Posts Tagged ‘taxes’

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Tax cuts and spending increases enacted by Republicans over the past four months will lead to wider than previously expected budget deficits, according to the Congressional Budget Office. The federal budget deficit would total $804 billion this year, 43 percent higher than it had projected last summer, and exceed $1 trillion a year starting in 2020.

Larger deficits will, of course, add to the national debt: debt held by the public will hit $28.7 trillion at the end of fiscal 2028, or 96.2 percent of gross domestic product, up from 78 percent of GDP in 2018.

Those estimates assume current law will remain in effect, meaning Congress would allow some tax cuts to expire and spending caps to take effect again in the coming years. If Congress extends the tax cuts, as many Republicans want to do, the CBO predicted higher deficits and publicly held debt of about 105 percent of GDP by the end of 2028—a level exceeded only once in U.S. history, in the immediate aftermath of World War II.

So, what do these escalating deficit and debt numbers mean?

Clearly, in the first instance, the Republican deficit hawks have gone the way of moderate Republicans and all other extinct species of politicians and other mammals. They existed for decades, always in an attempt to cut entitlement programs and other public expenditures for poor and working-class Americans. But once it was possible to pass massive tax cuts for corporations and wealthy individuals and boost military spending, the deficit hawks on the Republican side of the aisle simply disappeared into the walls of Congress.*

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But there’s a second, perhaps even more important, angle we need to take into account: wealthy individuals and large corporations—the chief beneficiaries of the Tax Cuts and Jobs Act—would rather lend money to the government, at interest, than pay taxes on the surplus they receive. As federal deficits and debt grow, they end up receiving, not paying for, a larger and larger share of federal expenditures.

debt

I have illustrated the structure of federal debt over time in the chart above. By the end of 2017, the federal debt (the red line) had reached $20 trillion, of which $14.5 trillion was held by the public (the green line).** Private investors (the blue line) own the bulk of debt held by the public (about 83 percent), while foreign investors (both private and public, the yellow line) hold less than half (43 percent) of U.S. public debt.

As we can see, private holders of U.S. public debt—mostly wealthy individuals and large corporations—the majority of whom are based in the United States, are the ones who stand to gain. They have been granted lower tax rates and, at the same time, will receive a mounting share of the interest that is paid out on the growing debt ($310 billion for fiscal year 2018).

In the current political economy of the United States, nothing can be said to be certain, except growing debt payments and lower taxes—all for the benefit of wealthy individuals and large corporations.

 

*But, as Michael Hiltzik [ht: sm] explains, the species of Republican economists and politicians who aim to cut entitlements, such as Medicare and Social Security, is still thriving.

One would have thought that after saddling the U.S. economy with a tax cut costing $1.5 trillion over 10 years, conservatives and their patrons in corporate America would soft-pedal the usual attacks on Social Security, Medicare and Medicaid.

One would be wrong.

**The difference between federal debt and debt held by the public is made up of intergovernmental holdings, Government Account Series securities held by government trust funds, revolving funds, and special funds (as well as Federal Financing Bank securities).

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Yesterday, I discussed the mean-spiritedness of the Republican tax cuts—which are being sold as a gift to the middle-class but, in reality, represent a massive transfer to a small group of large corporations and wealthy individuals.

But, of course, the real violence associated with the tax-cut gift occurs before federal taxes are even levied, in the pre-tax distribution of income.

As is clear from the chart above, since the mid-1970s, the share of income captured by the top 1 percent (the red line, measured on the right-hand side) has almost doubled, rising from 10.6 percent to over 20 percent. Meanwhile, the share of income going to the middle 40 percent (the blue line, on the left) has eroded, falling from 45.2 percent to 40.4 percent.

But that’s not enough for those at the top. They want even more—and their growing share of the surplus has given them more power to elect the candidates and write the rules to obtain even more income, both before and after taxes.

Meanwhile, many in the languishing middle-class, having given up hope for any improvement in their pre-tax income share, threw in their lot with the Republicans and their promise of tax relief.

They now know that that’s a dead end, too.

The American middle-class continues to lose out, both when they exchange their ability to work for an income in markets and afterwards, when they pay their taxes to the government.

Meanwhile, the tiny group at the top has been able to rig both mechanisms, exchange and taxes, to capture and keep more of the surplus.

Something clearly has to give.

corp taxes

One of the rationales for the great Republican tax heist of 2017 is that American corporations desperately need tax relief.

However, as is clear from the chart above, the current corporate tax rate is already very low—not absolutely (since it was in fact lower in 2009, when corporate profits fell during the Great Recession), but certainly in comparison to the rest of the postwar period.*

Today, the effective corporate tax rate in the United States is only 20.4 percent, lower almost by half than the much-ballyhooed statutory rate of 38.91 rate and less than half of what it was in the mid-1980s.

