Posts Tagged ‘taxes’

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Yesterday, I questioned the case—presented by Jason Furman and the White House Council of Economic Advisers—that the Obama administration had made a “historic achievement in reducing inequality.”

James Kwak, as it turns out, had much the same reaction:

inequality is every bit the problem we’ve always thought it was. It’s not as bad today as it would be if John McCain had been elected eight years ago. But we’re no closer to addressing its fundamental causes.

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First, Kwak explains that the key chart behind the Obama administration claim (which I’ve reposted above) is not what it seems. It doesn’t show inequality has actually declined by the stipulated amounts. What it does show is that (a) in 2017 (and therefore a forecast for next year) and (b) in comparison to a world in which the Bush-era tax cuts didn’t expire and without the Affordable Care Act (and therefore a parallel universe of lower tax rates and pre-Obama health coverage rates) “our universe is a little less unequal than that parallel universe.”

In summary, the economic factors that produce higher pre-tax income inequality—stagnant middle-class wages, high corporate profits, and booming asset markets—are alive and well, and it doesn’t seem the Obama administration has done much about them. The administration did pass the Affordable Care Act and let the Bush tax cuts expire for the rich, both of which helped mitigate the pre-tax inequality produced by contemporary American capitalism. But even if Barack Obama called inequality the “defining challenge of our time,” he has done little to tackle its fundamental causes. Let’s hope the next president does better.

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Kwak then takes on the larger issue of whether inequality has actually been getting worse or better under the Obama administration. What he shows (much as I argued yesterday) is that, while tax-and-transfer policies have made the distribution of income less unequal than it otherwise would have been (thus, the red line is lower than either the green or blue lines), they’ve done nothing to change the “underlying economic factors that determine inequality of pre-tax income.”

What we’ve seen then is pre-tax inequality has continued to grow and, even though tax-and-transfer policies lower the degree of inequality (and, indeed, have widened the gap between pre-tax and post-tax inequality), overall inequality has continued to grow under the Obama administration.

And looking forward?

Yes, 2015 was a good year for middle-class families, but it didn’t come close to making up for several bad years during the current expansion. There’s no obvious reason why the pre-tax income share of the 1% will stop rising anytime soon—except for the next recession, after which it will most likely continue its long-term ascent.

That, in my view, is why “economic inequality will remain the ‘defining challenge of the next generation, too’.”

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Inequality may be the “defining challenge of our time.” But you wouldn’t know so from Monday evening’s presidential debate, in which neither candidate directly addressed the issue.

But the Obama administration seems to be in full gear—with an op-ed piece by chair of the White House Council of Economic Advisers Jason Furman and an extensive report by the Council of Economic Advisers (pdf)—celebrating its own “historic achievement in reducing inequality.”*

Tax changes enacted since 2009 have boosted the share of after-tax income received by the bottom 99 percent of families by more than the tax changes of any previous Administration since at least 1960. President Obama has also overseen the largest increase in Federal investment to reduce inequality since the Great Society, largely reflecting the coverage provisions of the Affordable Care Act (ACA) and expanded tax credits for working families.

And the results? Together, the changes in tax policy and the ACA provisions will increase the share of after-tax income received by the bottom quintile in 2017 by less than one percentage point and reduce the share received by the top 1 percent by all of 1.2 percentage points.

That’s something, it is true, but it does not reverse the spectacular growth in inequality the United States has witnessed in recent decades (when the share of income captured by the top 1 percent rose from 9 percent in 1971 to 22 percent in 2015), and it doesn’t even touch the even-more-dramatic inequality in the distribution of wealth (such that in 2013, the last year for which data are available, families in the top 10 percent of the wealth distribution held 76 percent of all family wealth, families in the 51st to the 90th percentiles held 23 percent, and those in the bottom half of the distribution held no more than 1 percent).

So, what’s the problem? We already know, thanks to a 2015 Brookings Study (pdf), that the effect of changes in top individual tax rates (including a redistribution of all new revenues to household in the bottom 20 percent of the income distribution) are “exceedingly modest.”** And, of course, changes in tax rates on income have little if any effect on the unequal distribution of wealth.

The fact that the current administration can cite its own policies as a “historic achievement” just confirms how little other administrations have done to moderate growing inequality in the United States over the course of the past three decades.

They also confirm the fact that, unless and until the United States decides to tackle the issue of wealth ownership and the resulting unequal market distribution of income— especially the ability of the tiny group at the top to capture and invest for their own sake the enormous surplus created by everyone else—it’s clear that economic inequality will remain the “defining challenge of the next generation, too.”

 

*The same issue has been taken up on the other side of the pond, about whether the last Labor government did anything to reverse “the rise of inequality seen under the previous Conservative administration.” According to the data cited by Simon Wren-Lewis, the best that can be said is Labor did not continue the previous rise in inequality, although it certainly didn’t reverse it.

**Here’s the authors’ conclusion:

In this analysis we have simulated the effects of increasing the top income tax rate under three possible reforms: (a) raise the top individual income tax rate from 39.6 to 45 percent; (2) raise the top individual income tax rate from 39.6 to 50 percent; and (3) raise the top individual income tax rate to 50 percent for income greater than $1 million for joint filers, $750,000 for single filers. We calculate the resulting change in income inequality under these scenarios assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest, with changes in the Gini coefficient of less than 0.01.

That such a sizable increase in the top personal income tax rate leads to a strikingly limited reduction in overall income inequality speaks to the limitations of this particular approach to addressing the broader challenge. It also reflects the fact that the high level of U.S. income inequality is characterized by a wide divergence in income between higher-income households and those at the middle and below.

 

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All eyes right now are on the U.S. presidential campaign (especially the narrowing gap between Hillary Clinton and Donald Trump).

