Wow. Just Wow.

Via TAPPED and a host of other sites: the Washington Post published a piece yesterday on the Bush administration's current thinking about tax reform. The good news is that it does not seem that they'll go for a flat tax or a sales tax. The bad news is what they're proposing instead:

Pamela F. Olson, a former Bush Treasury official in close contact with administration tax planners, said the president will pursue a tax system where all income -- whether from wages, dividends, capital gains or interest -- is taxed only once. That would mean eliminating taxes on dividends and capital gains paid out of fully taxed corporate profits. Most investment gains are currently taxed at 15 percent.

The administration will also push hard for large savings accounts that could shelter thousands of dollars of deposits each year from taxation on investment gains, according to White House economic advisers who have been involved with the planning. And any tax reform, according to Treasury Department officials, would likely eliminate the alternative minimum tax, a parallel income tax designed to ensure that the rich pay income taxes but one that increasingly ensnares the middle class.

To pay for those large tax cuts, the administration is looking at eliminating both the deduction for state and local taxes, and the business tax deduction for employer-sponsored health insurance. That would raise nearly $926 billion over five years, according to White House and congressional documents."

There are three main things wrong with this proposal. First, there's the incredible idea of eliminating the business tax break on health insurance. The effect of this would be to raise taxes on those businesses that provide health insurance to their employees, thereby making it much less desirable to do so, and forcing those companies who are now barely able to afford health insurance for their employees to stop providing it. I can see eliminating this tax break in the context of a drastic overhaul of our current system of providing health insurance -- if we moved to a single-payer system, for instance, and employers provided not basic health insurance but some sort of special extra coverage to their employees, then it might be a good idea. But it is emphatically not a good idea now, in a system in which most people's basic health insurance is provided by their employer, to make it much more costly for employers to provide it. I cannot imagine why this would strike anyone as a good thing to do to our tax system.

Second, as far as I can tell, all the tax hikes disproportionately affect the poor and the middle class; that is, precisely the people who have benefitted least from the previous tax cuts, and who have the least to spare.

Third, all the tax cuts benefit primarily the wealthy. It is the wealthy who benefit the most from dividends and capital gains, as opposed to such archaic forms of income as wages. It is the wealthy who would benefit from increases in the limits on contributions to tax-free accounts: most people can't afford to contribute at the maximum limits currently allowed, let alone the higher limits this proposal seems to envisage. Even in the case of reforming the Alternative Minimum Tax, which is ostensibly designed to help the middle class, the administration has chosen a proposal that benefits the wealthy. The AMT was designed to make sure that the wealthy pay something every year; because it kicks in at a level that was not indexed to inflation, it is affecting increasing numbers of the upper middle class. The most obvious solution to this problem would be to raise the level at which the AMT kicks in and index it to inflation, so that it would affect only the wealthy. But the Bush administration proposes to eliminate it altogether.

This country is running a huge and unsustainable deficit. We cannot afford further tax cuts for the rich. Moreover, this administration has already slashed their taxes. There is no earthly reason to cut them further, especially if in order to do so we have to eliminate the business deduction for employer-sponsored health insurance. This tax proposal would cause a lot of working people to lose their health insurance in order to enable the wealthy to shield even more of their income from taxation. It is absolutely unfair, and we should oppose it.

To forestall one line of criticism: I am not anti-rich people. I would benefit from these tax cuts. My employer is unlikely to cut my health insurance, and I have dividend income. Lucky me. I just don't think that people like, for instance, me deserve another tax cut when our country cannot afford it, and when the price is someone who is working hard to get by losing his or her health insurance. That's just not right.

Comments

[Kent]

Are there any Republicans who would like to defend the policy ideas being floated? Sebastian? Blue? Anybody?

Serious question.

[Bill]

Let them do it. As someone whose employer does not pay for his health insurance and has to provide my own I could care less. Let all the people who voted for Bush see exactly how much he cares about them. The majority has spoken. 51% of America wants this.

The democrats want to make inroads in the south? Let this pass.

[vida]

In the pre-Bush years, this would have seemed so ridiculous that I would have been sure it was not accurate. Unfortunately, I now have little doubt that it is true. Tax policy that would shift more net income to the wealthy by creating millions more uninsured workers. Truly amazing. They are so just so, so ... "moral", is that it?

[Doh]

I agree this is atrocious tax policy, but I wonder what the Post means by eliminating taxes on "capital gains paid out of fully taxed corporate profits."

I thought when a company earns capital gains and distributes those gains to its shareholders, the gains are paid in the form of a dividend (unless the company is "pass-through" entity, in which case the gains would not qualify as "fully taxed" profits). I can't imagine a situation where capital gains tax would currently be imposed on previously-taxed corporate profits.

[Bernard Yomtov]

I wonder what the Post means by eliminating taxes on "capital gains paid out of fully taxed corporate profits."

It's not very clear. Just guessing, it means they want to eliminate capital gains taxes entirely, on the grounds that corporate taxes have already reduced the amount of the gains.

Btw, we've heard the business about "dividends...paid out of fully taxed corporate profits" before, as I recall. That was supposed to be the deal with the last dividend tax cut, until everyone realized it was unmanageable, and the qualification was dropped. I suppose we'll see the same thing again.

Make no mistake. This is a terrible proposal. A while ago I suggested here that Bush tax policies would have the effect of establishing a hereditary, largely tax-exempt, aristocracy. Can anyone read this proposal and disagree?

[dmbeaster]

Another wrinkle on this -- the propoganda to sell this nonsense will be "tax reform" and "revenue nuetral."

By the way, poker is also "revenue nuetral," however some leave the table with more and others with less.

