The American Dream:  A Free Ride
Nearly Half of All Americans Don’t Pay Income Taxes
http://blog.heritage.org/2012/02/19/chart-of-the-week-nearly-half-of-all-americans-dont-pay-income-taxes/

Also see
"Comparing the top and the bottom income earners: Distribution of income and taxes in the United States," by Govind S. Iyera, Peggy Jimeneza, and Philip M.J. Reckers, Journal of Accounting and Public Policy, March–April 2012, Pages 226–234 ---
http://www.sciencedirect.com/science/article/pii/S027842541200004X
Thank you Steve Sutton for the heads up.

Why, according to the OECD, is the US system so progressive? Not because the rich face unusually high average tax rates, but because middle-income US households face unusually low tax rates--an important point which de Rugy mentions and Chait ignores.
Note that the Excel file includes payroll taxes as well as income taxes ---
(Here are the IRS data, excel file.)
"U.S. Taxes Really Are Unusually Progressive," by Clive Crook, The Atlantic, February 10, 2012 ---
http://www.theatlantic.com/business/archive/2012/02/us-taxes-really-are-unusually-progressive/252917/

If you ask me, Jonathan Chait, a writer I respect, has made an ass of himself in a fight he picked with Veronique de Rugy over taxes and progressivity. She offended him by saying that America's income taxes are more progressive than those of other rich countries. Chait assailed her "completely idiotic" reasoning, called her an "inequality denier", "a ubiquitous right-wing misinformation recirculator" and asked if it was really any wonder he cast insults now and then at such "lesser lights of the intellectual world". (Paul Krugman said he sympathises. With Chait, obviously. The only danger here is in being too forgiving, Krugman advises. Chait may think the de Rugys of this world are only lazy and incompetent, but we know them to be liars as well.)

Just one problem. On the topic in question, De Rugy is right and Chait is wrong.

Income taxes in America are more progressive than in other rich countries--according to an authoritiative official study which, to my knowledge, has not been contradicted. The OECD's report "Growing Unequal", on poverty and inequality in industrial countries, includes a table that provides two measures of income tax progressivity in 2005. This is evidently the source of de Rugy's numbers. Here they are in an excel file. According to one measure, America's income taxes were the most progressive of the 24 countries in the sample, except for Ireland. According to the other, they were the most progressive full stop. (A more recent OECD report, "Divided We Stand", uses different data, a smaller sample of countries and a different measure of progressivity: the results are similar.)

Before you ask, this ranking takes account of employee-side payroll tax as well as the federal income tax.

Chait first objected to de Rugy's claim about progressivity because he thought she was inferring it from the fact that the US collects the biggest share of income taxes--45 percent of the total, col B1 in the table--from the top income decile. That would be a false inference, as Chait says, because it could be true of a country with a very unequal income distribution even if its taxes were not especially progressive. But look at the table. There was no need for de Rugy to draw any such inference, let alone try to mislead readers. All she needed to do--and all, I'm sure, she did--was glance over to the last column, which actually gives the measure of progressivity, showing the US to have the highest score.

The measure of progressivity is hard to explain, so I can see why de Rugy quoted the tax share instead. But she could have chosen a much more dramatic number if she was seeking merely to bamboozle her readers. Exclude payroll tax, and the top 1 percent of taxpayers, not the top 10 percent, have lately accounted for nearly 40 percent of income tax receipts, the top 5 percent for nearly 60 percent, and the top decile for roughly 70 percent. (Here are the IRS data, excel file.)

For the reason I just gave, this does not prove that the US tax system is more progressive than anybody else's--but it surely has some relevance to the question, "Are the rich paying their fair share of income tax?" If this isn't fair, what would be?

When Chait, with all the authority of a leading light of the intellectual world, says "Rich Americans pay a bigger share of the tax burden because they earn a bigger share of the income, not because the U.S. tax code is more progressive," he is making the same kind of sloppy bias-driven error he falsely accuses de Rugy of making. (I'll refrain from wondering whether he made the mistake deliberately.) According to the OECD, rich Americans bear a bigger share of the tax burden because they earn a bigger share of the income and because the US income tax system is more progressive.

There's a lot more to say on this subject.

Is measuring progressivity straightforward? No. It's difficult, because the underlying data are very complicated and hard to compare across countries. Another problem: expressing progressivity across the whole income range as a single number, so that one can say A is more or less progressive than B, can be misleading. Unfortunately, we all want to be able to say, A is more or less progressive than B.

Why, according to the OECD, is the US system so progressive? Not because the rich face unusually high average tax rates, but because middle-income US households face unusually low tax rates--an important point which de Rugy mentions and Chait ignores.

How does the picture change if you take indirect taxation into account? That would make the US system look even more progressive, because the US doesn't rely on a flat consumption tax like most other governments.

Continued in article

Most developed nations, other than the U.S., provide relief on double taxation
"Corporate Dividend and Capital Gains Taxation: A Comparison of the United States to Other Developed Nations," by Ernst & Young (Drs. Robert Carroll and Gerald Prante), February 2012 ---
http://images.politico.com/global/2012/02/120208_asidividend.html

February 24, 2012 reply from John Brozovsky

. . .

On a second note that has been carried in this thread. Two years ago I would have qualified as one of the people that paid no federal income tax. Plenty of other federal, state and local taxes due to a healthy accounting faculty salary but not federal income tax. I adjusted my behavior in a manner consistent with what the government ‘wanted’ to promote. I put in a geothermal system in my house which carried a 30% tax credit effectively wiping out my tax liability. While I do not think the government should be promoting social agenda with the tax code, I will certainly adjust to make use of it when it does.

