Time out from the word wars for some policy

[SimpleDon]

Wonkblog in the Washington Post is climbing the list of must reads for me.

They have published an analysis of the various Republican tax plans.

The new Republican tax plan is just the Bush tax cuts on steroids

(Since Reagan) conservatives have treated it as received wisdom that cutting taxes as much as possible is the onefold path to economic and political nirvana. Well, make that cutting the top tax rate as much as possible. The idea, known as supply-side economics, is that the lower the top rate, the more top earners will work and invest, and the more growth there will be to—keep waiting for it—trickle down to everyone else. Never mind that this hasn't really worked in the past and couldn't even work in the present, at least not that much, now that the top rate is already pretty low. This is still an orthodoxy that Republicans are barely allowed to deviate from, and only then if they say three Hail Reagans as penance.

What happens is the same that happened with the Bush tax cuts. A tax cut by lowering the top tax rate while heavily weighted to benefit the 1% isn't enough for the investor class, they want more. Instead of just lowering the top income tax rates they then lower the taxes that virtually only the top 0.1% pay, capital gains, on stock dividends and the inheritance tax, leaving nothing for the middle class. This is problem that the Republicans now face and it is the same problem that George W. Bush faced in 2000. History repeats itself. Here is what George W. Bush did.

George W. Bush's big idea was that instead of trying to cut the top rate from 39.6 to, say, 28 percent, Republicans should settle for 35 percent. That way there'd be money left over—which is a bit of a misnomer since this was all deficit-financed anyway—for them to expand, among others, the Earned Income Tax Credit and the Child Tax Credit. That way there'd be something for the middle class. But did Bush get the high priests of the supply-side to agree to this? Well, by giving them the real goodies: a capital gains tax cut from 20 to 15 percent, a dividend tax cut from 39.6 to 15 percent, and an estate tax cut eventually all the way down to zero. That's why, even though this did boost middle-class after-tax incomes by 2.2 percent, it boosted the top 1 and 0.1 percent the most, up 5.6 and 6.9 percent, respectively. But that didn't stop the Bush administration from claiming that this was really about helping someone like a single waitress with two kids. Or stop the conservative Heritage Foundation from saying that, rather than being a fiscally irresponsible exercise in upward redistribution, the Bush tax cuts would actually pay off the national debt by increasing growth so much that revenue wouldn't fall that much. [This didn't happen by the way.]

That's the same big idea that Marco Rubio and Mike Lee have today. They also want to cut the top rate from 39.6 to "only" 35 percent, and use the money that could have gone into cutting it even further to expand the Child Tax Credit from $1,000 to $3,500 instead. Now that credit would only be refundable against payroll and income taxes—so if you didn't owe any, you wouldn't get any help—which is why most of its benefits would go to the middle and upper-middle classes. The nonpartisan Tax Policy Center estimates that, altogether, this plan would raise after-tax incomes 1 percent for the bottom 40 percent, around 2.4 percent for the next 50, 2.8 percent for the top 1, and 3.8 percent for the top 0.1. That adds up to a lot of red ink, though: $2.4 trillion more in deficits over the next decade, to be exact.

So they went back to the drawing board, and sketched something that would blow up the budget even more. Why? Well, the supply-siders decided that this plan wasn't conservative enough, if not an outright "triumph of liberalism." And it was going a lot more than cutting investment taxes to 15 percent for them to change their minds. That's why the new Rubio-Lee plan would cut capital gains taxes from 23.8 percent to zero, dividend taxes from 23.8 percent to zero, and the estate tax from 40 percent to zero. That's a lot of zeroes. Not only that, but it would also cut the corporate tax rate from 35 to 25 percent, stop taxing overseas earnings, and allow businesses to deduct all their expenses at once. Nobody's run the numbers yet, but it's more than safe to say that most of these new tax cuts would go to the top 1 percent. Just think about this. The Tax Policy Center says that getting rid of all investment taxes would, on average, give someone in the middle 40 to 60 percent a $66 tax cut—don't spend it all in one place!—while the top 1 percent would get $61,891 and the top 0.1 percent would get $401,554.

It is hard to imagine that this would do anything but make our historically absolute worst income inequality much worse. Without increasing real business investment any, while building ever larger asset bubbles resulting in more meltdowns.

This is our modern Republican party. Champions of the big guy.

(Sorry to interrupt your Iran letter and Hillary email discussions with this real economic policy thread. You can now go back to your favorite diversions, secure in the knowledge that conservative governance is hard at work, behind the scenes.)

