Our Broken Tax Politics

by publius

Yesterday's Progress Report had an excellent rundown of why the House's proposed surtax is a reasonable and responsible proposal.  You should read the whole thing for yourself.  But the big points are that it's a modest tax, that it's narrowly targeted to the richest 1%, and that tax law has been very kind to this slice of the population in recent years.

On the last point, the numbers are pretty amazing.  The top 1% has (1) seen their after-tax income rise by 256% from 1979 to 2006; (2) seen their effective tax rate fall significantly since the mid-1990s; and (3) received a lot of money from Bush's tax cuts ($518K/household).  In short, they can afford it.  In fact, the House is asking for only a fraction of those tax cuts back (not all of them) to help insure 40 million people, among other things.

All that said, I'm not wedded to the surtax.  If Congress adopts other ways to raise revenues, fine.  A dollar is a dollar.

But what's really disturbed me has been the political reaction to the surtax, particularly in the Senate.  It's only been out a few days, but already Nelson and Grassley and Collins are all but calling it dead.  And Pelosi seems to be backpedaling a bit too.

This is my worry:  If this type of tax -- which is narrowly applied to only the very richest people -- isn't viable, what kind of tax is?  I mean, it's hard to imagine any of these people accepting any tax at this point.  And that's a problem given our country's pressing needs.

In sum it's just another data point to support the conclusion that the politics of our nation's tax policy is in a very harmful place at the moment (see also California -- which isn't exactly cutting "waste" in its deal).

Comments

[...now I try to be amused]

Shorter publius:

I fear we are all Californians now.

[John Thullen]

If conservatives in both parties don't want to pay "new" taxes, they can kiss my butt on the "old" taxes.

[Ugh]

This is my worry: If this type of tax -- which is narrowly applied to only the very richest people -- isn't viable, what kind of tax is?

Silly publius, don't you know the Golden Rule?

[Ron E.]

If this type of tax -- which is narrowly applied to only the very richest people -- isn't viable, what kind of tax is?

Obviously a tax on the very poorest. A national sales tax perhaps.

[Sebastian]

"This is my worry: If this type of tax -- which is narrowly applied to only the very richest people -- isn't viable, what kind of tax is? I mean, it's hard to imagine any of these people accepting any tax at this point. And that's a problem given our country's pressing needs."

This was always the wrong approach, and is a large part of what started the ball rolling downhill in California. "We'll just tax the internet millionaires". But there are never enough of them, and the general population doesn't start making the cost-benefit analysis until they pay too. So it all falls apart because they have been in free spending mode and haven't even tried to get out of it when the bill starts to hit home.

You have to change the mindset. If 'we' decide that all of us are paying, we will make better decisions, and have more social approval behind the tax structures.

The problem with the surtax as it stands right now is that the mid-level liberal movers and shakers in the big cities are suddenly realizing that the tax will threaten to touch their households and they don't think of themselves as rich. Now, they are, but they had been sold on a tax the other people plan instead of a tax the American people plan.

We've had at least 20 years of Republicans saying that all taxes should go down all the time, and that long of Democrats pretending that everything was a free lunch (health care will pay for itself!) or that you could only have rich other people pay.

The party of, if you want more social services in the country, YOU will have to pay, hasn't existed in a long time.

You haven't even started to prepare that field, so it isn't surprising that it isn't bearing fruit.

[charlie]

The republicans say, as they always do, that this tax will hurt small businesses. Does anyone have the facts on this?

[Turbulence]

The problem with the surtax as it stands right now is that the mid-level liberal movers and shakers in the big cities are suddenly realizing that the tax will threaten to touch their households and they don't think of themselves as rich. Now, they are, but they had been sold on a tax the other people plan instead of a tax the American people plan.

Do you have any evidence for this whatsoever? I mean, I'm not sure how anyone could ever have evidence for such vague assertions. Who are these "mid-level liberal movers and shakers"? Why do you assume that they're located in big cities? Why does their residence their, if it is true, matter? How do you know whether they think of themselves as rich? And even if they are, what makes you think they have enough political power to actually change things all on their own? I mean, they didn't do much to stop the Iraq war did they?

