Posts Tagged ‘taxes’

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John Hatgioannides, Marika Karanassou, and Hector Sala are absolutely right: mainstream macroeconomists and policymakers never venture beyond the “holy trinity” of economic growth, inflation, and unemployment.* Everything else, including the distribution of income and wealth, is relegated to the fringes.

This problem, while always serious, has been magnified in recent decades as inequality has grown to obscene levels, particularly in the United States. The labor share (the blue line in the chart above) has been falling since 1960 and, in the past decade and a half, it dropped an astounding 10.2 percent. Meanwhile, the share of income captured by the top 1 percent (the red line in the chart) has soared, rising from 10.5 percent in 1976 to 19.6 percent in 2014.

In order to rectify the problem, Hatgioannides, Karanassou, and Sala propose to bring inequality in from the margins as the “missing fourth statistic.”

They focus particular attention on inequality in relation to tax contributions. But they do so in the manner that departs from the usual discussion, which leaves the discussion at absolute income tax contributions (such as the share of income taxes paid by each economic group). Those are the numbers we often hear or read, which seek to show how progressive the U.S. tax system is. For example, according to the Tax Foundation, the top 1 percent paid a greater share of individual income taxes (39.5 percent) than the bottom 90 percent combined (29.1 percent).

Instead, Hatgioannides, Karanassou, and Sala concentrate on the ratio of the average income tax per given income group divided by the percentage of national income captured by the same income group (what they call the Effective Income Tax contribution), whence they calculate an inequality index (the Fiscal Inequality Coefficient).

What the Fiscal Inequality Coefficient shows is the relative contribution of filling the fiscal coffers for different pairs of income groups.

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In the figure above, they plot the Fiscal Inequality Coefficient based on income shares (they also report a related index based on wealth), of the bottom 90 percent versus the top 10 percent, the bottom 99 percent versus the top 1 percent, and the bottom 99.9 percent versus the top 0.1 percent for 1962, 1980, 1995, 2010, and 2014.

Thus, for example, the Fiscal Inequality Coefficient based on income shares remains relatively constant for all pairs for years 1962 and 1980 but increases significantly by 2010—with the bottom 90 percent effectively contributing 6.5 times more than the top 10 percent, the bottom 99 percent 21.4 times more than the top 1 percent, and the bottom 99.9 percent effectively contributing 89.7 times more than the top 0.1 percent.**

Clearly, the relative income tax burden for those at the top has fallen over time, demonstrating that the U.S. tax system has become less, not more, progressive.

And the authors’ conclusion?

In the current era of fiscal consolidation should the rich be taxed more? Our evidence suggests unequivocally yes.

 

*Their paper is discussed in the Guardian by Larry Elliott. The submitted version of their article is available here.

**The results are even more dramatic if one calculates the Fiscal Inequality Coefficient based on household wealth shares: in 2010, the Bottom 99.9 percent contributed 208.9 times more than the Top 0.1 percent, nearly four times more than what it was in 1980!

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“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Alice in Wonderland (pdf) is the key to understanding much of what is happening in the world today—especially the language of economics.

For example, we’re going to hear and read a great deal about tax reform in the days and weeks ahead. But, based on the proposals I’ve seen, nothing in the way of tax reform is being proposed.

The usual meaning of reform is that it involves changes for the better. Most of the so-called reforms that are being proposed by the Trump administration—including the vague speech by Donald Trump yesterday—are just cuts in the tax rates that will directly benefit wealthy individuals and large corporations.

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Supposedly, the rest of us will eventually benefit because of increased investment. However, as is clear from the chart above, both corporate profits and private domestic investment are doing just fine without a cut in tax rates. But the benefits to the rest of us simply haven’t appeared.

Moreover, as I have explained before, U.S. corporations are not losing out in the competitive battle with foreign corporations because they face tax rates that are much too high.

And, no, as I have also explained, repatriating corporate profits will not lead to more investment, government revenues, and jobs.

In fact, as Patrician Cohen makes clear, the whole idea of repatriating profits held abroad makes no sense.

That’s because repatriation is not really about geography. Most of the money is not stashed in some underground vault overseas, but already in American financial institutions and capital markets. Repatriation is in effect a legal category that requires a company to book the money in the United States — and pay taxes on it — before it can be distributed to shareholders or invested domestically.

The whole notion of earnings trapped offshore is misleading, Steven M. Rosenthal, a tax lawyer and senior fellow at the Urban-Brookings Tax Policy Center. “The earnings are not ‘trapped,’” he said. “They’re not offshore. They’re not even earnings. They’re accounting gimmicks that allow earnings to be shifted abroad.”

What’s more, companies already get something akin to tax-free repatriation by borrowing against those funds, with the added bonus of being able to deduct the interest paid on those loans from their tax bill.

What if corporations are induced to book their overseas profits in the United States? We probably won’t see much if any increase in private investment, since corporations aren’t facing any kind constraint in profits or their ability to borrow beyond their current profits. What is much more likely is some combination of more mergers and acquisitions, more stock buybacks, more payouts to shareholders, and more compensation distributed to CEOS.*

And that’s going to lead to even more inequality in the United States.

Alice surely would have seen through the meanings of all these misleading words concerning tax reform.

 

*AT&T is a good example of a company that already passes a low effective tax rate by exploiting tax breaks and loopholes. However, according to Sarah Anderson,

Despite the enormous savings AT&T has realized, the company has been downsizing. Although it hires thousands of people a year, the company, by our analysis at the Institute for Policy Studies, reduced its total work force by nearly 80,000 jobs between 2008 and 2016, accounting for acquisitions and spinoffs each involving more than 2,000 workers.

