tax policy Archives - Page 2 of 2

December 6, 2012October 23, 2013

A Tax Proposal Worth Considering

The Center for American Progress (CAP) recently published a summary description of their proposals for addressing tax and spending policy, in the light of the ‘Fiscal Cliff,’ Simpson-Bowles, and the ongoing flustercluck of fiscal policy negotiations going on before January 1, 2013.

Their summary report is as good as anything I’ve seen yet in terms of both credibility and reasonableness for addressing tax policy and fiscal deficits.

Who is the Center for American Progress? The CAP represents the Clinton Wing of fiscal policy, with such getting-the-band-back-together Clinton Administration veterans as Bob Rubin, Larry Summers, Roger Altman, William Daley, John Podesta, and Leslie Samuels. Before you roll your eyes at those same-old left-of-center Democrats, consider the facts:

This team produced fiscal surpluses at the end of the Clinton Administration[1]
This team cut Welfare
This team is EXTREMELY Wall Street friendly

And, so, now that I’ve established why both the Left and the Right will hate whatever these guys propose, my reply to the haters is that they have fiscal and financial credibility in a way nobody from the Bush era can claim, and they are far from being European Socialists when it comes to policy.

Some specific things I like about the CAP proposals:

They eliminate the ‘Carried Interest’ loophole, which I wrote about here.
They tax dividends like ordinary income – as they were taxed for 90 years before 1993[2]
They raise long-term capital gains taxes from 15% to 28% – as they were taxed after the Reagan tax reform of 1986[3]
They limit the kind of tax breaks which disproportionately favor high earners, such as mortgage interest tax deductions[4]
They simplify and reduce the need for itemization of one’s personal tax returns
They eliminate the Alternative Minimum Tax, aka the Tax Accountants and Preparers Full Employment Act[5]

Here’s the most compelling statement from the summary report:

[T]he real-world experience of raising taxes on those with higher incomes in the 1990s and cutting them in the 2000s strongly supports the view that higher taxes for those at the top – in the range seen in the United State in recent decades – don’t depress growth, and lower taxes don’t spur it. In 1993 when President Bill Clinton raised taxes on the top income earners, his opponents argued loudly that such tax hikes would mean economic decline, with some even promising lower tax revenues as a result. Needless to say, they were proven wrong in spectacular fashion with the longest period of economic growth in US history, increased business investment, 23 million jobs added, and, of course, budget surpluses. Eight years later, President Bush promised that his tax cuts would spark an economic boom. That boom never materialized, but renewed large deficits did. In addition to the clear historical record, study after study has found no relationship between deficit-financed tax cuts and economic growth.

On the other hand, here’s some things I don’t like or don’t understand well enough from the CAP proposals on spending to find credible:

They rely on a series of health care delivery reforms for fiscal savings. I’ve heard that one before. I’m calling BS on that one.
They rely on lowering drug costs and Medicare payments for savings. I’ve heard that one before too. If it was easy they’d have done it by now.
They propose $100 Billion in savings from nondiscretionary programs. “Non-discretionary” to me implies that somebody is going to squeal very loudly when you try to save $100 Billion on their particular non-discretionary item. I’m seeing a political hot mess.
They propose $300 Billion in new “job creation” spending by the Federal Government. Hey guys? Now you’re just opening yourselves up to being accused of typical lefty Democratic thinking. Just stop it.

In sum, I like the tax side of this CAP Report, and either can’t agree or remain skeptical of the spending side of the CAP Report. But hey it’s a start.

[1] Which is a reminder of the enraging fact that only 12 years ago the big problem was figuring out what to do with the expected fiscal surpluses we’d have by 2012.

[2] And the world didn’t end

[3] And again, the world didn’t end

[4] A helpful reminder of why this is, from their report: A high earner who pays $10K in mortgage interest could potentially deduct $3,500, while a low earner who pays $10K in mortgage interest could potentially deduct only $1,500. They both paid $10K in mortgage interest over the year, but the higher earner gets a much better deal on the deduction

[5] In other words, eliminating the AMT could greatly increase the # of folks who could file their own taxes. Which seems like a good idea to me.

Post read (4889) times.

November 29, 2012November 29, 2012

Powerball – A Horrific Tax On The Poor

In recent posts I argued that current tax policy for the wealthiest people in the United States incentivizes inheritance over effort, encourages getting ahead either from:

…all the while punishing people who actually, you know, work for a salary to achieve the American Dream.

In response, many outraged readers commented that the poorest Americans pay no income taxes, and that the real injustice wasn’t Richie Rich starting out life with $10 million tax free, but rather that Welfare Queens and moochers were living high on the hog of their $28,000 in annual transfer payments, off the sweat of the brow of the upper classes.

