A Call for Fairness in the Tax Code
http://thedianerehmshow.org/shows/2012-01-30/call-fairness-tax-code
Last week in his State of the Union address President Obama called for tax reform to ensure fair play. He proposed what he called a Buffett Rule: a minimum federal income tax of 30% for people making over $1 million. Republicans say he’s pushing class warfare and stifling economic growth in a period of weak growth. GOP presidential hopeful Mitt Romney is facing criticism for both how he made his enormous fortune and for his seemingly low tax rate, but, as many analysts point out, most households pay at an even lower rate. Please join us to discuss the tax rates and he economy.
Guests
Alice Rivlin
senior fellow, Brookings Institution, vice chair, Board of Governors, Federal Reserve System (1996-99); director, White House Office of Management and Budget (1994-96); and founding director, Congressional Budget Office (1975-83).
Stephen Moore
member of the Wall Street Journal's editorial board.
Jared Bernstein
senior fellow, Center on Budget and Policy Priorities; former chief economist and economic policy adviser for Vice President Biden.
David Leonhardt
Washington bureau chief, The New York Times.
Comments
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@marshach
The trap is the political one derived from this paradox where people believe we have free markets (when we don’t) so that is taken as proof that incentivizing investment doesn’t work.
The manipulation takes place anytime the government establishes an advantage for one business over another. This can be as simple as tax deductions or regulation but can get as complex as the EPA which puts a huge drag on the economy with the draconian way in which it interprets its regulations and works to expand its power over people and business. It also includes establishing “czars” which influence over business and establishing organizations like Fannie and Freddie. All of these cause the market to skew away from what a free market may choose in favor of what the government promotes, or at least away from those it tries to punish.
In the case of Fannie and Freddie they underwrote loans that lenders previously wouldn’t have taken on by themselves. This subverts the free market and promotes taking more risk than banks and lenders would normally find acceptable. It is a classic example of a government generated bubble formed by unintended consequences. They intended to make mortgages easier to get, and they did but as a result they also allowed ‘investors’ to make unreasonable profits because the borrows and the government were left holding all of the risk. Without the government involvement they was virtually no chance of this housing bubble forming because people who were not able to obtain the loans wouldn’t have gotten into the market.
Talk about paying your fair share? I am so weary of the focus on taking away from those who work hard and are sucessful. Just the other day I heard that almost 50% of American workers don't pay a cent of income taxes, let alone those that live on entitlements. Earned income tax credit is such a joke....it's just plain welfare.
Everyone...EVERYONE...should pay something.
I have been waiting for a show of this topic for ages. Thank you soo much. It's difficult to find such comprehensive talk about the Tax Code in the United States. I feel sick when I think about the injustices that make this country so difficult to survive in during this period in time. Major tax reform will be necessary to help recreate a fair relarionship between the US government and the American people. Average Americans are being delt with unfairly and the economic burdens of the country remain heavily on the worn out backs of the less well off.
@marshach
The financial industry is the second-most regulated, after medicine, if you count the number of regulations in the federal registry and the US code. This isn't even counting state laws.
I will answer #2 last because that will become clear as I explain #3.
This is a common misdirection your kind use. I say that a change in the regulatory demands alters their incentives to lend to risky borrowers, and you reply that I am "blaming the borrower." What does the culpability of the borrower have to do with anything? They get foreclosed on.
No, what I am doing is blaming the politicians who alter the risk incentives in the system to achieve the political goal of increasing home ownership. You call that blaming the borrower. I call that blaming the politician.
You see, you can't explain the phenomenon of mortgage bundling, the credit default swaps, or any of it, without something causing a short-circuit in the first place. Why did lenders decide to bundle up mortgages the way they did? It was the only way to make it possible to increase lending to high-risk borrowers. And to figure that out, you need to understand a little something about bank capital requirements, which it appears you know nothing of.
@ marshach, cont.
So to satisfy political - not market -objectives, flood the system with high-risk mortgages. Banks respond by diversifying the risk though securitization, a perfectly rational response. The models behind the risk valuations even won mathematicians Black and Scholes the Nobel Prize in economics.
