“A Tax System Tilted Toward The Rich”: Hitting Working Americans With Punishing Rates
Congress managed to pass a tax bill in December — a great relief to tax professionals like myself who are going to spend the next four months preparing returns for clients. But what our legislators didn’t do was address the fundamentally unfair way the United States taxes people who work for a living compared with people who live off of the earnings of their investments.
Our current system hits working Americans with punishing rates compared with what the investing classes are charged. A generation’s worth of legislative twists have left our tax code so warped that during the coming filing season, one married couple bringing in $150,000 in total income from two jobs could find itself paying almost three times as much in federal income taxes as another couple that is alike in every way — except for the source of its income.
The tax code started to tilt in the direction of favoring income from investments — or favoring the 1 percent, if you will — more than 20 years ago. In 1993, the year Bill Clinton took office, a married couple claiming the standard deduction — with no children, tax credits or other adjustments to income — and earning $75,000 apiece in wages, would have paid $35,650 in federal income taxes.
A similar couple, whose income came solely from long-term capital gains, would have gotten a small break thanks to what was then the 28 percent top rate on those gains. Their total tax bill, $34,158, would have been about $1,500 lower than that of the wage earners.
By 2000 — the year George W. Bush was first elected — the tax gap between wage earners and investors had already opened up. In that year, our two-wages couple would have paid $33,607 in taxes. They also would have paid that amount if all of their income had been from stock dividends; there was no preferential treatment for dividends at that point.
But the couple whose income came from long-term capital gains would have paid $23,025 in taxes — almost a third less.
Fast-forward to the 2014 tax season. Our two-income couple are still working full time to make the same $150,000 (not a farfetched scenario in our new-normal era of stagnant wages). After a decade’s worth of inflation adjustments to their tax bracket, their tax bill is now $24,138.
And the couple living off of their investments? Their tax bill — whether their money came from long-term capital gains or qualifying dividends — has been slashed to $8,385, or a little more than one-third of the tax load on wage earners.
Some of my clients who get their money from unearned income find this discrepancy unbelievable when they compare their federal taxes to their state bills. During this tax season, I know I will have clients — in California and Oregon, where I live — who will pay more in state income taxes than they do in federal taxes. I may even have some clients who will be stunned to learn that they face a four-figure state tax bill while paying exactly zero in federal income taxes for the year.
The reason: The federal code provides that there is no tax on capital gains or qualifying dividends for people in the 15 percent income tax bracket. That means that a Los Angeles married couple filing jointly for 2014 with $94,100 of adjusted gross income, all from long-term capital gains and qualifying dividends, would pay nothing — zero! — in federal income tax. But their California tax bill would be north of $3,000.
How did we get to this point? No legislator ever campaigned saying, “Tax laborers more than investors!” But several changes in the code since the early 1990s, including lowered tax rates on capital gains and lowered rates on qualified dividends, have conspired to produce that result. My high-income clients were dismayed last year by the new 3.8 percent net investment income tax, which applies to joint filers with modified adjusted gross incomes of more than $250,000 ($200,000 for singles), but that affects relatively few filers and, perversely enough, applies to non-tax-advantaged income such as rentals, as well as to dividends and long-term gains.
Neither political party gets sole credit or blame. President George W. Bush was most aggressive about pushing such tax changes, but breaks for unearned income were also passed and extended under both the Clinton and Obama administrations. Supporters argued that lower rates would benefit retirees living on fixed incomes and also spur investments. But the Center on Budget and Policy Priorities says that almost half of all long-term capital gains in 2012 went to the top 0.1 percent of households by income. For the nearly 60 percent of elderly filers who had incomes of less than $40,000 in 2011, the lower rates were worth less than $6 per household.
In 1924 — a different era to be sure — industrialist-robber baron-Treasury Secretary Andrew Mellon wrote in support of treating wages more favorably than investments. “The fairness of taxing more lightly income from wages, salaries or from investments is beyond question,” he wrote. “In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs. Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy and the people whose income is derived from investments.”
Well, that’s certainly not going to happen any time soon. But leveling out the tax treatment of wages and investment incomes would increase both the perceived and actual fairness of the tax code. It would eliminate preferences that distort investment and financial planning decisions. A fairer code might also increase respect for the system and improve tax collection rates overall.
By: Joseph Anthony, The Los Angeles Times (TNS); The National Memo, December 31, 2014
“Falling Further Into A Hole”: Wage Stagnation Puts The Squeeze On Ordinary Workers
Laurie Chisum works as a manager for a small office-equipment company in Orange County. She puts in about 30 hours a week on the job and spends much of her time at home caring for her mother, who is afflicted with Alzheimer’s disease.
