Topic: Tax and Budget Policy

Taxpayer Democracy, for Each Taxpayer

Today, the day American taxpayers wonder if the federal government is really worth all the money and hassle, I have an article at the Washington Post on how to give taxpayers more control.

Why shouldn’t taxpayers make direct decisions about how much money they want to spend on other government programs, like paying off the national debt, the war in Iraq or the National Endowment for the Arts? This would force the federal government to focus time and resources on projects citizens actually want, not just efforts that appeal to special interests.

To do this, we’d have to expand the concept of the campaign financing checkoff to all government programs. With this reform, the real expression of popular democracy would take place not every four years but every April 15. A new final page of the 1040 form would be created, called 1040-D (for democracy). At the top, the taxpayer would write in his total tax as determined by the 1040 form. Following would be a list of government programs, along with the percentage of the federal budget devoted to each (as proposed by Congress and the president). The taxpayer would then multiply that percentage by his total tax to determine the “amount requested” in order to meet the government’s total spending request. (Computerization of tax returns has made this step simple.) The taxpayer would then consider that request and enter the amount he was willing to pay for that program in the final column–the amount requested by the government, or more, or less, down to zero.

A taxpayer who thinks that $600 billion is too much to spend on military in the post-Cold War era could choose to allocate less to that function than the government requested. A taxpayer who thinks that Congress has been underfunding Head Start and the arts could allocate double the requested amount for those programs….

Real budget democracy, of course, means not just that the taxpayers can decide where their money will go but also that they can decide how much of their money the government is entitled to. Thus the last line on the 1040-D form must be “Tax refund.”  The form would indicate that none of the taxpayer’s duly calculated tax should be refunded to him; but under budget democracy the taxpayer would have the right to allocate less than the amount requested for some or all programs in order to claim a refund (beyond whatever excess withholding is already due him).

I regret that space considerations required the loss of my historical context:

Ever since Magna Carta, signed 800 years ago this spring, the Anglo-American tradition of fiscal policy has been that the people would decide how much of their money they would give to government. Parliament arose as a representative body to which the Crown would appeal for funds. The monarch had to explain why he or she was seeking more funds–and Parliament frequently rejected the request as frivolous, wasteful, or actually injurious to the commonweal.

Today, of course, we can’t count on the legislative branch to guard our tax dollars, and technology makes it easier for us to direct them ourselves.

More on taxes – and Magna Carta – in The Libertarian Mind. Find ideas for government programs that are unnecessary or too big at Downsizing the Federal Government.

Can Inequality Get Worse If Poverty Gets Better?

Jim Tankersley of the Washington Post believes he has discovered “The Big Issue With Hillary Clinton Running Against Inequality”:

“Inequality got worse under Bill Clinton, not better. That’s true if you look at the share of American incomes going to the 1 percent, per economists Emmanuel Saez and Thomas Piketty. It’s also true when you look at the share of American wealth going to the super-super-rich, the top 0.1%, per research by Saez and Gabriel Zucman.”

What this actually reveals is the absurdity of (1) defining inequality solely by top 1% shares of pretax income less government benefits, and (2) judging any strong economic expansion as a failure because top 1% income shares always rise during strong economic expansions.

The graph uses the Congressional Budget Office estimates of top 1% shares, because (unlike Piketty and Saez) they include government benefits as income and subtract federal taxes.  What it shows is that both affluence and poverty are normally highly cyclical. When the top 1 percent’s share of after-tax income jumped from 11.2% in 1996 to 15.2% in 2000, the poverty rate simultaneously dropped from 11% to 8.7%.  Meanwhile, median income, after taxes and benefits, rose from $50,900 in 1993 to $61,400 by 2001, measured in 2011 dollars. 

 

Conversely, when the top 1% share fell from 16.7% in 2007 to about 12% in 2013 (my estimate), the poverty rate rose from 9.8% to 15%.  If we adopt the egalitarians’ top 1% mantra, must we conclude that inequality “got better” lately as poverty got worse?Top 1% and Poverty

The income peak of 2000 is a tough act to beat, and few of us are ahead of it today – least of all the top 1%. The brief surge in top incomes of 2006-2007, like the related speculative surge in housing prices, proved unhealthy and unsustainable. But weak economic performance and high poverty in the past four years is no reason to dismiss the 3.7% average economic growth of 1983-2000 simply because such prolonged prosperity made more people rich.

Tankersley also asks us to “look at the share of American wealth going to the super-super-rich, the top 0.1%, per research by Saez and Gabriel Zucman.”  As I’ve explained in The Wall Street Journal, however, the Saez-Zucman estimates misinterpret shrinking shares of capital gains and investment income still reported on individual tax returns, or shifted from the corporate tax to a pass-through firm, rather than (like most middle-class savings) sheltered in IRA, 529 and 401(k) plans.