Translation -- take from the poor and middle class and give to the rich. That's how you make it revenue nuetral -- tax benefits for the rich offset by hidden tax increases for the poor and middle class. Reform the tax code to make it fair for the Robber Barons, basically.

And I can already hear Sean Hannity saying that criticism such as Hilzoy's is advocating "class warfare."

[vida]

"A while ago I suggested here that Bush tax policies would have the effect of establishing a hereditary, largely tax-exempt, aristocracy. Can anyone read this proposal and disagree"

I am an owner in a small business. If I net $80,000 this year, I will be paying over 40% federal tax as my top rate. That is 27% on income tax and over 14% on social security and medicare (employee and employer half).

On the other hand, under the Bush plan, if I inherit millions of dollars and live off dividends and interest, federal tax on my income will be, um, lets see, oh yeah, zero. Oh, and by the way, under his plan there will be no estate tax on the inheritance either.

This is class warfare. Unfortunately, at the moment, the middle class is losing the war.

[Phil]

My employer provides a pretty generous health insurance benefit -- my monthly premium is $50 to cover both myself and my wife, we pay a $10 co-pay for office visits, and either $10, $20 or $30 for prescriptions in a tiered plan. My employer also provides a quarterly allotment for optical and dental coverage, whereby I pay and then am reimbursed those expenses once per quarter. Also provided are allotments for physical fitness -- joining a gym, for example -- and education.

Assuming this passes, one of these things will be gone next year. I guarantee it.

[someguy]

Not only is this anti-worker--and by worker I mean everyone who earns a salary for a living--it is anti-small business.

[someguy]

Q1: when they say "fully taxed corporate profits"--I assume that applies fully whether or not the corporation, oh, actually pays taxes? Because many if not most do not.

Q2: I read that they were going to eliminate the deductions for state and local taxes--another way to stick it to the blue states. Is that in the final proposal?

It's terrible, terrible policy. It's as if they're not just trying to help the rich, but also actively trying harm the middle class and the poor. Class warfare indeed. (I don't think that's the actual motivation--a policy designed to help campaign contributors often looks remarkably like a policy designed to soak the middle class and poor.)

[mike p]

Well Kent, for the most part, this all sounds quite fine to me. My only concern would be that the elimation of the health care deduction gets passed without changes to a more market oriented system of health care. In a competitive labor economy, if health costs become nondeductible, but salary remains deductible, salaries will rise and the individual will be empowered to make his own choices with respect to obtaining health insurance. Suffice it to say that while Hilzoy and I have the same surface concern, I don't think single payer is the way to go. I don't believe government is the solution for wringing the inefficiencies out of health care, you may differ.

No problem with the elimination of deductions for local and state taxes. No different than getting taxed on the income that goes to your Social Security contributions. And that particular reform would certainly be progressive. Most local taxes are property taxes and by the standard definition, poor people have less property.

Dividend income ought to be taxed only once. That would make for greater efficiency - many companies in mature industries had been keeping dividends low and instead reinvesting in the company when it would actually be better, absent tax considerations, for shareholder value to pay a dividend and allow the shareholder the flexibility that cash provides.

As for tax free investment accounts, aren't a lot of people bemoaning that we aren't a nation of savers?

And eliminating the AMT would simplyfy things somewhat. A terribly convuluted system is slightly less complex than a system where you pay the greater of an amount determined according to a terribly convuluted system or a modified flat tax (which is essentially what AMT is). Of course they really ought to lower the AMT rate and throw out the regular income tax, but that is apparently off the table.

[DaveL]

One quibble: there is absolutely no theoretical justification for eliminating the employer deduction for health insurance premiums. Employer-provided health insurance is simply a form of non-cash compensation. Compensating employees is a cost of doing business and therefore should be deductible in determining the employer's net income.

If this actually had anything to do with tax policy, the Bushies could make the argument that compensation paid in the form of health insurance should be taxed the same way as other forms of compensation, i.e., included in the employee's taxable income. Of course they don't want to do that, because "employee" is another word for "voter."

[votermom]

As one of the working, salaried middle class, politics is getting damned personal.
I'm quite ignorant about how tax laws pass. Will this get voted on by House & Senate?
If yes, will Republicans actually go for this? (I'm assuming Democrats will votes against it).

[liberal japonicus]

I just wanted to give a quick shout out to Bush and the boys for this. They've made the Japanese tax system seem understandable in comparison.

[Gromit]

mike p: No problem with the elimination of deductions for local and state taxes. No different than getting taxed on the income that goes to your Social Security contributions. And that particular reform would certainly be progressive. Most local taxes are property taxes and by the standard definition, poor people have less property.

But does it hold for the middle class? They tend to have proportionally more of their wealth tied up in property, whereas the very wealthy tend to have more of their money in other investments, right?

[Jadegold]

This 'plan' is so insane, I strongly think it's a trial balloon. IOW, this appointed administration floats this proposal out there and then scales it back to get one or two other idiotic ideas like MSAs or capital gains tax reductions.

On the bright side, this tax plan passes, as proposed, Dems won't have to worry about winning elections for a long, long time.

[Jadegold]

No problem with the elimination of deductions for local and state taxes.

You can't be serious.

The vast majority of Americans aren't going to save enough on investment income/dividend deductions to offset the hit they'll take on the elimination of state/local tax deduction.

[Bernard Yomtov]

the individual will be empowered to make his own choices with respect to obtaining health insurance.

Except for the part where the individual can't get health insurance, or the individual policy is much more expensive than the group policy.

No problem with the elimination of deductions for local and state taxes. No different than getting taxed on the income that goes to your Social Security contributions.

Dividend income ought to be taxed only once.

Interesting combination of views. It's OK to tax wage income three times, but you shudder at the thought of double taxation of dividends.

