous posts on this here and here.)
  • Disaster response to hurricanes Irma and Maria in Puerto Rico was privatized by the Federal Emergency Management Administration because of insufficient staff. The results were substantial delays in the delivery of critical supplies, cost overruns of $179 million, and another $50 million in questionable costs.
  • Paying bills, monitoring quality of care, and transmission of funds to states for Medicaid and Medicare have been privatized leading to a labyrinthian maze that is challenging to navigate when problems or questions arise.
  • Housing for refugees arriving at the Mexican border has been privatized resulting in an unresponsive amalgamation of contractor-run shelters.

With privatized services, quality problems and cost overruns are frequent, but it’s the government that gets blamed. A classic example is the problem with the Affordable Care Act (aka Obama Care) website rollout. The problems stemmed from the 62 contracts with private firms that were hired to build the website. The government’s failing, beyond perhaps the decision to privatize this work, was that it didn’t have the capacity to effectively manage this complex set of private contractors.

Good management and oversight of contractors requires time and skill, which costs money. Privatization deals rarely provide for this because the focus is on cutting costs. So, the government can end up with private contractors managing other contractors. Contractors also end up writing policies – that sometimes benefit themselves. Private employees under long-term contracts end up sitting in the same offices and doing the same work as government employees, often at significantly greater cost. Members of the public dealing with the government have no idea whether they are interacting with a government employee or a contractor, but if things don’t go well the government gets the blame.

The number and complexity of privatization arrangements and a lack of transparency about some of them (often very intentional) mean that the number of private, contracted personnel and their cost to taxpayers are impossible to accurately aggregate. The effectiveness and efficiency of their performance is also often impossible to determine.

Reversing the trend toward privatization will be difficult for multiple reasons, but partly because companies with federal contracts are active lobbyists and campaign contributors. A 2011 study found that of the 41 companies making the most in campaign contributions over the previous 20 years, 33 had federal contracts.

I encourage you to let your elected officials at all levels, particularly the federal and state levels, know that you support strong government infrastructure as an essential component of a well-functioning society. We need President Biden and Members of Congress to support the rebuilding of government infrastructure and capacity, and to oppose privatization of core government responsibilities. The importance of this has become particularly evident during the pandemic, when the capacity of government public health agencies was essential to keeping people safe, through everything from economic assistance to eviction moratoriums to the distribution of vaccines and personal protective equipment. As Bob Kutner wrote in a recent blog from The American Prospect, “Face it, the only way to keep relatively safe is to elect people to run the government who believe in the government, and who operate it competently and relatively free of corruption.” [2] In other words, the only way to have the effective government that we need is to have solid, well-run government infrastructure.

You can find contact information for your U.S. Representative at  http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1]      Kettl, D. F., & Glastris, P., 7/1/21, “Memo to AOC: Only you can save the government,” Washington Monthly (https://washingtonmonthly.com/magazine/july-august-2021/memo-to-aoc-only-you-can-fix-the-federal-government/) This blog post is primarily a summary of this article.

[2]      Kuttner, R., 7/2/21, “The Condo, the Inspector, the Market, and the Government,” Today on The American Prospect blog (http://americanprospect.activehosted.com/index.php?action=social&chash=61b4a64be663682e8cb037d9719ad8cd.839&s=6009966078bda0f5056f960a346ead8a)

WE NEED STRONG GOVERNMENT INFRASTRUCTURE

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

Governments are critical components of our societal infrastructure. Effective governments are needed to deliver the services, supports, and public amenities that Americans want and need. As I noted in my last post, an important reason that massive unemployment insurance fraud occurred during the pandemic was that government infrastructure wasn’t up to the task of effectively administering expanded benefits. State computer systems and personnel didn’t have the capacity to accurately enroll and pay the wave of new beneficiaries. And law enforcement lacked the capacity to identify and punish fraudulent applicants.

For 40 years, small government advocates – mostly Republicans but with the acquiescence or assistance of many Democrats – have successfully pushed to shrink government infrastructure and capacity. President Reagan (a Republican) asserted in 1980 that government was the problem and not the solution – a claim that went unanswered by Democrats. This marked the beginning of a concerted effort by Republicans to downsize the federal government – except for the Defense Department – in terms of number of personnel, regulatory capacity and responsibility, provision of a safety net, emergency response and public health capacity, scientific and policy analysis expertise and data, etc. President Clinton (a Democrat) in 1992 declared the end of the era of big government and of welfare as we’d known it – supporting and furthering the weakening of government infrastructure.

One component of this attack on government infrastructure has targeted public employees, both to reduce their numbers and to denigrate them. One reason for this has been to discredit government by claiming that its employees are inefficient, incompetent, and overpaid. Another reason has been to undermine unions, which today are strongest in the public sector given the very successful efforts by corporatists and oligarchs to undermine private sector unions. (The percentage of private sector workers represented by a union has fallen to 20% of what it was 60 years ago – from over 30% to under 7%.)

Federal civilian employment is a little over 2 million, roughly the same as it was in 1966, despite a quintupling of federal spending and a population that has grown by 68%. The government has added agencies in that time such as the Environmental Protection Agency, the Department of Homeland Security, and the Department of Energy. In these new agencies and others, the government’s roles and responsibilities have grown and have also become much more complex. Nonetheless, the number of federal employees has not grown to meet these needs. Moreover, under the Trump administration, employment at the Department of Labor declined 11%, 9% at the State Department, and 8% at the Education Department, although their workloads were not declining. Scientists were a particular target of the Trump administration. For example, the Agriculture Department had 50% of its research jobs vacant under Trump. [1]

To maintain the services that Americans want and the functions government must perform (such as tax collection) with a limited number of federal employees has required a dramatic increase in the number of consultants and contractors working for the government. This has become big business for many companies including some of the well-known consulting companies such as McKinsey and Booz Allen. Booz Allen now gets 96% of its revenue from federal government contracts.

There are now over twice as many private contractors working for the federal government as there are employees. The Government Accountability Office has warned for years that the extensive use of contractors was eroding the government’s ability to govern, including the making of important policy decisions. President Obama worked diligently to reduce the number of contractors, having noted that they are “often unaccountable and often less efficient than government workers.” His administration succeeded in reducing the ratio of contractors to employees from 3.38 to 2.34. Trump reversed this trend and the contractor workforce grew by about 1.4 million people in his four years as President.

A 2010 study by the Project on Government Oversight examined 35 government job categories and found that for 33 of them government employees were less expensive than private contractors even when federal fringe benefits were included. For one job category, contractors were almost five times more expensive.

As a result of the weakening of the federal government’s infrastructure and the extensive use of privatization and contractors, the rate of highly visible failures of government services as risen from 1.6 per year in the 1980s to 4.3 during the Trump administration.

My next post will more closely examine the privatization of government functions and its effects.

Note: In addition to personnel, computer systems are another essential component of government infrastructure. Many government computer systems, at the federal and state levels, are out-of-date, if not antiquated, due to a lack of investment over the last 40 years. As a result, many government computer systems can barely perform essential functions, are difficult to update, and are unable to share data with other systems. This is a story for another day and another post or two.

[1]      Kettl, D. F., & Glastris, P., 7/1/21, “Memo to AOC: Only you can save the government,” Washington Monthly (https://washingtonmonthly.com/magazine/july-august-2021/memo-to-aoc-only-you-can-fix-the-federal-government/) This blog post is primarily a summary of this article.

HOW THE RICH GET RICHER #4

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

The inability of the Internal Revenue Service (IRS) to enforce tax laws has resulted in a high level of tax evasion by wealthy individuals and corporations. Some experts estimate that as much as $1 billion a year in taxes owed are not paid.

As the country’s tax collector and tax enforcer, the IRS has never been a popular agency among the public or politicians. However, the importance of the IRS’s work in enforcing tax laws, maintaining a fair and functional tax system, and collecting the revenue the government needs to operate had been broadly respected.

This changed when Republicans gained control of the U.S. House of Representatives and Newt Gingrich became the House leader in 1994. Republicans began vilifying the IRS and using “abolish the IRS” as a sound bite. Republican presidential candidates, including Sen. Lugar in 1996 and Sen. Cruz in 2016, made abolishing the IRS a central policy proposal. In 1998, Republicans introduced a bill in Congress to repeal the Internal Revenue Code (the country’s tax laws) and abolish the IRS. [1]

The Republicans have held congressional hearings on alleged abuses by the IRS. Despite the fact that in most cases investigations by the Government Accountability Office (GAO) and others have debunked the alleged abuses, the IRS’s reputation has been seriously undermined. This gave Republicans cover for passing laws weakening the IRS and its tax enforcement.

Beginning in 2010, Republicans in Congress undertook a multi-year initiative to cut the IRS’s budget and enforcement capacity. Since 2010 when its budget peaked at $14 billion, the IRS’s budget has been cut by about 20% (adjusted for inflation). Its staff has been cut by nearly one-quarter to 76,000 full-time employees and the number doing enforcement has fallen from 23,500 to 6,500, a 72% reduction. [2] It has the fewest auditors it has had since the 1940s and it has the oldest computer technology in the federal government.

The IRS recently announced a backlog of 35 million unprocessed tax returns, three times the number from a year ago and four times what it was in 2019. This means taxpayers have to wait longer for their refunds, payments from the Earned Income Tax Credit to low-income families will be delayed, and some transactions, like mortgage approvals, that require current income tax documentation will be delayed. It also revealed that only 3% of the calls to its most popular, toll-free hotline reach a real person. Despite its challenges, it has processed 137 million individual tax returns and sent refunds of more than $281 billion.

Tax obligations expire (i.e., become uncollectible) after ten years if the IRS doesn’t pursue them. In 2017, $8.3 billion of tax obligations expired, up from $482 million in 2010 (a 17-fold increase). Investigations of people who didn’t file a tax return have fallen from 2.4 million in 2011 to 362,000 in 2018 (down 85%). Similarly, collections from people who file but don’t pay have dropped dramatically. In 2017, the IRS conducted 675,000 fewer audits than in 2010, a 42% drop in the audit rate. The audit rate has dropped roughly 70% on those with incomes over $200,000 and but only about 40% for those with incomes under $200,000. This is a key contributor to increased tax evasion by the wealthy.

The impact of the IRS’s budget cuts has been exacerbated by substantial new responsibilities that it has been given under the Affordable Care Act and the response to the pandemic. In responding to the pandemic, the IRS has been tasked with distributing three rounds of relief payments, implementing changed rules on unemployment benefits and tax credits, and, most recently, sending out monthly checks to most families with children. With a significantly reduced budget and staff, it has been expected to do all of these things while trying to maintain its core business of processing tax returns. [3]

President Biden has proposed increasing the budget of the IRS by $40 billion over ten years to reduce tax evasion and generate revenue to help pay for infrastructure investments. He estimates that this increased IRS funding would raise government revenue by $140 billion over those ten years. The Congressional Budget Office (CBO) estimates added revenue of $103 billion and others have other estimates, but everyone agrees that increased enforcement would generate significant revenue. It would also make our tax system fairer by reducing tax evasion, which is largely done by wealthy individuals and corporations. However, it might well take five years to make the upgrades to the IRS’s computer systems and to hire and train the new staff needed to achieve these results.

Initially, the Republicans who were part of the bipartisan group of 21 Senators working on the infrastructure investment bill endorsed the increased funding for the IRS, but now they are backing away from it after hearing opposition from some of their wealthy backers.

Support for increased funding for the IRS has come from five former Secretaries of the Treasury, from both Republican and Democratic administrations. They state that increased funding for the IRS would “raise significant revenue and create a fairer, more efficient” tax system. [4]

The IRS and our income tax system depend, in large part, on the voluntary compliance and honesty of taxpayers. If taxpayers’ come to believe that the tax system is not fairly administered, voluntary and honest tax compliance is likely to decline. This could have dire implications for government revenue and for the IRS’s ability to do its job. It is important that the public believe that people pay the taxes the law says they owe. This encourages compliance with tax laws even if the overall perception is that the wealthy are not paying their fair share under our current tax laws. Then, the focus can be on making our tax laws fairer.

I urge you to contact your U.S. Representative and Senators and to ask them to support additional funding for the IRS so it can effectively enforce our tax laws. You can find contact information for your U.S. Representative at  http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

Please also contact President Biden and thank him for proposing increased funding for the IRS because this will mean it can more effectively implement our tax laws. You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1]      Kiel, P., & Eisinger, J., 12/11/18, “How the IRS was gutted,” ProPublica and The Atlantic (https://www.propublica.org/article/how-the-irs-was-gutted)

[2]      Puzzanghera, J., 7/5/21, “Aggressive IRS could help with roads bill,” The Boston Globe

[3]      Stein, J., 6/30/21, “IRS faces 35 million unprocessed tax returns as backlog swells, watchdog says,” The Washington Post

[4]      Puzzanghera, J., 7/5/21, see above

THE CASE FOR A WEALTH TAX

Note: I apologize for the infrequent blog posting. I’m on sabbatical with out-of-town grandchildren visiting.

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

Recent revelations about how little federal income tax the ultrawealthy pay and how they legally avoid income tax liability make the case that a wealth tax is essential for a fair tax system. A fair tax system is necessary a) to provide sufficient funds for the public programs needed to serve the public and the public good, and b) to preserve public support for the tax system.

ProPublica, an independent, nonprofit newsroom that does investigative journalism in the public interest, has obtain and analyzed 15 years of data on the tax returns of thousands of the country’s wealthiest households. Its analyses show the wealthy pay very little in income taxes, perfectly legally, despite the fact that their wealth is growing by leaps and bounds. [1] (This post is largely a summary of this ProPublica reporting.)

The median American household earns about $70,000 a year and pays about 15% of this in income taxes. For the period from 2014 to 2018, a typical middle class American household paid a total (for these five years) of about $62,000 in federal income tax on total earnings of around $350,000. Meanwhile, its wealth, primarily the value of its home, grew by $65,000. Its effective tax rate on the combine total of earned income and increase in wealth was about 15%.

ProPublica’s detailed analysis of the 25 wealthiest Americans found that collectively their wealth increased by $401 billion in the five-year period from 2014 to 2018. Their earned income was tiny by comparison. They paid an aggregate total of $13.6 billion in federal income taxes. Their effective tax rate on the combined total of their earned income and increase in wealth was about 3.4% (versus the 15% paid by a typical middle-income taxpayer).

Another analysis found that in 2018, in comparison to their wealth, a typical middle-income household paid 75 times as much in income tax as those 25 ultrawealthy Americans. At the end of 2018, the 25 wealthiest Americans had an estimated wealth of $1.1 trillion and in 2018 paid federal income taxes of $1.9 billion. It would take 14.3 million typical American households to have this much wealth and those 14.3 million households paid federal income taxes of $143 billion in 2018.

This disparity in income tax paid when wealth is factored in is the result of a 1920 Supreme Court decision where the Court ruled that the income tax laws as written apply only to income received in cash and not to an increase in wealth (i.e., the value of assets), unless assets are sold and cash (or other forms of proceeds) are received. Before this decision, the income tax had applied to increases in wealth.

This decision provided the wealthy with a huge loophole for tax avoidance. The ultrawealthy own billions of dollars worth of stock, often in companies they own or control. The 25 wealthiest Americans have seen the value of their stocks skyrocket in recent years. To minimize earned income (and income tax), they often take modest salaries from their companies; some take salaries of only $1.

Some of the ultrawealthy avoid having income (and therefore paying income tax) because they are able to pay their living expenses by borrowing large sums of money, sometimes billions of dollars, using their stock wealth as collateral for loans. These loans are not considered income and therefore are not subject to income tax. Furthermore, the interest on the loans is often tax deductible and can be used to offset (i.e., cancel out) income, reducing or eliminating taxable income and the amount of income tax owed.

The wealthy often avoid income tax by reducing taxable income with deductions. Deductions can be losses on various investments or business ventures, such as real estate or sports teams. Charitable contributions are another deduction that reduces taxable income. And, of course, if they do sell some of their stock or other assets, the profits on those sales, as well as the dividends and interest they get from their investments, are unearned income, which is taxed at a lower rate than earned income (if it isn’t eliminated by deductions).

The wealthy have gotten these tax breaks (and others) written into U.S. tax laws through their spending on and donations to the political campaigns of many of our elected officials, as well as through their lobbying of elected and appointed officials. (See my previous posts on how the U.S. tax system favors the rich and what can be done to make it fairer.)

The degree to which the wealthy control the debate on tax policy is reflected in the fact that the current tax reform proposals from President Biden would have little impact on the wealthy. Nonetheless, these tax reform proposals are reported as being big and controversial changes in our income tax laws. One proposal is to raise the income tax rate on high earned incomes back to 39.6% from 37%. (For perspective, it was over 90% in the 1950s and 70% in 1980.) This would have little effect on the wealthy because only a small portion of their income is earned income and this is a small percentage increase. A second proposal, would make the income tax rate on unearned income (e.g., dividends and the gain on the sale of assets) the same as the higher rate on earned income. This would have more of an effect on the wealthy, but little effect on the ultrawealthy that ProPublica analyzed in detail as they rarely sell their assets or they have deductions that reduce or eliminate their taxable income.

The failure of the wealthy in America to pay their fair share in taxes harms our country in two main ways. First, government is under-funded and can’t do the things we need it to do – from maintaining and building infrastructure, to investing in human capital, to maintaining a just and sufficient safety net for those who fall on hard times, to building and maintaining a public health system that can save lives during a pandemic or other health crisis. Second, taxes are citizens’ collective contributions to having a civil society and supporting the public good. Such a system is viable only if citizens believe it is fair and everyone is contributing their fair share.

ProPublica’s investigative reporting on the U.S. tax system is performing a valuable public service. An informed debate about our tax system and the design of policies for a fair system can only happen if there is good data and an accurate picture of how the tax system is working.

These data and the picture they paint make it clear that the only way to have a truly fair tax system is to tax wealth (as Senators Warren and Sanders have proposed) or to tax increases in wealth as income even if assets are not sold and no cash or other proceeds are received (i.e., to tax unrealized capital gains).

I urge you to contact your U.S. Representative and Senators and to ask them to support a tax on wealth or increases in wealth as the only way to make our tax system fair. You can find contact information for your U.S. Representative at  http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

Please also contact President Biden and ask him to support a tax on wealth or increases in wealth, in addition to his current proposals, as such a tax is essential to making our tax system truly fair. You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1]      Eisinger, J., Ernsthausen, J., & Kiel, P. 6/8/21, “The secret IRS files: Trove of never-before-seen records reveal how the wealthiest avoid income tax,” ProPublica (https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax)

OPPOSITION TO “SOCIALISM” IS A DOG WHISTLE FOR RACISM

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

As I imagine you’ve heard, Republicans are attacking President Biden’s and Democrats’ policy proposals as “socialism.” I thought, naively, that Republicans were just trying foster opposition based on Cold War fears by conflating socialism with communism and identifying it as the existential threat to American democracy.

Heather Cox Richardson, with her historical perspective, has opened my eyes to the fact that the opposition to “socialism” has deeper roots in our history and is a dog whistle for racism. (If this use of the term dog whistle is new to you, please see this footnote. [1])

First, socialism is formally defined as an economic and political system where workers own the means of production (e.g., factories, farms, and organizations that provide services as well as the raw materials, machines, tools, and physical facilities used in producing goods and services). This is NOT, by any stretch of the truth, what Biden and Democrats are proposing. Socialism recognizes workers as the essential input to the economy and, therefore, posits that they should own the means of production and be the beneficiaries of the fruits of the economy.

Social democracy, on the other hand, is a political and economic system where a democratic government manages and regulates capitalism (i.e., private ownership of the means of production) to ensure social and economic justice. In our democracy, the government’s commitment to social and economic justice for all is stated in our founding documents – that all people are created equal, that all people should be guaranteed life, liberty, and the ability to pursue happiness, and that all people have the rights delineated in the Bill of Rights.

The explicit recognition that equal opportunity and true freedom require economic security was stated by President Franklin D. Roosevelt in his proposal for an economic bill of rights [2] and by Senator Bernie Sanders in his statements on what democratic socialism means to him (although technically speaking, he was describing social democracy and not democratic socialism). [3] [4] (See this footnote for a definition of democratic socialism and communism. [5])

Currently, Republicans are using “socialism” as a dog whistle to mean the use of government resources to promote racial equity and justice. Their dog whistle definition of “socialism” is the use of taxes paid by hardworking white men (and women) to benefit lazy people of color who are happy to live on government benefits. Today’s Republicans claim this “socialism” will undermine American democracy and freedom. The dog whistle is that these policies will undermine the “freedom” and privilege of white people.

This use of “socialism” goes back to 1871 when southern Democrats claimed they opposed voting by Blacks, not due to racism, but because Black voters would elect policy makers who would promote “socialism,” i.e., taxing white property owners to pay for roads, schools, and hospitals that would benefit Blacks. [6] They argued that Black voting would lead to “socialism” that would destroy America (namely the America of white supremacy). [7] [8]

After the Brown v. Board of Education decision in 1954, which found racial segregation in public schools unconstitutional, the use of government resources to enforce desegregation and civil rights was attacked as “socialism” because the costs of implementing desegregation and civil rights (for “undeserving” Black people) would be paid for by taxes on hardworking white men (and women). In 1958, Republican Senator Barry Goldwater accused his own party’s President Eisenhower of succumbing to “the siren song of socialism” for his use of government resources (troops) to enforce desegregation of Little Rock, Arkansas, High School. The irony was that the Goldwater family had made its money from government funding for dam construction in Arizona. [9]

Republican attacks on government, on a public safety net, and on beneficiaries of public assistance (inaccurately stereotyped as people of color) took on new strength and significance with the election of President Reagan in 1980. Remember Reagan’s attack on the mythical “welfare queen” with her Cadillac and mink coat? The attacks on “socialism” as a dog whistle for racism have only escalated since then.

Today, Republicans are vigorously charging that President Biden and Democrats are working to bring “socialism” to America. They claim that a no-holds-barred fight is necessary to save American from “socialism.” They are even willing to dispense with a commitment to democracy to “save” America. This disregard for democracy dates to at least 1980 when Republican strategist Paul Weyrich stated, “I don’t want everybody to vote …our leverage in the elections quite candidly goes up as the voting populace goes down.” That’s why Republicans have been and are actively engaged in voter suppression efforts. (Weyrich was a co-founder of the Heritage Foundation, which today is deeply involved in promoting state voting suppression laws and with the “audit” of voting in Arizona and elsewhere.) In October 2020, Utah Senator Mike Lee tweeted, “Democracy is not the objective … liberty, peace, and prosperity are. … democracy can thwart that.” [10]

Republicans are claiming today, as white southern Democrats did after the Civil War, that keeping “socialism” from coming to America requires keeping Black and other likely Democratic voters from voting; democracy, our Constitution, and our founding principles (which make America exceptional) be damned. The racism of the post-Civil War white Democrats’ attacks on “socialism” was made clear by the brutal Jim Crow laws they implemented to keep Blacks in their place and to prevent them from voting.

The implications of today’s Republicans’ claims of needing to prevent “socialism” in America aren’t completely clear, but civil rights, police reform, and social and economic justice are definitely targets. However, the racism behind their attacks on “socialism” is clear and these attacks should no longer be a dog whistle; every American should hear the racism in their attacks on “socialism” loudly and clearly.

[1]      The term dog whistle here is a political adaptation of the fact that a dog whistle can’t be heard by humans but can be heard by dogs. In politics, it refers to language that will be heard as supporting white privilege and supremacy by those people attuned to such sentiments, but won’t be heard by many other people as being racist and where the politician opposing “socialism” – or using other dog whistles – can deny racist intent.

[2]      President Franklin Delano Roosevelt, 1/11/44, “The economic bill of rights,” retrieved from the Internet 5/22/21 at https://www.ushistory.org/documents/economic_bill_of_rights.htm

[3]    Senator Bernie Sanders, 11/19/15, “Senator Sanders on Democratic Socialism and Defeating ISIS,” retrieved from the Internet 5/22/21 at https://www.c-span.org/video/?400961-1/senator-bernie-sanders-address-democratic-socialism (Sanders begins speaking at 8 mins., defines socialism at 12 mins., and presents his and FDR’s vision at 30 mins. into this 1 hr. 40 min. video)

[4]    Golshan, T., 6/12/19, “Bernie Sanders defines his vision for democratic socialism in the United States,” Vox (https://www.vox.com/2019/6/12/18663217/bernie-sanders-democratic-socialism-speech-transcript)

[5]     Democratic socialism is socialism where both the economy and society are governed democratically, with decision making by citizens with a focus on economic and social justice. Democratic socialism is not compatible with capitalism, which is based on private ownership of the means of production and, therefore, where the benefits, economic and also social and political power, flow to the owners of capital, i.e., the owners of physical and monetary assets.

Communism is formally defined as an economic and political system where the workers own the means of production and that is dedicated to equality for all, implemented through an authoritarian government. The main difference between communism and socialism is that socialism is compatible with democracy and liberty, while communism requires authoritarianism and denies basic individual liberties.

[6]      Cox Richardson, H., 4/19/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/april-19-2021)

[7]      Cox Richardson, H., 5/14/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/may-14-2021)

[8]      Cox Richardson, H., 1/16/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/january-16-2021

[9]      Cox Richardson, H., 4/19/21, see above

[10]     Cox Richardson, H., 5/14/21, see above

KEEPING THE RICH FROM GETTING EVEN RICHER

The rich have been getting dramatically richer, generally at the expense of the rest of us, for the last 40 years. My previous post identified four ways the U.S. tax system favors the rich:

  • Lower tax rates on the types of income (i.e., unearned income) that are prevalent among the wealthy,
  • Weak enforcement of tax laws that allows the wealthy to engage in substantial illegal tax evasion,
  • The lack of a wealth tax on anything other than one’s home, and
  • Tax loopholes that allow the wealthy to significantly reduce the amount of income tax they pay.

Federal tax laws and regulations are, obviously, the result of policy decisions made by elected officials (i.e., Congress and the President) and bureaucrats in the executive branch who report to the President. Therefore, these four ways that the tax system is tilted in favor of the wealthy can and should be changed.

First, the tax rates on unearned income should be raised. There’s a strong argument for making the tax rates on unearned income the same as on earned income and there’s no good reason to tax unearned income at a lower rate than earned income. It would be fairer to treat all kinds of income the same and this would eliminate the perverse incentive to manipulate income to have it fall into a category with a lower tax rate.

Tax rates in general, for both unearned and earned income, should be made more progressive. This would make our tax system fairer. The current top income tax rate is 37%. In the 1950s, the top tax rate was over 90% and in 1980, it was 70%. [1] So, the rich have gotten huge tax cuts over the last 70 years. And by the way, the economy was doing just fine in the 1950s with those higher tax rates. Raising the top rate by 1% would increase government revenue for needed programs and investments by about $12 billion per year. President Biden has proposed increasing the top rate to 39.6% (where it was before the 2017 Republican tax cut). This would generate about $31 billion in annual revenue.

Second, the budget of the IRS needs to be increased to strengthen enforcement of tax laws. It is estimated that every dollar spent on enforcement will reduce tax evasion by about $10. President Biden has proposed increasing IRS funding by about $8 billion per year and estimates that this would decrease tax evasion and increase government revenue by about $70 billion per year.

The IRS’s funding has been cut dramatically in recent years. This has reduced its ability to enforce tax laws and stop tax evasion. According to a Congressional Budget Office (CBO) report, from 2010 to 2018, the IRS’s annual budget declined by 20% and its staff decreased by 22%. Funding for enforcement fell by nearly 33%. Reviews of individual tax returns fell by 46%, while reviews of corporate tax returns fell by 37%. With less money and fewer staff, the IRS has had reduced capacity to enforce tax laws. [2] Nonetheless, the IRS is auditing low-income households, particularly those claiming the Earned Income Tax Credit for low-wage workers, at about twice the average rate that it audits the overall population.

The CBO estimated that $381 billion per year of taxes owed are not collected, mostly because of under-reporting of income by wealthy Americans. Because nearly all wage income is reported to the IRS by employers, unearned income and business income are far more likely to be under-reported. Wealthy Americans receive far more of these kinds of income than middle- and lower-income households. Therefore, the wealthy are the primary ones guilty of tax evasion by under-reporting income and are the beneficiaries of reduced IRS enforcement.

Third, a wealth tax would be an important step in making our tax system fairer, reducing economic inequality, and limiting the ability of families to perpetuate multi-million-dollar fortunes across generations, which is contributing to the emergence of an oligarchy in American society and politics. (See my previous posts on oligarchy in America here and here.) Senators Warren and Sanders have proposed a wealth tax that would place a 2% annual tax on wealth over $50 million, rising to 3% on wealth over $1 billion. It is estimated that such a wealth tax would raise $300 billion a year in revenue for the federal government.

Fourth, tax loopholes for the wealthy should be closed. There are too many of them to go into detail or provide an exhaustive list. As a starting point, we should:

  • Eliminate the “carried interest” loophole for managers of real estate, venture capital, private equity, and hedge funds that lets them pay the lower unearned income tax rates on the income they earn from their jobs,
  • Reduce the amount of money that can be given as tax-free gifts,
  • Reduce the amount of money that can be put tax-free into retirement accounts,
  • Reduce the amount of money that can be transferred tax-free in an estate, and
  • Eliminate the “stepped up basis” law that allows for tax-free transfers of assets that have increased in value. (See my previous post for more details on these tax loopholes.)

I encourage you to contact your U.S. Representative and Senators and tell them you support policy changes such as those above that would make our tax system fairer, stop the runaway increase in economic inequality, and generate revenue to pay for needed government programs, such as improving infrastructure and providing better supports for children and families. You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

I also encourage you to contact President Biden and to tell him you support his policy changes and others that would make our tax system fairer, reduce economic inequality, and generate revenue to pay for needed government programs. Contact the White House at https://www.whitehouse.gov/contact.

[1]      Reich, R., 4/2/21, “Tax the rich. Here’s how,” Common Dreams (https://www.commondreams.org/views/2021/04/02/tax-rich-heres-how)

[2]      Congressional Budget Office, July 2020, “Trends in the Internal Revenue Service’s funding and enforcement,” https://www.cbo.gov/system/files/2020-07/56422-CBO-IRS-enforcement.pdf

HOW THE RICH GET RICHER #2

Here’s number 2 in a series of posts on how the rich get richer, generally at the expense of the rest of us. (See number 1 here.)

The U.S. tax system favors the rich with:

  • Lower tax rates on the types of income (i.e., unearned income) that are prevalent among the wealthy,
  • Tax loopholes that allow the wealthy to significantly reduce the amount of income tax they pay,
  • Weak enforcement of tax laws that allows the wealthy to engage in substantial illegal tax evasion, and
  • The lack of a wealth tax on anything other than one’s home.

First, unearned income (e.g., income from dividends and the increased value of investments, aka capital gains) is generally taxed at a lower rate than earned income (i.e., income from wages). The wealthy, of course, receive the lion’s share of unearned income.

The overall federal tax rate on earned income for a typical household is 29.65%. The income tax rate is 22% on middle income households. The tax for Social Security is 6.2% and is matched by one’s employer. The tax for Medicare is 1.45% and is also matched by one’s employer. Income tax rates on earned income begin at 10% for lower income households and increases to 37% (on income over $622,000). Social Security only taxes earnings up to $142,800, so the effective tax rate for those with higher incomes declines as income increases. Therefore, the highest overall federal tax rate on earned income today is just about 40%. (Historically, the maximum federal income tax rate was 70% in 1980 and over 90% in the 1950s, compared with 37% today.)

The federal tax rate on most unearned income is roughly half of that on earned income – 15% for middle income taxpayers and a maximum of 20% for high income taxpayers. The tax on long-term capital gains (i.e., the increase in value of investments owned for more than one year) is zero for lower income households and increases to 20% (on income over $434,550). Most dividend income is taxed at the same rates as long-term capital gains. Unearned income  is not subject to Social Security and Medicare taxes. By the way, billionaires in the U.S. gained about $1 trillion in wealth due to the increased values of their investments during the pandemic year from March 2020 to March 2021.

In early 2011, the very wealthy investor Warren Buffett publicly stated that he believed it was wrong that rich people, like himself, paid a smaller portion of their incomes in income taxes than  middle class people, like his secretary. President Obama and some in Congress proposed changes in income tax laws to ensure that the wealthy paid more in income tax, but these proposals were not enacted.

Second, the broad variety of tax loopholes that benefit the wealthy constitute a form of welfare for the wealthy that is rarely discussed using this terminology. One of the most egregious loopholes is the so-called “carried interest” loophole. It allows managers of real estate, venture capital, private equity, and hedge funds (who are invariably wealthy) to claim the income they earn from their jobs to be capital gains (i.e., unearned income), which cuts the income taxes they pay roughly in half. This loophole is estimated to cost the federal government about $1.4 billion a year in lost tax revenue. [1]

An individual can make a gift of up to $15,000 per year to anyone they want to (e.g., children and grandchildren) and to as many people as they want to. The recipient(s) do not have to pay any tax on the gift they receive. Only the wealthy can afford to make gifts of this magnitude, of course.

An individual can contribute up to $19,500 ($26,000 if over 50) to a 401k retirement savings account and reduce their taxable income by the amount of their contribution. In some cases, an individual could also contribute $6,000 ($7,000 if over 50) to an Individual Retirement Account (IRA) and reduce their taxable income by this amount as well. Clearly, only wealthy individuals can afford to make contributions of this magnitude to retirement accounts, so this is another way the rich can dodge income taxes.

When a wealthy individual dies, roughly $11 million of their estate can be passed on tax-free. As a result, only about 3,000 estates are subject to the federal estate tax each year. The maximum tax rate on the assets passed on by an estate is 40%. Some in Congress have proposed eliminating the estate tax completely.

If investments or assets are left to children when a wealthy parent dies, the children never have to pay any tax on the increased value of the investment during the parent’s lifetime. If they were to sell the investment or asset on the day they received it, they would owe no tax. So, for example, Bill Gates can leave his billions of dollars of Microsoft stock to his children and they can sell it when they receive it and owe no tax, so no tax would ever be paid on the billions of dollars of increase in its value from the day Bill Gates got the stock.

Any homeowner can deduct the interest paid on up to $1 million of mortgages to reduce the amount of income on which they owe tax. (This limit has been reduced to $750,000 for mortgages obtained after 2017.) This applies to mortgages on first and second homes. This tax break costs the federal government more than it spends helping poor families pay rent and avoid homelessness. Homeowners can also reduce their taxable income by up to $10,000 for property taxes they paid. [2] This $10,000 limit was imposed in 2017; the deduction used to be unlimited. These tax breaks have the greatest benefit for the wealthy, of course.

The cost to the federal government of lost revenue due to the various income tax breaks (aka loopholes) is huge – more than $1.5 trillion a year, which is more than the cost of Social Security or of Medicare and Medicaid combined. The bulk of the benefits from these income tax breaks or loopholes goes to wealthy individuals, of course.

Third, the wealthiest 1% of U.S. households don’t report over one-fifth of their income costing the federal government an estimated $175 billion every year. Some simply don’t report all their income, but many use complex tax strategies to dodge income taxes. Because the IRS rarely audits wealthy taxpayers (only 6% of those with income over $10 million), much of this tax avoidance is never subject to enforcement actions. Budget cuts and staff shortages at the IRS are partly to blame, but policy decisions have also contributed to the fact that the poor are audited at about twice the rate (roughly 0.7%) of the overall population. [3]

Finally, wealth is not taxed in the U.S., with the exception of the major asset or investment of the middle-class – one’s home. The property tax on one’s home, typically levied by local government, is the only wealth tax in America. It ranges from a high of 2% per year to a low of an effective rate of 0.3%. Ownership of all other wealth, other assets or investments (e.g., stocks, bonds, and other financial instruments), which are mostly owned by the wealthy, are not taxed.

The wealthy and their political supporters have lots of rationales for why they shouldn’t pay more taxes. Many of these rationales contradict ones they present to argue against public assistance for the poor or increased unemployment benefits or an increase in the minimum wage.

The bottom line is that by pretty much any measure and also from an historical perspective, the wealthy are not paying their fair share. The U.S. tax system is rigged in favor of the wealthy. When the wealthy and their political supporters say the country can’t afford to help low- and middle-income people with health care, child care, higher education, or housing costs, or that Social Security benefits need to be cut, remember that the wealthy are getting hundreds of millions of dollars of benefits each year from the provisions or loopholes of our tax laws. On top of this, there would be additional hundreds of millions of dollars of revenues for the federal government each year if the wealthy were paying their fair share.

My next post will present a variety of proposals and strategies to make our tax system fairer.

[1]      Reich, R., 4/2/21, “Tax the rich. Here’s how,” Common Dreams (https://www.commondreams.org/views/2021/04/02/tax-rich-heres-how)

[2]      Buchheit, P., 3/22/21, “The boundless advantages of the welfare state – for the rich,” Common Dreams (https://www.commondreams.org/views/2021/03/22/boundless-advantages-welfare-state-rich)

[3]      Johnson, J., 3/22/21, “ ‘This is tax evasion’: Richest 1% of US households don’t report 21% of their income, analysis finds,” Common Dreams (https://www.commondreams.org/news/2021/03/22/tax-evasion-richest-1-us-households-dont-report-21-their-income-analysis-finds)

PANDEMIC RELIEF, UNITY, AND BIPARTISANSHIP

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

Passage of the American Rescue Plan (ARP), i.e., the pandemic relief package, is a milestone for unity because it fosters economic recovery and fairness for all Americans. Although it was a great opportunity for bipartisanship, unfortunately it has only been another milestone in the continuing, now decades-long, hyper-partisanship of Republicans.

President Biden had Republicans to the White House to try to obtain bipartisan support. He compromised by cutting unemployment benefits and reducing the number of Americans who qualified for relief payments by 17 million to address Republicans’ and conservative Democrats’ concerns about the costs of the bill and the targeting of benefits to those most in need. Nonetheless, the Republicans did everything they could to delay the bill, including demanding that the whole 628-page bill be read aloud in the Senate. And then, not one single Republican voted for it despite its overwhelming, bipartisan support for it among Americans. Roughly 75% of Americans supported the bill, including about 60% of Republicans.

Many in the media reported inaccurately that the passage of the ARP was also the death of bipartisanship because no Republican voted for it. The truth is that Republicans killed bipartisanship in the 1990s with their impeachment of President Clinton and put another nail in its coffin in 2008 with their pledge to make President Obama fail and to block every one of his legislative initiatives.

The ARP will cut the number of children living in poverty by one half. Child poverty in the U.S. is significantly higher than any other wealthy country and is incredibly harmful to children. Children in poverty in the U.S. are, of course, disproportionately children of color. The ARP will cut the overall number of Americans in poverty by 1/3. By the way, the official poverty line in the U.S. is well below any minimally realistic standard of living in many parts of the country at $26,500 for a family of four, which can be a single parent with three children.

The ARP provides a huge boost to middle-income families, increasing their after-tax incomes by an average of 5.5%, or about $2,750 for a family with a $50,000 income and $5,500 for a family with a $100,000 income.

Perhaps not surprisingly, Republicans’ calls for unity seem to have disappeared in the shadow of their blatantly partisan actions on the ARP. They have made it clear that their primary goal is obstruction of any initiative proposed by President Biden and supported by Democrats, even if it would do tremendous good for the country, its people and small businesses, as the ARP will. The Republicans will even obstruct policies that have broad bipartisan support among the public if somehow they believe that doing so will help them politically, i.e., in retaining their power and elected positions.

Perhaps not surprisingly as well, some Republicans are already trying to take credit for the benefits of the ARP, making it sound like they supported it. For example, Senator Wicker (R-MS) tweeted positively about the bill the same day that it passed, noting that it would help small businesses and restaurants, and giving the false impression that he had voted for it.

Republicans’ obstructionism has extended to President Biden’s nominees for his Cabinet and other positions. The precedent is that every President should be allowed to have whomever he wishes in his Cabinet, regardless of political differences. Unqualified and inappropriate nominees have been smoothly confirmed for President Trump and other Republican Presidents. Nonetheless, Senate Republicans have been dragging their feet and opposing some of Biden’s nominees solely for political reasons. They are even opposing nominees because of their partisan social media activity – a standard that would have disqualified a number of Trump nominees.

Looking ahead a bit, the For the People Act and the John Lewis Voting Rights Advancement Act were recently passed by the House and would take strong steps to guarantee the right to vote for all, a key step toward unifying America. (See this previous post for more details.) These bills have the broad, bipartisan support of about 70% of Americans. However, the Republicans plan to block them in the Senate with the filibuster. Meanwhile, Republicans in many state legislatures and Governors’ offices are pushing bills that would suppress voting, particularly of people of color and those with low-incomes. (See this previous post for more details.) The House has also passed the George Floyd Justice in Policing Act, which will presumably be blocked by a filibuster by Senate Republicans. Clearly, most Republicans in Congress and those in many states across the country have no interest in bipartisanship and no interest in unifying America.

The hypocrisy of Republicans in Congress was just highlighted by their filing of a bill to repeal the estate tax. Over the next ten years, this would give $350 billion to 2,000 very wealthy people (i.e., those with estates of over $11 million for an individual or $22 million for a couple). Yet, the Republicans pushed to stop 17 million middle class Americans from receiving the $1,400 pandemic relief payments to save $24 billion (7% of the estate tax giveaway) and also to reduce weekly unemployment benefits by $100. So, Republicans support a big tax cut for some of the wealthiest people in America but oppose a little help for those in the middle class. This makes it clear that their purported concern about government spending and the deficit is hypocritical. Clearly, their calls for unity are hypocritical as well.

On a personal note, I’m dismayed to be writing so negatively about most Republicans and the Republican Party. I believe in political competition and an honest debate over policies. I grew up in New York State when Nelson Rockefeller, a Republican, was a well-respected Governor for 16 years. Up until the 1980s, I was a proud Independent voter, not registered in either party. My first significant political involvement was in 1980 when I worked hard for John Anderson for President, a Republican running as an independent against Jimmy Carter and Ronald Reagan.

However, the 1980s made it clear to me that the Republicans had become wedded to an anti-government, anti-worker, anti-civil rights agenda. And their agenda has only gotten more extreme since then. In the 1990s, I became quite disillusioned with the national Democrats who adopted much of the Republican deregulation, pro-big business, pro-Wall Street agenda.

