Case Studies in Gaming the Income Tax Laws

Tax Breaks 

The Top 40% Income Bracket Pays 106% of the Income Tax, The Lowest 40% Bracket Pays -9%% (Negative).

"Rich" People Gaming the Income Tax Laws:  Col. X and his Wife and Mega-Roth IRAs

"Poor" People Gaming the Income Tax Laws:  Juanita and Her Daughter Laura

Wealth Tax

Ten ways to fight inequality without Piketty's Wealth Tax

Effective Tax Rates are Lower Than Most People Believe
Obama’s inequality argument just utterly collapsed

The Phony Lifetime Disabilities Gaming by Tens of Millions of People Who are Not Disabled

How Can Scandinavians Tax So Much?,

Proposed Solutions

This is recommended as a celebration cocktail for the 49.5% of U.S. taxpayers who pay no income taxes:
"Next Time You're At the Bar, Order an Income Tax Cocktail," by Adrienne Gonzalez (Jr. Deputy Accountant), Going Concern, March 20, 2012 ---

"Why Some Multinationals Pay Such Low Taxes," by Justin Fox, Harvard Business Review Blog, March 26, 2012 --- Click Here

U.S. National Debt Clock ---
Also see

Academic Versus Political Reporting of Research:  Percentage Columns Versus Per Capita Columns ---
by Bob Jensen, April 3, 201

Moocher Hall of Fame ---

Should we keep increasing the government spending deficit and the national debt every year ad infinitum?

Although in these down economic times, the liberal's Keynesian hero and Nobel Prize economist, Paul Krugman, thinks recovery is stalled because the government is not massively increasing spending deficits. But he's not willing to commit himself to never reducing deficits or never paying down some of the national debt. Hence, he really does not answer the above question ---

So let's turn to a respected law professor who advocates increasing the government spending deficit and the national debt every year ad infinitum?

"Why We Should Never Pay Down the National Debt (even partly)," by Neil H. Buchanan George Washington University Law School), SSRN, 2012 ---

Calls either to balance the federal budget on an annual basis, or to pay down all or part of the national debt, are based on little more than uninformed intuitions that there is something inherently bad about borrowing money. We should not only ignore calls to balance the budget or to pay down the national debt, but we should engage in a responsible plan to increase the national debt each year. Only by issuing debt to lubricate the financial system, and to support the economy’s healthy growth, can we guarantee a prosperous future for current and future citizens of the United States.

Student Assignment

Since many of the most liberal economists are not quite willing to assert that "we should never pay down the national debt," what questionable and unmentioned assumptions have been made by Neil H. Buchanan that need to be addressed?

Are some of these assumptions unrealistic in any world other than a utopian world?

Bob Jensen's Answers ---

InfoGraphic on How the Tax Burden Has Changed ---

From The Wall Street Journal Accounting Weekly Review on March 30, 2012

Tax Breaks Exceed $1 Trillion: Report
by: John D. McKinnon
Mar 24, 2012
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: Tax Laws, Tax Reform, Taxation

SUMMARY: The article reports on a " report by the non-partisan Congressional Research Service [which] underscores how far-reaching..." are many of the most costly tax provisions in the U.S. tax code. As highlighted in the related video, these items are likely to become a focused issue in this election year. "House Republicans proposed in their new budget this week to reduce or eliminate an unspecified array of tax breaks in order to offset the costs of lowering top tax rates for both corporations and individuals to 25% from the current 35%." President Obama proposed reducing the top corporate tax rate only, from 35% to 28%, with corresponding proposals to eliminate certain corporate tax breaks, such as deductibility of the cost of corporate jets and tax treatment of foreign earnings.

CLASSROOM APPLICATION: The article is useful to summarize the types of items considered to be "tax breaks," and the current, election-year proposals to simplify the U.S. tax code.

1. (Introductory) Who produced the report on which this article is based? How do you think the information was obtained?

2. (Introductory) Why is this report useful in considering ways to overhaul the U.S. tax code?

3. (Advanced) What kinds of items are characterized as "tax breaks" in the document on which this article reports?

4. (Advanced) Specifically describe the tax treatment of each of the items listed in the graphic entitled "Popular Provisions." Who benefits from each of these items?

5. (Advanced) Based on your answer to question 2, explain why "House Republicans dismissed the report's significance saying it only confirms that overhauling the tax code will be politically challenging."

Reviewed By: Judy Beckman, University of Rhode Island


"Tax Breaks Exceed $1 Trillion: Report," by: John D. McKinnon, The Wall Street Journal, March 24, 2012 ---

A congressional report detailing the value of major tax breaks shows they amount to more than $1 trillion a year—roughly the size of the annual federal budget deficit—and benefit wide swaths of the population.

The figures could be useful to lawmakers of both parties and President Barack Obama, who are looking for ways to shrink future deficits and offset the anticipated cost of overhauling the much-criticized U.S. tax code, an effort likely to include tax-rate cuts. Both parties are looking to trim or eliminate tax breaks to achieve those goals.

Mr. Obama has suggested eliminating breaks for corporate jets and oil and gas companies to reduce deficits. He also has raised the possibility of reducing tax breaks for U.S. multinationals that ship jobs overseas, as a way to offset the cost of lowering the corporate tax rate to 28% from the current 35%. Research Report


House Republicans proposed in their new budget this week to reduce or eliminate an unspecified array of tax breaks in order to offset the costs of lowering top tax rates for both corporations and individuals to 25% from the current 35%.

The new report, by the nonpartisan Congressional Research Service, underscores how far-reaching many of the tax breaks are, which makes changing them a politically daunting task.

They include the exclusion from taxable income for employer-provided health insurance, the biggest break, at $164.2 billion a year in 2014; the exclusion for employer-provided pensions, the second-biggest, at $162.7 billion; and the exclusions for Medicare and Social Security benefits.

Other big breaks include the mortgage-interest deduction, third-largest; taxing capital-gains income at lower rates than other income; the earned-income credit for the working poor; and deductions for state and local taxes.

The report, citing political opposition, technical challenges and other reasons, said that "it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues" by eliminating tax breaks. That likely would leave little for reducing tax rates, perhaps only enough for one or two percentage points in the top individual rate, while maintaining the same level of revenue, the report said.

Continued in article

Jensen Comment
I'm suspicious that this greatly underestimates the so-called "tax breaks" by not mentioning exclusions from revenue. For example, hundreds of billions of interest  revenue from municipal bonds are excluded from taxable revenue (federal). Many types of life insurance payments are tax exempt. Clerics get some generous exemptions for housing allowances. And there are capital gains exemptions in Roth IRAs and scores of other exclusions.

Blue is Blue
From the TaxProf Blog on March 6, 2013

The Fiscal Times:  The Ten Worst States for U.S. Taxes:

  1. New York
  2. New Jersey
  3. California
  4. Vermont
  5. Rhode Island
  6. Minnesota
  7. North Carolina
  8. Wisconsin
  9. Iowa
  10. Maryland

The left of liberal governor of Vermont claims that his state's welfare generosity motivates Vermonters not to seek employment (at least the kind that does not pay cash under the table in the underground economy) ---

Case Studies in Gaming the Income Tax Laws ---

From Morning Ledger on March 14, 2013

Regulators ramp up payroll audits.
Regulators are cracking down on small businesses and other employers who misclassify workers as independent contractors to avoid paying payroll taxes and other expenses, the Journal’s
Angus Loten and Emily Maltby write. Some employers are turning to contractors to avoid hitting the federal health-care law’s 50-employee threshold for health insurance. And the crackdown is partly aimed at boosting tax revenue. The U.S. Treasury estimates that forcing employers to properly classify their workers—while tightening so-called “safe harbor” rules that provide them with leeway in determining who is and isn’t an employee—would yield $8.71 billion in added tax revenue over the next decade.

Jensen Comment

Another incentive for outsourcing certain types of work is to outsource risk of fines and bad publicity resulting from employing undocumented workers. A company, including a highly respected university, can get very bad publicity when the news media discloses a practice of hiring undocumented workers. For that reason those organizations will hire such things as building cleaning services from local businesses that are very small and less concerned about bad publicity. A friend of mine in a very respected large company in San Antonio said in all his years working as a security guard for that company he never met a janitor (male or female) who spoke one word of English.

"CBO: The Distribution of Household Income and Federal Taxes, 2008 and 2009," Congressional Budget Office ---
Thank you Paul Caron for the heads up.

For most income groups, the 2009 average federal tax rate was the lowest observed in the 1979–2009 period. ... For the lowest income group, the average rate fell from 7.5% in 1979 to 1.0% in 2009. ... Households in the middle three income quintiles saw their average tax rate fall by 7.1 percentage points over 30 years, from 19.1% in 1979 to 12.0% in 2009. ... The average tax rate for households in the 81st to 99th percentiles of the income distribution also reached a low point in 2009, about 4 percentage points below its 1979 level. ... In contrast, in 2009 the average tax rate for households in the top 1% of the before-tax income distribution was above its low point, reached in the early 1980s. ... The tax rate ... rose somewhat from 2007 to 2009, as sharp declines in capital gains income caused a larger portion of the income of that group to be subject to the ordinary income tax rates. The decline in after-tax income between 2007 and 2009 was much larger at the top of the income distribution than further down the distribution.

Let's soak'em for 100% so we can live off the fat of the land
"CBO: The wealthly pay 70 percent of taxes," by Stephen Dinan, The Washington Times, July 10, 2012 ---

Wealthy Americans earn about 50 percent of all income but pay nearly 70 percent of the federal tax burden, according to the latest analysis Tuesday by the Congressional Budget Office — though the agency said the very richest have seen their share of taxes fall the last few years.

CBO looked at 2007 through 2009 and found the bottom 20 percent of American earners paid just three-tenths of a percent of the total tax burden, while the richest 20 percent paid 67.9 percent of taxes.

The top 1 percent, who President Obama has made a target during the presidential campaign, earns 13.4 percent of all pre-tax income, but paid 22.3 percent of taxes in 2009, CBO said. But that share was down 4.4 percentage points from 2007, CBO said in a finding likely to bolster Mr. Obama’s calls for them to pay more by letting the Bush-era tax cuts expire.

The big losers over the last few years were the rest of the well-off, especially those in the top fifth, who saw their tax burdens go up.