If we are concerned about the distortions caused by the current arrangement we could make dividends deductible to the corporation. That would be an honest approach, which, incidentally, would benefit all shareholders, not just those who own stock in taxable accounts. Reducing or eliminating the income tax on dividends instead is plainly just a benefit for wealthy shareholders, not an effort to fix a problem.

As for tax free investment accounts, aren't a lot of people bemoaning that we aren't a nation of savers?

One thing that would do a lot for national savings is to reduce the deficit. How does this plan do that?

[vida]

"In a competitive labor economy, if health costs become nondeductible, but salary remains deductible, salaries will rise and the individual will be empowered to make his own choices with respect to obtaining health insurance."

Nice Econ 101 theory. In the reality-based world, you make health insurance premiums nondeductible and many employers will stop paying, leaving workers to try to deal with insurers on an individual basis. High cost people (i.e., sickly or older workers) are then priced out.

On the other hand, if what they really mean is that health insurance premium payments by employers would still be deductible as compensation expense, but would become taxable income to the employee, what they really accomplish is shifting the tax burden downward to middle class workers.

"This 'plan' is so insane, I strongly think it's a trial balloon."

From whose point of view is it "insane"? Not those living off investment income.

[DaveL]

One suspects that it's typical Bush Administration policy: they recognize that providing health insurance through employment is a silly way of doing things, so they propose policy changes that would tend to eliminate employer-provided health insurance. But, being the Bush Administration, they don't bother to think about what comes next. Their buddies will get health care one way or another, so who really gives a **** about the fact that the individual health insurance market is pretty much limited to people who don't need much health insurance.

[Jadegold]

From whose point of view is it "insane"? Not those living off investment income.

Obviously. However, that doesn't include the vast majority of Americans. But I'm interested to see how the GOP will sell this. I've got to think this is going to make an awful lot of GOP politicos very, very nervous.

[Lex]

One other thing to think about, folks: You eliminate the deductibility of state and local taxes, you almost certainly take a bite out of the home ownership rate. The only thing worse would be eliminating the deductibility of mortgage interest.

[Bernard Yomtov]

In a competitive labor economy, if health costs become nondeductible, but salary remains deductible,

In a competitive labor market what happens is that the elimination of the deduction raises the price of labor, leading to lower employment. The increase in cost may show up as a higher tax bill, if the employer continues to provide insurance, or as higher salaries if health insurance is eliminated. (Note that the salary increase needed to offset the loss of health insurance is greater than the cost of the insurance).

[Jesurgislac]

This is exactly what 51% of those who voted on November 2 voted for - more tax cuts to benefit the rich and disadvantage anyone who isn't rich. Bush & Co have always been pretty explicit that their policy is to cut taxes, and it's always been absolutely clear that the taxes they want to cut are those that affect only the rich and the super-rich.

I'll be interested to see how Bush & Co plan to sell this to the millions of Americans for whom this plan will mean economic disaster, but it was made clear earlier this month that a majority of those who voted wanted exactly this: to be impoverished by four more years of Bush economics. That's what they voted for, and that's what they're getting. Unfortunately, so are the millions who didn't vote for it, but that's how the two-party system plays.

[bob mcmanus]

I presume it is about semi-forced savings. If wage-income becomes so disfavored, and the safety net is shredded, the 25 year-old saves and invests instead of consumes. With the idea of eventually being able to draw income off investments. As soon as frigging possible.

When Bush said "compassionate conservativism", he meant destroying the safety net.
When he says "ownership society" he really meant it.

What this would mean on a macro-economic level, as America moved from a low-savings high-consumption society to its opposite, I can only begin to predict. I don't even know if an economy can really work that way. But one note. The dollar is the reserve currency because the rest of the world invests in America. The Japanese are relatively high-savings, and currently have the slack to buy treasury bonds at an effective loss. In the ideal Bush reality, America would own a lot of the world.

[CaseyL]

Bob - But Bush & Co are also devaluating the dollar; it's down to approximately 0.66 euros at this point. How long will the rest of the world invest in American bonds when US economic policy is everlasting escalating debt?

Which brings up another question: Do the parts of Bush's economic policies have anything to do with one another? Are all these aspects - weak dollar, stagnant salary income, huge deficits, shifting the tax burden downward, raising interest rates - are they all part of one economic strategy? Or are they piecemeal policies, with no one paying attention to how one part affects the others?

[Jadegold]

This is exactly what 51% of those who voted on November 2 voted for - more tax cuts to benefit the rich and disadvantage anyone who isn't rich.

This isn't accurate.

99% of that 51% didn't vote for this; instead, they voted on the misperception that somehow they'd see a tax cut.

And, ultimately, that's how this appointed administration will try and sell this folly--by claiming the plan cuts taxes by x gazillion dollars. Your average red-stater will hear this and start making plans to buy that bass boat or SUV that gets 7 miles/gal in the mistaken belief he's going to see some of that tax cut.

And when the tax savings fail to materialize--it won't make a whit of difference. Red-Stater will think he got a tax cut.

[DaveL]

They're all part of one strategy, but it's political, not economic.

[bob mcmanus]

"They're all part of one strategy, but it's political, not economic."

Yes it is all part of one strategy, and that includes Iraq. It is all deliberate, including both deficits and the devaluation/currency war. I am not entirely clear on the ultimate purpose, I do know it is huge, and transformational beyond most of our imaginations.

1) Some have said an intentional hereditary aristocracy is being set up, a militaristic neo-feudalism. The South has had an attraction to Sparta. On the one hand, setting up a family dynasty seems a petty goal to me, but on the other thousands of years of history tells me it is not unheard of. Cheney reads the classics, and feudalism is stable in periods of shortages.