Question
Can you lower income taxes for people who don't pay any income taxes?
Note that about half the taxpayers in the United States do not pay any income taxes.

Answer
Of course. You can increase their refunds that their already receiving before you "lower" their taxes.

"Can you cut taxes for people who don't pay taxes?" Des Moines Register, February 07, 2012 ---
http://www.rothcpa.com/archives/007655.php

Jensen Comment
It was conservative economist and Nobel Prize winner Milton Friedman who advocated simplifying the welfare system by introducing a negative income tax. We seem to have a negative income tax in place without giving Professor Friedman enough credit .

Question
Are there defects in statistics used the progressive and political media to rant about the economic decline of the middle class?
And has the liberal media intentionally avoided this research published almost a year ago?

Clue
According to a study led by Cornell University researchers, it's not so much a crime of commission as it is one of omission!.
Part of the problem lies in ignoring the many tax breaks available to middle class households.

"A 'Second Opinion' on the Economic Health of the American Middle Class," by Richard V. Burkhauser, Jeff Larrimore, Kosali I. Simon, National Bureau of Economic Research, April 24, 2012 ---
http://www.nber.org/papers/w17164.pdf

Researchers considering levels and trends in the resources available to the middle class traditionally measure the pre-tax cash income of either tax units or households. In this paper, we demonstrate that this choice carries significant implications for assessing income trends. Focusing on tax units rather than households greatly reduces measured growth in middle class income. Furthermore, excluding the effect of taxes and the value of in-kind benefits further reduces observed improvements in the resources of the middle class. Finally, we show how these distinctions change the observed distribution of benefits from the tax exclusion of employer provided health insurance.

SSRN charges $5 to view this paper unless you are already a paid subscriber.

The conservative media has jumped on this in a way that does not make me entirely happy on the other side of the political coin
"Obama’s inequality argument just utterly collapsed," by James Pethokoukis, Enterprise Blog, April 11, 2012 ---
http://blog.american.com/2012/04/obamas-inequality-argument-just-utterly-collapsed/

President Barack Obama has a theory of the case, yes he does. For the past 30 years, the living standards of middle-class Americans have gone nowhere even as the overall U.S. economy has grown markedly. The Obama explanation: Wealthier Americans grabbed all the money. Time to raise their taxes for the sake of “fairness.”

– Here’s Obama in January 2009: “Middle class Americans have been working harder, yet not enjoying their fair share of the fruits of a growing economy.”

– Here’s Obama in Osawatomie, Kansas, last December: “Over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk.”

– And here’s Obama this week: “What drags our entire economy down is when the benefits of economic growth and productivity go only to the few, which is what’s been happening for over a decade now, and gap between those at the very, very top and everybody else keeps growing wider and wider and wider and wider.”

Underlying Obama’s entire thesis is the work of two economists, Thomas Piketty and Emmanuel Saez. According to them, median American incomes rose just 3.2% from 1979 through 2007.  (All figures are inflation adjusted.)

So what happened to the rest of the dough? The top 10%, 1% and 0.1% grabbed all the money. Or pretty much most of it. Time to crank up taxes on the rich and spend more on the middle class. It’s not overstating things to say that the findings of Piketty and Saez form the very heart of Obamanomics, giving a powerful economic rationale for Obama policies such as ending the upper-end Bush tax cuts to Obamacare to the Buffett Rule.

But it’s just not true, according to a new study in National Tax Journal from researchers at Cornell University. (Here’s an earlier, working-paper version.) The academics, led by economist Richard Burkhauser, don’t say the findings of Piketty and Saez are wrong — just incredibly, massively incomplete. According to the Cornell study, median household income – properly measured – rose 36.7%, not 3.2% like Piketty and Saez argue. That’s a big miss.

And all income levels got richer. Yes, the very rich did exceptionally well, mostly due to technology and globalization. Incomes rose 63% for the top 5%, 56% for the top 10% and 52.6% for the top 20%.  But everyone else made out pretty well, too. Incomes rose 40.4% for households between the 60th and 80th percentiles, 36.9% for the next quintile, 25.0% for the next, and 26.4% for the bottom 20%. There’s the “shared prosperity” Obama says he wants, right in front of his eyes. (Indeed, the study finds, income inequality has actually been shrinking since 1989, with the Gini index falling to 0.362 from 0.372.)

As the Cornell study concludes:

Income inequality increased in the United States not because the rich got richer, the poor got poorer and the middle class stagnated, but because the rich got richer at a faster rate than the middle and poorer quintiles and this mostly occurred in the 1980s. .. the apparent failure of the median American to benefit from economic growth can largely be explained by the use of an income measure for this purpose which does not fully capture what is actually happening to the resources available to middle class individuals.

See, Piketty and Saez made lots of odd choices about what to measure and how to measure it. They chose to measure something called “tax units” rather than households, a move which ignores the statistical impact —  including economies of scale — of couples who cohabitate, kids who move back in with their parents after college, and senior parents who live with their adult children.

They chose to ignore the value of all government transfers — including welfare, Social Security, and other government provided cash assistance — received by the household.

They chose to ignore the role of taxes and tax credits.

