Wednesday, December 19, 2012

The Benefit and The Burden

The Benefit and The Burden: Tax Reform, Why We Need It and What it Will Take, Bruce Bartlett, (NY: Simon & Shuster, 2012), 258 pages, $26.00

In the opening sentences of the Introduction author Bruce Bartlett tells readers the Federal tax code needs regular attention like a garden needs weeding. Even though the present weedy tangle can only be changed by Congress, Bartlett hopes his book on “the fundamentals of taxation at the simplest level” will help inform the public in the debate.

Bartlett uses the introduction to tell readers he wants to be fair and so confesses a short list of biases. He accepts the need for Federal taxes to take a higher share of GDP and recommends taxing consumption to get it. He believes tax expenditures to be the equivalent of spending. He supports a Value Added Tax but not the Alternative Minimum Tax.

The book has 24 chapters, none of them long and each confined to a single topic or focus. Bartlett labels the first nine chapters, the Basics, and starts with a brief history of federal income taxes and the legislative process of getting a tax bill through Congress.

Chapter 3 reviews many definitions of income that sometimes include and sometimes exclude capital gains, rents, dividends and interest. Bartlett cites economist Irving Fisher who believed interest was not income but the discounted value between present and future consumption. Others have argued it should be consumption and change in net worth, meaning taxes on unrealized capital gains.

Chapters 4 through 8 explain the mechanics of marginal, average and effective tax rates and their affect on tax revenue, economic growth and the business cycle. While explaining the mechanics he finds the wealthy have low average tax rates and then contradicts Senator McConnell and others who claim that tax cuts raise revenue in the long run. The Bush tax cuts reduced federal revenues $2.8 trillion from 2002 to 2011.

Bartlett turns a dubious eye on tax incentives promoting saving and growth, which he suggests do not guarantee more savings, especially if the government has to use them to pay for deficits. The question of progressive taxes gets a 6 page review where he shows progressive rates schedules do not guarantee progressive taxes when there are many exemptions and deductions.

Chapter 9 compares U.S. taxes to other countries. Many other countries have a higher ratio of taxes to Gross Domestic Product than the U.S. He provides tables to compare growth rates with the ratio of taxes to GDP, which also demonstrates that low taxes do not necessarily mean high growth and vice versa. He chides Americans for their provincial views on taxes. Other countries tax consumption more than the U.S. and make use of wealth taxes and environmental taxes that Americans refuse to consider.

The second section of eight chapters identifies and reviews problems of United States taxes: tax expenditures and tax treatment of health care, housing, state taxes, charitable contributions, capital gains, corporations, and tax administration. The tax expenditure chapters take on a disgusted tone describing how current practice erodes the tax base and primarily helps the well to do who save more with deductions from income in high tax brackets.

Bartlett cites health care as the biggest tax expenditure that treats employer sponsored health care as a business expense but not taxable for employees. Where other countries tax their citizens to provide health care, our Federal government disguises their spending through a tax deduction to business. He gives a federal income tax loss of $184 billion and another $250 billion of loss in payroll taxes, although he does not cite his numbers.

Bartlett reminds readers that tax expenditures make things like health care and housing artificially cheap and encourage over use. Deductions for mortgage interest and property taxes do so twice by encouraging more home building and then encouraging local governments to pad local projects paid with property taxes home owners can deduct from their federal taxes, but no benefit to renters.

The last section of seven chapters looks at the future. Bartlett does some review of previous tax reform and reform proposals like the flat tax, a national sales tax proposal, the Herman Cain nine-nine-nine and a few more, but reminds readers that tax cuts alone are not reform. A whole chapter makes the case for more federal revenue, but readers get a big dose of pessimism and a summary of views on the consequences of unsustainable debt.

Two chapters outline the case for and against the Value added tax, but the material includes so many political objections along with a variety of pros and cons these pages reads like a digression or a diversion. Finally, it is on to the Bush Tax cuts and what to do. He gives a listing of the many Bush tax cuts and some archival background before totaling $3 trillion added to Federal debt and declaring the failure of the Bush tax cut policy. Bartlett also gives an unfavorable review of the anti-tax Republicans and Grover Norquist before declaring they will probably be able to prevent tax reform. He gets more pessimistic by suggesting tax reform will be delayed until we have a Republican president and a Democratic Congress.