It is easy to envision Republican partisans welcoming and adopting the Tankersley theme that Hillary Clinton should now be ashamed of the strong economy of 1996-2000 because “inequality got worse” as many new firms were created and stock prices soared. Yet whenever stocks crashed and the top 1% share fell (making inequality “better”?) the poverty rate rose and median incomes were flat or down.

Some Republican candidates have already alluded to the same pretax, pre-transfer “top 1%” figures to claim inequality worsened under Obama – meaning since 2009.  According to Piketty and Saez, real average incomes of the top 1% were indeed higher in 2013 ($1,119,315) than in the crash of 2009 ($975,884).  Before crashing below $1 million in 2009, though, top 1% incomes had been much higher in 2007 (the equivalent of $1,533, 064 in 2013 dollars) and in 2000 ($1,369,780). The rising tide has not lifted many small boats or big yachts since 2009, because the tide hasn’t risen much; higher tax rates in 2013 certainly didn’t help.

The trouble with Republicans using highly cyclical top 1% statistics as a political weapon against Democrats is that doing so requires capitulating to the divisive and dishonest leftist fallacy that poor people and middle-income people do best when the top 1% is doing badly.

The truth is that the poverty rate fell sharply and middle-incomes rose briskly in President Clinton’s second term, and the top 1% gladly reported more taxable income and paid more taxes as the tax on capital gains was cut from 28% to 20%.  There is a lesson to be learned here, but it is not to denigrate the so-called rising inequality of the late 1990s.

Fact Checking a Fact Checker: About Rand Paul and Reagan

Washington Post fact checker Glenn Kessler gives Senator Rand Paul Three Pinocchios for making the following claim on TV:

Ronald Reagan … said we’re going to dramatically cut tax rates. And guess what? More revenue came in, but tens of millions of jobs were created.

Before examining whether or not “more revenue came in,” consider just how dramatic the Reagan-era tax changes really were.  Under the first bill in 1981, all personal tax rates were eventually reduced by 23%.  But it is often forgotten that these rate reductions in were foolishly delayed until 1984.  By then, however, the 49% tax bracket was down to 38%, the 24% rate to 18% and the 14% rate to 11%.  

When the 1986 Tax Reform took effect in 1988, higher marginal tax rates fell further to 28-33% for those previously in tax brackets of 38-50%.  The corporate tax was cut from 46% to 34%.  After being reduced to 20% from 1982-86, however, the top capital gains tax was raised to 28% in 1987 before being rolled-back to 20% in 1997 and 15% in 2003.

Mr. Kessler mainly takes issue with Senator Paul’s comment that “more revenue came in” after the highest marginal tax rates on income or capital gains were reduced (I’ll deal with jobs issue in a separate blog).

Balanced-Budget Amendment to the Constitution

Presidential candidate Rand Paul has announced his support for a balanced-budget amendment (BBA) to the U.S. Constitution. This is an old idea, but a good idea. A BBA has been proposed in Congress as far back as 1936. In 1982 the Senate passed a BBA by a vote of 69-31, but it failed to get the needed two-thirds approval in the House. In 1995 a BBA passed the House by a 300-132 margin, but it fell one vote short of passage in the Senate.

Today we need a BBA more than ever. Historical budget data show that federal politicians have become increasingly irresponsible over the years. The bipartisan 19th century belief that balancing the budget was morally proper and economically prudent disappeared during the 20th century. As the chart below shows, from 1791 to 1929 the federal government balanced its budget in 68 percent of the years. But from 1930 to 2015, the government balanced its budget in just 15 percent of the years.

What changed in the 1930s? The unfortunate rise of Keynesian economics encouraged politicians to think that deficit spending helped the economy. Also, the 1935 creation of Social Security launched the government into the era of “entitlement” spending, which is spending that is on automatic pilot. Entitlement spending grows relentlessly year after year without politicians having to vote for the increases. It allows politicians to pretend that they are not responsible for the resulting deficits and debt.  

A legal cap on overall federal spending would be a better way to restrain the budget than a BBA. But either way, let’s hope that Paul can spur a renewed debate on fiscal control. We need it: despite today’s growing economy, the current administration recently proposed a budget that has half-trillion-dollar deficits as far as the eye can see. From a historical perspective, that sort of disregard for fiscal prudence is remarkable. In his 2014 book, America’s Fiscal Constitution, Democratic politician and financial executive Bill White argued that until recently, aiming for balanced budgets was part of an “informal constitution” that both parties understood.

Another 2014 book, A Nation Wholly Free, examined the drive to eliminate the federal debt under President Andrew Jackson in the 1830s. Author Carl Lane found,

Debt freedom, Americans in the Jacksonian era believed, would improve the material quality of life in the United States. It would reduce taxes, increase disposable income, reduce the privileges of the creditor class, and, in general, generate greater equality as well as liberty.

Those early Americans were right about debt freedom. A frugal government that balances its books helps to secure liberty and benefits average citizens. Hopefully, Paul and other reform-minded candidates can revive such sound fiscal thinking in Washington.