They chose to ignore the value of healthcare benefits. In short, Piketty and Saez ignored a lot of stuff. Again, Burkhauser and his team;

 The apparent failure of the median American to benefit from economic growth can largely be explained by the use of an income measure for this purpose which does not fully capture what is actually happening to the resources available to middle class individuals …  When using the most restrictive income definition – pre-tax, pre-transfer tax unit cash (market) income—the resources available to the middle class have stagnated over the past three business cycles. In contrast, once broadening the income definition to post-tax, post-transfer size-adjusted household cash income, middle class Americans are found to have made substantial gains.

So the tax and regulatory polices of the past three decades did not lead to stagnation for the middle class at the hands of the rapacious rich. Claims to the contrary — such as those made by Obama, the Occupy movement, and many liberal economists — never really passed the sniff test of anyone who lived through the past few decades. And now we know why: The inequality and stagnation alarmists were wrong. And so, therefore, is the economic rationale of the president’s class-warfare economic policies. Not that economics ever had much to do with them anyway.

 

Jensen's Unpopular Views on Tax Increases
I don't think these revelations should be a basis for not imposing higher taxes on high income earners and higher capital gains taxes (if those gains are first adjusted for inflation).

I do think that this revelation should inspire more research on higher taxes for the middle class and upper class.
In an election year?
Yeah Right!

"The Year Solar Goes Bankrupt," by John Ransom, Townhall, March 2012 ---
http://finance.townhall.com/columnists/johnransom/2012/03/12/the_year_solar_goes_bankrupt

Get ready for a new round of green bankruptcies, as Europe trims back subsidies for solar companies and taxpayers lose their appetite for subsidizing green power.

“The mini-bubble resulting from the rush to cash in on solar subsidies in European and U.S. markets is ending, as feed-in tariffs drop in Europe while loan guarantee and tax credit programs tighten up in the U.S.,” says a new report from Bank of America Merrill Lynch according to CNBC.com.

Germany is dialing back subsidies for solar this month by 29 percent with subsequent decreases each month, according to Bloomberg.com.

Rasmussen has recently released a survey of voters that show a diminishing number of voters support subsidizing the production of the Chevy Volt.

Only 29 percent of likely voters agree with Obama’s latest proposal to include a $10,000 subsidy in the federal budget to support the purchase of every electric vehicle.

Continued in article

Jensen Comment
Many buyers of electric cars like the Chevy Volt often overlook is that if gasoline hit $10 a gallon the price of electricity used to charge a Chevy Volt will also soar, and states will commence to find ways to tax Volt owners for road repair (because of lost road taxes as gas pumps). There's no free lunch as far as electric cars are concerned.

The Chevy Volt is also a huge disappointment in many respects. It's so heavy that it gets lousy gas mileage when the batteries run down. And those batteries run down after after 25-50 miles depending upon such things as hills and temperature. It's battery range is even less than 25 miles during the winter where I live in these mountains. And it has a notoriously bad heater forcing passengers to wear their long johns in wintertime.

It's taken for granted that the Chevy Volt is not a cost-effective net energy saver at the present time. But what about the more popular Toyota Prius? ABC News just did a module on the payback of the added price to get the Prius hybrid option. On average, ABC reported it takes 17 years of driving to pay back the hybrid's additional price.

And those energy credits and deductions on houses and cars account for much of the reason that 49.5% of the U.S. taxpayers pay zero income taxes or demand net refunds.

Trying to Tax Away Inequality is Naive and Dysfunctional
"Lead Essay:: What to Do about Inequality," by  David B. Grusky, Boston Review, March/April 2012 ---
http://www.bostonreview.net/BR37.2/ndf_david_b_grusky_inequality.php

Jensen Comment
This does not mean that increasing taxes at all levels (including the rich) is not a bad idea to a point that brings more fairness into the tax code and raises some revenue for deficit reduction. Taxpayers at all levels of wealth and income are probably getting too much of a break with a tax code that is absurdly complex and literally being written by too many lobbyists.

Why must there be punishment without any purpose other than punishment?
"Henninger: Demolishing Paul Ryan:  The Left launches on warning against any challenge to its ideological fortress," by Daniel Henninger, The Wall Street Journal, April 11, 2012 ---
http://online.wsj.com/article/SB10001424052702304356604577337922580242292.html?mod=djemEditorialPage_t

With the presidential battle begun, the Obama campaign has revived the Cold War nuclear strategy of launch on warning. At any suggestion that a conservative idea might be threatening its ideological fortress, the American left now launches ICBMs of rhetorical destruction.

So it was after the Supreme Court's hearings on the Obama Affordable Care Act, which put in jeopardy the federal command to buy health insurance. After the president green-flagged the assault, the Supreme Court's "legitimacy" was in play. The Roberts Court, wrote one blogger, is "on trial."

On current course, House GOP Budget Chairman Paul Ryan himself may exhaust their entire thermonuclear arsenal before November. Once again, the Campaigner in Chief threw the switch himself, calling the Ryan House budget "social Darwinism," "a Trojan horse" and "antithetical to our entire history." Rev. Samuel Rodriquez of the Hispanic Evangelical Association said the poor would be "budget-war collateral damage."

On Tuesday, Mr. Ryan pushed back. In an interview with the Christian Broadcasting Network, he said that in fact the Catholic Church's "social magisterium" had informed his House budget. One goal of that teaching, he said, is to prevent the poor from staying poor. Nor, he added, should individuals become lifelong dependents of their government.