The book provides basic information to understand taxes and the larger economic issues they raise, but the book is not elementary. Previous effort working and experimenting with the arithmetic of tax calculations for a variety of personal income situations should be considered a minimum prerequisite. All his chapters end with a long list of further reading that allow advanced study for those with the interest.

Bartlett has had a long career in taxes, especially in Congress where he helped draft the Kemp-Roth tax reform back in 1986, but his knowledge and experience do not make him optimistic. He makes recommendations to expand the tax base and raise revenue to meet the needs of spending that “can’t be cut,” but tells readers how and why entrenched political attitudes will prevent them. The book feels sour in a way that befits the public mood for a book published in the year of the fiscal cliff. The fiscal cliff will pass but for better or for worse I am certain the Benefit and the Burden will continue to be relevant, I’m afraid for quite a few years. In that we can be sure Mr. Bartlett will agree.

Thursday, December 6, 2012

The Fiscal Cliff and Social Security

Post election analysis has turned to discussion of economic issues put off before the election. Health care expansion will go forward and tax and budget disputes will be settled by default with the fiscal cliff, or by compromise in the Congress. A recent article by Robert J. Samuelson [“It’s the Welfare State, Stupid,” Washington Post, November 12, 2012] includes the claim that Social Security and Medicare are part of the welfare state that undermines incentives to work and devalues “earned success.” He thinks these shortcomings justify using Social Security as a target for cut backs in the fiscal cliff settlement.

In spite of the fact that all of us working for a living have to pay social security taxes under threat of IRS reprisal, the claim that Social Security recipients receive welfare subsidies requires explanation in light of the many changes to Social Security passed by Congress. Start with the steep Social Security tax increases Congress passed during the early Reagan years. Along the way the retirement age was raised and two full years of benefits were canceled, and then Congress started to force social security recipients to pay taxes on their benefits. In 2011 taxes start for single people who earn other income greater than just $25,000, and for joint filers at just $32,000. Recently there were unfavorable adjustments to the cost of living formula. The idea social security recipients receive welfare subsidies after as many as 50 years (50=67-17) of payroll taxes require financial examples and documented proof that Samuelson fails to give.

We might also remind Mr. Samuelson that the social security tax has an income cap at $110,100, meaning that those with very high wages have a tax preference: their tax rate drops to zero after the cap. While the rest of us pay 7.65 percent on all our wage income the wealthy get all wages over the cap exempted. If he thinks this preference should be eliminated as an unjustifiable subsidy to the wealthy he did not say.

Medicare and Medicare payroll taxes were added to Social Security in the Johnson Administration because more and more private insurance companies refused to insure retired people who lost their tax subsidized employer health care benefits. Now Samuelson suggests Medicare recipients are getting a subsidy they don’t deserve when all those receiving employer sponsored health care share in tax subsidized health care they do deserve.

After attacking Social Security and Medicare Samuelson concludes Social Security benefits undermine work incentive that “devalues” the work ethic. He tells readers “If eligibility were higher, people would work longer.” What Mr. Samuelson would find if he bothered to look at the U.S. Bureau of Labor Statistics, Current Population Survey is that older people are already working longer, much longer, and they have been doing so for two decades.

Americans over the age of 55 entered the labor force at a growth rate of 3.49 percent per year over the years 1990 to 2011, a rate one and half percent above their population growth rate in the same years. Those from the ages of 25 to 54 entered the labor force looking for work at a growth rate of .68 percent per year for the years 1990 to 2011, a rate more than two percent below their population growth rate in the same years.

People entering the labor force at any age have no guarantee of finding work: they could find employment or be unemployed. Unemployed Americans over the age of 55 had an annual growth rate of 7.03 percent in the years 1990 to 2011, more than double the growth rate of those aged 25 to 54. If Americans at or near retirement age lack incentives to work because the benefits of Social Security make life so easy then Mr. Samuelson needs to tell us why so many people at or near retirement age keep working, or looking for work, so long and so hard.

Mr. Samuelson did not question if those over age 55, but not eligible for Medicare, keep working because they can only get affordable health care through a job. He did not question if the gradual end of defined benefits pension plans and replacement with defined contribution pension plans makes it harder to retire and gives incentives to work longer. He did not question why older Americans need incentives to work longer when younger Americans struggle to find self supporting jobs. The rest of us should question whether Mr. Samuelson wants to make excuses to cut Social Security, or find solutions that work for everybody.