It seems weird how you've constructed this elaborate and peculiar model of the world with no evidence.

[ScentOfViolets]

This was always the wrong approach, and is a large part of what started the ball rolling downhill in California. "We'll just tax the internet millionaires". But there are never enough of them, and the general population doesn't start making the cost-benefit analysis until they pay too.

Sigh. Seb, do you have any sort of numbers to support your claim, any sort of cite? This seems to be something of a habit with you. And to cut you off at the pass - I'm being extremely civil when I note this. You aren't allowed to claim that I'm being mean, nasty, or rude out of hand merely because the observation I make is an unflattering one. Just so long as it is an accurate observation.

[Sebastian]

"Why do you assume that they're located in big cities? Why does their residence their, if it is true, matter? How do you know whether they think of themselves as rich? And even if they are, what makes you think they have enough political power to actually change things all on their own? I mean, they didn't do much to stop the Iraq war did they?"

They didn't stop the Iraq war, because their influence is with Democrats, not Republicans. There are more Democrats now, not Republicans. All sorts of things are different in relative power structure and influence with more Democrats than Republicans in Congress and the White House. Which is to say that different rich people have influence now.

[Sebastian]

SoV: "Seb, do you have any sort of numbers to support your claim, any sort of cite? This seems to be something of a habit with you."

Yes.

In the 3 years between 1998 and 2001, the *per capita*, *inflation adjusted* expenditures in California went up just under 19%. In the 10 years between 1998 and 2008, per capita, inflation adjusted expenditures in CA went up about 36%. They did not decline significantly until the 2003 budget crisis paralyzed the government for more than a quarter of the year (precipitated by the dot com bust of 2 years before).

[chmood]

Translation: no, Sebastian has no factual basis for his assertions.

[Eric Martin]

Seb: part of the problem in CA is that they CAN'T pass a tax increase without a 2/3 majority. So they don't get passed.

Also, the locking in of home values for property tax purposes insures that property tax revenues are relatively low.

[Sebastian]

I understand that they can't pass a tax increase without a 2/3 majority. I live in CA.

So if you haven't passed a tax increase, why exactly are you spending 36% more? Right?

The political reason is that you can increase spending in CA at 50% but can't pass tax increases without 2/3. Which is a stupid institutional design. If you put the tax point at 2/3 you should clearly put the spending point at 2/3 as well.

But you should note that there were five of initiatives this year (May 2009 election) which could have stabilized a number of issues but which lost in the 34% to 66% range. This strongly suggests that Californians aren't ready to pay for their spending levels, and that it isn't just a Republican minority obstruction thing.

I find the property tax issue pretty much uncompelling. The level of turnover in housing is pretty stable and can be counted on. It represents a budget constraint which has been in place since my birth, and which is very stable. It is exactly the kind of thing that you should be able to plan around. (The thing I would change on a substantive level is to remove it for commercial properties--the arguments for property tax issue make sense for residential use but not nearly so much for commercial use, and people eventually die and have to reasses the property).

[Turbulence]

They didn't stop the Iraq war, because their influence is with Democrats, not Republicans. There are more Democrats now, not Republicans. All sorts of things are different in relative power structure and influence with more Democrats than Republicans in Congress and the White House. Which is to say that different rich people have influence now.

But they couldn't even get the Dems to stop funding the war or to support impeachment or any of a dozen other big liberal priorities.

As far as speculation goes, this isn't bad, but there's no reason for anyone to believe it given that you've got no evidence.

[Turbulence]

And to cut you off at the pass - I'm being extremely civil when I note this. You aren't allowed to claim that I'm being mean, nasty, or rude out of hand merely because the observation I make is an unflattering one. Just so long as it is an accurate observation.

You know, I'm pretty sure that preemptive war was a profoundly stupid idea when Bush proposed it and it hasn't gotten any less stupid since then. Can't you at least wait for Seb to say something you disagree with before complaining about it?

[Eric Martin]

So if you haven't passed a tax increase, why exactly are you spending 36% more? Right?

Health care costs, education costs and other costs have gone up - that has had to impact increased spending in some ways.

