Why are Dems opposed to Trump's tax reform bill?

The Weekly Standard seems genuinely mystified.

Bringing U.S. corporate taxation in line with that of our global peers will spur the sort of broad-based growth that the Obama administration’s central planners could never achieve and that will benefit middle-income families quite as much as “the wealthy.” 

Ahem.

The first question was straightforward. Would they agree that if the US passed a tax bill “similar to those currently moving through the House and Senate,” GDP would be “substantially higher a decade from now”? Of the 42 economists polled, only one thought the Republican bill would boost the economy. The plurality said it wouldn’t, and the remainder were uncertain or didn’t answer.

Back to the Standard:

But the House bill, at least, contains some needed simplification: It cuts the number of brackets from seven to four, abolishes the estate tax, and gets rid of arbitrary breaks for such things as medical expenses, student-loan interest, and rehabilitating a historic home.

So. The promise of economic growth seems like a promise that might not materialize for the middle class or anybody else — but the loss of "arbitrary breaks" that help the middle class, for medical expenses and student loan interest — are pretty clear. The payoff may not come, but the sacrifice definitely will. This isn't that confusing.

The debate over the Bush tax cuts is over. The tax cuts won.

Today's New York Times:

It is a maxim in Congress these days: If high-profile legislation affecting millions of Americans is about to expire, deal with it at the last possible second, preferably with rancor. 

But a major exception is in the offing with the Bush-era tax cuts, which are set to lapse on Jan 1. Both parties in the House and the Senate are eager, perhaps even giddy, at the prospect of voting for their respective versions of an extension of the cuts this summer, well before the due date.

Now, the piece goes on to say that the Democratic package would drop the cuts for high earners and keep them for the middle class. But with a divided Congress and this president in charge, does anybody expect the Democratic preference will become law? Anybody?

(Crickets.)

Right. We've already seen this movie before. So maybe it's time to end the debate, make the tax rates permanent rather than dickering with them every two years, and start planning for a budget within those revenue limits. Politicians of every stripe and party should be clear with the public: You're going to keep your current tax rates, but you're not going to keep your current services. Something has to give.

The debate over the revenue side is over, and Democrats have lost. The sooner they and their allies admit it, the sooner they can prepare to shape the government that results from the revenue limitations. And the sooner they can decide what, exactly, they can live without.

The flat tax is bad

So says I in this week's Scripps Howard column with Ben Boychuk:

The flat tax is Republican-led class warfare. It makes the rich richer and the poor poorer, for no better purpose than making the rich richer and the poor poorer.

We have progressive taxation -- in which people with higher incomes pay a higher tax rate than those at the lower end of the scale -- for a reason: People on the low end are less able to pay. Flat taxes invert that logic, giving the rich a huge tax break and often burdening the poor.

The Tax Policy Center says a low-income family making $31,000 a year would lose its $5,147 tax return under Perry's plan, for example.

(Herman Cain's plan is worse. Nearly everybody making under $50,000 would see a huge tax increase.)

Perry's plan was unveiled the same day as a new Congressional Budget Office report showing economic inequality is widening in this country.

From 1979 to 2007, people in the richest 1 percent grew their after-tax income by 275 percent. The three-fifths of people in the middle class saw less than 40 percent income growth during the same period -- and the bottom fifth grew incomes just 18 percent.

The gap is getting bigger. Even before the recession, the middle class was being left behind. Perry's plan would exacerbate the problem -- and likely balloon the deficit even further.

"But I don't care about that," Perry says. He should.

In the new book "The Darwin Economy," economist Robert H. Frank points to research that high levels of income inequality are correlated to slow economic growth. "Larger shares (of income) for poor and middle-income groups were associated with higher growth rates," Frank writes.

Flat taxes burden the poor, make income inequality worse, and in so doing put a stranglehold on an already-strangled economy. Other than that, Mrs. Lincoln, how did you like the play?

