Taxes

A Clash of Visions Over Taxes

Actual tax cuts simply don't stir the hearts of garden-variety liberals, new spending does.

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House Republicans unveil their tax-cut package Thursday, which means the spot price for liberal shibboleths like "giveaway to the rich" and "hypocrisy on the deficit" is about to hit the roof. Which is only fair. Conservatives don't exactly trip over themselves to embrace Democratic policies, either.

The package will include lots of numbers. That will give critics plenty of ammunition with which to explain why this particular set of tax proposals does not deserve to pass. And maybe it doesn't! The trouble is that such arguments raise a question: What set of tax cuts would liberals consider worthy of passing?

Judging by their usual objections, those on the left want to see tax cuts that help the poor, and maybe the middle class, but not the rich. This sounds swell, but it short-circuits just about all tax cuts of any sort. That's because the bottom 50 percent of earners in the U.S. pay only 2.7 percent of the revenue collected through income taxes. The top 1 percent of earners, who enjoy 15 percent of all pre-tax earnings, pay 38 percent of all federal income taxes.

Some kinds of tax reform can benefit the poor but not the rich, such as expanding the earned income tax credit. But the EITC is not a tax cut. It is a subsidy—i.e., a government handout—based on a person's earnings and family size. It's a good policy that encourages people to work and has helped lift many people out of poverty, which is a noble enterprise. It's just not a tax cut.

Actual tax cuts simply don't stir the hearts of garden-variety liberals. They are to many liberals what reductions in carbon-dioxide emissions are to so many conservatives: something that might conceivably be nice in a perfect world, but nothing you'd hold a pep rally for.

To see what does stir the liberal heart, consider the Congressional Progressive Caucus' "People's Budget." This is the budget for all of those whose souls have been a rainy, bleak November for as long as they could remember, because the federal government isn't spending nearly enough money.

Thus the People's Budget would impose more than $7 trillion in tax hikes, raise the top rate to 49 percent, cut defense spending, and then jack up spending just about everywhere else: infrastructure, health care, job training, and so on. It even proposes a pilot program to hand out diapers. Talk about the perfect metaphor.

If enacted, the People's Budget would raise the federal government's take of GDP from 17.8 percent of GDP to 22 percent, and raise federal spending from 20.7 percent of GDP to 25.3 percent. Outlays haven't been that high since WWII.

The GOP tax package and the Progressive Caucus' People's Budget capture sharply different visions of the correct allocation of resources. But they also capture an even more important question: Who should do the allocating—the government, or the people who made the money in the first place?

The more modest approach holds that since you earned your paycheck, you ought to decide how it gets spent as much as possible—even if other people think you're doing it wrong. The more expansive approach says it's ridiculous to let a CEO buy yet another $12,000 wristwatch when parents in Appalachia or the Bronx can't even scrounge up the money for asthma medication so their kid can breathe. Both of these are pretty decent arguments.

Some liberals take issue with the idea that a person—or at least certain persons—really earn their paychecks. We are all just products of circumstance, goes the argument. Some people are lucky enough to be born with good genes and into good environments, so they go to good schools and get good jobs and make a good living. Even if they work very hard (goes the argument), persistence is either genetic or learned—so it's a product of luck, too. Since the rich person never really earns his fortune, he is not entitled to keep it. Hence any level of confiscatory taxation is perfectly fine.

This is probably a distinctly minority view. But even if we accept it as true, it fails as a justification for high taxes.

Assuming Jones has done nothing to earn his fortune, and therefore nothing to keep it, that does not explain what Smith has done that entitles him to confiscate it. Jones might not "earn" the $20 bill he finds on the sidewalk. But what gives Smith any right to take it from him? No doubt Smith has many wonderful plans for using the money to help the less fortunate. Still, does that justify his snatching it out of Jones' hand?

All analogies are imperfect. But this one might be worth chewing over as the debate over tax reform goes forward.

This column originally appeared in the Richmond Times-Dispatch.

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  1. Good thing deficits don’t matter now that Republicans are in charge

    1. Don’t worry, everyone changes their mind when they get into power…

      Mr. President, I rise today to talk about America’s debt problem.