What that means is Americans’ attention is diverted away from other politics and policies, such as the House GOP’s tax plan—the so-called “Better Way”—which would overwhelmingly benefit the richest 1 percent. It would allow the tiny group at the top to keep, via tax cuts, more of the surplus they manage to capture.

The plan would reduce the top individual income tax rate to 33 percent, reduce the corporate rate to 20 percent, and cap at 25 percent the rate on profits of pass-through businesses (such as sole proprietorships and partnerships) that are taxed under the individual income tax. Individuals could deduct half of their capital gains, dividends, and interest, reducing the top rate on such income to 16.5 percent.

According to the Tax Policy Center,

Overall, the plan would cut the average tax bill in 2017 by $1,810, increasing after-tax income by 2.5 percent. Three-quarters of the tax cuts would benefit the top 1 percent of taxpayers and the highest-income taxpayers (0.1 percent of the population, or those with incomes over $3.7 million in 2015 dollars) would experience an average tax cut of about $1.3 million, 16.9 percent of after-tax income. Households in the middle fifth of the income distribution would receive an average tax cut of almost $260, or 0.5 percent of after-tax income, while the poorest fifth of households would see their taxes go down an average of about $50, or 0.4 percent of their after-tax income. In 2025, the top 1 percent of households would receive nearly 100 percent of the total tax reduction. Households in some upper-middle income groups would have tax increases on average, and households at other income levels would have smaller average cuts, relative to after-tax income, than in 2017.

And, since the plan would reduce total federal revenues (by $3.1 trillion over the first decade of implementation and by an additional $2.2 trillion in the second decade), it implies massive cuts to federal programs, many of which benefit working-class households, thus making the plan even more regressive.

The better way, it turns out, is just another version of conservative trickledown economics.

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You’d think a Harvard economics professor would be able to do better than invoke horizontal equity as the sole argument for reducing the U.S. inheritance tax.

But not Gregory Mankiw, who uses the silly parable of the Frugals and the Profligates to make his case for a low tax rate on the estates of the wealthiest 0.2 percent of Americans who actually owe any estate tax.*

I’ll leave it to readers to judge whether or not it’s worth spending the time to compose a column on a tax that affects such a tiny percentage of rich—very rich—American households. And then to argue not for raising the tax, but for lowering it.

Me, I want to raise a few, more general issues about how mainstream economists like Mankiw think about inheritance taxes.

First, Mankiw presents one principle—horizontal equity, the “equal treatment of equals”—and never even mentions the other major tax principle—vertical equity, the “unequal treatment of unequals,” the idea that people with higher incomes should pay more taxes. Certainly, on the vertical criterion, those who receive large inheritances (for doing nothing more than being born into and raised within the right family) should pay taxes at a much higher rate than those who do not.

Second, even the notion of horizontal equity—that equals must be treated fairly—depends on an assumption that we each have come fairly to where we now stand. If that principle is violated (as it often is, e.g., because an estate represents the accumulated wealth based on other people’s labor, their surplus labor), then we need to ask if there is even an a priori principle of horizontal equity. The alternative is to judge everyone’s entitlements and burdens, including those occasioned by large inheritances, according to a single theory of equity or justice.

Finally, and perhaps even more important, both the horizontal and vertical equity standards presume that tax justice can be achieved by minimizing the coercive relation between the citizen and the state, which is then counterposed to the freedom guaranteed by a system of voluntary exchange. As Paolo Silvestri explains,

if the problem of the legitimacy of taxation as coercion is posed in terms of ‘voluntary vs coercion’, or freedom vs coercion, the maximum that one can ask it is to minimize coercion and maximize possibilities for voluntary exchanges, and / or minimize the role and size of government and leave as much room as possible to the private sector.

The alternative, of course, is to imagine a very different economic and political relationship, one in which both exchange and taxation—and thus notions of freedom and obligation—are understood in terms of an alternative logic. Consider, for example, the gift. If there is indeed something that the literature on gift economies has revealed it is the fact that social reciprocity—literally, creating and reproducing social relationships through gift exchange—configures the relationship between freedom and obligation in a manner quite different from that presumed by Mankiw and other mainstream economists.

What Silvestri makes clear is the circulation of the gift involves the free recognition (or non-recognition) of the obligation or debt occasioned by the gift, “in the sense that human freedom is asserted as such at the very moment in which it recognizes (or not) his debt.” Taxation, in particular, can be represented as an act of “giving back” to society, the recognition of a relationship of living together beyond the family—which, while never finally solving the tension between obligation and freedom, creates and recreates relations of mutual trust and living in common. It thus redefines the issue of equal or unequal return—the accounting framework of giving and taking embedded in notions of horizontal and vertical equity—in favor of asymmetry and an unending cycle of producing and resolving instances of justice and injustice across society.**

To which the only possible answer is further giving—and thus the freedom of those who have managed to amass great fortunes to comply with the obligation, after they have died, to pay taxes at a high rate based on large accumulations of the social surplus.

 

*There are many other facts about the estate tax Mankiw conveniently leaves out (according to the Center on Budget and Policy Priorities): the effective tax rate is much lower than the statutory rate, only a handful of family-owned farms and businesses owe any estate tax, the largest estates consist mostly of “unrealized” capital gains that have never been taxed, most other rich countries levy some form of estate tax, and the estate tax is the most progressive part of the U.S. tax code.

**My concern here is with the inheritance tax. Silvestri takes his argument in a related but different direction: “the European economic crisis, the restrictive fiscal policies and their social consequences [that] have done nothing but to sharpen the citizen’s distrust in such legal-political institutions, increased their resentments, and even undermined the very possibility of a democratic discussion on taxes.”

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