The Republican Party, for the most part, has now adopted an anti-democracy agenda that supports voter suppression, big corporations, and wealthy individuals without reservations. I hope President Biden can change the direction of the country and the Democratic national party while standing up to the radical revolutionaries of the Republican Party.

I urge you to contact the White House and let Biden know that you support his and the Democrats’ efforts to restore our democracy and its commitments to equal opportunity for all, the rule of law, and government of, by, and for ALL the people. You can contact the White House at https://www.whitehouse.gov/contact.

PRESIDENT BIDEN: STAND UP FOR A STRONG PANDEMIC RELIEF BILL

I just sent the following message to President Biden about the pandemic relief bill that he is meeting with ten Republican Senators today to negotiate. I had to break it into two pieces because of the limit on how many words you can submit in their contact form.

I urge you to contact him at https://www.whitehouse.gov/contact/ with your thoughts about the  pandemic relief bill.

President Biden,

Please stand up firmly for a strong pandemic relief bill. Americans need economic security in the face of this pandemic. Many Americans need financial assistance, including direct payments and enhanced unemployment benefits. Over 1 million workers are still applying for unemployment each week. Millions of families are facing hunger and homelessness. Many small businesses need financial assistance too. Thousands of small businesses have gone out of business and thousands more are on the verge of doing so.

Funding for the COVID vaccination program and other steps to fight the pandemic are essential and should not be short-changed. This is a matter of life and death. It is also about reducing suffering by reducing the numbers of people that get COVID.  And it is essential to the recovery of the economy. If there’s an area where we should not worry about allocating more money than may eventually be needed, this is it.

Finally, state and local governments need financial assistance. They’ve seen their revenues fall dramatically and their costs increase with the pandemic. Without assistance, state and local governments have been laying off tens of thousands of workers which hurts the workers, the economy and its recovery, and the delivery of badly needed government services. Support for getting children back in schools is a critical component of this. We know from the Great Recession in 2008 how harmful cutbacks in state and local spending were.

While I support bipartisanship, please do not let the Republicans undermine support for working families, the COVID programs, small businesses, or state and local governments. Many Republicans’ concerns about the cost of the benefits and the deficit are hypocritical. Their concern about the deficit did not stop the bailout of large corporations nor the huge tax cuts for wealthy individuals and corporations back in 2017. If they are truly concerned about the deficit, ask them to support repealing the 2017 tax cuts.

President Biden,

Please stand up firmly for a strong pandemic relief bill. Do not let Republicans give the cold shoulder to working Americans and small businesses after they very generously – and successfully – provided financial assistance to large corporations. The financial assistance to large corporations has their stocks at record high prices and their executives and large shareholders taking in billions of dollars.

I urge you to approach the negotiations with Republicans with caution. There are multiple examples where Republicans have not negotiated in good faith. They have pushed for compromises, then pushed for more compromises, and then have failed to support the final, compromise legislation. The Affordable Care Act is a classic example of this. Their supposed negotiations on pandemic relief bills that never passed this summer were similar. They demanded poison pills, moved the goal posts, and added new demands at the last minute. Their threat that failing to meet their demands will poison the well of bipartisanship rings very hollow; their lack of bipartisanship and bad faith negotiations through the Trump presidency and the whole Obama administration poisoned the well of bipartisanship long ago.

Please do not let your commitment to bipartisanship blind you to the Republicans’ disingenuous and divisive partisan tactics over the last 12 years and beyond. Their tactics had nothing to do with unity and everything to do with dividing and conquering or delaying and killing legislation.

Unity means providing economic security and equal opportunity for all Americans. Calling for unity is hypocritical without a commitment to honestly work toward the vision of our democracy and our Constitution for liberty, justice, and equal opportunity for all. In the face of the pandemic, Americans need you to act boldly to move toward that vision. The danger is not in doing too much, it’s in doing too little.

ENHANCED UNEMPLOYMENT BENEFITS NEEDED BY WORKERS – AND BUSINESSES

The enhanced unemployment benefits provided by the federal government expired this week and whether Congress will extend them is unknown. The federal program added $600 per week to the unemployment benefits provided by the states, which vary substantially from Mississippi’s $235 per week to Massachusetts’s $795. The amount received typically depends on how much a worker was earning and, in some states, the amount can increase based on the number of dependents a worker has.

Republicans are claiming that the added $600 per week serves as a disincentive for people to return to work and therefore this program should not be continued. It is possible that a few people would choose to continue to collect the enhanced unemployment benefit and not go back to work, but this number and its impact would be negligible, especially when compared to the positive effects of continuing the enhanced unemployment benefit.

The assertion that large numbers of workers wouldn’t go back to work is a myth with racist overtones as its premise is that many of “those people” are lazy and happy to collect welfare or other public benefits rather than work. [1]

Here are five reasons that make the case for continuing the enhanced unemployment benefit and that rebut the argument that doing so would mean workers wouldn’t return to work.

First, roughly 24.5 million Americans are unemployed, largely due to the coronavirus pandemic, and need financial assistance. Many of these workers simply cannot support their families on the unemployment benefit amounts provided by their states and a significant number of these families would fall into poverty without the enhanced benefit.

Second, given that consumer spending is roughly two-thirds of economic activity in the U.S., the enhanced unemployment benefit means people have money to spend, which keeps our economy and businesses going. Putting this money directly into workers’ pockets is one of the most effective ways to counter the economic slowdown of the pandemic. If all 24.5 million people without jobs were collecting the $600 per week federal supplement, that would be $14.7 billion that workers would be receiving. The great majority of that would be spent immediately on living expenses. That’s $14.7 billion a week that would not be spent in the U.S. economy if these benefits stop. It is estimated that the loss of this spending would result in the loss of 5.1 million jobs. [2]

Third, Americans were returning to work in record numbers and the unemployment rate was falling in May and June even though the enhanced unemployment benefit was being paid. Clearly, people want to work even if their unemployment benefit is greater than what they would get paid to work, given that for two-thirds of those who qualify for unemployment benefits the enhanced benefit is greater than what they were paid at work. (The fact that the enhanced unemployment benefit is more than they earned is a sad commentary on our low minimum wage and the low wages paid by many employers.) Workers know that the unemployment benefit is temporary and that they can lose the benefit if they aren’t actively looking for work, so if a job is available, the great majority of them will take it. [3]

Fourth, the still high unemployment rate (over 11% at the end of June) reflects the lack of available jobs. Workers can’t be incentivized by reduced benefits to take jobs that don’t exist. Moreover, the biggest disincentive to returning to work is the danger of becoming infected with the coronavirus, which is killing over 1,000 Americans a day.

Fifth, cutting unemployment benefits, when paid sick leave is far from universal, increases the risk that workers will go back to work even if they don’t feel well or have been exposed to the coronavirus because they would need the income from work if they aren’t getting the enhanced unemployment benefit. This obviously increases the risk they will spread the coronavirus to co-workers, customers, and others they come in contact with at work or in getting to and from work. This risk is exacerbated by the difficulty of getting a test for COVID-19 and the lack of quick availability of test results.

For all these reasons, not to mention a basic sense of fairness and humane decency, the $600 per week enhanced unemployment benefit from the federal government should be continued. I urge you to contact your U.S. Representative and your Senators and ask them to support the continuation of this emergency unemployment benefit. Please do this NOW as this decision may well be made this week as part of the pandemic relief bill currently moving through Congress.

You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

 

[1]      Editorial, 7/30/20, “No, unemployment benefits do not discourage work,” The Boston Globe

[2]      Sainato, M., 7/13/20, “Millions of U.S. workers still unemployed as enhanced benefits set to expire,” The American Prospect (https://prospect.org/coronavirus/millions-workers-still-unemployed-as-benefits-expire/)

[3]      Editorial, 7/30/20, see above

WE CAN’T AFFORD OUR RIGGED TAX SYSTEM

Our unfair tax system is one piece of our rigged economic system. To put our tax system in some perspective, the Internal Revenue Service (IRS) collects nearly 95% of all the federal government’s revenue; it collected $3.5 trillion in taxes in 2018.

My previous post on how our overall economic system is rigged, noted that the CARES Act, the $2.2 trillion coronavirus pandemic response, tilted our tax system further in favor of the wealthy by providing $135 billion in tax cuts for the richest 1% of Americans. This is money that could have been used to provide aid to workers who lost their jobs or to buy personal protective equipment for front-line workers or other needs related to the effects of the pandemic. Ironically, Republicans are now complaining about the cost of the pandemic relief efforts!

Another example of the rigging of our tax system in favor of wealthy individuals and corporations is the substantial tax cuts for corporations and wealthy individuals that were at the center of the 2017 Tax Cuts and Jobs Act (TCJA). The Act failed to deliver any significant benefits to workers and the middle class, despite politicians’ promises. (See this post for more detail.)

However, the tax cuts of the TCJA weren’t enough for the big multi-national corporations, so they lobbied, quite successfully, to rig the tax system even further to their benefit by getting additional tax reductions in the rules and regulations that were written to implement the TCJA. (See this post for more detail.)

A year after the TCJA passed, a study of the largest corporations in the U.S. found that of 379 large, profitable corporations:

  • 91 (almost a quarter of them) paid no federal income tax including Amazon, Chevron, Halliburton, and IBM.
  • Another 56 of them (15%) paid less than 5% of profits in taxes.
  • The average effective federal income tax rate for these 379 large, profitable corporations was 11.3%, barely half of the reduced tax rate of 21% in the TCJA (down from 35%), and the lowest rate in the history of this analysis, which was first done in 1984. [1]

So, not only are wealthy individuals and corporations successful in getting politicians to cut the taxes they owe, but many of them then do everything they can to avoid paying even the reduced (I’m tempted to say, minimal) taxes they owe under our rigged tax system.

Some of them simply don’t pay the taxes they owe. According to a recent report from the Congressional Budget Office (CBO) [2] unpaid taxes averaged $381 billion per year (roughly 14% of federal taxes owed) from 2011 to 2013. The richest 1% of taxpayers are responsible for 70% ($267 billion) of this total. [3]

The amount of unpaid taxes is growing because the IRS’s budget has been cut by 20% since 2010 (after adjusting for inflation), reducing its capacity to crack down on tax avoidance. Audits of the tax returns of the highest income taxpayers have declined by 63% from 2010 to 2018 and now occur at the same rate as for the poorest taxpayers. This has happened because the IRS no longer has the capacity to engage in audits of the complex tax returns of the rich. The number of IRS personnel who handle these complex cases fell by about 40% between 2010 and 2018. [4] Enforcement action against high-income individuals who do not file a tax return has been reduced to simply mailing a notice to them.

The CBO report estimated that for every dollar added to the IRS budget for tax law enforcement, about three dollars in unpaid taxes would be collected. In addition to reduced auditing of wealthy individuals, the frequency of audits of the largest corporations (those with over $20 billion in assets) also dropped from 2010 to 2018; it dropped by roughly 50%.

In his reaction to the CBO report, Senator Sanders stated that “the primary beneficiaries of IRS funding cuts are wealthy tax cheats and large corporations.” [5] In response to an earlier study of audit rates, Senator Wyden stated that “We have two tax systems in this country, and nothing illustrates that better than the IRS ignoring wealthy tax cheats while penalizing low-income workers over small mistakes.” [6]

Our tax system is rigged from top to bottom – from reduced tax rates for wealthy individuals and corporations, to tax loopholes and subsidies for them, to tax dodging by them, to weak enforcement of tax laws to stop their tax avoidance. Hundreds of billions of dollars (actually probably well over a trillion dollars) of tax revenue from wealthy individuals and businesses are lost every year because of unfairly low tax rates, special interest tax breaks, and tax dodging.

When politicians say we can’t afford to support education or unemployment benefits or food assistance or whatever, don’t believe them. What we can’t afford is rich individuals and corporations who don’t pay their fair share in taxes due to our rigged tax system.

[1]      Gardner, M., Roque, L., & Wamhoff, S., Dec. 2019, “Corporate tax avoidance in the first year under the Trump tax law,” Institute on Taxation & Economic Policy (https://itep.org/corporate-tax-avoidance-in-the-first-year-of-the-trump-tax-law/)

[2]      Congressional Budget Office, July 2020, “Trends in the Internal Revenue Service’s funding and enforcement,” (https://www.cbo.gov/system/files/2020-07/56422-CBO-IRS-enforcement.pdf)

[3]      Johnson, J., 7/9/20, “‘An absolute outrage’: Sanders rips ‘wealthy tax cheats’ as CBO estimates $381 billion in annual unpaid taxes,” Common Dreams (https://www.commondreams.org/news/2020/07/09/absolute-outrage-sanders-rips-wealthy-tax-cheats-cbo-estimates-381-billion-annual)

[4]      Congressional Budget Office, July 2020, see above

[5]      Johnson, J., 7/9/20, see above

[6]      Kiel, P., 5/30/19, “It’s getting worse: The IRS now audits poor Americans at about the same rate as the top 1%,” ProPublica (https://www.propublica.org/article/irs-now-audits-poor-americans-at-about-the-same-rate-as-the-top-1-percent)

RECENT EXAMPLES OF A RIGGED ECONOMIC SYSTEM

Here are some recent examples of how our rigged economic system favors wealthy individuals and big corporations.

In the CARES Act, the $2.2 trillion coronavirus pandemic response, Republican Senators slipped in a tax break that will give each of 43,000 wealthy business owners a $1.6 million tax cut, on average. Hedge fund investors and owners of real estate businesses (including President Trump and his family) will receive the great majority of this tax cut windfall. [1]

Overall, the CARES Act provides $135 billion in tax cuts for the richest 1% of Americans. This is money that could have been used to provide aid to workers who lost their jobs or to buy personal protective equipment for front-line workers.

Moreover, the Trump Administration and Republicans in Congress are considering a variety of additional tax cuts for investors and businesses for the next pandemic relief bill. [2] Supposedly, these tax cuts will stimulate the economy and help it return to normal, but what they really do is make the rich richer. And while Trump and the Republicans claim that there should be no more spending on unemployment and payments to individuals because we’ve spent enough, tax cuts are simply spending before the fact of revenue collection rather than after the fact. Conceptually, there is no difference, other than who gets the money.

Perhaps the ultimate indication of how rigged our economic system is, is that the wealth of billionaires in the U.S. increased almost $600 billion or 20% between March 18 and June 17 as the pandemic crushed the lives and livelihoods of mainstream Americans. The 643 U.S. billionaires, who are overwhelmingly white males, saw their aggregate wealth increase from $2.9 trillion to $3.5 trillion, an increase of about $1 billion a piece, on average. [3] [4]

Meanwhile, working and middle-class households lost $6.5 trillion in wealth and over 45 million Americans applied for unemployment insurance. The 643 billionaires’ increase in wealth was twice as much as what the federal government spent on the one-time stimulus checks that went to 150 million Americans.

The billionaires and other wealthy individuals have used their incredible wealth to gain extraordinary influence over our politics and policy making. This led to the tax cuts in the CARES Act, in the 2017 Tax Act, and on numerous other occasions. As a result, the taxes paid by these billionaires decreased by 79% as a percentage of their wealth from 1980 to 2018. [5]

As another indicator of a rigged economic system, as the pandemic hit in early 2020 only the richest 20% of U.S. households had regained the same level of wealth that they had had prior to the Great Recession of 2008. The other 80% of households were still struggling with the economic hangover of the 2008 financial industry crash. The 400 wealthiest billionaires, on the other hand, recovered their wealth in three years and in ten years had increased their wealth by over 80%.

On the corporate front, corporations are rewarding their investors, i.e., shareholders, while laying off their workers. For example, Caterpillar closed three facilities in late March and two weeks later made a $500 million distribution to shareholders. Levi Strauss announced on April 7th that it would stop paying workers and furloughed about 4,000 over the following month. Nonetheless, it paid $32 million to shareholders in April. Stanley Black & Decker announced furloughs and layoffs on April 2nd, but within two weeks issued a $106 million dividend to shareholders. [6]

You may recall that in August 2019 the chief executives of 181 companies from the Business Roundtable released a statement announcing that companies should deliver value to customers, workers, and suppliers, as well as shareholders. To-date, three of the executives who signed that statement – ones from Caterpillar, Stanley Black & Decker, and Steelcase – have furloughed workers while paying dividends to shareholders.

In our rigged economic system, the capitalists in government bailout capitalists (i.e., business owners and investors), not workers, home owners, parents, students, schools, states and cities, our social services, or our so-called safety net. Even small businesses get left behind as wealthy investors and corporations are taken care of first and foremost. This was evident in the 2008 bailout after the collapse of the financial and mortgage sectors and it’s evident again in the response to this pandemic.

I urge you to contact your U.S. Representative and Senators and to tell them that pandemic relief should go to workers, middle-class and low-income households, and small businesses. Not only is this what would be fair and democratic, this would support our economy because two-thirds of economic activity is consumer purchases. If consumers can buy, they will keep the economy going and create demand for the goods and services businesses produce. Bailouts to corporations and investors will make them wealthier but will do little to keep the economy going and very little to help the mainstream residents of America.

You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

[1]      Stein, J., 4/14/20, “Tax change in coronavirus package overwhelmingly benefits millionaires, congressional body finds,” The Washington Post

[2]      Tankersley, J., 5/6/20, “Trump considers tax-cut proposal for new bill,” The New York Times

[3]      McCarthy, N., 6/22/20, “U.S. billionaire wealth surged since the start of the pandemic,” Forbes

[4]      Americans for Tax Fairness, 6/18/20, “3 months into COVID-19 pandemic: Billionaires boom as middle class implodes,” (https://americansfortaxfairness.org/issue/3-months-covid-19-pandemic-billionaires-boom-middle-class-implodes/)

[5]      Collins, C., 5/11/20, “Billionaires are getting even richer from the pandemic. Enough is enough,” CNN Business (https://www.cnn.com/2020/04/28/perspectives/inequality-coronavirus-billionaires/index.html)

[6]      Whoriskey, P., 5/6/20, “Amid layoffs, investors reap dividends,” The Boston Globe from The Washington Post

UNDER-TAXED CORPORATIONS AND WAYS TO MAKE THEIR TAXES FAIRER

A year’s worth of data on what corporations are actually paying in taxes under the 2017 Tax Cuts and Jobs Act (TCJA) is now available. The TCJA cut the stated federal corporate income tax rate to 21% from 35%, a 40% reduction. It created many new tax breaks and loopholes, while (supposedly) closing some existing ones. However, as a previous post highlighted, corporations have been lobbying vigorously, and in many cases successfully, to have the rules and regulations implementing the TCJA weaken or eliminate its closing of tax breaks and loopholes.

An in-depth review of the financial filings of the Fortune 500 largest corporations revealed that 379 of them were profitable in 2018 and found enough information to calculate an effective federal income tax rate for them. (Their effective tax rate is the portion of their profits they paid in federal income taxes.)

The average effective federal income tax rate for these 379 large, profitable corporations was 11.3%, which is barely half of the stated rate. Ninety-one (91) paid no federal income tax including Amazon, Chevron, Halliburton, and IBM. Another fifty-six (56) of them paid less than 5% of profits in taxes.

The 11.3% average rate is the lowest rate since this analysis was begun in 1984. [1]  The industries with the lowest effective federal income tax rates, all of which paid less than half of the stated rate, were:

  • Industrial machinery (which paid an average effective tax of a negative 0.6%, meaning that on average they got back money from the government)
  • Gas and electric utilities (-0.5%)
  • Motor vehicles and parts (1.5%)
  • Oil, gas, and pipelines (3.6%)
  • Chemicals (4.4%)
  • Transportation and also Engineering & construction (8.0%)
  • Miscellaneous services (8.3%)
  • Publishing and printing (9.8%)
  • Financial (10.2%)

Twenty-five very large corporations received the bulk of the tax breaks that led to these low effective tax rates. They received $37 billion in tax breaks, half of the $74 billion in tax breaks that all 379 corporations received. This is the result of their capacity to influence public policy through lobbying, campaign spending, and use of the revolving door. (Two previous posts here and here provide more details on corporate manipulation of public policies.)

Five of those very large corporations received more than $16 billion in tax breaks (22% of the total for all 379 corporations): Amazon, Bank of America, J.P. Morgan Chase, Verizon, and Wells Fargo.

Large corporations have succeeded in manipulating tax laws, including through the TCJA and its implementing rules and regulations, to unfairly reduce their taxes. This results in small businesses and individuals having to pay more taxes and to bear an unfair portion of the taxes needed to support government at the federal, state, and local levels. Furthermore, it means governments don’t have the resources they need to perform important functions that are in the public interest and desired by taxpayers.

Here are some examples of changes in tax laws that would lead to large corporations paying a fairer share of taxes: [2]

  • Remove tax incentives and loopholes that reward the shifting of profits and jobs to offshore entities. This includes effective implementation of provisions of the TCJA that were meant to address this problem but have been undermined by successful lobbying by multi-national corporations during the writing of implementation rules and regulations. (See this previous post for more details.)
  • Reinstate a corporate Alternative Minimum Tax to ensure that all profitable corporations pay a reasonable amount of income tax each year.
  • Repeal TCJA and previous tax law provisions that allow corporations to deduct expenses for equipment and other capital expenditures much more quickly than the equipment actually depreciates in value. This is an accounting “trick” that reduces profits and, therefore, income taxes.
  • Stop the fictitious creation of large expenses for granting stock options to executives. This is another accounting “trick” that reduces profits and, therefore, income taxes.
  • Require public disclosure of key corporate financial data, including profits and taxes paid, on a country-by-country basis as a routine part of corporate financial reporting. This transparency will allow policy makers and the public to understand whether corporations are paying a fair share of their income in taxes and to adjust policies accordingly.

I urge you to contact your U.S. Representative and Senators to ask them to fix corporate tax laws so that corporations, particularly large, multi-national corporations, are paying their fair share in taxes. Otherwise, you and I and the small businesses we patronize in our communities will continue to bear an unfair burden in funding the public services we need from our governments at all levels.

You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

[1]      Gardner, M., Roque, L., & Wamhoff, S., Dec. 2019, “Corporate tax avoidance in the first year under the Trump tax law,” Institute on Taxation & Economic Policy (https://itep.org/corporate-tax-avoidance-in-the-first-year-of-the-trump-tax-law/)

[2]      Gardner, M., Roque, L., & Wamhoff, S., Dec. 2019, see above

NO BENEFITS FOR WORKERS FROM THE 2017 TAX CUT ACT DESPITE THE PR

The actual effects versus the claimed effects of the Tax Cuts and Jobs Act (TCJA) are becoming clearer all the time. (The TCJA is the December 2017 tax cut bill rushed into law by Republicans in Congress and President Trump.) A previous post provided a summary of what the TCJA did, the promises made about its effects, and the actual effects of the law. My last post reviewed the largely failed provisions that were supposed to tax the profits of multinational corporations more fairly.

Promised benefits for workers have failed to materialize and claims that the Tax Cuts and Jobs Act resulted in bonuses and wage increases for workers are unfounded. When President Trump signed the TCJA in December 2017, he stated that corporations would give “billions and billions of dollars away to their workers.” This has not happened.

Over the last two years, there has been no increase in workers’ compensation that can be attributed to the TCJA. In the short-term, to support the President and the rationale for the TCJA, some large corporations asserted that the bonuses they gave to workers in late 2017 were due to the TCJA. These bonuses were largely a public relations stunt. A few of those employers, such as AT&T and Walmart, engaged in major publicity around giving workers bonuses and then quietly laid off thousands of workers shortly thereafter.

The TCJA did incentivize the shifting of one-time bonuses from 2018 into 2017. Because expenses recorded in 2017 reduced 2017 profits when the tax rate was higher than it would be in 2018, it was advantageous to book as many expenses as possible in 2017. The value of the deduction of expenses, including the bonuses, from profits was more valuable under the 35% tax rate in place in 2017 than it would be in 2018 when the tax rate would only be 21%. In other words, it was cheaper for the corporations to pay the bonuses in 2017 than it would have been to pay them in 2018. Moreover, the TCJA provided a perverse incentive for the bonuses to be only a one-time occurrence, because in 2018 and beyond there would be increased incentives to maximize profits because of the reduced tax rate, which might not stay at that low level forever.

Nonetheless, bonuses accounted for only 2.7% of workers compensation in 2017, only a slight increase from 2.5% in 2016. Furthermore, this was a one-time blip as bonuses have declined since then.

If the TCJA were to have long-term or permanent effects on pay and the number of jobs, they would only be realized over a period of months or years, not immediately upon passage of the law, because making the necessary investments takes time. For the TCJA’s cut in the corporate tax rate to create a long-term, permanent increase in workers’ pay, corporations would need to use their tax savings for investments in improved equipment, worker skills training, or other steps that would improve workers’ productivity. To permanently increase the number of jobs, corporations would need to invest in increased production capacity. [1] Therefore, any compensation increases or growth in the number of jobs announced in late 2017 and early 2018 that were claimed to be results of the TCJA were public relations (PR) stunts, not effects of the TCJA.

Furthermore, corporate profits and cash reserves were high before the enactment of the TCJA, so corporations already had the resources needed to increase workers’ compensation or expand production if they wanted to. They weren’t increasing workers’ compensation or the number of jobs before the TCJA and they haven’t done so afterwards.

As background, corporate profits had risen dramatically from 5% of Gross Domestic Product (GDP, the total output of the U.S. economy) in 1990 to 9% in 2019, after having been largely in the range of 5% to 7% from 1952 to 1990. Furthermore, corporate taxes have been falling since the 1950s, so corporations have been keeping more of their profits. Taxes on corporate profits were 5% of GDP in 1952 and fell to 4% from the late 1950s to the late 1960s. They fell further to 3% of GDP from 1970 to 1980, and then to roughly 2% of GDP from 1982 until 2017. [2]

The bottom line is that the Tax Cuts and Jobs Act of 2017 has delivered none of the promised benefits for workers and low- and middle-income households, but has delivered much greater benefits than were promised (or admitted to) to wealthy individuals and to large, particularly multi-national, corporations. Increases in workers’ compensation that have occurred since the passage of the TCJA are ones that economic analysis indicates would have occurred anyway. Business investment and economic growth have not increased as promised. The promise of more fairly taxing multi-national corporations’ profits to increase tax revenue and discourage the shifting of profits and jobs overseas has been undermined. The multi-national corporations’ lobbying campaign got rules and regulations written for the implementation of the TCJA that significantly reduced the expected taxes on their profits. (See my previous post for more details on this.)

The truth about the Tax Cuts and Jobs Act is that despite the promises and public relations announcements that said otherwise, it has been a huge windfall for wealthy corporations and individuals, and of little or no benefit to workers. Historical experience and economic analysis indicated this would be the result in advance of TCJA’s enactment. The claims of benefits trickling down to workers from tax cuts for corporations and wealthy individuals had been convincingly rebutted. Nonetheless, proponents of the TCJA used this claim to argue for its tax cuts.

I believe many of the people who supported and voted for the TCJA knew what its actual effects would be. They lied about it because admitting that they wanted to enrich their political supporters and big campaign donors would have been unseemly and a political liability.

[1]      Corser, M., Bivens, J., & Blair, H., Dec. 2019, “Still terrible at two: The Trump tax act delivered big benefits to the rich and corporations but nearly none to working families,” The Center for Popular Democracy and the Economic Policy Institute (https://www.epi.org/files/uploads/20191211_Trump-Tax-Bill-R6.pdf)

[2]      Corser, M., Bivens, J., & Blair, H., Dec. 2019, see above

LOBBYING BY MULTI-NATIONAL CORPORATIONS UNDERMINES TAX FAIRNESS & INCREASES THE DEFICIT

The actual effects of the Tax Cuts and Jobs Act (TCJA) (the December 2017 tax cut bill rushed through by Republicans in Congress and President Trump) are becoming clearer all the time. My previous post provided a summary of what it did, noted the promises that were made about its effects, and provided an overview of its actual effects.

One result has been that the promise to tax the profits of multinational corporations more fairly remains largely unachieved. This was supposed to be accomplished by increasing taxes on profits shifted to overseas entities and by incentivizing corporations to repatriate trillions of dollars of profits previously stashed overseas.

Because the 2017 Tax Cuts and Jobs Act was rushed through Congress in a process some experts have called chaotic, it was sloppily written and left lots of details to be filled in by the executive branch agencies writing the rules and regulations implementing the law. (Congressional Republicans and Trump wanted to be able to claim a major legislative victory for their first year in full control of the federal government and to reward their wealthy campaign donors in the run-up to the 2018 elections.) Corporations had lobbied heavily during the writing and passage of the TCJA and they continued to lobby for favorable treatment during the process of writing TCJA’s rules and regulations.

The sloppiness and lack of detail in the law meant that lobbying for favorable rules and regulations was a potential gold mine for the big multi-national corporations. Therefore, in early 2018, shortly after the TCJA was enacted, the Treasury Department, a key agency writing rules and regulations, was swamped by corporate lobbyists. Reportedly, senior Treasury officials were having so many meetings with lobbyists, up to 10 a week, that they had little time to do their jobs.

The TCJA was supposed to be a grand bargain between the federal government and the big multi-national corporations where a big cut in the tax rate (35% to 21%) would occur in exchange for a reduction in tax dodging through the shifting of profits to low-tax offshore locations. Two new taxes were included in the TCJA to fulfill the second half of this bargain: BEAT and GILTI. The Base Erosion and Anti-abuse Tax (BEAT) targeted foreign corporations with major U.S. operations that had been dodging U.S. taxes by shifting profits from their U.S. subsidiaries to their foreign parents. Some payments sent to foreign parents would now be subject to a new 10% tax. The Global Intangible Low-Taxed Income tax (GILTI) targeted U.S. corporations that shifted profits offshore. Some of these offshore profits would be subject to a new tax of up to 10.5%.

At the time of the passage of the TCJA, it was projected that these two new taxes would generate about $26 billion a year of revenue for the federal government. However, lobbying on the writing of rules and regulations has succeeded in significantly reducing the taxes that will be paid. [1] In the lobbying on BEAT and GILTI rules and regulations, the revolving door has been very evident. For example, the senior Treasury official who has been writing them had previously spent decades at a consulting firm and a law firm where he guided corporations in using the tax avoidance strategies BEAT and GILTI were supposed to stop. Lobbyists from the firms he used to work for were lobbying him for rules that were favorable for their corporate clients. One of them had been a top Treasury official in the G. W. Bush administration.

A small group of foreign banks lobbied heavily against BEAT. Treasury Secretary Mnuchin, a longtime bank executive before taking his job at the Treasury, supported the regulatory loophole the foreign banks were asking for. Furthermore, one of the banks’ lobbyists joined the Treasury Department in September 2019 to work in the office that was writing the TCJA rules!

In December 2019, the Treasury Department issued final versions of some of the BEAT regulations and the corporations, foreign banks, and their lobbyists got most of what they wanted. The loophole for the foreign banks alone is estimated to reduce BEAT revenues by $5 billion a year. Experts estimate that BEAT, given the rules and regulations promulgated after all the lobbying, will produce a small fraction for the $15 billion a year that it was projected to raise. [2]

The lobbying around GILTI’s rules and regulations was similarly intense. As background, many multi-national corporations, including Apple, Google, Facebook, Coca-Cola, and drug companies Pfizer and Merck, use elaborate legal, financial, and accounting strategies to make it appear that sizable chunks of their profits are earned by subsidiaries in low-tax offshore countries such as Ireland, the Cayman Islands, Bermuda, or Luxembourg. For example, the drug and technology corporations shift the rights to their patents and other intellectual property (such as trademarks, logos, and copyrights) to offshore subsidiaries. Then these subsidiaries charge their U.S. parent corporations very high licensing fees, which, on paper, shift profits to these offshore entities.

In June 2019, the Treasury Department announced rules and regulations that greatly reduced the profits subject to GILTI’s new taxes, reducing corporate taxes by tens of billions of dollars. This increases the federal deficit while allowing multi-national corporations to continue to shift hundreds of billions of profits to offshore tax havens.

Finally, the multi-national corporations have repatriated far less of the profits they had previously stashed overseas than the projected $4 trillion; only about $1 trillion has been repatriated and therefore subjected to U.S. taxes. Once again, this has substantially reduced the amount of new tax revenue the federal government received, increasing the deficit further beyond the promised level.

The overall result of all the corporate lobbying during the writing of TCJA’s rules and regulations has indeed been a gold mine for multi-national U.S. and foreign corporations. The Treasury’s rules and regulations mean that these multi-national corporations will pay little or nothing in new taxes on profits shifted offshore, saving them tens if not hundreds of billions of dollars. The Organisation for Economic Cooperation and Development reported that in 2018 the U.S. had the largest drop in tax revenue among its 36 member countries and had the largest federal budget deficit of any of the countries by a wide margin. [3]

The Treasury Department is likely to finish the last set of rules and regulations for the TCJA shortly. The multi-national corporations have continued their intense lobbying through the fall and some of the U.S.-based ones have even threatened to move their headquarters overseas if the rules and regulations don’t further cut the new taxes BEAT and GILTI were supposed to impose.

The result of the multi-national corporations’ lobbying has been rules and regulations for implementing the BEAT and GILTI taxes that:

  • Significantly reduce the revenue for the federal government from what was projected and, therefore, increase the federal budget deficit much more than what TCJA proponents promised;
  • Dramatically undermine the effort to increase tax fairness; and
  • Have made the supposedly even-handed grand bargain for the big corporate tax rate cut very one-sided.

[1]      Drucker, J., & Tankersley, J., 12/30/19, “How big companies won new tax breaks from the Trump Administration,” The New York Times

[2]      Drucker, J., & Tankersley, J., 12/30/19, see above

[3]      Drucker, J., & Tankersley, J., 12/30/19, see above

LIES ABOUT THE 2017 TAX CUT ARE NOW CLEAR

The effects of the December 2017 tax cut bill, the Tax Cuts and Jobs Act (TCJA), rammed through by Republicans in Congress and President Trump, are now quite clear. I’ll provide a summary of what it did, note the promises that were made about its effects, and then review its actual effects.

The 2017 Tax Cuts and Jobs Act, among other things:

  • Permanently cut the corporate tax rate from 35% to 21% (the lowest level since 1939)
  • Repealed the 20% corporate alternative minimum tax (which had required profitable corporations to pay at least some taxes on their profits)
  • Allowed up to $63,000 of pass-through business profits to go untaxed to help small businesses (supposedly). (These are profits from businesses that are not taxed because they are passed through to and taxed on an individual’s tax return.)
  • Provided significant tax benefits to corporations for investments in facilities and equipment, as well as for borrowing money
  • Adjusted the taxation of multinational corporations to more fairly tax their profits, for example, by increasing taxes on profits shifted to overseas entities and by incentivizing corporations to repatriate trillions of dollars of profits previously stashed overseas
  • Doubled the size of an estate that is exempt from taxation from $5 million to $10 million per person
  • Repealed the requirement of the Affordable Care Act (aka Obama Care) that individuals have health insurance or pay a tax to support the health care system
  • Made changes in the personal income tax system that are generally neutral for most taxpayers, although several of the tax reduction provisions are scheduled to expire in 2025

The supporters of the TCJA, including Members of Congress, the President, corporate executives, and wealthy shareholders all promised that it would:

  • Provide a sizable tax cut for workers and middle-income people, while increasing taxes on high-income people
  • Increase wages and workers’ incomes by $4,000 a year
  • Increase business investment, and hence worker productivity, the number of jobs, and economic growth in the U.S.
  • Limit the increase in the federal government’s deficit to $150 billion a year
  • Discourage the shifting of corporate profits and jobs overseas through new taxes, while also increasing tax revenue by giving corporations an incentive to bring up to $4 trillion of profits stashed overseas back to the U.S. by reducing the taxes they would have to pay on those profits. (More on this topic in my next post.)

The actual effects of the TCJA have been: [1]

  • No discernable wage increase due to the TCJA. In fact, wage growth appears to have slowed in 2019.
  • Clear failure to increase business investment; no increase in 2018 and a significant decline in the first 9 months of 2019. When the TCJA was enacted in 2017, year-over-year investment growth was at 5.4%. However, it has been dropping sharply and was only 1.3% in the third quarter of 2019 (the latest data available). [2]
  • Larger than projected decline in federal corporate tax revenue, which was expected to be $96 billion a year (roughly a 26% tax cut). As a result, the deficit is increasing by about $30 billion a year more than the $150 billion a year that was promised. The deficit is projected to increase to over $1 trillion a year in 2020.

    The latest information suggests that the decline in revenue and the increase in the deficit may be even larger. (More on this in my next post.) The Congressional Budget Office now estimates that the deficit (including interest payments) will be an average of $230 billion a year higher over the next 10 years due to the TCJA and $310 billion a year higher in 2028.

    The federal government’s revenue from corporate taxes had already been declining as a portion of total federal tax revenue, largely due to corporate tax evasion and avoidance. The trend of declining tax revenue from corporations has been accelerated by the TCJA, which cut corporate taxes by about 26% or $96 billion a year. The corporate tax cut has primarily benefited corporate shareholders, at least in the short run; the 10% wealthiest households own roughly 80% of corporate shares and, therefore, these already wealthy households are the primary beneficiaries of the corporate tax cuts. [3]

  • Business profit pass-through tax exemption, supposedly targeted at small businesses, has largely benefited millionaires, which isn’t what most people think of when they think of a small businessperson. This shouldn’t have been a surprise to anyone, as 49% of pass-through income appears on the tax returns of the richest 1% of taxpayers.
  • Increase in income and wealth inequality along both class and racial lines. Rich corporate executives and wealthy shareholders have been enriched at the expense of workers. White households are 67% of taxpayers but are estimated to receive 80% of the TCJA’s benefits, and most of this will go to the 5% of households with the highest incomes, i.e., over $243,000 a year. The average tax cut for a Black household has been $840, but $2,020 for a White household. For families with incomes under $25,000, the average tax cut has been about $40.

    In 2018, the 5% of individuals with the highest incomes received nearly 50% of the TCJA’s benefits. After the individual tax cuts expire in 2025, the 1% of households with the highest incomes will receive 83% of the benefits of the TCJA.

  • A bigger tax cut for foreign investors than for low- and middle-income households in the U.S. Foreign investors, as a group, will receive an estimated $38 billion tax cut from the TCJA in 2020, while the 20% poorest households in the U.S., as a group, will receive an estimated $2 billion.

The bottom line is that the Tax Cuts and Jobs Act of 2017 has delivered none of the promised benefits to workers and low- and middle-income households, but has delivered much greater benefits than were promised (or admitted to) to large, particularly multi-national, corporations and to wealthy individuals. Economic benefits for workers and low- and middle-income households have not materialized and there is no reason to expect them to. Business investment and economic growth have not increased as promised. The promise of more fairly taxing multi-national corporations’ profits to increase tax revenue and discourage the shifting of profits and jobs overseas have not lived up to the promises made, and the most recent findings indicate that this failure has been more dramatic than was initially realized. (More on this topic in my next post.)

The loss of revenue for the federal government is significantly larger than was projected and, therefore, the increase in the federal budget deficit is much greater than what was promised.

[1]      Corser, M., Bivens, J., & Blair, H., Dec. 2019, “Still terrible at two: The Trump tax act delivered big benefits to the rich and corporations but nearly none to working families,” The Center for Popular Democracy and the Economic Policy Institute (https://www.epi.org/files/uploads/20191211_Trump-Tax-Bill-R6.pdf)

[2]      Blair, H., 12/17/19, “On its second anniversary, the TCJA has cut taxes for corporations, but nothing has trickled down,” Economic Policy Institute (https://www.epi.org/blog/on-its-second-anniversary-the-tcja-has-cut-taxes-for-corporations-but-nothing-has-trickled-down/)

[3]      Corser, M., Bivens, J., & Blair, H., Dec. 2019, see above

MEDICARE FOR ALL: ONE WAY TO PAY FOR IT

The main critique of Medicare for All has been that it’s too expensive and that we can’t afford it. Or that the only way to pay for it would be a big tax increase on the middle class. My previous post discussed the big picture in the health care debate – should comprehensive health care be available and affordable for everyone or should it be left to the private market where people buy whatever they can afford. It also documented the consensus that Medicare for All would provide significant savings and reviewed the typically ignored costs of not having universal, comprehensive health care.

To counter criticism that Medicare for All is unaffordable, Senator Warren recently released a detailed proposal for how she would pay for Medicare for All and its estimated cost of $59 trillion over ten years. She identifies $7.5 trillion in savings to offset part of the cost and then identifies $52 trillion in revenue to pay for the remaining costs. The revenue would come from the following: [1] [2]

  • $31 trillion that is already being paid by the federal, state, and local governments for health care.
  • $9 trillion from a fee that employers would pay per employee instead of paying for a portion of employees’ health insurance. This is projected to SAVE employers $200 billion over ten years.
  • $3 trillion from a 3% annual tax on individuals’ wealth of over $1 billion and the annual collection of a tax on the increase in the value of investments (i.e., a capital gains tax).
  • $2.9 trillion from closing corporate tax loopholes on the earnings of multinational corporations and from reducing accelerated write-offs of equipment purchases.
  • $2.3 trillion from improved enforcement of existing tax laws by enhancing the IRS’s enforcement capacity and effectiveness.
  • $1.4 trillion from increased income taxes paid on the roughly $4 trillion increase in workers’ take-home pay because they would no longer have money deducted from their paychecks for the health insurance premiums of their employers’ health plan or for health savings accounts.
  • $900 billion from a financial transaction tax of 0.1% on sales of stocks, bonds, and other financial instruments (that’s a sales tax of $1 on every $1,000) and a fee on too-big-too-fail banks to reflect the risk they present to our economy.
  • $800 billion from eliminating the Defense Department’s Overseas Contingency Operations fund, which is basically a slush fund for military spending that was originally meant to be short-term funding for unanticipated expenses of wars in the Middle East.
  • $400 billion from immigration reform that allows undocumented workers to work legally and therefore pay taxes on their earnings.