Just as the left thought the regulating reach of the Commerce Clause was beyond serious challenge, it long ago decided that none dare question the moral case for public spending. That social Darwinism speech Barack Obama is giving now in defense of federal programs isn't merely a public-policy statement. It's a Democratic encyclical. Paul Ryan's ideas are worse than wrong. They are heresy.

Within the hour of the Ryan CBN interview, the blogospheric left went ballistic. "Ryan is shilling for the Catholic Church," said Democrats for Progress, folding in another recently identified group of ObamaCare heretics. And: "Mr. Ryan has drunk the libertarian Kool-Aid." A pro-spending religious coalition, the Faithful Budget Campaign, emailed, "The differences in what the organized religious community is calling a Faithful Budget and what Rep. Ryan refers to could not be more stark."

What Mr. Ryan actually said is worth quoting, because it should revive the debate over the proper relationship between individual citizens, including the poor, and the national government:

"A person's faith is central to how they conduct themselves in public and in private. So to me, using my Catholic faith, we call it the social magisterium, which is how do you apply the doctrine of your teaching into your everyday life as a lay person?

"To me, the principle of subsidiarity . . . meaning government closest to the people governs best . . . where we, through our civic organizations, through our churches, through our charities, through all of our different groups where we interact with people as a community, that's how we advance the common good. By not having big government crowd out civic society, but by having enough space in our communities so that we can interact with each other, and take care of people who are down and out in our communities.

"Those principles are very, very important, and the preferential option for the poor, which is one of the primary tenants of Catholic social teaching, means don't keep people poor, don't make people dependent on government so that they stay stuck at their station in life. Help people get out of poverty out onto a life of independence."

Subsidiarity—an awful but important word—attempts to discover where the limits lie in the demands a state can make on its people. Identifying that limit was at the center of the Supreme Court's mandate arguments.

The first major use of subsidiarity as a basis for public policy was in Pope Leo XIII's famous 1891 encyclical "Rerum Novarum" (though the word itself doesn't appear). Leo was seeking a way to protect the dignity of human beings caught during those years in the tension between unfettered capitalism and unfettered government. "The State," he wrote, "must not absorb the individual or the family." Arguments over where the balance sits have raged since.

The American left thinks this debate is settled. So, for example, any hint of Supreme Court dissent from settled doctrine justifies questions about its "legitimacy."

Continued in article

Jensen Comment
Personally I hope that President Obama wins the Presidency for another four years without getting a liberal majority back in Congress. I've truly enjoyed the relative calm that he holds over the vicious liberal press. Over the past four years the New York Times has not, to my knowledge, leaked any classified military and diplomatic documents. The progressive press has not hounded us daily to close Gitmo. Keith Olbermann can't keep a job, and Chris Matthews just makes it more and more obvious that MSNBC is a one-sided headquarters for the Democratic Party.

More importantly, President Obama might accomplish more than in the correct direction than a press-tied Mitt Romney can accomplish. It's analogous to how the Democratic Party legislature in Rhode Island can accomplish more in reducing entitlement obligations than any Republican Party legislature in any other state. However, President Obama is scary if we give him a spendthrift Congress for the next four years that will pay for pork by cranking out another $2 trillion of printed greenbacks to pay bills in lieu of taxing the middle class --- which is what really needs to be done because 98% of the taxpayers paying no income taxes earn less than $100,000 per year. There just aren't enough rich people to make up the difference. So welcome to Zimbabwe Economics in North America.

Here's a tax unfairness that President Obama will never call "unfair":
April 11, 2012 message from Barbara Scofield

I am a Tax Aide in the AARP Foundation tax preparation program at a senior center in Odessa. My final client was an atypical senior because he had social security income plus retirement pay plus interest plus dividends. In addition, he had sold two stockholding positions during the year with capital gains in both positions, one for about $11,000. His dividends were also substantial, about $6,000.

After entering all of the information, he had about $35,000 in adjusted gross income and after exemptions for filing jointly with taxpayer and spouse over 65 and standard deduction, his taxable income was about $14,000.

Some of you already know the bottom line of this tax return, but it greatly surprised me.

He owed no taxes at all because his dividends and capital gains have a 0% tax rate for 2011 and exceeded his taxable income.

While he appreciated not paying taxes, I don't think this senior felt it was "fair." It was inscrutable.

Barbara W. Scofield, PhD, CPA
 Chair of Graduate Business Studies
Professor of Accounting
The University of Texas of the Permian Basin
4901 E. University Dr. Odessa, TX 79762

"Millions of jobless file for disability when unemployment benefits run out," New York Post via Fox News, February 19, 2012 ---
http://www.foxnews.com/politics/2012/02/19/report-millions-jobless-file-for-disability-when-unemployment-benefits-run-out/

Being unemployed for too long reportedly is driving people mad and costing taxpayers billions of dollars in mental illness and other disability claims. 

The New York Post reported Sunday that as unemployment checks run out, many jobless are trying to gain government benefits by declaring themselves unhealthy. 

More than 10.5 million people -- about 5.3 percent of the population aged 25 and 64 -- received disability checks in January from the federal government, the Post wrote, a 18 percent jump from before the recession.

Among those claiming disability, 43 percent are asking for benefits because of mental illness, the Post wrote. A growing number of those people are older, former white-collar workers. 

Disability claims come from the Social Security Trust Fund, which is set to go broke in 2018. Congress last week agreed to dip into the revenue stream to give a 2-percentage point tax break to working Americans.

The Post noted that the more people file for disability claims, the better for the unemployment picture since those people are removed from the jobless rolls.