Either way, this doesn't seem to be a case study for the proposition that levying a surtax on the super wealthy is a pointless endeavor.

[russell]

"If 'we' decide that all of us are paying, we will make better decisions, and have more social approval behind the tax structures."

We are all paying.

Seriously, who doesn't pay taxes?

"The problem with the surtax as it stands right now is that the mid-level liberal movers and shakers in the big cities are suddenly realizing that the tax will threaten to touch their households and they don't think of themselves as rich."

From several of your comments on this and other, related threads, I infer that you believe middle to upper middle class liberals favor the surtax because they won't have to pay it.

Further, it seems that you believe that their support for expanding government sponsorship of health care is based on a belief that they can make "some other guy" pay for it.

I'm not sure who these people are that you're talking about.

My wife and my household income put us right about the 95% percentile. Her business is not having a great year, so net/net we'll probably end up just short of that, but we'll still probably be above the 90th percentile.

If they raise my taxes to make health insurance more widely available, I'm OK with that. I'd love to not have my taxes raised, and I'd be delighted for them to go down. But the country is in a freaking mess, so neither of those things are bloody likely.

I favor a progressive tax scheme because people who have more money can afford to pay more taxes. Period.

If we want the overall tax rate to go down, we need to get rid of some of the stuff we pay taxes for. That's gonna be DoD or entitlements. The other budget items just aren't that big.

The entitlement programs are largely funded through flat or regressive payroll taxes, so rich folks are not getting soaked in any way, shape, or form to fund them. The folks who benefit from them are largely the folks paying for them.

If we want to rein in government spending, the place to look is in health care *cost*. No matter how you slice it, lowering health care cost is going to mean that some well paid folks are going to be less well paid.

So good luck with that. I'm not saying it's impossible, I'm just saying that there's going to be pushback, and lots of it.

But the image of middle class liberals looking to expand social programs by sticking it to the rich man just seems, to me, like kind of a cartoon.

I don't know who the heck you're talking about.

[russell]

"The political reason is that you can increase spending in CA at 50% but can't pass tax increases without 2/3. Which is a stupid institutional design. "

I gotta say, that does sound like a recipe for a train wreck.

[Sebastian]

"Either way, this doesn't seem to be a case study for the proposition that levying a surtax on the super wealthy is a pointless endeavor."

CA justified its initial increase in spending on the tax revenue it could get from Silicon Valley successes.

I don't particularly care about the surtax one way or another. I guess go for it.

I'm registering a general objection to the general idea, that it is wise to set up taxing structures where the majority of the people voting to increase services, can act as if they are spending other people's money without a large impact on themselves.

People who think that daddy is going to pay don't make wise cost/benefit decisions. I don't believe it is good to promote a norm of "we'll just tax other rich people and everything will always be fine" every time you want a new social program. If for no other reason than because in reality, there just aren't as many rich people as you think.

As for California, it seems as if the government saw the Silicon Valley wealth and made a decision to adjust expectations to always being able to milk it. When it turns out they couldn't, disaster (especially because they didn't change course and cut benefits back to previous levels when the bubble burst).

[Sebastian]

Oh and I thought I linked this from the San Jose Mercury News which strongly supports my thesis on California:

A Mercury News analysis of state spending since Republican Gov. Arnold Schwarzenegger took office in late 2003 found that he and the Democratic-controlled Legislature have spent money well beyond the rate of inflation and California's population growth — $10.2 billion more.

Yet the programs that received most of that money are priorities that Californians broadly support or have demanded at the ballot box: tougher prison sentences for criminals, health care for uninsured children and an aging population, and a cut in the "car tax" that they pay every year to register their vehicles.

The problem, according to a report last week from the state auditor, is that Republican and Democratic politicians in Sacramento have shirked their responsibility for the past decade, papering over shortfalls that started after the dot-com bubble popped in 2001.

Like homeowners paying off one credit card with another, they used accounting gimmicks and more debt, rather than raising taxes or cutting spending, to balance the books. As the economy worsened and tax receipts plummeted — from $102.5 billion last year to an estimated $87.5 billion this year — the house of cards collapsed.

If you read the whole article, you'll again and again read things about how both the spending and the lack of taxation is what the voters wanted.

