If You Don’t Like the Answer, Change the Question

January 12, 2015

A recent New York Times op-ed warns that the Republican leadership will instruct the (up till now) nonpartisan Congressional Budget Office to use dynamic scoring when it estimates the revenue impacts of changes to the tax code.

The House of Representatives, in fact, passed a rule last week that requires not only CBO, but the also nonpartisan Joint Committee on Taxation to use dynamic scoring for all “major legislation” — and to provide just one estimate, rather than the range they’ve customarily provided for large-scale economic effects.

We’ve had rumors of this radical change ever since Republicans seemed like to gain control of the Senate, as well as hold onto their House majority. Fueling them was the expectation, proved correct, that Congressman Paul Ryan, who’s a fan of dynamic scoring, would become head of the House tax-writing Ways and Means Committee.

And we’ve had warnings of the consequences for even longer. Because dynamic scoring has been around for quite awhile.

How CBO and JCT score legislation might seem far removed from policies that affect poor and near-poor people in America. But it isn’t because dynamically-scored tax cuts can make prospective revenues seem greater than they’ll actually be.

Congress can then more easily make tax cuts that will drive the deficit upward — and so set the stage for spending cuts (except for defense) more severe than even those we’ve seen.

Brief explanation from a non-economist who believes she’s read enough to grasp the basics.

How CBO and JCT Score Legislation

When bills with any potential revenue impact are proposed, they’re sent to CBO for a score, i.e., estimates, over a 10-year period, of how the legislative changes will increase or reduce federal revenues. JCT gets involved when the bills are tax-related.

As the op-ed author, Professor Ed Kleinbard explains, the experts try to predict how people will respond and to fold the results of those responses into the scores.

Say, for example, some Congress members want to raise the gas tax. CBO and/or JCT would factor in the likelihood that some people would drive less. Buy more fuel-efficient cars too perhaps. And so the revenue estimates wouldn’t be as high as a straightforward addition of the extra paid at the pump if drivers kept buying as much gas as they do now.

Congressman Ryan is thus pulling the wool over our eyes when he claims that the current scoring method fails to “take into consideration behavioral changes or economic effects.” Ditto the far right-wing Heritage Foundation’s tax and policy guru, who asserts that the current method is “static.”

How Dynamic Scoring Differs

Economic models that produce dynamic scores include estimated impacts on the entire economy and the revenue consequences thereof.

In the case of tax cuts for individuals, they’d factor in broad assumptions about what people would do, e.g., work more because they could keep more of what they earned (or less for the same reason), buy and/or invest more, which could ramp up production, create jobs and, therefore, boost income tax collections.

Similar sorts of assumptions for business tax cuts.

What the models don’t do, Kleinbard says, is factor in the consequences of tax cuts that don’t trigger spending cuts or tax hikes later. Nor, he adds, do they include the negative effects on economic output that would result from less government spending.

CBO actually does sometimes estimate “feedback effects” on the overall economy. But, it says, they tend to be “small relative to the direct budgetary effects.” And, as I said above, it never offers a single macroeconomic impact estimate.

Not what the Republican tax-cutters want. As Citizens for Tax Justice says, they’re looking for something like the oft-debunked Laffer curve, which has been used to argue that tax cuts pay for themselves.

Implications of the One-Estimate Rule

All the responsible experts I’ve read emphasize the iffiness of dynamic scoring. Understandably, because as Kleinbard says, the models economist use involve a lot of assumptions about who will do what if taxes rise or fall.

The Center on Budget and Policy Priorities, which has been bird-dogging the issue, points out that JCT produced eight different estimates of the dynamic effects of just-retired Congressman Dave Camp’s tax reform plan.

They ranged from $50 billion to $700 billion in additional revenues over the first 10 years — or from another perspective, a 16-fold difference between the lowest and highest estimates of the increase in the total value of goods and services produced.

And which do you suppose Camp cited? Which do you suppose Republicans tax-writers would use if presented with the options?