Audit Failure: The GAO Reported No Problems Amidst All This Massive Fraud|
Note that most of these particular workers retire long before age 65 and are fraudulently collecting full Social Security and Medicare benefits intended for truly disabled persons
"The Public-Union Albatross What it means when 90% of an agency's workers (fraudulently)  retire with disability benefits (before age 65)," by Philip K. Howard, The Wall Street Journal, November 9, 2011 ---
http://online.wsj.com/article/SB10001424052970204190704577024321510926692.html?mod=djemEditorialPage_t

The indictment of seven Long Island Rail Road workers for disability fraud last week cast a spotlight on a troubled government agency. Until recently, over 90% of LIRR workers retired with a disability—even those who worked desk jobs—adding about $36,000 to their annual pensions. The cost to New York taxpayers over the past decade was $300 million.

As one investigator put it, fraud of this kind "became a culture of sorts among the LIRR workers, who took to gathering in doctor's waiting rooms bragging to each [other] about their disabilities while simultaneously talking about their golf game." How could almost every employee think fraud was the right thing to do?

The LIRR disability epidemic is hardly unique—82% of senior California state troopers are "disabled" in their last year before retirement. Pension abuses are so common—for example, "spiking" pensions with excess overtime in the last year of employment—that they're taken for granted.

Governors in Wisconsin and Ohio this year have led well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing] the collective bargaining rights of public employees." What are these so-called "rights"? The dispute has focused on rich benefit packages that are drowning public budgets. Far more important is the lack of productivity.

"I've never seen anyone terminated for incompetence," observed a long-time human relations official in New York City. In Cincinnati, police personnel records must be expunged every few years—making periodic misconduct essentially unaccountable. Over the past decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a cost of $3.5 million.

Collective-bargaining rights have made government virtually unmanageable. Promotions, reassignments and layoffs are dictated by rigid rules, without any opportunity for managerial judgment. In 2010, shortly after receiving an award as best first-year teacher in Wisconsin, Megan Sampson had to be let go under "last in, first out" provisions of the union contract.

Even what task someone should do on a given day is subject to detailed rules. Last year, when a virus disabled two computers in a shared federal office in Washington, D.C., the IT technician fixed one but said he was unable to fix the other because it wasn't listed on his form.

Making things work better is an affront to union prerogatives. The refuse-collection union in Toledo sued when the city proposed consolidating garbage collection with the surrounding county. (Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts eliminated funding to mow the grass along the roads, the union sued to stop the county executive from giving the job to inmates.

No decision is too small for union micromanagement. Under the New York City union contract, when new equipment is installed the city must reopen collective bargaining "for the sole purpose of negotiating with the union on the practical impact, if any, such equipment has on the affected employees." Trying to get ideas from public employees can be illegal. A deputy mayor of New York City was "warned not to talk with employees in order to get suggestions" because it might violate the "direct dealing law."

How inefficient is this system? Ten percent? Thirty percent? Pause on the math here. Over 20 million people work for federal, state and local government, or one in seven workers in America. Their salaries and benefits total roughly $1.5 trillion of taxpayer funds each year (about 10% of GDP). They spend another $2 trillion. If government could be run more efficiently by 30%, that would result in annual savings worth $1 trillion.

What's amazing is that anything gets done in government. This is a tribute to countless public employees who render public service, against all odds, by their personal pride and willpower, despite having to wrestle daily choices through a slimy bureaucracy.

One huge hurdle stands in the way of making government manageable: public unions. The head of the American Federation of State, County and Municipal Employees recently bragged that the union had contributed $90 million in the 2010 off-year election alone. Where did the unions get all that money? The power is imbedded in an artificial legal construct—a "collective-bargaining right" that deducts union dues from all public employees, whether or not they want to belong to the union.

Some states, such as Indiana, have succeeded in eliminating this requirement. I would go further: America should ban political contributions by public unions, by constitutional amendment if necessary. Government is supposed to serve the public, not public employees.

America must bulldoze the current system and start over. Only then can we balance budgets and restore competence, dignity and purpose to public service.

Solutions that Don't Work

Trying to Tax Away Inequality is Naive and Dysfunctional
"Lead Essay:: What to Do about Inequality," by  David B. Grusky, Boston Review, March/April 2012 ---
http://www.bostonreview.net/BR37.2/ndf_david_b_grusky_inequality.php

Jensen Comment
This does not mean that increasing taxes at all levels (including the rich) is not a bad idea to a point that brings more fairness into the tax code and raises some revenue for deficit reduction. Taxpayers at all levels of wealth and income are probably getting too much of a break with a tax code that is absurdly complex and literally being written by too many lobbyists.

"Federal Budgets and Class Warfare:  I support letting the Bush tax cuts expire. But the Obama plan isn't a serious strategy," by Michael R. Bloomberg, The Wall Street Journal, March 28, 2012 ---
http://online.wsj.com/article/SB10001424052702303816504577309434216236936.html#mod=djemEditorialPage_t

A cardinal rule of American campaigns is that candidates must appeal to the party base during primary elections and then move to the center to win moderates and independents in November. This year, on the issues of taxes and spending, that shift can't come soon enough—and not just for the Republican nominee.

Over the past year, as the candidates jockeying for the Republican nomination raced to the right, the Obama campaign has sought to re-energize its base by tacking left. The president not only embraced the frustration expressed by Occupy Wall Street protesters—which was real—but he adopted their economic populism.

