Talking Sense About The Tax Code - And Why Cutting Government Is Idiotic

The Wall Street Journal Review section of two weekends ago featured a lot of ideas about revamping the income tax code, very few of which made any sense.  All one beheld was the smell of desperation to find excuses to escape the nation's fiscal responsibilities, usually by making the tax code simpler, say by replacing the multi-layered progressive income tax with a VAT (value added tax) . This, we are informed, is just a "consumption tax on goods and services that is used by almost all of the world's richest market democracies". Well, yeah, and if you visit those market democracies you will quickly see why most of their citizens are not enamored of it.

The one thing the first author (Reihan Salam) at least got right, is that the population has grown too much to talk of shrinking or cutting government. In fact, the current U.S. population is nearly THREE times the size of the population when the income tax arrived (under the 16th amendment) in 1913. At that time a mere 338,000 returns were filed compared to over 145 million today.

As populations grow, it ought to be obvious that their needs also grow, including demands for supporting infarstructure - whether for schools, highways, health care (including vaccinations for TB, smallpox etc.), or federal assistance in case of disasters. While it is very easy (and stupid) for some - like hardcore Libertarians- to take individualism to preposterous heights, say after a major hurricane hits, the truth is they'd also be begging for gov't help if their lives, homes were in ruins. This is especially so where whole cities have lost critical services, including water and electricity, as New Orleans did in the wake of Hurricane Katrina in 2005.

Thus, "the federal government spends far more today than it did in Woodrow Wilson's day.... so we have little choice but to raise more revenue than we did back then."

But it is also true to say we wouldn't need as much extra revenue if we kept our noses clean as opposed to butting into other nations' affairs when they don't specifically concern us. For example, Viet Nam was a civil war between North and South Viet Nam that didn't concern us. Most Americans with any sense knew it at the time and that the much ballyhooed "domino theory" of communist takeover was bollocks. LBJ even had to invent a pretext for war by confabulating the Gulf of Tonkin incident as a basis. We ended up with over 50,000 killed and blowing over $269b in tax money that could have been used to fund many other more constructive projects. And what happened at the end? Viet Nam is one of the 19 odd nations that stand to benefit when the Trans Pacific Partnership trade deal is finally approved.

Money wasted!

The same can be said of the $3 trillion pissed into oblivion on account of Gee Dumbya Bush launching the Iraq invasion and war. An even worse aspect is that he didn't even increase taxes to pay for it!  He told people after 9/11 to "go out and shop".

Now, what about replacing the income tax with a VAT?  This is not really a sensible plan. For one thing, this tax strikes at consumption, on which nearly 75% of our GDP depends. Thus, if you tax consumption as hard as Salam suggests (to essentially replace 120 million of today's 145 million income tax returns) the impact will be that people will spend much less than they are now. (Of course, I am all in favor of people spending less, but not that much less that it leads to a recession - affecting job creation).

The second problem is that those "further down the scale" will be clobbered because much less income will remain after  paying the VAT than for the wealthy spenders.  A 10% VAT will leave a billionaire with $9b to spend, while for a $20,000 WalMart store clerk only $18,000 will be left- so he or she is even closer to the margins. Even Salam agrees some kind of "offset" is needed to help those lower down the income scale and that a "truly effective VAT would be highly regressive".

Thus we come to the third problem which is how to implement workable offsets.  Assorted solutions have been offered that are deleterious in the end. One such, from Columbia Law School Prof. Michael J. Graetz (ibid.) is "a large payroll tax break for all workers earning $40,000 or less"

The key problem with this is that it is payroll taxes that support Social Security - which is already being hammered with 10,000 a day enrolling in the system.  Do we really really want to help lower wage workers by cutting payroll taxes- so they can buy more without penalty today - but be left penurious in their old age from S.S. cuts? That seems not to be a solution that makes any rational sense.

Lastly, it may be more a matter of perception than anything else that makes Americans believe they are overtaxed. As Salam himself observes, "most income tax filers don't actually pay that much in income tax".  Why the misperception? Well, because of the endless stream of misinformation and disinformation spouted by the likes of FAUX News and Lush Limbaugh. As Hitler once said: "If you repeat a lie often enough the people will believe it."