“Specifically, between 2007 and 2009, the share of taxes paid fell for the bottom three income quintiles, was close to flat for the fourth quintile, but rose for the highest quintile,” CBO said. “Within the top quintile, however, the shift was uneven; the share paid by the top percentile fell, and the share paid by the rest of the top quintile rose.”

The tax fight has risen to the top of this year’s presidential campaign, with Mr. Obama calling for the wealthy to pay more money both to lower the deficit and fund his new spending promises. He wants households making $250,000 or more a year to see their rates return to Clinton-era levels, though he has proposed a one-year extension of the rest of the Bush-era rates.

Republicans have countered that they want a one-year extension of all current rates in order to have breathing space to tackle a broader overhaul of the tax code.

CBO, the nonpartisan agency that serves as Congress’ official scorekeeper, said the current tax code is progressive chiefly because of the income-tax structure. On average, the lowest 40 percent of earners actually get money back through the income-tax code because of refundable tax credits.

Overall, the federal tax rates in 2008 and 2009 — at 18 percent and 17.4 percent — were the lowest in the last three decades, suggesting at least part of the reason the federal government has run record deficits in recent years.

In terms of actual earnings, the top 1 percent suffered the most in the recession, with their average earnings dropping from $1.9 million to $1.2 million. The lowest 20 percent saw their incomes drop from $23,900 to $23,500 during that time.


A Slide Show from the Tax Foundation (Click the arrows on the right side of the screen)
"Putting a Face on America's Tax Returns: A Chartbook September 24, 2012," by Scott A. Hodge William McBride, Tax Foundation, September 24, 2012
Thank you Caleb Newquist for the heads up.

You can get the above content in PDF format at

Jensen Comment
This slide show focuses heavily on inequality.

From The Washington Post regarding a recent Congressional Budget Office Report on Who is Shouldering the Tax Burden

. . .

The CBO study released this week provides ample evidence that the richest Americans are paying their “fair share” of federal taxes. In fact, the richest 20% of Americans by income aren’t just paying a share of federal taxes that would be considered “fair” — it goes way beyond “fair” — they’re shouldering almost 100% of the entire federal tax burden of transfer payments and all other non-financed government spending. What’s probably not so fair is that the bottom 60% isn’t just getting off with a small tax burden or no tax burden – the bottom 60% are net recipients of transfer payments from the top 20% to the tune of about $10,000 per household in 2011. So maybe what the CBO report shows is that we should be asking whether or not the bottom 60% are paying their fair share when they’re not paying anything – they’re net recipients of transfer payments that come from “the richest” 20% of American households. When the top 20% of US households are financing almost 100% of the transfer payments to the bottom 60% and financing almost the entire non-financed operating budget of the federal government, I’d say “the rich” are paying beyond their fair share of the total tax burden, and we might want to start asking if the bottom 60% of “net recipient” households are really paying their fair share.

Washington Post Wonkblog, Tax Rates Are Finally on the Rise for the Top 1 Percent, CBO Says:
November 17, 2014


Congressional Budget Office (CBO)
The Top 40% Income Bracket Pays 106% of the Income Tax, The Lowest 40% Bracket Pays -9%% (Negative).
CNBC. December 11, 2013 ---

Jensen Comment
This is a bit misleading in terms of bracket definitions. The income taxes paid or received in the above brackets are highly skewed such that the highest income taxpayers are paying a larger share in the top bracket and the lower income tax receivers in the low bracket are receiving a larger share of the negative cash flows.

Thomas J. Sargent's NYT Profile ---

"The Greatest Graduation Speech Ever Given Is This Bullet-Point List Of 12 Economic Concepts" ---

Students from the class of 2014 have begun graduating.

To mark the occasion, economist and blogger Craig Newmark and AEI's Mark Perry dug up a speech given by Nobel economist Thomas Sargent to graduates of Cal-Berkeley in 2007. 

It's only 335 words long, but it's really great. It breaks down the 12 economic concepts that every graduate should know.

Check it out:

Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

3. Other people have more information about their abilities, their efforts, and their preferences than you do.

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

5. There are tradeoffs between equality and efficiency.

6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for better or worse.

7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.

9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

Read more:

Jensen Comments
Some outstanding commencement speeches may have been more inspirational and motivational However, this one appeals to me in terms of separating economic realism from hopeless and sometimes costly dreams such as the dream that if we ignore entitlements our grandchildren will still be better off even if we don't make sacrifices ourselves today for those entitlements. Translated into Jenseneconomics this means that we cannot and should not allow half the taxpayers in the USA to pay no taxes. The rich just do not have enough money to sustain the poor and most of the middle class who pay little or no income tax toward Federal and state budgets even if they do pay some other taxes.



"Rich" People Gaming the Income Tax Laws:  Col. X and his Wife

Perhaps I am less sympathetic than most of you because I suspect that tens of millions of people are gaming the system to avoid income taxes even though they are not really so poor when the Great Scorer adds up their annual incomes. There are really two types of tax gamers. One type is a so-called "taxpayer" who files an income tax return but games the tax code to pay little or no income tax. The other gamer is supposedly so poor that it's not necessary to file a tax return and be classified as a "taxpayer."

I will tell you about two families I know in San Antonio. First note that San Antonio is heavily populated with retired military families who have extensive social networks and take advantage of the various Army and Air Force bases in the area. Among other things, these bases provide free medical services, free prescription drugs, low cost base exchange (BX) department stores that don't charge any sales tax, base golf courses, base social clubs, and even free base cemeteries for husbands and wives.

The American Dream:  A Free Ride
Nearly Half of All Americans Don’t Pay Income Taxes

Why don't they grant an Oscar to the state with the biggest tax breaks for Hollywood film makers?

. . .

Actually, nowadays an Eva Longoria who flipped burgers would probably qualify for the Earned Income Tax Credit and get a check from the government rather than pay taxes. It's the movie set where she works these days that may well be getting the tax break.

With campaign season over, you're not likely to hear stars bringing up taxes at this weekend's Academy Awards show. But the tax man ought to come out and take a bow anyway. Of the nine "Best Picture" nominees in 2012, for example, five were filmed on location in states where the production company received financial incentives. ...

Such state incentives are widespread, and often substantial, but they don't do much to attract jobs. About $1.5 billion in tax credits and exemptions, grants, waived fees and other financial inducements went to the film industry in 2010, according to data analyzed by the Center on Budget and Policy Priorities [State Film Subsidies: Not Much Bang For Too Many Bucks]. Politicians like to offer this largess because they get photo-ops with celebrities, but the economic payoff is minuscule. George Mason University's Adam Thierer has called this "a growing cronyism fiasco" and noted that the number of states involved skyrocketed to 45 in 2009 from five in 2002.


Col. X and his wife were our exceptional friends (more like family) when we lived in San Antonio. Erika and I went to dinner-card parties at least once each week with this couple and eight other couples that were retired from the military. On frequent occasions these parties expanded to 20-30 couples at parties on San Antonio's military bases and in area country clubs. Throughout most of our 24 years in San Antonio, the major military bases were Lackland AFB, Ft. Sam Houston Army Medical Command (Brooke Army Medical Center), Randolph AFB, Brooks AFB , and the huge Kelly AFB (much of Kelly is now owned and operated by the City of San Antonio).

Col X is a former Air Force physician. He's now retired.

I know some about the personal finances of Col. X and his wife because I helped them file their tax return each year while I was their close circle of friends. They receive about $90,000 in tax exempt bond interest annually. In addition they have about $75,000 in other retirement income that includes some really complicated depreciation pass-through amounts from low income housing investments. I never understood these investments. But that did not matter since Col. X's brokerage firm provided me with explicit instructions about how to feed all this information into Turbo Tax.

The bottom line is that during our years in San Antonio Col. X and his wife received well over $150,000 per year in retirement and paid almost no income tax. They lived in a $600,000 house with a four-car garage that housed two big Lincoln automobiles. They never seemed to begrudge losing thousands of dollars in monthly trips with friends to the Golden Nugget Hotel and Casino in downtown Las Vegas. But they adopted a strategy to only pay a pittance in income tax even though they lived on a full military pension with totally free medical services from the Brooke Army Medical Hospital on Fort Sam Houston, free prescription drugs, BX shopping, and other base privileges paid for by the military. When they die they will be buried, one on top of the other, by an honor guard at the Fort Sam Houston Military Cemetery.

I might add that during World War 2, Col. X was a B17 navigator who went on dangerous missions in North Africa, Italy, and eventually Germany. He recalls bombing the hell our of a ball bearing factory in Regensburg a few years before Erika, as a five-year old child, was smuggled across the Czech. border into Regensburg shortly after the war.

After World War 2 the Air Force paid the tuition for Col. X to attend the Johns Hopkins University Medical School. He also retained his active duty pay as a Captain in the Air Force while attending medical school. Afterwards he was assigned to both the Brooke Army Medical Center at Ft. Sam and the Wilford Hall Medical Center at Kelly AFB. Subsequent to retiring from the Air Force he went into private practice in San Antonio.

Among the 46% (some say 49.5%) of taxpayers not paying any taxes, is it mostly the outliers (extremely rich and extremely poor) who pay no income taxes?

Well, only in part. Most (89%) of those so-called "taxpayers" making less than $20,000 pay no taxes. A few like college students who are still claimed as dependents on the tax returns of their parents may pay a slight amount of income tax on part-time earnings.

Most of those making more than $100,000 pay some income taxes. Bloomberg reports that 98% of those that pay no income taxes have less than $100,000 in earnings. Most are availing themselves of recent tax breaks such as energy credits, tax breaks from employer contributions to medical insurance, increased tax breaks for dependents, and deferred tax breaks such as breaks professors get for employer contributions to TIAA-CREF.

Watch the April 3, 2012 Bloomberg Video ---

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 ---
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 ---

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 ---


Individual Retirement Account (IRA) ---

There are several types of IRA:

There are two other subtypes of IRA, named Rollover IRA and Conduit IRA, that are viewed by some as obsolete under current tax law (their functions have been subsumed by the Traditional IRA); but this tax law is set to expire unless extended. However, some individuals still maintain these arrangements in order to keep track of the source of these assets. One key reason is that some qualified plans will accept rollovers from IRAs only if they are conduit/rollover IRAs.

What was formerly known as an Educational IRA is now called a Coverdell Education Savings Account.

Starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many of the restrictions of what type of funds could be rolled into an IRA and what type of plans IRA funds could be rolled into were significantly relaxed. Additional acts have further relaxed similar restrictions. Essentially, most retirement plans can be rolled into an IRA after meeting certain criteria, and most retirement plans can accept funds from an IRA. An example of an exception is a non-governmental 457 plan which cannot be rolled into anything but another non-governmental 457 plan.

The tax treatment of the above types of IRAs except for Roth IRAs are substantially similar, particularly for rules regarding distributions. SEP IRAs and SIMPLE IRAs also have additional rules similar to those for qualified plans governing how contributions can and must be made and what employees are qualified to participate.


"Should You Contribute to a Non-Deductible IRA?" by Laura Adams, Money Girl, February 12, 2013 ---

Bob Jensen's personal finance helpers ---


Roth IRA ---

Jensen Warning
Deborah Jacobs may have overstated the case for a Roth IRA. Ordinary folks should not choose a Roth IRA without expert tax advice

Remarkably, despite warnings of future large revenue losses, Congress has put no cap on the amount that can accumulate in a Roth IRA. Still, the Yelp shares in Levchin’s Roth do raise a legal issue. Tax rules bar you from investing your IRA or Roth IRA in a business you control—such a “prohibited transaction” can render the IRA immediately taxable and ­possibly subject to penalties.
Deborah L. Jacobs (see below)

"How Facebook Billionaires Dodge Mega-Millions In Taxes," by Deborah L. Jacobs, Forbes, March 20, 2012 ---

In 2010 Max R. Levchin, chairman of social review site Yelp, sold 3.1 million shares of Yelp held in his Roth individual retirement account. Most of the $10.1 million he received was profit. But Levchin, a 36-year-old serial entrepreneur who started PayPal with ­billionaire Peter Thiel in 1998, won’t ever have to pay a penny of income tax on those gains. That’s because all earnings in a Roth IRA are tax free so long as its owner waits until age 59 1/2 to take money out.

Moreover, Securities & Exchange Commission filings show Levchin still has 3.9 million shares of Yelp, now trading near $22, in his Roth. So it appears his tax-free “retirement” kitty is worth at least $95 million—and maybe a lot more. We don’t know, for example, if Levchin’s Roth owned stock in social app company Slide, which he started in 2004 and sold to Google for $182 million in 2010. If Levchin doesn’t spend his mega-Roth in retirement, he can leave it to his kids or grandkids, who can, under current law, stretch out income-tax-free growth and withdrawals for decades.

Levchin isn’t the only tech titan who’s got a shrewd tax advisor. Buried in recent SEC filings for Facebook, Zynga and LinkedIn are other examples of legal moves the ultrarich use to shield big dollars from the ­taxman. These techniques are available to the merely well-off, too, but they produce the most dramatic savings when executed early in a hot company’s—or hot entrepreneur’s—life.

How early? Facebook billionaire cofounders Mark Zuckerberg and Dustin Moskovitz are both 27, unmarried and have no children we know of. Yet back in 2008 they both set up grantor retained annuity trusts (GRATs) that we estimate will allow them to transfer a total of at least $185 million of wealth to future offspring or others, gift tax free. That compares to a supposed gift-tax exemption of just $1 million in 2008 and $5.12 million today.

Both the Obama Administration and congressional Democrats have proposed new limits on GRATs. Meanwhile, you may want to copy the social tech wizards, if you have high-growth investments to shelter.


Remarkably, despite warnings of future large revenue losses, Congress has put no cap on the amount that can accumulate in a Roth IRA. Still, the Yelp shares in Levchin’s Roth do raise a legal issue. Tax rules bar you from investing your IRA or Roth IRA in a business you control—such a “prohibited transaction” can render the IRA immediately taxable and ­possibly subject to penalties.

It’s clear that if you own a small business, your IRA or Roth IRA can’t invest in it. But what if you are chairman or CEO of a private firm with many investors and buy its shares for your Roth? SEC filings show that in 2001, while CEO of ­PayPal, tech investor Thiel bought 1.7 million shares of that company for 30 cents a share through his Roth. In 2002 eBay bought out PayPal for $19 a share—an apparent $31.5 million tax-free profit for Thiel. It also appears from a letter we discovered in a federal court case that some of Thiel’s early investment in Facebook was also through his Roth IRA. He now sits on Facebook’s board.

Is this kosher? FORBES has been told reward-seeking informants are filing claims with the IRS Whistleblower Office, flagging such transactions as improper. But IRA expert Noel Ice says it’s a gray area, with little IRS or court guidance. Buying closely held stock for an IRA is probably okay, he says, so long as the IRA’s owner doesn’t have—when all his investments are combined—voting control of that company. Levchin, Thiel and the IRS wouldn’t comment.

The lesson for ordinary folks? Put investments with the highest growth potential in your Roth. Note: If you do want to put nonpublicly traded stock in an IRA or a Roth IRA, you’ll generally need to use a special custodian who handles “self-directed” IRAs. (The big brokers, banks and mutual fund companies that hold most IRAs generally limit investments to publicly traded stock, bonds, mutual funds and bank CDs.) Levchin and Thiel have used San Francisco-based Pensco Trust Co. to hold their Roth IRAs.

The Facebook GRATs

Thanks to a 2000 Tax Court decision ­involving a member of the billionaire Walton clan, which founded Wal-Mart, it’s now possible to transfer large amounts of wealth to heirs gift tax free using a grantor retained annuity trust. The person who wants to transfer wealth (the grantor) puts shares into the ­irrevocable trust and retains the right to ­receive an annual payment back from the trust for a period of time—say, 2 to 15 years. If the grantor survives that period, any property left in the trust when the annual payments end passes to family members.

The key is this: In calculating how much value will be left at the end—and thus how big a gift the grantor is making—the IRS doesn’t look at the performance of the actual stock in the trust. Instead, it assumes the trust assets are earning a paltry government-determined interest rate. With a zeroed-out, or “Walton” GRAT, the grantor receives an annuity that leaves nothing for heirs—if assets grow only at the IRS’ lowly interest rate. If they grow faster, the excess goes to heirs gift tax free. (If assets don’t grow, the grantor is no worse off, because the annuity can be paid by returning some shares each year to the grantor.)

Continued in article

Hi Ramesh,

If income and wealth equality is such a stimulant  to economic growth and prosperity why haven't nations other than Cuba and North Korea seriously experimented with making everybody equal in income and wealth?

Why, for example, haven't Japan, South Korea, Norway, Finland, India, and now China seen the egalitarian light?

Seems like an economic prosperity solution that Marx, Engels, and Mao brilliantly advocated in previous centuries.

More importantly, Ramesh, can you offer us a clue as to why the following countries, in an effort to stimulate economic growth, decreased rather than increased the taxes paid by their most wealthy citizens? Why on earth would Finland, Norway, Denmark, India, Iran, and the others do such a thing that is counter to the expert that you linked us to in this thread?

Isn't this an effort to increase the economy with less equality?
Liberals/progressives just will not provide me with an answer to this question.

I imagine you will also not answer this question about the economic stupidity versus brilliance of so many nations when they decrease taxes to their most wealthy citizens?


Marginal Tax Rate Declines in the Rest of the World ---


Table 1 Maximum Marginal Tax Rates on Individual Income
*. Hong Kong’s maximum tax (the “standard rate”) has normally been 15 percent, effectively capping the marginal rate at high income levels (in exchange for no personal exemptions).
**. The highest U.S. tax rate of 39.6 percent after 1993 was reduced to 38.6 percent in 2002 and to 35 percent in 2003.

  1979 1990 2002
Argentina 45 30 35
Australia 62 48 47
Austria 62 50 50
Belgium 76 55 52
Bolivia 48 10 13
Botswana 75 50 25
Brazil 55 25 28
Canada (Ontario) 58 47 46
Chile 60 50 43
Colombia 56 30 35
Denmark 73 68 59
Egypt 80 65 40
Finland 71 43 37
France 60 52 50
Germany 56 53 49
Greece 60 50 40
Guatemala 40 34 31
Hong Kong 25* 25 16
Hungary 60 50 40
India 60 50 30
Indonesia 50 35 35
Iran 90 75 35
Ireland 65 56 42
Israel 66 48 50
Italy 72 50 52
Jamaica 58 33 25
Japan 75 50 50
South Korea 89 50 36
Malaysia 60 45 28
Mauritius 50 35 25
Mexico 55 35 40
Netherlands 72 60 52
New Zealand 60 33 39
Norway 75 54 48
Pakistan 55 45 35
Philippines 70 35 32
Portugal 84 40 40
Puerto Rico 79 43 33
Russia NA 60 13
Singapore 55 33 26
Spain 66 56 48
Sweden 87 65 56
Thailand 60 55 37
Trinidad and Tobago 70 35 35
Turkey 75 50 45
United Kingdom 83 40 40
United States 70 33 39**

Source: PricewaterhouseCoopers; International Bureau of Fiscal Documentation.


Bob Jensen

Note that PwC does Romney's tax returns and most likely is his main source regarding global tax planning.
"In Superrich, Clues to What Might Be in Romney’s Returns," by James B. Steward, The New York Times, August 10. 2012 ---

On the face of it, Senator Harry Reid’s explosive but flimsily sourced claim that Mitt Romney paid no income tax seems preposterous. Mr. Romney has denied it, and without his returns no one can say for sure. But for someone who makes millions of dollars a year, would it even be possible?

Evidently it is.

It so happens that this summer the Internal Revenue Service released data from the 400 individual income tax returns reporting the highest adjusted gross income. This elite ultrarich group earned on average $202 million in 2009, the latest year available. And buried in the data is the startling disclosure that six of the 400 paid no federal income tax.

The I.R.S. has never before disclosed that last fact.

Not even Mr. Romney, with reported 2010 income of $21.7 million, qualifies for membership in this select group of 400. But the data provides a window into the financial lives and tax rates of the superrich. Since the I.R.S. doesn’t release data for the tiny percentage of Americans at Mr. Romney’s income level, the 400 are the closest proxy.

And that data demonstrates that many of the ultrarich can and do reduce their tax liability to very low levels, even zero. Besides the six who paid no federal income tax, the I.R.S. reported that 27 paid from zero to 10 percent of their adjusted gross incomes and another 89 paid between 10 and 15 percent, which is close to the 13.9 percent rate that Mr. Romney disclosed that he paid in 2010. (At the other end of the spectrum, 82 paid 30 to 35 percent. None paid more than 35 percent.) So more than a quarter of the people earning an average of over $200 million in 2009 paid less than 15 percent of their adjusted gross income in taxes.