One can only imagine, then, how low the effective rate will be if and when the statutory rate is reduced according to the tax bills passed through the U.S. House of Representatives and the Senate. They both cut it to 20 percent, on a permanent basis—which is the biggest one-time drop in the business tax rate ever.

 

*The effective corporate tax rate is defined here as the percentage difference between corporate profits before and after tax (both calculated without IVA and CCAdj adjustments), according to statistics from the U.S. Bureau of Economic Analysis.

distribution

Liberals have a problem: the kinds of redistribution they advocate and support just don’t do a lot to fundamentally alter the profoundly unequal distribution of income in the United States.

Consider the chart above, which illustrates the cash-income effects of the U.S. tax system (with dark colors marking the pre-tax distribution of income and the lighter colors the post-tax distribution). The results are quite meager: in 2014, the share of the top 1 percent (blue lines, measured on the right) was only lowered from 20.2 percent to 17 percent, while the share of the bottom 90 percent (plum lines, measured on the left) rose from 53 percent to just 59.2 percent.

So, even after all the tax-based redistributions are completed, the top 1 percent still ends up with a larger and larger share of income—and the share left over for the bottom 90 percent continues to fall.

All of that political fighting over tax rates and government programs to ameliorate the unequalizing effects of American capitalism and that’s all we end up with.

It should come as no surprise then that Isabel Sawhill [ht: ja] concludes that changing the tax structure, even radically, won’t really change much.

Sawhill’s analysis of both the political hurdles and the limited benefits of progressives’ favorite tax-and-spend schemes is certainly accurate. Existing economic institutions produce such an obscenely unequal distribution of income in the United States that it’s difficult to envision any political feasible changes in the tax structure that will bring down inequality into a region that progressives would consider fair and just.

So, what’s the alternative? Sawhill favors “stakeholder capitalism” (or what others have called “shared capitalism”):

It means paying attention not just to shareholders but also to workers, customers, and the community. It has proven to be a successful strategy for many companies. They have showcased what can be accomplished when the private sector takes greater responsibility for helping workers—whether in the form of profit sharing, training, or providing benefits such as paid leave and flexible hours. The fact is that without such an approach, it will be difficult to achieve broadly based economic growth. It would simply require too much redistribution after the fact. We need instead to test the limits of equalizing the distribution of market incomes before taxes and benefits enter the picture.

And perhaps Sawhill and other American liberals can convince employers to become “high-road,” stakeholder employers instead of taking the “low-road” of the shareholder economy.

Perhaps. But why does Sawhill limit the discussion to the choices existing employers might or might not want to make? Why not open up the discussion to consider other ways of organizing enterprises?*

I’m thinking, for example, of worker cooperatives and other kinds of enterprises owned by workers and the communities in which they live. If we think the existing distribution of income is fundamentally unjust and redistributive efforts are generally limited and ineffective—both of which are arguments that Sawhill herself makes—then why not focus on ways of actually improving the initial distribution without requiring the assent of existing employers?

The advantage of worker- and community-owned enterprises is they include the stakeholders from the very start. The stakeholders are the ones who decide how the firms will be organized, what the workers will be paid, how the surplus funds will be allocated, and so on. And from all the existing examples we have, from Cleveland’s Evergreen to Spain’s Mondragón, the initial distribution of income would be much more equal than anything we’ve seen, not only in the past few decades, but over the entire modern history of the United States.

Then, on top of that, people might want to have a tax-based redistributive scheme—for example, to correct for differences in enterprise success, regional discrepancies, and so on. But such redistribution would be much easier and more effective than anything Sawhill and others envision for the United States today. It just wouldn’t have an enormous mountain of inequality to dismantle.

So, while I agree with Sawhill that “our failure to achieve anything close to broadly based economic growth in the United States is very troubling,” I want to expand the discussion and see a much bigger role for alternatives to capitalism in distributing the rewards to workers and the members of the communities in which they live.

That one change, in the direction of more worker- and community-owned enterprises, can serve as the basis of an economy that would produce an array of incomes that brings us much closer to an initial distribution that many progressives consider fair and just.

 

*As Penn Loh explains,

Too often “the economy” is equated with markets where corporations compete to make profits for the wealthiest 1 percent and the rest work for a wage or salary (or don’t make money at all). . .

When everything that we label “economic” is assumed to be capitalist — transactional and market-driven — then it is no wonder that we run short on imagination.

To escape this “capitalocentrism,” we need to broaden the definition of economy beyond capitalism.