2) I think we are all underestimating the significance of China. If China were to reach half our level of productivity, it would have twice as much economic power as we do now. The world of the late twentieth century is simply gone.

3) The twentieth century was the century of oil. And even the second half of the nineteenth. The changes we are looking at in the next fifty years are as drastic as the gap between us and the Founding Fathers. In economics, politics, social relations.

I am kinda off-topic, I guess. And I certainly do not assume wisdom or benign intentions in Bushco. But if the proposals look drastic and revolutionary, I do believe we are in a catastrophic transition period mostly outside of our control.

[hilzoy]

"In a competitive labor economy, if health costs become nondeductible, but salary remains deductible, salaries will rise and the individual will be empowered to make his own choices with respect to obtaining health insurance."

Other people have already pointed out that the economy does not work in this frictionless way. I'd add: this comment also leaves out the tremendous differences in price between the individual and group insurance markets. Purchasing insurance as an individual is a lot more expensive than purchasing the same insurance as part of a group. If employees get to demand and receive enough money to buy their own insurance at individual rates, then their employers will have to take a big hit. If employers pass on only the rate they would have paid, their employees will not be able to buy health insurance without taking a major hit themselves. And if employers don't even pass along that much, then of course things will be even worse.

[hilzoy]

Bob M: I don't think it's all deliberate, partly because I am allergic to conspiracy theories on this scale, and partly because, like you, I can't see the ultimate goal, and moreover can't see how this administration's actions as a whole don't end up being disastrous even for them. So I tend to put it down to a failure to understand what they are doing.

[CaseyL]

DaveL - I know the political strategy is to recreate the glory days of feudalism. I just wondered if anyone was paying attention to what happens in the real world when your currency keeps dropping, your debt keeps rising, and at some point the foreign investors you're depending on to keep buying your debt decide it's no longer a good investment.

I was going to say something about how feudalism didn't end because the aristocracy suddenly decided to embrace a more egalitarian model...and then it occurred to me that what really ended feudalism was probably the Plague. So, no, I guess that's not a good example.

Funny thing about Red Staters: they don't connect economic policies to their own lives. They've bought hook, line and sinker the view that hard times - lack of good jobs, lack of healthcare, lack of good schools, even lack of public transportation that could help you get to work - are random, inexplicable things and you mustn't ask the government to do anything about it. What they do believe government should do is protect our "moral values." The idea that our government should be our moral guardian but not address civic issues stands centuries worth of political and governance theory on its head.

Feudalism won't bother the Red Staters at all. It fits in just fine with their worldview.

[Bernard Yomtov]

Let me be clear. I am not claiming that the desire to establish an aristocracy is the motivation behind the Bush tax plans. I am claiming that this is a plainly foreseeable consequence, and that as such it simply does not bother those who develop or support those plans.

Still, I disagree with hilzoy's view that they do not understand what they are doing. It seems impossible not to understand it.

[TM Lutas]

What the analysis so far has missed is the previously announced Bush policy to establish associational healthcare. That means that instead of getting your healthcare from your employer, you get it from the Lions Club or the Catholic Church. Change employers and you don't change health care plans. This makes for a vastly more empowered workforce as nobody is feeling trapped in their job just because junior has a health condition and they'd never get healthcare if they moved to a new job. You pick out the health care that works for you in the association you're comfortable with.

Now there's a whole lot of work to be done to make this actually sane instead of just potentially sane but I could see how it could be a positive thing for everybody. As part of the transition plan, you could mandate that employer healthcare spending had to be turned into cash and added to paychecks and there would have to be some sort of transition period where the associational health insurance system got set up and people moved off of employer provided health insurance.

Lets remember that the current system was an unintended consequence of WW II wage control legislation. It never has been a good idea that was planned. It was sort of an accident that we got in the habit of keeping around (sort of like that temporary tax from the spanish-american war that kept getting renewed every two years for the better part of a century). If we can move to different arrangements that provides better service, we should.

[Bernard Yomtov]

TM,

I don't think anyone will claim that employer-based health insurance is a great system. But it is what we have, and given that we already have the problem of 40 plus million uninsured people, it doesn't seem wise to take step that will add to that number.

I'm not familiar with Bush's plans for association policies. I do know that there used to be association plans and they largely went out of business because of adverse selection problems. In other words, the only members who bought the policies were those who couldn't get better insurance elsewhere, which caused rates to rise, which caused...

[Jesurgislac]

Jadegold: 99% of that 51% didn't vote for this; instead, they voted on the misperception that somehow they'd see a tax cut.

Very likely: but the data was there for them to access. They knew they hadn't benefited by Bush's previous tax cuts - or had benefited by a handful of dollars at most. While of course Bush & Co were making misleading statements about who had benefited and who would benefit, the figures for who would actually benefit were black-and-white clear: the super-rich, and, to a lesser extent, the merely rich. And since previous experience had shown them who would benefit, no, I don't think you can argue it away by claiming they were ignorant.

They knew what they were voting for; that's what they're getting. Tax cuts for the rich/super-rich: impoverishment for the middle classes and the poor. Ignorance works for me as an argument that people didn't realise what they were voting for with more complicated policies, or matters where Bush & Co outright lied, but with Bush's tax cuts and who they benefit, it's sufficiently clear.

[Jadegold]

Very likely: but the data was there for them to access. They knew they hadn't benefited by Bush's previous tax cuts - or had benefited by a handful of dollars at most.

Yes and no.

Yes, the data's there--if they care to do the reading. In most cases, they don't. That's why you have slews of people thinking they're immeasureably better off with a $300 refund check--while ignoring the fact state and local taxes have gone up to compensate and they're passing on huge debt service to their kids.