She’s not complaining — she’s thankful to have a steady paycheck. But no matter how hard she works, it feels as if she just can’t get ahead.
“It’s been six years since anyone at our company has had a raise,” said Chisum, 52. “It seems like I just keep falling further into a hole. The price of gas has gone down, but nothing else has.”
It’s a refrain we’ve heard throughout the year: wealth gap, income inequality, wage stagnation.
No matter how you say it, the upshot is the same. The rich are getting richer and everyone else is feeling squeezed.
The wealth gap in this country is now the widest it’s been in decades, according to a report this month from the Pew Research Center.
The median net worth of upper-income families reached $639,400 last year. That’s nearly seven times as much as for those in the middle and almost 70 times what people at the lower end of the economic spectrum are making.
That’s not just a data point. It’s sad proof of a system that grossly favors the rich over ordinary working families — even when the economy is improving.
“Far too many people simply aren’t feeling the benefits of this economic growth,” said U.S. Labor Secretary Thomas Perez. “People are working harder and smarter, but their sweat equity hasn’t translated into financial equity.”
David Neumark, director of the Center for Economics and Public Policy at the University of California, Irvine, said that “people at the top have had phenomenal wage growth,” whereas “people at the lower end of the spectrum have seen their real purchasing power decline.”
Corporate profits are at or near record levels. So’s the stock market. Chief executives are doing just fine, thank you very much. A recent report found that some of the biggest U.S. companies pay their CEOs more than they pay in federal income taxes.
For ordinary working stiffs, the numbers are more sobering. Average hourly wages rose an itsy-bitsy 0.4 percent in November, according to the Labor Department. And this was seen as good news because average wages increased a pitiful 0.1 percent in October and didn’t budge in September.
For the year, average hourly earnings through November rose 1.7 percent, according to the Bureau of Labor Statistics. Since the end of the recession in 2009, they’ve gained about 11 percent.
At the same time, though, the consumer price index — the cost of living — has increased 1.3 percent since the beginning of the year and about 11 percent since the end of the recession.
Wages, in other words, are barely keeping pace with overall inflation. That’s why many people feel as if they’re stuck in a financial rut.
“You wonder from month to month what else you’re going to have to cut back on,” said Chisum, a single mom who also is caring for a grown son with Down syndrome.
Things look even tougher when you tighten the focus on specific expenditures, such as food and rent.
Average food costs have climbed 12.5 percent since the end of the recession, according to the bureau. Average residential rents have risen 12 percent. The average cost of healthcare has jumped nearly 17 percent.
In that context, the 11 percent gain in wages since 2009 means that each of these necessities has taken a bigger bite out of family budgets and has left fewer dollars for other expenditures, such as the occasional restaurant meal or movie.
“There’s no evidence I can see that this is going to change in the near future,” said Edward Lawler, a professor at the University of Southern California’s Marshall School of Business. “These are tough times for workers.”
One key issue, he said, is that labor unions have less clout than they once enjoyed. This denies workers a unified voice at the bargaining table.
Improvements in technology have boosted productivity and allowed employers to limit hiring. And it’s become easy to ship jobs abroad, where people are willing to work for a fraction of the cost of American workers.
All these factors conspire to keep wages down while profits and the compensation of senior managers skyrocket.
Earlier this month, Microsoft shareholders approved an $84-million pay package for the company’s new chief executive, Satya Nadella, making him one of the country’s highest-paid corporate leaders. He’s run the company for less than a year.
Boeing, Ford, Chevron, Citigroup, Verizon Communications, JPMorgan Chase and General Motors each paid their CEOs more last year than they paid in income taxes to Uncle Sam, according to a report from the Center for Effective Government and the Institute for Policy Studies.
A recent study by Harvard Business School found that most Americans believe chief executives make roughly 30 times what the average U.S. worker makes. That was indeed the case in the 1960s. Nowadays, CEOs pull down more than 350 times the average worker.
Chief executives are important people, to be sure. But is their importance to a company 350 times that of their employees? I doubt most people — other than CEOs — would think so.
More effective unions would help, as would programs to give workers the skills they need to compete better in the 21st century workplace.
Chris Tilly, director of the University of California, Los Angeles’ Institute for Research on Labor and Employment, said a key step would be establishing a national minimum wage of $10 to $12 an hour, and then indexing that wage to consumer prices so that paychecks automatically rise with inflation.
