Budget & Taxes

The Income Gap Is Still Widening

Washington Post: “The rich are still getting richer, and the poor are still getting poorer, federal data released Thursday suggests. Accounting for taxes, though, everyone’s getting poorer, especially the rich.”

“The average American household’s income declined for a second year in a row, the data from the Bureau of Labor Statistics show, down 0.9 percent to $64,432. The wealthiest fifth of Americans were an exception, as their incomes increased by 0.9 percent. Among the poorest fifth, by contrast, incomes declined by 3.5 percent.”

“Taking taxes into account, the rich were much worse off. Income after taxes declined 8.1 percent in that wealthiest group, compared to just 1.8 percent among the poorest.”

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“Even taking them into account, inequality has increased, and the Congressional Budget Office gives a couple of a reasons. For one thing, as the workforce ages, more and more government spending goes toward maintaining the incomes of middle-class retirees rather than helping out the poor. For another, taxes on the wealthy have fallen over the long term, despite the increases in 2013.”

Tax Deductions Economists Want to Eliminate

Ben Casselman: “Well-structured tax incentives can promote behavior the government wants to encourage, such as saving, working or having children. But the key phrase there is ‘well-structured’—in practice, tax laws often end up having unintended consequences.”

“At the top of many economists’ hit list is the mortgage-interest deduction. If you have a mortgage on your home, you don’t have to pay taxes on the interest on that loan… Economists have all sorts of problems with the mortgage-interest deduction. For one thing, because wealthier people own bigger homes with bigger mortgages, the benefit disproportionately benefits the rich.”

“Next up on economists’ chopping block: the deduction for state and local taxes. Right now, if you pay taxes in your home state, you can write them off on your federal tax return. That might seem reasonable — you’re already paying taxes once! — but from the federal government’s perspective, state taxes really aren’t much different from any other expenditures. Your taxes pay for roads, schools and police protection, the same way your rent pays for housing.”

How the U.S. Can Get a VAT Tax

Mark Bloomfield reads the tea leaves in the tax reform discussions and believes that “a shift is emerging in thinking about tax reform, from fixing the income tax to replacing it with a consumption tax.”

“Consumption taxes aren’t a novelty.  In the U.S., there are local sales taxes everywhere. The value added tax (VAT) is common around the world–its absence in the U.S. is an anomaly. Former Treasury Secretary Larry Summers has observed that the U.S. has no VAT because liberals think it’s regressive and conservatives think it’s a money machine. The U.S. will get a VAT, Mr. Summers has said, when those positions are reversed.”

“Sen. Cardin addresses ‘regressivity’ by providing, for example, a large income tax exemption for joint filers making less than $100,000. He addresses the “money machine” issue by requiring that revenue in excess of 10% of GDP be returned to taxpayers. This 10% circuit breaker is an innovative idea that could open negotiations with conservatives and result in a compromise on a lower tax rate.”

Health Care Reform Promises the Unexpected This Tax Season

With the Affordable Care Act’s individual mandate entering into force this year, National Journal looks at a number of possible scenarios of how tax season might play out.

“Almost 7 million people picked plans through the exchanges and were eligible for subsidies last year. Half of them will end up owing the government money… The reason for this is because income—which is tied to the size of subsidies—can be very difficult to predict ahead of time. Most people elect to receive these subsidies in advance, when they enroll in health coverage, forcing them to predict what they’ll make. If this prediction is off (as it often is), they’ll have to reconcile it with what they actually made when they file their taxes.”

“Another 45 percent of people enrolled on an exchange and receiving subsidies will have a more pleasant tax-season experience: They’ll get money from the government. These people overestimated their income and have been paying more than the government says they should for their health insurance.”

“There’s a smorgasbord of possibilities, a mix-and-match of expectations, subsidies, penalties, and reporting requirements. Some people will both get some money back and pay a fine… But for all the potential complexity, for three-quarters of taxpayers, filling out their tax forms will require very little headache, as long as they are insured. These people will only have to check a box saying they have health coverage.”