But now banks are forced by regulation into the higher capital requirements of AAA rated mortgages. But a regulatory mismatch with the Basel II accords causes a kind of regulatory arbitrage to take place. Get an insurance policy through a thing called a swap, and it now enjoys the much lower capital requirement of the lower risk weighting of an insurance policy on a AAA rated asset.
Now, we are getting a little closer to "the rest of the story."
This was entirely caused by political objectives, and exacerbated by a forest of regulations that often worked at cross purposes and were full of contradictions.
And this answers #2. Risk was injected into the system through political means for political objectives. The system responded rationally by making it easier to diffuse that risk through diversification, but the systemic, aka non-diversifiable risk would still be there, which was largely driven by the bubble created by increasing demand for home ownership, and by people eager to make a quick buck off the relaxed lending standards, the so-called flippers.
EVERYTHING that happened, the securitization, the swaps, all of it, were a response to the politically injected risk into the system. When the risk pressure got higher, the government made implicit promises to back up all that risk through bailouts.
NONE of this could have happened without government interference in the economic ecosystem of risk and reward.
"Gary Brownell wrote:
For starters:
Carried interest and other means of characterizing compensation for services as capital gains should be eliminated.
The lower capital gains rates should be limited to the first $100,000 of capital gains.
Social security and medicare taxes paid by individuals should be allowed as CREDITS for determining income tax. This would preserve the separate income stream for these programs while eliminating the unfairness inherent in apply this tax mainly on lower income persons.
The mortgage interest deduction should be limited to mortgages not larger than some value such as 200% of the median home value in the state."
I agree more or less with your opinions on Capital Gains, but as long as a Homeowner must pay Capital Gains on his Home (Which can be astronomical) when S/He sells, S/He should be able to deduct Mortgage Interest and numerous other costs accrued during the Ownership.
Monte Haun mchaun@hotmail.com
"Pteromandias wrote:
Blah, blah, blabber.
More Blah, blather, blah.
Still more Blah, blubber, Banalities. Etc. etc, etc.
January 30, 2012 - 3:58 pm."
Most regulated, my adz! Most deregulated, in fact.
After Reagan, the lessening of competition, reduction of taxes and theft of the huge increases in productivity of American and Chinese Labor, put much, much more money in the hands of the Thieves than the Economy could absorb.
That's what drove the whole mess.
Hence the Great Refinancing Boom, "please take my money, I'll (Re)finance 125% of the value of your home". "Turn your Home into an ATM Machine."
Then came the Great Real Estate Boom and we all know the rest of that story.
Monte Haun mchaun@hotmail.com
All these years we’ve been hearing the convincing but fake argument of double taxation to justify reducing or eliminating capital gains tax, without any counter-argument. Finally, this year people are beginning to see through this – and all credit to Diane’s callers who were astute enough to wise up.
Every transaction is part of an infinite chain or network, and if you could follow the history of a particular dollar back in time you would find that it has been taxed multiple times. The double taxation argument is the ultimate absurdity that would make civilized government impossible to maintain; it implies that a given dollar can only be taxed once and never again.
Moore and his fellow travelers make any argument, however poorly founded, to justify the freeloading of their rich friends off the rest of us. That the double taxation canard has survived this long is a testament to the ineptness of our punditocracy and the complacency of progressives who have sat back all these years failing to understand the power of words to shape our society.
All these years we’ve been hearing the convincing but fake argument of double taxation to justify reducing or eliminating capital gains tax, without any counter-argument. Finally, this year people are beginning to see through this – and all credit to Diane’s callers who were astute enough to wise up.
Every transaction is part of an infinite chain or network, and if you could follow the history of a particular dollar back in time you would find that it has been taxed multiple times. The double taxation argument is the ultimate absurdity that would make civilized government impossible to maintain; it implies that a given dollar can only be taxed once and never again.
Moore and his fellow travelers make any argument, however poorly founded, to justify the freeloading of their rich friends off the rest of us. That the double taxation canard has survived this long is a testament to the ineptness of our punditocracy and the complacency of progressives who have sat back all these years failing to understand the power of words to shape our society.
3-on-1 hardly seems fair as long as we're going to talk about fairness.
Steve did a pretty good job given the odds and at best having 25% of the time.
Dear Pteromandias:
Wealth is indeed elastic- it can shrink too. Here is what we had in 1981 when Reagan ascended.