Warren’s plan projects that over ten years about $11 trillion would go back into people’s pockets because they would no longer be paying the $20,000 per year the average family pays for private insurance premiums, co-pays, and deductibles. If insurance premiums are viewed as a mandatory expense that is essentially a tax, this would represent the largest tax cut in American history for low and middle-income households. [3]

The Warren plan projects savings of $7.5 trillion over ten years from:

  • Reducing payments to service providers to save $2.9 trillion.
  • Cutting administrative spending by $1.8 trillion, reducing it from the current 12% of private insurers’ premiums to 2.3%, which is what Medicare spends on administrative costs.
  • Saving $1.7 trillion on drug prices by negotiating prices and setting a price ceiling for each drug that is 110% of an international index. If a drug company won’t negotiate a price under that ceiling, the plan calls for revoking the drug’s patent and licensing other manufacturers to make the drug or having the government manufacture it directly.
  • Restraining the growth in health care costs to the rate of growth of the economy to save $1.1 trillion, setting an overall health care budget cap, if necessary.

These projected savings do not include likely savings from the benefits of broad implementation of preventive care or stronger enforcement of antitrust laws. Virtually every part of our health care system has become highly concentrated, which increases costs due to monopolistic power. For example, hospitals in 90% of metropolitan markets are highly concentrated due to the 1,667 hospital mergers that have occurred over the past 20 years.

Now that Sen. Warren has put out a detail proposal for paying for Medicare for All, opponents of Medicare for All will quibble over the specific estimates and whether these revenue sources are the best way to pay for Medicare for All. They may also shift their criticism to other aspects of the transition to Medicare for All. The transition will be complex because Medicare for All is a major restructuring of our health insurance system.

Warren proposes a four-year transition period in two steps. First, soon after she becomes President, everyone would be allowed to buy into Medicare and it would be free for anyone under 18 or with an income below twice the poverty line (about $51,000 for a family of four). Second, three years later, Warren would push legislation that would complete the transition to Medicare for All and eliminate private insurance except for very special situations. [4]

The bottom line is clear: Medicare for All can be paid for, it will lead to significant savings in health care, and most Americans will be better off both health care-wise and financially. Everyone who’s honestly analyzed Medicare for All acknowledges that there will be significant savings from reduced administrative and non-care overhead costs, as well as from cost controls and long-term health benefits due to increased preventive care and reduced barriers to accessing care when needed. As Dr. Donald Berwick, the former administrator of Medicare and Medicaid has said, based on his extensive experience, only a single-payer system can both improve quality and control costs.

Therefore, Medicare for All is a realistic policy option. After all, all the other developed countries in the world have some version of a national health care system that covers everyone, controls costs, and enhances quality. We can do this too!

Medicare for All will improve access to care for many Americans, reduce costs for almost all Americans, and increase people’s choices of doctors, hospitals, and other providers for everyone who now faces restrictions from their private insurers.

My next post will summarize the reasons why a single payer system is necessary for efficiency and quality, and why having a private insurer option undermines the overall health care system.

[1]      Warren, E., 11/1/19, “Ending the stranglehold of health care costs on American families,” Team Warren (https://medium.com/@teamwarren/ending-the-stranglehold-of-health-care-costs-on-american-families-bf8286b13086)

[2]      Dayen, D., 11/1/19, “Warren’s Medicare for All plan includes no new taxes on the middle class,” The American Prospect (https://prospect.org/health/warrens-medicare-for-all-plan-includes-no-new-taxes-on-the-middle-class/)

[3]      Dayen, D., 10/22/19, “The Medicare for All cost debate is extremely dishonest,” The American Prospect (https://prospect.org/politics/medicare-for-all-cost-debate-is-extremely-dishonest/)

[4]      Bidgood, J., 11/16/19, “Warren outlines phased path to Medicare goal,” The Boston Globe

THE WEALTHY PAY A LOWER TAX RATE THAN YOU DO

It’s now official: the 400 wealthiest Americans pay taxes at a lower rate than everyone else, thanks to tax cuts, loopholes, and lax enforcement. For the first time in history, wealthy Americans’ federal, state, and local taxes are a lower percentage of their incomes, 23%, than anyone else.

The portion of income paid in taxes by the wealthy has plummeted over the last 70 years, contributing substantially to growing income and wealth inequality. In the 1950s, wealthy Americans paid 70% of their incomes in taxes. This dropped to 47% in 1980 and then was cut in half, to 23%, by 2018. Meanwhile, middle-income households’ tax burden increased, rising from 20% to 30% and then falling back to about 25%. Low-income households experienced the largest proportional increase in their tax burden, which rose from under 20% to roughly 25%.

This animated graph dramatically illustrates how the effective tax rates experienced by all households, from the lowest income households on the left to the 400 wealthiest households on the right, have shifted from 1950 to 2018 for the aggregated total of federal, state, and local taxes. [1]

Not only have tax rates on the wealthy been cut and loopholes added, but tax enforcement has been weakened. Driven by Republicans in Congress, the enforcement budget of the Internal Revenue Service (IRS) has been cut by 25% (adjusted for inflation) since 2010.

Since 2010, the auditing of high-income taxpayers has declined sharply, although the audit rate for taxpayers with under $100,000 of income has remained roughly the same. In 2015, 34.7% of taxpayers with over $10 million of income were audited; in 2018, 6.7% were audited – an 80% decline. For taxpayers with between $1 million and $5 million in income, audit rates fell from 8.4% to 2.2% – a 74% decline. This reduction in audits is happening at the same time as tax avoidance schemes used by the rich, such as using overseas accounts and business entities, are proliferating. Partnerships, which are typically used by high-income individuals such as lawyers and investment managers, had an audit rate in 2017 of only 0.2%, half of what it was in 2015. [2]

Audits of low-income households that are poor enough to claim the earned income tax credit [3] account for 39% of all IRS audits. The IRS claims this is because auditing the poor is quick and easy; it can often be done by mail and by lower level employees. The IRS says this is the most efficient use of limited enforcement resources and that it can’t increase audits of higher-income taxpayers until it has the money to hire more skilled employees and have them devote the time required to do more complex audits. [4] However, audits of low-income tax returns can only yield small amounts of additional taxes when mistakes or problems are uncovered. Audits of high-income returns, on the other hand, can yield millions of dollars of additional taxes and may reveal illegal tax avoidance that has been going on for years.

The share of income paid in taxes by the wealthy has declined because politicians have cut every tax that falls more heavily on those who are well-off: income tax rates on high incomes have been cut by more than half, taxes on income from investments (i.e., wealth) have been cut, and the estate tax has been dramatically cut. The justification for this has been the supply side plutocratic economics theory that the economy as a whole, and even tax revenue, would benefit. This has been proven wrong. The wealthy – and only the wealthy – have benefited. Incomes for workers and the middle class have been stagnant since 1980 and the growth of the economy has been disappointingly slow. The American economy hasn’t done well when inequality is extremely high and rising, and tax rates on the rich are low and falling. [5]

Raising income tax rates on very high incomes, implementing a small, annual wealth tax, and increasing taxes on large estates would increase the fairness of our taxes and begin to slow or reverse growing income and wealth inequality. Moreover, this would provide the public sector with the revenue needed to make critical public investments that will actually spur economic growth.

I encourage you to contact your elected officials and candidates for office to tell them you are outraged that the wealthy pay taxes at a lower rate than you do. Tell them that it’s crystal clear that income and wealth inequality are the result of policy choices made by elected policy makers. Ask them what they will do to reduce income and wealth inequality, and to make the American tax system fair again.

[1]      Leonhardt, D., 10/6/19, “The rich really do pay lower taxes than you,” New York Times

[2]      Fleischer, V., 9/26/19, “Create a more progressive tax policy,” The American Prospect (https://prospect.org/day-one-agenda/create-a-more-progressive-tax-policy/)

[3]      The earned income tax credit provides its greatest benefit of $6,400 to families with three or more children and incomes under $19,000. The benefit is then phased out at higher incomes and goes to zero at an income of $49,000 for a family with 3 or more children and at lower levels for smaller families.

[4]      Kiel, P., 10/2/19, “IRS: Sorry, but it’s just easier and cheaper to audit the poor,” Pro Publica (https://www.propublica.org/article/irs-sorry-but-its-just-easier-and-cheaper-to-audit-the-poor)

[5]      Leonhardt, D., 10/6/19, see above

PROGRESSIVE POLICIES TO REVERSE PLUTOCRATIC ECONOMICS AND ITS FAILURES

Forty years of plutocratic economics has produced a high level of economic inequality and numerous business sectors dominated by a monopoly or near monopolies. This has undermined democracy in our economy and in our political institutions.

A high level of economic inequality is bad for the economy. The Organisation for Economic Cooperation and Development (OECD), an international organization of 36 economically developed countries, estimates the U.S. lost almost 5% in economic growth over the period from 2000 to 2015 ($1 trillion a year in a $20 trillion economy) due to its high level of inequality. Part of this loss is due to limited access to education for people with lower incomes, which wastes human capital and reduces the productivity of the workforce. [1] In addition, our high level of inequality has undermined the consumer spending that is close to 70% of our economy because workers and the middle class simply have less money to spend.

There are multiple policy changes that are needed to reverse the failed plutocratic economic policies (see more information in previous posts here and here) that have been put in place over the last four decades and their effects. Some of them directly address the high levels of economic inequality in incomes and wealth that have been created. Others address the underlying issues that have allowed the plutocrats to amass wealth and power. Both are needed to reinvigorate our democracy and its commitment to equal opportunity, fairness, and the ability of all to pursue life, liberty, and happiness.

Policy changes that would directly address the dramatically increased and increasing economic inequality include: [2]

  • Increasing incomes of workers and the middle class by raising the minimum wage and strengthening unionization
  • Increasing spending on public education and making it equitable so all students are prepared to be productive members of society and the workforce
  • Raising taxes, partly by eliminating loopholes, on wealthy individuals and businesses
  • Raising the estate tax (which was meant to prevent wealth from accumulating and being passed down from generation to generation thereby creating a plutocracy [3])
  • Requiring the payment of a tax on the gain in value of appreciated property when it is passed on to heirs
  • Implementing a wealth tax

Policy changes that would address underlying issues that have enriched and empowered plutocrats include: [4] [5] [6]

  • Building progressive, grassroots, inclusive, and broad-based participation in our democratic policy making and elections, including through reforming campaign financing
  • Strengthening business and financial industry regulation, including strong anti-trust enforcement that limits the size and power, both economically and politically, of businesses (my next post will provide more detail on this important policy)
  • Reforming trade policies to protect workers and the environment and reduce the power of multi-national corporations over nations’ sovereignty
  • Updating labor laws for the gig economy, including clarifying standards for who is deemed an employee vs. an individual contractor
  • Strengthening regulation of public utilities from electric power to phones to airlines and of services that are essential to everyday life such as the Internet and financial services (which is what the Consumer Financial Protection Bureau was created to do but has been undermined in carrying out)
  • Stopping privatization of assets and functions best managed by democratic public entities, such as roads, bridges, basic education, prisons, health insurance, and public assistance programs
  • Building a robust system of public banking and mortgage finance perhaps through the U.S. Postal Service (which used to provide basic banking services)
  • Creating publicly owned, mixed-income, highly desirable social housing (as is widely done in Europe especially Austria) as opposed to the poorly performing privatized or public-private partnership subsidized housing we now have
  • Regulating the flow of capital and valuation of currency to reduce financial manipulation, speculation, and tax avoidance
  • Adding employees to corporate boards of directors

These are some of the key policy changes needed to reverse plutocratic economics and support workers and the middle class. I urge you to listen to and ask candidates running for public office which of these policies they support.

[1]      Ingraham, C., 7/25/19, “The richest 1 percent now owns more of the country’s wealth than at any time in the past 50 years,” The Washington Post

[2]      Reich, R., 7/9/19, “The four biggest conservative lies about inequality,” The American Prospect (https://prospect.org/article/four-biggest-conservative-lies-about-inequality)

[3]      Collins, C., & Hoxie, J., October 2018, “Billionaire Bonanza 2018: Inherited Wealth Dynasties of the United States,” Institute for Policy Studies (https://inequality.org/wp-content/uploads/2018/11/Billionaire-Bonanza-2018-Report-October-2018.pdf)

[4]      Sabeel Rahman, K., Summer 2019, “The moral vision after neoliberalism,” Democracy Journal (https://democracyjournal.org/magazine/53/the-moral-vision-after-neoliberalism/)

[5]      Kuttner, R., 6/25/19, “Neoliberalism: Political success, economic failure,” The American Prospect (https://prospect.org/article/neoliberalism-political-success-economic-failure)

[6]      Warren, E., 6/4/19, “A plan for economic patriotism,” Office of Senator Elizabeth Warren (https://medium.com/@teamwarren/a-plan-for-economic-patriotism-13b879f4cfc7)

SUPPLY-SIDE, TRICKLE-DOWN TAX CUT THEORY HAS FAILED

Plutocratic economics (see this previous post for background), and specifically so-called supply-side or trickle-down economics, claims that cutting taxes, particularly on the wealthy and businesses, will stimulate economic growth so much that 1) government tax revenue will actually increase, 2) the number of jobs will grow, and 3) workers’ pay will increase.

There have been at least six significant federal tax cuts between 1978 to 2019 and, in every case, federal government revenue did NOT increase as promised. These tax cuts, under Presidents Carter, Reagan, G. W. Bush, and Trump, each produced some short-term economic stimulus, but federal revenue declined and the budget deficit increased. Furthermore, these tax cuts have been neither fair (economic inequality has increased) nor efficient (some of the country’s most profitable corporations and wealthiest individuals pay little or no taxes). [1]

Some states have also cut taxes based on supply-side economic theory, most notably Kansas in 2012. Like the federal cases, the results have not been what was promised. Kansas’s Republican Governor Brownback and the state’s overwhelmingly Republican legislature eliminated state income taxes for more than 100,000 businesses and greatly reduced taxes on wealthy individuals. Invoking supply-side, trickle-down economic theory, Brownback predicted the tax cuts would more than pay for themselves, i.e., that state tax revenue would grow. Instead, revenues fell so precipitously that shortages in funding for schools required that the school year had to be considerably shortened to save money, public construction projects ground to a halt, and the health coverage of the state’s Medicaid program had to be greatly reduced. The state’s economy ceased producing jobs and Kansas’s economy performed more poorly than its neighboring states on virtually every economic indicator. (See this previous post for more details.)

In 2016, Kansas voters – including Republicans who objected to seeing their children’s educations shortchanged – revolted. Republican primary voters, joined by Democrats, ousted legislators who had refused to repeal the tax cuts, and in 2017, the new legislature overrode Brownback’s veto of a bill repealing the cuts. In 2018, voters elected Democrat Laura Kelly as their new governor, and today, with adequate funding restored, Kansas has resumed its support for education, infrastructure spending, and the other basic governmental functions. As a result, in 2019, Kansas leapt from 35th (in 2018) to 19th on CNBC’s list of the top states for business. [2]

Nonetheless, in 2017, supply-side, trickle-down economic theory was invoked by President Trump and the Republicans in Congress in justifying their $150 billion a year tax cut primarily for corporations and wealthy individuals. The results of these tax cuts have been, predictably, NOT what was promised. Rather than stimulating higher economic growth, growth and job creation have been slow.

The federal budget deficit has grown substantially and workers’ compensation remains stagnant. Huge rewards have gone to large corporations and their executives, so economic inequality has grown sharply. The corporations are using the windfall to buy back their own stock at record rates. This enriches executives and other large stockholders. Corporations have not been increasing workers’ compensation, nor hiring additional workers, nor investing in innovation. (For more detail see this previous post.)

Furthermore, the Trump administration and Republicans in Congress, citing the growing budget deficit, argue that cuts need to be made in economic safety net programs including food assistance for the poor, health care for the poor and seniors (i.e., Medicaid and Medicare), and Social Security.

Future posts will summarize the harm plutocratic economics has done to workers and our democracy. They will also discuss the politics of neoliberalism and identify progressive policies that can reverse the harmful effects of plutocratic economics.

[1]      Kuttner, R., 6/25/19, “Neoliberalism: Political success, economic failure,” The American Prospect (https://prospect.org/article/neoliberalism-political-success-economic-failure)

[2]      Meyerson, H., 7/23/19, “Going up in economic ratings? Then lose trickle-down,” The American Prospect Today (https://prospect.org/blog/on-tap/going-economic-ratings-then-lose-trickle-down)

THE PLUTOCRATS’ ECONOMIC CON

Since the late 1970s, a concerted effort has been made by right-wing, wealthy elites to promote a new brand of “free market” capitalism, which I refer to as plutocratic economics. [1] Their broad, well-funded initiative was successful in reversing and undermining the progressive, managed capitalism that was put in place in the 1930s and 40s in response to the failure of the largely unregulated markets that led to the Great Depression.

After 40 years of experience with these plutocratic policies, the results are in: they don’t work. Wealthy elites (the plutocrats) have benefited substantially, but the consequences for the economy, workers, and the middle class have been very negative.

The plutocrats’ basic argument is that markets work and government doesn’t. They assert that government is inherently incompetent, in part because it and its regulators have been “captured” by the special interests they were supposed to regulate. [2]

The wealthy individuals and large, often multi-national, corporations pushing plutocratic economics invested in politicians, academicians, think tanks, and advocacy organizations to promote their theories, rationales, and policies. Academicians and think tanks were hired and funded to give a scholarly veneer and rationale to what otherwise would have been seen for what it was – a raw power grab. The resultant public policies greatly benefited the self-interest of the wealthy elites and corporate executives.

On the political front, the plutocrats use multiple strategies to achieve their policy goals. They employ lobbyists who work to convince policy makers to support their policies. They place supporters (often former corporate employees) within the government bureaucracy (a.k.a. the revolving door). They make campaign contributions and “independent” expenditures on behalf of candidates to elect supportive individuals and to buy access to elected officials. They promote trade policies and a type of globalization that undermines American workers. They got U.S. policy makers to choose trade policy options that put the interests of multi-national corporations and investors first and those of workers last. [3]

Proponents of the plutocratic economics promised that markets and businesses would regulate themselves for the good of all, that markets would be more efficient without government regulation, and that social goals could be more effectively achieved by using market forces. They also argued that social programs that supported low income workers and families were inefficient, unnecessary, and provided disincentives to work hard and make positive contributions to our economy.

In concert with their economic and political theories, the plutocrats pushed to reduce progressive taxation, eliminate government regulation and anti-trust enforcement (which had limited the size and marketplace power of corporations), and dramatically weaken public programs that provide support for workers and a safety net (including the minimum wage, unemployment benefits, unions, and welfare payments to the poor). Their trade policies allowed U.S. multi-national corporations to ship five million jobs overseas over the last 20 years. As a result, multi-national corporations now have a smaller portion of their global workforce in the U.S. than the portion of their sales that are in the U.S. [4]

The plutocrats and their hired experts developed rationales for their policies based on economic theories and assumptions about markets that were not supported by actual experience (and have since been disproved by actual experience). For example, they assumed ideal and efficient markets where perfect information was available to buyers and sellers, where prices were set solely by supply and demand, where sellers and buyers were numerous and no one had any marketplace power, and where there were no significant externalities, such as pollution. Supply-side economics is a classic case of an economic theory with no actual evidence for it and with substantial evidence refuting it today. It claims that cutting taxes, particularly on the wealthy and businesses, will 1) stimulate economic growth and 2) do so to such an extent that government tax revenue will actually increase. Despite multiple experiences where tax cuts have been enacted and have not produced the promised effects, the plutocrats still use supply-side theory to justify tax cuts, as they did successfully with the December 2017 $150 billion a year tax cut.

It is important to note, that despite the rhetoric, markets under plutocratic economics are NOT actually free markets. All markets require rules to function, such as rules about ownership of property including patents, copyrights, and other protections for intellectual property; laws governing contracts and courts to enforce them; standards for what constitutes unfair competitive practices; laws and courts to determine liability for accidents and harm from products; and standards for credit, debt, bankruptcy, financial transactions, and investments.

The issue for policy makers is how the markets’ rules balance the power and interests of various parties. The bottom-line questions are who makes the rules and who benefits. For 40 years, plutocratic economic policies have put returns to shareholders (i.e., primarily wealthy investors) and, by implication, corporate executives, ahead of the interests of workers and also of investment in a company’s future. As a result, compensation for workers has been flat while their productivity has continued to grow. Overall, the result of these plutocratic policies has been dramatic growth in income and wealth inequality, leaving the U.S. with the most unequal income distribution of any rich democracy. [5]

Future posts will 1) summarize the evidence that plutocratic economic policy has failed, 2) discuss the politics of plutocratic economics and how the plutocrats have reacted as the failure of their policies has become clear, 3) review the harm that plutocratic economics has done to our democracy, and 4) identify progressive policies that are needed to reverse the harmful effects of plutocracy.

[1]      Technically, among policy wonks and economists, this form of capitalism has been labeled neoliberal economics. This is confusing because liberal in the economic world means something quite different than liberal means in common political usage. Although this is a bit of an oversimplification, liberal in economics refers to individualism – an every person for him or herself approach.

[2]      Kuttner, R., 6/25/19, “Neoliberalism: Political success, economic failure,” The American Prospect (https://prospect.org/article/neoliberalism-political-success-economic-failure)

[3]      Kuttner, R., 6/4/19, “Warren’s astonishing plan for economic patriotism,” The American Prospect (https://prospect.org/article/warrens-astonishing-plan-economic-patriotism)

[4]      Tyler, G., 1/10/19, “The codetermination difference,” The American Prospect (https://prospect.org/article/codetermination-difference)

[5]      Tyler, G., 1/10/19, see above

THE U.S. SHOULD HAVE A WEALTH TAX SAY THE WEALTHY

A group of wealthy Americans who would be taxed by a wealth tax have written a letter supporting such as tax. It is a very persuasive letter explaining their reasoning. Here is a summary of it.

They call on all the presidential candidates (making it clear they are not endorsing any candidate) to support a modest wealth tax on people like them – the 19 signers of the letter who are among the richest 1/10 of 1% of Americans. By increasing taxes on the one-out-of-a-thousand wealthiest households, or about 75,000 families, our country could address many important challenges that it is facing and would, thereby, provide millions of Americans a better life and a better shot at the American dream.

They state that the U.S. has a moral, ethical, and economic responsibility to tax wealth more heavily. They note that middle income Americans already pay a wealth tax on their primary form of wealth, namely the property taxes they pay on their homes. A broader wealth tax would ask the richest Americans to pay a similar wealth tax on the primary sources of their wealth, namely stocks, bonds, and other financial investments.

The letter notes that a moderate tax on so few people raises so much money (about $300 billion a year) because the wealthiest Americans have extremely high levels of wealth. These 75,000 households have as much wealth as the least wealthy 90% of Americans. In other words, these 75,000 families have as much combined wealth as that of the 67,500,000 families with the least wealth.

The letter highlights six key reasons the signers support a wealth tax, which could do all of the following:

  • Tackle the climate crisis: The wealth tax revenue could be used to invest in accelerating innovation and implementation of a clean-energy, low-carbon economy. A wealth tax would mean that those who have benefited the most from our economic system would be helping to pay for fixing one of its most devastating flaws.
  • Strengthen our economy: The revenue could be used to invest in aging infrastructure, child care, education, and easing student debt. This would increase productivity, entrepreneurship, and homeownership, thereby promoting broad-based economic growth and prosperity. Wealth tax revenue could support innovation and job creation, strengthening our economy in ways that would benefit everyone.
  • Improve health: High economic inequality is linked to disparities in health outcomes and longevity; the wealthiest individuals have a life expectancy 15 years longer than the poorest individuals. The wealth tax revenue could be used to invest in addressing major public health challenges such as cardiovascular disease and opioid addiction.
  • Increase fairness: A wealth tax would help close the gap between the low effective tax rates paid by the wealthy and those paid by everyone else. The wealthiest 1/10 of 1% of Americans are estimated to pay 3.2% of their wealth in taxes annually, while the bottom 99% pay an estimated 7.2%. The letter states that “Taxing extraordinary wealth should be a greater priority than taxing hard work. The most fortunate should contribute more.” (p. 4)
  • Strengthen freedom and democracy: The growing concentration of wealth undermines the stability and integrity of our democracy. High levels of economic inequality have tended to concentrate political power and lead to plutocratic governments in other countries. In the U.S., major policies seldom become law without the support of wealthy interests, leading to division, dissatisfaction, and distrust of democratic institutions among the public. The wealthy signers of the letter state that “We believe instituting a wealth tax would lead to political, social, and economic stability, strengthening and safeguarding America’s democratic freedoms.” (p. 4)
  • Reflect patriotic duty: It is the patriotic duty of every American to contribute what they can to the success of the country. The letter states that the richest Americans should be proud to pay a bit more to strengthen America’s future; it’s the least they can do for the country they love.

The letter discusses the arguments against a wealth tax and concludes that they are often overstated and are mostly technical, implementation details.

The signers of the letter conclude by noting that while a wealth tax does not further their narrow economic interests, it is in their interests as Americans. Due to the strong rationale for a moderate wealth tax, they join the majority of Americans in supporting it and call on all the presidential candidates to do so as well. (For more information on a wealth tax and the rationale for it, see this previous post.)

CAN THE U.S. AFFORD PROGRESSIVE POLICIES?

Many in Congress and the Trump Administration, along with many in the media and many pundits, assert that the U.S. can’t afford the progressive policies being proposed by some Democrats in Congress and some of the Democratic presidential candidates.

This is a matter of priorities not affordability. For example, in 2017, Congress and the Trump Administration were able to afford $150 billion a year in tax cuts primarily for wealthy individuals and corporations. They also propose spending over $700 billion in 2020 on the military and foreign wars, a $34 billion increase from 2019. And the country has had no problem spending hundreds of billions of dollars building prisons and paying for a huge increase in the number of people in prison.

To fund her progressive policy proposals, Senator (and candidate for president) Elizabeth Warren has proposed a wealth tax on American citizens with over $50 million in wealth. It would generate about $275 billion per year to spend on progressive programs. (See my previous post for details and background on her proposed wealth tax.)

A recent report called the Poor People’s Moral Budget puts forth a vision for a set of progressive polices for the U.S. including ways to pay for them. [1] Their definition of “poor people” includes low-income households up to twice the federal poverty line or “one emergency away from being poor.” This includes 43.5% of the U.S. population or 140 million people. Many of these people are on the edge of being middle class and many of them were middle class before the loss of a good job, a health care emergency, or some other crisis pushed them over the edge and into economic hardship.

The Poor People’s Moral Budget identifies three categories of policy changes that could provide the federal government with the funds to pay for progressive policies:

  • $886 billion a year from fairer taxes on wealthy individuals, businesses, and the financial industry (see detail below),
  • $350 billion a year in cuts to military spending (see detail below), and
  • Billions of dollars in savings from reducing incarceration and other sources.

The proposals for fairer taxes on wealthy individuals would bring in an estimated $628 billion per year:

  • An annual wealth tax: $275 billion per year. (This is the same as Sen. Warren’s proposal. See my previous post for details.)
  • Increase the income tax rate on income (e.g., dividends and interest) and gains from assets (e.g., stocks and bonds) so they are taxed at the same rate as income from work: $150 billion per year.
  • Apply the capital gains tax to the increased value of assets prior to any transfer, such as through a gift or inheritance: $78 billion per year.
  • Impose a 5.5% income tax surtax on income above $500,000 per person: $50 billion per year.
  • Increase the inheritance tax by closing loopholes and applying it on inheritances of over $3.5 million per person (instead of the current $11 million per person): $40 billion per year.
  • Increase the income tax rate on income over $10 million to 70% (which is what it was in the 1970s and before): $35 billion per year.

The proposals for fairer taxes on businesses would bring in an estimated $170 billion per year:

  • Restore the corporate tax rate to 35% (instead of 21%) as it was before the 2017 tax cut law: $130 billion per year.
  • Repeal the 2017 tax cut that provides individuals with a 20% deduction for income from un-incorporated businesses: $39 billion per year. (More than 80% of this tax cut goes to the richest 5% of individuals, such as hedge fund managers and partners in law firms.)
  • Repeal tax breaks for fossil fuel companies: $1 billion per year.

The proposals for fairer taxes on the financial industry would bring in an estimated $88 billion per year:

  • Place a small “sales” tax on financial transactions ($1 for every $1,000 of value): $78 billion per year. (This would discourage speculative, short-term trading, which is destabilizing to financial markets and has no productive value for the economy. See my earlier post for more details.)
  • Place a small tax on big banks ($1.50 for every $1,000 of liabilities): $10 billion per year. (This would discourage risky investments and reduce the likelihood that banks fail and must be bailed out.)

The proposals for cutting military spending would save $350 billion per year and cut military spending roughly in half. The savings in military spending include:

  • Close 480 of the 800 overseas military bases in 90 countries: $90 billion per year. (The U.S. would still have four times as many overseas bases as all other countries combined.)
  • End the foreign wars the U.S. is currently fighting: $66 billion per year.
  • Reduce purchases of weapons that are obsolete, ineffective, or unneeded: $58 billion per year.
  • Eliminate nuclear weapons and delivery systems, and cancel planned upgrades: $43 billion per year. (This would be a huge step toward eliminating the threat of nuclear war and allow the U.S. to join the 70 countries that have signed the U.N. ban on nuclear weapons.)
  • A variety of other cuts and improvements in efficiency: $93 billion per year.

These new revenues and spending cuts would allow the federal government to spend over $1,250 billion per year (roughly one-third of the current federal budget) on progressive policies that would increase opportunity and fairness in our society. The new progressive policies would create jobs, strengthen our economy, address climate change, rebuild infrastructure, invest in education and human capital, and provide other short-term and long-term benefits.

With progressive policies in place, the rising tide of a growing economy would once again lift up all people as it did in the 1950s, 1960s, and 1970s. The middle class would be revived and re-invigorated.

Future posts will discuss some of the specific progressive policies that could be implemented with the $1.25 trillion in annual funding made available by the changes in revenue and spending policies identified above.

[1]      Barnes, S.G., Koshgarian, L., & Siddique, A., June 2019, “Poor people’s moral budget: Everybody has the right to live,” Poor People’s Campaign, Institute for Policy Studies, and Kairos Center (https://www.poorpeoplescampaign.org/budget/)

SHOULD THE U.S. HAVE A WEALTH TAX?

Economic inequality has been growing rapidly in the U.S. over the last 40 years. The wealthiest 10% of households now have roughly 80% of all wealth in the U.S. and 50% of all income. The richest 130,000 households now have almost as much wealth as the poorest 117 million households combined. The top 0.1% of households have seen their share of all wealth nearly triple, from 7% to 20%, in the last 40 years. Changes in tax laws since the 1980s have dramatically reduced taxes on the wealthy, even though they are the ones who receive the greatest benefit from the U.S. economic system and our public infrastructure. Economic disparities in the U.S. are greater than in any of the other 36 countries with advanced economies that make up the Organisation for Economic Co-operation and Development (OECD). [1]

One way to slow the growth of inequality, and perhaps reverse it, would be to tax wealth annually, like income taxation. Income is taxed because it is one way to determine how much someone has benefited from our economic system and public infrastructure, how much they can afford to pay in taxes, and how much it would be fair for them to contribute to the maintenance of our public infrastructure and the smooth functioning of our society – our education system, our transportation systems, our public safety systems, our legal system of laws and courts, etc. As with the income tax, a wealth tax would have a standard deduction or exemption so that low-wealth households would not pay any wealth tax. For example, the current exemption in Switzerland is about $75,000 per person in wealth (i.e., savings), in Spain it’s around $800,000 per person, and Senator Warren has proposed $50 million per household for the U.S. (See below.)

Under our current tax system (including federal, state, and local taxes), wealthy households pay a smaller portion of their financial resources in taxes than poorer households. This is true whether the calculation is done based on income or wealth. For example, the 0.1% wealthiest households are estimated to pay 3.2% of their wealth in all taxes, while the bottom 99% of households are estimated to pay 7.2%. U.S. tax laws no longer reflect the core principle of fairness – that what one pays in taxes reflects his or her ability to pay.

Some current taxes share some characteristics of a wealth tax but are limited in scope or scale. At the state and local levels, the ownership of real estate is typically taxed and in some places some forms of tangible property, such as cars or business assets, are taxed. However, ownership of financial assets (e.g., stocks, bonds, etc.), of boats and planes, of jewelry and art, of collectibles, and of other forms of wealth are generally not taxed. Income from wealth held as financial assets and the profits from the sales of assets are taxed. Transfers of assets through gifts and inheritance are taxed.

For every one of the wealth-related taxes – on property, on income and gains from assets, and on inheritance – the wealthy and well-connected (often due to their campaign spending) have gotten policy makers to change and write loopholes into our tax laws that reduce the taxes wealthy individuals pay. For property ownership, real estate taxes and interest payments on mortgages are deductible when calculating federal income taxes (although the 2017 tax bill has surprisingly put some limits on these deductions). Income from wealth held as financial assets and the profits from the sales of assets are taxed at a lower rate that income earned from working. If assets are transferred to another person, through inheritance, gifts, or other means, the gain or profit on the assets is typically NOT taxed, allowing the wealthy to pass on their wealth tax-free. Furthermore, the inheritance tax has been cut and serious efforts have been made to eliminate it. Currently, it is applied only on assets over $11 million per person. In addition, loopholes in tax laws allow wealthy families and their tax experts to avoid or reduce their payment of inheritance taxes. If an asset is given to a charity, the gain or profit on it is not taxed, even though the donor can deduct the full, current value of the asset to reduce the income tax they would otherwise owe. This is a double tax avoidance scheme that provides huge benefits to the wealthy.

Four European countries have a wealth tax and back in 1990 twelve of them did. The wealth tax has been dropped in eight countries for a variety of reasons, but one was that wealthy individuals in Europe can relatively easily designate a tax-free location as their official residence to avoid the wealth tax. In addition, the wealth taxes were not generating much revenue because the tax rate was low (e.g., 1% to 2%), because exemptions for certain assets or circumstances have been written into the laws, and because of tax avoidance. Furthermore, other wealth-related taxes were viewed as preferable, e.g., taxes on gains or profits when assets are sold, inheritance taxes, property taxes, and taxes on inter-generational gifts. [2]

Senator Elizabeth Warren, as part of her presidential campaign, has proposed a wealth tax for the U.S. that she calls the Ultra-Millionaire Tax. It would apply only to the 0.1% richest households – about 75,000 households – with net wealth (i.e., assets minus debts and other liabilities) of over $50 million. They would pay an annual tax of 2% on net worth over $50 million up to $1 billion and 3% on net worth over $1 billion. This tax is estimated to generate $275 billion per year and, thereby, increase federal government revenue by about 7%. [3]

Warren’s proposed wealth tax would apply to all assets held anywhere in the world by a U.S. citizen. The IRS would be able to grant deferments (i.e., a postponement or delay) in the payment of the tax in extenuating circumstances. To calculate someone’s wealth, Warren notes that the IRS already has rules for valuing most assets for inheritance tax purposes. These rules could be used or they could be improved, and the IRS would be authorized to use cutting-edge valuation techniques for hard-to-value assets. Her proposal includes an increase in the IRS’s enforcement budget to oversee taxpayers subject to the Ultra-Millionaire Tax. A 40% exit tax would be charged on net worth above $50 million for anyone renouncing their U.S. citizenship to avoid the tax. The revenue this proposal would generate is what Senator Warren would use to pay for the programs she has proposed in other policy areas.

Economic inequality in the U.S. is spiraling to unprecedented levels because the wealthy have been using their wealth to skew public policies, such as tax policies, to their benefit. For example, some Republicans in Congress acknowledged that the 2017 tax bill, with its huge tax cuts for the wealthy, was passed to satisfy and reward donors to their campaigns, who were demanding a return on their “investment”. [4]

A wealth tax could be one strategy to address the huge and growing economic inequality in the U.S. It would ask those who have benefited tremendously from the U.S. economic system and our public infrastructure to pay something back to maintain this business environment so that the next generation has the same opportunity to succeed as they did.

[1]      Thornton, A., & Hendricks, G., 6/4/19, “Ending special tax treatment for the very wealthy,” Center for American Progress (https://www.americanprogress.org/issues/economy/reports/2019/06/04/470621/ending-special-tax-treatment-wealthy/)

[2]      Taylor, T., 2/4/19, “Why have other countries been dropping their wealth taxes?” Conversable Economist (http://conversableeconomist.blogspot.com/2019/02/why-have-other-countries-been-dropping.html)

[3]      Warren, E., retrieved 6/12/19, “Ultra-Millionaire Tax,” (https://elizabethwarren.com/ultra-millionaire-tax/)

[4]      Thornton, A., & Hendricks, G., 6/4/19, see above

PRIVATE WEALTH IS MADE ON PUBLIC INVESTMENTS

Private companies and individuals benefit from public investments in many ways. You may remember Senator Elizabeth Warren saying back in 2014 that “Nobody got rich on their own. Nobody. People worked hard, they built a business, God bless, but they moved their goods on roads the rest of us helped build, they hired employees the rest of us helped educate, they plugged into a power grid the rest of us helped build,” they are protected by police and firefighters that we all pay for, and so forth. [1]

Clearly, successful companies and individuals owe their success in part to public infrastructure and investments. Therefore, they should pay their fair share in taxes to support public spending on both the infrastructure they depend on and also to invest in the future so other individuals and companies can succeed as they did.

Another way that public investment supports and benefits private individuals and companies is that the federal government invests heavily in basic research that is then used by the private sector to develop products and services.

One example of this is that the National Institutes of Health (NIH) spends $30 billion each year on drug research and development (R&D). The pharmaceutical industry routinely justifies the high prices of drugs by citing the high cost of R&D to bring new drugs to market. This rationale is overstated from many perspectives (see my previous blog on drug pricing), but Representative Ocasio-Cortez shed new light on this overblown claim in a hearing in Congress earlier this year.

Rep. Ocasio-Cortez asked Dr. Aaron Kesselheim [2] whether the public was receiving any return on the investments in drug R&D made by the NIH when they led to highly profitable drugs. His answer, “No, … when those products are … handed off to a for-profit company, there aren’t licensing deals that bring money back into the coffers of the NIH.” [3]

Every one of the 210 new drugs approved by the Food and Drug Administration (FDA) between 2010 and 2016 benefited from NIH funded R&D.

The U.S. government is the biggest venture capital investor in the world. Examples outside of pharmaceuticals abound. The Internet grew out of the 1960s ARAPNET program funded by the Defense Department. Touchscreen technology was developed at a publicly-funded university using National Science Foundation grants. GPS technology began as a 1970s Defense Department program. Voice recognition technology came out of a project of the Defense Advanced Research Projects Agency (DARPA). Every one of the 12 key technologies of smart phones grew out of government-funded research projects. The Department of Energy has made over $35 billion in loans to high-risk clean technology projects, including Tesla’s development of electric cars. [4]

Unfortunately, the U.S. public is not getting the return it deserves on these investments. One way to get a public return is to tax the profits of companies using technologies in which the government has invested. Currently however, some of these companies pay very little or nothing in taxes. Furthermore, the 2017 tax cuts reduced corporate taxes to a near-record low. In addition to taxes, in countries such as Germany and Finland, the government obtains partial ownership or royalty payments from companies that benefit from public investments.

Part of the reason the public does not get a return on public investments in the U.S. is that our political system has been skewed to favor the interests of the private sector through our campaign finance system, lobbying, and the revolving door between government and private sector jobs. For example, over the last ten years, the pharmaceutical industry has spent almost $2.5 billion lobbying Congress. This includes hundreds of millions of dollars spent to influence the drug coverage provisions of the Affordable Care Act, which produce about $35 billion in additional profits for the pharmaceutical corporations.

Our elected officials and government regulators need to begin insisting that private companies and individuals provide the public – the taxpayers – with a reasonable return on public investments, including everything from roads, bridges, and air transportation, to our education system, to research and development. Fair taxation is one way to do this, but other avenues, such as partial ownership and royalty payments, should be explored as well.

[1]      Senator Elizabeth Warren, August 2012, campaign event https://www.youtube.com/watch?v=AHFHznu-N-M (30 seconds in)

[2]      Dr. Kesselheim is a doctor and a lawyer. He is an Associate Professor of Medicine at Harvard Medical School. He is an expert on the effects of intellectual property laws and regulatory policies on pharmaceutical development, the drug approval process, the costs, availability, and use of prescription drugs, and bioethics. (https://bioethics.hms.harvard.edu/person/faculty-members/aaron-kesselheim)

[3]      Karma, R., 3/6/19, “Alexandria Ocasio-Cortez and the myth of American innovation,” The American Prospect (https://prospect.org/article/alexandria-ocasio-cortez-and-myth-american-innovation)

[4]      Karma, R., 3/6/19, see above

EFFECTS OF THE 2017 CORPORATE TAX CUTS

There are new data on the effects of the federal tax cuts enacted in December 2017 by the Tax Cuts and Jobs Act (TCJA). They are not what their Republican proponents promised. They promised that corporations would use their big tax cuts to create new jobs, hire new workers, and improve workers’ pay and benefits. And they promised the tax cuts would pay for themselves and not increase the federal debt. (See this previous post for some background information.)

The tax cuts did dramatically increase profits for corporations. Corporate profits for the biggest 500 corporations (the S&P 500) grew by almost 21% in 2018. At the six biggest U.S. banks, profits grew almost 30% to a record $120 billion. [1] AT&T projects profits will be up $3 billion in 2018 and Amazon doubled its profits to $11.2 billion.

So, what did corporations do with their record profits?

Corporations have rewarded shareholders, first and foremost. In 2018, they spent $1 trillion buying up their own shares of stock and paid out $500 billion in dividends to shareholders. Both figures are records. Because of foreign ownership of stock in US corporations and of corporations or subsidiaries in the US, a third of the money spent on stock buybacks and dividends goes to foreign nationals. Because this money doesn’t get spent in the US economy, the tax cuts probably made America poorer, not richer. [2] US corporations also spent a record $400 billion on cash acquisitions of other companies, which doesn’t add to the economy or benefit workers.  [3]

Stock buybacks boost a stock’s prices, rewarding shareholders (not workers) and corporate executives, whose pay is almost always tied to the price of the stock. Senators Sanders and Schumer have proposed a law that would ban stock buybacks for any corporation that pays workers less than $15 per hour. [4]

Stock buybacks were illegal until 1982, which is roughly (and probably not wholly coincidentally) the same time wages stopped rising for most Americans. Before then, a bigger share of corporate profits was used to increase workers’ wages, rewarding them for their increased productivity. [5]

Given that the great bulk of the corporate tax cuts have been passed through to stockholders via dividends and stock buybacks, and given that 84% of stocks are owned by the wealthiest 10% of the population, the other 90% of residents will see little if any benefit from the corporate tax cuts. Therefore, these corporate tax cuts contribute to growing income and wealth inequality.