The company has also spent $34 billion repurchasing its own stock since 2008, according to our institute report, a maneuver that artificially inflates the value of a company’s shares. This is money that could have gone toward research and development or hiring.

Companies buy back their stock for various reasons — to take advantage of undervaluation, to reward stockholders by increasing the value of their shares or to make the company look more attractive to investors. And there is another reason. Because most executive compensation these days is based on stock value, higher share prices can raise the compensation of chief executives and other top company officials.

Since 2008, [AT&T CEO Randall] Stephenson has cashed in $124 million in stock options and grants.

Many other large American corporations have also been playing the tax break and loophole game. Their huge tax savings have enriched executives but not created significant numbers of new jobs.

Boeing is another good example. As Justin Miller explains,

Boeing has received a tax refund in five of the past ten years. It saves itself $542 million a year using a special domestic manufacturing tax break, and $1.8 billion in further cuts thanks to a research and development tax credit. Boeing also benefits from the immensely favorable depreciation schedules on capital that has saved it billions of dollars over the past decade.

Boeing also entered into a $9 billion tax incentive deal with Washington state back in 2013—the largest corporate subsidy ever—to “maintain and grow its workforce within the state.” But, as Michael Hiltzik points out in the Los Angeles Times, the company has since cut nearly 13,000 jobs (about 15 percent of its Washington workforce) as it sets up shop in cheaper states that offer incentives of their own.

It still manages to enrich its shareholders though. On the same day that it announced a production slowdown in December, Hiltzik notes, Boeing also announced a 30 percent increase in its quarterly dividend and a new $14 billion share-buyback program.

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Most of us pay the taxes we’re required to pay. That’s because there aren’t many ways to avoid them. Sales, property, payroll, or income—the tax is paid at the time of the purchase, the amount is deducted from our paychecks, or the records go directly to the government. There’s no real way around them. And we pay those taxes out of wages and salaries more or less willingly, since that’s how government services are financed.

Not so for those who are able to capture the surplus. Large corporations and wealthy individuals pay far less than their fair share of taxes. Their ability to evade taxes is only matched by their insistent demand that their tax rates be lowered even more.

We’ve known for a long time that large corporations use a variety of mechanisms—from claiming tax deductions and using loopholes to stashing profits in tax havens abroad—to lower their effective tax burden.

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Thus, for example, according to Oxfam America (pdf), between 2008 to 2014, the top 50 companies in the United States paid an effective tax rate (to the federal government as well as to states, localities, and foreign governments) of just 26.5 percent overall, 8.5 percent points lower than the statutory rate of 35 percent and just under the average of 27.7 percent paid by other developed countries. And then they use their tax savings to lobby for even more tax advantages.

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One of the results of corporate tax evasion is, I’ve argued before, the tax burden has been shifted from corporations to individuals.

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But not to wealthy individuals. As new research by Annette Alstadsaeter, Niels Johannsen, and Gabriel Zucman has shown (pdf), the top 0.01 percent of the wealth distribution—a group that includes households with more than $40 million in net wealth—evades about 30 percent of its personal income and wealth taxes. This is an order of magnitude more than the average evasion rate of about 3 percent.

The main reason those at the very top of the wealth distribution are able to evade a large portion of their tax burden is because they’ve managed to use their cut of the surplus to accumulate personal wealth—and then to hide that wealth offshore.

Ownership of wealth is, of course, extremely concentrated. Offshore wealth even more so. According to Alstadsaeter et al., the top 0.01 percent of the distribution owns about 50 percent of offshore wealth, which means the top 0.01 percent manage to hide about one quarter of their true wealth.

We now have an economy in which more and more surplus is captured by a small number of large corporations and wealth individuals, who in turn manage to evade a larger and larger portion of their fair share of taxes by hiding the surplus.

Oxfam’s view is that

Rather than engaging in a mutually destructive race to the bottom, the US should stake out a leadership role in addressing structural problems in the global tax system. The US should push for a truly inclusive process where all governments are able to build mutually beneficial tax rules that improve information sharing, transparency and accountability globally.

Until that happens, the rest of us—who are not members of the boards of directors of large corporations or wealthy individuals—will continue to be forced to shoulder the burden of paying taxes to finance government services. And the distribution of income and wealth will become, year by year, increasingly unequal.

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I continue to maintain that Congressional Republicans will stick with President Donald Trump until they get their favorite policies enacted—or until Trump’s missteps and declining popularity stand in the way of their getting what they want.

And one of the things they want is tax reform—specifically, a cut in corporate taxes.

Here’s the problem: U.S. corporations aren’t taxed too heavily. They’re taxed too little.

As is clear from the chart above, corporate profits (as a percentage of GDP) have risen dramatically since the mid-1980s—from 5.8 percent in 1985 to 11.8 percent in 2016.

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However, as I have shown before, even while individual taxes have remained relatively high (as a percentage of federal tax receipts), taxes on corporate income fell throughout the postwar period and have remained relatively low (at about 10 percent of federal tax receipts) since the mid-1980s.

Here’s what the Economic Policy Institute recommends in a recent report:

If we wish to reform corporate tax policy to benefit the vast majority of Americans—and not just a wealthy few—we should not be talking about lowering corporate tax rates or offering other tax breaks to corporations; we should instead be focusing on closing loopholes in the system that have eroded the corporate income tax base, to ensure the corporate sector is paying its appropriate share of taxes.