The WSJ piece goes on to note (ibid.):'

"The Tax Policy Center estimates that roughly 45.3 percent of tax returns won't actually owe any federal income tax this year. Many will pay a negative tax rate based on their eligibility for various tax credits."

This despite the fact the federal gov't is revenue deprived (for all its assorted commitments) by nearly a trillion dollars.

But make no mistake, while a VAT may indeed impede congress' ability to "micromanage the economy through the tax code", it is still not the answer.

With Social Security Disability Nearly Broke - The One Lesson That Should Have Been Learned

According to The Wall Street Journal ('U.S. Disability Program Nearly Broke', July 23, p. A4) while the long term solvency of Medicare and Social Security "has been improved slightly" (actually Medicare by 13 years, thanks to Obamacare, and S.S. by 1 year to 2035) the Social Security Disability Program is due to "exhaust its reserves next year". That means if nothing is done, a 19 percent cut in benefit payments will be triggered.

Treasury Secretary Lew has proposed a re-allocation of payroll taxes from the retirement trust fund to the disability insurance trust fund to bolster it. This would require congressional approval, but the Republicans - who control both houses of congress - are in no mood to cooperate. According to the Denver Post yesterday they are demanding cuts to Social Security (the retirement part)  to move forward.

In terms of the retirement program proper - which must be distinguished from disability insurance - it ran a $55 billion surplus last year, according to the WSJ, and this "stemmed entirely from interest on reserves". But, excluding interest, the general program ran a $74b deficit last year and a $76b deficit the year before.  As a share of taxable payroll, "the program is projected to run a deficit of 1.3% this year, the largest ever faced by the program".

Interestingly, this would be nearly the re-allocation proportion needed to salvage the disability program in order to prevent those 19% cuts. Adding up those two actual deficits we get $150b, or about $20 b less than the  $170b removed from the system via the "payroll tax holiday" over 2012-13 and passed by congress including insane Demos.

As I complained about at the time (post, Jan. 15, 2013):

"the payroll tax holiday never should have been introduced in the first place! Like the middle class Bush tax cuts, they have only dug us deeper into a hole and made it more possible for ardent, anti-Social Security repukes to hop on their bandwagons to demand S.S. privatization or underhanded benefits' cuts via the dastardly "chained CPI".

This also has to do with the fact that millions more beneficiaries piled into the retirement program as well as millions into the disability insurance program - often people who had lost their unemployment insurance and had no place else to go.

The Democrats, the supposed "party of the people",  are also largely to blame for this payroll tax holiday nonsense since without their votes it couldn't have gone forward.  As Richard Eskow noted in an article at the time of my blog post ( 'The Long Game: Payroll Taxes, Hostage Taking and Social Security' ):

"By proposing to expand and extend this 'holiday,' Democrats have bypassed more efficient ways to help the economy, and have once again endangered Social Security"

Eskow's reference was to the fact the payroll tax holiday removed $170 b from the system and lowered its ability to cover costs of millions of new beneficiaries, many of them seeking Social Security Disability. And it wasn't as if everybody was suddenly surprised by the retiring boomers pouring into the system and the ancillary demands for disability. Most serious financial mavens knew this was coming, as well as the feckless politicos - always ready to posture for temporary support.

Now, of course, the 'chickens' have come home to roost, and the Demos - as per their earlier stupidity of extending the Bush tax cuts (then having to face budget "sequesters")-  must go cap in hand to the Repukes to help them out, hoping that out of the goodness of their hearts they'll approve a rescue without any strings.

Of course, this is a pipe dream. The Reepos will play this for everything they can and demand their pound of benefits flesh while lecturing the Dems on the "unsustainability" of both Social Security and Medicare. No kowtowing to the Reeps would have been necessary if the Dems had just had the foresight to see that with millions opting to apply for disability it was folly to take a payroll tax "holiday" (cutting the 6.2% contribution to 3.1%).

Will the Democrats learn an important lesson on payroll taxes for the future? Doubtful,  so long as they value political posturing above the welfare of citizens.

See also:

http://brane-space.blogspot.com/2011/11/most-loathsome-destructive-tax-cut-so.html