Central to fixing the country's problems, he has argued, is making the wealthiest Americans pay their "fair share," even though the top 5% already pay 59% of all federal income taxes, while 42% (actually 49.5%) of filers have no federal income tax bill at all (or got a check from the government via the earned-income tax credit). Warren Buffett's secretary became the public symbol of this strategy, even appearing at the president's State of the Union address. (Mr. Buffett, of course, did exactly what lower capital gains taxes are designed to encourage: He invested!)

I don't believe in class warfare, and not because I don't want to pay more in taxes. I think the Bush tax cuts should expire for all Americans—you, me, everyone—as part of a long-term plan to rein in the deficit. We are all in this together. Pitting one group against another not only divides us in counterproductive ways but offers one group the false promise of something for nothing.

That's exactly what got our country into this mess in the first place. Mortgages were approved with no money down for borrowers with no income and no assets. Meanwhile, the federal government was running up huge deficits during a period of economic growth and telling the American people not to worry about the bill. Even today, four years later, none of the major candidates for president has developed a plan for paying the bill. Instead, all are still offering something for nothing.

The president asserts that 98% of Americans do not need to pay more in taxes, that we just need those earning more than $1 million to pay a minimum of 30% in federal income taxes. But according to Congress's Joint Committee on Taxation, this plan would generate only $1.1 billion in revenue for the coming fiscal year. To put that in perspective, the federal government this year is spending $1.2 trillion more than it is taking in.

Whether you support it or not, the president's tax plan is a political strategy, not an economic one. It will have virtually no bearing on the federal deficit or our ability to finance current spending levels.

The Republican presidential candidates have unveiled tax plans that are just as divorced from reality. They say they'll make the Bush tax cuts permanent while also eliminating the deficit. If you believe that, I've got a bridge to sell you. Republicans who emphasize economic freedom would have a lot more credibility if they'd stop promising a free lunch. Any candidate who says we can cut taxes and balance the budget is either delusional or dissembling.

Both parties' candidates are also promising major reductions in spending. But there's one small catch: They don't have the courage to tell the public which programs they'll cut, and how they'll reduce entitlement spending, to balance the budget.

This is a problem not just for voters but for businesses. Nearly every CEO and business leader I speak with says virtually the same thing: They are hesitant to make major investment decisions until they know how Washington intends to grapple with its huge deficits. That uncertainty is a major drag on job creation because the price of uncertainty for business is paralysis. Companies with healthy balance sheets that could be creating jobs are sitting on the sidelines, waiting to see if the federal government will begin increasing market stability by reducing long-term deficits.

If the federal government passed a real deficit-reduction plan, business leaders would respond as they did in the 1990s, when President Clinton and Congress adopted a long-term deficit-reduction plan that gave businesses more certainty about the market. A serious deficit-reduction plan that both increases revenues and reduces expenditures would be the most effective economic stimulus plan Washington could adopt.

As the two parties sketch out their general-election campaign platforms, both should commit to a reasonable and responsible goal—closing the deficit in 10 years. Even given Washington's current dysfunction, this can be achieved through a simple two-step process: The president can declare that he will allow the Bush tax cuts to expire for all income levels, and Congress can take an up-or-down vote on the Simpson-Bowles deficit-reduction plan, as a bipartisan group of House centrists will propose this week. That plan calls for $4 trillion in savings by capping discretionary spending, slowing the growth of entitlement costs including Social Security, and raising revenue through tax reform.

I believe there is enough support in both parties and both houses to pass Simpson-Bowles. And the American people deserve to know, before the November election, where their representatives—and the candidates for president—stand on it.

The era of something for nothing must end if we are to get our country back on track. The nominee who is more willing to tell that truth to the American people will win the election.

Mr. Bloomberg is mayor of New York City.

Tax Reform:  France Versus the United States Versus Greece

France
"Tax Expenditure Theory and the Reform of French Loopholes," by Eric Pichet, SSRN, April 18, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041897
Thank you Paul Caron for the heads up.

Abstract:
This study has a dual ambition. One is to develop, for the first time ever, a complete Theory of tax expenditures and, therefore, a proposal for reforming the French tax loophole system. Having noted the proliferation of such loopholes in France and elsewhere over the past 20 years or so, we provide a succinct analysis of their political origins and highlight the absolute necessity of stopping a deviation that risks undermining the very foundations of efficient and fair taxation, the only possible basis for a social consensus and citizens’ ongoing willingness to pay tax. The first section, from a theoretical point of view, offers our Theory of tax expenditures as well as a new and more complete definition of this construct, thereby tracing an idealized border between tax determination modalities, the elements that are inherent to any benchmark tax system and actual tax expenditures. The second section, from a pragmatical point of view, recalls three possible methodologies for assessing tax expenditures, evaluating the many different analysts that work in France (all deeply rooted in an initial spending paradigm) before offering our own methodology, one based on the double criteria of effectiveness and fairness. On this basis, we analyze France’s 17 main tax expenditures today in 2012 and invite the next Parliament to keep any legitimate tax expenditures (after modifying them, if need be) while eliminating many costly, ineffective and inadapted loopholes, along with any that generate windfall effects (what we might call illegitimate tax expenditures). Lastly, we suggest a new global architecture for tax expenditures, one relying on clear and coherent foundations.

