Post-Filing Tax Thoughts

April 16, 2011

Just finished up my tax returns. Feeling grouchy, as I always do when I sign on the bottom line.

So many pieces of paper to riffle through. So many figures to enter. Doubts at some points that I’m putting the right numbers into the right places. Anxieties about potential penalties and audits.

And frankly, the amount I owe makes me feel somehow deprived. But I know this is irrational. Many people apparently don’t.

Every year, long about this time, the Tax Foundation announces Tax Freedom Day — the day when, according to its calculations, workers stop working for the government, i.e., have earned enough to pay all their taxes.

And every year, long about this time, the Center on Budget and Policy Priorities explains why the Tax Foundation’s figures are misleading.

But the whole notion of Tax Freedom Day is misleading because the only people who are working for the government during the time they’re earning what they’ll owe in taxes are government employees.

Our taxes aren’t feeding some abstract entity. They’re paying for programs and services we want — public education, police and fire departments, courts, libraries, parks, highways, reasonable assurance that the plane we’re on won’t blow up or crash into another, breathable air, safe food and drinking water, defense against threats to our national security, a modicum of economic security in our old age, a safety net that protects us and our less fortunate neighbors….

I know I’m leaving out a lot of things we want from our public sector. But point, I hope, is made.

Two things got me started on all this. One is the intense hostility to taxes that we see at both federal and state levels. And I’m not talking about Tea Partiers alone.

The other is how relatively easy it is for me to champion higher income tax rates, fewer credits, loophole closers and the like. Because such reforms would have little or no affect on me.

Let’s say I made $84.5 million last year, like the head of Viacom’s media empire. (Yes, let’s!) Would I still feel that the tax code should be reformed that I pay my fair share?

I’d like to think so. But I’ve just done every legal thing I could to reduce my tax liabilities. And I recall how cheery I used to feel when the home mortgage interest deduction — one of the costliest tax breaks in the federal code — reduced them significantly.

Still, I’d like to see a federal deficit reduction plan that restores more of the pre-Bush tax brackets than just the top two — all that President Obama still seems willing to target.

Restoring equal taxation of investment and employment income would be a good idea too.

Here in the District, I’d back a tax reform plan that put a new bracket low enough to capture more of my income and a property tax more in line with what our Virginia and Maryland neighbors pay.

I know I’d grumble at tax time. So I guess would most people fortunate enough to have a livable income and homes we own.

But a goodly number of grumblers have to get over the view that we can have everything we want — lower deficit, no tax increases that would touch our wallets and sufficient spending on everything we care about.

And those of us who advocate for shared prosperity and economic security — for ourselves, our neighbors and the next generation — have to be willing to put our money where our mouth is.

Yours truly included.


The Budget Debate We Could Be Having

March 13, 2011

Arianna Huffington rightly calls it “the incredible shrinking budget debate.” She’s referring, of course, to the controversey about how much and where we’ll cut federal non-security discretionary spending.

The debate is shrinking — or more precisely, shrunk — for two reasons.

First, as I and many others have said before, it’s focused on a small fraction of the federal budget — and not the parts that are driving the deficit upward, e.g., health care costs, military spending. We could blow away the entire non-security discretionary part and barely make a dent.

Second, the current debate is focused almost entirely on the spending side of the ledger.

Republicans in Congress are dead set against tax increases of any sort. Indeed, on the House side, new rules pave the way for more tax cuts — and without offsets to keep the deficit from rising.

But what about the Democrats?

President Obama says he’ll push against a further extension of the Bush-era tax cuts for families earning more than $250,000 a year and the estate tax changes that benefit only the very wealthy.

But he’s still celebrating the extension of all the other tax cut extensions — an indication, I think, that he won’t back off his campaign promise not to increase taxes on the (generously defined) middle class.

Tax cuts for them represented a far larger portion of the costs of the December compromise than the tax benefits for the wealthy — $485 billion versus $139 billion, according to a Center on Budget and Policy Priorities analysis.

Presumably they’d again cost much more if extended past 2012, when all the cuts are due to expire. And, of course, there’s no way the President will get them extended without agreeing to keep the rest alive — unless the next elections produce a huge party shift in Congress.

So either the deficit soars or spending gets even more savagely cut.

On the positive side, the President would like the corporate tax code simplified. The Tax Foundation reports that the current plethora of deductions, incentives and the like will cost $102 billion this year.

