Posts Tagged ‘taxes’

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600_216610  Toles-tax cuts

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The majority of government expenditures in the United States go towards social insurance and means-tested transfers.* And the good news is, they work.

According to recent report by Bruce D. Meyer and Derek Wu, Social Security cuts the poverty rate by a third—more than twice the combined effect of the five means-tested transfers. Among those transfers, the Earned-Income Tax Credit and food stamps (officially, the Supplemental Food Assistance Program) are most effective. All programs except for the tax credit sharply reduce deep poverty (below 50 percent of the poverty line), while the impact of the tax credit is more pronounced at 150 percent of the poverty line. For the elderly, Social Security single-handedly slashes poverty by 75 percent, more than 20 times the combined effect of the means-tested transfers.** Supplemental Security Income, Public Assistance, and housing assistance have the highest share of benefits going to the pre-transfer poor, while the tax credit has the lowest.***

And the bad news?

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Even after all those expenditures, more than one tenth of Americans are still struggling to survive at or below the poverty line—12.7 percent according to the official poverty measure, 14 percent according to the Supplemental Poverty Measure.****

U.S. capitalism leaves such a large portion of the population in destitute circumstances that even massive public spending has not been able to solve the problem. In other words, anti-poverty programs work—but the mountain of poverty created by the American economy is simply too large to overcome.

But wait, it gets worse.

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Every year, the federal government doles out billions in “tax expenditures” to corporations (especially those that allow multinational companies to delay paying U.S. taxes on their foreign profits and “accelerated depreciation,” effectively a tax subsidy for spending on machinery and equipment) and individuals (through deductions for retirement savings, employer-sponsored health plans, mortgage-interest payments and, sweetest of all, income from watching the value of your home, stock portfolio, and private-equity partnerships grow). According to the Center on Budget and Policy Priorities, the total of all federal income tax expenditures in 2017 was higher than Social Security, the combined cost of Medicare and Medicaid, or the combined cost of defense and non-defense discretionary spending.

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The bulk of each year’s spending on individual tax expenditures is delivered in the form of deductions, exemptions, or exclusions.  The value of these tax breaks increases as household income rises: the higher one’s tax bracket, the greater the tax benefit for each dollar that is deducted, exempted, or excluded. As a result, these tax expenditures provide their largest subsidies to high-income people (27.5 percent to the top 1 percent in 2015), even though they are the individuals least likely to need financial incentives to engage in the activities that tax expenditures are generally designed to promote, such as buying a home, sending a child to college, or saving for retirement.  Meanwhile, moderate- and low-income families receive considerably smaller tax-expenditure benefits for engaging in these activities (only 22.3 percent for the bottom 60 percent of American taxpayers).

Eliminating those welfare programs for the rich would go a long way toward improving and expanding the anti-poverty programs for the nation’s poor.

Alternatively, the American economy could be reorganized so that it doesn’t generate such obscene levels of poverty in the first place, thereby eliminating the need for the endless debates about the size and nature of government programs to help the poor.

 

*Social insurance programs are available to all individuals who have experienced unfortunate circumstances or are aged. These programs include Social Security retirement and disability insurance, unemployment insurance, and Medicare. Means-tested transfers provide cash or in-kind assistance to only those with the lowest incomes. These programs include the Supplementary Nutrition Assistance Program (formerly, food stamps), Supplemental Security Income, and Public Assistance, as well as certain tax credits, housing assistance, and Medicaid. All told, according to my calculations (based on the historical tables from the White House Office on Management and Budget), these programs constituted 60 percent of all federal outlays in 2015, in addition to a large share of state and local spending.

**Another consequence of Social Security, as noted by Christina Gibson-Davis and Christine Percheski, is that the net wealth across the range of elderly households grew from 1989 to 2013 since “With stable income, fewer older people dipped into savings to pay their bills, and they had more money to invest”—in contrast to households with children most of whose wealth declined during that same period.

***The Supplemental Security Income program is a federal cash-assistance program specifically targeting individuals with low incomes and who are also aged (65 or over), blind, or disabled. Public Assistance broadly refers to benefits (often in the form of cash welfare) offered by state and local governments to needy families and individuals. An especially prominent program is the Temporary Assistance for Needy Families program, which is federally funded but run by states and targeted to low-income families with children. The Earned-Income Tax Credit is given to individuals and couples with positive earnings, especially those with qualifying children. Federal agencies as well as states and localities offer a wide variety of housing assistance programs, including rental houses or apartments that are managed by local housing agencies and funded by the Department of Housing and Urban Development and vouchers to tenants who are free to choose any housing that meets minimum health and safety standards.

****The supplemental measure extends the official poverty measure by taking account of many of the government programs designed to assist low-income families and individuals that are not included in the official poverty measure.

 

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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.

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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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