Republicans Are Poised to Raise Spending

Republicans control both chambers of Congress. Republicans trumpet their desire to cut federal spending and control the growth in entitlement programs, but a number of their actions over the last month suggest otherwise.  

First, Congress is supporting large increases to defense spending. The Budget Control Act (BCA) of 2011 sets defense spending at $523 billion for fiscal year 2016, but both chambers want to provide more funding while getting credit for honoring its previous promises. Each chamber authorized $96 billion in additional funding for 2016, using the Overseas Contingency Operations (OCO) slush fund to get around BCA spending caps. That exceeds the $58 billion requested by President Obama for OCO. It also exceeds the $74 billion spent in OCO for fiscal year 2015. In total, Congress will authorize $619 billion in defense spending for fiscal year 2016.

Second, Congress is set to increase spending with its repeal of the Sustainable Growth Rate (SGR). The SGR, passed in 1997, attempts to limit the growth in Medicare spending by cutting payments to doctors if Medicare grows too quickly. Historically, Congress has been hesitant to actually allow the payment cuts to go into effect, so it instead has delayed the cuts 17 times in 13 years.

House Speaker John Boehner and House Minority Leader Nancy Pelosi negotiated a deal in March to eliminate the SGR permanently. In exchange, small reforms to Medicare would be made. However, the deal would expands the deficit. The Congressional Budget Office estimated that the SGR repeal package would increase the deficit by $141 billion over 10 years.

The House  passed the deal with an overwhelming margin, 392–37, throwing fiscal restraint out the window. The Senate is expected to consider the legislation next week. Several senators are pushing for the Senate to pay for the bill before passing it, but their success is far from certain.

Third, Rep. Paul Ryan (R-WI), chairman of the House Ways and Means Committee, is suggesting that Congress could support higher spending than in its budget resolutions. Ryan voiced support for a deal between Congress and the president to hike spending. As then-chairman of the Budget Committee, he negotiated a similar deal in 2013 that increased spending for fiscal years 2014 and 2015, but promised that spending cuts would resume after that. At the time he said, “We are not turning the sequester [automatic spending cuts] off, we are just giving a little bit of short-term relief for the sequester.” Now, he is suggesting providing more sequester relief for fiscal year 2016, the first year following his original deal.

Ryan has a long history leading the House GOP Conference on budgetary issues. He likely represents the majority view on the issue. Further, the White House has said that it will not support spending bills that match the budget resolution amounts, suggesting that a deal needs to be struck. But Ryan’s statements basically concede the negotiations before they even begin. Higher spending is coming.

It is less than 100 days into the new Republican Congress, and Republicans are already disappointing fiscally conservative voters on spending restraint. Multiple actions over the last month suggest that Republicans may be no more committed to spending restraint than President Obama and the Democrats.

IRS Budget Cuts and Tax Filing

For taxpayers needing IRS help, this year’s filing season could be a nightmare. The Washington Post today reports on the long lines at IRS offices. The newspaper suggests that five years of Republican budget cuts are to blame, even though Democrats control the White House and, until recently, the Senate. But, whoever is at fault, the IRS commissioner is correct that his agency’s service is “abysmal.”

Let’s take a closer look at those alleged budget cuts. Using data from the OMB budget database, I split total IRS outlays into two activities: administration and handouts. Administration includes tax return processing, taxpayer help, enforcement, and other bureaucratic functions. Handouts are mainly refundable tax credits, particularly the earned income tax credit, child credit, and Obamacare exchange subsidies, which began in 2014.

The chart shows that the IRS budget for handouts has skyrocketed (red line). The IRS has become a huge welfare agency. Handouts quadrupled from $30 billion in 2000 to an estimated $121 billion in 2015. Handouts have spiked the past two years because of Obamacare exchange subsidies of $13 billion in 2014 and an estimated $29 billion in 2015. (Data for 2015 are the president’s estimates).

How about IRS administration costs? They have been relatively flat (blue line). They grew from $8.4 billion in 2000 to a peak of $12.3 billion in 2011, and then they dipped to an estimated $11.3 billion in 2015.

Familiar Yet Forgotten Tax Lessons from Ancient Greece and Rome

In Ancient Greece, “The politicians strained their ingenuity to discover new sources of public revenue… . The results of these imposts was a wholesale hiding of wealth and income, Evasion became universal, goods were seized, men were thrown into jail. But the wealth still hid itself, or melted away.”

–Will Durant The Life of Greece, Simon and Schuster, 1939. P. 66.

 In ancient Rome; “taxation rose to such heights that men lost incentive to work or earn, and an erosive contest began between lawyers finding devices to evade taxes and lawyers formulating laws to prevent evasion. The government issued decrees binding the peasant to his field and the worker to his shop until all his debts and taxes had been paid. In this and other ways medieval serfdom began.”

–Will, and Durant, Ariel. The Lessons ofHistory, Simon and Schuster, 1968.