      The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.

      Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is ”trillion” with a ”T.” That is money that we have bor- rowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. And over the next 5 years, between now and 2011, the President’s budget will in- crease the debt by almost another $3.5 trillion.

      Increasing America’s debt weakens us domestically and internationally. Leadership means that ”the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans
      deserve better.

      I therefore intend to oppose the effort to increase America’s debt limit.

      -U.S. Senator Barack Obama (D-IL)
      Floor Speech
      March 16, 2006

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  2. Scrap the entire tax code and replace it with something simple and balanced that can fit on a page or two. I don’t even necessarily object that much to one bracket for the “haves” and another for the “have-nots” if it’ll help to shut up the stupid-ass Block Yomommatards.

    The purpose of the tax system should be to pay for the government we supposedly think we need, not to artificially create endlessly competing groups of winners and losers locked in an eternal struggle to see who can steal a slightly bigger piece of the pie.

    1. Hrm… I actually have an idea about this, but off the cuff I think it would require a Constitutional Amendment or two.

      Basically, instead of the federal government taxing indivduals or buisnesses, it taxes states. The states are then free to decide for themselves how to raise the revenue. The amount of the “state tax”, and which portion is to be born by each state, would need to be done by a legislative body that owes fealty to state governments (since it’s the state governments that would be responsible for raising the revenue). Prior to the 1

      1. Whoops, hit the wrong key.

        Back to where I was: prior to the 17th amendment, the obvious body would be the senate as senators were mostly elected by the state legislatures, and represented their state governments rather then state citizens.

        Anyway, lots of possible problems, but the broad stroke is to push down taxation decisions to states, and let a body representing states themselves (as opposed to citizens of states) decide how much of a budget to give the federal government. Or to put it another way: most folks can try to negotiate for a raise, but they can’t demand one. The federal government should be similarly limited, and have to ask the states nicely for a raise.

        1. I don’t like this because Blue states with higher incomes wouldn’t pay more. :p

    2. Or who gets more stolen from them, you mean.

  3. Payroll taxes are more than a 3rd of all federal revenue, yet it’s as if they don’t exist when it comes time to talk tax reform

    1. They’re not taxes. They’re involuntary contributions to insurance programs in which you cannot decline to enroll. Totally different.

      1. More of a “contribu-tax”.

      2. Insurance programs which function in all manner like redistributed taxes, and in no way like actual insurance programs. Except the naming and “play account” they set up for everyone.

    2. But you understand why, right? Would you really want to treat SS as general revenue & general spending? That might be an improvement, but lots of people have worried from the very beginning that if it weren’t, then it’d be a very serious & anger-making struggle over redistribution of incomes, It might lead to more of the same, or less…hard to tell…but it’d be acrimonious to say the least. I think we’re better off policy-wise keeping its books separate from the general fund, letting them lend to each other as necessary.

      1. I just think the focus on keeping the SS books balanced in the long term has been a net advantage for fiscal responsibility. Make it all one acc’t, & I’ve every reason to believe it’d run at an open-ended deficit, since all it’d be doing is adding to the total federal deficit. Just compare to all the other countries that run it that way.

    3. Funny thing about payroll taxes. Only employers pay them because only employers have payrolls. For some reason they want to call a tax on an employee’s income a payroll tax even though it’s definitely an income tax.

      1. For some reason they want to call a tax on an employee’s income a payroll tax even though it’s definitely an income tax.

        All taxes are income taxes. Even capital gains. If you have no income, you never own anything which will produce a capital gain.

        Every dollar collected by any government, whatever the identifier given it, permit, fee, etc., is a tax.

  4. REPUBLICAN TAX CUT PLAN LEAKED!

    Republicans are now copying Democrats when it comes to all things, not just with culture war tactics. Therefore, they have decided to use the tax code for social engineering.