The creation of new jobs and the growth in wages have been modest. There certainly hasn’t been the boom in the economy or wages that Trump and the Republicans claimed would happen. Moreover, the largest corporations, which benefited the most from the tax cuts, have NOT been creating jobs or boosting workers’ wages.

The 1,000 largest public corporations in the U.S. have CUT nearly 140,000 jobs since the passage of the tax cut law. For example, General Motors recently announced plans to close several plants and cut 15,000 jobs, despite receiving a roughly $500 million benefit from the tax cuts.

AT&T cut over 10,000 jobs in 2018 and is closing three U.S. call centers, despite an estimated $3 billion annual increase in profits due to the tax cut. Although AT&T’s CEO had promised to create jobs and bolster its workforce with the benefits of the tax cuts, AT&T has only paid a one-time, $1,000 bonus to its employees at a cost of $200 million, which is only 7% of one year’s increase in profits. Meanwhile, three-quarters of its overall 2018 profits were spent on dividends and stock buybacks that benefit shareholders, including executives, and not its workforce. [6]

For the Wall Street financial corporations, profits for the first half of 2018 were up 11% at $13.7 billion, after rising 42% in 2017. The average salary in these firms jumped 13% to $422,500. Jobs in the financial industry account for less then 5% of private sector jobs in New York City, but 21% of private sector wages. [7] Wages for these highly-paid workers are rising, but not for most workers.

Due to the tax cut, federal tax revenue on corporate income plunged $130 billion (45%) from 2017 to 2018, from $290 billion to $160 billion. [8] Furthermore, Amazon, for example, paid no federal income taxes for the second year in a row despite having profits of $17 billion over those two years. [9]

The federal deficit is increasing and is estimated to be $830 billion for 2018 and to climb to $1,000 billion next year (i.e., $1 trillion) and remain at that level for subsequent years. The annual deficit had been declining under President Obama both in terms of dollars ($585 billion in 2016) and as a portion of the overall economy (i.e., 3.1% percent of Gross Domestic Product [GDP]). Under President Trump, it has jumped in dollars ($830 billion) and to 4.0% percent of GDP. [10] So, clearly the tax cuts are not paying for themselves.

Moreover, the increase in the federal deficit and the cost of interest on the growing federal debt will result in future cuts to government programs or increases in other taxes. These cuts or increases are much more likely to fall on the less wealthy 90% of the population.

Therefore, it’s a near certainty that the great majority of Americans will be worse off due to the Trump and Republican corporate tax cuts of 2017.

[1]      Levitt, H., & Abelson, M., 1/16/19, “It’s official: Wall Street topped $100 billion in profit,” The Wall Street Journal

[2]      Krugman, P., 1/1/19, “The Trump tax cut: Even worse than you’ve heard,” The New York Times

[3]      Wursthorn, M., 12/16/18, “The rocky stock market stills pays dividends to investors,” The Wall Street Journal

[4]      Inequality Weekly newsletter, 2/18/19, Inequality.org (https://inequality.org/resources/inequality-weekly/)

[5]      Reich, R., 3/21/18, “The buyback boondoggle is beggaring America,” The American Prospect (http://prospect.org/article/buyback-boondoggle-beggaring-america)

[6]      Johnson, J., 1/7/19, “After promising more jobs from Trump tax cut, report shows AT&T has ‘done just the opposite’ by slashing over 10,000 jobs in 2018,” Common Dreams (https://www.commondreams.org/news/2019/01/07/after-promising-more-jobs-trump-tax-cuts-report-shows-att-has-done-just-opposite)

[7]      Talking Points, 9/18/18, “Wall Street salaries at highest level since 2008,” The Boston Globe

[8]      Krugman, P., 1/1/19, see above

[9]      Inequality Weekly newsletter, 2/18/19, see above

[10]     Amadeo, K., 2/12/19, “US budget deficit by year, compared to GDP, debt increase, and events,” The Balance (https://www.thebalance.com/us-deficit-by-year-3306306)

THE DEPARTMENT OF DEFENSE’S MASSIVE FINANCIAL FRAUD

The Department of Defense (DOD) has been engaging in massive financial fraud for years. It has inflated its expenditures and budget requests repeatedly while stashing hundreds of billions of dollars into hidden slush funds.

In 1990, Congress passed and President George H. W. Bush signed into law the Chief Financial Officers Act. It requires 24 federal agencies to submit to annual audits – something every publicly-owned, private, for-profit corporation and every not-for-profit organization are required to do.

Only one of the 24 agencies has failed to comply with the requirement for an annual audit: the Department of Defense. It has only had one audit conducted and it failed the audit miserably. The private firms that were hired to perform the audit concluded that DOD’s financial records were so deficient and full of errors and irregularities that a reliable audit was impossible to perform.

The unsuccessful audit identified at least $21 TRILLION in financial transactions at DOD since 1999 that can’t be traced, documented, or explained. The DOD has the largest discretionary budget in the federal government, $716 billion in 2019, representing 54% of all appropriations. So, the financial problems uncovered and its failure to perform annual audits are extremely significant.

The attempted audit documented that the DOD’s leaders and accountants have been falsifying accounting records for decades. This has been done to deliberately mislead Congress (and the public) and to justify ever increasing budgets, regardless of actual need. The DOD was found to be literally making up numbers and financial transactions in its reports to Congress. [1] It’s important to note that higher DOD budgets mean more money for military contractors, including Boeing, Lockheed Martin, Raytheon, BAE Systems, Northrop Grumman, and General Dynamics.

One of DOD’s strategies was that rather than returning the money to the Treasury, as is required by law, when it didn’t spend all the money in its annual budget, it would create phony transactions to shift the money to a slush fund where it could hide the money and keep it.

Another DOD strategy was to create phony figures to cover up accounting errors and mismanagement. These made it look like its financial reports were accurate and that spending was in alignment with appropriations in the budget. These figures are referred to as “plugs” because they plug holes in DOD’s financial reporting. For example, in the 2015 Army’s budget alone, $6.5 trillion of plugs were found; a truly astonishing figure given the Army’s budget for the year was $122 billion.

DOD also frequently shifts money from the purposes officially authorized in its budget to other uses. Sometimes money is shifted multiple times making the ultimate use of the funds virtually untraceable.

Part of the reason for the 1990 Chief Financial Officers Act and its requirement for annual audits was that whistle-blowers in the 1980s had exposed wildly inflated DOD spending. Cost over-runs on weapons, enormous amounts of waste (such as $1,200 mugs [2]), financial mismanagement, and out-right fraud were evident at DOD then as they are today. The 1980s whistle-blowers estimated that DOD had accumulated roughly $50 billion in a slush fund by not returning unspent funds to the Treasury. However, this story line goes back at least to 1968 when another whistle-blower, A. Ernest Fitzgerald, testified before Congress and Senator Proxmire about cost overruns at DOD. He was demoted and his position eliminated as a result. In 1973, he was reinstated by order of the Civil Service Commission, but DOD marginalized him. In 1981, he was a founder of the organization that became the Project on Government Oversight (POGO), a private government watchdog that helps other whistle-blowers share information without having to be publicly identified. [3]

On September 10, 2001, Donald Rumsfeld, President G.W. Bush’s Secretary of Defense, held a press conference and made the startling announcement that “According to some estimates we cannot track $2.3 trillion in [DOD] transactions.” [4] This amount was over seven times the total DOD budget of $313 billion for 2001. No other Secretary of Defense, before or after Rumsfeld, has been anywhere near this forthright about DOD’s accounting shenanigans. Unfortunately, the attention this revelation was due got completely overshadowed and lost due to the terrorist attack the next day on the World Trade Centers in New York.

The Office of the Inspector General (OIG) within DOD has criticized DOD’s accounting practices for years but has never advocated for punitive action against DOD accountants or anyone else. After the recent increased attention to the problems highlighted by the unsuccessful audit, OIG began removing previous reports from its website. In addition, while OIG audit reports have always been made available on-line and in full, a recent report on the Navy’s 2017 financial statement was heavily redacted when it was made publicly available. Despite requests from the media and Congress for an unredacted version of the report, OIG has refused to release one. A Freedom of Information Act (FOIA) request by The Nation magazine for the unredacted version is currently pending. [5]

The scale and consistency of DOD’s financial manipulation and misreporting make it clear that this has been an intentional strategy to mislead Congress and pad its budget year after year after year. If this happened in the private sector (think Enron) people would be fired and prosecuted; and companies would go out of business.

If we want to make government more efficient and to save money by reducing waste and fraud, there’s more money and efficiency to be found at DOD than all other federal agencies combined. We need members of Congress now and a future President to demand that DOD clean-up its finances. They will need to counter the huge and powerful bureaucracy that is the DOD and the power of the military contractors (and their campaign contributions and lobbyists). They will have to overcome the sacrosanct nature of DOD spending and the political dogma that anyone who criticizes DOD spending is weak on defense and unpatriotic. Of course, nothing could be further from the truth. Having an efficient, effective, well-managed DOD is what being strong on defense is really all about.

[1]      Lindorff, D., 11/27/18, “Exclusive: The Pentagon’s massive accounting fraud exposed,” The Nation (https://www.thenation.com/article/pentagon-audit-budget-fraud/)

[2]      Gelardi, C., Week of 12/3/18, “A mugs’ game,” The Nation

[3]      Sandomir, R., 2/14/19 “A. Ernest Fitzgerald, exposer of waste at the Pentagon, dies at 92” The New York Times

[4]      As reported in Lindorff, D., 11/27/18, see above

[5]      Lindorff, D., 11/27/18, see above

INVESTING IN INFRASTRUCTURE AND A GREEN ECONOMY: THE PROPOSALS

My previous post outlined the need for investing in our infrastructure while simultaneously taking advantage of opportunities to make our economy more environmentally friendly and fairer for workers. Here are overviews of some of the infrastructure investment proposals that various groups have developed to address these issues.

The Democrats have proposed “A Better Deal to Rebuild America” which calls for a $1 trillion federal investment in infrastructure that would create more than 16 million jobs. It would invest in green infrastructure and ensure opportunities for small businesses. It would incorporate strong environmental protections and labor standards. It proposes investing in roads, bridges, rail, and public transit; high-speed internet; schools; airports, ports, and waterways; and water and energy systems.

The infrastructure proposals from the Congressional Progressive Caucus, [1] the Campaign for America’s Future, [2] and Demos [3] have much in common and share similar underlying visions. The Campaign for America’s Future’s proposal is put forth as a “pledge to fight for good jobs, sustainable prosperity, and economic justice.” It incorporates investment in traditional and green infrastructure along with ensuring that workers can form unions to bargain collectively for better wages and benefits. It supports a living wage, affordable health care and child care, and paid family leave, sick and vacation time for workers. It advocates for full employment with particular attention to helping individuals and communities harmed by discrimination, de-industrialization, and privatization.

Demos proposes an economic agenda that addresses issues of race and class, while motivating working people to “engage in the civic life of their communities and our nation.” Its 25 policies mirror the goals of the Campaign for America’s Future’s pledge. They also call for investment in affordable housing and for guaranteed employment for everyone who wants to work, with the federal government as the employer of last resort (as was done during the Great Depression).

In an article in The American Prospect, Jon Rynn recommends considering health care, education, and financial infrastructure as part of the infrastructure investment paradigm. This reflects the inclusion of human capital and public goods, not just physical capital, as important components of overall infrastructure. Universal health insurance, such as Medicare for All, would expand health care infrastructure and support the productivity of human capital. Affordable public college and early care and education (aka child care) are both pieces of educational infrastructure and are investments in the current and future workforce’s human capital. Finally, regulating the financial industry and creating public banks would be ways of strengthening and democratizing financial infrastructure. [4]

A recent addition to the infrastructure proposals being promoted in Congress is the Green New Deal. It isn’t as detailed as the proposals mentioned above; it’s more of a vision statement. It envisions a substantial investment in infrastructure and the green economy. It would transform our economy by decarbonizing it to address climate change, while also making it fairer. [5]

After the October release of the Intergovernmental Panel on Climate Change (IPCC) report that presented ominous data and predictions about global warming, a series of events occurred that have pushed the Green New Deal into the spotlight. After the November election, Representative (and soon-to-be House Speaker) Pelosi announced that she planned to revive the Select Committee on Energy Independence and Global Warming to pursue bipartisan action. However, climate change activists viewed the Committee and a bipartisan approach as likely to continue to be fruitless.

So, the youth-led Sunrise Movement organized a sit-in in Rep. Pelosi’s office, calling for a committee charged with developing a plan to meet the goals deemed essential by the IPCC report. Sunrise approached Representative-elect Ocasio-Cortez, who had campaigned in support of a Green New Deal, and asked her to help publicize the sit-in. She not only agreed to do so and to reach out to other new representatives, but agreed to attend the sit-in. Roughly 200 activists occupied Pelosi’s office on November 13 with significant media attention.

Sunrise, Rep. Ocasio-Cortez, and others in or coming into Congress developed a proposal for a Select Committee on a Green New Deal. By December 10, forty members of Congress had endorsed the proposed committee and an even larger occupation of Pelosi’s office occurred.

While the specifics of a Green New Deal are to be determined, its four core elements are:

  • Decarbonizing the economy
  • Large-scale public infrastructure investment
  • Federally-guaranteed employment for everyone who wants to work
  • A just transition to a green economy with remediation for those most negatively affected by historical discrimination, climate change, and the shift to a green economy

For any infrastructure investment program, the first question usually is, can we afford it? Many people would argue that we can’t afford not to make these investments and that the cost of climate change will be much larger than these costs if we don’t take aggressive steps to green our economy.

To put the suggested costs of roughly $500 billion per year for a significant infrastructure program in perspective, the Works Progress Administration’s budget in the 1930s was roughly 2.2% of Gross Domestic Product (GDP, the size of the overall economy). This would be about $450 billion per year today with U.S. GDP at $20.66 trillion. The tax cuts passed in 2017 cost roughly $200 billion per year. Congress and President G.W. Bush approved, on short notice, a $700 billion bailout of the financial sector after the 2008 crash and, in addition, by March 2009, the Federal Reserve had committed $7.8 trillion, more than 50% of GDP at the time, to rescuing the financial system. So, the answer to whether we can afford the proposed infrastructure investments is YES; we can afford it if we have the public and political will to make the commitment to repairing and modernizing our infrastructure while greening our economy and making it work fairly for the benefit of all.

If Democrats are willing to commit to a Green New Deal (GND), which means standing up for a fair economy and taking aggressive steps to address climate change, they could reap the benefits of the current grassroots energy behind these issues. Some Democrats will resist endorsing a GND, fearing the loss of campaign donations and support from wealthy individuals and corporations. However, not supporting a GND would risk squandering a tremendous opportunity, both politically and to do what’s good for our people, our democracy, our country, and our planet.

I encourage you to communicate with your U.S. Senators and Representative about infrastructure investment and the Green New Deal. Nothing is more likely to persuade them to support a GND than hearing from constituents who care about climate change, well-maintained infrastructure, and an economy that works for everyone. I welcome your comments and feedback on steps you feel are needed to make our economy fairer and more responsive to regular Americans, as well as to tackle global warming and climate change.

[1]      Blair, H., 7/24/18, “‘The People’s Budget’: Analysis of the Congressional Progressive Caucus budget for fiscal year 2019,” Economic Policy Institute (https://www.epi.org/publication/the-peoples-budget-analysis-of-the-congressional-progressive-caucus-budget-for-fiscal-year-2019/)

[2]      Campaign for America’s Future, 2018, “The Pledge” (http://campaignforamericasfuture.org/pledge/)

[3]      Demos, 1/31/18, “Everyone’s economy: 25 policies to lift up working people” (https://www.demos.org/publication/everyones-economy)

[4]      Rynn, J., 6/28/18, “What else we could do with $1.9 trillion,” The American Prospect (https://prospect.org/article/what-else-could-we-do-19-trillion)

[5]      Roberts, D., 12/26/18, “The Green New Deal explained,” Vox (https://www.vox.com/energy-and-environment/2018/12/21/18144138/green-new-deal-alexandria-ocasio-cortez)

INVESTING IN INFRASTRUCTURE AND A GREEN ECONOMY

In previous posts, I’ve noted that with Democrats taking over control of the U.S. House in January, there’s a wide range of issues they might tackle. Even if many of the bills they propose, and hopefully pass, don’t become law (because they aren’t passed by the Senate or are vetoed by President Trump), they will frame the debate going forward and into the 2020 elections. Raising substantive issues will shift the political discussion to meaningful policies to address important problems rather than tweets and meaningless bluster.

Readers’ feedback on the list of topics in a previous post identified infrastructure investment and environmental policy issues as the two top priorities. Coincidentally, these two issues have become linked. They were described in my post as follows:

  • Infrastructure: repair roads and bridges; repair and improve mass transit including railways and airports; provide quality school buildings for all children; repair and enhance water, sewer, and energy systems; provide universal, high speed, affordable Internet access; restore and enhance public parks; provide good jobs with good wages and benefits through work on infrastructure projects.
  • The environment: move forward with the Green New Deal, which supports the development of renewable energy and green jobs while aggressively addressing climate change.

The American Society of Civil Engineers’ (ASCE) 2013 Report Card for America’s Infrastructure gave the U.S. a grade of D+ and estimated that an investment of $3.6 trillion was needed by 2020. No significant improvement has occurred since the report card was issued. (A new report card, which is done every four years, will be out on March 9, 2019.) ASCE describes infrastructure as the backbone of our economy and notes that there’s a significant backlog of maintenance and a pressing need for modernization. The overall grade is a summary of grades in 16 areas from schools to water and waste systems to transportation and energy systems.

Large portions of our deteriorating infrastructure were built in the 1930s under the New Deal’s Works Progress Administration (WPA). The WPA built electricity generation and distribution systems, constructed dams and water distribution systems, restored ecosystems, built national parks, and rescued the Midwest from the Dust Bowl. During World War II, the government built factories that produced military equipment and supplies, which after the war produced consumer goods. After WWII, the government subsidized housing construction and invested in human capital through the GI bill, which subsidized education for veterans. In the 1950s, public money built the Interstate Highway System and our aviation system. [1]

By the late 1960s, public infrastructure investment began to slow and by the 1980s, with privatization, deregulation, cutting taxes, and shrinking government at the top of the political agenda, the decline in infrastructure investment accelerated. The public seems to have quickly forgotten that it was public investments that built the infrastructure everyone takes for granted in their everyday lives.

Today, recognition is growing that our failure to invest in maintaining and modernizing infrastructure is hurting our global competitiveness and inconveniencing our everyday lives. A growing number of voices are noting that infrastructure investment is needed and would be a much better use of public funds than spending $5 billion on a wall to prevent immigration from Mexico or $1.9 trillion over 10 years on tax cuts (largely for wealthy individuals and corporations) as was done in December 2017.

Investing in green industries, particularly clean and renewable energy, thereby addressing climate change, is one component of infrastructure investment. This is also an opportunity to revitalize the U.S. economy and to foster our ability to compete in the growing international market for green technology.

Infrastructure investment can also be a means to address under-employment and inequality. Although overall unemployment figures are low, many people who lost good, blue collar, union jobs to global trade are still earning less and are less secure economically than they used to be. Many recent college graduates are struggling to find good jobs and unemployment is still high for people without college degrees, especially those who are not white. Ensuring that the many jobs created by infrastructure investment are full-time jobs with good wages and benefits would be an important step toward reducing economic inequality and insecurity.

Although President Trump has expressed support for infrastructure investment, his approach would privatize public infrastructure, unfairly enrich private developers, and fail to build much of the infrastructure that’s need. (See my earlier post, Trump’s Infrastructure Plan: A Boondoggle, for more details.) Furthermore, it would not promote the greening of our economy or reducing inequality.

My next post will review some infrastructure investment proposals, including the Green New Deal, which has been getting a lot of attention lately.

[1]      Rynn, J., 6/28/18, “What else we could do with $1.9 trillion,” The American Prospect (https://prospect.org/article/what-else-could-we-do-19-trillion)

THE DOWNSIDE OF PHILANTHROPY

Philanthropy, particularly at this time of year, is typically viewed as the ideal expression of caring for others and contributing to amelioration of social problems. However, philanthropy, particularly when tax-subsidized and done by the super-rich, has a significant downside.

Philanthropy in the U.S. is subsidized for those who itemize deductions on their income tax returns. Deducting charitable donations from taxable income means that the donation costs the donor less than its full amount. For a high-income tax payer paying roughly 40% of income in taxes, the donation only costs 60 cents for every dollar donated. For a lower-income taxpayer paying a 15% tax rate, a donation costs 85 cents for every dollar donated. Furthermore, it’s primarily high-income taxpayers and home owners who itemize deductions. So, both of these factors skew the financial benefits of philanthropy to those with high incomes and provide lower or no benefit to those with lower incomes.

Therefore, our current system of tax-subsidized philanthropy favors the giving preferences of the wealthy over those of low income or poor people. This problem was exacerbated by the 2017 tax cut. It raised the standard deduction for income tax calculation, which means that only the top 10% or so of incomes will still find it worthwhile to itemized deductions. Therefore, our tax system will now subsidize the philanthropy of only the top 10%.

Poor and middle-class people give away as high a percentage of their incomes as the wealthy, which suggests that the tax subsidies for philanthropy are rewarding the wealthy for behavior they would most likely engage in anyway. Charitable activities have occurred for centuries, but we have provided tax benefits for them only for the last 100 years. Therefore, these tax subsidies may well just be a benefit, a pat on the back, for high income people. If this is the case, it makes no sense to give away the tax revenue or to allow the wealthy to avoid paying their fair share in taxes by giving them a tax break for their charitable giving. [1]

Because of the growth of income and wealth inequality, and the huge amounts of money the super-rich can easily afford to give away, increasingly the philanthropic preferences of the wealthy are shaping our society. However, the giving preferences of the wealthy do not reflect the philanthropic preferences of the rest of society. [2]

Rob Reich, the author of “Just Giving,” would prefer to see society pursue democratically identified goals rather than private projects selected by wealthy philanthropists. The big splash that big philanthropy makes, such as Amazon’s Bezos’s recent announcement of a $2 billion commitment to address homelessness and improve early childhood education, distracts us from crafting policy solutions that will systematically address problems and help everyone who is facing a challenge rather than the subset who fall within the purview of a philanthropic project.

When the super-rich decide which institutions to support (e.g., universities, museums, hospitals) and which social problems to tackle (e.g., homelessness in the U.S., hunger and health in poor countries), they are usurping the role of public decision-making and priority setting that should be done by democratically run organizations, particularly governments. [3]

Charitable donations have been increasing since the 2008 recession, exceeding $400 billion for the first time in 2017. However, fewer households are giving, dropping from 66% in 2000 to 55% in 2014. While Giving Tuesday this year set a record with $380 million raised from 4 million individuals (an average of about $100 each), this represents only 0.1% (one tenth of one percent or one thousandth of overall giving).

Non-profit organizations are relying on fewer, larger donations. This means their support is less reliable from year to year and that they may tweak their missions to fit the interests of large donors. Overall, it means the favored institutions, causes, and projects of the wealthy are funded, while others struggle to survive. For example, it may mean that there is one awesome charter school for a hundred or so children, but that quality public education for all gets left behind.

Large-scale philanthropy can cause public organizations, such as public schools, to alter policies and procedures to qualify for philanthropic funding. For example, billionaire Bill Gates’s foundation’s grants for public schools have pushed school systems and states to adopt the Common Core learning standards and to internally subdivide schools into “schools-within-a-school” in accordance with grant requirements.

Super-sized philanthropy can’t replace broad-based public programs and investments that improve overall public well-being. An irony is that the super-rich may oppose public policies that would address issues they tackle through their philanthropy. The most dramatic and recent example is that of Amazon’s Bezos. He announced $2 billion in philanthropy to tackle homelessness and early education, but vehemently opposed, successfully, a per person tax on employment in Seattle to address the growing homelessness there. [4] Seattle’s homelessness problem is exacerbated by escalating housing prices driven in significant part by the need for housing for the growing number of Amazon employees in the Seattle area.

A more equitable and democratic system would stop providing a tax benefit for the philanthropy of the rich and more fairly tax the high incomes and wealth of individuals and corporations. The increased public revenue could be used to broadly and equitably improve societal well-being. For example, if we had increased the minimum wage to keep up with inflation and productivity since the 1960s, if we had reduced executive salaries and shareholder rewards in order to benefit employees, and if we provided affordable, quality health care for all, maybe we wouldn’t need super-sized philanthropy to help people afford a place to live or child care.

Charitable giving is not a bad thing, although giving of one’s time can be as valuable and more rewarding than giving money. However, our current system of tax-subsidized charitable giving and super-sized philanthropy based on great disparities in wealth is not good for democracy nor the best way to maximize social welfare.

[1]      Ortiz, A., 12/2/18, “The price of philanthropy,” The Boston Globe (This article is an interview with Rob Reich, the author of the new book “Just Giving.”)

[2]      Ortiz, A., 12/2/18, see above

[3]      Loth, R., 12/10/18, “We can’t privatize our way out of poverty,” The Boston Globe

[4]      Loth, R., 12/10/18, see above

EVEN THE RICH RECOMMEND TAXING THE RICH

There are many arguments for increasing taxes on the rich. It’s interesting and noteworthy when the rich themselves argue for higher taxes on themselves and others like them. Warren Buffet, one of the richest men on the planet and an investor without peers, has been stating since 2011 that he pays a lower income tax rate than his secretary and that this isn’t fair. [1]

Other wealthy individuals also argue that the rich should pay more. First, there’s Douglas Durst, a billionaire New York City real estate magnate, who recently stated that he supports “higher taxes on people like me.” He noted that the US “has more of a revenue problem than a spending problem.” His father, also a real estate man, created the National Debt Clock (that displays the federal government’s overall debt) and put it on a building he owned near Times Square in New York in 1989. Durst, the son, maintains it today as the US government’s debt is growing by almost $1 trillion per year. Republicans, who campaigned on balancing the budget, have increased the annual deficit to this level (and even higher in the future) by cutting taxes and increasing spending. The US hasn’t had this high a debt level in comparison to the size of the overall economy (i.e., Gross Domestic Product [GDP]) since World War II.

Durst is baffled that President Trump and the Republicans in Congress would give a tax cut to wealthy people like him. “We’re mortgaging our children’s future. … The tax cut was an overall step in the wrong direction. Nobody who has any background in economics thought the tax bill was a good idea.” [2]

Over the last 40 years, President Clinton is the only President who has balanced the federal budget and reduced the overall debt.

Second, there’s Nick Hanauer, a billionaire, venture capitalist, and serial entrepreneur, who recorded a 6-minute TED Talk in 2012 and this summer wrote an article in The American Prospect magazine, both of which argue that taxes on the rich should be increased. [3] He argues that “taxing the rich is the only plan that would increase investment, boost productivity, grow the economy, and create more and better jobs.” He states (correctly) that there is no observable evidence or plausible economic mechanism to support the claim that cutting taxes for the rich will spur economic growth. This did not happen when President Reagan cut taxes on the rich; it did not happen when President G. W. Bush did it. However, when President Clinton raised taxes on the rich, the economy boomed and the federal government balanced the budget. President Trump and the Republicans cut taxes on the rich in December 2017 and the economy has not boomed; it has continued its slow growth that began under President Obama. Furthermore, well over 90% of the benefits of current economic growth are going to the wealthy.

In Kansas in 2012, Governor Brownback and Republicans in the state legislature dramatically cut taxes on the rich, promising unprecedented economic growth. The reality has been that Kansas’s economy has under-performed neighboring states and the country. Because of the loss of state revenue, spending on schools (and everything else) has been cut dramatically and the state’s courts stepped in and ordered the state to spend more on K-12 education. The legislators have now overridden a gubernatorial veto and reversed some of the tax cuts.

Many (if not all) credible studies of the interaction between tax rates for the wealthy and economic outcomes show either that 1) increasing taxes on the rich increases economic growth and other indicators of economic success and well-being or 2) there is no link between top tax rates and the economic benefits the proponents of tax cuts and trickle-down economics claim.

In the 1950s, the top tax rate was 91% – and the economy was booming. It was 70% in 1980 when President Reagan took office and he cut it to 50%. The 2017 tax cut cut the top rate to 37%! As Hanauer states in his TED Talk, if cutting tax rates on the rich led to economic growth and job creation, our economy would be exploding and everyone would have great jobs given that today’s top rate is only 37%.

Finally, Hanauer notes (accurately) that consumer spending is what drive the US economy; it accounts for 70% of GDP. Current levels of inequality mean that rich people (and corporations) literally have more money than they know what to do with. With income and wealthy that is over 1,000 times that of the average American, they can’t buy 1,000 houses, or 1,000 times as many cars, clothes, and food items.

Therefore, putting more money in the hands of the middle class, workers, and low-income people will boost the economy because they will spend it in the local economy. They will also invest some of the money in human capital development, i.e., education and training, for themselves and their children. These investments in human capital are key to spurring future growth and success for our economy.

Hanauer states that anything governments spend money on will pump more money into our economy that what the rich do with their excessive amounts of money. Low wages and high levels of inequality cause slow growth. Therefore, increasing inequality by cutting taxes on the rich will not spur economic growth. A 2014 report from the Organisation for Economic Cooperation and Development (OECD) concluded that growing economic inequality in the US had reduced its economic growth by 9% over the previous 20 years.

In conclusion, we need to reduce economic inequality in the US as a matter of fairness and to live up to our ideals of equal opportunity and that all people are created equal. We also need to reduce inequality to spur economic growth today and in the future.

To reduce economic inequality, we need to increase taxes on the rich and invest the revenue in good jobs (e.g., rebuilding our infrastructure), in human capital (e.g., education and training from birth and throughout careers), and in a safety net (e.g., unemployment insurance and guaranteed healthcare) to support people who fall on hard times.

These steps will allow the United States to live up to its ideals and principles of equal opportunity, will boost our economy, and will contribute to creating a fairer, more just society that supports all children and families.

[1]      Isidore, C., 3/4/13, “Buffet says he’s still paying lower tax rate than his secretary,” CNNMoney (https://money.cnn.com/2013/03/04/news/economy/buffett-secretary-taxes/index.html)

[2]      Long, H., 9/17/18, “‘I support higher taxes’: the billionaire behind the National Debt Clock has had it with Trump,” The Washington Post

[3]      Hanauer, N., Summer 2018, “Want to expand the economy? Tax the rich!” The American Prospect (http://prospect.org/article/want-expand-economy-tax-rich)

THE EFFECTS OF THE FEDERAL TAX CUT

The initial effects of the federal tax cuts enacted in December 2017 by the Tax Cuts and Jobs Act (TCJA) are now visible; they are not what their Republican architects promised.

Although it’s too early to know definitively if the tax cuts will have an effect on the overall economy, growth in the first quarter of 2018 was steady but not noteworthy. There is no evidence of the tax-cut-fueled acceleration of economic growth the Republicans promised. [1] The latest projections, as well as experiences elsewhere, strongly suggest that the effects on economic growth will be small at best.

The effects of the tax cut on the deficit are becoming clearer. The latest projections from the non-partisan Congressional Budget Office (CBO) are that the federal government’s revenue will be reduced by $1.3 trillion over the next 10 years. When the costs of paying interest on the growing debt are included, the CBO projects that the cumulative deficit will increase by $1.9 trillion over the period from 2018 to 2028 due to the tax cuts, despite the Republicans’ promise of no increase in the deficit. [2] Furthermore, the growth in the deficit will be exacerbated by the spending bill that was enacted in early 2018, which increases spending by $300 million over the next two years.

The CBO projects the federal government’s deficit will be $804 billion for fiscal year 2018, up 21% from 2017. Furthermore, it projects the deficit will be over $1 trillion a year by 2020, despite President Trump’s campaign promise to eliminate the deficit. From 2021 to 2028, the CBO estimates the deficits will average 4.9% of Gross Domestic Product (GDP), the total of all economic activity in the U.S. This is higher than at any time since World War II, except during the Great Recession of 2008 – 2009 when tax revenue slumped with the collapsing economy and spending was high to bail out Wall St. and to stimulate the economy.

The growing deficit reflects the gap between what the Republicans who control the federal government want to spend and their unwillingness to enact the taxes necessary to pay for it. This is blatant fiscal irresponsibility. Moreover, growing deficits are of serious concern when the economy is doing well and unemployment is low. In this situation, many economists and responsible officials recommend reducing the deficit and even generating a surplus, as President Clinton did, so that the country has the capacity to weather the next economic downturn.

Analysis of the individual tax cuts finds that the wealthiest households will receive the biggest tax cuts, both in terms of dollars and percentage increase in after-tax income. Households with incomes under $25,000 will receive an average tax cut of $40. Meanwhile, those with incomes from $49,000 to $86,000 will receive an average tax cut of about $800, those with incomes of $308,000 to $733,000 will get about $11,200, and those with incomes over $733,000 will get a tax cut of about $33,000. [3]

As an example of the benefits of the corporate tax cuts, the six biggest, multi-national banking corporations (JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, and Bank of America) together paid at least $3.6 billion less in taxes for the first quarter of 2018 than they would have without the 2017 tax cut law. Before the tax cut, these corporations had paid 28% to 31% of their income in taxes; for the first quarter of 2018 they paid between 17.2% and 23.7%. Their tax rate is estimated to be 20% – 22% for the full year, meaning they will receive a tax cut of $19 billion for this year. [4] By the way, the tax cut law also provides benefits, and therefore incentives, to corporations to move jobs and profits overseas to dodge U.S. income taxes. [5]

The Economic Policy Institute projects that roughly 80% of the benefits of the corporate tax cuts will be passed on to shareholders and executives, and not used to pay employees or re-invest in the business. Although some corporations gave small raises or bonuses to their workers – thanks to intense public visibility and pressure – a huge chunk of the tax cut has been used to buy back company stock.

In just the four months since the tax cuts were enacted in December, corporations have announced more than $250 billion in stock buybacks. This rewards stockholders and executives as it pushes up the price of the corporation’s stock. These buyback announcements are an acceleration from an already record-high, $5.1 trillion of buybacks over the previous decade. Virtually all the profits of the country’s 500 largest corporations from 2005 to 2015 went to share buybacks and dividends, and not to workers’ wages or investments that would increase productivity, both of which have stagnated. [6]

Stock buybacks give huge rewards to corporate executives because much of their compensation is paid in shares of stock. For example, the CEO of Wells Fargo bank got a $4.6 million raise for the year due to the increase in the corporation’s stock price from stock buybacks.

Stock buybacks were illegal until 1982, which is roughly (and probably not wholly coincidentally) the same time wages stopped rising for most Americans. Before then, a bigger share of corporate profits was used to increase workers’ wages and re-invest in the business, rather than for less economically productive stock buybacks. [7]

Some corporations have announced bonuses or pay increases for workers. However, so far these announcements have applied to only 4.1% of workers and roughly 80% of them are one-time bonuses not on-going pay increases, even though the corporations’ tax cuts are permanent and on-going. [8] In some cases, the workers have not received (and may never receive) actual increases in pay. For example, some corporations have made the pay increases the subject of negotiations with unions. Corporations have announced spending 42 times as much on stock buybacks as on increases in employees’ pay. [9]

To put all this in some perspective, it is estimated that the Koch brothers, extremely wealthy corporate executives, will see their incomes increase by about $27 million per week or $1.4 billion per year. Not coincidentally, they have pumped hundreds of millions of dollars into Republican election campaigns over the last four years. Meanwhile, the few workers lucky enough to get a pay increase are typically getting, at most, a one-time bonus of a few hundred or maybe a thousand dollars for the year. [10]

I encourage you to contact your U.S. Representative and Senators and to ask them to support the Reward Work Act. This bill would significantly limit stock buybacks, give employees of publicly traded corporations the power to elect one-third of the corporation’s Board of Directors, and force corporations to use their tax cuts to reward their workers, instead of executives and stockholders.

You can find your US Representative’s name and contact information at: http://www.house.gov/representatives/find/. You can find your US Senators’ names and contact information at: http://www.senate.gov/general/contact_information/senators_cfm.cfm.

[1]      Horowitz, E., 4/28/18, “So far, tax cuts aren’t noticeably driving growth,” The Boston Globe

[2]      Stein, J., 4/9/18, “Deficit to top $1 trillion per year by 2020, CBO says,” The Washington Post

[3]      Sammartino, F., Stallworth, P., & Weiner, D., 3/28/18, “The effect of the Tax Cuts and Jobs Act individual income tax provisions across income groups and across the states,” Tax Policy Center (http://www.taxpolicycenter.org/publications/effect-tcja-individual-income-tax-provisions-across-income-groups-and-across-states/full)

[4]      Sweet, K., 4/20/18, “Big banks saved $3.6 billion in taxes last quarter under new law,” Associated Press

[5]      Thomhave, K., “Even the CBO says the GOP tax reform will incentivize corporate offshoring,” The American Prospect (http://prospect.org/article/even-cbo-says-gop-tax-reform-will-incentivize-corporate-offshoring)

[6]      Heath, T., 4/13/18, “America’s biggest companies are announcing buybacks. But whose cash is it, anyway?” The Washington Post

[7]      Reich, R., 3/21/18, “The buyback boondoggle is beggaring America,” The American Prospect (http://prospect.org/article/buyback-boondoggle-beggaring-america)

[8]      Madrid, M., 4/13/18, “Waiting — and waiting– for corporate tax cuts to deliver those wage hikes,” The American Prospect (http://prospect.org/article/waiting-and-waiting-corporate-tax-cuts-deliver-those-wage-hikes)

[9]      Americans for Tax Fairness, retrieved 4/28/18, “Trump tax cut truths,” (https://americansfortaxfairness.org/trumptaxcuttruths/)

[10]     Hoxie, J., 4/18/18, “Five tax myths debunked,” Institute for Policy Studies (http://otherwords.org/five-tax-myths-debunked/)

TAX CUTS FOR THE WEALTHY DON’T STIMULATE THE ECONOMY

Tax cuts for wealthy individuals and corporations don’t stimulate the economy, grow jobs and wages, or increase government revenue. The evidence for this comes not only from national experience under Presidents Reagan and G. W. Bush, but also from the recent, dramatic events in Kansas.

In 2012, in an effort led by newly elected Governor Sam Brownback, Kansas passed a tax bill like the one recently enacted by President Trump and the Republicans in Congress. The Kansas law slashed income tax rates (especially for the wealthy) and for privately-held companies, just like the recently enacted federal tax law. It also cut tax credits that helped low and moderate-income families, just like the recent federal tax law.

Governor Brownback and his supporters in the Kansas legislature promised that Kansas’s economy would boom and state tax revenue would grow as a result, just like the promises President Trump and the Republicans in Congress are making. [1]

In the almost six years since Kansas’s tax cuts, it has had one of the worst performing state economies in the country, the state’s tax revenues have been falling by hundreds of millions of dollars each year, and Kansas ranks among the top ten states for the percentage of people moving out-of-state. The big tax cut for privately-held companies appears to have fueled more tax evasion than job creation.

To deal with the dramatic decline in revenue for the state’s $6 billion budget, Governor Brownback and Republican Legislature have:

  • Cut hundreds of millions of dollars from spending, putting public schools (see more below) and other service providers into crisis
  • Cut payment rates for health care services, putting many of the state’s hospitals into crisis
  • Cut state administrative capacity, resulting in residents experience lengthy delays and waitlists when accessing state services (e.g., the delays in approving seniors’ eligibility for Medicaid so they could go into nursing homes became so bad that the federal government charged Kansas with violating federal law)
  • Increased regressive taxes, such as the sales tax and alcohol and tobacco taxes
  • Diverted over $100 million from the state’s highway fund and $40 million from the required contribution to the state employees’ retirement fund in 2015 alone
  • Increased state debt by over $1 billion, which, along with other fiscal issues, led to the downgrading of Kansas’s bond rating

The cuts in public school funding led to a lawsuit where the state’s Supreme Court ruled in 2015 that the state had to spend hundreds of millions of dollars more on K-12 public education. A previous, decades-long dispute between local school districts and the state over the levels and allocation of state funding for public education had been settled in 2006. That settlement required the state to increase funding for public education. However, the Great Recession of 2008 and then Governor Brownback’s tax cutting in 2012 had reduced state revenue so dramatically that, despite the settlement, the state cut funding for public schools by 16.5% (one-sixth) between 2008 and 2013.

In 2015, as state revenue continued its dramatic decline due to the tax cuts, Brownback cut another $28 million from K-12 public education funding. Two school districts were forced to end their school years early because they ran out of money. The cuts in state school funding disproportionately hurt low-income and urban school districts that couldn’t make up for lost state funding with increased local funding.

Some of the school districts sued and in 2015 the state’s Supreme Court ruled that the state had to provide $40 million immediately as a first step in correcting the under-funding of public education. In a further ruling in 2017, the courts required the state to come up with over $700 million for public education over the next several years.

In the 2016 elections, while Trump was winning 57% of the presidential vote in Kansas, Democrats and moderate Republicans were winning state legislative races due to concerns about the public schools and other issues. Facing a nearly $1 billion shortfall in the state’s two-year budget and a court requirement to significantly increase funding for K-12 education, the legislature voted in February 2017 to repeal most of the 2012 income tax cuts for individuals and privately held companies. Governor Brownback vetoed the bill and the legislature came up just short of overriding the veto.

In June 2017, the legislature again passed a repeal of most of the 2012 income tax cuts. Governor Brownback again vetoed the bill. This time the legislature overrode the veto by one vote in the Senate and four votes in the House. Although it will take Kansas many years to recover from the damage that has been done to the state’s schools, health care system, and economy, the state’s bond rating was lifted a step just two days later.

There are striking similarities between Governor Brownback’s tax cuts and those of President Trump and the congressional Republicans. There are also striking similarities in their promises of economic growth and increased government revenue. However, the great majority of economists and other knowledgeable observers believe the results of the federal tax cuts are very likely to be similar to Kansas’s experiences.