“That way you wouldn’t have to wait for Congress to act every year,” he said. “This would be a basic decision that wages would keep up with the cost of living.”
Perez, the labor secretary, also called for a higher minimum wage, plus “strengthening overtime protections” and “ensuring that workers have a strong voice in the workplace.”
A rising tide lifts all boats. At least that’s how we’re told things are supposed to work.
The reality is that the tide is rising in a big way for some, and they’re comfortably sunning themselves on the decks of their yachts.
For most others, that rising tide is more like a stormy sea threatening to swamp the family lifeboat.
We’ll likely hear a lot in the coming year about how the economy is improving and businesses are thriving. Chief executives will point toward fast-rising stock prices as proof that they’re worth every million they’re paid.
And everyone else will try to make their 0.4 percent hourly pay hike go as far as they can.
By: David Lazarus, Columnist, The Los Angeles Times; The National Memo, December 29, 2014
“There’s A New Twist This Time”: To GOP Congress, As Usual, It’s Welfare On The Chopping Block
Congress loves to be Scroogey when it comes to helping the poor at Christmastime. Last year, it let an unemployment extension for the long-term jobless expire during the holidays. That was right after food-stamps were cut. This year, a bare-bones welfare program will continue into the New Year without being updated. For some, it’s a mixed blessing: This Congress would likely cut the program even more rather than fix its problems.
In late 2010, Tea Party Republicans first stormed into the House of Representatives with their budget-cutting agenda, one of the first items they nominated for the chopping block was a component of the program once known as welfare.
The program was a $25 billion emergency fund that passed in the stimulus act and encouraged employers to hire low-income workers by subsidizing their salaries through welfare-to-work funds. Throughout 2009 and 2010, it had created 250,000 jobs in 37 states, including conservative states like Mississippi, and was widely popular because it helped bolster employment during the economic downturn.
Despite the program’s popularity, Congress let it die in September 2010. So it was ironic a couple of months later when the Tea Partiers were railing against it—it had already expired.
And that’s how fights over virtually all aspects of the program once known as welfare go. Welfare recipients have had to meet work requirements to receive their checks ever since President Bill Clinton signed the welfare reform law in 1996, and those paychecks are meager: in most states, the average family will receive between $200 and $400, clocking in between 20 and 30 hours of work activities and applying for as many as 20 jobs a week. Yet stereotypes of the program as a large handout to moochers who don’t have jobs remain, and the program is always among the first that the public and conservatives would sacrifice to budget cuts.
And so as the year ends, Temporary Assistance for Needy Families, as what we call welfare is officially known, is not being reauthorized again this year. The bill expired way back in 2010. Congress keeps funding it through continuing resolutions, but TANF’s existence has been year-to-year, and supporters of the social safety net have always preferred full reauthorization.
But there’s a new twist: Now, many progressives and policymakers who care about the poor are ironically happy that TANF isn’t being reauthorized again this year. The reason? These folks fear that reauthorizing the bill will hand Republicans who control the house—and as of January, the Senate—the opportunity they’ve been waiting for—to gut it.
The program already operates at a minimum level. In 1997, the first year after the law was passed, state governments spent 70 percent of the funds provided through the program on cash assistance for families. Now they only spend about a quarter of their money by directly helping families, and they send the rest of the money on other welfare-related programs or use it to close holes in their own budgets. Critics noted this led to the program’s lackluster response to the economic crisis. In 2011, only 27 percent of families living in poverty were receiving welfare assistance.
Among the fears are that House Republicans will try to eviscerate funding—which in 2013 totaled about $16.5 billion for the welfare program. The House budget chair, the Wisconsin Republican Paul Ryan, wants to turn all safety-net programs into a giant block grant to the states—he says it would maintain the programs’ current levels of funding but most experts believe funding would ultimately dwindle and serve fewer families.
Republicans showed their gleeful willingness to go after safety-net programs when they tried to slash food stamps by more than half. And when President Barack Obama attempted to provide waivers to states so that they could be more flexible in how they administered welfare-to-work and do less paperwork for the federal government, Republicans accused him of gutting the work requirements. So not only are Republicans likely to cut funding, but they would also resist any changes that might actually make the program run better.
This is why progressives are just as happy to see TANF not be reauthorized. However, there’s a downside to that. Only eight states have raised the amount of money that families get to keep pace with inflation, which is why so many families in so many states get so little money. Reauthorizing the bill could force states to readjust the formulas they use to determine benefits so that families get more.