"Monday, March 12, 2007
WWII was followed by a huge increase in American labors productivity that has never relented. To deal with any Luddite fears, we were promised much more liberal working conditions- at one time, a 3 or 4 day work week, European type vacations, early retirement and a life of moderate ease was considered possible. An end to 7 day 12 hour work until we drop dead in our harness like mine ponies and are dragged to the dump. We had attained a relative Utopia - affordable medical care, low inflation, low interest rates, earlier retirement, greater job safety, single income households, low taxes, low crime, disability pension if we were hurt, security for our kids if the Breadwinner died- a relative Utopia indeed. Since the 1980s though, the race has been to the bottom. Now we work longer hours, retirement being pushed off by the government with an eye to ending it completely. We are paid less, even by the Govts calculus, we are losing ground to inflation and the actuality is made worse by a CPI that is understated by about 2 per-cent per year. People compensating for lower wages with debt- mind numbing credit card, mortgage and government debt- in an unstable state that any recession or falling Real Estate prices will unhinge. Squandering what we have in insane wars. Well, I'm getting tired of typing, but will wind up with a comment for the guy who brags that we ought to bust our backs working Night and Day like the Indians do. Screw you Buddy, I only get one go-around and I want a life of some security, time to enjoy my family and should one of us take sick, reasonable medical care and hope that when my mind and body are finally spent, a few years in a rocking chair. Monte Haun mchaun@hotmail.com
By mchaun | Mar 13, 2007 1:09:01 AM | Request Removal"
(Cont)
(Cont)
Here is what we have now-
30 YEARS OR MORE for a TWO INCOME FAMILY to buy a lousy ticky tacky house 50 miles from our jobs. 5 Years to buy a car. 10 or more years to pay off college costs preparing for a job that will be taken by an H-1B Immigrant whose education was paid for by his Father gouging another $0.10 per Kilo of Rice from his starving Peasants. Then S/He will remit his/her wages to prepare a nice berth for when S/He goes back home to retire and live like a Rajah on Social Security.
A Reagan-Gingrich CPI-COLA that screws Workers and Social Security Annuitants from 2 to 4 % per Year.
Then the final indignity of being told we should have prepared better for our Retirement.
Monte Haun mchaun@hotmail.com
March 31, 2011 - 2:42 pm
"mancuroc wrote:
All these years we’ve been hearing the convincing but fake argument of double taxation to justify reducing or eliminating capital gains tax, without any counter-argument. Finally, this year people are beginning to see through this – and all credit to Diane’s callers who were astute enough to wise up."
Thanks, mancuroc, very ably put.
I composed a related comment, but decided not to post it at first, but will now.
First of all, true Capital Gains aren't normally paid by Corporations, they are paid by Stockholders or Owners and then only when the Stocks or Assets are sold.
If there is any justification, at all, for treating Capital Gains differently, it is for Long Term Gains in which part of the gains are due to Inflation not real gains in value.
As to taxes on operating profits ie. Earnings, I said-
Haven't you heard (From Romney, among others) that Corporations are People too. So why shouldn't they pay Taxes??
Furthermore, If, as all the elites assure us, taxes are merely passed through to the consumer in higher prices, why shouldn't the Corporation be allowed to deduct the taxes paid by their steel suppliers, indeed the taxes paid by the Iron Miners, railroads- taxes due at every stage of production?
If you don't like that, integrate vertically- entirely too much fragmentation in the Economy anyhow.
Monte Haun mchaun@hotmail.com
in reply to hainc:
"3-on-1 hardly seems fair as long as we're going to talk about fairness.
Steve did a pretty good job given the odds and at best having 25% of the time."
Please. Given the political right's wall-to-wall domination of talk radio, the TV networks' Sunday morning political gossip shows, and even the rightward tilt on C-SPAN's morning call-in show, both in terms of guests and in its selection of republican/conservative talking points as topics, you have no valid complaint.
mancuroc wrote:
"Given the political right's wall-to-wall domination of talk radio"
Undeniable - because Air America had a message nobody wanted to hear
"the TV networks' Sunday morning political gossip shows,"
Uh ... there's only 1 and that's Fox News Sunday - which, by the way presents a very balanced panel of guests.