Red States Love the Gas Tax

“Don’t believe the axiom that Republicans reflexively oppose tax increases: Outside the Beltway, it just doesn’t hold up,” The Atlantic reports.

“States across the country are raising their fuel taxes to pay for the upkeep of deteriorating roads and bridges, and in a surprising number of those states, the governors and legislative leaders pushing those changes are Republicans, not Democrats. In Utah, GOP Governor Gary Herbert signed a law last week passed by the state’s Republican-controlled legislature that raises the gas tax by 5 cents and ties future increases to prices at the pump. A month ago, Iowa’s Republican governor, Terry Branstad, approved a gas-tax hike that sailed through the legislature in under two weeks. Top Republicans in Georgia, Michigan, and South Dakota have proposed similar increases, and as many as 12 states could raise fuel taxes in 2015 alone, after six did so in the last two years, according to an analysis by Carl Davis of the Institute on Taxation and Economic Policy.”

“The movement is a breakthrough for many states that have gone more than 20 years without touching the levy on gasoline, and it presents quite the contrast with the dynamics in Washington… The mere proposal of a tax hike in Washington sends lobbyists scrambling and conservative activists mobilizing in opposition. Yet the most fascinating part of the recent gas-tax debate in at least some of the states is the absence of any visible ideological fights.”

How Many Federal Dollars Does the EPA Really Gobble Up?

Inside Climate News: The Environmental Protection Agency has been accused of everything from running this country to waging an economy-destroying war on coal. But it turns out the GOP’s prime target isn’t that big after all.

The agency’s budget represents an almost invisible slice of the federal pie—less than a quarter of a percent of Obama’s proposed $4 trillion budget for the 2016 fiscal year. If approved, the EPA’s budget next year would be 16.5 percent smaller than it was in 2010.

What is the Real Solution to Wage Stagnation?

Lawrence Mishel in the New York Times argues that the solution to wage stagnation – tax cuts – is not effective.

“What has hurt workers’ paychecks is not what the government takes out, but what their employers no longer put in — a dynamic that tax cuts cannot eliminate.”

“As wages continue to stagnate, it is impossible to continuously cut taxes and still pay for things like education and social programs for the growing population of older Americans.”

“The challenge is to ensure that a typical worker’s wages grow along with profits and productivity. There is no silver bullet, but the key is to make raising wages the central focus of economic policy making and to reverse decades of decisions that have undercut wage growth.”

“We need to start with monetary policy. In the next few years, the most important decisions being made about wages are those of the Federal Reserve Board as it determines the scale and pace at which it raises interest rates — and thereby slows job growth. Before raising rates, it is essential we achieve a robust recovery, with roughly 3.5 to 4 percent annual wage growth. This will ensure that wage growth matches productivity growth and that everyone can benefit from the rebounding economy.”

Mishel also recommends raising the minimum wage and protecting and expanding workers’ right to unionize and bargain collectively.

Conservatives Hate Taxes, Unless They’re For the Poor

Shaila Dewan in the New York Times observes that “a number of Republican-led states are considering tax changes that in many cases would have the effect of cutting taxes on the rich and raising them on the poor.”

“Conservatives are known for hating taxes but particularly hate income taxes, which they say have a greater dampening effect on growth. Of the 10 or so Republican governors who have proposed tax increases, nearly all have called for increases in consumption taxes, which hit the poor and middle class harder than the rich.”

“Just as the tax burden has shifted away from the wealthy, the wealthy have received a huge share of income growth in recent years.”

“While the bottom fifth of earners pay more than 10 percent of their income in state and local taxes, the top 1 percent pays closer to 5 percent

” less regressive tax code is the answer to state budget woes, in what is basically a sophisticated pitch for a millionaire’s tax … Taxing the top fifth of earners at the same rate as the middle class would bring in $200.5 billion to state and local coffers … Taxing just the top 1 percent at the same rate as the middle class would bring in $88.5 billio.”

Paul Krugman asks: “Can anyone show me an example of a prominent Republican politician proposing anything that would reduce after-tax-and-transfer inequality?”