Ben, in his portion of the column, points out that Perry's plan would let people opt to stay under the current tax structure. Fair point. The likely result of that is top earners would choose the flat tax and lower earners would stick with the current tax structure—meaning the Perry plan is to make the rich richer, and let the poor spin their wheels. That's not quite as awful as the picture I paint, but it seems kind of pointless—particularly in an era of ballooning deficits. Nobody's made a serious suggestion that I'm aware of that the problem with the economy is that rich people don't have enough money; I'm skeptical that such a plan would actually deliver good results for the rest of us.

Philadelphia: Does George Bochetto really pay more than half his income in taxes?

Stu Bykofsky, always the contrarian, uses his perch in the Philadelphia Daily News today to let the "Top 1 Percent" respond to the Occupy Wall Street protests. I found this excerpt to be particularly confounding:

How do the members of the "1 percent" feel? I asked three - Renee Amoore, Tom Knox and George Bochetto - each a local, unapologetic, self-made millionaire. They believe they already pay their "fair share" in federal taxes.

"I don't only pay the 35 percent," says Center City lawyer Bochetto, who was raised in an orphanage. "I also pay Social Security tax, state and city income tax, property tax. More than half of my income goes to the government. That's my fair share."

Due respect to Bochetto and his rise to riches from the orphanage. Good for him! But does he really pay more than half his income to the government? If so, he needs to hire a new accountant—immediately.

Why do I say that? Because the effective tax rate for the top 1 percent of earners—and this combines and includes federal, state, and local taxes—was 30.9 percent in 2008. Here's a chart from Citizens for Tax Justice:

Granted, this is a national overview that's several years old. And granted, Philadelphia can be a little tougher on the pocketbook than a lot of places. But is it so much tougher that Bochetto loses and additional 20 percentage points off his income? Really, really doubtful—especially since the Social Security taxes actually take a bigger bite out of the incomes of low-wage earners than they do millionaires like Bochetto.

We can argue about appropriate tax rates and the responsibility of the rich to help provide services and opportunities for the rest of us. But that argument should be grounded in reality instead of unchallenged hyperbole. Bykofsky didn't help anybody by quoting Bochetto uncritically today.

Did the Bush tax cuts increase or reduce revenue?

During my segment on the Morning in America show with Steve Hayward today, I tossed out the idea that—contrary to Laffer Curve expectations—the Bush tax cuts didn't actually increase revenue to government. That apparently resulted in some controversy after I left the air, with callers saying that I'm dead wrong on the topic.

The easiest response here is to note that before the Bush tax cuts were enacted in 2001 and 2003, the federal government had a surplus of money to fund its operations and pay down the country's debt. After the tax cuts were enacted, we started borrowing money on a full-time basis.

That's not proof on its own, of course, because we tacked on some new spending obligations during the Bush Era—most notably the wars in Iraq and Afghanistan, increased national security spending aside from those wars, and the expansion of Medicare benefits to cover prescription drugs.

So, hey, let's look at the revenues:

Bruce Bartlett writes: "According to a recent C.B.O. report, (The Bush tax cuts) reduced revenue by at least $2.9 trillion below what it otherwise would have been between 2001 and 2011. Slower-than-expected growth reduced revenue by another $3.5 trillion.

"Spending was $5.6 trillion higher than the C.B.O. anticipated for a total fiscal turnaround of $12 trillion. That is how a $6 trillion projected surplus turned into a cumulative deficit of $6 trillion."

But don't just take the CBO's word for it. Greg Mankiw, a Harvard economics professor, once called advocates of the lower taxes/higher revenue theory "charlatans and cranks": "I used the phrase 'charlatans and cranks' in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't."

Mankiw, of course, was one of George W. Bush's top economic advisers from 2003 to 2005. He wrote the paragraph above in 2007. And he was an advocate of the tax cuts—not because they raised revenues (he didn't believe they did) but because he believed they helped spur demand in the face of a challenging economy at the time. So: Not even Bush's own economic advisers who favored tax cuts believed they raised revenues. If that's the case, why should the rest of us?