[cleek]

Obviously. However, that [# of people living off investments] doesn't include the vast majority of Americans. But I'm interested to see how the GOP will sell this.

they'll say "just you look how many people are investors" and point to people in 401Ks and SEPs. the pundits will repeat it.

[Don Quijote]

Courtesy of Matt Yglesias

Internal Revenue Service data on income in 2000, the most recent year available, tell a similar story, showing that income derived from taxable stock and mutual fund assets is heavily concentrated at the top of the income spectrum. Only 22 percent of filers with income under $100,000 reported any dividend income in 2000, while 72 percent of filers with incomes between $100,000 and $1 million and virtually all filers with income over $1 million reported dividends.

Well, there is your ownership society.

[Detlef]

Just a stupid question....
(I should add that I´m a German so I don´t really know your tax system.)

Now dividends shouldn´t be taxed twice, by the company and the shareholder both, according to the Bush administration. And according to mike p.
Taxing money twice is bad!

Then why should anyone working for a wage and paying the income tax (on that wage), pay any additional taxes?
I mean his/her income from wages was already taxed, right?

Things like a "sales tax", "insurance tax", "gasoline", "alcohol" and "tobacco" tax or whatever other additional taxes you have in the USA whenever you buy or own something.

(If these are all state and not federal taxes, am I to assume then that Republican governed states have already abolished those double taxation?)

Just asking....

[mike p]

Bernard, WRT taxing income twice/three times, I wasn't trying to make the point that it was a good idea, just that eliminating the federal deduction for local taxes wasn't fundamentally different from the current arrangement with payroll taxes. I'd actually prefer a lower flat tax with no deductions and reasonably high exemptions. But that's off the table.

I believe that ideally dividends should be corporate tax free, rather than personal income tax free, but it's easier to sell dividend tax reform as a break for individuals instead of a tax break for corporations. Though even people holding a dividend paying stock in a tax deferred account should, in the short term, get some extra appreciation as the market price of a stock would rise if dividend taxes were cut because the after tax holders are bidding up the same shares they hold.

Hilzoy, as for individual policies being more expensive than group ones, that's true for people who aren't healthy, but since group policies don't require individual underwriting, the average cost will necessarily be higher - you just don't generally see the full cost if your health care is an employee benefit. If you think health care should be a guaranteed right, individual underwriting is of course unacceptable.

And what's so great about the home interest deduction anyway? Subsidizing borrowing inflates home prices and provides a tax break for property owners that is unavailable to those of lesser means. It's regressive and distorting. Unfortunately, it's also sacred, and its repeal would cause a downward correction in property values.

[mike p]

Detlef, sales taxes are generally levied by the states. A few states have no sales tax, but most have some. Many states also charge an income tax in addition to the federal income tax. Property taxes are generally assessed on a local level at rates that vary from town to town; some localities will also charge additional sales taxes.

There are also taxes on things like gasoline, cigarettes and alcohol that are in addition to the regular sales tax.

Since there are generally different levels of jurisdiction, they each want their own revenue stream, so multiple types and levels of taxation are pretty well hard wired into the system. Simplification should still be a goal, recognizing those constraints.

For the record, states with no state income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Those states are generally speaking more Republican (excepting Washington), but there are plenty of states that have an income tax and also have as many or more Republicans as Democrats.

Not sure about how things work in Germany but in the US, the sub national government units (states) independently set their own tax rates and policies. I imagine the local tax laws in Germany are more uniform region to region, which might explain some of the confusion?

[crionna]

while ignoring the fact state and local taxes have gone up to compensate

Oh really? Well, I certainly wish I could've gotten some of the Democrats here in SF to vote with me to increase local taxes. Instead they voted in favor of laying off hundreds of city workers, in favor of shutting down firehouses, in favor of keeping the homeless on the streets, in favor of the destruction of historic buildings and in favor of ensuring that the city can't sell stadium naming rights that would've brought in $millions.

As I said in the other thread, its interesting to me that people here are horried that some people vote against their own economic interests and for their beliefs. I guess I shouldn't be surprised since San Franciscans have proven (at least in this election) to to be good at voting against their supposed beliefs and for their own economic benefit.

[Jadegold]

Crionna:

Never realized SF was in a red state.

The point is if taxes are cut on a federal level, chances are excellent local/state taxes have to go up to compensate. Of course, the alternative is to sustain cuts in services and programs.

And, having lived in SF a number of years ago, I know taxes in SF aren't exactly low.

[crionna]

Never realized SF was in a red state.

The state is red, the cities are blue. But that's the thing, folks here disparage the administration and its supporters but then refuse to support their own beliefs with their own pocketbooks. I find that pretty hypocritical to say the least.

The point is if taxes are cut on a federal level, chances are excellent local/state taxes have to go up to compensate.

Agreed, and as a resident of a state that gets less than it gives in federal funds*, this would seem to be a winning proposition for me by trading taxes that I won't see return to my area, for taxes that I will ;)

And, having lived in SF a number of years ago, I know taxes in SF aren't exactly low.

True, but I'm not complaining. I mean jeez, an additional quarter on each $100 you spend? And heck, my property taxes would've gone up a total of about $50/year to pay for the low income housing and the historic preservation. I just can't believe that a town that voted 85% Kerry voted against housing to support the "Care not Cash" initiative that they passed just a year ago. Very disappointing...

*Which really is OK. Roads in Kansas are just as expensive as roads in California and they gotta be there. That there are fewer federal taxpayers there to support the road building isn't anyone's fault.