 

[SimpleDon]

If I was Obama here is what I would do. I would propose that the corporate income tax would be eliminated, taken down to zero. There are a lot of good economic reasons why the corporate income tax is one of the most disruptive taxes for the economy. Entire corporations are run as tax hedges, not as entities that produce products for consumption. Playing games to hide profits in offshore tax havens, for example. The corporate income tax provides the major source of income for the tax lawyers and the Congressional lobbyists. We could do with fewer of each.

I would base this offer on the following conditions,

1. All realized capital gains, stock dividends and inheritances are taxed as personal income.
2. Offshore companies' US profits and the dividends paid to offshore stockholders will be subject to say 15% withholding.
3. That tax rates would be readjusted to make the proposal revenue neutral.
4. That income taxes would be subject to say 7 years of income averaging
5. We keep the payroll taxes but make them variable, dependent on inflation.
6. We fund Social Security and Medicare out of the general revenues, no fake trust funds.

Do you think that the Republicans would accept this?

I don't, for all of their complaining about our high corporate tax rates they are only in the business of increasing the incomes of the very wealthy. This proposal would increase the taxes that they pay while decreasing, actually eliminating income taxes for say, 80% of Americans.

 

[Loren Pechtel]

If I was Obama here is what I would do. I would propose that the corporate income tax would be eliminated, taken down to zero. There are a lot of good economic reasons why the corporate income tax is one of the most disruptive taxes for the economy. Entire corporations are run as tax hedges, not as entities that produce products for consumption. Playing games to hide profits in offshore tax havens, for example. The corporate income tax provides the major source of income for the tax lawyers and the Congressional lobbyists. We could do with fewer of each.

We actually come close to agreeing on something???

I agree corporate taxes should be zeroed but that's because they're passed through to the consumer--and thus end up being a regressive tax.

I would base this offer on the following conditions,

All realized capital gains, stock dividends and inheritances are taxed as personal income.

I disagree here.

I have no problem with taxing capital gains as ordinary income if the basis value is in constant dollars.

Dividends, yes. They should either be taxed as corporate profit or as individual income, not both. I find the latter to be the better answer.

Inheritances--you realize current inheritance tax is higher than the personal income tax?

Offshore companies' US profits and the dividends paid to offshore stockholders will be subject to say 15% withholding.

I'm not sure what the effect would be here. I rather suspect it would be bad.

That tax rates would be readjusted to make the proposal revenue neutral.

I would have to see what this ends up being.

That income taxes would be subject to say 7 years of income averaging

Applied to income that was really earned over time I fully agree.

]We keep the payroll taxes but make them variable, dependent on inflation.
We fund Social Security and Medicare out of the general revenues, no fake trust funds.

I would take a slightly different approach here: The payroll taxes aren't keyed to inflation, but rather SS/Medicare spending. Every year the tax rate is adjusted to cover the expected expenditure + any carryover from an imperfect estimate.

Do you think that the Republicans would accept this?

What are you smoking??

 

[jonatha]

Inheritances--you realize current inheritance tax is higher than the personal income tax?

But the first $5 million plus is presently completely untaxed. I believe SimpleDon would eliminate that...

 

[Draconis]

My impressions of tax cuts for higher earners is this: the money thus freed up is either squirrelled away and never seen again, or else it is spent: at first creating a spending boom, then quickly causing inflation for everyone. Either way, any economic benefit does not last long. If there is still a need for tax income, it is collected further down the income ladder.

 

[Loren Pechtel]

My impressions of tax cuts for higher earners is this: the money thus freed up is either squirrelled away and never seen again, or else it is spent: at first creating a spending boom, then quickly causing inflation for everyone. Either way, any economic benefit does not last long. If there is still a need for tax income, it is collected further down the income ladder.

The rich do not squirrel away money. They put it somewhere useful.

 

[arkirk]

My impressions of tax cuts for higher earners is this: the money thus freed up is either squirrelled away and never seen again, or else it is spent: at first creating a spending boom, then quickly causing inflation for everyone. Either way, any economic benefit does not last long. If there is still a need for tax income, it is collected further down the income ladder.

The rich do not squirrel away money. They put it somewhere useful.

Like the Caiman Islands slush funds? Or perhaps arms manufacturing....or finding Glen Beck a new job.

 

[Sarpedon]

I hate to pour cold water on this discussion, but the Republicans haven't had a decent tax plan since they lowered their standards to the point where Paul Ryan is considered a 'wonk.'

What is there to discuss?

 

[Loren Pechtel]

The rich do not squirrel away money. They put it somewhere useful.

Like the Caiman Islands slush funds? Or perhaps arms manufacturing....or finding Glen Beck a new job.

Even things like the Caymans the money doesn't just sit there, the banks invest it.