The stimulus program that helped low-income Americans find employment during the recession—the one the Republicans were so proud to claim credit for cutting—could be reauthorized as well. While the economy has been inching toward recovery, the long-term unemployed and low-income Americans are still struggling to find good jobs that pay well, and increased welfare funds designed to employ them could bolster the economy again.
There are other programs, including those designed to help states serve their clients better, that have expired or gotten lost in the shuffle. Many advocates want those changed, adjusted, or bolstered, and the only way to do that is to open up the bill and reauthorize it.
Instead, conservatives still view the fact that Americans need help from the government as a disaster, and are more likely to cut benefits than to think about helping them. It was a Republican Congress working with a Democratic president that succeeded in passing the welfare reform bill the first time. But this time around, advocates are too worried Republicans will do something unprecedented, like they did with food stamps—which is try to tear the program completely apart.
By: Monica Potts, The Daily Beast, December 26, 2014
“A Massively Failed Experiment”: Why Conservatives Learned Nothing From Sam Brownback’s Failure
Kansas governor Sam Brownback had a plan when he got elected in 2010, and it was a plan that could only be enacted in a place like Kansas: Pass huge tax cuts, then watch the state transform into a kind of economic heaven on earth. Brownback surely could never have doubted it would work, since he and those in his party have been saying for decades that tax cuts deliver economic growth, rising tax revenues, general happiness, and shinier, more manageable hair.
You’ve probably heard the story: growth in Kansas did not, in fact, explode, but what did happen is that revenues plummeted, leading to severe cutbacks in education and other state services. Brownback nevertheless managed to get re-elected, because it was a non-presidential year and because it’s Kansas. So now he’s had a chance to reflect, and here’s how he’s looking at things, according to a Topeka newspaper:
As Gov. Sam Brownback’s first term comes to a close, the Republican governor has one regret — no, scratch that — one thing he would do differently.
“I probably would have chosen words better at different times, because you go through a campaign where you’ve got to eat the words you inartfully said,” Brownback said during a recent interview with The Topeka Capital-Journal.
The former U.S. senator — with the help of a Republican-controlled Legislature — slashed taxes, privatized portions of state government and pursued a staunchly conservative policy agenda during the past four years. And then Brownback fought off a competitive challenge from Democratic Rep. Paul Davis.
Atop the list of words and phrases that have proven controversial and given his opponents the greatest opportunity for mockery: predicting the Kansas tax cuts would act as a “shot of adrenaline” to the state’s economy and referring to the plan as an “experiment.”
In other words…
It’s obvious that he regrets calling it an “experiment” for no reason other than that word showed up in a bunch of Democratic attack ads. But as for the idea that tax cuts would give the Kansas economy a “shot of adrenaline”? Of course that’s what he said, because that’s what he believed. If you don’t believe that, you can’t call yourself a Republican.
It isn’t that there’s no truth to it—all else being equal, tax cuts put more money in people’s hands, so they can spend more, which will have some positive impact on the overall economy. The problem is that 1) the effect is never as large as Republicans expect it to be; 2) not only did Brownback’s tax cuts go mostly to the wealthy, who are less likely to spend the money, he actually raised taxes on poor people (there’s an explanation here), and 3) the benefits were swamped by the harm created by the inevitable cratering of state revenue.
But if you’re Sam Brownback, how do you account for such an outcome? It can’t possibly be that the theory on which the entirety of contemporary Republican economic policy rests is false. What’s he going to say—”It turns out that tax cuts don’t do much good”? Not in this universe.
It’s not just him. The failure of Brownback’s experiment may provide an effective rhetorical tool liberals can use against conservatives in economic debates, but it won’t actually change any conservatives’ thinking. The reason is that their belief in tax cuts doesn’t rest on the practical effects. That’s an argument that’s meant to appeal to everyone, since it concerns something (growth) that just about everyone thinks is good. But the real source of the conservative support for tax cuts is moral, not practical. They believe that taxes are inherently immoral — the government stealing from you the fruits of your labor (or inheritance or wise investments, as the case may be) to enact its nefarious schemes. Taxes should therefore be as low as possible. Conservatives also tend to believe that progressive taxation is doubly immoral, since it takes more from the most virtuous among us.
So my guess is that Brownback sees his experiment as a practical failure but a moral success, and other conservatives would agree. Not that he’d say so in quite those terms, because he knows how it would sound. But the only lesson he’s learned from his failure is to change the words he uses.
