The Tax Lawyer's Blog

The Center on Budget Policies and Priorities is promoting a study by Moody’s of the recent bi-partisan tax bill which concludes that the Democratic parts of the bill are better for the economy than the Republican parts of the bill:

As a result of the tax cut-unemployment insurance legislation that President Obama signed into law last week, economic forecasters have substantially upgraded their outlook for 2011. … An analysis of the compromise by Mark Zandi, the chief economist for Moody’s Analytics, indicates that this greater optimism stems largely from the longer extension of federal emergency unemployment insurance (UI) programs than forecasters had expected, the extension of various improvements enacted in 2009 in several tax credits for low- and modest-income families, and a reduction in the payroll tax.

By contrast, the extensions of the upper-income Bush-era tax cuts and a substantially weakened estate tax will provide little or no boost to the economy in the short run; moreover, those extensions increase the risk that such measures will ultimately be made permanent and thereby deal a setback to efforts to restore long-run fiscal balance.

• In a December 8 analysis of the compromise legislation, Zandi finds that, compared with Moody’s pre-compromise economic forecast, the deal would add 1.2 percentage points to economic growth and 1.6 million jobs to payroll employment in 2011, while lowering the unemployment rate by 1.2 percentage points. (Moody’s pre-compromise forecast already assumed enactment of several measures that were part of the compromise, most notably extension of the “middle-class” tax cuts. Please see the box on page 4 for a more detailed explanation of the measures in the compromise.)
• Zandi also finds that what he terms the “Democratic Proposals” in the package — the 13-month extension of UI benefits (Moody’s pre-compromise forecast assumed only a three-month extension), the extension of various refundable tax credit improvements enacted in the 2009 Recovery Act, the reduction in the payroll tax, and the “expensing” provision for businesses — account for 1.1 percentage points of the 1.2 percent boost to real economic growth in 2011, 1.4 million of the 1.6 million-job increase in payroll employment, and 1.1 percentage points of the 1.2 percentage-point reduction in the unemployment rate.
• In other words, Zandi estimates that about 90 percent of the expected improvement in economic and job growth and the reduction in the unemployment rate will be due to the UI and tax provisions the Administration promoted, while the high-end tax provisions will have only very small economic impacts.

It doesn’t take a Chinese arithmetician to find problems with the Moody’s/CBPP analysis. 

First, by touting a seemingly non-partisan study that purports to determine the tax effects of those provisions of the bill that are “Republican” and those that are “Democrat” the CBPP reveals its political bias.¹ The truth is, bills are passed in their entirety, not piece-meal. Consequently, everyone who voted for the bill deserves credit for everything in the bill. Thus, Democrats who voted for the measure are as responsible for the extension of the Bush tax cuts for the rich as Republicans who voted for the measure are responsible for the extension of benefits to the unemployed. 

Second, the CBPP (and Moody’s) assumes that the only reason Republicans favor tax cuts for all Americans is because they believe those tax cuts will stimulate the economy. This shows either a complete misunderstanding of the conservative position on taxes and the role of government or a cynical attempt to mis-educate the public about the anti-tax position. Whenever debating taxes it is important to remember that Republicans and conservatives believe that the federal government is inefficient and that it grows more inefficient the larger it gets. And more important, they believe that the confiscation of the wealth of the rich for the purpose of redistribution to the poor is both immoral and an assault on economic freedom that is counter to American values.²

Third, the argument that the tax savings realized by the rich will not be spent and, therefore, will not stimulate the economy is an argument that would apply equally to a measure that, in addition to allowing the the Bush tax cuts for the rich to expire, imposed a 10% surtax on the rich. In short, because 99% of Americans are not rich any proposal that seeks to either reduce or prevent an increase in the taxes of the rich can be demagogued as hurting the poor and the middle class by not stimulating the economy. I presume that there is a limit to how much taxes the CBPP thinks the rich ought to pay. If this is true, then there is little difference in the substantive positions of the left and the right. They agree that the rich should be taxed and disagree only as to the rate and extent of that taxation.³

Footnotes:

¹  Here’s the CBPP’s stated mission (emphasis added):

The Center conducts research and analysis to help shape public debates over proposed budget and tax policies and to help ensure that policymakers consider the needs of low-income families and individuals in these debates. We also develop policy options to alleviate poverty.

In addition, the Center examines the short- and long-term impacts of proposed policies on the health of the economy and the soundness of federal and state budgets. Among the issues we explore are whether federal and state governments are fiscally sound and have sufficient revenue to address critical priorities, both for low-income populations and for the nation as a whole.