The major difference is that the federal government does not have to have a balanced budget. So, along with the recently passed budget bill, the result in the short-term will be federal budget deficits of roughly $1 trillion per year. This is not sustainable, financially or politically. Sooner or later, significant federal spending cuts and/or tax increases are highly likely to be necessary.

The only questions, in both Kansas and nationally, are how much damage will be done by the tax cuts and how long will it take to recover from them. Note that some individuals in Kansas, such as children whose schooling was compromised or people whose health was compromised by lack of access to health care or other services, will never recover all that they have lost. The harm on a national level will certainly be greater in scale – more people will be harmed. Only time will tell how great and long lasting the harm will be for individuals and for our society.

[1]      Miller, J., 6/28/17, “Kansas, Sam Brownback, and the trickle-down implosion,” The American Prospect (http://prospect.org/article/kansas-sam-brownback-and-trickle-down-implosion-0)

FIGHTING TAX AVOIDANCE BY THE WEALTHY

A recent Op Ed in the Boston Globe caught my attention and I couldn’t resist sharing it. If you want to understand how wealthy individuals and corporations use off-shore tax havens to avoid paying their fair share of taxes and what we can do about it, this article provides answers. [1]

  • The best estimate is that 11.5% of personal wealth (i.e., $8.7 trillion), globally, is stashed in off-shore tax havens.
  • This costs the U.S. government an estimated $32 billion a year in lost tax revenue from individuals. (Other countries’ governments probably lose $140 billion a year in tax revenue.)
  • In addition, corporations dodge about $70 billion a year in U.S. taxes by using off-shore tax havens. This represents about 20% (one-fifth) of what the U.S. does collect in corporate income taxes each year. (Other countries’ governments probably lose $60 billion a year in tax revenue.)
  • The roughly $100 billion per year the U.S. is losing to off-shore tax dodging is what the federal government spends on Food Stamps, other nutrition programs (such as school lunches), the Children’s Health Insurance Program (CHIP), Head Start, child care subsidies, and welfare COMBINED.
  • Taxing corporate income based on what is called formulary apportionment would stop this tax avoidance. Under this approach, a corporation would pay U.S. taxes based on the portion of its sales that are in the U.S., regardless of any accounting gimmicks or other strategies that made it look like the income from those sales was in another country. This tax approach is in wide use today; many states use it to calculate state corporate income taxes. It is a tax approach that has been used since the days of multi-state railroad construction in the 1800s.
  • Stopping individuals from using offshore accounts to avoid paying taxes would require international cooperation. Today, the IRS has a comprehensive system for tracking earned income. Even if you move from state to state or out of the country, the income you earn is reported to the IRS and you pay income taxes based on your total income. States with income taxes track income that you earn out-of-state and require you to pay state income tax on it. A similar approach should be applied to tracking other kinds of income and ownership of financial securities or assets that produce income. The U.S. passed the Foreign Account Tax Compliance Act in 2010 that requires foreign banks, including the notoriously secretive Swiss and Cayman Island banks, to share information with the IRS on accounts held by American clients. This is a starting point for the international cooperation needed to reduce tax dodging by the wealthy that hurts the U.S. and many other countries.

Tax avoidance by the wealthy contributes to the astronomical and growing inequality of wealth and income. It also means that everyone else must pay more in taxes to make up for the lost taxes when wealthy individuals and corporations don’t pay their fair share.

[1]      Scharfenberg, D., 1/21/18, “A world without tax havens,” The Boston Globe

GENERATING THE REVENUE NEEDED TO INVEST IN AMERICA

The People’s Budget, an alternative budget for the US, presents a coherent vision and a detailed plan for generating the revenue needed to invest in America’s infrastructure and people. It includes specific proposals for increasing revenue, decreasing tax expenditures (i.e., loopholes and deductions), and increasing efficiency in the public and private sectors. These will more than pay for its spending proposals (which I summarized in my previous post). [1]

Current tax policy is failing in multiple ways. Tax cuts and tax avoidance have reduced government revenue so that it is insufficient to pay for needed spending. Tax policy changes over the last 35 years have exacerbated economic inequality and created complexity that favors politically powerful special interests and those who can afford sophisticated tax accountants and lawyers. The theoretical progressivity of income taxes has been lost through tax cuts, tax deductions, tax avoidance, and favored tax rates and loopholes for high-income individuals.

The People’s Budget addresses the inequities in our tax system through changes in individual and corporate tax laws. Income taxes on the richest individuals would be increased. The tax on income from investments would be raised so it is at the same rate as income earned from working. The People’s Budget also would reduce tax deductions that favor the wealthy, such as interest deductions for mortgages on vacation homes and yachts. It maintains a tax on estates worth over $3.5 million, which current proposals would eliminate. It would also reduce income inequality by increasing tax deductions for low-income families. [2]

Inefficient corporate tax loopholes would be eliminated. Corporate tax benefits from moving jobs, profits, and a corporation’s legal home overseas would be ended. The People’s Budget would ensure that corporations pay their fair share of taxes and that large, multi-national corporations do not enjoy more favorable tax treatment than small, US-based companies. Current tax loopholes make it hard for small businesses to compete with large multi-national corporations.

A small tax would be placed on financial transactions. This is essentially a small sales tax on the buying and selling of financial products, like (but at a much lower rate than) the sales taxes many of us pay on non-financial products we buy. In addition to generating hundreds of millions of dollars in annual revenue, it would also discourage quick turnaround, high-volume, speculative trading of securities that can destabilize markets and that provide no benefit to our economy.

The People’s Budget would close tax loopholes and end subsidies for fossil fuel corporations, while putting a price on carbon pollution. This would end the unjustifiable public subsidies of fossil fuel extraction and use, requiring those burning carbon fuels to pay the true costs of doing so. In addition, the People’s Budget would invest in energy efficiency and clean, renewable energy production.

Income and wealth inequality would be reduced by the tax reforms in the People’s Budget, as well as by its spending proposals, which were summarized in my previous post. The Economic Policy Institute’s (EPI) analysis of the People’s Budget concludes that it “would have significant positive impacts, including improving the economic well-being of low- and middle-class families, … and increasing tax progressivity and adequacy while reducing the deficit in the medium term.” [3]

The People’s Budget would reduce the federal government’s projected debt level by trillions of dollars over the next 10 years. This makes it clear that we can afford investments in our human and physical capital if we reform our individual and corporate tax systems. Furthermore, we can simultaneously reduce income and wealth inequality.

I believe that candidates and the party(ies) who fully embrace the vision and goals of the People’s Budget will find that the American public and voters will strongly support them. Senator Bernie Sanders’ presidential campaign was built on a very similar vision and received tremendous grassroots support. Although President Trump’s rhetoric supported elements of the People’s Budget and many people voted for him believing or hoping that he would bring this kind of change in direction to Washington, his actions to-date have not reflected the vision or goals of the People’s Budget. The Republican Party appears to have a totally different vision for America – one where the rich and large corporations do very well and where everyone else struggles to make ends meet.

The Democratic Party would seem to have every reason to embrace the People’s Budget’s vision and goals. Although the Congressional Progressive Caucus has 75 Democratic members in the House (out of 194 Democratic Representatives), the national Democratic Party has not adopted many of the key proposals of the People’s Budget. The Party has not committed itself to goals and a vision for America that puts the working and middle class before wealthy individuals and large corporations.

Our democracy is threatened. Plutocracy, where a relatively small number of wealthy individuals control the government, might be a more accurate description of our current political system. Currently, neither of our major political parties is committed to government of, by, and for the people, as opposed to wealthy individuals and corporations. The People’s Budget would change this.

I encourage you to contact your Representative and Senators in Congress to encourage them to support the Congressional Progressive Caucus’s comprehensive, well thought out proposals that make up the People’s Budget. We need to support the working and middle class, decrease income and wealth inequality, and invest in preparing America and Americans for the future. The People’s Budget makes it clear we can do this and lays out a realistic plan to do so.

[1]      Vanden Heuvel, K., 5/9/17, “Trump’s budget betrays his supporters. Here’s one that doesn’t.” The Washington Post

[2]      Congressional Progressive Caucus, retrieved 7/7/17, “The People’s Budget: A roadmap for the resistance,” https://cpc-grijalva.house.gov/uploads/FINAL%20CPC%20Budget%20FY18%20Executive%20Summary.pdf

[3]      Blair, H., 5/2/17, “‘The People’s Budget’: Analysis of the Congressional Progressive Caucus budget for fiscal year 2018,” Economic Policy Institute Policy Center (http://www.epi.org/publication/the-peoples-budget-analysis-of-the-congressional-progressive-caucus-budget-for-fiscal-year-2018/)

AN ALTERNATIVE BUDGET FOR THE U.S.

Meaningful alternatives to the policies being put forward in Washington, D.C., are available, but do not get the attention they deserve, particularly from our mainstream, corporate media. For example, the Congressional Progressive Caucus has prepared a detailed, well thought out alternative budget for the country.

The People’s Budget, as it is called, presents a coherent vision and plan for making our democracy and economy work for everyone, not just the wealthy. It promotes true full employment (i.e., full utilization of the workforce’s skills) and reduces income and wealth inequality. It is a comprehensive ten-year plan that provides much more detail than the budget document presented by the Trump administration. [1] It includes specific dollar amounts for all major budget items for fiscal year 2018, which starts Oct. 1, 2017, as well as for the next 10 years.

The Economic Policy Institute (EPI) has analyzed the People’s Budget and concluded that it would make our tax system more progressive (i.e., fairer) and increase revenue so we can afford to address national needs and priorities. In addition, it “would have significant positive impacts, including improving the economic well-being of low- and middle-class families, making necessary public investments, strengthening the social safety net, and … reducing the deficit in the medium term” (i.e., in 2-3 years). [2] The EPI estimates that the People’s Budget would bring the US economy to a full recovery from the Great Recession of 2008, increasing Gross Domestic Product (GDP, the total of all the goods and services produced by the US economy) by 2% and employment by 2.4 million jobs in the near term (i.e., over the next 1-2 years). It would end the under-use of productive resources, particularly the under-employment of the workforce, and improve productivity, which would produce growth in workers’ incomes and living standards.

The People’s Budget would spend $2 trillion over 10 years to repair our crumbling infrastructure and provide jobs. It would repair and modernize our energy, water and sewer, and transportation systems, while increasing access to reliable, high-speed internet services. The infrastructure spending would cover 92% of what the American Society of Civil Engineers has estimated is needed to make our infrastructure safe and up-to-date.

It would also invest in our human capital through spending on our education system. It would make health care and child care affordable. It would support the working and middle class and improve their economic security. It would strengthen our safety net programs while reducing the need for them. It would provide support to the strained budgets of state and local governments, supporting, for example, local public safety and K-12 education systems.

While the spending in the People’s Budget would increase the deficit in fiscal year 2018 (FY2018), it includes increases in revenue and decreases in tax expenditures that would not only pay for its spending proposals, but reduce the federal budget deficit in subsequent years. [3] (More detail on this in my next post.)

The People’s Budget would reverse the reductions in domestic spending that have been made over the last 10 years of austerity budget cutting and the previous 25 years of cuts and failure to keep up with inflation. These cuts have reduced spending for education, job training, research, aid to state and local governments, and just about every other type of non-defense public spending. Current non-defense discretionary spending is near a historical low and current budget plans would have it continue to decline over the next 10 years to new all-time lows. The government spending cuts of the last 10 years have been a major – if not the major – cause of the slow recovery from the 2008 Great Recession. The People’s Budget would gradually increase non-defense discretionary spending to its historical level as a percentage of GDP by 2022.

In the health care arena, the People’s Budget strengthens and improves the Affordable Care Act (aka Obama Care). It would provide a public, Medicare-like option in each state’s insurance market, providing competition for the private insurers. This would ensure that the private insurers must provide good coverage at reasonable rates to be competitive. It would also allow states to transition to a single-payer, Medicare-for-All type health care system if they would like to. It would expand access to mental health services and to drug addiction treatment. It would lower prescription drug costs by allowing Medicare to negotiate drug prices (as Medicaid, veterans’ health care, and private insurers currently do) and by reforming laws covering drug patents and pricing.

The People’s Budget invests in our human capital by supporting our education system from birth to career. It makes quality early care and education (aka good child care) affordable for all families. It invests in our K-12 education system and in special education from birth through age 21. It increases educational opportunities in computer science, allows refinancing of student debt, and makes debt free college a possibility for all students.

Workers are supported by increasing the minimum wage, strengthening collective bargaining rights, and addressing gender pay equity. It would increase funding for the safety net where needed, especially for assistance to workers whose jobs have been moved overseas. Support for small businesses would be increased to support job creation.

Overall, the People’s Budget is projected to cut the number of people living in poverty in half in 10 years. As part of its comprehensive plan, the People’s Budget also addresses problems with our support for veterans, our criminal justice system, our immigration system, and voting rights and elections. It would modernize and increase efficiency in the Defense Department, reducing military spending while increasing funding for diplomacy and international humanitarian programs.

Some people say we can’t afford the investments in our human and physical capital that the People’s Budget calls for. However, it includes specific proposals for increasing revenue, decreasing tax expenditures (i.e., tax loopholes and deductions), and increasing efficiency in the public and private sectors that will more than pay for its spending proposals. I’ll summarize these proposals in my next post.

[1]      Vanden Heuvel, K., 5/9/17, “Trump’s budget betrays his supporters. Here’s one that doesn’t.” The Washington Post

[2]      Blair, H., 5/2/17, “‘The People’s Budget’: Analysis of the Congressional Progressive Caucus budget for fiscal year 2018,” Economic Policy Institute Policy Center (http://www.epi.org/publication/the-peoples-budget-analysis-of-the-congressional-progressive-caucus-budget-for-fiscal-year-2018/)

[3]      Congressional Progressive Caucus, retrieved 7/7/17, “The People’s Budget: A roadmap for the resistance,” https://cpc-grijalva.house.gov/uploads/FINAL%20CPC%20Budget%20FY18%20Executive%20Summary.pdf

TAX REFORM FOR THE WEALTHY

After the failure of the Republican health care reform proposal, the Trump administration and Congressional Republicans may turn their attention to tax reform. As with their health care reform, WATCH OUT!

House Speaker Paul Ryan, one of the architects of the health care reform proposal, has a tax reform plan. However, despite unprecedented levels of income and wealth inequality in the US, it would exacerbate inequality, not reduce it.

House Speaker Ryan’s tax plan would give huge tax cuts to high income households and very modest ones to everyone other than the 5% richest households. The other 95% of households – those with incomes of less than roughly $300,000 – would receive an average tax cut of less than $400 per year. Households with incomes of less than $25,000 would get an average tax cut of only $50 per year. [1]

The richest 1% of households – those with incomes of more than $700,000 – would receive an average tax cut of about $200,000 per year. And the richest 0.1% of households – those with incomes of more than $3,700,000 – would receive an average tax cut of about $1,200,000 per year or $12 million over 10 years! Clearly, this would make income inequality worse, not better!

Speaker Ryan’s plan would cut individual income taxes by approximately $3 trillion over 10 years, with 76% of the cuts going to the richest 1% and 47% of the cuts going to the richest 0.1%. Over time the benefits become even more skewed, with the top 1% getting 99.6% of the benefits by 2025.

The highest tax rate on unearned interest income would be cut from 43.4% to 16.5%, while the top rate on capital gains and dividends would be cut from 23.8% to 16.5%. This means that an individual, working hard and earning a modest $50,000, would be paying income tax at a rate of 25%, while a wealthy individual with $50,000 in unearned income from investments would be paying a tax rate of 16.5%.

The top individual tax rate on earned income (i.e., income from working) would be cut from 39.6% to 33% and the Alternative Minimum Tax, whose purpose is to ensure that high income households pay at least some taxes, would be eliminated. In addition to cutting income taxes, Ryan’s plan would eliminate the estate and gift taxes, thereby cutting taxes on the transfer of wealth and facilitating the perpetuation of the tremendous wealth inequality in the US. [2]

If instead of Ryan’s plan, the $3 trillion 10-year tax cut were simply split evenly across all households, every household – rich, middle class, or poor – would get $1,810 per year. Given the tremendous inequality of income and the economic insecurity of the middle and working class, I don’t think it’s fair to give everyone the same amount of money. Some need more income much more than others. But it’s much fairer than what Ryan and the Republicans have proposed to-date!

The rationale that we’re likely to hear for these tax cuts is that they will stimulate economic growth. However, real-life experience has shown that this is not true. Presidents Reagan and George W. Bush cut taxes for the rich and the economy did NOT boom. President Clinton, on the other hand, increased taxes on the rich and economic growth accelerated. So, don’t believe the false argument that tax cuts for the rich will improve the economy. The only rationale that I can think of for these tax cuts that makes any sense is that our policy makers want to give big tax cuts to their big campaign donors.

[1]      Blair, H., 1/13/17, “Republicans’ opening bid for tax reform is egregiously tilted to the rich,” Economic Policy Institute (http://www.epi.org/publication/republicans-opening-bid-for-tax-reform-is-egregiously-tilted-to-the-rich/)

[2]      Nunns, J., Burman, L., Page, B., Rohaly, J., & Rosenberg, J., 9/16/16, “An analysis of the House GOP tax plan,” Tax Policy Center of the Urban  Institute and the Brookings Institution (http://www.taxpolicycenter.org/publications/analysis-house-gop-tax-plan/full)

CORPORATE BEHAVIOR DRIVES INEQUALITY

Several corporate practices, particularly those of large, multi-national corporations, are major contributors to income and wealth inequality. One is their avoidance of taxes, which means other taxpayers must make up the difference. Another is their employee compensation practices.

The huge and growing differential between the compensation for corporate executives and workers needs to be reduced. Increasing the minimum wage is one step. However, taxing or limiting compensation for executives should also occur.

Wall Street gave out $24 billion in bonuses last year to 177,000 workers who got an average of $138,200 each. The average Wall Street bonus has increased 900% since 1985, while the minimum wage has increased a little over 100%. This $24 billion in bonuses for 177,000 workers is over one and a half times the total pay for the year for all 1,000,000 (1 million), full-time, minimum wage workers. [1]

This excessive Wall Street compensation not only contributes to overall inequality, it contributes to gender and racial income disparities. Roughly 85% of Wall Street executives and senior managers are white and over two-thirds are male. By contrast, 56% of minimum wage workers are non-white and almost two-thirds of them are female.

Huge Wall Street bonuses and “performance pay” provide incentives to Wall Street to engage in the kind of high risk, high return financial strategies that led to the 2008 financial collapse. The Dodd-Frank financial reform law called for regulation of these bonuses but these regulations have been blocked and delayed. Furthermore, the 20 largest US banks gave out over $2 billion in so-called performance pay to their top executives between 2012 and 2015. Not only do these huge amounts provide incentives for risky behavior, they are also tax deductible for the corporations, saving them $725 million in taxes.

A recent study of corporate taxes showed that many large, profitable corporations frequently pay no federal taxes. The analysis found that 258 large corporations that were consistently profitable from 2008 to 2015 and had $3.8 trillion in profits rarely paid the 35% tax rate that they, President Trump, and Republicans in Congress say needs to be cut. On average, the study found they paid only 21% of their profits in taxes – a lower rate than many individuals pay on their incomes.

In fact, 18 of these large, consistently profitable corporations paid no federal tax over the study’s 8-year period. And 100 of them paid no taxes in at least one year of the 2008 and 2015 period studied, despite reporting a profit. They did this by using tax loopholes and avoidance strategies such as shifting profits to overseas entities, depreciating assets very quickly, deducting the cost of huge stock options given to executives, and using special industry-specific tax breaks they’ve gotten slipped into our tax laws.

These tax breaks are highly concentrated with most of them going to a few, very large, multi-national corporations. Just 25 corporations received over half of the tax subsidies of all 258 corporations in the study. The study reported that the corporations with the biggest tax subsidies over the 8-year period were AT&T ($38 billion), Wells Fargo ($31 billion), JPMorganChase ($22 billion), and Verizon ($21 billion). [2]

The study refutes the argument that the US’s corporate tax rate is higher than that of foreign countries and that it makes the US an unfavorable location for doing business. The tax rates paid over the 8-year period by certain industries were quite low: gas and electric utilities – 3%, industrial machinery – 11%, telecommunications – 12%, oil, gas, and pipelines – 12%, and Internet services and retailing – 16%. The industry-specific tax breaks that lead to these low tax rates are unfair and unnecessary.

The study’s report recommends five changes to US tax laws to remedy these problems:

  • Repeal the tax exemption for overseas profits,
  • Limit the deduction for the phantom costs of executive stock options,
  • Eliminate tax provisions that allow for rapid, let alone immediate, depreciation of assets,
  • Reinstate a strong corporate Alternative Minimum Tax, and
  • Increase transparency by requiring full, country-by-country disclosure of corporate financial information. [3]

I urge you to contact your members of Congress and ask them to support these changes to our tax laws so that large, multi-national corporations pay their fair share of taxes. Please also ask them to support increasing the minimum wage and implementing regulations on Wall Street compensation to reduce incentives for risky behavior that could lead to another financial disaster.

[1]      Anderson, S., 3/15/17, “Off the deep end: The Wall Street bonus pool and low-wage workers,” Moyers & Company (http://billmoyers.com/story/wall-street-bonus-pool-2017/)

[2]      Cohen, P., 3/9/17, “Profitable companies, no taxes: Here’s how they did it,” The New York Times https://www.nytimes.com/2017/03/09/business/economy/corporate-tax-report.html?_r=0

[3]      Institute on Taxation and Economic Policy, 3/9/17, “The 35 percent corporate tax myth: Corporate tax avoidance by Fortune 500 companies, 2008 to 2015” http://itep.org/itep_reports/2017/03/the-35-percent-corporate-tax-myth.php#.WM6CaYWcHIU

TRUMP’S INFRASTRUCTURE PLAN: A BOONDOGGLE

Trump promised during the campaign that he would stimulate up to $1 trillion of investment in rebuilding the country’s infrastructure. This sounds surprisingly like President Obama’s efforts throughout his presidency to spend a similar amount on public infrastructure. Obama’s proposal would have stimulated job growth and the economy. It would have helped the US more quickly and fully recover from the Great Recession of 2008. But the Republicans in Congress would have none of it. It will be interesting to see how Congressional Republicans react to a major infrastructure investment proposal from President Trump, assuming he does put a proposal forward.

There are major differences between what Trump has described and what Obama proposed. Obama proposed spending federal government money using a public decision-making process to determine the projects to be undertaken.

Trump’s plan, rather than spending federal money as Obama proposed, would provide big tax breaks to private developers. The private developers, not public officials, would select the projects to undertake. The projects would, of course, be ones on which the developers would make a profit. The private developers would effectively own the completed facility and would receive federal tax credits of 82% of their equity investment. [1] That is the equivalent of buying a home and receiving 82% of the cost back in tax credits, meaning the home that you now would own outright would only have cost you 18% of its value.

Thus, the projects that would be undertaken under Trump’s plan would be quite different than those of Obama’s approach. For example, it’s unlikely under Trump’s plan that many school buildings would be renovated or that new schools would be built. Many of our school buildings do need major renovation or to be replaced, but this is not a profit-making undertaking. Similarly, public transportation is not likely to receive much investment. Public facilities, including water and sewer systems and public housing, would only receive investments if private developers were allowed to effectively own the resulting facility and make a profit from it. We’ve already seen what happens if private interests are given control of water systems. For example, in Detroit, water rates were increased to the point where many customers couldn’t afford their water bills. Then, the water authority callously shut off water to those who were behind on their bills.

Investments in our deteriorated roads and bridges would occur only if private developers were allowed to effectively own them and to charge tolls so they could profit from their investment. Investments in buildings for commercial or residential use probably would occur, because developers can charge rents and make profits. Investments would likely be made in high-income, well-developed communities where the return on investment is assured, not in communities suffering from under-investment where infrastructure improvements are most needed.

Furthermore, many of the projects that would benefit from Trump’s plan would have been undertaken anyway, without the tax credit. Therefore, the tax breaks would be windfall profits for developers and nothing more. In addition, important sources of investment capital, such as pension funds, endowments, and collective investment funds, would not be incentivized to make infrastructure investments because they are tax-exempt, non-profit entities and would not benefit from the proposed tax credit.

Trump’s advisors claim that his infrastructure plan would pay for itself because the new revenue resulting from its projects would fully cover the lost revenue from its tax credits. This conclusion is based on clearly unrealistic assumptions. It assumes that all the projects that receive the tax credit wouldn’t have otherwise occurred, that all the workers on the projects would otherwise have been unemployed, that the workers would have taxable incomes 3 to 4 times that of typical construction workers, and that all the money invested in these projects would otherwise have been sitting idle rather than invested elsewhere. [2]

In summary, the Trump infrastructure plan would not produce the infrastructure investments that are needed and that would benefit the public. It would provide private developers with windfall profits from a big tax credit that would increase the federal government’s deficit. It would privatize decisions on infrastructure investments, the effective ownership of the facilities built, and most of the resulting benefits.

Direct spending by the federal government on needed public infrastructure would be an economically sound, rational policy for making needed investments. Given the very low interest rates at which the federal government can currently borrow money by selling Treasury bonds, the cost of raising money for such investments would be very low. Therefore, the return on investment would be unusually high.

I urge you to contact your Congress people and ask them to support infrastructure spending that will benefit our nation as a whole and not just line the pockets of private developers. Ask them to ensure that the projects undertaken create infrastructure that meets public, not private, needs.

[1]      Huang, C., Van de Water, P.N., Kogan, R., and Kamin, D., 12/2/16, “Trump infrastructure plan: Far less than the claimed $1 trillion in new projects,” Center on Budget and Policy Priorities (http://www.cbpp.org/research/federal-budget/trump-infrastructure-plan-far-less-than-the-claimed-1-trillion-in-new)

[2]      Huang, C., et al., 12/2/16, see above

THE RIGHT WAY TO STOP THE OFFSHORING OF US JOBS

The US needs to stop hemorrhaging jobs to other countries. For starters, we need to do three things:

  • Impose financial disincentives for offshoring jobs,
  • Change the mindset among corporate executives that offshoring jobs is the right and acceptable thing to do, and
  • Reverse the resignation among workers and the public who believe that the offshoring of jobs is inevitable.

To create financial disincentives, we should pass laws that place special taxes or restrictions on corporations that have offshored say 100 or more jobs in the last five years. Possible examples include:

  • Bar such corporations from receiving federal contracts. Or there could be demerits subtracted from the scores of proposals from such corporations in competitive bidding situations. Or there could be financial penalties on existing federal contracts such as the deduction of $10,000 per offshored job or of 1% of a contract’s annual payment per 1,000 offshored jobs, whichever is greater.
  • A corporation’s taxes could be increased by $10,000 per offshored job or its tax rate could be increased by 1% per 1,000 offshored jobs, whichever is greater – with no offsets to allow a corporation to avoid this tax.
  • Bar such corporations from receiving government tax breaks, loans, or grants.
  • Require such corporations to pay a special, unavoidable, and substantial tax on aggregate executive compensation that is over $1 million. [1]

Senator Bernie Sanders has announced that he will introduce a bill in Congress that will include provisions similar to these to discourage the offshoring of jobs. He is calling it the Outsourcing Prevention Act. [2]

To counter the mindset that favors offshoring jobs, we should pass laws or establish executive branch procedures that publicize a corporation’s offshoring of jobs. Possible examples include:

  • Require such a corporation to hold a public hearing in the community losing the jobs 90 days before the termination of the jobs. If the number of jobs is 500 or more, a hearing in Washington before a congressional committee should be required.
  • Establish a new anti-offshoring czar in the Office of the President who would visit any such corporation’s CEO to make it clear that offshoring jobs is viewed negatively.

Providing financial rewards to corporations to keep jobs in the US is not an efficient way to stop offshoring. Typically, state or local governments provide tax abatements or other tax benefits to corporations to keep jobs. However, state and local taxes are generally only 2% or so of a corporations’ costs. Labor costs are a far greater portion of operating costs. Therefore, tax abatements are not likely to offset the savings in labor costs provided by offshoring. For example, in the recent United Technologies / Carrier (UT/C) case in Indiana, the state will provide $7 million in tax benefits over 10 years. However, UT/C estimated was that it would save $65 million per year ($650 million over 10 years) for offshoring 2,100 jobs. [3]

Corporations’ demands for financial benefits from state and local governments to keep or create jobs are really just blackmail. To stop this job-based blackmail, which robs states or municipalities of needed tax revenue, the federal government should put a 100% tax on these financial benefits, so there is no overall financial incentive for the corporation. The federal government should also reduce grants to state and local governments that give financial incentives to corporations to keep jobs. For example, awards under the Community Development Block Grant or other economic development programs could be cut for states or municipalities that agree to pay job blackmail to corporations. The federal government has used a similar strategy in other instances to get states to change policies. For example, the federal Transportation Department used cuts in federal transportation grants to get states to raise their alcohol drinking ages to 21. This reduced car accidents and saved thousands of lives. [4]

I encourage you to contact your US Representative and Senators and ask them what they plan to do to reduce the offshoring of US jobs. Request that they support a systematic approach to discouraging offshoring such as that offered by Senator Sanders’ Outsourcing Prevention Act.

[1]       Greenhouse, S., 12/8/16, “Beyond Carrier: Can Congress end the green light for outsourcing?” The American Prospect (http://prospect.org/article/beyond-carrier-can-congress-end-green-light-outsourcing)

[2]       Sanders, B., 11/26/16, “Sanders statement on Carrier and outsourcing,” Press release from Senator Bernie Sanders (http://www.sanders.senate.gov/newsroom/press-releases/-sanders-statement-on-carrier-and-outsourcing)

[3]       Leroy, G., 12/7/16, “Can Trump’s wild one-off at Carrier combat corporate welfare?” The American Prospect (http://prospect.org/article/can-trumps-wild-one-carrier-combat-corporate-welfare)

[4]       Leroy, G., 12/7/16, see above

LOW-WAGE BUSINESS MODEL CREATES PARASITE ECONOMY

The term the parasite economy is being applied to employers whose business model is built on low-wage jobs. These corporations take more out of their employees and society than they put in, hence they are parasites. The low incomes of their workers mean that the workers can only survive with the support of the publicly-funded safety net, including subsidized food, housing, child care, and health insurance, as well as the Earned Income Tax Credit. [1] And to make matters worse, some of these corporations are ones that use loopholes in the tax code to avoid paying their fair share of taxes.

As Henry Ford realized 100 years ago, if you don’t pay your workers enough to buy the products you make, your business model will struggle to be sustainable. In 1914, Ford began paying his employees $5.00 a day, over twice the average wage in the auto industry. He also reduced the work day from 9 hours to 8 hours. Ford believed he would get higher quality work and less turnover as a result. He stated, “The owner, the employees, and the buying public are all one and the same, and unless an industry can so manage itself as to keep wages high and prices low it destroys itself, for otherwise it limits the number of its customers. One’s own employees ought to be one’s own best customers.” [2]

As Henry Ford acknowledged in the early 1900s, the U.S. economy is driven by consumers. About two-thirds of our economic activity today is consumer spending. However, low-wage workers have a very limited ability to purchase goods and services, either to support themselves and their families or to sustain our consumer economy. A strong middle class is essential for the vitality for our consumer economy.

Although some of our politicians deride those who use public assistance as “takers” (as contrasted with “makers”), the real “takers” in our economy and society are the low-wage paying corporations. These low-wage employers are subsidized by the tax dollars that pay for the public assistance programs their low-paid workers (and their families) rely on to survive. [3] This is corporate welfare and these corporations are truly “takers,” as opposed to “makers” who contribute to our economy and society. [4]

Low-wage corporations are parasites, making nice profits and typically paying high compensation to their executives while relying for their success on low pay and public subsidies for their workers. Walmart and McDonald’s are classic examples.

It is estimated that American taxpayers pay roughly $153 billion a year for public assistance programs that support low-wage workers and their families. Seventy-three percent or almost three out of every four people who use public assistance programs live in families where at least one person is working. Forty-eight percent of home care workers rely on public assistance, along with 46% of those providing child care and 25% of part-time college faculty. [5]

A large part of the restaurant industry is a classic example of the parasite economy. The industry association, the National Restaurant Association, is a leading advocate for the low wages of the parasite economy. It has lobbied hard and is actively engaged in election campaigns in its efforts to keep industry wages low by opposing increases in the minimum wage and supporting the existence of an even lower, special minimum wage for tipped workers. The federal minimum wage for tipped workers – most restaurant employees – is $2.13 per hour and hasn’t been changed since 1991. The median wage for restaurant servers including tips is just $9.25 per hour. As a result, restaurant servers are three times as likely to be in poverty as the average worker.

The effects of moving to a low-wage business model were seen in the 2009 outsourcing of hotel housekeeping by Hyatt Hotels in the Boston area. Ninety-eight housekeepers were fired and replaced by contracted temp workers at half the pay, with no benefits, and with almost twice the workload. The fired housekeepers, some of whom had worked for Hyatt for 25 years, had had average pay of $17 per hour with good benefits. They were financially stable and appeared secure – able to pay their bills, support their children including with college costs, and help aging parents. Today, seven years later, the effects are still being felt by some of them, who have depleted their savings, defaulted on loans, and have poor credit ratings. Some have experienced high levels of stress and health consequences. Taxpayers had to provide unemployment benefits, as well as food, housing, and health care subsidies. [6]

The low-wage business model is pervasive in the U.S. today. Seventy-three million Americans (nearly a quarter of our population) live in working poor households that are eligible for the Earned Income Tax Credit (EITC). This public program, the primary replacement for “welfare as we know it” that President Clinton ended in 1996, provides subsidies to workers who are paid so poorly they and their families cannot survive without public assistance. The federal government spent $57 billion on EITC benefits in 2014 and many states provided their own additional EITC benefits (roughly another $10 billion). Most of these workers – and you have to be working to qualify for this benefit – work for large, profitable corporations.

Between 2003 and 2013, wages (after adjusting for inflation) actually fell for the 70% of workers at the lower end of the U.S. income spectrum. Further contributing to the need for public assistance, fewer and fewer Americans have health insurance through their employers. As a result, working-poor families (as opposed to the unemployed) receive more than half of all federal and state public assistance. Beyond the EITC, public subsidies that go primarily to the working poor include ones for food and nutrition ($86 billion), child care ($71 billion), housing ($38 billion), and health insurance ($475 billion).

My next post will discuss why the parasite economy is so prevalent in the U.S. today and what we can and should do about it.

[1]       Hanauer, N., Summer 2016, “Confronting the parasite economy,” The American Prospect

[2]       Nilsson, J., 1/3/14, “Why did Henry Ford double his minimum wage?” The Saturday Evening Post (http://www.saturdayeveningpost.com/2014/01/03/history/post-perspective/ford-doubles-minimum-wage.html)

[3]       Hanauer, N., Summer 2016, see above

[4]       Johnson, J., 5/3/16, “McDonald’s, the corporate welfare moocher,” Common Dreams (http://www.commondreams.org/views/2016/05/03/mcdonalds-corporate-welfare-moocher)

[5]       Jacobs, K., 4/15/16, “Americans are spending $153 billion a year to subsidize low-wage workers,” The Washington Post (https://www.washingtonpost.com/posteverything/wp/2015/04/15/we-are-spending-153-billion-a-year-to-subsidize-mcdonalds-and-walmarts-low-wage-workers/?utm_term=.7120f83f959f)

[6]       Boguslaw, J., & Trotter Davis, M., 9/5/16, “Lessons from the Hyatt 100,” The Boston Globe

LACK OF GOVERNMENT SPENDING LEADS TO WEAK RECOVERY

The current economic recovery from the Great Recession of 2008 has been the weakest recovery since World War II. The average annual growth of our economy since the recession officially ended in June 2009 has been only 2.1%. [1] The other ten recoveries since 1949 have had annual growth rates of 2.8% to 7.6%, with an average of 4.65%. [2]

It’s not a coincidence that every other economic recovery since WWII was supported by increased government spending (federal, state, and local combined), except the one in 1970 – 1973. The current recovery (2009 – 2016) has seen government spending actually decline by 6.1%. It and the one in the 1970s both experienced declines in government spending of about 1% annually. The 1949 – 1953 recovery saw government spending increase at an annual rate of 17.9%, while the other eight recoveries averaged a little over 2%.

In contrast to the 6.1% decline (-0.9% annually) in government spending during the current recovery, government spending during the 2001 – 2007 recovery under President George W. Bush grew by 11.7% (1.9% annually) and during the 1982 – 1990 recovery under President Reagan it grew by 33.5% (3.8% annually).

A recession is defined as a period of time when economic output (i.e., Gross Domestic Product [GDP]), incomes, employment, industrial production, and sales decline. This occurs when the demand for goods and services in our markets – the spending of households, businesses, and governments – is not sufficient to purchase everything the economy is capable of producing.

The remedy for a recession is to boost marketplace demand. There are three ways to do this:

  • Reduce interest rates to spur borrowing and resultant spending,
  • Increase government spending, and
  • Cut taxes to spur spending by consumers, which increases demand for goods and services. (Consumer spending represents two-thirds of our economy.)

At the start of the Great Recession, interest rates were already very low so there was not much interest rate reduction that could be done. Currently, the basic interest rates of the Federal Reserve, the key ones to cut to stimulate the economy, are virtually zero.

Some cutting of taxes was done, but it was small scale because of concerns about increasing the federal deficit or creating unmanageable losses of revenue at the state level. Tax cuts for middle and low income Americans are the most effective stimulus for the economy because this group will quickly spend the increased money that’s in their pockets in the local economy. Tax cuts for wealthy individuals and corporations, which were favored by some politicians, are less effective because larger portions of this money will be saved or spent outside the local economy (e.g., overseas), so they are not as effective in stimulating the local economy.

As noted above, government spending decreased during the current recovery and therefore reduced economic growth. Spending in the economy, including government spending, has what’s referred to as a “multiplier effect” on growth. That’s because each dollar spent supports additional spending by the individual or business that received it (a cycle that is repeated endlessly), meaning that its impact is multiplied. Similarly, cuts in spending have a multiplier effect in reducing growth, reducing economic activity by more than a dollar for each dollar of reduced spending.

One reflection of reduced government spending is that the number of government employees today is roughly 400,000 fewer than it was at the beginning of the recovery in June 2009, after bottoming out in late 2013 at 800,000 less than in 2009. Each person without a job adds to unemployment and reduces consumer demand for goods and services. Prior to President Obama’s term, the total number of government employees had grown under every president since Eisenhower. [3] This loss of jobs has been primarily at the state and local levels, where government revenue was hard hit by the recession, has been slow to recover, and has not been augmented by increased funding from the federal government. Government spending per resident in the U.S. is 3.5% lower today than it was in 2009. [4]

This austerity (i.e., reductions in government spending) are widely viewed as the primary reason the current economic recovery has been so weak and so slow. Government spending cuts have occurred largely because Republican lawmakers at the federal and state levels have insisted on them. [5] If it weren’t for these cuts, economic growth would be stronger and our economy would have lower unemployment and under-employment. [6] To confirm the harm that austerity policies cause, one can look to Europe and especially Greece, where austerity policies even more extreme than the ones in the U.S. have resulted in continuing high unemployment and fiscal crises.

Government spending, even if it increases the federal government’s budget deficit in the short-term, will stimulate economic growth. This growth will lead to increased government revenue that will reduce the deficit.

In particular, spending that represents investments in our physical and human capital has a high rate of return and pays for itself over the long-term. [7] Investments in infrastructure (e.g., roads, bridges, trains, public transportation systems, and school buildings) and education (from birth through higher education) create jobs, support our current and future economies, and address real needs while also stimulating the economy. Especially with the extremely low interest rates at which the federal government can currently borrow money, it is a lost opportunity to fail to make important and needed investments in our future.

[1]       Morath, E., & Sparshott, J., 7/29/16, “U.S. GDP grew at a disappointing 1.2% in second quarter,” The Wall Street Journal (http://www.wsj.com/articles/u-s-economy-grew-at-a-disappointing-1-2-in-2nd-quarter-1469795649)

[2]       Scott, R.E., 8/2/16, “Worst recovery in postwar era largely explained by cuts in government spending,” Economic Policy Institute, Working Economics Blog (http://www.epi.org/blog/worst-recovery-in-post-war-era-largely-explained-by-cuts-in-government-spending/)

[3]       Walsh, B., 8/5/16, “Here’s an Obama-era legacy no one wants to talk about,” The Huffington Post (http://www.huffingtonpost.com/entry/obama-austerity-legacy-jobs_us_57a499ece4b03ba68012032b?)

[4]       Bivens, J., 8/11/16, “Why is recovery taking so long – and who’s to blame?” Economic Policy Institute (http://www.epi.org/files/pdf/110211.pdf)

[5]       Bivens, J., 8/11/16, see above

[6]       Scott, R.E., 8/2/16, see above

[7]       Scott, R.E., 8/2/16, see above

TAX BREAKS: PROMOTING SAVING FOR RETIREMENT OR PERPETUATING FAMILY WEALTH?

Our income tax system provides incentives to save for retirement. Individuals can contribute up to $5,500 per year to an Individual Retirement Account (IRA) or $18,000 to an employer-sponsored retirement plan and not pay income tax on the amount saved. (These amounts are $1,000 and $6,000 higher, respectively, for those over 50.)

This exemption from income tax is intended as an incentive to help low and moderate income individuals save for retirement. The tax exemption for IRAs is phased out as the adjusted gross income (AGI) on one’s tax return increases. The phase out varies by a taxpayers’ status (e.g., single, married, filing jointly or separately, with or without an employer retirement plan), however, for all taxpayers with an AGI over $200,000, there is no income tax exemption.

The contribution limits are sufficient to provide, along with Social Security, a modest, but reasonable retirement income even at the lowest of the contribution limits. For example, if one put $5,500 into an IRA every year over a 40 year career ($220,000) and invested it reasonably, earning a 5% – 6% annual return, one would have over half a million dollars ($500,000) saved at retirement. With an employer-sponsored retirement plan, one could save three times as much and have quite a comfortable retirement.

However, there is a loophole in our tax laws that allows highly paid executives and investment managers to avoid income tax by putting huge amounts of money into “retirement” accounts, called deferred compensation accounts. These wealthy individuals don’t need any tax incentives to save for retirement. And it makes no sense to allow them to avoid income tax on huge sums of money that far exceed what they will need in retirement.