    Activities which earn a tax cut:
    – Going to NASCAR races
    – Living further than 100 miles from the nearest city
    – Buying flags
    – Buying guns
    – Supporting the troops no matter what
    – Having babies, as long as they are Good Murican Babies

    Activities which earn a tax increase:
    – Drinking lattes
    – Shopping at Whole Foods
    – Living in any big city
    – Working at a university
    – Being a journalist
    – Kneeling
    – Being Muslim

    1. Correction: kneeling outside of church.

      Observant Catholics are a major interest group in the modern GOP. We can’t risk offending them.

    2. REPUBLICAN TAX CUT PLAN LEAKED!
      Activities which earn a tax increase:
      Being a fucking idiot.
      chemjeff hardest hit!

  5. You cannot reform or abolish the income tax unless you understand what it is. ie an excise tax on the exploitation of a federal privilege for profit.
    The lib/con establishment falls into the two great errors identified by Murray Rothbard in a famous 1978 essay.
    Left Sectarianism is the first error. . Sheldon Richman is the poster boy for this error. For Sheldon, all problems have one solution-a return to or creation of some kind of libertarian ideal, such as panarchy, a return to the Articles of Confederation, etc. See also repeal of the 16th Amendment.
    Right opportunism is the second error.Cato in its tax policy proposals is a good example.
    This is the unqualified acceptance of the IRS/establishment view and arguments about one kind or other of tinkering with tax rates, etc.
    The correct way of course would have been to study Tax Honesty.In particular, it is understanding the work of Pete Hendrickson, who is the most successful Tax Honesty proponent, and who has helped tens, possibly hundreds of thousands of Americans receive full refunds of Federal and State income taxes , including payroll taxes, since 2003.
    But that would require thinking outside the box. Libertarians claim they do that, but in the case of the income tax, the thinking from the libertarian conservative establishment is hopelessly pedestrian.
    See Pete Hendrickson’s You Tube channel if your want to challenge your herd thinking

    1. And how many of them are in jail, or facing large fines from the IRS?

    2. “See Pete Hendrickson’s You Tube channel if your want to challenge your herd thinking”

      Also if you’d like to spend the rest of your life meeting with IRS agents.

    3. would I discover any simple tricks that the government doesn’t want me to know about?

  6. There is also the fact, thatbthe eay marginal tax rates work, a cut to the lower tax brackets are also tax cuts for the rich, because they pay those rates for for the first part if income earned. The only eay to avoid is targeted fac credits, which are just straight income transfers rather than tax cuts.

  7. I ain’t as smart as that there last feller but. It seems to me that a flat tax, a simple percentage, is the easiest and most equitable I’ve heard politicians and others state that a flat tax is not possible or feasible. However ever municipality and state that I’ve lived in has a flat income tax and it seems to work fine, Therefore the only obstacle I can see is that a flat tax would prevent politicians from making sweetheart deals in return for votes, monies, and fantastic prizes!

    1. Which is why it is politically impossible.

    2. I live in California, which has about 52 tax brackets last I checked, and it works fine too. Very few people understand state taxes here and the assembly just fleeces us for more every year and no one seems to notice or care. Win win!

      1. A bracket for each gender. How progressive.

    3. Flat taxes don’t simplify much of anything except the final step of “your taxable amount is X, your tax is Y”. Even with 20, 50, or 100 marginal rates, this last step amounts to nothing more than a lookup in a table. The IRS publishes a “tax table”. You go down the left side to find you taxable income, the across to your filing status and BAM there’s your tax. Doesn’t matter how many marginal brackets there are.

      Flat taxes usually are stated as something like “5% on all your income, no deductions or exemptions”. Fine. Define INCOME. Does income include gifts? If not, then I’ll be convincing my employer to give me a large gift instead of wages. If it does, does Grandma need to file a 1099 for the $100 she gave little Johnny for Christmas? Are gambling winnings income? Lottery winnings (not income in UK, as I understand it)? Insurance payouts? Forgiven loans? Cash from selling used crap at a yard sale? Barter? Exchange of services? Can my employer give me a car or is that income?

  8. What tax cut? My taxes will go up, as will taxes for many other people who itemize deductions. Corporations will get a tax cut, but with the top rate staying, even most rich people won’t get a cut.