How do they do it?

The data show that the ultrarich typically pay low tax rates every year, but 2009 was a special case. In 2008, people with large stock portfolios and other less liquid assets were disproportionately hit with large losses on paper. One of the oddities of the tax code is that capital gains taxes are discretionary, since they must be paid only when gains are realized. And they can be offset by losses. The silver lining in a bad year like 2008 for wealthy people is that they can “harvest” losses by selling assets, then use those losses to offset any gains. They can also carry forward the losses to offset gains in future years.

There’s ample evidence that happened in 2009 among the richest taxpayers. Their average income, $202 million, dropped from $270 million in 2008 and was the lowest since 2004. Like Mr. Romney in 2010, for the richest taxpayers most income comes from capital gains and other investment income. Their net capital gains (the data doesn’t include gross gains and losses) dropped by nearly 40 percent, from an average of $154 million in 2008 to $93 million in 2009, which accounts for nearly all of their drop in total income. Even with these lower gains, these 400 taxpayers, a minuscule fraction of the population at large, still managed to account for 16 percent of all capital gains. That is the highest percentage since the data was first released for 1992, when that percentage was less than 6 percent.

Tax experts I consulted said these results almost certainly reflected aggressive use of tax-loss carry-forwards from 2008, since the stock market bottomed in March 2009 and rallied strongly during the rest of the year.

The superrich also accounted for a disproportionate amount of dividend income, which averaged over $26 million for the top 400, or over 6 percent of total dividend income, also a record. Capital gains and dividends are both taxed at a maximum rate of 15 percent, as opposed to the maximum rate on earned income of 35 percent, which helps explain why so many of the superrich pay a relatively low rate. Still, that preferential rate doesn’t get them anywhere near zero, or even 10 percent.

Edward Kleinbard, professor of law at the Gould School of Law at the University of Southern California, explained it this way, “You start with income dominated by tax-preferred income — capital gains and qualified dividends. That gets you to 15 percent. Then you use charitable contributions of appreciated securities to reduce ordinary income. But the charitable contribution deduction is capped at 50 percent of adjusted gross income. Now you’re way down, but you’re not at zero.”

Continued in article

Jensen Comment
Note that in many instances what we call a "tax savings" is not a net savings. For example, when a taxpayer has millions of dollars invested in tax-exempt bonds of towns, cities, counties, states, and schools (the so-called muni-bonds), those government entities are getting a lower cost of capital (adjusted for financial risk) than if the federal government took away those tax-exempt options in tax reforms. For example, the cost of capital for municipalities would soar much higher if their bonds were suddenly to become taxable on federal tax returns and, thereby, had to compete with lower risk corporate bonds.

One could argue that it would be better for the government to eliminate tax exemptions for municipal bonds and then subsidize all of the towns, cities, counties, states, and school districts, but the trillions in subsidies required would clobber Federal deficits now over a trillion dollars. And shrewd high-income taxpayers would simply find other ways avoid taxation.

Even if Congress should enact a flat tax, I'm not in favor of eliminating tax exemption for bonds of towns, cities, counties, states, and school districts. That elimination would be too much of a shock to all the Main Streets of America.

Having said this, I think there are many things that need to be accomplished in major tax reforms for all levels of AGI.

The American Dream --- 


"Poor" People Gaming the Income Tax Laws:  Juanita and Her Daughter Laura

Nationally, the poverty rate increased from 14.3 percent in the 2009 to 15.3 percent in the 2010
How Poverty is Calculated


Now we come to the second San Antonio family that games the income tax system. Col. X and his wife pay about $400 per week for two part-time maids --- a mother and daughter team. Juanita is not a U.S. citizen although she's lived in San Antonio for over 40 years. Her daughter Laura is a U.S. citizen and single parent with five children, welfare, food stamps, and free Medicaid family medical care.

Juanita and Laura also work for several of our other friends. As best I can tell, they're earning over $50,000 in cash per year that's never been reported to the government. When combined with welfare, food stamps, and Medicaid services and drugs, their income is probably equivalent to a family earning over $100,000 in reported income. And yet Juanita and Laura are considered too "poor" to even file income tax returns.

We're told that about half the taxpayers-gamers in the United States pay no income taxes when they file their returns. In addition tens of millions of other gamers are too "poor" to even file income tax returns.

Yet many of them are cash gaming the system with tax free unreported cash. This includes the following:

Note there are various instances when poor people who do not have to file an income tax return are advised to do so by the IRS ---,,id=105097,00.html

"2 in 5 Young Americans Don’t Have Jobs and Aren’t Looking," Time Magazine, November 14, 2014 ---

93% of Americans who aren't looking for work say they don't want a job

Nearly 40% of people in the United States ages 16 to 24 don’t have a job, and are fine with it. They say they’re happy not to be employed and don’t plan to find a job anytime soon, according to a Pew Research Center analysis of Bureau of Labor Statistics data.

The figures do not include young people who aren’t working, but are actively seeking employment. About 10% of Americans aged 20 to 24 and 19% of those aged 16 to 19 are considered unemployed, which means they are actively seeking work.

However, most Americans who are of working age and don’t have jobs are not actively seeking employment. Overall, 93% of the 86 million Americans 16 and older who aren’t looking for work say they don’t want a job. The total figure is up from a decade ago, and the change is most stark for young people. Around 30% of young Americans of working age in 2000 said they weren’t looking for work, compared to nearly 40% today. People over 55 are much more likely not to look for work, the data shows.

Individuals who aren’t looking for work do not count as unemployed for statistical purposes. The U.S. unemployment hit 5.8% last month, the lowest number since 2008

Jensen Comment
I guess they either live on welfare or somebody who loves them to a point where they don't have to contribute to their own room and board. Most of the time it's probably parents for the young people who are not yet parents themselves and qualify for welfare.

To be honest, I don't really trust these statistics due to the $2+ trillion underground economy. The nerd who fixes computers for cash probably does not report the income to the IRS and is not truly "unemployed." The same goes for many of the people who clean houses, work on construction, farms, and ranches for cash, load and unload furniture trucks for cash, tutor in math and music for cash, etc. Sadly, tens of thousands are also drug pushers, prostitutes, stealing cars, or otherwise starting life as career criminals.

"Senate report finds (massive) disability benefits fraud," by Erik Wasson, The Hill, October 7, 2013 --- 

A Senate committee on Monday wrapped up a two-year investigation into the nearly insolvent Social Security Disability Insurance program and alleged weak systemic oversight allowed massive fraud to perpetrated by a Kentucky lawyer.

The investigation, spearheaded by Sen. Tom Coburn (R-Okla.), found evidence that lawyer Eric Conn collaborated with Administrative Law Judge David B. Daugherty, to wrongly award potentially billions in benefits.

The revelations of fraud and inability of bureaucrats to address weak oversight comes as the disability fund is set to run out of money to pay full benefits by 2016. It also comes as the federal government is partially shutdown and because of that officials from the Social Security Administration were not available to testify before the Senate on Monday about the fraud allegations. 


“A two-year investigation of his actions representing claimants applying for Social Security Disability Insurance (“SSDI”) and Supplemental Security Income (“SSI”) benefits uncovered a raft of improper practices by the Conn law firm to obtain disability benefits, inappropriate collusion between Mr. Conn and a Social Security Administrative Law Judge, and inept agency oversight which enabled the misconduct to continue for years,” the report concludes.


Coburn said that the fraud was hurting the truly disabled and the report lists a series of steps the government can take to prevent fraud. 

“Every bogus claim made on behalf of someone who is not truly disabled robs taxpayers and denies or delays benefits for someone who is truly disabled.   This is an enormous and urgent problem that should demand our immediate attention,” Coburn said in a release.

The report found that Daugherty, who was sanctioned and allowed to retire, had awarded an unusually large $2.5 billion in benefits and had received unexplained cash payments. The judge had provided the Conn law firm with assistance through lists in obtaining medical opinions for Conn clients. 

The investigation found questionable benefit awards by Daugherty based on evidence by doctors who had suspect medical credentials, and determined that Conn had destroyed a massive amount of evidence once he came under congressional investigation. 

The Democratic chairman of the panel said the investigation was troubling.

“While we don't have any evidence that this is more than an isolated case, one example of inappropriate actions of this nature is one too many,” Sen. Tom Carper (D-Del.) said. “ I am encouraged that the Social Security Administration has already acknowledged many of the issues raised by the investigation, and I understand that it has begun to implement stronger reviews and other solutions.”

Read more:
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Bob Jensen's threads on entitlements disasters ---


U.S. Census Report:  Only a small percentage of impoverished adults actually say it's because they can't find employment.
"Why The Poor Don't Work, According To The Poor," by Jordan Weissmann, The Atlantic, September 23, 2013 ---


Conservative Republicans have officially made it their mission to end food stamps as we know them. Such was evident last week, when the House GOP voted to cut the Supplemental Nutrition Assistance Program, as food stamps are now known, by $39 billion over a decade and begin bulking up its work requirements, along the lines of welfare reform in the 1990s.


Whether you believe this a good or humane idea probably boils down to your take on a single question: why don't the poor, who make up the overwhelming majority of food stamp recipients (nearly 50 million of them), go to work? In 2012, more than 26 million 18-to-64-year-old adults lived under the poverty line; about 15 million of them didn't have a job during the year. Is the economy to blame? Or are personal choices at fault?


If you're a liberal, your answer is probably pretty cut and dry, and these days likely involves the word "recession." But conservatives tend to take a different view. They argue that whereas unemployment among middle class families rises and falls with the health of the job market, poverty is shaped and fueled mostly by cultural forces, that the poor could work if they wanted, and that the safety net lulls them into indolence. One of their key data points on this front comes from the Census. Each year, the bureau asks jobless Americans why it is they've been out of work. And traditionally, a only a small percentage of impoverished adults actually say it's because they can't find employment, a point that New York University professor Lawrence Mead, one of the intellectual architects of welfare reform, made to Congress in recent testimony.


In 2007, for instance, 6.4 percent of adults who lived under the poverty line and didn't work in the past year said it was because they couldn't find a job. As of 2012, it had more than doubled, leaving it at a still-small 13.5 percent. By comparison, more than a quarter said they stayed home for family reasons and more than 30 percent cited a disability. 