For example, the CEO of Progressive Insurance last year put over $26 million into his deferred compensation account. He now has over $150 million in this account, which is enough to provide him with an income of $850,000 per month for the rest of his life.

The retirement savings of the top one hundred CEOs are equal to those of 50 million American families (41% of the population). Employees at some of these CEOs’ companies have no retirement plan or savings at all. Furthermore, about half of these CEOs have traditional pensions as well; something most American workers have seen vanish over the last two decades. The CEOs of the 500 largest corporations have $3.2 billion in their deferred compensation accounts and avoided roughly $78 million in income taxes in 2014 by putting almost $200 million more into their “retirement” accounts than regular employees would have been allowed to save in their retirement accounts. [1]

The tax incentives that are supposed to be promoting saving for retirement are poorly designed and inefficient. Most of the benefits go to a small number of individuals with very high incomes. [2]

This is one example of how the rich and powerful have bent our tax laws to their benefit. It is also one reason that economic inequality is growing. And it is a piece of the puzzle of why social class mobility is diminishing in the US. These wealthy individuals obviously won’t spend all of these huge tax-deferred savings during their retirements, so these “retirement” savings will be passed on to their heirs, ensuring that the next generation of these families remains part of the economic elite.

[1]       Klinger, S., & Anderson, S. (10/28/15). “A Tale of Two Retirements,” Institute for Policy Studies (http://www.ips-dc.org/tale-of-two-retirements/)

[2]       Morrissey, M. (3/3/16). “The state of American retirement: How 401(k)s have failed most American workers,” Economic Policy Institute (http://www.epi.org/publication/retirement-in-america/)

THE YEAR-END SPENDING BILL: A BIG WIN FOR SPECIAL INTERESTS, WHILE KEEPING GOVERNMENT OPERATING

The year-end spending bill that Congress passed on December 18 was loaded with riders that had nothing to do with the budget. For example, it lifted the 40-year-old ban on crude oil exports from the US, just as the climate summit in Paris concluded that emissions from burning fossil fuels must be lowered to address climate warming. The bill continued a ban on federal funding for public health studies of the causes of gun violence and continued to allow people on the no-fly list to buy guns. It repealed the 2008 requirement that meat sold in the US has to identify its country of origin.

This spending bill also included two provisions that block the disclosure of the sources of political spending. The Internal Revenue Service is prohibited from requiring the disclosure of political spending by and donors to not-for-profit entities that engage in political activity. And the Securities and Exchange Commission is prohibited from requiring the disclosure of political spending by corporations. [1]

The bill also had pork barrel spending inserted by individual members of Congress. For example, a provision for Senator Cochran of Mississippi directs the Coast Guard to build a $640 million ship in his home state, but the Coast Guard says the ship isn’t need. Similarly, Maine Senator Collins got $1 billion in the budget for a destroyer that will probably be built in Maine, but the Navy says the ship isn’t needed. [2]

The good news is that the year-end spending bill keeps our government open and operating and funds important programs for middle and low-income Americans. Furthermore, many even more odious riders were kept out of the bill. As I noted in my last post, the good news about the separate year-end tax bill is that 40% of its provisions actually benefit regular, working Americans. This percentage is almost double what it has been in the past. Concerted activism by progressive politicians, leaders, and regular Americans made some good things happen in both the year-end spending bill and the year-end tax bill.

The bad news is that, as Moyers and Winship write, “There is an unwritten rule in Congress that before you do even a little for the working class you must do a lot for the donor class.” [3] These bills do a lot for the donor class – wealthy individuals and the corporations they run. As Moyers writes, “Candidates ask citizens for their votes, then go to Washington to do the bidding of their donors,” including cutting their taxes. So, we now have a wealthy donor class that gets high levels of representation and low levels of taxation. [4]

So, keep an eye on and be in touch with your elected officials. Let them know you are watching. Let them know that you want them to serve the interests of regular, working Americans, not those of the donor class of economic elites and the corporations they run. Make this a New Year’s resolution, because your activism as an informed citizen in a democracy can make a difference. Indeed, it has to, or our democracy, of, by, and for the people, will become a plutocracy run by and for the wealthy.

[1]       Moyers, B., & Winship, M., 12/17/15, “Lurking Within That Ominous, Omnibus Spending Bill,” Moyers & Company (http://billmoyers.com/story/lurking-within-that-ominous-omnibus-spending-bill/)

[2]       Moyers, B., 12/22/15, “The Plutocrats Are Winning. Don’t Let Them!” Common Dreams (http://www.commondreams.org/views/2015/12/22/plutocrats-are-winning-dont-let-them)

[3]       Moyers, B., & Winship, M., 12/17/15, see above

[4]       Moyers, B., 12/22/15, see above

THE YEAR-END TAX BILL: A BIG WIN FOR CORPORATIONS AND A LITTLE WIN FOR WORKING AMERICANS

Because of the gridlock in Congress, so few bills pass that those that have to pass get laden with special interest provisions and riders like ornaments on a Christmas tree. The recent year-end spending bill (2,009 pages long) and tax legislation (233 pages long) are the latest two examples. There were literally thousands of riders attached to these two massive and complicated bills. Many special interest provisions are slipped in by powerful legislators, typically on behalf of corporate lobbyists, when there is little time for other legislators (let alone the public) to scrutinize them. Nonetheless, these provisions can produce significant, windfall benefits for the targeted beneficiaries. Not surprisingly, the executives of the corporations that stand to reap the benefits are often large campaign contributors. [1]

The tax legislation Congress passed on December 18 was a $686 billion 10-year package. In it, Congress made permanent two recent expansions of tax credits that support low-income, working families: the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). Over the next 10 years, this will put $118 billion in the pockets of low-income working Americans. This will keep 16 million people from falling into poverty or deeper into poverty and it will help the economy by putting money in the pockets of people who will spend it at local businesses.

Congress also renewed the American Opportunity Tax Credit. It provides a tax credit of up to $2,500 per year for the costs of college. This will give a helping hand to millions of families struggling with the costs of higher education.

Overall, nearly 40% of the tax breaks in this legislation – approximately $250 billion – benefit working Americans who are overwhelmingly low- and middle-income. Typically, when the year-end tax cut package is passed low- and middle-income Americans have gotten just 20% of the tax breaks. So this year, with advocacy by many progressive leaders and activists, the benefits for working families were double what they usually are. [2]

This is the difference that political activism can make. Thank you to all of you who contributed your time, efforts, and voices to this fight.

Nonetheless, corporations got more than $400 billion in tax breaks. For example, heavy lobbying by Wall Street financial institutions made permanent a supposedly temporary, major tax loophole that makes it easier to stash profits offshore and avoid taxation here at home. This $78 billion (over 10 years) tax loophole has helped General Electric go five straight years without paying any federal income tax, and instead getting billions in refunds. Another offshore tax loophole was extended for five years at a cost of $8 billion. A special tax provision on the depreciation of equipment, intended as a temporary measure to fight the 2008 recession, was extended for another six years costing $28 billion in lost corporate tax revenue. Corporate lobbyists helped draft the language of at least some of these tax giveaways.

The hypocrisy of the supposed deficit fighters in Congress was on full display. None of the $400 billion in corporate tax breaks was paid for; their cost was simply added to deficit. Not one loophole was closed or tax subsidy eliminated to pay for this largesse. Yet when a provision to extend benefits for 9/11 first responders came up, the supposed deficit hawks insisted that it had to be paid for with spending cuts and new revenue!

My next post will cover highlights of the year-end spending bill.

[1]       Moyers, B., 12/22/15, “The Plutocrats Are Winning. Don’t Let Them!” Common Dreams (http://www.commondreams.org/views/2015/12/22/plutocrats-are-winning-dont-let-them)

[2]       Clemente, F., 12/22/15, “Families Advance With Recent Tax Bill, But Corporations Got a Lot More,” The Huffington Post (http://www.huffingtonpost.com/frank-clemente/families-advance-with-rec_b_8861986.html)

DANGER AHEAD IN DC: CORPORATIONS AND THE WEALTHY POISED TO TAKE ADVANTAGE

ABSTRACT: Some people in Washington, D.C., are taking the election results as an indication that Republican policy priorities are in favor with the public. Furthermore, the Republicans in Congress and the President may want to show that they can work together, get things done, and pass new laws. Senator Elizabeth Warren (Democrat from Massachusetts) warns us that big corporations and their lobbyists will try to take advantage of this situation. (As my previous post (11/25/14) documented, the conclusion that Republican policy priorities are in favor with the public is not an accurate interpretation of the election results.)

Given Warren’s warning, it’s little surprise that the House this week passed a massive package extending tax breaks primarily for banks, investment firms, and other wealthy interests. The more than 50 tax breaks included in the bill would add nearly $42 billion to the budget deficit over the next decade. Surprisingly, there seems to be little concern over this cost. Previously, less expensive initiatives (that benefited the unemployed, low income families, and families with child care expenses) were defeated, supposedly because they were unaffordable.

I encourage you to contact your Senators and the President to let them know that these tax breaks for big corporations and wealthy individuals, if warranted, should be paid for by closing loopholes benefiting these same groups. Furthermore, I’d encourage you to note that the focus of any tax breaks and other legislation should be on helping low and middle income families and individuals, not wealthy corporations and individuals.

FULL POST: Some people in Washington, D.C., are taking the election results as an indication that Republican policy priorities are in favor with the public. This may include President Obama, who may feel that he has to reach out and accommodate the new Republican majorities in the Senate and House. Furthermore, the Republicans in Congress and the President may want to show that they can work together, get things done, and pass new laws. Senator Elizabeth Warren (Democrat from Massachusetts) warns us that big corporations and their lobbyists will try to take advantage of this situation. [1]

As my previous post (11/25/14) documented, the conclusion that Republican policy priorities are in favor with the public is not an accurate interpretation of the election results. Truly progressive candidates won in the US Senate and elsewhere. Progressive ballot initiatives won across the country, including in states that were electing Republicans. The public supports, among other things, improved pay and paid sick leave for low income workers, as well as stronger regulation of campaign spending and the ethics of elected officials.

As Warren writes, “The stock market and gross domestic product keep going up, while families are getting squeezed hard by an economy that isn’t working for them. … they see a government that bows and scrapes for big corporations, big banks, big oil companies and big political donors — and they know this government does not work for them.” She states that we the people should look carefully at any new laws that surface in Congress or get to the President’s desk to be signed and examine whose interests they serve. The big corporations, their lobbyists, and the elected officials whose campaigns they and their wealthy allies funded will try to take advantage of the situation to push their agendas and benefit their interests. [2]

She warns us to be on the lookout for “trade deals negotiated in secret, with chief executives invited into the room while the workers whose jobs are on the line are locked outside. … tax deals that carefully protect … billionaires and big oil and other big political donors, while working families just get hammered.” She also is concerned that the big Wall Street financial corporations will try to weaken regulation despite their billions in profits and huge executive pay packages, which they are reaping only because of huge public bailouts after they crashed our economy in 2008.

Given Warren’s warning, it’s little surprise that the House this week passed a massive package extending tax breaks primarily for banks, investment firms, and other wealthy interests, such as NASCAR race track owners, filmmakers, racehorse owners, and rum producers. However, the bill fails to extend tax breaks for low income families and for child care expenses. There are some benefits for teachers, commuters, individuals in states without an income tax, and small businesses, but the bulk of the benefits go to wealthy corporations and individuals. [3]

The more than 50 tax breaks included in the bill would add nearly $42 billion to the budget deficit over the next decade. Surprisingly, there seems to be little concern over this cost. Previously, less expensive initiatives (that benefited the unemployed, low income families, and families with child care expenses) were defeated, supposedly because they were unaffordable.

The President has threatened to veto the bill, saying it favors large corporations over families and the middle class. The Senate’s leaders have not yet indicated what they plan to do with this legislation from the House.

I encourage you to contact your Senators and the President to let them know that these tax breaks for big corporations and wealthy individuals, if warranted, should be paid for by closing loopholes benefiting these same groups. Furthermore, I’d encourage you to note that the focus of any tax breaks and other legislation should be on helping low and middle income families and individuals, not wealthy corporations and individuals. Let’s help those who need it the most, not those who already have the most.

[1]       Warren, E., 11/11/14, “It’s time to work on America’s agenda,” The Washington Post

[2]       Warren, E., 11/11/14, see above

[3]       Ohlemacher, S., 12/4/14, “House votes to extend tax breaks through December,” The Boston Globe from the Associated Press

THE IGNORED DEFICIT IN PUBLIC GOODS

ABSTRACT: The federal government’s budget deficit is getting more attention than it deserves. It is half of what it was in 2009 and is at what economists consider a manageable level. Meanwhile, our deficit in investments in public goods is being almost totally ignored. Public goods are things of value to society but in which individuals, businesses, and other private organizations don’t and won’t invest.

These public goods are essential to a prosperous society. However, the US has been under-investing in public goods for decades. The paradox of public goods is that they are forgotten, unacknowledged, and in effect invisible when they are readily available.

Government spending on public goods has been in a relatively steep decline since the 2008 economic crash. And for the 30 years before that the investment in public goods had been in a slow decline.

Those opposed to a robust government, ideologically or due to self-interest, have engaged in an active campaign to get the public to forget the personal and societal benefits they receive from government. A discussion about public goods is largely missing from our media and society.

We need to correct this omission in our discourse and our investment in order to have a prosperous society. Without necessary public goods, we cannot maintain our health and productivity as individuals; nor will we be able to maintain the health and productivity of our businesses and ultimately those of our economy and society.

FULL POST: The federal government’s budget deficit is getting more attention than it deserves. It is half of what it was in 2009 and is at what economists consider a manageable level. (See post of 4/6/13. [1]) Meanwhile, our deficit in investments in public goods is being almost totally ignored.

Public goods are things of value to society but in which individuals, businesses, and other private organizations don’t and won’t invest. Public goods provide public benefits and require collective efforts and responsibility. Therefore, the public sector, namely government, must take responsibility for them. Children’s education, from birth through high school and beyond, is a classic example. Transportation infrastructure is another, including roads, railroads, bridges, airports, and ports. Other examples include parks, libraries, scientific research, public and individual health (including healthy air and water), and public safety (including safe communities, workplaces, homes, food, and medicine). A large, thriving, economically solid middle class may be the ultimate public good.

These public goods are essential to a prosperous society. [2] However, the US has been under-investing in public goods for decades. Part of the reason for this is that when they are present and functioning effectively, we forget about them – they are out of sight and out of mind. This is the paradox of public goods: they are unacknowledged and in effect invisible when they are readily available. We forget that there was a need or problem that has been addressed. Or we don’t realize that a problem, such as polluted drinking water, could occur if we don’t invest in protective and preventive measures. We forget that public expenditures by government were what met the need, maintain the solution, and prevent problems. [3]

However, here in the US, we are beginning to notice our public goods deficit. We’ve had bridges collapse or be closed because they are unsafe. Many of our school buildings are old, out-of-date, and in some cases unsafe. Students are leaving college with huge debts. Local governments are cutting police, fire, and school personnel. Our middle class and its economic security is dwindling. And so on.

Government spending on public goods has been in a relatively steep decline since the 2008 economic crash. And for the 30 years before that the investment in public goods had been in a slow decline. Economist John Kenneth Galbraith warned us way back in the 1950s that improper government budget priorities could lead to “private opulence and public squalor.”

In addition to the invisibility of public goods, those opposed to a robust government, ideologically or due to self-interest, have engaged in an active campaign to get the public to forget the personal and societal benefits they receive from government spending and actions. They have explicitly labeled government as the problem not a solution to problems. In fact, a survey of the public found that 94% of those who reported never receiving a benefit from a government program had indeed received benefits from one or more government programs and on average from four programs. [4]

A discussion about public goods is largely missing from our media and society. The notion of air, water, parks, and so forth, as shared public goods that require and deserve public investment is mostly missing from public consciousness. Our discussion of the production of wealth and goods by the private sector is robust, but the discussion is atrophied in terms of the role of the public sector and of the public goods that it produces, maintains, and protects.

We need to correct this omission in our discourse and our public spending in order to have a prosperous society. Without necessary public goods, we cannot maintain our health and productivity as individuals; nor will we be able to maintain the health and productivity of our businesses and ultimately those of our economy and society.


[2]       Hacker, J.S., & Loewentheil, N., 2012, “Prosperity economics: Building an economy for all,” Prosperity for All (http://www.prosperityforamerica.org/wp-content/uploads/2012/09/prosperity-for-all.pdf)

[3]       Derber, C., & Sekera, J., 1/22/14, “An invisible crisis: We are suffering from a mushrooming public goods deficit,” The Boston Globe

[4]       Mettler, S., 9/19/11, “Our hidden government benefits,” The New York Times

THE FEDERAL BUDGET DEAL

ABSTRACT: As you probably know, Congress will vote this week on a budget deal for fiscal years 2014 and 2015. If the budget deal doesn’t pass, the government would shut down again on Jan. 15. The deal could fail to pass in Congress. Without a deal, the phase 2 sequester cuts take effect and would be much more painful than the phase 1 cuts were this year. Under the sequester, the 2013 cap on discretionary domestic and military spending is $986 billion. This cap is slated to drop to $967 billion for 2014.

The budget negotiators are proposing spending $1,012 billion in 2013 and $2,014 billion in 2015, claiming deficit reduction of $23 billion over 10 years and smarter budget cutting than the across-the-board sequester’s cuts. However, some of the shrink-the-government diehards are opposed to this increase in spending.

To cut costs, the contributions new federal civilian employees pay into their pension fund will increase and military pensions will receive smaller cost of living increases. To increase revenue, airlines’ fees to pay for the TSA will go up, resulting in a $5 increase in add-on fees on each airline ticket. This consumer fee increase has been criticized and some in Congress have suggested closing the private jet tax loophole as an alternative.

A bone of contention is that the deal does not extend the emergency unemployment benefits for the long-term unemployed. These benefits will expire on Dec. 28 for 1.3 million workers. Without an extension, an additional 850,000 workers’ will lose benefits in the first quarter of 2014. This would have an estimated impact on the economy of 300,000 fewer jobs in 2014 and a reduction in economic growth of 0.4%.

If there are issues in these budget negotiations that you feel strongly about, now is the time to contact your Congress people and get your two cents (or more) into the discussion.

FULL POST: As you probably know, Congress will vote this week on a budget deal for fiscal years 2014 (which started last Oct. 1) and 2015. Their deadline is this Friday because Congress is planning to adjourn and go home for the holidays then. Other deadlines are lurking behind this one: the temporary extension of the fiscal year 2013 budget in October expires on Jan. 15, the second round of automatic budget cuts (phase 2 of the sequester) goes into effective Jan. 1, and long-term unemployment benefits expire on Dec. 28.

If the budget deal doesn’t pass, the government would shut down again on Jan. 15, a result almost no one appears to want. The deal could fail to pass in Congress because the negotiating has been done by a small group and there is opposition to the deal from multiple sides. [1]

Without a deal, the phase 2 sequester cuts would take effect and would be much more painful than the phase 1 cuts were this year. Many federal agencies and programs were able to use surplus or reserve funds that are now exhausted. In the case of air traffic controllers, airport construction funds were used to fund them and aren’t available again. And some one-time accounting maneuvers were used. Therefore, the second round of cuts will have much greater impacts. [2] The phase 2 sequester cuts in government spending would also hurt the economy and cost an estimated 800,000 jobs in 2014. [3]

Nonetheless, a number of issues could derail the budget deal. One such issue is the overall spending caps currently in place under the sequester, officially known as the Budget Control Act (BCA) of 2011. The 2013 cap on discretionary domestic and military spending is $986 billion. This cap is slated to drop to $967 billion for 2014.

The budget negotiators are proposing spending $1,012 billion ($1.012 trillion) in 2013 and $2,014 billion in 2015. Military spending would be $521 billion and non-military spending $492 billion. [4][5] With some offsetting revenue increases and future cuts in spending, they are claiming deficit reduction of $23 billion over 10 years and smarter budget cutting than the across-the-board sequester’s cuts. [6] However, some of the shrink-the-government diehards are opposed to this increase in spending. Spending that Obama called for in his State of the Union speech on education and infrastructure (in part to create jobs) is not part of the budget deal.

To cut costs, the contributions new federal civilian employees pay into their pension fund will increase ($6 billion over 10 years). This is causing some pushback given that federal workers have already experienced a 3 year pay freeze, unpaid furloughs due to the sequester, and delays in receiving their pay during the government shutdown. [7] Military pensions will receive smaller cost of living increases ($6 billion over 10 years). A cut in payments to Medicare health care providers is extended 2 years to 2023 ($23 billion). [8] Costs of mineral leases and petroleum extraction research will also be cut.

To increase revenue, airlines’ fees to pay for the Transportation Security Administration (TSA) will go up, resulting in a $5 increase in add-on fees on each airline ticket. This consumer fee increase has been criticized and some in Congress have suggested closing the private jet tax loophole as an alternative way to raise revenue. [9] Companies’ premiums for insuring pension plans will increase, however, the closing of corporate tax loopholes, including the use of offshore tax havens (which alone could generate over $20 billion a year in revenue), that some in Congress had called for, are not part of the deal. [10]

A bone of contention is that the deal does not extend the emergency unemployment benefits for the long-term unemployed. These benefits will expire on Dec. 28 for 1.3 million workers who have been out of work for longer than the usual 26 week limit on benefits. An extension of benefits would cost $25 billion for 2014. Not only do such benefits help the workers and their families, but they also support the economy by helping to maintain household incomes and consumer spending, which is two-thirds of our economy. [11] Without an extension, an additional 850,000 workers’ will lose benefits in the first quarter of 2014 when their regular 26 weeks of benefits run out, and 4.8 million workers would be affected by expiring benefits over the course of 2014. This would have an estimated impact on the economy of 300,000 fewer jobs in 2014 and a reduction in economic growth of 0.4% (from a current level of 2.4% for 2013) in the first quarter of 2014. [12] Some Democrats would still like to see this in the budget deal, while others are planning to push it separately in the near future.

Although unemployment is down to 7.0%, long-term unemployment is still a serious problem. Furthermore, the emergency long-term unemployment benefits were started under President George W. Bush when unemployment was only 5.6%. Over 37% of the unemployed have been unemployed for over 26 weeks, and this percentage is still rising. [13]

If a budget deal is successfully passed by Congress and signed by the President, it will be the first official budget since 2011. However, a number of issues could present challenges to passage in the House or the Senate.

If there are issues in these budget negotiations that you feel strongly about, now is the time to contact your Congress people and get your two cents (or more) into the discussion.


[1]       Everett, B., & Gibson, G., 12/8/13, “Budget talks worry those not in the room,” Politico

[2]       Taylor, A., 11/12/13, “Mandated cuts expected to be more painful in ’14,” The Boston Globe

[3]       Montgomery, L., 12/6/13, “Congressional GOP may be willing to let emergency unemployment benefits lapse,” The Washington Post

[4]       Weisman, J., 12/11/13, “Congressional negotiators reach deal on federal budget,” The Boston Globe from The New York Times

[5]       Przybyla, H., 12/11/13, “Budget deal easing spending cuts faces Republican ire,” Bloomberg

[6]       Weisman, J., 12/6/13, “Congress appears near a modest accord on the budget,” The Boston Globe from The New York Times

[7]       Montgomery, L., 12/9/13, “Budget deal expected this week amounts to a cease-fire as sides move to avert a standoff,” The Washington Post

[8]       Espo, D., & Taylor, A., 12/10/13, “Congressional negotiators reach budget pact,” The Boston Globe

[9]       Przybyla, H., 12/6/13, “Budget negotiators seek limited deal as opposition mounts,” Bloomberg

[10]     Tong, J., 12/5/13, “Representatives Doggett and DeLauro introduce legislation to end sequestration and corporate offshore tax havens,” Common Dreams (www.commondreams.org/newswire/2013/12/05-4)

[11]     Krugman, P., 12/8/13, “The punishment cure,” The New York Times

[12]     Lowrey, A., 11/17/13, “Extension of benefits for jobless set to end,” The New York Times

[13]     Needham, V., 12/8/13, “Advocates see hope for renewal of unemployment benefits extension,” The Hill

FUNDING SOCIAL SECURITY

ABSTRACT: Advocates for cutting Social Security benefits claim that cuts are needed because of a future funding shortfall. However, Social Security’s projected shortfall is small and 20 years in the future. Moreover, there are adjustments to the funding for Social Security that will easily eliminate the future funding shortfall.

The two most frequently mentioned ways of cutting Social Security’s costs are reducing future benefit payments and increasing the retirement age. The leading proposal would cut benefits by reducing the annual cost of living increases that seniors receive. However, to most accurately reflect the change in the cost of living that seniors actually experience, the annual increase in benefits should be greater than it is currently, not less. Cutting benefits will hurt retirees who rely on their modest Social Security benefits to make ends meet.

Another way to reduce Social Security’s cost is by increasing the age for receiving Social Security. The age for collecting full Social Security benefits is being increased from 65 to 67. People are living longer on average, but those with low incomes and less education have seen very little change in their life expectancy. Therefore, it hardly seems fair to increase the Social Security retirement age further.

The simplest and probably fairest way to address the Social Security shortfall would be to eliminate or increase the cap on the earnings that are subject to the Social Security tax. If the cap were eliminated, Social Security’s shortfall would be solved for at least 75 years.

FULL POST: Advocates for cutting Social Security benefits claim that cuts are needed because of a future funding shortfall. However, Social Security’s projected shortfall is small and 20 years in the future. It has no impact on the federal deficit because Social Security has its own, dedicated funding stream. So cutting benefits will do nothing to reduce the deficit but would hurt retirees who rely on their modest Social Security benefits to make ends meet. (See my post The Retirement Crisis and Social Security of 11/26/13 for more information. https://lippittpolicyandpolitics.org/2013/11/26/the-retirement-crisis-and-social-security/) Moreover, there are adjustments to the funding for Social Security that will easily eliminate the future funding shortfall.

The two most frequently mentioned ways of cutting Social Security’s costs are reducing future benefit payments and increasing the retirement age. The Republican budget and President Obama and some Democrats have proposed that benefits be cut by reducing the annual cost of living increases that seniors receive. This would be accomplished by using a different and lower measure of the Consumer Price Index (CPI) to calculate the annual adjustment in benefits – the “Chained CPI” instead of the regular CPI. (See my post Social Security and Chained CPI of 4/13/13 for more information. https://lippittpolicyandpolitics.org/2013/04/13/social-security-and-chained-cpi/)

However, the most accurate measure of the change in the cost of living for seniors is the CPI-E (for Elderly), and it is typically higher than either of the regular CPI (which is currently used) or the proposed “Chained CPI”. This means that to most accurately reflect the change in the cost of living that seniors actually experience, the annual increase in benefits should be greater than it is currently, not less. The bills in Congress to strengthen Social Security generally include the use of CPI-E for the annual cost of living adjustment. [1]

Another way to reduce Social Security’s cost is by increasing the age for receiving Social Security. The age for collecting full Social Security benefits is being increased from 65 to 67. (One can get Social Security benefits at younger ages but the amount received is reduced.) The major argument for this is that people are living longer on average. They are, but it is the well educated and affluent who are living longer. Those with low incomes and less education have seen very little change in their life expectancy and those with the least education have seen their life expectancy decline. [2] Therefore, it hardly seems fair to increase the Social Security retirement age further.

The simplest and probably fairest way to address the Social Security shortfall that’s 20 years in the future would be to eliminate or increase the cap on the earnings that are subject to the Social Security tax. (This Social Security tax is the dedicated and sole funding source for Social Security.)

Currently, Social Security tax is only paid on the first $113,700 of earnings. Amounts above that are untaxed. For workers earning up to that amount, they pay a 6.2% tax that is deducted from their paychecks and their employers match that amount. But because of the cap, someone making $1 million only pays tax on $113,700 of earnings, meaning that overall they pay less than 1% (instead of 6.2%) of their earnings into Social Security. If the cap were eliminated, Social Security’s shortfall would be solved for at least 75 years.

The bills in Congress to strengthen Social Security generally solve the funding shortfall by increasing the funding from the Social Security tax. Some raise or eliminate the cap on earnings subject to the tax. Others apply the tax to earnings over $250,000 but not to earnings between the current cap and $250,000 to avoid increasing taxes on people in that upper middle class earning range. It seems fairer and simpler to me to eliminate the cap and cut the tax rate slightly. This would give a small tax cut to everyone earning less than the $113,700 cap.

There are other ways to increase Social Security funding. One that has been suggested is to increase income taxes on high income individuals getting Social Security benefits and putting this revenue back into Social Security. Another is to use some of the revenue from the estate tax to fund Social Security. There are other options, but raising or eliminating the cap on earnings subject to the Social Security tax is the simplest and most straight forward solution to Social Security’s long-term funding shortfall. (See my post Social Security: Facts and Fixes of 12/4/11 for more information. https://lippittpolicyandpolitics.org/2011/12/04/social-security-facts-and-fixes/)


[1]       McAuliff, M., 11/18/13, “Elizabeth Warren: Expand Social Security,” The Huffington Post

[2]       Krugman, P., 11/21/13, “Expanding Social Security,” The New York Times

THE RETIREMENT CRISIS AND SOCIAL SECURITY

ABSTRACT: There is a retirement crisis in America. Both current and soon-to-be retirees are more dependent on Social Security than ever, yet some politicians and corporate executives are arguing that Social Security should be cut. Senator Elizabeth Warren of Massachusetts recently gave a speech in the Senate where (in only five and a half minutes) she did an excellent job of summarizing the retirement crisis and making the case for strengthening Social Security (http://ourfuture.org/20131118/elizabeth-warren-on-social-security-its-values-not-math).

Retirees’ reliance on Social Security is only going to increase because the other two legs of the three-legged retirement security stool, pension plans and personal savings, have been weakened. With Social Security as the only strong leg of retirement security, this is not the time to be reducing its benefits.

Given that 70% of Americans indicate in polls that they oppose Social Security cuts and 65% support increasing benefits, who is pushing for these cuts? Many Republicans are ideologically opposed to social welfare programs and cuts to Social Security are in the Republican budget. President Obama and some Democrats have signed on to the idea of the cuts as a compromise in pursuit of a “Grand Bargain” to resolve the federal budget’s deficit.

Prominently promoting the cuts in Social Security benefits have been two groups of corporate executives: the Business Roundtable and Fix the Debt. There’s great irony here from two perspectives. First, the corporate executives on the Business Roundtable have retirement accounts worth $14.5 million on average. Second, if the current Social Security tax cap were eliminated, corporate executives with $10 million in income, for example, would pay $1.24 million into Social Security instead of $14,000 and Social Security’s future funding problem would disappear.

Bills have been introduced in Congress to strengthen Social Security and its benefits. I encourage you to contact your Senators and Representative to ask them where they stand on Social Security cuts and these bills.

FULL POST: There is a retirement crisis in America. Both current and soon-to-be retirees are more dependent on Social Security than ever, yet some politicians and corporate executives are arguing that Social Security should be cut. This makes no sense from a budget perspective or a retirement policy perspective. There are bills currently in Congress to strengthen Social Security, by improving both its finances and its benefits, without any impact on the federal budget or the deficit. [1]

Senator Elizabeth Warren of Massachusetts recently gave a speech in the Senate where (in only five and a half minutes) she did an excellent job of summarizing the retirement crisis and making the case for strengthening Social Security. I encourage you to listen to her speech at http://ourfuture.org/20131118/elizabeth-warren-on-social-security-its-values-not-math.

Although the average recipient gets less than $15,000 a year from Social Security, many seniors are highly dependent on it. For 36% of seniors, Social Security is 90% of their income and for two-thirds of seniors, Social Security is more than half of their income. The current poverty measure indicates that 9% of seniors live in poverty, but an updated measure that most experts consider more accurate puts that figure at almost 15%. [2] Cutting Social Security benefits would clearly increase poverty among seniors.

Retirees’ reliance on Social Security is only going to increase because the other two legs of the three-legged retirement security stool, pension plans and personal savings, have been weakened. Only 18% of private sector workers have pensions (which pay a guaranteed monthly benefit for life as Social Security does). In 1975, 50% of workers had pensions. A combination of factors including expanded foreign trade and competition, along with weakened unions (which had made pensions a standard part of workers’ benefits) contributed to this dramatic decline in pensions.

Personal retirement savings are relatively small and have been hurt by the economic collapse, which cut the value of homes (where the middle class had most of its savings) and the value of investments. Some employers have replaced pension plans with personal savings accounts such as 401ks. However, only half of workers have such accounts and 80% of those accounts have less than $67,000 in them. [3]

With Social Security as the only strong leg of the three-legged stool of retirement security, this is not the time to be reducing its benefits. Given the current state of affairs, 53% of workers are at risk for having a lower standard of living in retirement than they had while working. And this percentage is up from 38% in 2001.

Given that 70% of Americans indicate in polls that they oppose Social Security cuts and 65% support increasing benefits, [4] why is there a push to cut Social Security benefits? The only reason that seems to make any sense is that those pushing a cut are ideologically opposed to Social Security – and often to social welfare programs in general.

So specifically who is pushing for these cuts? As mentioned above, it is in the Republican budget and reflects many Republicans’ ideological opposition to social welfare programs. President Obama and some Democrats have signed on to the idea of the cuts as a compromise in pursuit of a “Grand Bargain” to resolve the federal budget’s deficit.

Prominently promoting the cuts in Social Security benefits have been two groups of corporate executives: the Business Roundtable and Fix the Debt (a project of The Committee for a Responsible Federal Budget). These groups have been spending tens of millions of dollars on campaigns to build support for cutting Social Security (and Medicare, our health insurance program for seniors). There’s great irony here from two perspectives. First, the corporate executives on the Business Roundtable have retirement accounts worth $14.5 million on average. That would generate a monthly retirement check of over $86,000 compared to the typically monthly Social Security check of $1,237. [5] Second, the current Social Security tax (Social Security’s dedicated and only funding source) is only paid on the first $113,700 of earnings. Amounts above that are untaxed. If this Social Security tax cap were eliminated, corporate executives with $10 million in income, for example, would pay $1.24 million into Social Security instead of $14,000 and Social Security’s future funding problem would disappear.

Bills have been introduced in Congress to strengthen Social Security and its benefits. The Keeping Our Social Security Promises Act has been introduced in the Senate by Senator Sanders (S.1558) and in the House by Representative DeFazio. The Strengthening Social Security Act has been introduced in the Senate by Senator Harkin (S.567) and in the House by Representative Sanchez (H.R.3118). I encourage you to contact your Senators and Representative to ask them where they stand on Social Security cuts and these bills. [6]


[1]       Sargent, G., 11/5/13, “Liberal push to expand Social Security gains steam,” The Washington Post

[2]       Krugman, P., 11/21/13, “Expanding Social Security,” The New York Times

[3]       Democracy for America, 11/24/13, “Expand Social Security,” http://act.democracyforamerica.com/sign/social_security_infographic/?source=ptnr.ssw_ssinfo.20131105 (You can get more information and sign their petition to support expanding Social Security here.)

[4]       Alman, A., 11/19/13, “Voters in key states really don’t want Social Security cut,” The Huffington Post

[5]       Anderson, S., 11/21/13, “CEOs against grandmas,” Daily Times Chronicle

[6]       You can find contact information for your US Representative at http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

STARVING AMERICA

ABSTRACT: On November 1, federal food assistance to poor Americans was cut by $5 billion. The $78 billion Food Stamps program, officially known as the Supplemental Nutrition Assistance Program (SNAP), currently serves 48 million low income Americans, including 21 million children. This reduction in food assistance from the federal government is equal to the amount donated to churches, synagogues, and private food banks.

A family of four receiving the maximum amount will have their benefit fall from $668 to $632 per month. It is estimated that the typical SNAP beneficiary will receive $1.40 per meal. The Institute of Medicine found that the SNAP allotment, which is critically important for nutrition and health for both adults and children, was inadequate even before this cut.

The number of Americans receiving SNAP benefits has increased mainly due to the large number of people who lost jobs during the Great Recession. In addition, many Americans in low wage and / or part-time jobs qualify for Food Stamps.

Food, obviously, is a necessity and SNAP’s food stamps are a vital support for poor families with children, low income seniors, some people with disabilities, and some unemployed workers. Nonetheless, Congress actually wants to cut food assistance even more! This cut and the additional cuts being discussed will cause real harm to recipients by reducing a meager but essential support. There are many better and fairer ways to cut spending or increase revenue so these cuts to SNAP can be avoided.

FULL POST: On November 1, federal food assistance to poor Americans was cut by $5 billion. The $78 billion Food Stamps program, officially known as the Supplemental Nutrition Assistance Program (SNAP), currently serves 48 million low income Americans, including 21 million children. The cut is caused by the expiration of supplemental funding from the 2009 stimulus package. Although many politicians had pledged to extend this funding if it was still needed, that has not happened. On top of the hardships of the Great Recession and a weak recovery, this is another blow to people who are already among the most vulnerable citizens in our nation. [1]

Despite its significant impact on households that struggle to put food on the table, this event received scant attention in the mainstream, corporate media. This reduction in food assistance from the federal government is equal to the amount donated to churches, synagogues, and private food banks, according to a study by the Washington-based anti-hunger advocate Bread for the World. [2]

SNAP benefits will be cut by about 5.5%. A family of four receiving the maximum amount will have their benefit fall from $668 to $632 per month. It is estimated that the typical SNAP beneficiary will receive $1.40 per meal. [3] The Institute of Medicine found that the SNAP allotment, which is critically important for nutrition and health for both adults and children, was inadequate even before this cut. The cut means that nutrition will suffer and more families will run out of food by the end of the month. And more families will be in poverty because in 2012 SNAP lifted 4 million people above the poverty line ($18,300 for a family of 3, which often is a single mother with 2 children), making it one of the most effective anti-poverty programs we have. [4]

The $5 billion SNAP cut will have an effect on the overall economy. It is projected to slightly reduce our slow economic growth (from 2.0% to 1.9%) and has retail food stores and other consumer outlets worried about reduced sales. It is estimated that every $1 of Food Stamp benefits generates $1.74 of economic activity. [5]

The number of Americans receiving SNAP benefits has increased to roughly 48 million from about 26 million in 2007. This growth is mainly due to the large number of people who lost jobs during Great Recession, and especially those who either didn’t qualify for unemployment benefits or whose benefits have run out due to long-term unemployment. (Fewer than half of unemployed workers are currently receiving unemployment benefits.) In addition, many Americans in low wage and / or part-time jobs qualify for Food Stamps, including many workers at our large fast food corporations and at Walmart. (See my post of 10/30/13, Lack of Good Jobs is our Most Urgent Problem, for more information: https://lippittpolicyandpolitics.org/2013/10/29/lack-of-good-jobs-is-our-most-urgent-problem/.)

SNAP is a Department of Agriculture program and historically has been part of the Farm Bill. Renewal of the Farm Bill is currently stalled in Congress, in part over differences in how much more to cut SNAP. (That’s not a typo; Congress actually wants to cut food assistance even more!) House Republicans are proposing additional cuts of about $4 billion a year that would remove about 3 million people from the program, while Senate Democrats would cut one tenth of that, or $400 million a year. The Farm Bill also includes subsidies to multi-billion dollar agricultural corporations, billionaire investors in farms, and 14 members of Congress. However, these subsidies apparently won’t be cut; they will continue or increase. [6][7]

Food, obviously, is a necessity and SNAP’s food stamps are a vital support for poor families with children, low income seniors, some people with disabilities, and some unemployed workers. This cut that went into effect on November 1 and the additional cuts being discussed as part of the Farm Bill are tiny amounts in terms of the overall federal budget but will cause real harm to recipients by reducing a meager but essential support. There are many better and fairer ways to cut spending or increase revenue so these cuts to SNAP can be avoided. [8]

 

[1]       Kaufmann, G., 10/28/13, “This Week in Poverty: No Time to Wait on a Movement,” The Nation

[2]       Wallbank, D., & Bjerga, A., “Wal-Mart to widows will feel U.S. Food Stamp cuts,” Bloomberg

[3]       Dayen, D., 11/6/13, “The Democrats’ original Food-Stamp sin,” The American Prospect

[4]       Kaufmann, G., 10/28/13, see above

[5]       Rampell, C., 10/31/13, “As cuts to Food Stamps take effect, more trims to benefits are expected,” The New York Times

[6]       Alman, A., 7/23/13, “George Miller Criticizes House Republicans Over Farm Subsidies,” The Huffington Post

[7]       Nixon, R., 11/7/13, “Billionaires Received U.S. Farm Subsidies, Report Finds,” The New York Times

[8]       Weinstein, D., 11/6/13, “Time to tell the truth about Food Stamps,” The Huffington Post

CORPORATIONS’ TAX AVOIDANCE

ABSTRACT: Large corporations are dodging taxes by using offshore tax havens. They use them to avoid paying about $90 billion a year in US income taxes. Of the 100 largest US corporations with publicly traded stock, 82 maintain subsidiaries in offshore tax havens and they are holding $1.2 trillion in them, on which they have avoided paying US income tax. If all 82 of these corporations reported their $1.2 trillion stashed offshore as US income and paid the 35% rate, the federal government would receive $420 billion, which would cut the deficit by more than half.

For the 2010 tax year, profitable US corporations that filed a US income tax return paid an average of only 13% of their worldwide profits in income tax, despite the stated US corporate income tax rate of 35%.

The loss of this revenue for the federal government hurts all of us. It means that we, as individual taxpayers, and small businesses either have to pay more taxes to make up the difference or that our federal government (and state governments too) have less to spend on things we count on government to do.

Closing this offshore tax haven loophole would be a step toward tax fairness. There are bills in Congress to do so. I urge you to contact your Senators and Representative to urge them to support closing the offshore tax haven loophole.

FULL POST: Large corporations are dodging taxes by using offshore tax havens. They use them to avoid paying about $90 billion a year in US income taxes. This costs the US government more than was saved ($85 billion a year) by the ill-conceived, across-the-board budget cuts in March (known as the sequester) and far more than the proposed cut in food stamps (known as SNAP) would save ($4 billion a year). (See posts of 9/16 and 9/19 for some of the effects of the sequester.)