United States
"Tax Reform Holds Promise, But if Not Done Carefully, Could Increase the Deficit and Inequality and Harm the Economy Policymakers Must Not Let Tax Reform Become 'Trap' That Produces Harmful Policies," by Chuck Marr and Chye-Ching Huang, Center for Budget and Policy Priorities, June 8, 2012 ---
http://www.cbpp.org/cms/index.cfm?fa=view&id=3792

Policymakers are increasingly discussing the need for tax reform, with a number of them calling for large cuts in tax rates — to levels well below the Bush tax rates — as a core element of reform. They contend that sweeping but unspecified cuts in tax expenditures (credits, deductions, and other tax preferences) will offset the cost of deep cuts in tax rates and, depending on the proposal, possibly generate some revenue to reduce deficits. Many who favor this approach go a step further and call for policymakers to commit to specific cuts in tax rates before they agree on any specific tax expenditures to reduce.

Such approaches pose big risks. They could produce tax “reform” that increases both deficits and inequality because while cutting “tax expenditures” sounds appealing in the abstract, cutting specific tax expenditures enough to offset the costs of substantial new rate cuts and contribute meaningfully to deficit reduction would likely prove difficult, if not impossible, to achieve. Indeed, the difficulty of cutting popular tax expenditures — from the mortgage interest deduction to 401(k) tax preferences to the deduction for charitable contributions to the exclusion for employer-sponsored health insurance — is why those who urge policymakers to commit upfront to specific, large rate cuts rarely specify any tax expenditures to cut. In fact, they often highlight tax expenditures that they would refuse to touch, such as the preferential tax rate for capital gains.

Continued in article

Greece
Tax Reform in Greece is Probably a Hopeless Cause ---
http://taxjustice.blogspot.com/2010/03/tax-evaders-freedom-fighters.html

Reply from Apostolos A. Ballas

The comments on tax reform in Greece are a bit dated. Since some of the reforms are discussed in France and the USA, let me give you my view on the issue:

a)      A number of tax expenditures / loopholes have been eliminated or substantially reduced. For example, only 10% of the interest element in mortgage payments is treated as income reduction. Similarly, medical expenses and payments for (private) pension plans.

b)      The system now relies on income indicators. That is, if you can afford a house in Kolonaki, Athens (equivalent to 5^th Av, New York) then most probably you are rich and you have to prove that you are not earning a substantial income. I consider this very rough justice, but justice at last. Indeed, I am very happy that a number of such individuals are enjoying the “hospitality” of the Greek prison system.

c)      Last year, a new law on property taxes was enacted. To give you an indication on the rates, I had to pay 1,5% on the market value of my flat. This proved to be highly controversial and will likely be scrapped. Personally, I found the law dumb because (in its initial form) it was asking people on unemployment benefits to pay X euros while there was no variation of the rates depending on the number / accumulated value of properties owned.

d)      Tax evasion is both an ethical / legal issue and an economic one. We should not confuse the two, however. If the rich and famous do not pay their taxes, then no one will. Nevertheless, the situation in Greece is that tax evasion is a widely accepted practice because it is to the advantage of all individuals to evade taxes. Let me give you an example. Medical expenses were a tax deductible item. Thus, my incentive was to ask the doctor to give me a receipt. He / she would record the revenue and be taxed (marginal rate 40%) and I would be getting a (marginal rate) 20% tax deduction. Now, I am not getting the deduction. If the doctor offers a 20% discount for not issuing a receipt, what are the incentives? Another issue is that a large proportion of the untaxed income comes from people close to the taxable income threshold who simple do not file a tax return. If they are not in the system, how can they be caught? Last, but not least, does anyone know of a good study of the level of tax evasion AFTER TAKING INTO ACCOUNT 2^ND ORDER EFFECTS. I mean by this: some of the tax not paid goes into consumption which is taxed (VAT). Thus, state revenue losses are actually less that they initially seem.

e)      Finally, a point about the situation in Greece which most do not understand. The current situation is that we live in an environment where there is wealth, but no liquidity. Thus, even the best intentioned citizens if they cannot pay taxes, they will not pay taxes. Your family, not your taxes, is your priority in the Greek environment.

And one accounting issue for you Bob: how can a country mislead about its financial statistics before it issues its financial statistics? Another comment: A country’s debt (most of it at least – mainly excluding NATO financial transactions) is a matter of public record. It is approved by parliament (at least in Greece), you can read about it in Bloomberg screens. In Greece we have made many mistakes but let us all behave us adults. No one fooled anyone who did not want to be fooled. And since I am Greek a comment about the European siuation: Creon in Antigone was absolutely right in his own terms, but Gods still punished him very, very harshly.

Best regards,

Apostolos

Jensen Comment
I was sad to see the role Goldman Sachs and other U.S. banks played in the filing of phony economic performance reports ---
 

. . .

To keep within the monetary union guidelines, the government of Greece had also for many years misreported the country's official economic statistics. At the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001, for arranging transactions that hid the actual level of borrowing.[20] The purpose of these deals made by several successive Greek governments, was to enable them to continue spending, while hiding the actual deficit from the EU. As reported in the table below, the revised statistics revealed that Greece at all years from 2000-2010 had exceeded the Euros stability criteria, with the yearly deficits exceeding the recommended maximum limit at 3.0% of GDP, and also the debt level clearly exceeding the recommended limit at 60% of GDP.

Continued in article

June 13, 2012 reply from Scott Bonaker

Paul Caron, on his TaxProf Blog has a list of the Top 5 Tax Paper Downloads that includes two new papers in the #4 and #5 spot.