Ah, but dear outraged reader, do not worry and do not be alarmed – the poor do not slide by tax free. No, no, no. If those poor people want good schools and good roads, our leaders have devised extraordinary measures to tax people who pay no income taxes.

Moreover, taxes on the poor have been rising steadily in the past two decades. What is this hidden tax?

Lotteries! Casinos! The great thing about lotteries and casinos is that the government can capture significant revenue[1] from those Welfare Queens and moochers, without having to raise taxes on the wealthy to pay for stuff like, you know, schools and roads.[2]

Indeed last night’s extraordinary Powerball drawing reminds us that governments constantly levy hefty taxes on poor people, especially poor people who are bad at math.[3]

Lotteries, which generate state revenue of approximately 30 cents for every dollar spent by purchasers, implicitly tax participants much more heavily than other revenue sources, between 25% and 56%.

As I wrote before, what I really find offensive about the abolition of the estate tax and the loopholes for the wealthy is the message that government leaders implicitly send about the value of work and government-incentivized methods of accumulating wealth.[4] Likewise, what I really find offensive about lotteries and casinos is the clear message from government leaders to the poor about the way to get ahead in life, and the way to accumulate wealth.

The implicit message of taxation through lotteries and casinos is the following: Never mind trying to work for a living. It’s best for you to try to reach the American Dream through pure dumb luck: the roll of the dice, the spin of the wheel, the turn of the card, or the scratching off of the ticket. Money is best made not by discipline, sacrifice, intelligence, education, or work, but rather by playing a game, secretly knowing that the odds are rigged against you and that you’re going to lose anyway.

That’s our hugely regressive tax policy for the folks who don’t pay income tax. That’s the message to poor people from our leaders rushing to promote lotteries and casinos.[5]

[1] States collected close to $18 Billion in revenue from lotteries in 2010.

[2] How, besides common sense, do I know poor people pay these Lottery and Casino taxes in disproportionate numbers? Great stats and facts accumulated here. To highlight a few: 1. Instant tickets in Texas were more likely purchased by someone out of work than someone working or retired. 2. 49% of Californians without a college degree play the lottery, versus 30% with a college degree. 3. 54% of lottery players in South Carolina earn less than $40K a year, although they account for 28% of the state population.

[3] Of course, last night’s estimated $580 million Powerball lottery payout was exceptional – in that the expected value of $1 spent on a lottery ticket was actually positive – an unusual case. The government still seeks to tax the poor with this lottery, but at least it wasn’t, for this brief instance, taxing both the poor and the innumerate.

[4] To be specific about that message: “The best way to get wealthy is to be born in to the right family. The best way to earn a living is to have your money make money for you. The best business you can set up is a private equity or hedge fund, as we will give you generous tax breaks on your income if you do that.”

[5] Also of course the fact that I bought two Powerball tickets and did not win has fueled my anti-lottery feelings this morning. Go ahead, call me a hypocrite. I can take it.

Post read (5201) times.

November 16, 2012

Tax Update – An EVEN BETTER WAY To Get Your First $10 Million

Earlier this week I posted about how the tax code incentivizes you toward the old-fashioned way to make your first $5 million: Inherit it.

That’s because, at least until December 31^st, the first $5 million you receive through estate inheritance comes to you tax free.

I was trying to point out that there’s no better way to get ahead in life, as the tax code tends to take your money away if you are so foolish as to, you know, actually work for a living.

But, as the Wall Street Journal reminds us today, there’s an even better way to make your first $10.24 million, at least until the law changes or gets updated on December 31^st.

An expiring but very generous lifetime federal gift-tax exemption allows individuals (presumably your parents) to gift you up to a maximum of $5.12 million each[1], without paying any taxes on it. This works like the better-known $13,000 annual gift tax-exemption, except your parents can only take advantage of it once.

This is far better than the estate tax gift I mentioned earlier in the week.

You see, the downside of inheriting $5 million is that somebody close to you has to die first. That’s kinda sad, and it’s also hard to count on, timing wise. You might need the $10 million, like, right now. But fortunately, because of this generous lifetime gift exemption, your living parents can start you off right in life, like, right now.

So, Richie Rich, you have no time to lose because the tax code either reverts to a $1 million lifetime exemption per person[2] next year, or Congress passes a law to extend the gift-exemption.

I think its time to be nice to your parents again.

And if that doesn’t work, get on the phone with your Congressman and get him to extend that exemption.

“Either way, Daddy, start writing checks!”[3]

[1] Hence, the $10.24 million total, $5.12 million from each parent

[2] $2 million if both your parents maximize their lifetime exemption.

[3] as I once heard a classmate at Harvard say, un-ironically, when she didn’t get into the prestigious dormitory of her choice

Post read (10870) times.