But under the House rule, they wouldn’t be. They’d get just one — and instead of, rather than in addition to the conventional score that’s provided the basis for revenue estimates up until now. But only when they thought it would support their plans, since they could easily evade the “major legislation” standard when it wouldn’t.

And very importantly, they wouldn’t necessarily get the explanations for dynamic scores, as they have up until now. Which means that we wouldn’t have them either.

The model that produced the estimate Camp touted assumed that Congress would prevent the deficit from soaring by cutting transfer payments, e.g., Social Security, unemployment insurance, SNAP (food stamp) benefits.

One way or the other, the dynamic scoring gambit will ultimately feed arguments for cutting social insurance, safety net benefits and/or other programs that are properly viewed as investments, e.g., in science, infrastructure, public education. Like as not, all of the above.

That, Kleinbard concludes, “is what lies inside the Trojan horse of dynamic scoring.” And it’s why we everyday citizens ought to care about what seems so arcane.


DC Fitness Club Owners Again Up in Arms Over Sales Tax Expansion

June 16, 2014

Once upon a time, not so long ago, the District of Columbia faced a severe revenue shortfall. Balancing the budget — as the District, like virtually all states must — required deep program cuts, unless laws were modified to collect more taxes.

The DC Fiscal Policy Institute and allies recommended, among other things, an expansion of the sales tax to at least some of the services that were perplexingly exempt — fur storage, for example, and homes-away-from-home for fur-bearing pets.

Word got out that the DC Council just might tax some of the exempt services. And next thing you knew, Councilmembers were barraged with e-mails from people who worked out at gyms and/or took for-fee yoga lessons — these orchestrated by the business owners, of course.

For this, as well as other reasons, the Council decided to increase the sales tax rate, but leave services alone.

Now we’re being treated to another round of outrage because a Council majority has voted to apply the sales tax to “health clubs,” as well as five other types of services.

This time, the sales tax expansion would partly offset revenues the District would lose by adopting other recommendations made by the Tax Revision Commission.

Most of these would cut personal income tax liabilities for low and moderate-income filers. But there’d also be a reduction in business franchise taxes — presumably a boon to the unhappy fitness club owners.

Clearly, the tax cuts must be offset. Otherwise, the District would be left with many, many millions less for essential programs and services.

And clearly, the fitness club members will have considerably more money in their pockets to pay the 5.75% tax on their dues — on average, $36.33 a month for those with adjusted gross incomes in the $50,000-$70,000 range, according to Council Chairman Phil Mendelson.

What’s now a $70 a month gym membership would cost an extra $4.01 — less than the cost of two short lattes at Starbucks.

But, says the Yoga Alliance, the District would be “taxing essential healthcare.” A “wellness tax,” one of the several petitions calls it. This makes about as much sense as saying that the sales tax on my daily newspaper is a tax on literacy — or informed citizenship, if you prefer.

We’re asked to worry especially about lower-income residents — people “on the fringe,” as one fitness club owner calls them.

Those folks over in the east part of the city have “ZERO full-service gyms,” exclaims another petition. And the smaller operations there “don’t need another reason to have fewer customers,” especially when obesity and diabetes rates are higher in low-income areas.

Might this have something to do with the fact that many who live there can’t afford a healthful diet, let alone a health club membership? Is there no way to get exercise except at a members-only gym or in a yoga class?

The so-called yoga tax will bring in an estimated $5 million in the first year it’s effective. Where will that $5 million come from if the fitness club folks get their way — or the additional millions in years to come?

From the “record [revenue] surpluses,” Councilmember Jack Evans says — as if we don’t have better uses for the money, e.g., affordable housing for homeless residents. As if the latest recession is the last we’ll ever have.

But it won’t be. Sooner or later, the mayor and the Council will again have a tough time balancing the budget. As always, programs that serve the needs of low-income residents will be especially vulnerable.

So, says Citizens for Tax Justice, will businesses whose goods and services aren’t exempt from the sales tax — and, of course, their customers. But there will be “less pressure to jack up the sales tax rate” if the base is broadened now.