[Jacob Davies]

"People who think that daddy is going to pay don't make wise cost/benefit decisions."

Well, if we're going to use childish metaphors, it's more like "daddy got richer after he left mommy but daddy also stopped paying child support", given the last couple of decades of decreasing tax progressiveness and increasing income inequality.

So maybe "daddy" needs to get back to paying the kind of share of the cost of running this country that he used to.

(For the record, we don't hit the surtax bracket now but we probably will at some point, so "daddy" is not a completely abstract entity . In any case I would be happy to pay a 1-2% higher tax rate even on household income over $100k if it means universal health coverage - that's a bargain for an insurance policy against having to pay COBRA premiums or buy individual coverage if we both lost our jobs at the same time.)

[russell]

"People who think that daddy is going to pay don't make wise cost/benefit decisions. I don't believe it is good to promote a norm of "we'll just tax other rich people and everything will always be fine" every time you want a new social program."

I get the fact that California's setup is kinda dumb, but I'd also like to reiterate my essential objection to this line of argument.

Virtually everybody pays taxes. Absolutely everyone that works pays federal taxes, and the biggest social programs are primarily funded by taxes that are either flat or profoundly regressive.

The argument for increasing the top marginal tax rate is being made in the context of 50 years of history of that top rate going down, down, down, down, and down. The wealthiest folks now pay income taxes at a top marginal rate that is 38% of what it was fifty years ago.

During the last 35 years of that time, VIRTUALLY ALL of the wealth associated with the expansion of the US economy, which is a significant amount of money indeed, has gone to the top 20% of the population.

All. The other 80% of the population have seen none of it.

Nobody is "asking daddy" for anything, and characterizing the question that way is profoundly patronizing.

[Sebastian]

"Virtually everybody pays taxes. Absolutely everyone that works pays federal taxes, and the biggest social programs are primarily funded by taxes that are either flat or profoundly regressive.

The argument for increasing the top marginal tax rate is being made in the context of 50 years of history of that top rate going down, down, down, down, and down. The wealthiest folks now pay income taxes at a top marginal rate that is 38% of what it was fifty years ago."

This is pretty much orthogonal to my argument. I'm arguing that if you propose plans and expect the costs to be taken on by others (see funding any major new program with a new surtax on people other than you) that you won't be as careful about whether or not you are making the right choices, because you feel like the costs are not hitting you.

You are arguing about abstract fairness. I'm talking about how we go about making decisions on new programs.

Now if you want to talk about what an abstractly fair system would look like and how it can be coupled with incentives to make wise choices. I'm all for it.

I'm focusing on this particular problem, because it seems to be what everyone is talking about--getting new stuff from the government while making sure that 99% of the population doesn't have to think about it gets paid for. That doesn't seem like a good method for making wise decisions.

[Marty]

"Absolutely everyone that works pays federal taxes"

This isn't close to true. Some majority probably pay FICA it's not close to all and a large minority pay no income tax.

[Ugh]

Some majority probably pay FICA it's not close to all and a large minority pay no income tax.

Other than students and maybe some other limited exceptions, anyone who works pays FICA (or at least is supposed to).

[Ugh]

I should note that the exception for students is also very limited (they must work for their educational institution and meet other requirements).

[Rob in CT]

CA's system is FUBAR. In hindsight, it seems obvious. Voters can very easily vote for unfunded programs, but legislators have a heck of a time increasing taxes. Yikes.

I'm one of those East Coast liberals whose household income probably puts us in the top ~5%. I support a progressive tax code - a more progressive one than we currently have. I think the current distribution of wealth, coupled with the tax code, is both unfair and kinda stupid.

"I'm focusing on this particular problem, because it seems to be what everyone is talking about--getting new stuff from the government while making sure that 99% of the population doesn't have to think about it gets paid for. That doesn't seem like a good method for making wise decisions."