By: Paul Waldman, Contributing Editor, The American Prospect, December 23, 2014
“The Facts Aren’t On Mitch McConnell’s Side”: Sorry, GOP, Tax Cuts Don’t Pay For Themselves
As they prepare to take control of Congress, Republicans are looking to change the rules of the game. To lend budget-busting tax cuts the illusion of fiscal responsibility, conservatives would codify the notion that these cuts pay for themselves into congressional accounting rules.
Democrats should not allow this to happen. But if conservatives insist on fudging the numbers, liberals shouldn’t shy away from making creative budgetary arguments of their own.
The accounting device promoted by the right is known as “dynamic scoring,” and it’s politically significant because of the basic policy positions of the two parties. Conservatives tend to favor tax cuts, which come at the expense of social services. Liberals tend to support increasing social services, which come at the cost of higher taxation.
But conservatives have an end-run around this dynamic. They point to the Laffer curve, an economic theory proposing that we can cut tax rates without sacrificing tax revenue, thus avoiding cuts to social services. This is because tax policy has dynamic effects on the macro-economy — that is, cutting tax rates incentivizes people (and particularly high-earners, who gain the most from tax cuts) to work harder, invest more, and generate more economic growth. As the economic pie grows larger, tax revenue can remain constant even as tax rates fall.
Though logical in theory, this idea hasn’t really been borne out in practice. The Bush administration repeatedly predicted that tax cuts would boost overall revenue, but they assuredly did not. And they still don’t, as Kansans have learned during Gov. Sam Brownback’s “real live experiment” in conservative economics, which has only blown a hole in the state budget.
This is because any potential dynamic effects of tax cuts take a long time to materialize, which makes these future benefits extremely difficult to quantify today. And as Congress’ authoritative accountant, the CBO is in the business of attaching hard numbers to would-be laws.
Understandably, the CBO has resisted the uncertain and speculative math of dynamic scoring. But the underlying argument still infuses and skews our political debate. Republicans feel less constrained when proposing tax cuts, while Democrats struggle to shore up revenue sources for government service proposals.
Ostensible fiscal conservatives like Sens. Mitch McConnell (Ky.) and John Kyl (Ariz.) argue that tax cuts need not be paid for at all because they are inherently good for the economy. “[T]here’s no evidence whatsoever that the Bush tax cuts actually diminished revenue,” McConnell contends, in spite of overwhelming evidence that these cuts diminished revenue at historic rates.
Yet these same Republican leaders still insist that spending on unemployment benefits be accounted for by cuts or tax increases elsewhere, even though there’s little compelling economic reason to treat tax cuts and social insurance transfers like unemployment benefits differently. Both policies promote economic growth by increasing disposable income and thereby boosting consumption.
Liberals have largely failed to point this out and haven’t effectively countered conservative attacks on these transfer programs. Contrary to what Speaker John Boehner (Ohio) says, there’s no evidence that unemployment benefits reduce work ethic. And other transfer programs can be carefully structured to minimize any potential work disincentives.
Liberals can do more than play defense in these debates. They, too, can conjure creative arguments for how targeted spending programs can “pay for themselves.”
Take liberal proposals for new or expanded transfer programs like refundable tax credits, child allowances, and other income subsidies. These relieve some of the strain on the budgets of low-income and middle-class Americans. More disposable income means more consumption, which generates higher economic growth and higher overall income, producing more tax revenue. By this logic, transfer programs could pay for themselves, too.
In fact, targeted transfers to the poor and middle class would likely give a stronger immediate jolt to the economy than would tax cuts for the wealthy. Compared with the wealthy, the poor spend a much higher share of each additional dollar of disposable income that they receive, providing greater stimulus to the economy. Policy measures that alleviate inequality are thus a boon for economic growth.
This isn’t to say that liberals should sit back and let dynamic effects fund their policy priorities. Any responsible party must provide revenue sources for new tax or spending programs. But drawing on this rhetoric would level the playing field of our skewed politics. The parameters of our current debate — where liberal proposals must be paid for while conservative ones don’t — are stacked against the interests of average Americans in favor of the wealthy.
Conservatives want to muddy the numbers for our lawmaking process. For the sake of a fair debate, liberals can and must show that two can play at that game.
By: Joel Dodge, The Week, December 19, 2014
Share This Blog
Unknown Feed- An error has occurred; the feed is probably down. Try again later.
mykeystrokes.com 