Of the 100 largest US corporations with publicly traded stock, 82 maintain subsidiaries in offshore tax havens and they are holding $1.2 trillion in them, on which they have avoided paying US income tax. Fifteen corporations hold two-thirds of this cash in 1,900 subsidiaries. [1] Many of these subsidiaries are officially housed in the Cayman Islands where the corporations maintain a legal address but no other physical presence. Ironically, roughly half of this offshore money is invested in US securities or through US accounts. [2]

In part because of the use of these offshore tax havens and accounting tricks that shift income to them, for the 2010 tax year, profitable US corporations that filed a US income tax return paid an average of only 13% of their worldwide profits in income tax. Even when state, local, and foreign income taxes are included, they paid only around 17% of profits, despite the stated US corporate income tax rate of 35%. [3] (See post of 11/5/11 for more information on corporate income taxes.)

A few specific examples help to put this in perspective.

  • Pfizer, the world’s largest drug maker, has 40% of its sales in the US but reported no taxable income in the US over the last 5 years. It has $73 billion sitting untaxed in 172 subsidiaries in offshore tax havens.
  • Microsoft has an untaxed $61 billion in 5 offshore tax havens.
  • Citigroup, which US taxpayers bailed out during the 2008 financial collapse, has $43 billion sitting untaxed in 20 offshore subsidiaries. [4]
  • Apple Computer made $30 billion in supposedly offshore profits over the past 4 years on which it paid no taxes to any national government, largely by exploiting technicalities in US and Irish tax laws. [5]
  • The Bank of America, also bailed out by US taxpayers during the 2008 financial collapse, has $17 billion sitting untaxed in 316 offshore subsidiaries.
  • Oracle has an untaxed $21 billion in 5 offshore subsidiaries.
  • Google has $33 billion sitting untaxed in 25 offshore subsidiaries. [6]

If these 7 corporations reported this $278 billion as US income and paid the 35% tax rate on it, the federal government would receive $97 billion. This would be more than enough to reverse the sequester’s cuts and continue food stamp benefits. If all 82 of the largest corporations with offshore tax haven subsidiaries reported their $1.2 trillion stashed offshore as US income and paid the 35% rate, the federal government would receive $420 billion, which would cut the deficit by more than half.

The loss of this revenue for the federal government hurts all of us, including small and local businesses. It means that we, as individual taxpayers, and small businesses either have to pay more taxes to make up the difference or that our federal government (and state governments too) have less to spend on education and job training, transportation and other infrastructure, safety and security, and all the other things we count on government to do.

Closing this offshore tax haven loophole would be a step toward tax fairness. There are bills in Congress to do so: in the US Senate, the Cut Unjustified Tax (CUT) Loopholes Act (bill # S.268) and in the US House, the Stop Tax Haven Abuse Act (bill # H.R. 1554). I urge you to contact your Senators and Representative to urge them to support closing the offshore tax haven loophole.

(You can find out who your Congress people are and get their contact information at: http://www.senate.gov/general/contact_information/senators_cfm.cfm for your Senators and http://www.house.gov/representatives/find/ for your Representative.)


[1]       US PIRG, 7/31/13, “Offshore shell games,” (http://www.uspirg.org/reports/usp/offshore-shell-games)

[2]       Clark, K., 10/4/13, “Crackdown on offshore tax havens,” Daily Times Chronicle

[3]       US General Accounting Office, May 2013, “Corporate income tax: Effective tax rates can differ significantly from the statutory rate,” (http://www.gao.gov/products/GAO-13-520)

[4]       MASSPIRG, 4/4/13, “Picking up the tab,” (http://masspirg.org/reports/map/picking-tab-2013)

[5]       The Balance Sheet, 5/21/13, “Apple slips through $30 billion tax-code hole,” The American Prospect

[6]       US PIRG, 7/31/13, see above

WHY IS THE GOVERNMENT SHUTDOWN?

ABSTRACT: The federal government’s shutdown for lack of a budget has nothing to do with the deficit or democracy; rather, it has everything to do with politics, ideology, and the tyranny of a minority. The extreme wing of the Republican Party, without the support in Congress to pass legislation and having lost the last election, is trying to impose its ideology on the country by taking the government’s budget hostage.

The federal government’s budget deficit is at its lowest level in 5 years and roughly half of what it was in 2009. The Republicans’ primary policy target is the Affordable Health Care law, also known as Obama Care. They ideologically oppose this expansion of the government’s role in health care, even though it is built on conservative principles and will provide health insurance to tens of millions of Americans who don’t have it now.

There’s a bill sitting in the House that funds the government for a few weeks – a so-called Continuing Resolution (CR). With a simple yes or no vote, it would pass. But because it doesn’t have the support of the majority of Republicans, Speaker Boehner won’t allow a vote on it.

800,000 federal employees will lose their paychecks and millions of Americans will lose services funded by the government. Nonetheless, members of Congress will continue to get their paychecks and their good, taxpayer-subsidized health insurance.

As recent history has shown, if the extremists in Congress get what they want, or any part of it, they’ll just be back at the next opportunity, creating another crisis, and asking for more. Therefore, negotiation with this extortion, blackmail, hostage taking, or bullying, whatever you want to call it, should not and cannot be undertaken.

FULL POST: The federal government’s shutdown for lack of a budget has nothing to do with the deficit or democracy; rather, it has everything to do with politics, ideology, and the tyranny of a minority. The extreme wing of the Republican Party, without the support in Congress to pass legislation and having lost the last election, including the presidency and seats in both houses of Congress, is trying to impose its ideology on the country by taking the government’s budget hostage.

This extreme faction is not willing to abide by the last election, by legislation previously passed (such as the Affordable Care Act), or by the will of the American public. And they are not willing to engage in meaningful negotiations because they believe they know what is best for the country and for all of us. They are willing, however, to disrupt the lives of millions of Americans and to harm our weak economic recovery by shutting down the federal government.

And this is not about the deficit. The federal government’s budget deficit is at its lowest level in 5 years and roughly half of what it was in 2009. [1] The deficit is projected to continue to fall as the economy recovers, which increases government revenue and reduces expenses. Many economists expect that in 2 years it will have decreased to a sustainable level. [2]

The Republicans’ primary policy target is the Affordable Health Care law, also known as Obama Care. They ideologically oppose this expansion of the government’s role in health care, even though it is built on conservative principles: 1) it uses private health insurers and providers, and 2) it requires personal responsibility through the mandate that individuals purchase health insurance (an idea born in a conservative think tank). They oppose it despite the fact that it will provide health insurance to tens of millions of Americans who don’t have it now, and the fact that the more the public knows about Obama Care’s specific provisions, the more they like it. (See my posts of 8/21/13 and 8/19/13 for more information.)

Various budget proposals from the Republicans identify their other policy targets. They have included cuts to other social programs that their extreme wing opposes, including cuts to Social Security, the Medicare and Medicaid health programs, and food and nutrition assistance, among others. On the other hand, most of them would increase military spending on top of its significant increases in recent years, which already mean that we are spending more on the military (adjusted for inflation) than at any time since World War II. [3]

The Republicans in the House of Representatives, who are the roadblock to passage of a budget, are refusing to bring to a vote any budget that does not have the support of a majority of Republicans. Therefore, the most extreme 117 Republicans in the House, 27% of its overall membership, can and are blocking progress and forcing this shutdown. (See post of 7/27/13 for more information on obstructionism in the House.)

There’s a bill sitting in the House that funds the government for a few weeks – a so-called Continuing Resolution (CR). It’s simple and straightforward; it simply funds the government at current levels without making any policy changes. If the Republican leadership in the House would allow a simple yes or no vote on this bill, it would pass with support from members of both parties – as it did in the Senate. But because it doesn’t have the support of the majority of House Republicans, Speaker Boehner won’t allow a vote on it.

800,000 federal employees will lose their paychecks and millions of Americans will lose services funded by the government, including meals for seniors, Head Start classes for preschoolers, and access to national parks for all of us. Nonetheless, members of Congress will continue to get their paychecks and their good, taxpayer-subsidized health insurance.

This is the second time in 20 years that an extreme Republican agenda has forced a government shutdown. Democrats have never done this when they were in the minority or did not hold the presidency.

As recent history has shown, if the extremists in Congress get what they want, or any part of it, they’ll just be back at the next opportunity, creating another crisis, and asking for more. Therefore, negotiation with these extortionists, blackmailers, hostage takers, or bullies, whatever you want to call them, should not and cannot be undertaken. [4]

Long before blocking Obama Care was linked to a government shutdown, Norm Ornstein, the political scientist at the conservative America Enterprise Institute, wrote that “What is going on now to sabotage Obamacare is not treasonous – just sharply beneath any reasonable standards of elected officials with the fiduciary responsibility of governing.” [5] I wonder what he would say now about those in Congress whose behavior has led to this government shutdown.


[1]       Klimasinska, K., 9/12/13, “U.S. budget gap narrows as stronger growth boosts revenues,” Bloomberg

[2]       Lowrey, A., 4/22/13, “The incredible shrinking budget deficit,” The New York Times

[3]       Bilmes, L., 7/31/13, “Pentagon a ripe target for cuts,” The Boston Globe

[4]       Reich, R., 9/30/13, “Why Obama and the Democrats shouldn’t negotiate with extortionists,” The Huffington Post

[5]       Light, J., 7/25/13, “Obstructionism for the recordbooks,” Moyers & company (billmoyers.com/2013/07/25/obstructionism-for-the-recordbooks)

EFFECTS OF THE SEQUESTER Part 2

ABSTRACT: The $85 billion across the board budget cuts that went into effect on March 1, known as the sequester, are significantly affecting individuals, families, children, and public sector functions. The following list of some of the sequester’s effects is a continuation of my post of 9/16/13 and is drawn from the Coalition on Human Needs extensive compilation of reports from on-the-ground, front-line service providers and other sources.

The sequester’s budget cuts are having the following effects (among others): 1) the Center for Medicare and Medicaid Services is cutting its reimbursements to community cancer clinics for cancer treatment drugs below the actual cost of the drugs; 2) civilian medical staff at military medical facilities are losing significant income because of sequestration furloughs and therefore are quitting; 3) many school districts will be increasing class sizes, reducing instructional and non-instructional staff, reducing professional development and academic programs, and/or deferring textbook purchases; 4) 57,000 fewer children will participate in Head Start and Early Head Start, services will be reduced by 1.3 million days, and 18,000 staff will either be laid off or face reduced pay or hours; 5) the federal court system’s budget has been cut by $350 million leading to layoffs of public defenders, delays in trials, and cuts in mental health treatment, drug treatment and testing, and offender monitoring; 6) hundreds of thousands of low income mothers and their young children have lost nutrition benefits; 7) roughly 300,000 students with disabilities will receive reduced services; 8) Meals on Wheels has delivered hundreds of thousands fewer meals for tens of thousands of seniors; and 9) housing assistance has been cut or denied for tens of thousands of families.

FULL POST: The $85 billion across the board budget cuts that went into effect on March 1, known as the sequester, are significantly affecting individuals, families, children, and public sector functions. The following list of some of the sequester’s effects is a continuation of my post of 9/16/13. The Coalition on Human Needs has been compiling reports of the sequester’s effects from on-the-ground, front-line service providers, as well as from national reports and sources. Here are some “highlights” from their extensive compilation: [1]

  • The Center for Medicare and Medicaid Services is cutting its reimbursements to community cancer clinics for cancer treatment drugs below the actual cost of the drugs. As a result, the clinics have two choices: they can send Medicare patients to the hospital for treatment or they can continue to serve patients but take a loss on drug costs. Given tight budgets, many clinics are sending their patients to hospitals where taxpayers pay $6,500 more each year for cancer care and seniors pay $650 more in co-pays than they would at community cancer clinics.
  • Civilian medical staff at military medical facilities are losing significant income because of sequestration furloughs and therefore are quitting. The Army and Air Force combined have lost 3,300 doctors, nurses and other medical staff, about 6 percent of their total. Medical facilities’ hours of operation have been reduced and certain non-emergency medical procedures delayed.
  • The sequester’s cuts will affect many school districts this fall. In a survey of 541 school districts in 48 states done by the School Superintendents Association, 86% indicated they would be implementing cuts, including: increasing class sizes (48%), reducing instructional staff (53%), cutting non-instructional staff (47%), reducing professional development (59%), reducing academic programs (33%), and deferring textbook purchases (33%).
  • Due to the sequester’s cuts, 57,000 fewer children will participate in Head Start and Early Head Start this fall, the early education programs designed to close the school readiness gap for disadvantaged children. In addition, services will be reduced by 1.3 million days at Head Start centers and 18,000 staff will either be laid off or face reduced pay or hours. Programs also closed early at the end of the last school year, canceled summer programs, shortened daily hours of operation, and/or reduced services such as transportation. The concentration of Head Start services in poorer states and cities means that very poor communities and their children will be hit hard by these cuts, which will likely have life-long impacts on them and increase the challenges facing their schools.
  • The federal court system’s budget has been cut by $350 million by the sequester. This has resulted in layoffs of public defenders and furloughs of up to twenty days without pay. There have been delays in trials, reductions in lawyer training, and less funding for research, investigation and expert help. Several courts are not holding trials on Fridays to adapt to the reductions. If cases cannot be processed in accordance with the Speedy Trial Act, they may have to be dismissed. The number of federal probation officers has declined 7 percent since 2011, to approximately 6,000, despite an increase in the number of offenders in the probation system. In 2012, 187,000 offenders were supervised by these probation officers, and the number is expected to rise to a record 191,000 by 2014. Probation and pretrial services, including mental health treatment, drug treatment and testing, and offender monitoring, have all been cut.
  • The sequester’s cuts to food programs have meant that hundreds of thousands of low income mothers and their young children have lost nutrition benefits, which could do long-term harm to the health and school readiness of the children.
  • Hundreds of millions of dollars of sequester cuts mean that roughly 300,000 students with disabilities will receive reduced services.
  • Because of sequester cuts, Meals on Wheels has delivered hundreds of thousands fewer meals for tens of thousands of seniors. Transportation and other services for seniors have been cut.
  • Housing assistance has been cut or denied for tens of thousands of families due to the sequester. Some families have lost their housing assistance, some are being asked to pay more, and already long waiting lists and times (measured in years in many places) have grown. Maintenance of public housing and staff at housing agencies have been reduced.

I strongly urge you to call your US Senators and your Representative to tell them that the sequester’s budget cuts are harmful and unwise. Tell them that there are smarter and fairer ways to reduce the federal budget’s deficit.

(You can find out who your Congress people are and get their contact information at: http://www.senate.gov/general/contact_information/senators_cfm.cfm for your Senators and http://www.house.gov/representatives/find/ for your Representative.)


 

[1]       The Coalition on Human Needs’ extensive compilation of the sequester’s effects is available at: http://www.chn.org/wp-content/uploads/2013/08/completesetofsequesterreports.pdf.

EFFECTS OF THE FEDERAL BUDGET CUTS, AKA THE SEQUESTER

ABSTRACT: The $85 billion in federal budget cuts that went into effect on March 1 have now had time to have measurable effects. Most economists agree that the cuts, known as “the sequester,” have slowed economic growth by at least 1.5 percentage points. Joseph J. Minarik, an economist, cannot remember “when fiscal [i.e., federal budget] policy was so at odds with the needs of the economy.”

Effects of the sequester are having significant impacts on people’s lives, but continue to be ignored by Congress. The budget cuts are having the following effects (among others): In July, 199,000 federal workers had work hours reduced and contractors lost work; Federal court proceedings have been dramatically slowed and the number of federal law enforcement and probation officers has been reduced; The FBI will shut its headquarters and offices on 10 weekdays over the next year; The National Institutes of Health is cutting $4 million from the $9 million core contract for the Framingham Heart Study, one of the most important and unique research projects in medical history; The decline in federal money for scientific research has been exacerbated, leading 18% of scientists to consider taking their research to another country; The Coast Guard has cut patrols, training, and purchases of new equipment; and Efforts to remove unexploded land mines have been canceled or curtailed.

FULL POST: The $85 billion in federal budget cuts that went into effect on March 1 (which were part of the so-called “fiscal cliff”) have now had time to have measurable effects. Most economists agree that the cuts, known as “the sequester,” have hurt economic growth and the creation of jobs. They estimate that the reduced federal expenditures have slowed economic growth by at least 1.5 percentage points, with more harm to the economy and jobs expected if Congress and the President allow the cuts to continue.[1]

According to a recent NBC News/Wall Street Journal survey, 22% of Americans say they have been “significantly affected” by sequestration cuts. Among people earning below $30,000, 31% say they have been affected by the sequester. [2]

Joseph J. Minarik, economist and director of research at the corporate-supported Committee for Economic Development, says he cannot remember “when fiscal policy was so at odds with the needs of the economy.” Similarly, University of Michigan economist Justin Wolfers says, “The disjunction between textbook economics and the choices being made in Washington is larger than any I’ve seen in my lifetime. … At a time of mass unemployment, it’s clear, the economics textbooks tell us, that this is not the right time for fiscal retrenchment.” Given the consensus on this in the often fragmented economics profession, he adds, “To watch it be ignored like this is exasperating, horrifying, disheartening.” Warren Buffett, billionaire investment guru, stated that the sequester “is a stupid way to enact a cut in the budget.” [3]

The economic and jobs situations would be even worse if the Federal Reserve (the Fed) wasn’t taking aggressive actions to stimulate the economy (including holding interest rates extremely low) that offset some of the drag on the economy from federal budget cuts. However, it is likely the Fed will begin reducing one of its stimulus measures soon (the one known as quantitative easing).

As you may remember, the sequester’s cuts to air traffic controllers caused flight delays (that affected members of Congress as well as all the rest of us), so Congress acted with rarely seen speed to provide funding for them (see post of 4/30/13). However, other effects of the sequester, which are having far more significant impacts on people’s lives than having a flight delayed, continue to be ignored by Congress even as the real, measureable impacts are being felt. Given that the cuts were applied across the board, the range of effects have been broad. Here are some examples:

  • In July, 199,000 federal workers had work hours reduced and contractors lost work due to the sequester, thereby curtailing a wide range of services. [4] As workers’ incomes are reduced, some by as much as 30%, the impact ripples through the economy, stifling economic growth and job creation. These workers run the gamut from Internal Revenue Service (IRS) employees to public defenders in the federal court system to civilian employees of the military, many of them scientists, engineers, and medical staff. In Massachusetts alone, these cuts are expected to take $45 million out of the local economy. (Woolhouse, M., 7/22/13, “State feels pinch on federal workers,” The Boston Globe)
  • Federal court proceedings have been dramatically slowed and the number of federal law enforcement and probation officers has been reduced, jeopardizing public safety, according to an unusual letter to Congress signed by the chief judges of the trial courts in 49 states (every state except Nevada). (Sherman, M., 8/15/12, “Judges urge Congress to avoid more sequestration cuts,” The Washington Post)
  • The FBI will shut its headquarters and offices on 10 weekdays over the next year, leaving only a skeleton staff on duty. Off-duty employees will not be paid for these days. Given that personnel costs are roughly 60% of the agency’s budget, this was deemed the most effective way to cope with the sequester’s budget cuts. The FBI also has implemented a hiring freeze that means it has 2,200 vacant positions. Training has been substantially cut and no new vehicles are being purchased. There are concerns that employees will leave for better pay in the private sector, that investigations will be slowed, that domestic intelligence gathering will be harmed, and that the FBI’s capabilities will be degraded over the long-term. (Schmidt, M.S., 9/12/13, “F.B.I. plans to close offices for 10 days to cut costs,” The New York Times)
  • The National Institutes of Health is cutting $4 million from the $9 million core contract for the Framingham Heart Study, one of the most important and unique research projects in medical history. Over the past 65 years, data from the study has been used to develop and test technologies and treatments that have saved millions of lives and hundreds of billions of dollars in health care costs. The study has monitored the health, lifestyles, and medical treatments of 15,000 people and 100 of the original participants are still alive and being followed, as are multiple generations in some families. Thanks in part to the Framingham study, deaths from heart disease have been cut by more than 70 percent over the past four decades. The study was the first to link smoking and stress to heart disease and identify cholesterol and obesity as risk factors for heart problems. In fact, the very term “risk factor” or “factors of risk” was coined by Framingham researchers. The study will continue, but researchers will be laid off and participants will answer health questions by phone instead of having an in-person medical examination by a doctor. The ultimate effect on the study and the costs to our health and health care system in terms of discoveries delayed or never made is unknown. (Gellerman, B., 9/11/13, “Sequester Puts 65-Year-Old Framingham Heart Study In Jeopardy,” WBUR)
  • The decline in federal money for scientific research has been exacerbated and 67% of 3,700 scientists surveyed reported receiving less federal grant funding for their research than 3 years ago. 55% reported they have a colleague who has lost or is about to lose his or her job, and 18% reported they are considering taking their research to another country. (Steinstein, S., 8/30/13, “Nearly 20 percent of scientists contemplate moving overseas due in part to sequestration,” The Huffington Post)
  • The Coast Guard has cut patrols, training, and purchases of new equipment. (Gellerman, B., 8/6/13, “Coast Guard Pilots In Mass. Feel Sequester Pinch,” WBUR)
  • Efforts to remove unexploded land mines left behind in former warzones have been canceled or curtailed. (Bender, B., 8/3/13, “Home front impasse has distant victims,” The Boston Globe)

 My next post will list additional effects of the sequester’s budget cuts.


 

[1]       Calmes, J., & Rampell, C., 8/2/13, “U.S. Cuts Take Increasing Toll on Job Growth,” The New York Times

[2]       O’Brien, M., Chuck, E., & Lamb-Atkinson, G., 7/29/13, “Ahead of budget battle, more Americans say sequester has hurt,” NBC News

[3]       Calmes, J., & Rampell, C., 8/2/13, see above

[4]       Calmes, J., & Rampell, C., 8/2/13, see above

GOVERNMENT AUSTERITY DEBUNKED

ABSTRACT: The argument for government austerity was largely built on two economic theories, both of which have been debunked recently by academia and reality. First was the theory that if government debt exceeded 90% of economic activity, then economic growth would be sharply lower. The second was that cutting spending in a depressed economy would create jobs.

 

The study the first was based on was dramatically discredited when an error was discovered in the Excel spreadsheet used to calculate its findings. Furthermore, the link highlighted between government debt and slow economic growth does not indicate that government debt causes slow growth; it could just as likely be the reverse.

The second theory was based on another academic study that was refuted by a 2010 study by the International Monetary Fund, which used better data. And finally, real life experiences in the US and Europe have not borne out what the austerity advocates predicted or promised.

Despite this debunking of the rationales for austerity, there hasn’t been any change in policies or political rhetoric in the US. The US austerity movement appears to be driven by small government ideologues who are using the economic crisis as an opportunity to push for cuts in social programs they’ve always opposed. There also appears to be an issue of class hiding behind austerity advocacy. While the years since the Great Depression and of austerity policies in Washington have been hard on the middle and lower classes, for the well off they’ve been pretty good. So, perhaps it shouldn’t be a surprise that the wealthy and political elites keep pushing austerity policies despite the lack of support from theory or reality.

FULL POST: The argument for government austerity – reducing the deficit by cutting spending and perhaps raising taxes – was largely built on two economic theories, both of which have been debunked recently by academia and reality. First was the theory that if government debt exceeded 90% of economic activity (measured by gross domestic product [GDP]), then economic growth would be sharply lower. The second was that cutting spending in a depressed economy would create jobs.

The first, on the danger of government debt, was based on a 2010 study by two Harvard economists, Reinhart and Rogoff, “Growth in a Time of Debt.” Despite significant controversy about it, its finding of a tipping point for reduced economic growth when government debt hit 90% of GDP was presented as fact by politicians and media arguing for the need for austerity. [1]

This study was dramatically discredited when an error was discovered by Thomas Herndon, a Ph.D. student at the University of Massachusetts, Amherst, in the Excel spreadsheet Reinhart and Rogoff used to calculate their findings. An error in one of their formulas had excluded data from Canada, New Zealand, and Australia, all of which had experienced strong economic growth in periods of high government debt. [2] (Reinhart and Rogoff have acknowledged the error.) This explained why other researchers, using similar data, hadn’t been able to replicate their findings. As Reinhart and Rogoff’s work was scrutinized, it was also criticized for omitting data and using questionable statistical procedures.

Furthermore, the link they highlighted between government debt and slow economic growth does not indicate that government debt causes slow growth; it could just as likely be the reverse, that slow growth leads to higher government debt. Indeed, the latter is clearly what happened in Japan in the early 1990s when government debt grew after the economy collapsed. [3]

The second theory, that cutting spending in a depressed economy would create jobs, was based on another academic study. It was refuted by a 2010 study by the International Monetary Fund (IMF), which used better data. The IMF study found that austerity reduced job growth instead of accelerating it as the original study and austerity promoters claimed. [4]

Finally, real life experiences in the US and Europe have not borne out what the austerity advocates predicted or promised. In the US, government debt and a bit of stimulus did not produce high interest rates and a shrinking economy. Most recently, the austerity measures adopted in March – namely the sequester’s budget cuts – are clearly causing jobs to be cut, with no signs of resultant job creation. Meanwhile, most of Europe is in recession despite consistent application of the austerity medicine for the last four years.

Despite this debunking of the rationales for austerity, there hasn’t been any change in policies or political rhetoric in the US, and little in Europe. This suggests that the austerity movement is not based on research and reality, but on ideology.

The US austerity movement appears to be driven by small government ideologues, given that the push for budget cuts continues unabated. These ideologues are using the economic crisis as an opportunity to push for cuts in social programs they’ve always opposed. They’ve seized on the austerity theories from academia as justification for their actions, and aren’t letting go of them even when they have been soundly discredited. [5]

There also appears to be an issue of class hiding behind austerity advocacy. The wealthy in the US regard the deficit as the most important problem we face and favor solving it by cutting spending on health care and Social Security. The middle and lower classes, although they see the deficit as a problem, view unemployment as a more important problem and want to see spending on health care and Social Security increase. [6] Given the political power of the wealthy elites, it’s not surprising to see policy bending to their preferences. While the years since the Great Depression and of austerity policies in Washington have been hard on the middle and lower classes (high unemployment, incomes that aren’t keeping up with inflation, home values that haven’t recovered to 2008 levels), for the well off they’ve been pretty good (incomes growing faster than inflation, corporate profits and stock prices surging). So, perhaps it shouldn’t be a surprise that the wealthy and political elites keep pushing austerity policies despite the lack of support from theory or reality.


 

[1]       Krugman, P., 4/18/13, “The Excel depression,” The New York Times

[2]       Roose, K., 4/18/13, “Meet the 28-year-old grad student who just shook the global austerity movement,” Daily Intelligencer

[3]       Krugman, P., 4/18/12, see above

[4]       Krugman, P., 5/3/13, “Playing whack-a-mole with expansionary austerity,” The New York Times

[5]       Editorial, 5/5/13, “Blame ideologues, not economists for failed ‘austerity’ policies,” The Boston Globe

[6]       Krugman, P., 4/15/13, “The 1 percent’s solution,” The New York Times

FIXING THE SEQUESTER’S BUDGET CUTS

ABSTRACT: The impacts of the $85 billion, 5% across the board budget cuts that went into effect on March 1st (known as the Sequester) are being felt. The cuts to air traffic controllers caused flight delays, so Congress acted with rarely seen speed to provide funding for them.

However, other impacts of the sequester, which are having far more significant effects on people’s lives than having a flight delayed, are being ignored by Congress. It is estimated that almost 60,000 young children will lose or receive reduced Head Start and Early Head Start services. Grants for child care subsidies have been cut, which will undermine the ability of parents to work and the school readiness of an estimated 28,000 children. The estimated impacts of other cuts include: lost nutrition benefits for 600,000 mothers and their young children, reduced K-12 education supports for 1.2 million disadvantaged children, fewer meals for tens of thousands of seniors, and 4,000 fewer AmeriCorps and VISTA volunteers. Unemployment benefits, vouchers for rental housing assistance, and health care funding have also been cut.

I urge you to email, write, or call your representatives in Congress and the President to say that it’s nice to fix the sequester’s impact on flight delays, but it’s much more important to fix the significant, negative impacts the sequester is having on people’s daily lives, on our children and their education from birth onward, on seniors’ ability to live independently, and on the ability of low income families and the unemployed to make ends meet.

FULL POST: The impacts of the $85 billion, 5% across the board budget cuts that went into effect on March 1st (known as the Sequester) are being felt. As you’ve probably heard, the cuts to air traffic controllers caused flight delays. So Congress acted with rarely seen speed and in just two days passed a bill that shifts money from airport improvement projects to provide funding for the controllers. The meat industry, the Pentagon, and the Homeland Security and Justice Departments also got some relief from the sequester’s cuts in the bill. [1]

However, other impacts of the sequester, which are having far more significant effects on people’s lives than having a flight delayed, are being ignored by Congress. Here are some examples: [2][3]

  • Early childhood care and education:
    • Head Start and Early Head Start, which provide families in poverty with school readiness enrichment for children under 5 and other support, are cutting services. Some are closing early and some are shutting down for 2 – 3 weeks. Others are laying off staff and serving fewer children, with some conducting lotteries to determine which children will be asked to leave. This is potentially harmful to children’s brain development, which is likely to negatively affect their success in school and their ability to be productive workers in the future. Nationally, it is estimated that almost 60,000 young children will lose or receive reduced services.
    • Grants to the states for child care subsidies have been cut. Therefore, states will offer less help to low income families to pay for child care. This will undermine the ability of parents to work and the school readiness of an estimated 28,000 children.
  • Nutrition for mothers and their young children: It is estimated that 600,000 low income mothers and their young children will lose nutrition benefits. This could do long-term harm to the health and school readiness of these children.
  • K-12 Education: School teachers, aides, and literacy and remedial specialists are being laid off. In particular, the Title I program that provides funding to schools serving high numbers of low income families has been cut by $726 million, which is estimated to affect 1.2 million disadvantaged students and 10,000 school staff members.
  • Unemployment benefits: The federal government advised states to cut their unemployment benefits to the long-term unemployed by 10.7% in the first week of April or make larger percentage cuts later. In California, for example, where unemployment is 9.6%, 400,000 long-term unemployed workers, whose average weekly check is $297, will receive a cut of $52 a week.
  • Housing: Vouchers for rental assistance are being cut. Some recently issued vouchers are being rescinded and some subsidized tenants are being asked to pay more toward their rent. Waiting lists and times (measured in years in many places) for housing assistance are growing. Tens of thousands of families will be affected.
  • Services for seniors: Transportation services for seniors are being cut and some senior centers are being closed. Meals on Wheels will deliver hundreds of thousands fewer meals for tens of thousands of seniors.
  • Health care: Local clinics, the most convenient and cost-effective places to get health care, are cutting services, forcing patients to travel longer distance to access more expensive services at hospitals. Hospitals and health care organizations will lose $11 billion this year. Non-profit hospitals that serve large Medicare populations will be disproportionately affected.
  • Community service: 4,000 of 80,000 AmeriCorps and VISTA volunteers will be cut.

The impacts of the sequester’s cuts to social and human service programs are difficult to quantify and describe because they are in numerous programs and grants, and are happening differently in each state, in each city, and in each agency and program as these entities struggle to implement the cuts with the least harm possible.

Meanwhile, Congress, including prominent deficit hawks, is insisting that the military spend almost half a billion dollars on tanks that the Pentagon doesn’t want to save 700 jobs at a General Dynamics plant in Ohio. General Dynamics, by the way, spent $11 million on lobbying last year. [4]

I urge you to email, write, or call your representatives in Congress and the President to say that it’s nice to fix the sequester’s impact on flight delays, but it’s much more important to fix the significant, negative impacts the sequester is having on people’s daily lives, on our children and their education from birth onward, on seniors’ ability to live independently, and on the ability of low income families and the unemployed to make ends meet.


[1]       Grant, D., 4/16/13, “Before members rush for airports, Congress ends sequester flight delays,” The Christian Science Monitor

[2]       Zero to Three, 4/26/13 and 4/8/13, “The sequester’s pain: Air travelers get relief, little kids not so much,” and “When babies share the burden – How the sequester is affecting young children,” Baby Policy Blog of Zero to Three

[3]       Coalition on Human Needs, April, 2013, “Sequester impact factsheets,” http://www.chn.org/background/save-state-fact-sheets/

[4]       Lardner, R., 4/29/13, “Army says no to tanks, but Congress insists,” Associated Press in Daily Times Chronicle

SOCIAL SECURITY AND CHAINED CPI

ABSTRACT: In his federal government budget, President Obama has proposed cutting future Social Security benefits. He has done so in a way that is probably meant to obscure this fact. The Social Security Administration estimates that the result would be a 5% cut in benefits over every 12 year period.

It would not reduce the annual deficit, because SS has its own, dedicated funding stream. Social Security (SS) does not have a major funding problem; its shortfall 20 years from now is easily remedied.

Therefore, it seems that the only reason President Obama is proposing this cut in SS benefits is to offer a political olive branch to Republicans who want to cut SS because they are ideologically opposed to it.

An average 77 year old is receiving $23,832 per year from SS. If chained CPI had been used over the last 12 years, this person would be receiving $22,560 instead. Despite the very modest level of income that SS provides, one-third of seniors rely on SS for at least 90% of their income and another third for over 50% of their income.

The use of chained CPI as the government’s new, official measure of inflation will also, over time, reduce low income families’ eligibility for benefits and push low and middle income taxpayers into higher income tax rate brackets. Thus, it will disproportionately hit low and moderate income families. This would be morally and ethically questionable in the best of times, but with low and middle income families still suffering from the effects of the Great Recession, and income and wealth inequality at levels unseen for at least 80 years, this is unconscionable.

I urge you to contact the President, your Senators, and your Congressperson in the House of Representatives and ask them to oppose this change – or to explain why they support it.

FULL POST: In his federal government budget, President Obama has proposed cutting future Social Security benefits. He has done so in a way that is probably meant to obscure this fact or at least muddy the waters so his proposal isn’t describe as a benefit reduction.

Obama has proposed that the annual inflation adjustment for Social Security (SS) benefits be calculated differently. Instead of using the current Consumer Price Index (CPI), he proposes using a figure called the “chained CPI.” [1] It gives a lower estimate of inflation than CPI, so benefits would increase more slowly. The Social Security Administration estimates that the result would be a 5% reduction in benefits over every 12 year period.

This would cut total SS payments by $10 – $20 billion per year over the next 10 years. However, it would not reduce the annual deficit (which is roughly $800 billion), because SS has its own, dedicated funding stream and is not part of the regular federal budget. Furthermore, SS does not have a major funding problem; its shortfall 20 years from now is easily remedied by other steps that don’t reduce future payments to retirees. (See posts of 1/7/13 and 12/4/11 for more details.)

Therefore, it seems that the only reason President Obama is proposing this cut in SS benefits is to offer a political olive branch to Republicans who want to cut SS because they are ideologically opposed to it.

An average 77 year old is receiving $23,832 per year from SS. If chained CPI had been used over the last 12 years, this person would be receiving $22,560 instead, $1,272 less or a little over a 5% reduction. [2]

Despite the very modest level of income that SS provides, one-third of seniors rely on SS for at least 90% of their income and another third for over 50% of their income. Chained CPI won’t keep up with the inflation that seniors actually experience, given the high portions of their incomes that go for the necessities of food and health care. [3]

And if that isn’t bad enough, remember that SS was meant to be one leg of a three legged stool of retirement security that included employer pension plans and personal savings. Employer pensions have disappeared for most workers and have, at best, been turned into personal savings plans, such as 401ks, where workers have all the risk, just like other personal savings. Given this, now is not the time to be cutting SS, the only guaranteed retirement benefit left in what is now a much less stable and riskier two legged stool.

The use of chained CPI as the government’s new, official measure of inflation will also, over time, reduce low income families’ eligibility for benefits and push low and middle income taxpayers into higher income tax rate brackets. For example, the federal poverty rate is adjusted annually for inflation. Using chained CPI, it will rise more slowly and, in the future, fewer families will fall below the poverty line, which is used to determine eligibility for programs from Head Start to health care, food, and heating assistance. The federal income tax brackets are also adjusted annually for inflation. With the cut off amounts for higher income tax rate brackets rising more slowly, more taxpayers will fall into higher brackets, increasing their income tax. This doesn’t affect the wealthy, of course, because they are already in the top bracket. [4]

The bottom line is that this change in the measure of inflation that is used to calculate Social Security benefits, eligibility for many anti-poverty programs, and income tax rate brackets will disproportionately hit low and moderate income families. This would be morally and ethically questionable in the best of times, but with low and middle income families still suffering from the effects of the Great Recession, and income and wealth inequality at levels unseen for at least 80 years, this is unconscionable.

In reality, this is a backdoor way to cut benefits for SS recipients and low income families, and to have low and middle income taxpayers pay more in income taxes – without having to say that’s what you’re doing. Obfuscation is the name of this game.

I urge you to contact the President, your Senators, and your Congressperson in the House of Representatives and ask them to oppose this change – or to explain why they support it.


 

[1]       Chained CPI assumes that as the prices of goods and services rise, consumers substitute less costly alternatives. For example, if gas prices rise, consumers use their cars less or buy (usually smaller) cars that get better gas mileage. Or if the price of beef goes up, they buy less beef and more chicken or less meat overall. Or if the price of heating oil goes up, consumers turn down the heat and use electric space heaters to heat only the rooms in which they spend time. First, this sounds, in many cases, like a decline in one’s standard of living or quality of life. Second, in some cases buying a cheaper substitute isn’t really an option. When the cost of health insurance and health care goes up, there often isn’t a way to buy a less costly alternative. And for seniors, this is a big part of their budget.

[2]       Matthews, D., 12/11/12, “Everything you need to know about Chained CPI in one post,” The Washington Post

[3]       Warren, E., 4/10/13, Newsletter from Senator Elizabeth Warren

[4]       Ohlemacher, S., 4/8/13, “Obama plan hits seniors, low-income taxpayers,” Associated Press (in the Reading Daily Times Chronicle)

THE SHRINKING DEFICIT

ABSTRACT: The federal government’s annual budget deficit is falling, and falling faster than at any time since WWII. Overall government spending has been falling since 2007. Roughly 750,000 government jobs have been cut since the recovery began in 2009, cancelling out much of the benefit of increased private sector employment, and leaving unemployment higher than it would be otherwise.

Many economists believe that an austerity strategy of a rapidly declining deficit and spending cuts such as the “sequester” could hurt the economy and its recovery. Europe is experiencing a second recession and very high unemployment (12%) due to its austerity strategy. The current, irrational obsession with the deficit is precluding investments that have a high return and would improve the fiscal picture over the long-term.

Ultimately, jobs and a strong economy are the answer to taming the deficit, which is already shrinking rapidly.

FULL POST: The federal government’s annual budget deficit is falling. And it’s falling faster than at any time since the end of World War II. And that’s even before the March 1 spending cuts (the “sequester”) are factored in. [1] The deficit for this year is projected by the Congressional Budget Office to be $845 billion, down from $1,100 billion last year and $1,413 billion in 2009. It grew in 2008 and 2009 because the Great Recession led to 1) a dramatic loss of tax revenue due to decreased economic activity and jobs; [2] 2) increased expenditures for unemployment, food assistance, and other government benefits that softened the impact of the recession on families; and 3) tax cuts that were used to stimulate the economy, reducing the depth of the recession. [3]

Overall government spending, including the federal, state, and local levels, has been falling since 2007. Although the decline in federal spending in the fourth quarter of 2012 is seen as the culprit in causing the economy to shrink (i.e., negative growth) in that quarter, spending reductions and job losses have been most pronounced at the state and local levels. Federal spending has declined from 25.2% of our total economy or Gross Domestic Product (GDP) in 2009 to 22.8% in 2012, and is projected to fall to 21.5% by 2017 without any dramatic changes in budget policy. (The 40 year average has been 21.0%.)

Roughly 750,000 government jobs have been cut since the recovery began in 2009. This has been a “massive drag on the economy,” cancelling out much of the benefit of increased private sector employment. [4] Although the US unemployment rate has fallen to 7.7%, it would have fallen significantly further if these government jobs, including those of many teachers, had not been lost.

Many economists believe that an austerity strategy of a rapidly declining deficit and spending cuts such as the “sequester” could hurt the economy and its recovery. Historically, rapidly falling government deficits and spending have tended to lead to recessions. [5] If you want evidence of this, you need look no further than Europe at this moment. Europe is experiencing a second recession and very high unemployment (12%) due to its austerity strategy. Mark Cliffe, chief economist at IMG, describes its austerity strategy as “a bit of a vicious circle. Europe is pursuing a policy that is self-evidently failing.” [6]

The current, irrational obsession with the deficit (rather than a focus on creating jobs and strengthening the economy), is precluding investments in infrastructure and other activities that have a high return on investment and would improve the fiscal picture over the long-term. Especially given the federal government’s ability to borrow money at near zero interest rates, now is an ideal time to make investments in the future strength and growth of our economy, which is the best long-term strategy for reducing the deficit. [7]

There isn’t a good answer to the question of why the deficit – which is already rapidly falling – is more important now than creating jobs and strengthening the economy. [8] And if we look at Europe, we can see clear evidence that an austerity strategy does not lead to a falling deficit or a stronger economy with more jobs. The only answer is ideology – a belief that a smaller public sector is more important than putting struggling Americans back to work and back on their feet.

Ultimately, jobs and a strong economy are the answer to taming the deficit and the overall accumulated debt. Furthermore, a focus on creating jobs would resonate with the American public, many of whom are still struggling with the impacts of the Great Recession. It’s a matter of delivering a clear message about the need to create jobs and stimulate the economy, and that this will solve the issue of the deficit, which is already shrinking rapidly.