[liberal japonicus]

Crionna responded on the previous thread (list and capital letter responses are the recommendation of the SFGate, small letter responses are Crionna's memory of the results)

----
My recollection is (in small letters after your caps):

A Floats bonds to finance a $200 million affordable-housing bond. YES, no
B Borrows $60 million to preserve historical buildings. YES, no
C Changes oversight of city worker medical benefits. NO, no
D Revises the rules by which the Board of Supervisors operates. NO, no
E Raises benefits for survivors of police or firefighters who die in the line of duty. YES, yes
F Allows noncitizen parents to vote in school-board elections. NO, no
G Authorizes the city to establish health plans for residents. YES,no
H Prevents the selling of Candlestick stadium naming rights. NO, yes
I Requires the city to analyze proposed legislation for its economic effect. YES, yes
J Raises the sales tax by 1/4-cent to help balance the city budget. YES, no
K Levies a new gross-receipts tax on businesses. NO,no
L Routes $10 million from hotel-tax revenues to purchase movie theaters. NO,no (but that's good actually)
N Calls on U.S. to end occupation of Iraq and "bring our troops safely home now." NO, yes
O Designates Prop. J sales-tax funds for assist low-income residents. NO, no
----

I would suggest that the vote looks more motivated by a refusal to trust anyone with revenues rather than a voting against their interests. (I freely admit that I'm not there, and it's really hard to find info on the various propositions) Note that the only prop that was voted for that involved actual money was increasing benefits to survivors of firemen. I'm not there, and I wasn't there during the election, but it would not surprise me at all if the anti-bush vote was coupled with a refusal to vote for money with the assumption that local taxes are being increased to cover shortfalls in state revenues.

Also, there are state propositions that probably interacted with the local propositions. For example, I think that this article is discussing state ballot initiatives, so one would have to know which passed and which failed and what were the votes in SF for both before simply claiming hypocrisy.

I have not lived in SF (though my cousin lives there and we have been frequent visitors) but I did live in Oregon, which I thought was the home of ballot initiatives (someone claimed that ballot initiatives were a red state thing, I think not) and speaking for the people I knew, there was a distinct case of initiative fatigue having to wade through all of these un-thought out pie in the sky plans that the urge was to just blow them all off. I have to imagine that there is an element of that involved here, especially after the recall debacle.

[CaseyL]

Washington is a blue state with a very lively initiative process. Too lively.

Ballot initiatives were intended, IIRC, to address issues the legislature couldn't or wouldn't. What happened in Washington was Tim Eyman's "tax revolt": a series of intiatives which have cut the legs out from under the state budget. Eliminating taxes wasn't enough: the initiatives included a proviso that ANY tax or fee increase has to be approved by voter initiative.

The natural consequence of this is that voters micromanage the state budget, initiative by initiative. The inevitable result is that we approve programs via initiative, but not the funds for them.

Take Sound Transit. Sound Transit was a state-passed initiative back in '96, to build a lightrail system; it was to be partially funded via excise taxes on motor vehicles, with matching funds coming from the federal government. Eyman's first tax-cut initiative reduced the excise tax to a flat $30 (it had been 2.2% of the sales price). That instantly left Sound Transit without its primary fund source, and it's been struggling ever since.

Another example was an initiative to raise teacher salaries. That passed easily - but, again, voters also approved tax cut initiatives which ensure the salaries can't be funded. It seems that Washingtonians are good at passing "feel good" initiatives, which we then refuse to fund.

Part of the problem is that Washington is actually 2 states: the western half of the state is blue, the eastern half is red. Western Washington passes the program initiatives; Eastern Washington passes the tax-cut initiatives, and ne'er does the twain meet. (Parts of Western Washington are turning red, too.)

Another part of the problem is one crionna mentioned: liberals who say they support social programs, but then refuse to vote for the money for them. Crionna calls this hypocrisy. I've come to regard it as the Ineffectual Liberal Syndrome: all talk, no follow-through.

Initiatives are an idea whose time has come - and gone. In Washington, and apparently in California, the intiative process has gutted the legislative one. Legislators won't or can't do their jobs, because voters have the final say via initiative, and voters won't put their money where their mouth is.

[rilkefan]

The Republican leadership seeks access to your tax return:

Hereinafter, notwithstanding any other provision of law governing the disclosure of income tax returns or return information, upon written request of the Chairman of the House or Senate Committee on Appropriations, the Commissioner of the Internal Revenue Service shall allow agents designated by such Chairman access to Internal Revenue Service facilities and any tax returns or return information contained therein.

[crionna]

but it would not surprise me at all if the anti-bush vote was coupled with a refusal to vote for money with the assumption that local taxes are being increased to cover shortfalls in state revenues.

Well, all I can say is that the folks I hear talking are not nearly that sophisticated in their thinking. They simply said that no, they wouldn't increase their sales tax a tad, and no, they wouldn't pay a ridiculously small tax on business, and no, they didn't want to raise their property taxes (that are artificially low due to Prop 13 anyhoo), and no, they won't allow the city to sell the stadium naming rights to raise millions of dollars (like anyone cares what Candlestick Park is actually called by the announcers).

We're in trouble because Democratic mayors exploded the size of city government over the past decade and now when the piper has to be paid, noone wants to reach for the check.

I hope what you postulate is not true. Talk about cutting off your nose to spite your face. I mean allowing your house to burn down, or the homeless to sleep in the rain or local landmarks to be razed to spite the federal government? How stupid and mean is that? I'd be embarrassed to admit that was why I voted against these measures.

[liberal japonicus]

I hope what you postulate is not true. Talk about cutting off your nose to spite your face. I mean allowing your house to burn down, or the homeless to sleep in the rain or local landmarks to be razed to spite the federal government?