But the President says he’d use the savings to lower the corporate tax rate, not to reduce the deficit. Perhaps because he wants a corporate buy-in and some Republicans at the table. As New York Times columnist Paul Krugman has observed, he has a history of “negotiating with himself” before the bargaining begins.

But that’s not the total story.

The President has gotten unfairly bashed for not incorporating the recommendations of his fiscal commission into his proposed Fiscal Year 2012 budget. But he’s apparently adopted a key part of the framework proposed by commission co-chairmen Erskine Bowles and Alan Simpson.

As CBPP’s top experts explain, the Bowles-Simpson plan skews toward deep program cuts. They’d represent more than two-thirds of savings through 2020, with about 21% coming from non-security discretionary spending.

And the two-to-one ratio is reportedly what we see in the President’s proposed Fiscal Year 2012 budget –or pretty close. Tax Policy Center Director Donald Marron says the revenue side seems somewhat more than one-third.

Why limit tax increases to one-third or so of a deficit reduction plan — especially when the baseline reflects a decade of tax cuts? So far as I know, it’s just an unexplained policy preference.

What if the tax breaks — corporate and individual — were viewed as less important than the needs of low-income people?

The Center for American Progress has an interesting table that pairs the total current costs of some of the safety net programs the House Republicans have targeted with the revenues lost due to some tax breaks that benefit “the wealthy,” including corporations.

It’s an eye-opener, though some of the pairings are, to my mind, a little dicey. We learn, for example, that:

  • Per-year lost revenues due to the recent tax cuts for very wealthy estates would more than pay for early childhood education programs.
  • Eliminating the loophole that allows hedge fund managers to pay taxes on what’s essentially salary income at capital gains rates would yield more than enough revenues to cover homelessness assistance grants.
  • The cost of extending “alcohol fuel,” e.g, ethanol, tax breaks is nearly double the current spending level for community health centers.
  • All the programs CAP identifies could be paid for by the first year of savings from not extending the Bush-era tax cuts for high-income filers.

Huffington concludes that the current budget debate is going to end with “lots of unnecessary suffering” because that’s what “those who control our political debate” have chosen.

I’d like to think she’s wrong, but it’s hard to envision a shift big enough and quick enough to yield a different outcome.


Deficit Double-Talk

February 1, 2011

About 10 years ago, arch-conservative Grover Norquist revealed the impetus behind the Bush tax cuts. “My goal,” he said, “is to cut government … down to the size where we can drag it into the bathroom and drown it in the bathtub.

I cite this fine display of candor because it’s notably absent from what Congressional Republicans are saying now. But it’s nonetheless applicable to the course they claim reflects the will of the American voters

First, they adamantly insist that all the Bush tax cuts must be extended. Also that even more wealth must be exempted from the estate tax. These measures, of course, increase the deficit — though the “middle class” tax cut extensions the President also wanted made up the largest part of the impact.

Then the Republican-controlled House adopts new rules that will exempt further tax cuts from budget discipline. At the same time, it subjects all spending increases to new constraints, requiring that they be offset only by spending cuts.

A good way to “cut the government down to size,” but no way to reduce the deficit.

The House Republican leadership also reaffirms its pledge to roll back federal spending to the pre-Recovery Act level. At this point, that  would seem to entail $60 billion in immediate cuts, plus an additional $40 billion beginning in October — assuming Congress passes a Fiscal Year 2012 budget on time.

Not good enough, says the Republican Study Committee, representing a majority of Republican House members. We want discretionary spending, i.e., the spending Congress annually approves, rolled back to the 2006 level and frozen there until 2021. Except for Defense — the single biggest chunk of discretionary spending.

The Center on Budget and Policy Priorities reports that the RSC plan would ultimately cut non-defense appropriations 42% below what the Congressional Budget Office says would be needed to maintain the Fiscal Year 2010 funding level, with adjustments for inflation.

No way this much could be cut without decimating key government programs — especially because it’s a sure bet that not all programs would get hit with that 42%.

Such drastic spending cuts aren’t needed to address the long-term deficit. Nor would they do so. As this nifty interactive pie chart shows, all non-defense discretionary spending accounted for just 15% of the Fiscal Year 2010 budget.

Nearly 60% was mandatory spending, i.e., spending that Congress doesn’t vote on each year. And nearly 70% of that was for Social Security, Medicare and Medicaid.