In other words, giving the fitness club owners a free pass will shift the burden to other business owners — and to residents who’ve got no choice but to buy certain taxable items, e.g., toilet paper, soap, diapers.

All this said, I understand how the health club owners could feel picked on. As I said, their services are one of only six types the Council’s plan would tax.

The group seems to me oddly arbitrary — carpet cleaning, home water delivery, car washes, billiards parlors and bowling alleys, storage locker rentals, plus tanning studios, which are lumped together with health clubs.

An expert retained by the Tax Revision Commission identified these — apparently because he thought they’d be difficult for residents to purchase untaxed. But he also recommended two the Council will leave tax-exempt, unless the package changes before the final vote.

Notwithstanding the rationale, I find the choices over-selective. People who have to store their belongings because they’ve lost their homes will pay the sales tax. People who store their fur coats still won’t.

People who have their cars washed will pay the sales tax. People who have their dogs washed still won’t. People who go bowling will pay the sales tax. People who go to the ballet still won’t.

Merely examples from a list that’s perhaps a bit outdated, but still fairly accurate. There are more than eighty tax-exempt services on it.

Seems to me the better approach would have been to begin with the presumption that services would be taxed and then selectively exempt those for which there’s a compelling reason. Health club memberships wouldn’t qualify in my book, but bona fide healthcare would.



Simpler Tax Code Good, But No Tax Prep Better

April 8, 2013

I’ve just finished preparing my federal tax returns. I do them myself not only to save professional preparation fees, but to see what deductions and credits I might claim — and the plethora I never could.

But I know that someone can claim them because every tax-reducing provision got into the code for a reason — not necessarily what we who don’t benefit think a good one, of course.

This is one of the reasons the big brouhaha about tax reform may come to nothing.

The biggest barrier at this point is the partisan divide on what to do with savings the federal government would achieve if it weren’t spending so much through the tax code — an estimated $1.3 trillion this year alone.

The Republicans, as you probably know, want to use all the savings to offset the costs of reducing tax rates.

The Democrats generally want to use some of the savings for deficit reduction, thus meeting the targets in the Budget Control Act with less severe cuts than the mandatory caps would require. But they’re far from united.

The other barrier though is that every provision that tax reform might eliminate or constrict has a constituency.

Hedge fund managers, for example, would again cry out if Congress tried to close the loophole that allows them to pay the lower capital gains rate on what’s really salary income.

The largest tax expenditures have much larger constituencies — in some cases, more than one.

The mortgage tax interest deduction, for example, is near and dear not only to homeowners (and yacht owners), but to real estate brokers, building companies and, of course, mortgage bankers.

So actually cleaning out the tax code may prove beyond what this highly-partisan — and donor-indebted — Congress can do.

It could, however, make the tax code “simpler and smarter,” as Howard Gleckman at the Tax Policy Center suggests.

At least one of the simpler, smarter reforms tax experts have recommended would benefit low-income couples, many of whom pay to have their tax forms prepared because of the complexities involved in claiming the Earned Income Tax Credit and the Child Tax Credit.

Anyone who’s seen the signs in the windows of neighborhood tax preparers knows that these couples are likely to be offered instant refunds — essentially for-fee advances on what the preparer figures they’ll get from the Internal Revenue Service and perhaps their state tax office.

A now-outdated, but still useful study found that taxpayers in the Washington, D.C. area forfeited, on average, more than $189 of a $1,500 EITC refund once all the fees, including the refund anticipation loan were deducted.

That was back in 2001-2. Fees have gone up since then, of course. And though banks have been forced out of the RAL business, tax preparers have found workarounds.

If claiming the refundable credits were a whole lot simpler, low-income families would get the full benefit intended. And volunteers who provide free tax preparation services could help more of those who still found the forms daunting.

Or what about letting IRS do the tax prep work for free? This probably wouldn’t save time — or alternatively money — for filers who can claim those various arcane credits and/or will owe less if they itemize.

But past studies have estimated that well over 40% of filers would use what’s been called a return-free system. Their savings could total more than $2 billion a year.