Otherwise you've got liberal ABC, liberal CBS, liberal NBC, and liberal CNN (just look at the moderators)
"and even the rightward tilt on C-SPAN's morning call-in show"
Don't get to see it so I can't comment
"you have no valid complaint."
Oh .. and I almost forgot Eleanor Clift on PBS - enough STUPID and enough LIBERAL to fill a cruise ship all by herself.
Yeah. The right has PLENTY of complaint.
I think a highly illustrative graphic was done by xkcd:
http://xkcd.com/980/
Be sure to zoom in. The sources for the data is all there as well.
I am NOT in any way connected to xkcd.
More on the xkcd graphic:
http://xkcd.com/980/
Perhaps one of the most telling number there is the following:
Production worker hourly pay in 2007 dollars
1965: $19.61
2007: $19.71
CEO hourly pay in 2007 dollars
1965: $490.31
2007: $5,419.97
Diane,
I was disappointed today when nobody spoke up, after Stephen Moore evolved the “prosperity” of the Reagan era and the wonders of supply side economics. I would have like to hear this simple phrase: “but, Mr. Reagan tripled the national debt.” Moore’s stance reminds me of a man who binged on credit cards longing for the good old days before his credit got cut off.
The debt of under a trillion dollars when Reagan took office was accumulated during 40 years of New Deal spending. He came, he said to balance the budget; he tripled it. Although his Budget Director David Stockman resigned in protest, maintaining it was a deliberate, Reagan used to tote this big budget book up onto a podium every year and complain of how Tax and Spend Liberals were destroying this country. So the poor got blamed for their own problems, the middle class’ and the rich man’s. How’s that for Class Warfare. What people like Moore make sound so complicated, isn’t. These masters of "The Big Lie" stole our children’s future (and a good deal of middle America's current well being) and funneled it to the wealthiest 1% thorough series of stock market bubbles , the last of which, so fa,r was the SWAP equity Crises of 2008.
My problem is that nobody in the room today didn’t know this. The great consensual hallucination of supply side economics , which has destroyed this nation with debt, just needs good people to say nothing. How I would have liked to get a call in today.
I don't understand one comment by Stephen Moore from the Wall Street Journal. Warren Buffet says his secretary has a higher tax rate than his. But Moore disagrees. Moore says Warren Buffet's tax rate is actually much higher than his secretary's because Buffet's corporation paid tax on corporate income before Buffet paid tax on his income. But his secretary, like me, probably spends at least half of her income on food or products that corporations make. The price of every item I buy includes the costs of ALL the taxes paid to make that item. So if I use Moore's reasoning, Buffet's secretary and I are being taxed even higher than Buffet because she and I spend more money on corporate goods as a percent of our income. And we pay a higher % of our income on things like SS tax, sales tax, property tax, phone tax, utility tax, gas tax, etc. Buffet would have to own hundreds of cars and homes to pay the same percent of his income as I do on property tax and gas tax. I admire Warren Buffet for saying that his tax rate should go up.
If millionaires don't want to pay any tax on new income from investments, they could put the money they already made under their pillow. No income, no tax.
There is one point I didn't hear. Everyone talks about what % income is fair. To me, that is not the important issue. What matters is how much effort everyone puts in. For example, It might be 30% "effort for me to make my tax contribution of say, $10,000.00, but Mitt Romney may expend only 10% effort to contribute ten times as much! Too bad there is no way to measure effort.
If a group of people, including strong, and weak, women, & men, and some really strong members of the Chicago Bears. Would it be fair to give everyone the same size, same weight suitcase to carry? I think anyone with common sense would ask the Bears to carry a little extra. Also, if all the regular people are sweating to carry their load, but the Bears are carrying their suitcase with their little finger, the group as a whole would look to redistribute the load so that everyone was sweating, but not so much.
Lastly: If Mitt pays 35% of his income as tax, he doesn't get to purchase the Jet with three engines, the poor guy must settle for a jet with one engine, while the poor little widow woman, who pays 1% tax is forced to give up her house, live in an apartment in the bad part of town, and eat cat food!
One of the real beauties of the graduated income tax, is the fact that if one should lose his job, and finds it necessary to take a job at a lower income level, he also receives an !instant! tax break! Thus some of the pain is mitigated. Of course rich people would never think of that!