Enter Congressman Paul Ryan’s Roadmap for America’s Future. As the Economic Policy Institute explains, the Roadmap aims to “dismantle Medicare and Medicaid,” replacing them with vouchers that would increasingly fall short of health care costs.

Also cut Social Security benefits while partially privatizing the system. This, says EPI, would mainly benefit wealthier Americans, who would also gain from drastic shifts in the tax burden — so drastic that millionaires would pay taxes at lower rates than middle-class families.

Death knell for what’s historically been our progressive federal income tax system.

These are not deficit-driven conservative proposals. They’re as revolutionary as the Tea Party’s name. Because they would radically define what we the people — well, most of us people — have come to understand as the federal government’s responsibility “to promote the general Welfare.”

The depth of the cuts, combined with the re-engineering of social insurance programs would shift that responsibility to state and local governments. But they have neither the resources nor the budgetary flexibility to assume it — even if they want to. And current evidence suggests some don’t.

Bottom line is that the House Republican majority, seconded by Republican leaders in the Senate, would roll up the safety net and roll back the clock to the nineteenth century, when poverty, education, public health and the like just weren’t any of the federal government’s business.


Republican House Leadership Aims For More Tax Cuts, Not Deficit Reduction

January 4, 2011

Just before Christmas, the House Republican leadership announced new procedural rules to govern tax and spending legislation when it takes control. They confirmed big time two of the lessons Washington Post blogger Ezra Klein found in last month’s tax cut deal.

  • No one really cares about the deficit.
  • The Republicans really, really, really care about tax cuts for rich people.

As the Center on Budget and Policy Priorities explains, the new House procedural rules pave the way for more tax cuts — and possibly big increases in the deficit.

I say “possibly,” as CBPP doesn’t, because the Republicans may well use the potential deficit increases to justify even more drastic spending cuts than they’ve already promised.

These spending cuts would almost certainly focus on programs that benefit moderate and low-income people because large spending areas, e.g., defense and security, would probably be exempt, as they are in the spending pledge for next fiscal year.

One rule embodies something Senate Minority Leader Mitch McConnell said awhile ago. The deficit “isn’t because we are taxing too little…. [I]t’s because we’re spending too much.”

Incoming House Majority Leader John Boehner obviously agrees, since instead of the existing “pay as you go rule,” the House will operate under a “cut as you go rule.”

Under the so-called PAYGO rule, any spending increase had to be offset by a spending cut, a revenue increase or a combination of both. Henceforward, spending increases will have to be offset only by spending reductions. And tax cuts will require no offset at all.

This rule will inevitably erode a wide range of federal programs their costs rise, even if they’re not expanded.

Consider Section 8 housing choice vouchers, for example. They cover rental costs over 30% of the voucher holders’ incomes. Rents go up. So vouchers cost the federal government more. This is why President Obama’s proposed budgets would have provided just about enough to renew all existing vouchers, even though the proposed funding levels were higher.

Another new rule changes the reconciliation process. Basically, this process creates a bundle of budget-related measures, which are then subject to a single up-or-down vote, with limited opportunities for amendment.

In the good old days, before the Bush administration and the Republican Congressional majority decided to push through their tax cuts, the process could be used only for legislation that reduced the deficit.

Going forward, the House can use the reconciliation process to fast-track deficit-increasing packages, so long as they’re tax cuts. The process can’t be used for legislation that results in even a minimal net spending increase.

At this point, the reconciliation rule may not make much difference. The Senate still has a deficit reduction-only rule. And the process is more important there because reconciliation packages can’t be filibustered. But the new rule still shows which way the wind is blowing.

Lest there be any doubt, another new rule authorizes the Chairman of the Budget Committee to ignore rules for enforcing budget cost limits when dealing with measures to extend or make permanent all the Bush-era tax cuts — including, of course, the top tax brackets and the egregious estate tax giveaway.

Budget discipline could also be waived for a hefty new tax cut for small businesses — or rather for individuals who file tax forms indicating business income. Howard Gleckman at the Tax Policy Center explains the difference.

If past is prologue, the tax break in the offing would benefit a lot of high-earning filers we generally don’t think of as small businesses, e.g., doctors, lawyers, partners in investment firms, movie stars, major league athletes and owners of large local retail chains.

New York Times columnist/blogger Paul Krugman says the new House rules show that Republicans who claim to be deficit hawks are “frauds” — that their “self-styled … deficit hawkery is just a stick to beat down social programs.”

Strong words, but hard to disagree, I think.


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