Continued in article


Jensen Comment
What the article overlooks is that millions of people who are described as "not working" really are working in the underground economy where cash wages are tax free to maids, farm workers, construction workers, care providers, pool cleaners, roofers, etc.

It's also hard to determine underground compensation relative to the minimum wage because so many such workers contract by the job rather than by the hour for housekeeping, lawn services, etc. For example, my  lawn worker in New Hampshire (one person only) that charges me $100 per job has expenses for equipment, fuel, travel, etc. but usually does the job in less than 2.5  hours. I do that part myself with my tractor and hand mower. In the winter he has a very profitable ski and sportswear shop.

He only does the front part of my lawn but is not interested in the back lawn where the ground is not a smooth
Up here the "cash only" housekeepers generally get paid by the job that nets out to over $35 per hour. One woman wanted over $50 per hour.

Estimates according to USA Today run as high as $2 trillion in the underground economy ---

USA Today also attributes much of the economic recovery to the $2-trillion underground economy.
Unemployment is not what it seems.


Pretending to be a shoeless and homeless bum is good business
"Bum given boots by kind-hearted cop is back to begging barefoot Panhandler has '30 pairs of shoes'," by M.L. Nestel, Kevin Fasick, and Bob Fredericks, The New York Post, March 26, 2016 ---

Jensen Comment
Reminds me of the time I followed a fashionably-dressed beautiful woman with two small children through a payment line at a supermarket in San Antonio. She paid for her groceries with food stamps and then a man helped her load the stash into a shiny new Cadillac Escadade (starting around at over $60,000). I overheard her children him "Daddy." My guess is that she had more than 50 pairs of shoes stored at his magnificent house.

Why do any parents want to get married? The food stamp game can be played better without getting married.

The New Yorker:
From maids to roofers to drug dealers the underground economy resulted in an estimated $2 Trillion (with a T) of underreported taxable income in 2012
Unemployment and Welfare Fraud
"The Underground Recovery," by James Surowiecki," The New Yorker, April 29, 2013 ---

When we all finished filing our tax returns last week, there was a little something missing: two trillion dollars. That’s how much money Americans may have made in the past year that didn’t get reported to the I.R.S., according to a recent study by the economist Edgar Feige, who’s been investigating the so-called underground, or gray, economy for thirty-five years. It’s a huge number: if the government managed to collect taxes on all that income, the deficit would be trivial. This unreported income is being earned, for the most part, not by drug dealers or Mob bosses but by tens of millions of people with run-of-the-mill jobs—nannies, barbers, Web-site designers, and construction workers—who are getting paid off the books. Ordinary Americans have gone underground, and, as the recovery continues to limp along, they seem to be doing it more and more.

Measuring an unreported economy is obviously tricky. But look closely and you can see the traces of a booming informal economy everywhere. As Feige said to me, “The best footprint left in the sand by this economy that doesn’t want to be observed is the use of cash.” His studies show that, while economists talk about the advent of a cashless society, Americans still hold an enormous amount of cold, hard cash—as much as seven hundred and fifty billion dollars. The percentage of Americans who don’t use banks is surprisingly high, and on the rise. Off-the-books activity also helps explain a mystery about the current economy: even though the percentage of Americans officially working has dropped dramatically, and even though household income is still well below what it was in 2007, personal consumption is higher than it was before the recession, and retail sales have been growing briskly (despite a dip in March). Bernard Baumohl, an economist at the Economic Outlook Group, estimates that, based on historical patterns, current retail sales are actually what you’d expect if the unemployment rate were around five or six per cent, rather than the 7.6 per cent we’re stuck with. The difference, he argues, probably reflects workers migrating into the shadow economy. “It’s typical that during recessions people work on the side while collecting unemployment,” Baumohl told me. “But the severity of the recession and the profound weakness of this recovery may mean that a lot more people have entered the underground economy, and have had to stay there longer.”

The increasing importance of the gray economy isn’t only a reaction to the downturn: studies suggest that the sector has been growing steadily over the years. In 1992, the I.R.S. estimated that the government was losing $80 billion a year in income-tax revenue. Its estimate for 2006 was $385 billion—almost five times as much (and still an underestimate, according to Feige’s numbers). The U.S. is certainly a long way from, say, Greece, where tax evasion is a national sport and the shadow economy accounts for twenty-seven per cent of G.D.P. But the forces pushing people to work off the books are powerful. Feige points to the growing distrust of government as one important factor. The desire to avoid licensing regulations, which force people to jump through elaborate hoops just to get a job, is another. Most important, perhaps, are changes in the way we work. As Baumohl put it, “For businesses, the calculus of hiring has fundamentally changed.” Companies have got used to bringing people on as needed and then dropping them when the job is over, and they save on benefits and payroll taxes by treating even full-time employees as independent contractors. Casual employment often becomes under-the-table work; the arrangement has become a way of life in the construction industry. In a recent California survey of three hundred thousand contractors, two-thirds said they had no direct employees, meaning that they did not need to pay workers’-compensation insurance or payroll taxes. In other words, for lots of people off-the-books work is the only job available.

Sudhir Venkatesh, a sociologist at Columbia and the author of a study of the underground economy, thinks that many workers, particularly younger ones, have become comfortable with casual work arrangements. “We have seen the rise of a new generation of people who are much more used to doing things in a freelance way,” he said. “That makes them more amenable to unregulated work. And they seem less concerned about security, which they equate with rigidity.” The growing importance of services in the economy is also crucial. Tutors, nannies, yoga teachers, housecleaners, and the like are often paid in cash, which is hard for the I.R.S. to track. In a 2006 study, the economist Catherine Haskins found that between eighty and ninety-seven per cent of nannies were paid under the table.

Continued in article

Labor Hoarding ---

"Housing has been booming! Construction jobs haven’t. Here’s why," by Neil Irwin, The Washington Post, March 19, 2013 ---

. . .

Key to understanding the sluggish growth in construction jobs is a concept called “labor hoarding.” That’s what happens during a recession when companies don’t fire as many workers as the decline in business would seem to have justified. Firms don’t want to lose all their quality workers and then be unable to keep up with demand when business finally turns around, so they keep people on staff even when there is not enough work to keep them fully busy.

This seems to have happened on a large scale in construction in the last few years. Kris Dawsey and Hui Shan at Goldman’s economics research group calculated that the economic value added per construction worker fell from $80,000 in 2006 to under $60,000 at the end of 2012. That is labor hoarding in a nutshell.

But because construction companies never fired as many workers as the collapse in their business would have justified, that means that over the last year, they haven’t needed to hire additional workers to keep up with the uptick in business.

Continued in article

Jensen Comment
I think an even bigger reason that a housing boom is disappointing for reducing unemployment is the way housing contractors outsource much of the construction work to skilled tradesmen who are self-employed and not included in the employment-unemployment data generated by the government ---

For example, such things as basement construction, plumbing, electrical wiring, bricklaying, siding, roofing, landscaping, swimming pool installation, etc. are outsourced mainly for reasons of not having to pay benefits to employees and unemployment insurance. The self-employed subcontractors often hire unskilled and unreported helpers in the underground market where no benefits like health care, Social Security, Unemployment Compensation, and Medicare payments must be paid.

In San Antonio, for example, hundreds and hundreds of workers, many undocumented, crowd selected street corners in south San Antonio waiting for subcontractors to pick them up for day work. Their self-employed bosses have the trade skills, but they need helpers who do not have to be so skilled. The one fringe benefit is that unskilled workers often learn tricks of the trade, like bricklaying, and eventually become their own self-employed subcontractors.

I replaced my roof twice in San Antonio with the same roofing company over a period of 24 years. My roofing contractor did not have a single employee on the books and did not go up on the roof himself after the day he estimated the price of each job. I never met any of his workers who could speak much, if any, English. However, some of them who worked for my contractor were regulars over the years who became quite skilled at roofing.  I was happy with their work even if I always hated having a flat roof next to enormous live oak trees, I grew very tired of having to rake and blow leaves from my roof in San Antonio. In what remains of my life I will never again own a house with a flat roof or swimming pool.

Here is a politically incorrect tax loophole costing billions ---

"For Spain's Jobless, Time Equals Money," by Matt Moffett, The Wall Street Journal, August 27, 2012 ---

Even though she's one of millions of young, unemployed Spaniards, 22-year-old Silvia Martín takes comfort in knowing that her bank is still standing behind her. It's not a lending institution, but rather a time bank whose nearly 400 members barter their services by the hour.

Ms. Martín, who doesn't own a car and can't afford taxis, has relied on other time-bank members to give her lifts around town for her odd jobs and errands, as well as to help with house repairs. In return, she has cared for members' elderly relatives, organized children's parties and even hauled boxes for a member moving to a new house.

The time bank not only saves her cash, she says, but also lifts her spirits by making her feel "part of a community that's taking some positive action during hard times."

As Europe's leaders struggle with a five-year-old economic crunch that has saddled Spain with the industrialized world's highest jobless rate, young Spaniards are increasingly embracing such bottom-up self-help initiatives to cope. The diverse measures—some commonly associated with rural or disaster-zone economies—supplement a public safety net that is fraying under government austerity programs.

Besides time banks, they include barter markets springing up in barrios, local currencies designed to spur the flagging retail economy, and charity networks that repurpose discarded goods. An environmental group recently launched Huertos Compartidos, or Shared Gardens, that links up owners of vacant land with those willing to plant vegetables in them and share the harvest.

The growth of time banks revives a concept pioneered by 19th-century anarchists and socialists in the U.S. and Europe, who wanted to test their philosophy that prices of goods and services should more closely reflect the labor involved in producing them.

The number of such banks in Spain—some run by neighborhood associations, others by local governments—has nearly doubled to 291 over the past two years, according to a survey by Julio Gisbert, a banker who runs a website called Vivir Sin Empleo, or Living Without Work, that tracks mutual-aid initiatives. Some economists worry that the rise of such informal systems of economic exchange is pushing more of Spain's economy underground—out of the view of regulators and tax collectors, and effectively sending the country back in time developmentally.

"It's a step backward not only for a euro country, but also for a developed country," says José García Montalvo, an economics professor at the University of Pompeu Fabra in Barcelona.

Banks and social currencies, he says, can backfire on the broader economy since the income received from such arrangements often goes undeclared, therefore depriving the government of tax revenue. Social currencies and time banks also preclude taking on debt, adds Mr. García Montalvo, which in moderate levels can help people start businesses and access beneficial goods and services that they can't afford upfront.