    I would vote for a standalone repeal of the estate tax (even though it doesn’t benefit me) and standalone tax cuts for the “rich”, but not if I have to pay more for the privilege.

    1. “Corporations will get a tax cut”

      Corporations do not pay taxes. They collect the money from their customers and send it to the government.

      1. Due to global competition, a corporation can ‘t always collect taxes imposed on them from their customers. How does, say, Boeing pass on the tax on a jet made in Seattle to a potential customer in Sierra Leone which can buy a perfectly nice jet made in France where the corp. tax may be lower on Airbus?

        1. Get the Import/Export bank to subsidize them?

      2. CBO agrees. A CBO report on the incidence of corporate taxes…

        “A corporation may write its check to the Internal Revenue Service for payment of the
        corporate income tax, but that money must come from somewhere: from reduced
        returns to investors in the company, lower wages to its workers, or higher prices that
        consumers pay for the products the company produces. Understanding the mechanisms
        through which those tax burdens are transferred is crucial in determining the
        economic effects of the corporate income tax.

        “Although economists are far from a consensus about exactly
        who bears how much of the burden of the corporate income tax, the existing studies
        highlight the significant types of economic mechanisms as well as the empirical
        estimates necessary for further quantifying the burdens. CBO’s review of the studies
        yields the following conclusions:

        o The short-term burden of the corporate tax probably falls on
        stockholders or investors in general, but may fall on some more than
        on others, because not all investments are taxed at the same rate.

        o The long-term burden of corporate or dividend taxation is unlikely to
        rest fully on corporate equity, because it will remain there only if
        marginal investment is not affected by those taxes. Most economists
        believe that the corporate tax system has some effect on investment
        decisions.

        o In the very long term, the burden is likely to be shifted in part to
        labor, if the corporate tax dampens capital accumulation.

  9. Assuming Jones has done nothing to earn his fortune, and therefore nothing to keep it, that does not explain what Smith has done that entitles him to confiscate it. Jones might not “earn” the $20 bill he finds on the sidewalk. But what gives Smith any right to take it from him? No doubt Smith has many wonderful plans for using the money to help the less fortunate. Still, does that justify his snatching it out of Jones’ hand?

    That’s all fine and dandy as a philosophical question, but we have plenty of historical empirical evidence to know what happens when property rights are universally diminished. The more they are diminished, the less wealth creation happens, which raises the cost of living over time. Who gets fucked over the most by cost of living increases? It’s not the people who go on yacht cruises. It’s your single parent households barely scraping by on their handouts. The faith in socialism as the answer to poverty has been proven wrong so many times in history that it’s criminally negligent to continue to ignore the inconvenient facts.

    1. If the free market did better for poor people nobody would have ever thought of socialism.

      1. Wait, you actually believe that socialism was thought up to help poor people?

          1. I’m sure it was entirely altruistic and not meant at as a rhetorical device for political power. Especially later scientific socialist movements by angels like Marx and Engels.

          2. LOL! It just creates more poor people!

      2. If the free market did better for poor people didn’t threaten the power of the aristocracy nobody would have ever thought of socialism.

        FTFY

      3. The free market provably does better for poor people. Socialists is a character flaw based largely on envy.

  10. Why aren’t you asking why tax cuts is the single most important priority for the US government right now? They don’t help anyone who needs any help. They don’t do anything for economic growth. If Paul Ryan had grown up with a fetish for lady’s shoes instead of tax cuts, would we be talking about nationalizing Payless ShoeSource right now instead?

    Also spare me the ignorant horseshit about how tax cuts are always good in themselves because they’re giving people their own money back. Taxes do pay for things. If anyone is getting a discount on those things, that is welfare every bit as much as a check cut to a poor person. Sorry if that obvious baby math undermines the entire point of libertarianism, but nobody forced you to believe stupid shit.

    1. Yep, that extra $200/month I was getting due to the Bush cuts wouldn’t help at all now (what with inflation and health insurance costing three times what it did back then). And no, I wasn’t rich then either.

      Look, I get it Tony, you hate everybody (but poor people most of all) and want to see them suffer. But you have to realize that is an incredibly fucked up way to view the world and it’s not going to make you friends.