I tend to agree with CaseyL. The whole process of ballot initiatives has made it impossible to sort out what proposal is good and what is bad. This is not cutting off your nose to spite your face, it is simply saying a pox on all your houses. Here are the state propositions with the SFgate's recommendation
---
1A Ends the practice of the state taking funds from cities and counties. YES
59 Gives Californians a constitutional right to government information. YES
60 Requires a partisan primary election. NO
60A Uses proceeds from the sale of surplus state properties to pay down debt. NO
61 Authorizes bonds to build, expand, remodel or refinance children's hospitals. YES
62 Allows voters to pick any candidate in the primary, regardless of party. YES
63 Imposes a surtax on $1 million-plus incomes to fund mental-health programs. YES
64 Cuts down on abuses of "shakedown" lawsuits against businesses. YES
65 Original supporters have abandoned this measure in favor of Prop. 1A. NO
66 Amends "three strikes" law to limit life sentences to serious and violent crimes. YES
67 Taxes phone service to raise funds for emergency medical services. NO
68 Allows racetracks and card clubs to have slot machines. NO
69 Requires law enforcement to collect DNA samples from adults arrested for a felony. NO
70 Allows tribes to expand gambling in exchange for paying a corporate tax rate. NO
71 Authorizes bonds to finance embryonic stem-cell research in California.YES
72 Requires employers to provide health insurance for their workers. NO
----
Here is the results for the state propositions. I still can't find the results for the various city propositions, but assuming that San Franciscans are x because of elections results that we don't even know the percentage of for and against seems to be a bit overreaching. It looks like Californians as a whole agreed to several things that they would have to pay for, as well as approving 1A, which I imagine was presented as a 'solution' because it prevented the state from taking money from the locality. If someone has been telling me that there's going to be all this money that remains with the locality, I'm going to think 'Hey, I don't need to pay any more'. This article suggests that I may have a point.

To see what a mess the whole ballot initiative kettle of fish is this site for the state propositions. The notion that there are initiatives floating out there, just waiting to find enough suckers, err, signatures, is the stupidest thing I've ever heard.

[dmbeaster]

Bernard Yomtov:

Still, I disagree with hilzoy's view that they do not understand what they are doing. It seems impossible not to understand it.

How about this wrinkle. What they understand they are doing is advantaging specific constituencies who are their allies. What they do not understand they are doing (probably because they could care less) is the larger economic impact of their policies. Or to put it another way, what they do not understand (because they could care less) is the impact of their policies on the constituencies that they have no concern for.

And that seems to be Hilzoy's point.

[JadeGold]

Hereinafter, notwithstanding any other provision of law governing the disclosure of income tax returns or return information, upon written request of the Chairman of the House or Senate Committee on Appropriations, the Commissioner of the Internal Revenue Service shall allow agents designated by such Chairman access to Internal Revenue Service facilities and any tax returns or return information contained therein.

Where's the outrage, conservatives?

The GOP claim as the party of less intrusive Govt has gone the way of fiscal conservatism.

[Bernard Yomtov]

Mikep,

WRT taxing income twice/three times, I wasn't trying to make the point that it was a good idea, just that eliminating the federal deduction for local taxes wasn't fundamentally different from the current arrangement with payroll taxes.

If taxing wages two or three times is a bad idea then maybe reducing that burden should have a higher priority than reducing the burden of double taxation of dividends. What is being proposed here is an increase in the tax on labor income - by removing the deductibility of state and local taxes and employer-paid health insurance - in order to make up for revenue lost by reducing taxes on investment income. That is outrageous. Anyway, the fact is that the effective corporate tax rate is fairly low, lower I believe than the payroll tax rate, so the double tax is not that onerous to begin with.

It is true that those who own stock in retirement accounts today would receive a benefit in the form of a one-time boost in stock prices. But what about future purchases? These will have to be made at prices that are, from the point of view of the buyer, inflated by a tax privilege that they will not enjoy. You don't see many people putting municipal bonds into their retirement accounts. In that sense the proposal would actually discourage investment, by lowering returns.

Hilzoy, as for individual policies being more expensive than group ones, that's true for people who aren't healthy, but since group policies don't require individual underwriting, the average cost will necessarily be higher - you just don't generally see the full cost if your health care is an employee benefit. If you think health care should be a guaranteed right, individual underwriting is of course unacceptable.

If I may respond to this, I think your view of the health insurance market is oversimplified. You seem to be saying that because group policies are not underwritten on an individual basis that the average premium is higher thanit would be for underwriten individual policies. I doubt this.

First of all, the cost of selling and administering individual policies must be higher, per covered person, than that of group policies. Second there is the cost of underwriting on an individual basis. Underwriting done only once is useless, as people's health changes over time. Surely it is much more efficient simply to assume that a group represents a reasonable random sample and use known population statistics to set rates.

In addition, underwriting is hardly an exact science. In a competitive insurance market, an individual may get several different quotes for the same policy. So there will be a sort of "winner's curse" outcome for the insurance companies, which they will seek to avert by increasing the quoted premium.

Finally, there are the well-known problems around adverse selection, that may create a situation where no market can exist without government intervention.

Daniel Davies (dsquared) put up a good post on some of this on Crooked Timber a while ago. It can be found at

http://www.crookedtimber.org/archives/002551.html

Both the post and the comment thread are worth reading.

[Bernard Yomtov]

Jadegold,

Where's the outrage, conservatives?

Face facts, jadegold. The Congress is being run by thugs, cowards, and bullies. As usual they are scurrying to deny any responsibility for inserting the odious provision. The Senate is little better. Daschle gave his farewell speech the other day and five Republicans attended, despite the tradition that all opposition Senators attend these speeches. Frist couldn't be bothered.