Others, though, say the measures represent a significant stabilizing force in society. For "people who can't find work, these kinds of possibilities of exchanges and mutual help can help make bearable a situation that otherwise would be unsustainable," says José Luis Álvarez Arce, director of the economics department at the University of Navarra.

Continued in article

Wealth Tax ---

Kaiser Family Foundation:  People love Medicare-for-All until they're told it'll raise their taxes to  the $30+ trillion cost:  Then support nosedives  ---
Jensen Comment
Virtually all nations with national health plans raise the funds needed with taxation at all levels of income. Estimates of USA's cost run $30+ trillion over ten years, but a lot depends upon what his covered (think long-term disabilities), who is covered (think 29+ million undocumented immigrants), what is covered (think nursing homes). and capital costs (will government buy all the USA hospitals and medical clinics?).

Wealth Tax ---

Even if wildly successful Senator Warren's wealth tax would only pay $2.75 trillion of the $30+ trillion cost ten-year cost of Medicare-for-All
Elizabeth Warren's proposed wealth tax would raise $2.75 trillion over a ten-year period from about 75,000 families, or less than 0.1 percent of U.S. households ---
Jensen Comment
This could have all sorts of economic consequences. One is that most of those 75,000 wealthy USA families have their wealth tied up in long-term investments like real estate (think of Trump hotels, Ted Turner's ranches in Australia, Amazon's many shares owned by Jeff Bezos), etc.  Warren's Wealth tax could force liquidation of these long-term investments to pay the $2.75 trillion wealth tax. If you want your top millionaires and billionaires to move out of the USA this is a sure-fire way to wave bye bye to them and the $2.75 trillion that becomes uncollectable.
Wealthy taxpayers are probably not worried with a conservative Supreme Court.  Arguably her proposal requires an amendment to the USA Constitution because her wealth tax proposal is extremely disproportional.---
You can read more about wealth taxes at
Why did liberal Sweden axe its wealth tax while at the same time lowering its top income tax rate from 87% (1979) to 65% (1990) to 56% (2002)? ? ---
Elizabeth Warren would probably prefer that you do not study experiences of all disastrous Scandinavian wealth taxes and very high marginal income tax rates that were later greatly reduced to stimulate the economy (called supply side (Laffer Curve) economics) ---

Those 75,000 wealthy taxpayers now invest in hundreds of billions in tax-exempt bonds (called municipal bonds) that underlie the building of most schools and municipal buildings in the USA. The muni bond market would nosedive if most of those 75,000 people sold their tax-exempt bonds and moved these hundreds of billions in investments off shore on their way out of the USA. That's not a cost that the naive Elizabeth Warren factored into her proposed wealth. What's the incentive for a billionaire who moved to Switzerland to continue to invest hundreds of millions of dollars in the USA muni market?

I suspect that Elizabeth Warren knows that her wealth tax would be an economic disaster. I think she's just trying to get votes from financially-ignorant voters. It's all politics and no substance.



Thomas Piketty’s 696-page book Capital in the Twenty-First Century is No. 1 on the Amazon bestseller list. It’s a serious economics book that takes a long, hard look at the dynamics affecting the distribution of capital, the concentration of wealth, and the long-term ---

Ten ways to fight inequality without Piketty's Wealth Tax ---

But just as there is more than one way to skin a cat, there’s more than one way for society to push back against growing inequality. Commentators reacting to Piketty’s thesis have offered up a bevy of policy options they see as more feasible or with fewer unintended consequences.

1) Open the borders.
African migrants sit on top of a border fence covered in razor wire between Morocco and Spain's north African enclave of Melilla during their latest attempt to cross into Spanish territory, April 3, 2014. Spain has more than doubled the strength of security forces at Melilla, after about 500 people stormed its fences in the biggest border rush for years earlier this month. Immigrants from all over Africa regularly dare the razor-wire fences of Spanish enclaves Ceuta and Melilla, which are surrounded by Moroccan territory and sea. African migrants try to get into Spain. Reuters/Jesus Blasco de Avellaneda

By intent and necessity, Piketty’s book is focused on wealthy countries, but we know well that emerging markets are only becoming more important to the global economy. Economist Suresh Naidu notes that “if we’re aiming for politically hopeless ideas, open migration is as least as good as the global wealth tax in the short run, and perhaps complementary.” More migration would redress global inequality by giving more earning power to migrants from poor countries, while lowering capital’s share of income in wealthy countries. 1

2) Get rid of some intellectual property protections.
A police officer displays seized Parvon Spas capsules, a type of analgesic and anti-spasmodic, in Jammu July 28, 2009. Police said on Tuesday their men recovered 20,000 capsules from three drug peddlers during a routine search at a police check post on the outskirts of Jammu. “Contraband” drugs in India.REUTERS/Mukesh Gupta

One of the scary ideas in Piketty’s vision is the rise of a new class of rentiers who earn their money not by working but simply from the capital returns on their assets. One solution is to get rid of a major source of modern rents—patents on software and pharmaceuticals. The case against software patents has been made, even by software companies, as a way to stop wasteful patent trolling and unleash innovation. For medicines, that an Indian factory can make the same drugs far more cheaply than an American factory, with the only difference being patent protection, means there is already pressure on the current system. While drug companies say the research that leads to new cures wouldn’t be possible without restrictive patents, economists wonder if pure competition wouldn’t do the same job. 1

3) Cut taxes.
The mosaic on the the patio of the South Beach mansion formerly owned by fashion designer Gianni Versace in Miami Beach, Florida July 23, 2013. Versace spent $33 million renovating the house, which features a 54-foot mosaic pool lined with 24-karat gold, according to Fisher Auction Company. The mansion will be offered for sale at an auction on September 17, 2013. The wealth Americans are already taxing.Reuters/Gaston De Cardenas

This one is actually stolen from Piketty himself, who responds to skeptics of his wealth-tax idea by saying that the US already has a wealth tax. It varies from locality to locality, but the average American real-estate owner pays an average property tax of 1.38% of a home’s value. Piketty thinks that merely turning this into a tax on “net” and not nominal capital would help reduce inequality: +

[The United States] has a property tax which is a pretty big wealth tax. I would prefer it to be a progressive tax that was proportional and I would prefer it to be on net wealth rather than the gross value of real estate—if you take someone whose house is $500,000 and they have a mortgage liability of $490,000, his net wealth is $10,000, I would propose he would pay no property tax, no wealth tax. Right now he is paying as much property tax as someone with no mortgage who inherited his apartment 20 years ago. My premise is not to tax to destroy the wealth of the wealthy, it’s to increase the wealth of the bottom and the middle class. +

Of course, the missing tax revenue would have to be made up for somehow—higher taxes, less public spending, more public borrowing—elsewhere. 

4) Crack down on offshore tax havens.
The island of Grand Cayman, a British dependency that covers 76 square miles (197 square kilometers) in the northwest Caribbean Sea, is visible in this near-vertical photograph. Geologically similar to The Bahamas, Grand Cayman is a low-lying, limestone island located on top of a submarine ridge. The city of George Town, the capital and chief port of the Cayman Islands, can be seen at the southwest end of the island. Grand Cayman’s 7-mile beach can be seen on the western side of the island. All 76 square miles of Grand Cayman, one of the largest sources of foreign investment in the US.NASA

Many objections to Piketty’s wealth tax include a reference to how hard it would be to tax wealth, because wealth is so very good at hiding in shell companies and secretive offshore trusts. But that’s a problem already: Perhaps $34 to $109 billion in US-owned financial assets are hidden from the tax man in Caribbean tax havens, just to avoid income on capital gains, a recent study found. The good news from that same study is that a push for tax information exchanges is cutting down on assets hidden overseas. But there’s lots more to be done on that front, whether it’s demanding public registration of the true owners of shell companies, or getting more countries to sign tax information exchange agreements. +

5) Open up the city.
Oracle Team USA sails near the city skyline against Emirates Team New Zealand during Race 14 of the 34th America's Cup yacht sailing race in San Francisco, California September 22, 2013. Nothing says inequality like a rich man’s yacht in front of a city where no one can afford to live.Reuters/Robert Galbraith

One wealthy countries manifest inequality is the high cost of living in large cities. This cost is partly a result of high demand to live there, but is also the more artificial product of zoning decisions, building codes and nostalgia that prevent the optimal utilization of space. Changing building codes to allow more development of affordable housing, taller buildings and fewer subsidies for cars would help alleviate inequality.

6) Wait for China’s labor costs to catch up.
An employee yawns as he works at a garment factory in Humen township, Guangdong province November 24, 2013. Activity in China's vast factory sector grew at a milder pace in November as new export orders shrank, a preliminary survey showed on Thursday, bolstering expectations the economy could lose some of its vigour in the fourth quarter as Beijing shifts its focus to structural reform. Picture taken November 24, 2013. Workers of the world, unite.Reuters/Stringer

One big reason wages have stagnated in the American middle class—thus widening the gap between them and the rich—is competition with cheaper labor in China and other countries. It has pushed many manufacturing jobs offshore, or forced US factories to automate faster than they might have otherwise. But wages won’t be low in China forever: Labor costs are already rising there, as low-wage jobs move to other places. It’s not inevitable, but some economists think that the trend could continue, as so-called “catch-up” growth spreads across the world—Africa, perhaps, is next. This growth lifts living standards and makes workers demand raises. On a globe without an obvious source of cheap labor, wages have to rise. Smarter trade rules might help accelerate this process.

7) Unleash antitrust.
Carlos Brito, Chief Executive of Anheuser-Busch InBev, poses during a news conference on the company's 2012 results in Leuven February 27, 2013. Anheuser-Busch InBev, the world's biggest beer maker, forecast a weak start to the year in the United States and Brazil after slightly lower earnings than expected in the final months of 2012. Carlos Brito’s InBev empire—which controls 25% of the world’s beer production—is often dinged for monopolistic practices.Reuters/Francois Lenoir

Fewer monopolies, lower prices, less inequality—it’s all so simple, right? Economist Dean Baker specifically cites the telecom industry and its push toward consolidation, but there are good arguments that sectors from beer to tech to agriculture have consolidated in ways, sometimes subtle, that hamper economic growth and competition. Anti-trust rules, aggressively enforced, could improve life for customers, and by forcing companies to compete rather than just sit on their monopolistic laurels, would also lower profit margins for shareholders—tough luck, but good for equality. +

8) Punish the financial sector.
JPMorgan Chase Chairman and CEO Jamie Dimon speaks during a discussion on "Closing the Workforce Skills Gap", at the Aspen Institute in Washington December 12, 2013. Don’t even try it.Reuters/Mike Theiler

A favorite among populists of all stripes. Pruning the banks isn’t easy, as the mixed experience of reformers after the worst financial crisis in most of our lifetimes showed. But the financial sector’s growing share of income in wealthy economies still has people on the left and right supporting policy ideas—from financial transaction taxes, to higher capital requirements, to limits on bank sizes—that would make the sector less profitable. That means less money going to annual trading bonuses, and presumably more money invested in the real economy.