      1. I thought half the country didn’t pay taxes. So how are tax cuts going to help them?

        1. How will higher taxes help?

          1. It’ll make poor people ever poorer and then they’ll die off and Tony will never have to see a fat redneck on a rascal at the Piggly Wiggly again?

          2. If you’re a deficit hawk, they would help pay for the shit we bought.

            Also our tax system could use a big fat injection of progressivity which would have many positive effects.

            1. Translation: Give me your money or else. We already have the most progressive tax code in the industrialized world, dumbass. We certainly don’t need any more.

      2. US Corporate tax rates are non-competitive compared to the rest of the world and encourage compaied to keep foreign earnings on their overseas divisions and reincorpirate in other countries.

        1. They are not so non-competitive if you look at all the loopholes and calculate an effective corporate tax rather than the top line number.

          1. It may be more accurate to say that the corporate tax rate is more competitive for some than it is for others.

          2. Corporations spend amount the same amount of money doing their taxes (record-keeping, accounting, legal advice,…) as they pay in taxes. So for every $1 the federal government collects (about $400B per year give or take), corporations are out $2 ($1 to the government, $1 to “the process”).

            Is that an efficient way to collect taxes? Might that $400B of compliance costs done better in the economy doing other things than tax compliance?

    2. The argument (which I’m sure you know) is that market driven forces are more efficient than allocation by decision-makers who are subject to political forces (and human limitations), and don’t act optimally. That’s why.

      I think it’s a perfectly reasonable view in a vacuum. The problem is that massive federal deficits are certain to increase at a much faster rate with tax cuts, because there won’t necessarily be any accompanying spending cuts. Nobody has convinced me that the inefficiencies associated with increases in the deficit (i.e. interest payments) can be overcome by the improvements in efficiency due to tax cuts. By the same token, I’m not sold on the spending increases suggested by people who bastardize Keynes — for exactly the same reason.

      1. Nobody has convinced me that the inefficiencies associated with increases in the deficit (i.e. interest payments) can be overcome by the improvements in efficiency due to tax cuts. By the same token, I’m not sold on the spending increases suggested by people who bastardize Keynes — for exactly the same reason.

        ^ This is why cutting spending is the only way.

        1. I agree. It’s also the politically hard thing to do. One group is trying to sell the idea that government spending “stimulates” the economy in a way that overcomes the inefficiencies associated with deficit spending. The other group is trying to sell the idea that tax cuts “stimulate” the economy in a way that overcomes the inefficiencies associated with deficit spending.

          But we’re neanderthals for thinking that costly stimulus strategies don’t work long term. Both sides cite increases in GDP to support their view, suggesting that this could not possibly be due to other factors.

  11. WE PLANNED IN WAR.

    I like the wrist watch example because it doesn’t actually consume $12,000 in resources. It transfers money from the wealthy to the laboring watchmaker. The watchmaker then pays taxes and spends the money.

    How is that really any different from society’s perspective than simply giving the money away?

    Now, if the plutocrat were setting food on fire or salting arable land, that would be different. He’d be destroying value rather than transferring it.

    1. Hey, you know darned well we libertarian plutocrats put all our cash into huge money vaults where we swim in coin every day.

  12. “those on the left want to see tax cuts that help the poor, and maybe the middle class, but not the rich. This sounds swell, but it short-circuits just about all tax cuts of any sort. That’s because the bottom 50 percent of earners in the U.S. pay only 2.7 percent of the revenue collected through income taxes. The top 1 percent of earners, who enjoy 15 percent of all pre-tax earnings, pay 38 percent of all federal income taxes.”

    As they should. The fundamental flaw with a flat tax or any other regressive tax is that it operates under the assumption that we all benefit equally from the existence of government. This is a view held by statists, and should not be adopted by anyone with even a modicum of libertarian leanings.

    1. Right, the more productive people benefit far less. Flat taxes aren’t regressive, they’re proportional. Same with consumption taxes unless you think there is value in just having money that you can never spend.

      1. “Right, the more productive people benefit far less.”