I think that's a fair concern to have, but from where I sit it looks disconnected from recent history. You know, that period we just went through when the government spent a lot more money than it was bringing in whilst it slashed taxes on that 1% of the population. Some of the 1% even objected to the absurdity of it all. Well, one guy. Anyway, (partially) funding something by taxing that 1% at rates that are in the context of US history quite unremarkable doesn't worry me. If it becomes a pattern whereby the overall tax burden on that 1% threatens to rise to historically abnormal levels as the rest of us have a treasure bath, I will worry - both because it may be unfair and because it's probably dumb.

[cleek]

If it becomes a pattern whereby the overall tax burden on that 1% threatens to rise to historically abnormal levels

the rates would have to get pretty damned high for them to even approach abnormal.

[russell]

"This isn't close to true. Some majority probably pay FICA it's not close to all and a large minority pay no income tax."

Who doesn't pay FICA?

[russell]

"Some majority probably pay FICA it's not close to all"

Who doesn't pay FICA?

I didn't bring it up, you did.

Among folks who work, who doesn't pay FICA?

[Marty]

"Some majority probably pay FICA it's not close to all"

Who doesn't pay FICA?"

For precision in Wikipedia under FICA:

"For very low income individuals with no children, the Earned Income Tax Credit operates as an effective refund of FICA taxes, since the amount of the credit is calculated to be congruent with the amount withheld from the individual's wages, up to a certain level. The credit phases out and disappears altogether at higher wage levels."

Under Earned Income Credit:

"for a person with two qualifying children, the credit is equal to 40% of the first $11,790 of earned income, thus reaching a plateau of $4,716 and staying there until earnings increase beyond $15,399, at which point the credit begins to phase out at 21%, reaching zero as earnings pass $37,782. The dollar amounts are indexed annually for inflation."

Again under FICA:

"FICA is also not collected on "unearned income", including interest on savings deposits, stock dividends, and capital gains such as profits from the sale of stock or real estate. The proportion of total income which is exempt from FICA as "unearned income" tends to rise with higher income brackets."

[russell]

The folks who don't pay FICA at all are, precisely, people who are attending a college or university at least part-time, and who work in a part-time position for that college or university.

Every other person who works pays FICA.

Folks who don't make a lot of money may be eligible for an EITC. Part of the motivation for the EITC is to offset the thoroughly regressive nature of FICA.

Personally I don't call that "not paying FICA". FICA funds particular programs, it's not part of the general budget. It's not the same pot of money as income tax, or at least is not supposed to be.

All kinds of people receive all kinds of tax credits for all kinds of reasons, but we generally do not consider those to be rebates for their payroll taxes.

However if you want to entertain that line of thought, let's try it on.

If you don't have kids, the EITC benefit tracks your FICA payment more or less exactly until you earn $5596, when it maxes out at $428 a year. From $7K to $12,589 it declines to zero.

The number of households making $5596 or less is maybe 1.5% of the population.

If you have kids, it's no longer tied to FICA, it's more generous. If you have one kid, the EITC maxes out at $2853. If you have two, the max is $4716. That's about $55 and $95 a week, respectively.

The number of families with income of $11,790 or less is something like 8% of the population, but the mean family size at that income level is less than two, so the number of families with one or more kids is even fewer.

If you have any interest income at all, you can actually lose money on EITC, but the number of folks at these income levels who also have interest income is no doubt less than noise.

So that's the EITC situation.

And yes, FICA is not levied on investment income, but that more or less reinforces my point.

The number of people who work who don't pay federal taxes is vanishingly small.

In the context of Sebastian's comment about "daddy will pay", there ain't no daddy. We all pay. Or, close enough to "all" for government work.

And the proper answer to "who doesn't pay FICA" is college kids who work part time for their college or university.

[Gary Farber]

FICA, again.

[Marty]

"Personally I don't call that "not paying FICA". FICA funds particular programs, it's not part of the general budget. It's not the same pot of money as income tax, or at least is not supposed to be"

ok, I'll accept your definition. I was only covering FICA because you brought it up. An EITC offset to reduce it seems to me to be not paying it, but thats ok.

""Virtually everybody pays taxes."

This could also be true depending on your definition of virtually, not sure it is accurate with my definition.

[Gary Farber]

"This could also be true depending on your definition of virtually, not sure it is accurate with my definition."

Who never pays a sales tax?