9) Create more sovereign-wealth funds.
Oil rig pumpjacks, also known as thirsty birds, extract crude from the Wilmington Field oil deposits area where Tidelands Oil Production Company, which is owned by Occidental Petroleum Corporation (Oxy), operates near Long Beach, California July 30, 2013. Occidental Petroleum posted a smaller-than-expected quarterly profit on Tuesday, hurt by lower oil prices in the Middle East and North Africa, where the fourth-largest U.S. oil company is considering an exit. Out of the ground and into the national investment account.Reuters/David McNew

The key reason inequality tends to increase, Piketty says, is that investment returns (which go to the rich) will always exceed economic growth. But what if we give the public a share of those investment returns? One proposal from economist Tyler Cowen is the creation of government-run investment funds. These are already a common tool in countries with massive natural-resource wealth; they serve to diversify the national income stream and make it more sustainable. The US—which is no slouch on the natural resources front itself—could conceivably create a sovereign-wealth fund and share the dividends.

10) Massive social upheaval and bloody conflict.
In this April 20, 1936 file photo, armed troops march past German Chancellor Adolf Hitler during a parade in Berlin to celebrate his birthday. As the Nazis increasingly targeted Jews and others they considered enemies, they moved in 1938 to loosen gun statutes for the loyal majority, said Bernard Harcourt, a University of Chicago professor of law and political science who has studied gun regulations under Hitler. The 1938 law is best known for barring Jews from owning weapons, after which the Nazis confiscated guns from Jewish homes. But Harcourt points out that Hitler's gun law otherwise completely deregulated acquisition of rifles, long guns and ammunition. It exempted many groups from requiring permits. The law lowered the age for legal gun ownership from 20 to 18. And it extended the validity of gun permits from one year to three years. Bad news.AP Photo

Not exactly ideal, but one of the most convincing empirical findings from Piketty’s research is that World War I, the Russian revolution and World War II were the great levelers of the 20th century, wiping out more than a century of capital accumulation and creating the conditions for more equitable growth in their wake. Continent-wide warfare may not be a pleasant prospect, but it’s probably a good deal easier to bring about than most of the solutions listed above. Why, there’s a handy little annexation going on in central Europe right about now.

Jensen Comment
Not mentioned is seriously curtailing the underground economy that wealthy employers as well as struggling employers use to reduce wages and encourage tax avoidance of workers. USA Today estimated this to be a $2 trillion underground economy in the USA.

"Spain’s underground economy employs a million people and is worth 20% of its GDP," by Roberto A. Ferdman, Quartz, July 16, 2013 ---

Spain’s illicit economy—all that is unaccounted for because it’s illegal or unreported—is worth an unseemly 20% of the country’s GDP, according to a new report by Spain’s Foundation for Financial Studies (FEF). That’s higher than every other country in the European Union except Italy, with 21%.

Illicit activity, while technically illegal, doesn’t necessarily mean drug-related or violent. Much of Spain’s unreported business is due to labor law and tax circumvention, which varies widely from industry to industry. Some sectors are relatively clean, like Spain’s financial industry, where the rate of illegal activity is believed to hover below 10%; others are ridden with messy, unreported business, like the country’s construction industry—Spain’s most flagrant offender—whose rate clocks in at 35%.

The effects of such a massive, underground economy are substantial—for example, more than a million Spaniards are believed to be employed by the country’s unreported economy, and thus, unemployed by the country’s official economy. Spain’s unemployment has ballooned since the onset of the euro zone crisis, but many of those reportedly unemployed may simply be earning their money informally. As much as $26 billion dollars in taxes are also being withheld from tax authorities—money that the government especially needs now amidst an acute financial squeeze. But what’s perhaps most detrimental about the country’s enormous illicit economy is its ability to skew Spain’s economic data, president of FEF Juan Carlos Ureta explained.

Spain’s unemployment rate, which hovers just below 30%, is an eyesore, no doubt. And the country’s inability to forecast and control its deficits has forced it to create an independent fiscal authority to monitor the government’s finances. But the upside is the country can improve its economic outlook by merely coercing some of its illicit economy back into the public sphere.

Among the report’s many suggestions for chipping away at the country’s informal economy is lowering Spain’s high personal and company tax rates, which discourage official activity. It also advocates the creation of “mini-jobs,” which employ workers for up to 40 hours a week for up to $520 a month and are meant to incentivize those working in Spain’s underground economy to gradually shift into its official one.

While neither of the measures will fix Spain’s wounded economy entirely, one thing is certain: an illicit economy worth 20% of the country’s GDP isn’t just unhealthy—it’s unsustainable.

Bob Jensen's threads on the underground economy in the USA ---

Hi Paul,

The whole key is how much the higher earning people pay toward the Federal and State governmental budgets most of which are now social welfare programs of one type or another, including Social Security, Medicare, and other social programs that now comprise 70%-80% of the federal budget and nearly all of the state budgets.

Nearly half (48%) of the taxpayers below the median level of income pay zero in federal and state income taxes. Technically only 90% of the that 48% are below the median according to Bloomberg. A small percentage of poor people end up paying a small amount of income tax such as students who are claimed ad dependents on the tax returns of their parents ---
The poor do pay other taxes such as sales taxes, payroll taxes, and lower levels of property taxes on homes they own or rent, although the really poor have Title 8 and other housing subsidies.

You, Paul Williams, stated the following:

"And by what logic is it punishing the rich toexpect them to contribute something to the welfare of the society that made them rich."

Have you seen the proportion of the federal and state income taxes paid by the "rich? It's nearly 40% give or take depending upon how closely state income taxes are pegged to federal taxes paid.

What you despise is that the top 1% of the the annual income taxpayers in the USA receive about 24% of the reported income ---
Actually it's considerably less than the 24% if you factor in the $2 trillion dollars of unreported income in the underground economy, although estimates of the unreported incomes are subject to a wide margin of error. My very rough estimate reduces the top 1% of the share of the total USA income to less than 10% down from the reported 24% by that ignores the huge underground economy.

Be that as it may, what are the top 1% high income people contributing to government in the way of taxes.

Here's a quotation from the tax foundation:

“Incomes have stagnated for low-income households in recent years, but this is true for high-income households as well,” said Tax Foundation chief economist William McBride. “In inflation-adjusted terms, the income thresholds for all groups – including the top 50 percent, the top 1 percent, and the top 0.1 percent – are lower than they were in 2001.”

In 2010, the top 1 percent of tax returns included 18.87 percent of all adjusted gross income and 37.38 percent of all federal individual income taxes paid. The top 5 percent earned 33.78 percent of income and paid 59.07 percent of taxes, and the top 10 percent earned 45.17 percent of income and paid 70.62 percent of taxes.

The Tax Foundation’s analysis is based on new individual income tax data from the Internal Revenue Service, reporting on calendar year 2010.  This year the IRS changed its methodology to exclude dependent filers and include returns with negative adjusted gross income. For comparison’s sake, the new data is presented as far back as the IRS provides, to 2001, with the discontinuity noted for prior years.

Tax Foundation Fiscal Fact No. 343, “Summary of Latest Federal Individual Income Tax Data,” by chief economist William McBride is available here.


Jensen Comment
In my personal opinion tax reforms are needed, the most important reform being that the Alternative Minimum Tax should kick in for virtually all taxpayers paying little or nothing and especially for high income people paying little or nothing. Personally my own income tax in retirement is too low. I pay about 10% of my income to to the federal government, and this is too low for what I get living in this fantastic nation.

I repeat that I would like an AMT for virtually all levels of taxpayers.

And yes I would like to see marginal tax rates increased for taxpayers having an AGI of more than $350,000 with even higher rates for taxpayers earning more than $500,000. I hesitate to say what those rates should be until the joint interactions of tax avoidance loopholes are balanced with increased rates. Eliminating some loopholes would be a disaster to the economy. For example, eliminating tax exemptions for bonds of school districts, cities, towns, and villages may be disastrous in terms of their cost of capital (because these are usually risky bonds). Eliminating the home mortgage deduction would be a disaster to a sick real estate market. Charities claim they will die without tax preferences.

Since I do not favor elimination of some of the tax preferences, I vote for a significant increase in tax rates at all levels of income. Perhaps the marginal rate should be close to 50% for high income tax payers who get the most benefit from the tax preferences.

I think executive compensation is an outrageous rip off of business firms ---
This is not so much stealing from the government as it is stealing from investors in business firms.

The main problem is that Boards of Directors who approve the outrageous executive compensations are appointed by the those very executives. How dumb can it get?

It can get dumber. Not only are those executives overpaid for most of their successes they are overwhelmingly overpaid for their failures.

I would make golden parachutes illegal and cap executive pay on the basis of key measures of performance. Personally I don't think any executive should earn more than $5 million per year, and most executives should be earning less than $1 million per year.

Bob Jensen


Effective Tax Rates Are Lower Than Most People Believe

"Measuring Effective Tax Rates," by Rachel Johnson Joseph Rosenberg Roberton Williams, Urban-Brookings Tax Policy Center,  February 7, 2012 ---

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.


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.

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 ---

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 .


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?

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 ---

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 ---

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 ---

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

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

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 ---

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.

As John F. Kennedy put it in 1963 when he endorsed a cut in this tax: "The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital" as well as "the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy." Today's Democrats in Washington are no Jack Kennedys. As President Obama told Charlie Gibson of ABC News in 2008, whether or not a higher capital-gains tax raises more revenue is irrelevant to him. He wants a higher rate as a matter of "fairness.".
"Obama's Revenue Soup: A History Lesson on Capital Gains Taxes:" The Wall Street Journal, April 9, 2012 ---
Jensen Comment
I might buy into the "fairness" argument if President Obama would also agree to index the cost basis of long-term capital gains for inflation before applying the higher rate. It's highly unfair, for example, to treat the cost of farm land purchased in 1945 that is sold in 2012 as if the 1945 dollars had the same purchasing power as 2012 dollars. For example, in 1945 you could buy a cup of coffee for a dime and an new Chevy for $1,200. Fairness demands that capital gains taxes be applied to costs and revenues having the same purchasing power.