        Look at the allocation of federal (and state) funding and, more importantly, the infrastructure in place, and I think you’ll sing a different tune.

        As much as we libertarians sing the praises of “property rights”, and as much as (some) libertarians extend those rights to things that aren’t even property, it should be acknowledged that it is incredibly costly to protect those “rights”.

        Put more simply, homeless people rely on government and use its resources a lot less than, say, Microsoft does.

        1. So your argument is basically extortion, “It would be a damn shame if something were to happen to your house/business/nice things.” Actual defense of property rights is a drop in the bucket compared to the massive check clearing house that is the federal (and much of state) government. But then again I actually understand the numbers instead of your feelz.

          1. Jesus you people jump on the insult bandwagon quickly. Sheesh.

            To answer your question — “actual defense of property rights” is a lot less expensive than the USA’s version of defense of property rights, which is incredibly costly. First of all, the USA extends property rights to things that are questionable. Second of all, the bureaucratic mess that they’ve created to aid in the defense, restoration, and redistribution of property where they see fit is astronomical. This includes things like IP protection, which many free market economists don’t even consider valid concepts, let alone something that falls under the umbrella of property.

            Why doesn’t Microsoft pay for their own detective work, enforcement, and prevention of IP infringement? Why are we subsidizing it? In fact, why are we subsidizing virtually everything in Microsoft’s profit model, including training their workforce from the age of 5 to 25 for free; trampling on the rights of their competitors, effectively increasing the amount of money they can charge; providing grants with taxpayer money to public sector institutions to develop novel tools that they will turn around and sell (often exclusively) for profit; and then actually forcing certain groups to purchase their products as a result of excessive regulations in areas like privacy? I don’t mean to pick on Microsoft specifically — corporations almost universally enjoy analogous “benefits”.

  13. I’d be more sympathetic to Jones’ argument if wealthy Jones didn’t object so much to the minimalist regulations that help poor Smith. Some examples: Not dumping pollutants into rivers, not putting tiny print on financial instruments so that no one can sue you when you defraud them, not insisting on subsidies for his industry only etc.. Regulation needs to be reduced but it can’t be eliminated. Sometimes regulation is the only thing that prevents nearly all power from being stripped from the non-wealthy since we can’t all afford legions of lawyers to sue.

    1. You said it better than I did. Agreed completely. Those who advocate a flat tax fail to account for the fact that our economic system is not a free market.

    2. Not dumping pollutants into rivers

      Who is it that you think is in favor of allowing the dumping of pollutants into rivers? What regulations have prevented anyone from doing so, as opposed to fear of liability?

      not putting tiny print on financial instruments so that no one can sue you when you defraud them

      Just taking a stab at what trendy issue-du-jour you’re alluding to here, but how does including a clause requiring an attempt to resolve a dispute via arbitration prior to filing a lawsuit strip power from people who can’t afford lawyers? Traditionally arbitration clauses have been considered the exact opposite of that.

      Do you really think that a handful of government inspectors empowered to issue fines is what is keeping us from living in Blade Runner?

      1. He’s basically saying the court system will fail people in contract disputes therefore we need an authoritarian govt system to restrict contracts people should be allowed to enter into.

        Typical justification, people are evil therefore we need better people with more power over them.

        1. The court system DOES fail people in contract disputes. I don’t see any suggestion in his post that we need an authoritarian system to restrict contracts. He’s correctly pointing out that the current environment fails to protect potential competitors (“poor Smith”) who are the victims of collusion between government and big business (“wealthy Jones”), specifically mentioning corporate subsidies as an example. And in his example of polluting rivers, this is less about contracts between two parties, and more about government arbitrarily choosing what to regulate and what not to regulate.

          The wealthy distort the court system and government interference into their own personal gain. Which is usually a smart move on their part, but it’s an abuse of government power that we should reject, not defend.

  14. Hinckle,

    Since when is a tax cut a government “handout” or “subsidy”. An entity can only “handout” or a government can only “subsidize” when that wealth does not already belong to the recipient. A good analogy is if a thief robs me of $100, then returns $10, that thief does not give me a “handout” of the $10, that was my wealth in the first place.

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