On a related note: after I left the air Steve apparently chastised me a bit for not providing a top tax rate that's appropriate in a market economy like ours. Fair enough, I guess, but I think it's something of a mug's game to pick a number and stick to it. Different tax rates will be appropriate at different times, depending on the economy, the needs of government—being at war, for example, is more expensive than not being at war—and so forth. I'm not interested in confiscatory levels of taxation—unlike some liberals, I don't hearken back to the Eisenhower-era 90-percent marginal rate on top earners—but I also think we're a long way from there. Perhaps the answer "it depends" isn't rigorous enough, but it also has the advantage of being true.

About food stamps and millionaires

At National Review today, Robert Verbruggen urges the federal government to save (admittedly minimal) money by tightening standards for the food stamp program. Spending on the program, he says, has quadrupled during the last 10 years and standards are too loose:

This has created some truly ridiculous situations — such as the case of a Michigan man who won $2 million in the lottery, tied it up in investments, and received so little income from them that he was still eligible for food stamps. Until a recent policy change, food-stamp eligibility in the state was based solely on income, with no consideration of savings accounts, investments, or other assets. Though the policy was set at the state level, federal taxpayers picked up the tab.

But how many millionaires are gaming the system to get food stamps? I'm guessing maybe ... this guy. Maybe there are a few others out there. But I'll pull a number out of my posterior and guess that 99.99 percent of all food stamp recipients are not millionaires. And I defy anyone to prove otherwise.

This is in keeping with standard conservative rhetoric—going back to the time of Ronald Reagan's legendary "welfare queen"—that the people who receive safety benefits are somehow secretly well-off people who don't need the government largess. (It's only been a couple of months since National Review tried the same tack against a school-lunch program in Detroit.) That seems unlikely to be as effective an argument as it once was: Formerly middle-class suburbanites are a huge portion of the new food-stamp recipients. But the policies conservatives advocate aren't really designed to keep millionaires from getting food stamps—they're designed to keep poor people from getting food stamps.

Here's how you can tell: Verbruggen's example—a millionaire escapes his responsibilities because he receives his income not as "income" but as interest on investments—is also the fundamental scenario underlying President Obama's advocacy of the "Buffet rule." Some millionaires actually do pay lower tax rates, overall, than most middle-class folks because they receive most of their living money from capital gains, which are taxed at a much lower rate than ordinary income. Yet I doubt very much that Verbruggen would advocate increasing the tax rate on capital gains because of this situation.

Take a guess: Are millionaires more likely to avoid paying higher tax rates because of investment income, or more likely to use that income as a loophole to apply for food stamps? And which activity has a greater social impact?

This is one reason there is an Occupy Wall Street movement: Conservatives will defend millionaires from paying the same tax rates on investment income that you do on your work income—but they'll use that same investment income as a justification for undermining the safety net for the poor. It's almost as if Republicans were the party of the rich.

Max Boot still sounds like Paul Krugman

I noted recently that conservative hawk Max Boot was starting to sound like Paul Krugman. Today, he again makes the economic case for leaving the military budget untouched:

If the Pentagon is forced to slash a trillion dollars during the next decade—which would amount to an 18 percent reduction from the Obama budget projections released earlier this year—the Committee staff projects the total size of the Army and Marine Corps could fall from 771,400 personnel today to just 571,000, a 25 percent reduction that would make it impossible to respond to a range of different contingencies around the world. Some 200,000 soldiers and Marines who signed up to serve their country will be fired—and many of them will be hard put to find work at a time when the national unemployment rate is over 9 percent and the unemployment rate for young Iraq and Afghanistan veterans is believed to be over 20 percent. (For wounded veterans the rate is said to be over 40 percent.) We would not only be breaking faith with these heroes but also jeopardizing our security—and that of our allies—in the process.

Again, that's the Krugman argument against recession austerity—that reduced budgets kicks thousands and thousands of public employees off the payroll into an unwelcoming job market. Soldiers, sailors, and marines are to be exempt from this process because they provide us security. Police and firefighters, apparently, don't.