And IRS would collect some portion of the $350 billion that the now-Chairman of the Senate Finance Committee has said we collectively owe, but don’t pay.

Which is why Grover Norquist, whose cause in life is starving the federal government of tax revenues, opposes it, as do some other so-called taxpayer advocacy groups.

Lined up in opposition for other, obvious reasons are members of the Computer and Communications Industry Association, including Intuit. It’s the firm that produces TurboTax — the software most do-it-yourselfers use.

Intuit claims, among other things, that a voluntary return-free system would curtail “citizen participation in the taxation process” because lots of us take stock of our personal finances only at tax time — and, one’s given to understand, wouldn’t if all we had to do was review, edit or altogether reject a form IRS prepared for us.

Nothing whatever to do with the $1.47 billion or so that Intuit reaps from TurboTax.

I, for one, would readily forgo the form of participation I’ve just concluded — and the alleged “financial literacy” I’ve gained — if I could just check what IRS had produced against the 1099s I’ve laboriously keyed in

What about you?

Do Taxes Have to Be So Damn Complicated?

April 17, 2012

I spent two and a half horrible days last week preparing my 2011 federal tax returns.

Worst of it was trying to answer questions my tax software was asking — and not because I hadn’t diligently squirreled away the mass of documents I thought I’d need.

It was the questions themselves — so many and some so perplexing, though I was quite sure I was supposed to know the answers.

Bookending the apparently relevant questions were long lists of potential deductions and credits I had to skim lest any apply. None did.

By the end of the process, I was ready to endorse a flat tax — that perennial favorite of far-right politicians and their think tanks. Well, not really.

But I truly was half-ready to get on board with Congressman Paul Ryan’s tax reform plan — not the rate reduction part, but the clean-out of the tax code that he claims would pay for it.

Shows how doing your taxes can drive you crazy.

As you’ve probably read, Congressman Ryan hasn’t said what tax breaks he’d get rid of. Nor has Mitt Romney, whose tax reform plan looks a lot like Ryan’s.

Smart move on their parts because the most costly tax expenditures — the technical name for policy preferences promoted by foregoing revenues — aren’t in those lengthy lists I skimmed.

They’re widely-applicable exclusions, deductions, credits and the like — employer-paid health insurance benefits, interest on home mortgages, contributions to retirement plans, etc.

Can you imagine the outcry if Congress decided to eliminate them?

And arguably it shouldn’t — not, at least, without making other policy changes to support the same goals.

The Earned Income Tax Credit, for example, is one of the largest and most effective anti-poverty programs we’ve got. In 2010, the Census Bureau reports, it lifted 5.4 million people above the poverty threshold.

Other tax expenditures also support major priorities, e.g., encouraging savings for a college education and retirement, home ownership, charitable giving.

But tax expenditures cost the federal government a lot — nearly $1.3 trillion this year alone, according to Donald Marron at the Tax Policy Center.

Some of them smack of nothing but successful lobbying — the now-famous corporate jet tax preference, for example, and a special deduction for alpaca breeders. Yes, really.

Seems to me we should get rid of these, though the savings would be relatively piddling.

But what about the more costly tax breaks that we who file as individuals may claim? There are good arguments against them too.

First off, most of them make our tax system less progressive since deductions are worth more to people with higher incomes.

A family in the top bracket, for example, gets more than twice the benefit per dollar paid in mortgage interest as a family in the 15% bracket. And, of course, families at the bottom of the income scale get nothing because it’s all they can do to afford a place to rent.

Second, economists say that tax preferences are generally inefficient. Those top-dollar individual benefits in particular are a waste of money because they reward people for doing what they’d do anyway.

Also, I should add, reward what we’ve no good reason to reward at all. Why give up needed revenues to reward a family for buying a vacation home in, say, La Jolla — or, for that matter, a yacht?

Top of my list, however, is the lower tax rate on long-term capital gains and qualified dividends — much on my mind after laboriously itemizing these.

I’ve never understood why tax policy should prefer wealth over work. The argument that the policy encourages the kind of risk-taking our economy needs seems to me stuff and nonsense.