And remember. Corporations are people too. It is NOT Warren who is paying that corporate tax; it is some other "person", Warren's corporation!
I agree, and was thinking something similar. I found this rundown in a book:
-1929 economic analysis was based on Say’s law. “Supply creates it’s own demand”. Thus lassez-faire would be the best government policy.
-But, 1929 brought prolonged unemployment (increasing labor supply) WITHOUT creating demand for labor, a condition impossible under Say’s law.
-Keynes analysis indicated the solution lay on the demand side. Unemployed consumers won’t buy; without sales, suppliers won’t invest.
-Per Keynes, government should run a deficit through spending, and/or tax reduction.
-Politicians were slow, but WWII forced deficit spending.
-An expanding economy from 1940s until the ‘70s, proves Keynesian theory is right!
-In the 70s for reasons still not understood there was unemployment plus inflation, the worst recession since WWII.
-Unemployment plus inflation was called Stagflation, a failure of the Phillips curve, which showed a direct trade-off between inflation and unemployment.
-The Keynesian formula for once wouldn’t work, since boosting spending would contribute to inflation.
Contd'
-Arthur Laffer proposes “Supply Side” economics that appealed to candidate Reagan.
According to the theory, taxes could be raised so high that they would actually reduce revenue. Reducing tax will result in increased revenue! “A FREE LUNCH!”
-The claim that high tax and and too much business regulation caused stagflation has not been proven through empiric evidence, but appeals to Libertarian ideals of minimal government.
-Paul Volker prioritized stabilizing inflation over reducing unemployment, and is successful so that,
-Reagan’s Economic Recovery Tax Act of 1981, introduced during the recession, and with inflation stabilized is ironically, a Keynesian stimulus! Along with increased military spending, renewed economic growth results.
-Supply-side theory though, did not bring increased revenue, instead resulting in structural deficit by the end of the 80’s
-Tax burden shifted from the wealthy to the middle class.
-George H. Bush, & Bill Clinton saw the need to raise taxes and cut spending.
-Supply-siders predicted destruction of the economy, but
-(Omnibus Budget Reconciliation Act of 1993) resulted in budget surplus!!
(It was success predicted by the Keynesian model), and
-Structured Deficit created during Reagan administration was resolved.
Keynes would recommend running surplus when the economy is good, but instead
-Bush II redistributes tax revenue to individuals rather than using it for common good, & public purposes.
-The Bush II Economic Growth and Tax Relief Reconciliation Act of 2001 leads to a return of structural deficit.
What to do now?
=========== I believe we should start by going back to budget surplus. Eliminate the Growth and Tax Relief Reconciliation Act of 2001! =================
Notes from – The Libertarian Illusion by William E. Hudson
It's not that Buffett pays too little, it's his secretary who pays too much.
@Pteromandias
---------------------------------
"Why did lenders decide to bundle up mortgages the way they did? It was the only way to make it possible to increase lending to high-risk borrowers."
---------------------------------
You're right about me knowing nothing about bank capital requirements. However, I don't believe for a minute that mortgage-backed securities were created for the magnanimous purpose of making more money available to lenders. The people who created mortgage-backed securities did it to make huge profits for themselves at the expense of unsuspecting investors.
Anyway, was it the lenders who bundled the mortgages? Correct me if I am wrong, but didn't the "Bad credit? No credit?" mortgage lenders sell those risky mortgage loans to financial institutions that did the bundling and selling?
@Pteromandias
-----------------------------------
'NONE of this could have happened without government interference in the economic ecosystem of risk and reward."
----------------------------------
You're honor, my client is innocent! Yes, he entered his neighbor's home, attacked and robbed them, but NONE of that would have happened if the government hadn't made it possible for his neighbors to get the loan to buy the house!
I was hoping someone on your panel would bring up the point that if corporations are "people" under the law, then Warren Buffet's income is separate and apart from any corporation in which he is a stockholder. The taxes Mr. Buffet pays cannot be lumped together with the taxes paid by his corporations in order to determine his effective tax rate. This is an important distinction to make in the wake of Citizens United. You can't have your cake and eat it, too...at least not yet.