 

[1]       Klein, E., 2/12/13, “The deficit chart that should embarrass deficit hawks,” The Washington Post

[2]       Raum, T., 2/22/13, see above

[3]       Konczal, M., 1/22/13, “The most important graph on the deficit, “ The Roosevelt Institute

[4]       Raum, T., 2/22/13, “Government downsizes amid GOP demands for more cuts,” Associated Press (in the Reading Daily Times Chronicle)

[5]       Klein, E., 2/12/13, see above

[6]       The Balance Sheet, 4/3/13, “Europe’s austerity addiction,” The American Prospect

[7]       Summers, L., 1/21/13, “America’s deficits: The problem is more than fiscal,” The Washington Post

[8]       Wolf, M., 1/22/13, “America’s fiscal policy is not in crisis,” Financial Times

NO FISCAL CLIFF FOR CORPORATE TAX LOOPHOLES

ABSTRACT: So you thought our Washington politicians were serious about reducing the deficit? Guess again. The actual bill that averted the “fiscal cliff” in January included 43 corporate tax breaks worth $67 billion in 2013, which is more than the revenue that was raised! This means that the “fiscal cliff” legislation did NOT decrease the deficit, but rather increased it. The tax breaks include: 1) $11 billion for corporations such as GE, Citicorp, and Ford on overseas earnings, 2) $430 million for Hollywood producers for filming in the US, 3) $331 million for railroads for track maintenance, 4) $500 million for pharmaceutical giant Amgen, and 5) $120 million for Whirlpool Corporation. The support for corporate tax loopholes is often bipartisan as they provide leverage for campaign contributions.

So, take with a big grain of salt all the talk about deficit reduction. Corporate welfare continues unabated while deficit reduction is used as an axe to cut government programs, many focused on helping low and middle income families. And take with a big grain of salt the talk about the need to cut Medicare and Medicaid spending when big giveaways to Amgen and other pharmaceutical corporations are costing these programs billions of dollars every year.

Note: I’m back to blogging after a three month hiatus. And no, unfortunately, this post is NOT an April Fool’s joke.

FULL POST: So you thought our Washington politicians were serious about reducing the deficit given the last minute “fiscal cliff” deal in January and the automatic spending cuts (“the sequester”) that went into effect on March 1? Guess again. Corporate tax loophole giveaways that were actually part of the “fiscal cliff” bill cost more than the revenue that was raised!

As background, the manufactured austerity crisis, known as the “fiscal cliff,” was a package of spending cuts and tax increases set to go into effect automatically on December 31, 2012, if a substitute agreement on deficit reduction wasn’t reached. (See post of 12/12/12 for more details.)

Early on New Year’s Day legislation was passed that supposedly tackled the deficit by increasing revenue. It also postponed the spending cuts until March 1. Most of the scheduled tax increases were scaled back, so only $30 – $60 billion per year in new revenue was generated. Income tax rates on individuals with incomes over $400,000 were increased, with some reductions in deductions starting at $250,000 in income. The estate tax was increased a bit and workers’ Social Security taxes were increased by 2% of wages on earnings up to $110,000. (This restored a temporary cut in the Social Security tax that was targeted at boosting the economy and middle and low income workers during the Great Recession.) (See post of 1/7/13 for more details.)

The postponed spending cuts ended up going into effect on March 1 because our politicians could not come to an agreement on other deficit reduction measures. These spending cuts are likely to hurt the economy, slowing the recovery and increasing unemployment. In addition, these cuts are hurting low and middle income families. Head Start’s high quality school readiness programs are serving fewer children – fewer 3 and 4 year olds from families in poverty. School systems are laying off teachers and staff. College students are losing government support. Housing authorities are laying off staff and cutting housing assistance to poor families. And there will be cuts in health care that will disproportionately affect low income individuals. [1]

Despite all of this, quietly, and with very little coverage by the mainstream (corporate) media, the actual bill that averted the “fiscal cliff” in January included 43 corporate tax breaks worth $67 billion in 2013, which is more than the revenue that was raised by the highly publicized tax increases. [2] This means that the “fiscal cliff” legislation did NOT decrease the deficit, but rather increased it by giving more in tax breaks to corporations than it raised in tax revenue from individuals!

For example, Whirlpool Corporation got a tax benefit worth an estimated $120 million in 2012 and 2013 after spending $1.8 million on lobbying over the last two years; a 6,700 percent return on investment. Whirlpool’s total income taxes paid to federal, local, and foreign governments for 2009 -2011 were a REFUND of $561 million! And it is carrying forward federal tax credits it can use to decrease its US taxes in future years. Meanwhile, Whirlpool closed a factory in Arkansas and laid off 800 workers, moving the manufacturing of its refrigerators to Mexico. This was part of an overall reduction of its workforce in North America and Europe of 5,000 jobs, which it announced in 2011. [3]

Another example was a provision in the “fiscal cliff” legislation that gave two years of relief from Medicare cost controls for certain drugs. Although not mentioned by name, the clear beneficiary is the pharmaceutical giant, Amgen. It is estimated that this loophole will cost taxpayers about $500 million over two years – to the benefit of Amgen. The company’s CEO quickly informed investment analysts of this good news. Two factors make this particularly egregious:

  • Amgen had already received a two year delay on these cost controls and another one is hard to justify
  • Two weeks earlier, Amgen had pleaded guilty in a major federal fraud case to illegal drug marketing and had agreed to pay $762 million in criminal and civil penalties

This particular case is tied to close relations Amgen has with three Senators: Max Baucus (D – Montana), Mitch McConnell (R – Kentucky), and Orrin Hatch (R – Utah). [4][5] As in this case, the support for corporate tax loopholes is often bipartisan. Many of them have to be renewed every two years. This gives members of Congress leverage for an on-going source of campaign contributions from these corporations and their lobbyists. The supposedly temporary nature of these corporate tax loopholes also avoids the accounting analysis, and resultant publicity, the federal budget process requires of permanent or longer-term tax expenditures. Overall, corporate welfare will cost the federal government at least $154 billion in 2013 through 135 individual provisions in the tax code. [6]

Other corporate tax breaks in the “fiscal cliff” legislation include:

  • $11 billion for corporations such as GE, Citicorp, and Ford on overseas earnings
  • $430 million for Hollywood producers for filming in the US
  • $331 million for railroads for track maintenance

So, take with a big grain of salt all the talk about deficit reduction. Corporate welfare continues unabated while deficit reduction is used as an axe to cut government programs, many focused on helping low and middle income families. And take with a big grain of salt the talk about the need to cut Medicare and Medicaid spending when big giveaways to Amgen and other pharmaceutical corporations are costing these programs billions of dollars every year.


[1]       Coalition on Human Needs, 3/22/13, “Sequester Impact,” http://www.chn.org/wp-content/uploads/2013/03/sequester-impact-mar-13-21.pdf

[2]       Rowland, C., 3/17/13, “Tax lobbyists help businesses reap windfalls,” The Boston Globe

[3]       Rowland, C., 3/17/13, see above

[4]       Moyers, B., & Winship, M., 1/25/13, “Foul play in the Senate,” Common Dreams

[5]       Lipton, E., & Sack, K., 1/20/13, “Fiscal cliff bill benefits Amgen,” The New York Times

[6]       Rowland, C., 3/17/13, see above

CUTTING SPENDING TO REDUCE THE DEFICIT Part 2

ABSTRACT: Medicare and Medicaid do present significant funding challenges. This is because they reflect the costs of our health care system, which spends 2 ½ times what other advanced economies spend on average – and our health outcomes are worse. Obamacare takes initial steps to make our whole health care system more cost effective. One proposal to save money in Medicare is to raise the age at which one is eligible for coverage from 65 to say 67. This would save only $13 billion per year over 10 years and would only shift the cost for health insurance somewhere else.

Cuts to Medicaid mean that fewer low income individuals, primarily low income children and seniors, would have health insurance.

It is unfair and unnecessary to cut services and benefits for low income families and seniors when other options for reducing the deficit are available.

FULL POST: Medicare and Medicaid do present significant funding challenges. This is because they reflect the costs of our health care system, which spends over $7,500 per person per year. This is 2 ½ times what other advanced economies spend on average – and our health outcomes are worse. (See post of 12/9/11 for more details.)

The real issue is the need to make our whole health care system more cost effective. Obamacare takes initial steps to do just that. It includes cuts in payments to Medicare health insurers and health care providers of $700 billion, requiring them to be more efficient, but not cutting any benefits to seniors. Nonetheless, during the 2012 campaigns, Republicans attacked this as a cut to Medicare, despite the fact that their Vice Presidential candidate, Paul Ryan, the chairman of the House Budget Committee, had included these cuts in his budget the previous two years. Ironically, Republicans have also taken steps to eliminate the cost control board created by Obamacare that is charged with limiting the growth of Medicare spending. [1]

President Obama has continued his efforts to reduce Medicare costs by proposing giving Medicare the right to negotiate with drug makers for lower prices. [2] The Veterans Administration and large health insurers already do this and save significant amounts of money, but President Bush’s Medicare drug benefit prohibited Medicare from doing so, providing a windfall to the pharmaceutical corporations.

Another proposal to save money in Medicare is to raise the age at which one is eligible for coverage from 65 to say 67 and increase premiums for high income recipients. The Congressional Budget Office reviewed these proposals and concluded that they would save only $13 billion per year over 10 years. Moreover, increasing the eligibility age would only shift the cost for health insurance somewhere else and would leave some people without health insurance.

Cuts to Medicaid mean that fewer low income individuals would have health insurance or that their benefits would be cut. Medicaid beneficiaries are primarily low income children and seniors, with Medicaid paying for many seniors’ nursing home care. An expansion of Medicaid is an essential part of reducing the number of Americans without health insurance under Obamacare.

It is unfair and unnecessary to cut services and benefits for low income families and seniors when other options for reducing the deficit are available. Despite our riches, the US is less generous in its benefits for seniors and low income families than other countries with advanced economies. Surely, we can find the will and a way to maintain, if not improve, our benefits for these members of our society.


[1]       New York Times editorial, 11/18/12,  “A bad idea resurfaces,” The New York Times

[2]       Krugman, P., 12/3/12,“The GOP’s big budget mumble,” The New York Times

CUTTING SPENDING TO REDUCE THE DEFICIT

ABSTRACT: A deal was reached to address the year-end “fiscal cliff” or austerity crisis. Spending cuts were postponed for two months and most of the tax increases were eliminated, while some tax and revenue increases were enacted. The deficit reduction focus will now largely shift to spending cuts. We should be focusing on job creation and strengthening the economy, but somehow the deficit is the hot topic.

 The discussion of spending cuts will probably focus on the military and on entitlement programs, specifically Social Security and the health care programs, Medicare and Medicaid. Much of the discussion of cutting military spending will be on avoiding cuts. However, military spending can be reduced up to $200 billion per year – without jeopardizing national security.

 Turning to calls for cuts in Social Security and our public sector health programs, keep in mind that every other advanced economy has health care for all and a retirement support system. Social Security has its own funding stream and does not contribute to the deficit, so rationally it shouldn’t be part of this discussion. Ideologues are using the deficit issue to target Social Security because of their doctrinaire opposition to it. Minor changes to its funding would cover benefits for the next 75 years.

 My next post will review proposed cuts to Medicare and Medicaid.

 FULL POST: As you probably know, a deal was reached to address the year-end “fiscal cliff” or austerity crisis. Spending cuts were postponed for two months and most of the tax increases were eliminated, while some tax and revenue increases were enacted. The cap on the US government’s debt was not addressed and will be hit in about two months. Here’s a quick summary of what was enacted: [1]

  • Income tax rates on incomes over $400,000 will increase from 35% to 39.6% and some reductions in deductions will start at $250,000 in income, but there is no “Buffett Rule” requiring 30% be paid on incomes over $1 million. The net result is that new revenue from income taxes will be only about $60 billion per year as opposed to up to $450 billion with the rates increased on incomes over $250,000 and the “Buffet Rule”.
  • The Social Security payroll tax reduction was NOT extended, so all workers will have an additional 2% taken out of their paychecks on earnings up to $110,000.
  • Tax benefits for low income households were extended: a child credit and the Earned Income Tax Credit, which supplements income from low paying jobs. The tuition credit was extended as was the corporate research and development credit. The Alternative Minimum Tax, which originally was to function like the “Buffett Rule”, was adjusted so it won’t affect middle income taxpayers.
  • Unemployment benefits for the long-term unemployed were extended for a year.
  • The estate tax was increased slightly but not nearly as much as some had proposed and only on individual estates of over $5 million or joint estates of over $10 million.

The deficit reduction focus will now largely shift to spending cuts. We should be focusing on job creation and strengthening the economy, given high unemployment and slow economic growth, but somehow the deficit is the hot topic. As the current experience in Europe is clearly showing, cutting government spending weakens the economy and job growth and can put countries back into a recession.

Having said that, the discussion of spending cuts will probably focus on the military and on entitlement programs, specifically Social Security and the health care programs, Medicare (for seniors) and Medicaid (for low income people including low income seniors).

Unfortunately, much of the discussion of cutting military spending will be on avoiding cuts, including the $50 billion per year cut that is now scheduled for March 1. Military spending can be reduced this much and more – up to $200 billion per year – without jeopardizing national security. (See blog posts of 9/29/12 and 11/17/11 for more information.) For example, Lawrence Korb, an assistant defense secretary under President Reagan, has itemized $150 billion in annual cuts to the military budget. [2]

In the recently enacted $633 billion Defense Department spending bill, there was widespread criticism of inclusion of unnecessary spending. The dollar amount was more than the Department or President requested.  The Pentagon complained that it is required to keep weapons, as well as bases and units, that are not needed or efficient. Defense Secretary Panetta decried meddling by Congress that required “excess force structure and infrastructure.” [3][4]

Turning to calls for cuts in Social Security and our public sector health programs, keep in mind that every other advanced economy has health care for all and a retirement support system. So the issue is not whether it is possible to have these programs, it is are we willing to pay for them and are we willing to control health care costs.

Social Security has its own funding stream and does not contribute to the deficit, so rationally it shouldn’t be part of this discussion. Ideologues are using the deficit issue to target Social Security because of their doctrinaire opposition to it. Furthermore, its current funding will cover its benefits for roughly the next 20 years and after that minor changes to its funding would cover benefits for the next 75 years without any cuts in benefits. (See post of 12/4/11 for more details.)

The most prominent proposal for cutting Social Security spending is to reduce the annual increase in benefits that adjusts for inflation. This would save less than $20 billion per year over 10 years. [5] Ask any senior you know if the inflation adjustment is sufficient to keep up with their cost of living and I bet they’ll say, “No.” So cutting this will only hurt our seniors and reduce Social Security’s ability to keep seniors out of poverty. Furthermore, Social Security has become an increasingly important part of retirement income as private sector pensions have largely disappeared; cutting its rather modest benefits seems inappropriate in this environment.

My next post will review proposed cuts to Medicare and Medicaid.


[1]       New York Times, 1/1/13, “Highlights of the agreement,” The Boston Globe

[2]       Dubose, L., 11/15/12, Book review of Ralph Nader’s “The seventeen solutions: Bold ideas for our American future,” The Washington Spectator

[3]       Bender, B., 1/5/13, “A reprieve for local military bases: New Congressional funding flouts Pentagon’s plan for cutbacks,” The Boston Globe

[4]       Boston Globe Political Notebook, 12/21/12, “House approves defense bill despite Pentagon objections,” The Boston Globe

[5]       Krugman, P., 12/3/12, “The GOP’s big budget mumble,” The New York Times

REBUTTING ARGUMENTS AGAINST INCREASING INCOME TAXES ON THE WEALTHY

ABSTRACT: The Bush tax cuts, and the even larger cuts in the income tax rates for high incomes over the last 30 years, have contributed to creating the federal government’s deficit (see post of 12/22/12) and to dramatically widening income and wealth inequality in the U.S. There has been a dramatic shift of the tax burden from the well-off and corporations to middle and lower income households. This shift in the tax burden has contributed to stagnant incomes for middle and lower income earners while incomes at the top have skyrocketed.

 Despite the Republican rhetoric that high income individuals are “job creators,” the fact is that increased income for them is far less effective in stimulating job growth than increased incomes for low and middle income individuals. There is strong evidence, from multiple perspectives, that increasing taxes on the wealthy and redirecting the funds to productive investments or to lower income individuals, for example through unemployment benefits, will benefit the economy and job creation. It would also reduce inequality and address a root cause of the deficit.

FULL POST: The Bush tax cuts, and the even larger cuts in the income tax rates for high incomes over the last 30 years, have contributed to creating the federal government’s deficit (see post of 12/22/12) and to dramatically widening income and wealth inequality in the U.S., which are at their highest levels since the 1930s.

The 400 richest individuals in the US, as identified by Forbes magazine, have pocketed $1.3 trillion because of the Bush tax cuts. The best estimates are that these individuals actually pay only about 18% of their income in taxes, while their predecessors in 1960 paid more than 70%. Not only have their tax rates fallen dramatically (from 91% in 1960 and 70% in 1980 to 35% today [see 11/27/11 post for more detail]), but their increased use of offshore tax havens and other tax reduction strategies has further reduced the taxes they actually pay. For example, the tax return Mitt Romney released shows that he, and presumably his partners at Bain Capital, reported their management fees as capital gains rather than earned income. Assuming they all did, they saved an estimated $200 million on income taxes and another $20 million on the Medicare payroll tax. [1] Also since the 1960s, corporate taxes have fallen from over 27% of federal government revenue to about 10% today. [2]

These reductions in government revenue from high income individuals and corporations have dramatically shifted the tax burden from them to middle and lower income households at the federal, state, and local levels. This shift to regressive revenue sources [3] includes flat rate payroll taxes (i.e., Social Security and Medicare), and in the case of Social Security a cap so that no tax is paid on earnings over $110,000. It also includes most state and local revenue sources, such as sales and excise (e.g., cigarette, alcohol, and car) taxes; flat rate state income taxes; and state revenue from gambling (i.e., lotteries and casinos), all of which are quite regressive. [4] This shift in the tax burden has contributed to stagnant incomes for middle and lower income earners while incomes at the top have skyrocketed. [5] (See my post of 11/13/11 for more detail.) Both fairness and reversing causes of the deficit would argue for increased income tax rates on high incomes.

Despite the Republican rhetoric that high income individuals are “job creators,” the fact is that increased income for them is far less effective in stimulating job growth than increased incomes for middle and low income individuals. The US economy is driven by consumer spending; it’s 70% of our Gross Domestic Product (GDP), a measure of overall economic activity. The lower an individual’s income, the more likely he or she is to spend any additional income to buy goods and services in the local economy. On the other hand, the wealthy are more likely to save additional income or to spend or invest it outside of the US. Furthermore, they are much more likely than the less well-off to use the money for speculative rather than productive investments. Speculative investments do not help the economy or create jobs; they actually harm the economy by increasing prices for consumer goods (e.g., food and gasoline [see my post of 3/5/12]) and by contributing to speculative bubbles (e.g., Internet stocks and mortgage investments) that eventually burst and harm the economy.

Republicans have opposed an increase in the tax rate on high incomes, claiming it will hurt small businesses. But only about 2 – 3% of “small businesses” would be affected and many of these aren’t really small or aren’t businesses at all. Republicans also claim that such a tax increase would hurt the economy and job creation, but “yearly gains in employment, GDP growth, and small business job growth were all greater after the Clinton tax hikes of 1993 than after the Bush tax cuts of 2001.” [6]

In summary, there is strong evidence, from multiple perspectives, that increasing taxes on the wealthy and redirecting the funds to productive investments (such as infrastructure building) or to lower income individuals (who will spend it in their local economies), for example through unemployment benefits, will benefit the economy and job creation. [7] It would also reduce inequality and address a root cause of the deficit.

In my next posts, I’ll take a look at cutting the deficit through spending cuts, the spending cuts in the austerity package, and alternatives to them.


[1]       Peters, C. Nov./Dec. issue, “The Bain of my existence,” Washington Monthly

[2]       Van Gelder, S., 12/8/12, “4 ways to leap the ‘fiscal cliff’ to a better USA,” YES! Magazine

[3]       Regressive revenue sources place a greater burden, relative to one’s ability to forego the income, on middle and lower income households than on higher income individuals.

[4]       Jacoby, J., 12/9/12, “Biggest lottery winner? That’d be the Treasury,” The Boston Globe

[5]       Appelbaum, B., & Gebeloff, R., 11/29/12, “Tax burden is lower for most Americans than in the 1980s,” The New York Times

[6]       Lehigh, S., 12/14/12, “Points of clarity through the fiscal cliff fog,” The Boston Globe

[7]       Judis, J.B., 12/12/12, “Rein in the rich: How higher taxes could lift the economy,” The New Republic

INCREASING REVENUE TO CUT THE DEFICIT

ABSTRACT: Increased revenue needs to be part of the effort to reduce the federal government’s budget deficit. Two revenue sources that are not included in the austerity package are closing corporate tax loopholes and enacting a financial transactions tax. They could eliminate over half the deficit with little negative impact on the economy.

 The highest profile revenue issue in the austerity package is the personal income tax. Given that the 2001 – 2003 tax cuts on earned and unearned income were significant contributors to creating the deficit, reversing them for high income individuals would seem appropriate. Maintaining the Bush tax cuts on high incomes would cost up to $160 billion per year in lost revenue. Alternatively, using these funds on high impact spending will reduce the deficit over the long-term while strengthening the economy and creating jobs in the short-term.

FULL POST: Increased revenue needs to be part of the effort to reduce the federal government’s budget deficit. However, the increased or new taxes that produce the revenue should not be so large or so quickly implemented that they put the economy back into recession. Here’s a look at the revenue increases that are part of the current austerity package (aka the “fiscal cliff”), some of the negotiations that have occurred on them, and some alternatives that are not included in the package.

First, two revenue sources that are not included in the austerity package are closing corporate tax loopholes and enacting a financial transactions tax (as 10 European countries are doing). These could provide $250 billion and $350 – $500 billion annually, respectively, in new revenue, and eliminate over half the deficit with little negative impact on the economy. (See my post of 9/29/12 for more detail.) An alternative minimum tax for highly profitable corporations that would ensure that they pay a minimum tax rate – similar to the Buffet Tax proposal for high income individuals – would seem quite reasonable. Roughly a quarter of our large and profitable corporations pay NO federal income tax despite multi-billion dollar annual profits. (See my post of 11/5/11 for more detail.) Google, for example, avoided paying $2 billion in taxes in 2011 by funneling profits to overseas shell companies. [1]

The highest profile revenue issue in the austerity package is the personal income tax. The tax cuts enacted by President Bush in 2001 and 2003 are scheduled to expire. President Obama originally proposed letting the cuts expire on income over $250,000 per year, but keeping the cuts on income under that amount. The Republicans proposed a $1 million cut off and Obama has countered with a $400,000 cut off. As the cut off gets higher, the amount of revenue (and deficit reduction) is reduced. The difference between a $250,000 and a $400,000 cut off is estimated to be $40 billion per year in revenue (i.e., $160 billion versus $120 billion in increased revenue).

Expiration means the tax rate on upper incomes would increase from the current 35% to 39.6%, the rate that was in place in the late 1990s. (Note that for an individual with $20 million in taxable income, the Bush tax cuts of 2001 – 2003 have put roughly $1 million in their pockets each year for the last 10 years.) In addition, increasing the tax rate on unearned income – capital gains, dividends, and interest – back to 1990s rates is another hot topic. Given that the 2001 – 2003 tax cuts on earned and unearned income were significant contributors to creating the deficit, reversing them for high income individuals would seem appropriate.

The bottom line is that maintaining the Bush tax cuts on high incomes would cost up to $160 billion per year in lost revenue. Alternatively, using these funds on high impact spending, such as infrastructure investments or unemployment benefits, would generate an estimated net gain of 1.2 million to 1.5 million jobs and add 1.0% to 1.5% to economic growth. The growth in jobs and the economy will, in and of itself, reduce the deficit because taxes and revenue grow when the economy grows. Therefore, this approach will reduce the deficit over the long-term while strengthening the economy and creating jobs in the short-term. The only revenue increase in the austerity package that has a greater positive effect on jobs and the economy than letting the tax cuts on high incomes expire is terminating the cuts in the estate and gift taxes. [2]

In my next post, I’ll review the arguments against raising tax rates on high income individuals. In subsequent posts, I’ll take a look at cutting the deficit through spending cuts, the spending cuts in the austerity package, and alternatives to them.


[1]       Brown, C., 12/13/12, “Google on ‘immoral’ tax evasion: ‘It’s capitalism’,” Common Dreams

[2]       Bivens, J., & Fieldhouse, A., 9/18/12, “A fiscal obstacle course, not a cliff,” Economic Policy Institute

A MANUFACTURED AUSTERITY CRISIS, NOT A FISCAL CLIFF

ABSTRACT: The so-called fiscal cliff you’ve been hearing so much about is actually a manufactured austerity crisis. There is widespread agreement that if nothing is changed by or relatively soon after December 31 that our economy is extremely likely to fall into a recession and unemployment is likely to increase to over 9%, an increase of between 1% and 1.5%.

 

The federal government’s deficit does need to be addressed, but doing so precipitously and in the wrong ways will hurt the economic recovery. The immediate problems are not the government deficit, but the lack of jobs, particularly middle class jobs, and the lack of consumer spending, which represents two-thirds of our economic activity. We should use strategies for addressing the deficit that minimize negative effects on jobs and the economy, and phase them in over time to reduce their impact on our weak economy.

 The austerity package bundles together a variety of measures that are largely unrelated. Addressing these complex issues individually and with time for thoughtful consideration would make more sense than doing so in a bundle under severe time constraints. The austerity package’s cuts to social programs would be 8.4% across the board, with a few programs exempted. These cuts would have very significant negative effects on low income families and on education.

FULL POST: The so-called fiscal cliff you’ve been hearing so much about is actually a manufactured austerity crisis. [1] Congress and the President agreed on this package of spending cuts and tax increases (which take effect on December 31) because the Republicans demanded it in exchange for their votes to increase the federal government’s debt cap back in August 2011. As you may remember, they pushed the government to the brink of default – which hurt its credit rating and the economy – in order to extract these austerity measures. (By the way, I believe this brinksmanship and the harm it caused is incredibly UNpatriotic; but that’s a separate discussion.) A Congressional “Super-committee” was created to find alternative ways to reduce the deficit but was unable to come to a consensus recommendation, so we are left with this “fiscal cliff.” However, the effects of the austerity package would occur over time, so it is actually more of a “slope” than a “cliff.” [2]

There is widespread agreement that if nothing is changed by or relatively soon after December 31 that our economy is extremely likely to fall into a recession and unemployment is likely to increase to over 9%, an increase of between 1% and 1.5%. The roughly $100 billion per year in spending cuts and $350 billion in annual tax increases would reduce the deficit from about $1 trillion per year to about $600 billion. But taking this $400 billion out of the country’s economic activity would almost certainly turn slow economic growth into a recession. (See my post, The “Fiscal Cliff” and the Economy of 9/19/12 for more details.) As we’ve seen in Europe, austerity measures have pushed Greece, Spain, and Britain into a recession and the whole Eurozone is teetering on the edge of recession.

The federal government’s deficit does need to be addressed, but doing so precipitously and in the wrong ways will hurt the economic recovery. The immediate problems are not the government deficit, but the lack of jobs, particularly middle class jobs, and the lack of consumer spending, which represents two-thirds of our economic activity. [3] In addressing the deficit, we should use strategies that minimize negative effects on jobs and the economy. (See my post, Addressing the Deficit on 9/29/12 for four specific policy changes that would eliminate the roughly $1 trillion per year deficit with minimal impact on jobs and the economy.) Furthermore, spending cuts and increased tax revenue should be phased in over time to reduce their impact on our weak economy. [4]

The austerity package bundles together a variety of measures that are largely unrelated other than they have some impact on the federal government’s revenue or spending; although some actually have no impact on the deficit. Therefore, some view this “fiscal cliff’ as more of a “fiscal obstacle course.” [5] Major changes to both the personal and corporate tax codes are included, as well as significant changes to spending on a wide range of government programs from defense to social programs. Addressing these complex issues individually and with time for thoughtful consideration would make more sense than doing so in a bundle under severe time constraints.

In addition to the expiration of the Bush tax cuts, which expire for all income levels in the austerity package, other benefits for middle and low income households are scheduled to expire as well. These include:

  • Unemployment benefit extensions beyond the traditional 26 weeks (2 million individuals would lose benefits in December and another 1 million in April)
  • The reduction in the Social Security and Medicare payroll tax (by 2% of pay, which puts about $1,000 a year in the average worker’s pocket)
  • An enhancement to the Child Care Tax Credit
  • The expansion of the Earned Income Tax Credit, which augments incomes of low income workers
  • An exemption from income tax on mortgage debt that is forgiven

The austerity package’s spending cuts come 50% from the military and 50% from social programs. Many members of Congress oppose the cuts to the military. However, there are strong arguments for cutting military spending: 1) it has more than doubled (to $733 billion per year) since 2001, 2) we are winding down the wars in Iraq and Afghanistan, 3) we have far and away the largest military budget in the world, and 4) it’s widely acknowledged that there is significant waste in the military budget. Furthermore, military spending is not an efficient way to create jobs and at 58% of the federal government’s discretionary spending, it would be difficult and unfair to significantly reduce spending without cutting the military budget. (See posts of 9/29/12 and 11/17/11 for more details.)

The austerity package’s cuts to social programs would be 8.4% across the board, with a few programs exempted, such as Medicaid and the Children’s Health Insurance Program. These cuts would have very significant negative effects on low income families and on education. It is estimated that: [6]

  • 75,000 3 and 4 year old, disadvantaged children would lose the enriched preschool services of Head Start;
  • 25,000 young children would lose subsidies for early care and education (aka child care);
  • 16,000 teachers and other school staff would lose their jobs;
  • 460,000 students would lose special education services and 12,500 special education staff would lose their jobs;
  • 20,000 youth would lose job training;
  • 734,000 households would lose heating (or cooling) assistance;
  • Community health centers would lose $55 million; and
  • 1.3 million college students would lose tuition support.

If cuts to military spending are reduced, but overall spending reductions are maintained, cuts to social programs would be even more severe.

In my next two posts, I’ll discuss reducing the deficit through alternatives to the current austerity package, including reviewing various alternative proposals that have been put forth. I’ll focus first on options for increasing revenue and second on options for cutting spending.


[1]       Klein, E., 11/28/12, “It’s not a fiscal cliff, it’s an austerity crisis,” Bloomberg

[2]       Stone, C., 9/24/12, “Misguided ‘fiscal cliff’ fears pose challenges to productive budget negotiations. Failure to extend tax cuts before January will not plunge economy into immediate recession,” Center on Budget and Policy Priorities

[3]       Krugman, P., 11/12/12, “On deficit hawks and hypocrites,” The New York Times

[4]       Woolhouse, M., 11/19/12, “Phase in deficit cuts, economists say,” The Boston Globe

[5]       Bivens, J., & Fieldhouse, A., 9/18/12, “A fiscal obstacle course, not a cliff,” Economic Policy Institute

[6]       Every Child Matters Education Fund, 11/16/12, “The pending threat of Congressional actions to children’s safety net programs,” Every Child Matters, http://everychildmatters.org

THE DEBT, THE ECONOMY, AND THE POLITICAL PARTIES

ABSTRACT: Since 1945, Democratic presidents have on average reduced the federal government’s debt as a percentage of GDP by about 3% while Republican presidents have on average increased it by about 3%. PresidentObama has increased the debt percentage more than any president in this period. However, this is largely due to his inheriting a large deficit and the worst recession since the Great Depression. Other than this, the six largest increases in the debt percentage have occurred in recent Republican presidents’ terms.

Multiple measures of economic performance are better under Democratic presidents than Republican ones. Since 1949, overall economic growth measured by median annual increase in GDP has been 4.2% under Democratic presidents and 2.6% under Republican presidents. Stock market performance since 1913 as measured by the median increase in Standard and Poor’s index of 500 stocks has increased 12.1% under Democratic presidents and 5.1% under Republican presidents. The annual increase in corporate earnings since 1936 has been 10.5% under Democrats and 8.9% under Republicans.

This data certainly shows that Republicans aren’t more fiscally responsible than Democrats; if anything it strongly suggests the opposite. The data also show that Republicans aren’t the party of economic prosperity more so than Democrats.

FULL POST: The historical record of the federal debt and the performance of the economy under Republican and Democratic presidents is interesting to examine.

First, the federal government’s total debt (the total of all the previous annual deficits and surpluses) as a percentage of the overall economy (i.e., the Gross Domestic Product or GDP) is probably the most meaningful statistic about the debt. Since 1945, Democratic presidents have on average reduced the debt’s percentage of GDP by about 3% while Republican presidents have on average increased it by about 3%.

President Obama has increased the debt percentage more than any president in this period. However, this is largely, if not totally, due to his inheriting a large deficit and the worst recession since the Great Depression. Other than this, the six largest increases in the debt percentage have occurred in recent Republican presidents’ terms: George W. Bush’s two terms (with 2005 – 2009 being the worst other than Obama), George H.W. Bush’s term, Ronald Reagan’s two terms, and Gerald Ford’s partial term. The only two terms under Democratic presidents where the debt percentage increased were Harry Truman’s and Bill Clinton’s first terms. Both of them reduced the debt percentage in their second terms significantly more than the increase in their first terms, so overall they both reduced the debt percentage. [1]

Multiple measures of economic performance are better under Democratic presidents than Republican ones. Since 1949, overall economic growth measured by median annual increase in GDP has been 4.2% under Democratic presidents and 2.6% under Republican presidents.

Stock market performance since 1913 as measured by the median increase in Standard and Poor’s index of 500 stocks has increased 12.1% under Democratic presidents and 5.1% under Republican presidents. The annual increase in corporate earnings since 1936 has been 10.5% under Democrats and 8.9% under Republicans. [2]

While a president’s actions have only indirect influences on these measures and a president inherits policies and the state of the economy from his predecessors, this data certainly shows that Republicans aren’t more fiscally responsible than Democrats; if anything it strongly suggests the opposite. The data also show that Republicans aren’t the party of economic prosperity more so than Democrats.


[1]       The Economist, 11/1/12, “The change in America’s debt by presidential term,” www.economist.com/blogs/graphicdetail/2012/11/daily-chart

[2]      Healy, B., 11/2/12, “Taking stock of past races,” The Boston Globe

CANDIDATES’ BUDGET PROPOSALS AND THE DEFICIT

ABSTRACT: Both Presidential candidates, Obama and Romney, have put forward tax and budget proposals that they say will reduce the deficit. Obama’s tax and spending proposals would reduce the deficit by about one quarter. Romney’s proposals cannot be reasonably expected to reduce the deficit. Furthermore, they are likely to increase the deficit and the already high levels of inequality in income and wealth.

FULL POST: Both Presidential candidates, Obama and Romney, have put forward tax and budget proposals that they say will reduce the deficit. Obama has specified tax increases and a cut to military spending that would begin to reduce the deficit. Romney says his tax proposals would be revenue neutral, although he fails to specify how he would offset his tax cuts, and he promises to increase military spending. He asserts that his proposals would produce economic growth that would increase tax revenue and reduce the deficit; however, there is no credible evidence for that assertion. (Note: President G. W. Bush’s tax cuts, increases in military spending, and promises of economic growth that would pay for them are what began the process of turning a federal government surplus into deficits.)

Obama would let the Bush tax cuts on income over $250,000 expire and would also restore or increase taxes on unearned income (i.e., capital gains, dividends, and interest). He has also proposed limiting deductions and exclusions from income, as well as implementing the “Buffett Rule,” so that households with incomes over $1 million would at least pay taxes at the rate that middle class families do. These measures would generate roughly $200 billion per year in additional revenue, reducing the deficit by one-fifth. [1]

Obama has also proposed reducing the $700 billion military budget by about $50 billion per year as the wars in Afghanistan and Iraq wind down. Together, these tax and spending proposals would reduce the deficit by about one quarter.

Romney proposes keeping the Bush tax cuts and further reducing tax rates on earned income by one-fifth. He would maintain even lower tax rates on unearned income than earned income. Overall, these proposals would reduce income tax revenue by about $400 billion per year. Romney says he will make up for the lost revenue by reducing tax deductions and credits, and that the well-off will continue to pay at least the same amount in taxes. He says would do this by limiting total deductions and credits on a tax return to a fixed dollar amount and has mentioned amounts ranging from $17,000 to $50,000. [2]

While it is theoretically possible to achieve the same amount of revenue (i.e., revenue neutrality) under Romney’s proposals, it would be challenging and would require significantly cutting very popular deductions. [3] Four deductions account for 80% of all deductions and credits; in order of size they are the deductions for 1) home mortgage interest, 2) state and local taxes paid, 3) real estate taxes paid, and 4) charitable contributions. If an across the board cut to deductions were used to offset the loss in revenue, Romney would have to cut all these deductions by about one-third. Clearly, this would be unpopular and would also hit the middle class as well as high income families.

Romney has also proposed eliminating the estate tax, while Obama proposes maintaining an estate tax on estates over $3.5 million. Romney has also stated that he will increase the military budget. Here again, Obama’s proposal clearly reduces the deficit and these Romney proposals would clearly increase the deficit. The benefits of eliminating the estate tax, of course, go to wealthy families.

With a backdrop of 30 years of decreasing income tax rates that have seen dramatic increases in income and wealth in our best-off households and middle class families struggling to keep their heads above water, further cuts in tax rates do not seem at all likely to reverse this trend or benefit the middle class. Further, to provide some perspective on Romney’s proposal, looking at the cuts in tax rates alone, a family with taxable income of $100,000 or less, whose tax rate is cut from 25% to 20%, would see a benefit of $5,000 or less. A family with taxable income of $1 million, whose rate is cut from 35% to 28%, would see a benefit of $70,000; and if income is $10 million, a benefit of $700,000. This just doesn’t seem fair, especially on top of the huge tax cuts these high income households have seen over the last 30 years.

In addition, Romney’s proposal maintains lower rates on all unearned income (i.e., capital gains, dividends, and interest), while Obama’s has lower rates only on long-term capital gains (i.e., investments held for over one year). Having lower rates on all unearned income also doesn’t seem fair, especially given that the great bulk of unearned income goes to high income, high wealth households. Moreover, one of Romney’s arguments for lower tax rates is that by letting taxpayers keep more of what they earn, they will be rewarded for working. If we want to reward work, then income tax rates on work, namely earned income, should be lower (not higher) than the rates on non-work (unearned) income.

Finally, Romney’s assertion that cuts in tax rates will spur economic growth does not have any credible evidence. [4] This rationale has been used for the tax rate cuts that have occurred over the last 30 years. The strongest economic growth of the past 30 years (and the only elimination of the federal government’s deficit) occurred under President Clinton when he increased tax rates on high incomes. Furthermore, the rationale for tax cuts spurring growth has been that they put more money in consumers’ pockets and, with consumer spending being two-thirds of our economy, their spending will grow the economy. However, Romney has said his tax cuts will be offset by reducing deductions so that there will be no loss in government revenue or increase in the deficit. Therefore, there is no increase in the money in consumers’ pockets and no increased spending to spur economic growth.

If Romney’s tax cuts are indeed offset by reducing deductions so the result is revenue neutral, and if he lives up to his commitment to cap federal government spending at 20% of the overall economy (i.e., of gross domestic product), which would require significant spending cuts, Romney’s plans are likely to lead to job losses and a recession, not economic growth. Overall, Obama’s budget and tax proposals are highly likely to do more to spur near-term growth in jobs and the economy than Romney’s. [5]

In conclusion, Obama’s tax and budget proposals do take steps that can be reasonably expected to reduce the deficit by about one-quarter. Romney’s proposals cannot be reasonably expected to reduce the deficit. Furthermore, they are likely to increase the deficit and the already high levels of inequality in income and wealth.


[1]       Tax Policy Center, Oct. 2012, “Major tax proposals by President Obama and Governor Romney”

[2]       Wirzbicki, A., & Borchers, C., 10/5/12, “Questions on challenger’s idea to cap tax deductions,” The Boston Globe

[3]       Kranish, M., 9/21/12, “Candidates leave much unsaid on tax plans,” The Boston Globe

[4]       Rowland, C., 10/15/12, “GOP faith unshaken in supply-side tax policies,” The Boston Globe

[5]      Bivens, J., & Fieldhouse, A., 9/26/12, “Who would promote job growth most in the near term?” The Century Foundation

THE FINANCIAL TRANSACTION TAX

ABSTRACT: A financial transaction tax (FTT) could generate $350 to $500 billion of revenue per year by applying a very low tax rate to financial transactions. The US had a financial transaction tax from 1914 to 1966 and 40 other countries have such a tax. It would not only generate needed revenue, it would also provide a disincentive for high volume, short-term, speculative trading. It has been dubbed “The Robin Hood Tax” (see www.robinhoodtax.org).

Multiple bills to create a FTT have been introduced in Congress, one of which, HR 6411, would rebate the tax to households with incomes under $75,000. It is also aligned with a broad, international campaign for the FTT.

FULL POST: As presented in my previous post (9/29/12), a financial transaction tax (FTT) could generate $350 to $500 billion of revenue per year by applying a very low tax rate to financial transactions. This would in effect be a sales tax on Wall St. transactions.

The US had a financial transaction tax from 1914 to 1966 and 40 other countries have such a tax. The US tax on purchases and sales of stock was 0.04% (40 cents on a $1,000 transaction). Currently, the US has a very small 0.0034% tax (3.4 cents per $1,000) that is levied on stock transactions to support the operating costs of the Securities and Exchange Commission (SEC), which regulates financial markets. However, much of the revenue is being diverted to other purposes. [1]

A financial transaction tax would not only generate needed revenue, it would also provide a disincentive for high volume, short-term, speculative trading. Such trading produces profits for speculators, but no benefit for the overall economy. It actually harms the economy by contributing to increased market volatility and increased prices for commodities such as food and gasoline (see blog post 3/5/12).

The financial transaction tax has been dubbed “The Robin Hood Tax” and is being supported by National Nurses United (www.nationalnursesunited.org) and others (see www.robinhoodtax.org). Multiple bills to create a FTT have been introduced in Congress. One is House bill HR 6411, The Inclusive Prosperity Act. It would impose a 0.5% tax on stock trades ($5 per $1,000) and a lesser rate on other financial transactions (e.g., trading of bonds, currencies, and derivatives). The tax would be rebated to households with incomes under $75,000. It would generate an estimated $350 billion per year that could be used for deficit reduction or social and human needs, as recommended in the bill. It is aligned with a broad, international campaign for the FTT, including a very active effort in the European Union. The international campaign includes a specific focus on using revenue generated to address climate change and global health issues. [2]


[1]       Wikipedia, retrieved 9/28/12, “Financial transaction tax,” en.wikipedia.org/wiki/Financial_transaction_tax

[2]       Vanden Heuvel, K., 9/26/12, “The better bargain: Transaction tax, not austerity,” The Nation