 

http://taxprof.typepad.com/taxprof_blog/2012/06/top-5-1.html

#4 Carter: New Life for the Death Tax

Elizabeth Ruth Carter (LSU), New Life for the Death Tax:

This article examines the ascendancy of wealth redistribution as the policy underpinning the federal estate tax through the lens of sociology and argues that, by attempting to ensure equal access to the American dream by penalizing only those who have fulfilled its promise, the federal estate tax places fundamental American values in irreconcilable conflict. The reason that the current system does not work, I argue, is rooted more in history and sociology than it is in economics. The solution is not necessarily the repeal of the federal estate tax. Nor is the solution replacing the estate tax with an inheritance tax, an accessions tax or taxing inheritances as income, as proposed by other commentators. The estate tax plays — or should play — an important role in ensuring vertical and horizontal equity in our federal tax system. Perhaps more importantly, it also has the potential to provide a safety net of revenue during times of exigency — such as that currently faced by our nation. In order to achieve these goals, however, we must first correctly recognize the fundamental problem with the current system. When the history of the tax is examined from a sociological and historical vantage point, the real problem is clear.

#5 Kant and the Ethics of Taxation

Gary Banham (Managing Editor, Kant Studies Online), Kant and the Ethics of Taxation:

In this article I address the normative basis Kant provides for taxation. There exists a significant literature already that applies “Kantian” principles to the understanding of taxation but it does so in a limited way that shows little grasp of the structure of Kant’s ethics. Here I set the justification of taxation Kant provides in the setting it requires prior to treating his account of different types of justified taxation. The relationship between Kant’s ethics, his political theory, and his view of taxation thus becomes clearer. Subsequently I treat at some length the degree and nature of Kant’s view of redistributive taxation before concluding with a discussion of some implications for views of redistribution in contemporary political philosophy.

 

 

"Clock Ticks on U.S.'s Fiscal Time Bomb," by David Wessel, The Wall Street Journal, March 28, 2012 ---
http://online.wsj.com/article/SB10001424052702304177104577309203491177784.html?KEYWORDS=defuse+the+fiscal+time+bomb

Pundits and pollsters speculate hourly on the outcome of the next Republican presidential primary. Business executives and investors increasingly focus on whether Congress and the president will defuse the fiscal time bomb they have built—or whether they will be so paralyzed that the bomb will go off at year-end.

Without congressional action before Dec. 31, here's what happens:

A payroll-tax holiday ends, which means a tax increase for workers of as much as 2% of wages.

Income-tax rates revert to pre-George W. Bush levels, rising not only for the rich but for nearly all taxpayers.

Across-the-board cuts in domestic and, particularly, defense spending are triggered.

The federal debt bumps up against the legal ceiling, at some point yet to be determined, reviving confidence-rattling headlines about a potential U.S. default.

That's just a partial list. Federal Reserve Chairman Ben Bernanke calls this "a massive fiscal cliff." Abrupt tax increases and spending cuts, which together would equal roughly 3.5% of the nation's gross domestic product, would devastate an economy not fully recovered from a deep recession.

No one in Washington wants that. The rule of thumb is that if no one in Congress or the White House wants something, politicians will find a way to prevent it. But these days, well, you never know. There are three possible outcomes:

Scenario One: The grand compromise.

One reason this is politically tough is that there is no pain-free deficit cure. With a lid on annually appropriated spending, most Republicans' answer to long-term deficits is to cut future benefits from what they would otherwise be. The Democrats' answer is to cut benefits and raise taxes. Resolving that disagreement is key.

If Mitt Romney or another Republican wins the White House, congressional Republicans won't flinch on taxes in a lame-duck session. And if Barack Obama is re-elected and Republicans lose some seats in the House? Would an emboldened Mr. Obama and chastened Republicans cut a deal? Possible, but unlikely.

Just in case, though, the deficit-reduction lobby and sympathetic members of Congress are drafting plans. To make a point, a small bipartisan bunch is putting one tax-hike-and-spending-cut plan to a vote in the House this week.

Odds: 25%.

 

Scenario Two: A standoff.

If neither side wins big in November, Congress may be unable to pass legislation that defuses the time bomb—unless a measure hitches a ride to must-pass legislation to, say, lift the federal debt ceiling or avert a government shutdown.

If lawmakers can't agree, then taxes will go up and spending will be cut across the board. Then Congress and the president (the re-elected one or a new one) would negotiate from a new starting point, softening the blow retroactively. This has been done before, but it's unsettling and messy, and adds to already more-than-ample uncertainty.

Odds: 25%.

 

Scenario Three: Kick the can down the road.

Faced with unappealing alternatives, Congress is always tempted to look for a way out. The obvious one: Suspend the tax increases and across-the-board spending cuts for a time, declaring they would endanger the economy and national security. Promise—really, truly—to fix the deficit later. No one will advocate for this in advance, but at year-end, particularly if the economy isn't doing well, a six- or nine-month delay will be appealing.

To save face, this probably would be paired with another legislated commitment to deal with the deficit later. That may be expedient, but it won't help rebuild public trust. After all, Congress set these Dec. 31 deadlines last August to try to force its own hand.

Odds: 50%.

 

All these odds will change before year-end.

It matters who wins in November, and how decisively. A sweep by either party lifts the odds that its approach will prevail and reduces the odds of gridlock.

Continued in article

Bob Jensen's threads on the entitlements disaster are at
http://www.trinity.edu/rjensen/Entitlements.htm