What would we do if the money our money earns were taxed at the same rate as money we earn by working? Put in under the mattress?

The President, as you know, is pumping the Buffett rule. And surely it’s reasonable to collect a reasonable amount from millionaires — and billionaires like Buffett.

Nearly a quarter of them, we’re told, paid at a lower rate than comfortably middle-class filers during the most recent year the Internal Revenue Service can report on.

But we wouldn’t need yet another complexity in the tax code if we’d merely apply the same rate to investment income as to income earned by the sweat of the brow.

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.

Giving The President His Due On Tax Reform

March 19, 2011

I realize that I haven’t given President Obama full credit for the tax reforms he’s proposing as part of his Fiscal Year 2012 budget.

First, there seems to be a fairly wide consensus that the basic corporate tax rate is too high. At 35%, it’s higher than the rates in every other country with a highly-developed economy.

Which isn’t to say that U.S. corporations pay more in taxes. In 2009, General Electric owed nothing to the U.S. government. In fact, it managed to report a $1.1 billion tax benefit, i.e., negative domestic earnings, which it can use to offset future tax liabilities.

If I understand correctly, the argument economists make is that the high nominal tax rate, combined with the mass of deductions, credits and the like distorts economic decision-making and may create incentives to locate job-creating production overseas.

So the President’s plan seems to make sense. And the revenues potentially lost by reducing the statutory rate have to — or rather, should be — paid for somehow.

I think I may have been misled by the term “revenue neutral.” I understand now that it’s a shorthand for a corporate tax reform plan that doesn’t increase the deficit. To my knowledge, the President and his people haven’t indicated whether they will seek a plan that raises more revenues from the corporate sector.

Second, the President isn’t focused only on corporate tax reform. He again proposes some changes for individual taxpayers that would bring in more revenues.

As I’ve already said, he’s again going to “push against” a further extension of the Bush-era tax brackets for families earning more than $250,000 a year and again going to try to restore the estate tax to what it was during the last year before it expired.

He’s also recycling some related proposals, e.g., raising the tax rate on capital gains from 15% to 20% — again, only for high-income filers.

And once again, he proposes closing the loophole that allows hedge fund and private equity fund managers to pay the capital gains rate, rather than a regular income tax rate on a substantial portion of their compensation.

Beyond this, the most significant — and undoubtedly controversial — change in the individual income tax code would cap the value of itemized deductions for high-income filers at 28%. Probably the largest impact would be on the subsidy we provide, through the tax code, for home ownership.

The Tax Policy Center puts the total cost of this year’s subsidy for home mortgage interest alone at $131 billion. Savings would be considerably less, since the deduction would be capped only for families with incomes over $250,000.

The Economic Policy Institute reports that all revenues raised by the cap would total $321.3 billion over 10 years.

The President proposed the same deductions cap in 2009 and again in 2010. The first time, the extra revenues were supposed to help pay for the then-pending health care reform plan.

This time, revenues gained would be used to offset the costs of a three-year “patch” for the Alternative Minimum Tax. Congress regularly passes a short-term “patch” to exempt middle income filers, who were never supposed to be subject to the AMT.

But it doesn’t always provide for an offset. So a three-year, paid-for fix seems a fiscally responsible proposal.

None of this, however, affects the point I made about the balance between spending cuts and revenue raisers in the proposed budget.

The roughly one-third revenue raisers/two-thirds spending cuts formula seems to me arbitrary and counter to our national interests.

Top of my list are growing the economy (without destroying the planet), reducing egregious income inequality, ensuring public health and safety and providing for the needs of low-income and other vulnerable people.

Fiscal commission members Alice Rivlin and Pete Dominici chaired another group that developed a plan distinctively different from the plan of the fiscal commission co-chairs.

This one would produce a 50-50 split. Some parts of it are problematic — most notably, the proposals for reducing federal health care spending.

But it shows there’s no magic in the framework the President has apparently adopted. There are a lot of ways to skin this cat.