I'm sure there are outraged individuals. Apparently even some Republican Senators were upset. But that's water off the leadership's back. They will try anything, and they'll get away with some of it.

[crionna]

LJ

I couldn't find the results either and have already recycled the Chron from 11/3, but I did find this from an an article about how these measures went down to defeat: City voters resoundingly rejected two tax measures and an affordable housing bond.

Later in the article the Mayor says he won't close fire stations, but we already have "rolling brownouts" which basically closes houses on regular days, like russian roulette.

[Fledermaus]

The dividend "double taxation" aruement is a crock. A shareholder has no right to the company's income, until a divendend is declared. At that point the shareholder does have a right to that money. It is a transfer of wealth and is income to the shareholder.

Although I'm sympathetic to the argument that corporations can deduct dividends from income. But for the shareholder the dividend is a change in wealth and should be taxed.

[liberal japonicus]

Crionna
Thanks for the info, it's always interesting watching a fight over taxes when you don't have a dog in it. Here are some articles about Prop K pre election, (I haven't found much post election stuff.)
here, here, here, and here. And here are the results (scroll down for the totals) of the city props. A 45-54 split described as 'resounding' is a bit difficult to understand (but I have trouble understanding why 51% constitutes a 'Sweeping mandate') It is also interesting that the Mayor's long time ally, Jim Ross, headed up the anti Prop K coalition. This suggests to me that there is a lot more to this than simply SF voters being hypocritical. Which other propositions were ones that you felt were being unfairly voted down?

[crionna]

LJ,

A, B, and J. ANd H passed when it cshould not have.

[liberal japonicus]

Thanks Cri. Why for A and B was a 2/3rds majority required? As for Candlestick, the wording of the referendum is pretty crappy and looks like it was whipped up by anti-naming folks, which is one of the big problems with the initiatives, that they can be worded in such a way as to make them seem logical when they aren't. Sadly, I think we will see more of this in the future.
cheers

[crionna]

LJ,

A and B were increases to property taxes, so 2/3rds required...why? I don't know.

H was indeed written by the anti-namers, namely Gonzalez, a lame-duck President of the Board of Supes. Still, there were plenty of opportunitites to understand all of the initiatives, from direct mail to the papers.

[Nicholas Weininger]

Y'know, I think getting away from employer-provided health insurance and toward a more individualist system is a good idea, and getting rid of the disparity in tax treatment between employer-paid and individual-paid premiums is a necessary step in doing it.

Now the right way to do this would be to phase out the deductibility over a few years and simultaneously step in cuts in the lower tax rates (or raise the personal exemption if you don't want to change the marginal rates). That way the overall impact on middle-class tax rates would be a wash, the incentive structure would be improved, and people would have some time to adjust their plans.

But if there's one thing we've learned in the last four years it's that this administration will never do anything resembling the right way, whether the underlying idea is good or bad.

[hilzoy]

Nicholas: there are fairly large problems with a more individualist system, about which I may post more extensively later. Short version: individual insurance costs way too much, especially if you have a preexisting condition; no 'individualist' proposal that I'm aware of would begin to cover the costs of insurance; doing it through taxes would leave out those poor enough not to pay taxes but not poor enough for Medicaid; plus the main individualist proposal (health savings accounts plus catastrophic coverage) is really bad for people with chronic illnesses, since they will pay the full amount of the catastrophic care deductible every year, rather than saving money in their health savings account.

I agree that the employer-based system is broken, but I don't think this is the solution.

[Nicholas Weininger]

On your cost objectives: a large part of the reason individual insurance costs so much right now is that the individual insurance market is a lot less competitive than it could and should be, due to the fact that most people get health insurance through their employer. Also, if most people had HSA's and thus paid for routine costs out of their own pockets, the resultant direct consumer price pressure would lower those costs too.

Your other objections seem to be based-- please correct me if I'm wrong here-- on the premise that universal coverage is a sine qua non objective. If that's so, then we'll probably agree to disagree on this, since I don't share that premise at all, nor do I think it's the government's job to make sure that people with chronic health costs-- costs which are certainties, not risks, and thus not insurable in the proper sense of the term-- have those costs subsidized by others.

[hilzoy]

I didn't mean to imply that universal coverage was a sine qua non objective; only that some people might think it was a problem if poor people with chronic medical problems couldn't pay for medical care, and if the basic insurance setup was structured in such a way that this inability was a permanent part of it.

[Nicholas Weininger]

OK, fair enough. If one just wants to address that (relatively) narrow issue, however, it could be addressed as a patch to an individualist system rather than treated as a reason to change the fundamental structure toward universality. Yes, I know that part of the problem with our current system is that it includes way too many clumsy attempts at patching leaks; but *any* comprehensive proposal for dealing with this complicated an issue is going to include a few such things. It depends, I suppose, on whether you believe that the efficiency and freedom gains from a fundamentally individualist system will outweigh the costs of the patches.

[Bernard Yomtov]

One problem with the high-deductible approach is that, as I understand it, a very large portion of the health care costs incurred by individuals are incurred due to catastrophic events. If routine care is paid for out of the individual's pocket there is an incentive to minimize preventive care, leading to larger catastrophic costs.

nor do I think it's the government's job to make sure that people with chronic health costs-- costs which are certainties, not risks, and thus not insurable in the proper sense of the term--

I don't think that's quite right. After all, chronic costs start sometime. In that sense they are a risk. If I have insurance in any system then surely I'm entitled to have my newly developed chronic condition covered. And if I don't have insurance when it shows up are you really going to deny me treatment?

I think problems like this, and others, do make universal coverage a sine qua non, to the extent that I favor mandatory coverage. Without it, it is difficult to guarantee coverage to anyone who wants it.