But wait. There's also our security. What valuable security interests do we have that require 771,400 soldiers and Marines that 571,000 won't? Boot doesn't answer that question—there's always danger out there, nebulous though it may be. Instead, he relies ever-more-heavily on the economics argument, even noting that cutting a number of weapons programs will result in private-sector layoffs:

Cutting all these programs will result in even more job losses—the report projects at least 25 percent of the civilian defense workforce will have to be furloughed, resulting in the elimination of 200,000 jobs.

Again: The argument applies just as well to non-defense sectors of government spending.

Do we owe our veterans something more than unfettered capitalism? Maybe. Do we need to have a rough-and-ready defense force ready to protect our country? Sure. But the government is tightening its belt. We have to live within our means—and maybe that means giving up the ability to invade countries on the other side of the planet.  But if the primary argument against defense cuts is that it will harm the economy, and the unemployment rate, then that argument applies to the rest of government as well. Our military is special—but it's not that special.

Millionaires can afford a tax hike: Some correspondence

Nothing makes middle-class conservatives angrier than suggesting millionaires should be paying more in taxes. One admires such folks for sticking so rigorously to a principle that won't benefit them in the least, but still one wonders—why?

Anyway, I've heard from you in blog comments and at Facebook. I also received a couple of letters on the topic overnight. The first, from John Senuta in Wickliffe, Ohio:

Hey Joel here is another way to look at it .The poor that don't want to
work and live off you they look at you as RICH and they want alot more of your
money to spend.They want your TAX rate to go to 75% so they could live
better,you can afford it RIGHT???? 

And by the way a portion of your phone bill pays for a cell phone for them
to use FREE.Do you have a cell phone????How much are yoiu paying???Let dig a
little deeper into your pocket and help them out....

There's a presumption here that "the poor" are a bunch of lazy panhandlers trying to get their hands into your pocket. But of course, there are four job-seekers for every job opening in America today. And the money raised from a millionaire's tax, in this case, would go towards programs like tax breaks for businesses to hire employees.  So that people can work private-sector jobs. It's shifting the tax burden ... to people who can afford it.

H Kennedy, meanwhile, tells me that my thinking is "narrow and faulty based on a short coming socialist point of view." An excerpt:

Of course, you give no thought to the fact within our present tax structure the top 1% of wage earners already pay 39% of taxes collected. And, I might add, the top 50% of earners pay 97% of the taxes. 97%, that means the entire remaining 50% pay only 3% of all taxes. Yet, avail themselves of all the benefits provided by the greater taxes collected from the others. Perhaps it is your concept is those top 50% should pay 100%. That way all the others shouldn't pay anything. 

As well, many of those 3% not paying any revenue into the system will get 'refunds' under the Earned Income Tax Credit' or Child care Credits. Refunds, I might add, from the taxes paid by those evil rich. 

Additionally, have you given no thought that the 'millionaires' are already paying more taxes? They are paying more in their communities in Real Estate Taxes due to the more and expensive 'upper class' homes. Also, more taxes in licensing fees, sales taxes, and personal property taxes for the cars, boats, etc. they own. So, these greater tax payments support the local fire, police, schools, and support services. And too, pay more to keep the streets, bridges, sidewalks, infrastructure, etc. in their towns and cities.

So, Pay More???? 47% of the population isn't paying anything. Yet, they use those fire, police, EMT, personal. They travel those street, roads and bridges. Those "not so fortunate" share in all these with any cost sharing all due to the payment of the 'evil rich'.

Some mistakes that Kennedy makes:

• I don't think I've said the rich are evil.

• It's incorrect that 47 percent of the population "isn't paying anything." Now: A good portion of the population doesn't pay income taxes, it's true. But they do pay other taxes—FICA, for example, to the feds, plus all manner of local sales taxes and other fees—that go to support the very services Kennedy says only the rich are paying to support.

• As Ezra Klein notes in the link on the previous bullet point, Citizens for Tax Justice (PDF) has added up all the federal and state and local taxes paid by each income group. And this is what they've found:

The Top 1 percent earns 22.2 percent of all income in the United States—and pays 23 percent of all taxes: federal, state, and local combined. Despite what Kennedy says, the rich are not unduly burdened.

And it suggests we can do what I've been saying all week: Raise taxes on the millionaires. They can afford it.