It Pays to be a Farmer

Washington Post: “Farm subsidies have for decades disproportionately benefited richer Americans.”

“Call it agricultural inequality. The country’s top recipients swept 77 percent of subsidies from 1995 to 2012 … The U.S. Department of Agriculture will soon propose a rule that could drive that percentage down, Politico reports, starting with tightening the definition of an ‘actively engaged’ farmer. The eligibility for agricultural subsidies remains broad: Anyone who invests time, money or guidance in a farm can qualify for a fat government handout.”

“’It’s a loophole some folks not ‘actively engaged’ in farming are using to collect farm benefits,’ USDA spokesman Cullen Schwarz said, ‘and we’re trying to close that to the extent that we can.’”

“The USDA proposal is parked in the Office of Management and Budget, Schwarz said. Change could take months. Farm subsidies, meanwhile, continue to cushion the privileged.”

“In the past 20 years, at least $11.3 million in farm subsidies went to 50 billionaires — including Microsoft co-founder Paul G. Allen, investment giant Charles Schwab and Chick-fil-A founder S. Truett Cathy.”

“Then there’s the new crop insurance program, intended to replace direct payments. It comes with no income cap and can help out the kind of earners who don’t necessarily need to be saved … The shift from direct payments to crop insurance, Dayen notes, means it will be much harder to track how the handouts are distributed.”


A Growing Threat to Social Security’s Fiscal Health

Washington Post: Income inequality “poses a direct threat to the already shaky fiscal health of Social Security, according to a report released Tuesday by the left-leaning Center for American Progress.”

Social Security “is funded by a payroll tax that this year applies to wages of $118,500 and below. But the amount of revenue coming in is not as large as it could be, now that an increasing share of wage growth is going to people who make more than that, and the wages of many Americans are stagnant, or even in decline. That is adding fiscal stress to a program already struggling with the demands of an aging population.”

“Upward redistribution of income in the United States has meant that income has shifted away from the workers whose full earnings are taxed and toward high-income workers whose additional dollars are exempt.”

“The tax cap is adjusted each year in step with average wage growth year to year. Overall, some 17 percent of the nation’s wages escaped the tax, up from 10 percent in 1983. The increase in the share of wages exempt from the payroll tax has been jagged, but the upward drift has been unmistakable, as the chart below illustrates.”

Obamacare as a Contributor to Falling Health-Care Costs

Ezra Klein: “The CBO’s newest projections suggest the federal government will spend $600 billion less on health care than they predicted back in 2010.”

“So far, so good: projections are always wrong by at least a bit, and it’s nice to have the extra $600 billion in America’s pocket.”

“But here’s the incredible thing: as Paul Van de Water, a health care expert at the Center on Budget and Policy Priorities, points out, the January 2010 projection didn’t include any of the spending associated with Obamacare. The latest projections include all of the spending associated with Obamacare.”

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“So even adding all the spending in Obamacare, the CBO is projecting the federal government will spend $600 billion less on health care than the agency expected in 2010, when they weren’t counting even a dollar of the spending in Obamacare.”

Avoiding Fiscal Responsibility: The Long-Run Dodge

Paul Krugman asks, when considering criticism over President Obama’s budget, “why, exactly, is it crucial that we deal with the threat of future benefits cuts by locking in plans to cut future benefits?”

“Even where the long-term issues are real, it’s truly strange that they have so often taken center stage in recent years. We are, after all, still living through the aftermath of a once-in-three-generations financial crisis. America seems, finally, to be recovering — but Bowles-Simpsonism had its greatest influence precisely when the United States economy was still mired in a deep slump. Europe has hardly recovered at all, and there’s overwhelming evidence that austerity policies are the main reason for that ongoing disaster. So why the urge to change the subject to structural reform? The answer, I’d suggest, is intellectual laziness and lack of moral courage.”

“I understand why it’s tempting to dismiss the whole debate and declare that the really important issues involve the long run. But while people who say that kind of thing like to pose as brave and responsible, they’re actually ducking the hard stuff — which is to say, being craven and irresponsible.”