Tuesday, April 18, 2017

Let's Talk Taxes



Since it’s income tax day, let’s talk taxes. Of course nobody likes to pay taxes, but for Republicans, taxes are one of the great evils of the world (in spite of all the stuff they want to spend money on). And since they are in control in Washington, they are threatening tax reform once again, and if they can get the Freedom Caucus to fall in line, maybe they’ll be able to inflict some damage. And I mean damage.
You might remember last time the Republicans were in charge, we paid for two wars and Medicare Part D with tax cuts. I think that’s what they call “fiscal conservatism.” The arithmetic doesn’t work out very well, but if you get the ideology right, who cares about the math? There are always Paul Ryan’s magic asterisks to make all the numbers add up, sort of.
Then we had the Great Recession, which pumped up the debt to truly impressive levels. Of course, Obama came into office in the middle of this mess, so of course the Republicans tried to pin all the debt on him. The truth, of course, is that in a recession, you need government to step in and keep the ship afloat, and with so many people unemployed, tax revenues also drop precipitously, all of which creates more debt. Nevertheless, the “deficit scolds,” as Paul Krugman calls them, were out in force. The big issue for Republicans all during Obama’s first term and half of the second was the massive debt that was drowning America. What they never would admit is that if we hadn’t added a good deal of stimulus when things were awful, it would have gotten a lot worse. Obama generally gets very high marks for his handling of the economy during the late Great Recession. But accumulating debt under those circumstances is pretty much unavoidable.
Now that the economy is humming along, though, we should be trying to build up a surplus. You’d think that would be a high priority for so-called fiscal conservatives. Instead, what do we hear from the Republicans? Well, Trump wants a $1 trillion investment in infrastructure. This would actually be a good idea. Our infrastructure is crumbling. But how do the Republicans propose to pay for this (and other conservative priorities, such as building up an already bloated military and constructing a totally unnecessary wall on half of our southern border)? You guessed it. With tax cuts that primarily benefit the wealthy. Is anyone surprised by this? Of course not. It’s how Republicans operate. They accuse the Democrats of “tax and spend.” All I can say is that “tax and spend” makes a whole lot more sense than “cut taxes and spend.” For some reason, when the Republicans are in power, the debt doesn’t seem to matter at all. Oh, Trump wants to slash spending in important but relatively inexpensive departments and agencies, but all those savings would go to the military, so the net effect is zero. And this week he has actually admitted that repealing Obamacare is really about setting the stage for “tax reform.” It’s not about providing health care for Americans. It’s about tax cuts. At least he’s honest about one thing.
I do agree with the deficit scolds in principle, if not in either timing or methodology. Our debt is too high and can and should be reduced. But it cannot be reduced through tax cuts. That is just obstinacy and absurd ideology and arithmetic deficiency. To put this in some sort of historical perspective, let’s look at top marginal tax rates over time. To save space, I will list only the years when the rate changed.
1940
81.0%
1942
88.0%
1944
94.0%
1946
86.45%
1948
82.13%
1950
84.36%
1951
91.0%
1952
92.0%
1954
91.0%
1964
77.0%
1965
70.0%
1968
75.25%
1969
77.0%
1970
71.75%
1971
70.0%
1981
69.13%
1982
50.0%
1987
38.5%
1988
28.0%
1991
31.0%
1993
39.6%
2001
39.1%
2002
38.6%
2003
35.0%
2013
39.6%

A couple of things are obvious. First, when we needed to pay off our World War II debt, we weren’t afraid to require more of the wealthy. Second, if you look at the national debt, it predictably began to rise with the Reagan tax cuts of the 1980s that took our top marginal rate from almost 70 percent to 28 percent. And once you cut taxes, it is extremely difficult to increase them. In spite of the massive debt, we’ve managed only a measly 4.6 percent increase in the past 14 years.
Hidden in this simplified chart are the myriad tax loopholes that combine with these nominal rates to produce effective tax rates for the wealthy that are quite a bit lower than these figures. Additionally, the capital gains tax rate is 15 percent, which applies to a large share of the income earned by the wealthy. This is why Warren Buffett complained about paying a lower tax rate than his secretary.
So, if we were really serious about reining in our massive national debt, we would enact laws to affect three different elements of the tax code. We would (1) increase top marginal rates to at least pre-Reagan levels, (2) get rid of loopholes that skew the system in favor of the wealthy, and (3) increase the capital gains rate to at least 35 percent, preferably higher. If you think this is drastic, well, just look at the debt we’ve accumulated by playing the silly supply-side game. We’ve been at it for 35 years now, and it doesn’t work. Time to deep-six this awful legacy of Ronald Reagan.
Now, another point about taxes. One piece of misinformation we hear quite often is that Americans are overtaxed compared to other countries. This is simply not true. The OECD (Organization for Economic Co-operation and Development) keeps track of total tax revenue in participating countries as a percentage of GDP. Here are the figures for 2015 (except for Australia, Japan, and Poland, which were unavailable, so I inserted 2014 figures).

Australia
27.8
Austria
43.5
Belgium
44.8
Canada
31.9
Chile
20.7
Czech Republic
33.5
Denmark
46.6
Estonia
33.6
Finland
44.0
France
45.5
Germany
36.9
Greece
36.8
Hungary
39.4
Iceland
37.1
Ireland
23.6
Israel
31.4
Italy
43.3
Japan
32.0
Korea
25.3
Latvia
29.0
Luxembourg
37.0
Mexico
17.4
Netherlands
37.8
New Zealand
32.8
Norway
38.1
Poland
32.1
Portugal
34.5
Slovak Republic
32.3
Slovenia
36.6
Spain
33.8
Sweden
43.3
Switzerland
27.9
Turkey
30.0
United Kingdom
32.5
United States
26.4
OECD Average
34.3

As you can see, of the 35 member countries, only Chile, Ireland, Korea, and Mexico pay lower taxes, on average, than Americans. We pay 7.9 percent less than the OECD average. We want government to do lots of stuff for us. We just don’t want to pay for it. So we’re not really overtaxed. We are 3.4 percent higher than we were in 2009, in the midst of the Great Recession, but that was an anomaly.
Finally, I can’t let income tax day pass without bringing up the fact that Donald Trump has broken his promise to release his tax returns. Of course his statements over time are a moving target. Now he claims that Americans don’t care, but a recent poll says otherwise. Three-quarters of those polled want him to release his returns. And there is probably good reason why he never will. It may have a lot to do with the Russian connection. We’ll really never know unless Congress, which has the power to do so, requests them from the IRS. Of course, this will never happen as long as Trump’s enablers control both houses of Congress. But the way things are going, that could change in 2018. Stay tuned.
Oh, and happy income tax day.