Federalist 30-36: This Government Was Made For Taxin'. And That's Just What It'll Do.

The farther I read into the Federalist Papers, the more I'm convinced the Tea Partiers only know about half their history.

Back up: I didn't start reading the Federalists with the aim of debunking the Tea Partiers. But it's impossible to read historical documents about the nature of governance in America when there's a coalition of folks out there who so strongly identify with those historical personages.

Their narrative, I believe, goes something like this: America was born, essentially, in a tax rebellion. And the Founding Fathers then created a limited government in order to avoid oppressing the people either with burdensome taxes or directly tyrannical rule. And maybe, just maybe, if the tax burden gets too large -- well, maybe, Americans have the right to resort to rebellion again.

Like I said: I think that's only partly right. Because the Federalist Papers -- the documents we most use, aside from the Constitution itself, for insight into the Founders' thinking -- seem to favor a rather more expansive vision of government than the Tea Party narrative would suggest.

I already mentioned this theory back in Federalist 15. But it's' greatly reinforced by reading Alexander Hamilton in Federalist 30 through 36.

Why? Because those chapters are about the topic nearest and dearest to the hearts of Tea Partiers: Taxation.

And get this: Hamilton was arguing that the power to tax was a central reason -- maybe the central reason -- the Constitution needed to be passed. And not just any power to tax: Unlimited power to tax.

This kind of goes against the narrative we hear lately, but there it is in Hamilton's own words: Without unlimited power to tax, the government will be a weak and ineffective thing.

How is it possible that a government half supplied and always necessitous, can fulfill the purposes of its institution, can provide for the security, advance the prosperity, or support the reputation of the commonwealth? How can it ever possess either energy or stability, dignity or credit, confidence at home or respectability abroad? How can its administration be any thing else than a succession of expedients temporizing, impotent, disgraceful? How will it be able to avoid a frequent sacrifice of its engagements to immediate necessity? How can it undertake or execute any liberal or enlarged plans of public good?

Now, Hamilton was speaking from some experience here: A reason the Articles of Confederation were considered to have failed was that the Congress under the articles couldn't raise its own money -- it had to ask the states, essentially. And the states weren't always forthcoming. That left the United States unable to expeditiously pay its debts from the Revolutionary War.

Here's where honesty compels me to note, though, that Hamilton's call for unlimited power of taxation -- and I'm serious here: he wanted it to be unlimited -- didn't seem to be in the service of creating a welfare state, but rather to pay for the common defense. (Federalist 34: "The expenses arising from those institutions which are relative to the mere domestic police of a state, to the support of its legislative, executive, and judicial departments, with their different appendages, and to the encouragement of agriculture and manufactures (which will comprehend almost all the objects of state expenditure), are insignificant in comparison with those which relate to the national defense.")

But unlimited power is, of course, unlimited power. And that's what Hamilton was arguing for. Here he is in Federalist 31:

As the duties of superintending the national defense and of securing the public peace against foreign or domestic violence involve a provision for casualties and dangers to which no possible limits can be assigned, the power of making that provision ought to know no other bounds than the exigencies of the nation and the resources of the community.

As revenue is the essential engine by which the means of answering the national exigencies must be procured, the power of procuring that article in its full extent must necessarily be comprehended in that of providing for those exigencies.

As theory and practice conspire to prove that the power of procuring revenue is unavailing when exercised over the States in their collective capacities, the federal government must of necessity be invested with an unqualified power of taxation in the ordinary modes.

This, of course, was horrifying to the antifederalists. And -- not to drive the point home with too much earnestness -- it was horrifying to them in a way that today's Tea Partiers would find very familiar. Here's "Brutus" writing in Antifederalist 32:

We may say then that this clause commits to the hands of the general legislature every conceivable source of revenue within the United States, Not only are these terms very comprehensive, and extend to a vast number of objects, but the power to lay and collect has great latitude; it will lead to the passing a vast number of laws, which may affect the personal rights of the citizens of the states, expose their property to fines and confiscation, and put their lives in jeopardy. It opens a door to the appointment of a swarm of revenue and excise collectors to prey upon the honest and industrious part of the community, [and] eat up their substance. . . .