It would be consistent with its stated mission for the CBPP to propose a tax policy that mandated the confiscation of, say, 80% of the wealth of the rich for the purpose of redistribution to the poor. After all, the seizure of an amount of wealth from the rich suffiicient to reduce them to middle-class and a distribution of that wealth to the poor sufficient to raise them to middle-class would achieve the CBPP’s stated goal of alleviating poverty, would it not?

²  The tax-the-rich left uses an ends-justify-the-means approach to justify increasing taxes on rich people (who, by the way, already pay more than 50% of all taxes even though they represent less than 5% of the population). Utilitarian heroes Jeremy Bentham and John Stuart Mill might describe the principle this way: A tax policy that seeks to confiscate the wealth of the rich and redistribute it to the poor helps a greater number of people then it hurts, therefore, it is a morally correct policy.

It is interesting to note that the left regularly eschews the use of the utilitarian approach in matters of war. See, for example, the left’s opposition to the Bush administration’s waterboarding of suspected terrorists. This interrogation technique was designed to identify and foil existing terrorist plots which, if carried out as planned, would have resulted in the deaths of thousands of innocent people.

³  If I proposed that the top rate on the super-rich be raised to 90% and the Democrats opposed me on the grounds that 90% is too high, I would find myself in the exact same position that the Democrats are now in viz a viz the Republicans. And, consequently, I would be able to cynically declare that it is the Democrats who are only looking out for the rich.

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The Florida legislature passed a bill recently that would tie teacher’s pay to student performance, but, The Miami Herald reports, teachers hate the idea:

In the most dramatic show of opposition in the state, more than 6,300 of Miami-Dade’s 21,260 public-school teachers took a personal or sick day Monday to protest controversial legislation that would overhaul their pay.

Though schools remained open and were staffed by substitute teachers, the “sickout” — though most teachers said they took personal days — was large enough to disrupt the day for thousands of schoolchildren.

Later, more than 1,000 teachers gathered at Tropical Park in Westchester to drive the point home.

Is it sacreligous to suggest that teachers care more about themselves than the kids they purport to teach?

Related Post:

• Teacher’s Union Prays for Death of New Jersey Governor

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“Facts are counter-revolutionary”

- Eric Hoffer -

Paul Campos of Salon is, predictably, calling Niall Ferguson a liar for accurately pointing out that the bottom 50% of Americans pay no federal income taxes:

Of all the wrongheaded claims in Niall Ferguson’s much-mocked effusion of trite right-wing talking points, this is my favorite:

Welcome to Obama’s America: nearly half the population is not represented on a taxable return—almost exactly the same proportion that lives in a household where at least one member receives some type of government benefit. We are becoming the 50–50 nation—half of us paying the taxes, the other half receiving the benefits.

In fact, America has a barely progressive tax system, in which rich, poor and middle-class people all pay roughly comparable percentages of their income in taxes.  As this study illustrates, last year people who had an average income of nearly $1.4 million (the blessed 1%) paid almost the same percentage of their income in taxes as the bottom 99% of the population. …

[W]hat can be done to combat the constant barrage of nonsense people like Ferguson emit on the subject of taxes? I have a modest proposal, which draws on insights from what in behavioral economics is known as prospect theory. Prospect theory reveals that people are far more averse to giving up what they think of as something they already own than they are to not getting something they think of as not yet theirs. This is known as the “endowment effect.” …

[W]e should have a system in which, to the extent possible, Americans pay no “taxes” at all; instead, our wages should simply be lower, while a portion of what we previously thought of (rather absurdly) as “our” money goes directly to the government.

Campos is the one who is lying, of course. In a blog post I wrote in February 2012 titled U.S. Tax System is More Progressive than France, Germany, Belgium and U.K.  I published this chart from Lucy Barnes of Nuffield College, Oxford (click to enlarge):

Campos should also read my blog post Who Pays Taxes: Top 1% Pays more than Bottom 95%  in which I wrote:

Looks like the rich pay more than their fair share of taxes after all.

Scott Hodge of the Tax Policy Center Blog wrote today about newly released IRS statistics that show,

[T]he top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history. By contrast, the top 1 percent paid 24.8 percent of the income tax burden in 1987, the year following the 1986 tax reform act.

Remarkably, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.

To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined. (Emphasis Added)

Now, consider Campos “Prospect Theory” proposal for a second. What he is saying is that we need to confiscate people’s money before they get  it so as to fool them into thinking its not their money. This way, according to Campos, they won’t miss it. Very democratic, huh? No doubt Mr. Campos also wants to set up a few reeducation camps to accelerate the brainwashing.