Moreover, last I looked, many Republicans and conservatives and anti-tax folks in general objected to every governmental fee as a "tax" and object to each and every such fee or attempt to increase government revenue in any way as a "tax." Do you disclaim that sort of thing, or do you agree with it? Because things can't be a "tax" when you object to them as such, but not a tax when it's convenient to claim people don't pay them. They have to be either one or the other, consistently.

[Marty]

Gary, based on the initial comment and supported by this later comment ("The number of people who work who don't pay federal taxes is vanishingly small.") I assumed we were talking about federal income tax.

Russell,

The numbers for 2006 are 43M paid no taxes, as referenced here

[Sebastian]

Is there a federal sales tax already?

[russell]

Marty, FWIW I think your link refers to income tax.

To bring the discussion back on point:

Seb claims that planning to fund an expansion of medical coverage by a surtax on very high incomes will lead to bad policy, because the burden of paying is not broadly spread.

In a nutshell, I think this is wrong.

Most, if not all, federal taxes are borne in different amounts by different parts of the population.

Income tax is progressive. FICA is regressive. Investment income is taxed at a different rate than earned income. Etc etc etc.

If you'd like to introduce a tax regime whereby we add up the federal budget, divide by the total national income from all sources, and assess taxes at a plain flat rate based on that, I'd actually support it. Just as long as *all sources* are included.

But short of that, we live in world where it is not only common, but the norm, to assess taxes differently on different populations.

Sometimes the poor folks come out on top, quite often the rich folks do.

I basically reject the argument that people who support the surtax are doing so because of a desire to "stick it to the rich", or because they think they're getting something for free. Nobody's looking for "daddy" to pay for anything.

We're trying to figure out a way to make it possible for the millions and millions of people who DO NOT HAVE ACCESS to a reasonable level of medical care to get that access.

And as a point of fact, if that happens and it ends up being funded by a surtax on very high incomes, or an increase in the top marginal rate, it will represent nothing more than a modest adjustment to a decades long trend of reducing the tax liability of the wealthiest people.

I ain't saying it's the right thing or the wrong thing to do. What I'm saying is that claiming that plans to fund it by a surtax on very high incomes represents laziness, or a cheap quick fix, or some kind of class warfare, are not really legitimate.

A surtax on high incomes is a pretty reasonable proposal. It's not the only possibility, and it might not be the right one, but there's nothing wrong with it per se.

[Mike H.]

"Nobody's looking for "daddy" to pay for anything."

I can't help but wonder that, if this were actually true, we'd be proposing a tax increase on EVERYONE - not a specific group who just happen to be the richest 1%.

I call bs.

The tax increase on everyone could even be - wait for it - a progressive one! Assuming that's the kind of thing that floats your boat. :)

I don't disagree that the uninsured is a giant problem, I just question what's being proposed to 'solve' it.

I'm kind of a firm believer in liberty, and I'd really like to see us uphold that AND do something to help out the uninsured. Really, there's GOT to be a better way. We need to try harder.

[russell]

"I can't help but wonder that, if this were actually true, we'd be proposing a tax increase on EVERYONE - not a specific group who just happen to be the richest 1%."

That's fine with me.

IMVHO progressive would be better, cos it does indeed float my boat. Mine and Adam Smith's, and for the same reasons.

"I'm kind of a firm believer in liberty"

Yeah, me too.

I'm also a firm believer that we need to watch out for each other, otherwise some folks fall between the cracks.

And the way you "help out the uninsured" is you help them get insurance. It ain't that complex.

[Tony P.]

Mike H.,

Note that russell wrote "a surtax on high incomes" and you wrote "a specific group who just happen to be the richest 1%".

This is a profound difference in world-view. I am squarely with russell: we tax incomes, not persons. Putting a surtax on particular persons would be, for example, d'd'd'dave's trollish suggestion that we raise the taxes of Mormons. Putting a surtax on the highest incomes is different: a person's income might be high today and low tomorrow, or vice versa.

To put it most starkly: we could identify the 1% of persons who have the highest incomes today and charge them a surtax forever, regardless of how their income changes in the future. That would be a clear case of targeting "a specific group". Is that what you think us libruls are proposing?

--TP