If you're a Tea Partier, that sounds like a fairly accurate description of what happened, I suppose.

But the antifederalists were wrong, to some extent. They were concerned, it seems, with preserving a fair measure of state sovereignty -- "state's rights" you might say -- and their biggest worry about the Constitution's grant of unlimited power to tax was that it would, over time, deprive the states of their power to tax. It hasn't really worked out that way.

In the end, Hamilton rejected every suggested limitation to restrict Congress' power to tax. The only real check, he suggested, was the voters themselves -- and their ability to send to Congress wise people who would understand how to balance the needs of government against the income of its citizens.

There is no part of the administration of government that requires extensive information and a thorough knowledge of the principles of political economy, so much as the business of taxation. The man who understands those principles best will be least likely to resort to oppressive expedients, or sacrifice any particular class of citizens to the procurement of revenue. It might be demonstrated that the most productive system of finance will always be the least burdensome. There can be no doubt that in order to a judicious exercise of the power of taxation, it is necessary that the person in whose hands it should be acquainted with the general genius, habits, and modes of thinking of the people at large, and with the resources of the country. And this is all that can be reasonably meant by a knowledge of the interests and feelings of the people. In any other sense the proposition has either no meaning, or an absurd one. And in that sense let every considerate citizen judge for himself where the requisite qualification is most likely to be found.

Two-hundred years later, the only question I can ask is: How's that working out for ya?

Fun with math: Obama's health care 'tax increase' on the middle class

Daniel Foster points to this Hill story, showing that Obama's health reform bill will actually sock the middle class with tax increases. The bolded parts are Foster's emphases:

Taxpayers earning less than $200,000 a year will pay roughly $3.9 billion more in taxes — in 2019 alone — because of healthcare reform, according to the Joint Committee on Taxation, Congress' official scorekeeper for legislation.

The new law raises $15.2 billion over 10 years by limiting the medical expense deduction, a provision widely used by taxpayers who either have a serious illness or are older.

Taxpayers can currently deduct medical expenses in excess of 7.5 percent of their adjusted gross income. Starting in 2013, most taxpayers will only be allowed to deducted expenses greater than 10 percent of AGI. Older taxpayers are hit by this threshold increase in 2017.

Once the law is fully implemented in 2019, the JCT estimates the deduction limitation will affect 14.8 million taxpayers — 14.7 million of them will earn less than $200,000 a year. These taxpayers are single and joint filers, as well as heads of households.

"Loss of this deduction will mean higher taxes for 14.7 million individuals and families making under $200,000 a year in 2019," Sen. Chuck Grassley (R-Iowa) told The Hill. "The new subsidy for health insurance would not be available to offset this tax increase for most of these households."

A little more math here is helpful, though: 14.7 million taxpayers will lose the deduction; they'll get hit with a collective $3.9 billion in new taxes in 2019. That means each taxpayer (and taxpaying household) will see an average tax increase of ... $26.

Clearly, socialism is bringing confiscatory tax rates to America.

Funny, though, Foster's excerpt skipped The Hill's line right after the Grassley quote:

The healthcare law contains tax breaks for individuals purchasing health insurance, but the breaks phase out for those making $88,000 a year.

So: The average tax increase of $26 a year will apply to families making between $88,000 and $200,000 a year. Even if you're on the low end of that scale, that average $26 increase will consume roughly three-tenths of one percent of your income!

I suppose that technically, this violates Obama's promise not to raise taxes of people making less than $250,000 a year. In reality, I'm not sure they'll notice it all that much. Unless organizations like The Hill continue to force readers to do the math to put these things in context -- and let Republicans needlessly scare the middle class.

UPDATE: The back of the envelope is no match for a calculator. I failed to carry a "zero" somewhere: Actual numbers are a $265 a year increase for those 14.7 million people. That's a bigger and more-noticeable number, to be sure. Still three-tenths of one percent of the $88,000-a-year income though. (How the hell did I make that mistake?)