People like Campos are true believers and they are very dangerous. Any statistic, study, theory or fact that tends to discredit their argument is summarily dismissed as a lie

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Would a private sector company ever do this?

Richard Rubin of Bloomberg.com reports that the Internal Revenue Service’s approach to issuing tax identification numbers to non-U.S. residents let fraud go undetected, according to a report by the agency’s inspector general:

The IRS emphasized getting applications processed while creating an environment that discouraged employees from stopping potentially fraudulent applications, the report said today. It said 15,795 numbers were assigned to a single address in Phoenix, and $52.5 million in tax refunds associated with nonresidents’ numbers were sent in 2011 to just four addresses in Atlanta.

“It is to be hoped that significant, systematic change, rather than interim improvements, will take place,” Russell George, the Treasury Department’s inspector general for tax administration, said in a statement.

The audit emphasized the amount of money at stake. In 2011, the IRS processed more than 2.9 million tax returns with the numbers and sent $6.8 billion in tax refunds, according to the report. It didn’t have an estimate of how much of that amount involved potentially fraudulent claims.

The IRS gives individual taxpayer identification numbers to tax filers who aren’t entitled to get Social Security numbers. The IRS doesn’t consider applicants’ immigration status, and even nonresidents who aren’t authorized to work in the U.S. can have tax filing obligations and pay taxes.

Individuals who have the numbers are able to claim certain refundable tax credits or file false tax returns to claim refunds.

Romney caught a lot of flak for saying that he likes to fire people who are not providing the services he hired them to provide. Well, the problem with federal agencies like the IRS is that we can’t fire them.

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The Wall Street Journal in an article titled The Numbers Beside a Hot Button Issue states four truths about income tax rates and who is and who is not paying their fair share:

1. The top 5%, top 1% and top 0.1% of Americans have been getting a bigger slice of all the income and paying a growing share of federal taxes.
2. Average tax rates have come down for everyone. On average, the tax bite on the rich is bigger—except for those whose income mainly comes from capital gains and dividends.
3. The share of taxes paid by the bottom 40% of the population has been shrinking along with their share of income.
4. The tax system narrows the gap between economic winners and losers, but not enough to stop the gap from widening.

Be sure to read the whole thing.

(Hat Tip: Paul Caron)

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Can we at least wait until we get the details on Romney’s plan before we start hyper-analyzing it?

The New York Times is reacting with glee that the Tax Policy Center has concluded that Mitt Romney’s tax plan will give tax breaks to wealthy individuals and cause taxes to rise for non-wealthy individuals. One small glitch, though, it isn’t Romney’s plan that the TPC has analyzed (emphasis is mine):

A tax system overhaul along the lines that Mitt Romney has proposed would give big tax cuts to high-income households and increase the tax burden on middle- and lower-income households, according to an analysis from economists at the Tax Policy Center.

The researchers did not analyze the exact Romney plan, since it is incomplete and the researchers were reluctant to make assumptions until the campaign released more details.

Instead they created a model for a revenue-neutral income tax change that incorporates some of Mr. Romney’s proposals, which include lowering marginal tax rates, eliminating both the alternative minimum tax and taxation of investment income of most taxpayers, doing away with the estate tax and repealing the additional high-income taxes passed with the Affordable Care Act.

The TPC authors, Samuel Brown, William Gale and Adam Looney conclude that,

It is not possible to design a revenue-neutral plan that does not reduce average tax burdens and the share of taxes paid by high-income taxpayers under the conditions described above, even when we try to make the plan as progressive as possible.

This is rather obvious. You can’t give income tax cuts to people who don’t pay income taxes and right now about 50% of Americans don’t pay income taxes. In short, if you’re going to give tax breaks, you have to give them to people who are actually paying taxes, welfare credits like the EITC notwithstanding. And even if Romney’s plan does give tax breaks to the wealthier amongst us (i.e. those who actually pay taxes), he would merely be making the system more, not less, fair. The rich already fund the lion’s share of the federal government.

The left’s consistent attempts to paint Romney as a benefactor of the rich and privileged at the expense of the poor and disadvantaged is almost as annoying as a middle of the back itch and twice as tired. Let me give you an illustration:

1. I let a friend stay rent free in my garage apartment for two years.
2. I pay everything. He pays nothing.
3. One day I send him a letter telling him that I will have to start charging him rent.
4. His response: You are placing all the burden on me and that’s unfair.

I don’t think it’s a reach to characterize the strategy of progressives like this: Let’s make those in the earning class give money to those in the non-earning class and when they object accuse them of being heartless bastards.

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