November 7, 2012November 13, 2012

Four Reactions to the Election

Four quick thoughts now that the elections are over, from a recovering banker.

1. The equity indexes fell immediately at the open today, and remain down over 2% on the day. Do not let any talking head from the financial-industrial-infotainment industry try to suggest that this is in response to Obama’s election. Every trader on the planet knew that Obama had a 60% chance of winning as of last month, a 75% chance of winning as of last week, and a 90% chance of winning as of the final 48 hours.[1] Nobody who manages capital for a living was caught off-guard by the Obama victory, so nobody suddenly had to reposition their portfolio as a result this morning. Markets and the people with real capital who participate in them are forward-looking and probabilistic; equity markets already reflected widespread expectations of an Obama victory.

2. The next Treasury Secretary matters tremendously for the biggest financial-regulatory issue of the day – the unaddressed problem of Too Big To Fail banks. Secretary Geithner pre-announced that he would not serve in a second Obama administration[2] so the hunt for a new Treasury Secretary is now underway. Geithner’s utterly failed to address the TBTF problem and pushed the Obama administration into a business-as-usual, same-guys-in-charge approach to Wall Street reform. Secretary Paulson’s background as the former Goldman chief who grew up professionally with the rest of Wall Street’s heads played an inordinate role in selecting the winners and losers of the Credit Crunch of 2008, along with in providing the ultimate government backstop for the country’s biggest financial firms. Had Paulson come from any other industry – instead of finance – he would have seen what the rest of us saw: It’s unconscionable to allow firms to pay executive bonuses[3] in the same year that the firms were bailed out by taxpayers. Geithner continued Paulson’s protective approach to Wall Street banks, rather than seizing the opportunity to extract real concessions or reform when the industry needed the government to survive.

I’m not suggesting we put someone like Elizabeth Warren[4] in charge, but we need someone who can independently evaluate what parts of Wall Street need supporting and which parts need curbing. Somebody, in other words, who didn’t spend his or her entire life working on the Street.

3. The “Fiscal Cliff” and fiscal responsibility.

Obviously the FC now becomes the next hot topic for overheated punditry, at least until we pass the January deadline.

I’m not optimistic about the tone of the discussion nor about the possible results of fiscal compromise, but I do have my wishes.

I wish that, with elections for Congress now two years away, can we have less complete bullshit when it comes to fiscal policy positions? Would that be too much to ask?

One party’s leader says the solution lies in tax cuts. The other party’s leader says the solution lies in more generous social spending. One party’s leader says military spending is untouchable. The other party’s leader says transfer payments and social safety net spending is untouchable. All those proposals leave us in a worse fiscal position as a nation.

Hey guys? Can you treat us like grown-ups? We can handle a bit more truth than you’re giving us credit for. We know budget deficits have a terrible trajectory and only a combination of tax hikes and spending cuts will correct the course.

Say what you will about the 2016 Republican nominee, Gov. Chris Christie, he’s proved that refreshingly blunt and seemingly unpopular – but honest talk – can appeal to both sides of the political aisle. Let’s have some more of that as we drive, full throttle, toward the Fiscal Cliff.

4. Tax policy

I’ll have more to write about this shortly, but one of interesting lessons of Mitt Romney’s candidacy is how little the US electorate understands, or cares to understand, about our income tax policies.

By releasing only his 2010 and 2011 income tax returns, Romney effectively obfuscated his financial background. He signaled (albeit quietly) that his tax-planning strategies were so aggressive that their release would explode his electoral chances. And yet, I don’t think this cost him anything real in the end in terms of votes. He calculated – correctly! – that the electorate’s ignorance of current tax policies, and popular tax-planning strategies of the wealthy would protect him.

Despite heightened resentment toward the wealthy, I observe the “99%,” for the most part, has no idea what they don’t know. They can’t even conceive of the many ways someone like Romney avoids paying his proportionate share of taxes. Romney knew that, and he was not about to wake that ignorant, sleeping giant by revealing his methods in the unreleased tax returns.

[1] Because professional traders pay attention to data and evidence, not pundits trying to hype a competitive race. Which is why Nate Silver is a the mutherflipping P.I.M.P. of the moment.

[2] And I have this sick feeling in my stomach that he’ll be Goldman’s next senior hire

[3] Bonuses are for success. Bonuses are optional. Bonuses should reflect private profit and should never be paid by borrowing from taxpayers. Only a deeply embedded executive like Paulson could have missed the implications of this.

[4] I know I may sound strident when it comes to Wall Street reform, but I actually admire the industry very much and I want it to thrive. Warren, by contrast, strikes me as overly ideological when it comes to Wall Street, incapable of seeing the positive.

Post read (1957) times.