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 ---

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


The American Dream ---

To help explain what is really going on with mortgage refinancings and foreclosures I wrote a teaching case:
A Teaching Case:  Professor Tall vs. Professor Short vs. Freddie Mac 



The Phony Lifetime Disabilities Gaming by Tens of Millions of People Who are Not Disabled

"Millions of jobless file for disability when unemployment benefits run out," New York Post via Fox News, February 19, 2012 ---

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 ---

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.


"How Can Scandinavians Tax So Much?," by Henrik Jacobsen Kleven (Professor at the London School of Economics), July 20, 2014

How can Scandinavian countries raise large amount s of tax revenue for redistribution and social insurance while maintaining some of the strongest economic outcomes in the world? Combining micro and macro evidence, this pa per identifies three policies that can help explain this apparent anomaly: the coverage of third-party information reporting (ensuring a low level of tax evasion), the broadness of tax bases (ensuring a low level of tax avoidance), and the strong subsidization of goods that are complementary to working (ensuring a high level of labor force participation). The paper also presents descriptive evidence on a variety of social and cultural indicators that may help in explaining the economic and social success of Scandinavia.

American visitors to Scandinavian countries are often puzzled by what they see: despite large income redistribution through distortionary taxe s and transfers, these are very high-income countries. They rank among the highest in the world in terms of income per capita, as well as most other economic and social outcomes. The economic and social success of Scandinavia poses important questions for economics and for those arguing against large redistribution based on its supposedly detrimental e ff ect on economic growth and welfare.

To form a basis for the discussion, Table 1 shows tax revenues and income tax rates in the three Scandinavian countries—Denmark, Norway and Sweden—as compared to other European countries and the United States. We see that the tax-to-GDP ratio and the tax rates on income are much higher in Scandinavia than elsewhere. The top marginal tax rates are about 60-70% in the Scandinavian countries as opposed to only 43% in the United States . The contrast is even more striking when considering the so-called “participation tax rate”, i.e. the effective average tax rate on labor force participation when accounting for the distortions due to income taxes, payroll taxes, consumption taxes, and means-tested transfers. This tax rate is around 80% in the Scandinavian countries, implying that an average worker entering employment will be able to increase consumption by only 20% of her earned income due to the combined effect of higher taxes and lower transfers. By contrast, the average worker in the United States gets to keep 63% of her earnings when accounting for the full im pact of the tax and welfare system.

This paper asks how Scandinavian countries are able to impose very hi gh tax rate s and still perform strongly on measures of tax compliance a nd real activity. Are ther e specific features of policy design that can account for this combination of outcomes? Or is there something special about Scandinavians that make them less responsive to a given set of distortionary tax and transfer policies. If policy choices can largely explain th e positive mixture of economic and social outcomes in Scandinavia, this may have important policy implications for societies where large inequality has been justified by growth consider ations. If not, those opposing more redistribution may rest assured that Scandinavia is a special case th at cannot be replicated elsewhere.

The next three sections of this paper consider three dimensions of policy design that can shed light on these questions. First, the Scandinavian tax systems have very wide coverage of third- party information reporting and mo re generally, well-developed information trails that ensure a low level of tax evasion . Second, broad tax bases in these countries further encourages low levels of tax avoidance and contribute to modest elasticities of taxable income with respect to the marginal tax rate. Third, the subsidization or public provision of goods that are complementary to working— including child care, elderly care, transportation, and education—encourages a high level of labor supply . Such public provision of labor complement s implies that the effective labor supply distortions are less severe than implied by th e tax-transfer distortions shown in Table 1.

We also explore the hypothesis that “Scandinavians are different” by considering cross-country evidence on social and cultural influences. Much of the public debate on these issues is based on a notion that social motivations such as morals, norms, and trust may vary across countries in a way that can explain international patterns in economic outcomes. We consider cross-country correlations between tax take and proxies for so cial motivations.

Jensen Comment
Scandinavia keeps better track of immigrants and their employment and taxation. In the USA we lose track of tens of millions of undocumented workers staying here permanently, working in the underground economy, and collecting free benefits like education and medical care.

My point is that comparing Scandinavia is a lot like comparing apples and horses. But there are many lessons to be learned. I might note that Scandinavia, like most other nations, discovered that taking almost everything from the high income earners for redistribution was dysfunctional. The marginal rates for top earners were lowered to less than 70% from their former 90%+ levels in Scandinavia.


In the United States, a progressive tax system is employed which equates to higher income earners paying a larger percentage of their income in taxes. According to the IRS, the top 1% of income earners for 2008 paid 38% of income tax revenue, while earning 20% of the income reported. The top 5% of income earners paid 59% of the total income tax revenue, while earning 35% of the income reported. The top 10% paid 70%, earning 46% and the top 25% paid 86%, earning 67%. The top 50% paid 97% (of total imcome tax collected), earning 87% and leaving the bottom 50% paying 3% of the taxes collected and earning 13% of the income reported.

Comparisons of top marginal tax rates between the USA and Scandinavia are a bit misleading until you also factor in the benefits of health insurance, college education, and other freebies in Scandinavia that have to be paid by high income Americans in addition to their taxes. Also the USA takes a much heavier bite in property taxes in addition to income taxes from high income earners, especially on high-valued homes, to pay for schools and municipal services. Property taxes in Sweden, for example, account for only 2.4% of total tax revenue whereas in the USA the take is 12.2% according to Table 1 at
Consumption taxes are higher in Sweden, but these are regressive in that the lower income people are taxed more heavily.

USA taxation will probably never be comparable to other nations until the USA comes to grips with its enormous trillion-dollar underground cash economy that is not subject to taxation. It will probably never be comparable until the USA stops providing free military services to much of the outside world and fighting the wars between other nations.


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 ---

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.

"Too reliant on the few Taxes are best raised on a broad base, but in many countries it is worryingly narrow," The Economist, September 20, 2014 ---

“I LIKE to pay taxes,” said Oliver Wendell Holmes. “With them I buy civilisation.” Most people recognise that taxes pay for public services, but few are as keen to stump up for them as Justice Holmes was. High income taxes tend to discourage effort and entrepreneurship, while encouraging all manner of activity to avoid them. That is why a basic principle of good tax policy has long been to charge a low rate over a broad base.

It is a target which many countries miss, and the gap is growing. Income taxes—one of the main sources of tax revenue across the rich world—are increasingly paid by a small minority of the most affluent. In Britain, employment has risen by 1.3m in the past five years, but the number of taxpayers has fallen by 2.2m. More than 40% of American households pay no income tax. In contrast, the most highly paid 1% of workers in Britain pay 28% of all income tax, while in America it is 46%. In 1979 those shares were 11% and 18% respectively. Corporate income taxes show the same concentration. In Britain just 830 firms pay almost half of all corporation tax. Five American industries account for 81% of the country’s corporate tax revenue, but just a third of its companies.

This narrowing of the tax base is partly the natural consequence of widening inequality. Since an ever bigger share of overall income goes to the highest earners, and since income taxes are progressive (with a higher rate levied at higher income), it is inevitable—and appropriate—that the most affluent should pay a growing share of the overall tax take. Well-intentioned efforts to encourage work among poorer folk have also concentrated the pool of taxpayers. America’s Earned Income Tax Credit (EITC), which tops up the earnings of the least-skilled, is one of its biggest poverty-fighting schemes. Thanks to the EITC, millions get a cheque from Uncle Sam rather than paying income tax. Much of the drop in the number of British taxpayers is also thanks to generous new exemptions for low earners (see article).

Unfortunately, the narrowing of the tax base, both personal and corporate, also reflects two failures of tax policy. The first is the proliferation of exemptions and deductions that go far beyond reasonable poverty-fighting policies. America is the most egregious offender. Its income tax (which contributes a bigger share of overall revenue than in other rich countries) is riddled with myriad deductions, from medical insurance to mortgage interest, which collectively cost a whopping 7% of GDP and mean that income tax is levied on a much narrower base than it could be. Other rich countries, from Italy to Australia, also have too many unnecessary deductions.

The second problem, which applies most to corporate income taxes, is that tax rules have failed to keep up with the reality of the 21st-century economy. A web of arcane bilateral tax treaties allows clever companies to shift their profits from high-tax to low-tax jurisdictions, whether by registering patents or setting up intra-company loans. A firm’s tax bills depend more on what industry it is in and how clever its accountants are than its profitability. America, with the highest marginal rate, has the biggest distortions.

Better simpler and better together

These failures need to be fixed. A narrow tax base is economically and politically risky, particularly if the logic for who pays taxes seems capricious. Governments across the rich world, but particularly in America, should aggressively prune deductions. And they should work together to reach international agreement on how firms should book their profits. This week’s blueprint from the OECD is a good start (see article). As with trade, a multilateral approach to tax treaties is far better than bilateral deals. That way, more countries have a better chance of raising the taxes that help build civilisation.

From Paul Caron's Tax Prof Blog on January 25, 2013

NY Times Debate: What Should Tax Reform Do?

New York Times, Room for Debate:  What Should Tax Reform Do?:

Raising taxes on wealthy Americans, as was agreed upon by Congress earlier this month, won’t be enough to deal with the nation’s budget deficit. Some would argue that we also need to raise taxes on everyone. At the very least, a broader conversation about this country’s tax policy is necessary, and that means asking a simple question: What should tax reform do?


"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 ---

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

"Tax Expenditure Theory and the Reform of French Loopholes," by Eric Pichet, SSRN, April 18, 2012 ---
Thank you Paul Caron for the heads up.

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 ---

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

Tax Reform in Greece is Probably a Hopeless Cause ---

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 5th 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 2ND 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,


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.

#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 ---

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

Tax Foundation Facts & Figures (Free) ---

To help explain what is really going on with mortgage refinancings and foreclosures I wrote a teaching case:
A Teaching Case:  Professor Tall vs. Professor Short vs. Freddie Mac 

Bob Jensen's blogs and threads ---