Statism and cronyism

An Empire of Taxation

The government role in Obama’s budget looks like something last seen in 17th century Europe.

By

Daniel Henninger

Feb. 4, 2015 7:16 p.m. ET

264 COMMENTS

original article

The president’s annual budget reminds the Beltway tribes of what they do—tax the country, distribute revenues to their allies, and euphemize it as a budget. With his 2015 budget, Barack Obama at last makes clear his presidency’s reason for being: to establish an empire of taxation.

Commenting on Mr. Obama’s nearly $4 trillion budget, Jared Bernstein, a former policy adviser to Vice President Joe Biden , told the New York Times : “It’s a visionary document and basically says, ‘You’re with me or you’re not,’ and we can have big philosophical arguments about the role of government.”

He is right. For the Obama presidency that is what it has always been about: You’re with me or you’re not. The government role reflected in this budget looks less like a 21st century American institution than a system last seen in 17th century Europe, in which a leader defines national wealth by handing out dispensations, emoluments and punishments.

The administration’s infliction of punishment deserves special note, most recently what the Obama Justice Department did this week to Standard & Poor’s, the bond-rating agency.

S&P had been very public in saying the Justice Department’s investigation of the company was political payback for its 2011 downgrade of the U.S.’s credit rating. This week S&P agreed to pay the government a mind-boggling settlement of $1.5 billion, while pointedly withdrawing its charge of political retribution. What we have here is the creation of a political crime, heretofore unrecognized in the U.S., known as lèse-majesté, or insulting the majesty of the sovereign.

House and Senate Republicans will submit their own budgets in coming weeks. News analysis of the Obama budget admits that its spending and tax priorities are a “utopian vision” (the New York Times). But it argues that congressional Republicans may eventually buy into a version of Mr. Obama’s own private utopia because he’s offering them spending they can’t refuse on infrastructure and defense. The White House also calculates the Republicans are desperate to escape blame for Washington’s “gridlock.”

Maybe it’s time for the Republicans to tell the Obama Democrats that if they want to own the issue of promising to bring the American people federal government goodness, they can have it. The Republicans should claim as their own what’s left, which is to say the entire private sector.
In six years, the Obama Democrats have abandoned any belief in the idea that the private sector is the primary cause of American prosperity. Instead, they seem to see the private sector as a kind of tax sump-pump, a dumb machine whose only purpose is tax flow.

At the small end of the private economy, starting this year, employers with at least 50 full-time workers who fail to offer health care must pay an Orwellian-sounding ObamaCare tax called the Employer Shared Responsibility Payment. At the other, larger end, the Obama budget offers corporations with overseas profits a convoluted tax deal, whose payments will be dedicated, he says, to underwriting public infrastructure projects.

“Infrastructure” is supposedly the carrot with which Mr. Obama will attract Republican rabbits into his spending garden. But refusing to bite on Mr. Obama’s carrots would be a good way for Republicans to re-establish credibility with American voters.

The most lasting contribution of the conservative insurgency out in the country may be that it blew the whistle on Washington’s bipartisan crony capitalism. Republicans should use infrastructure to join the whistleblowers.

Building infrastructure could indeed be a real public good, if the political process beneath it weren’t so bad. Economists for the International Monetary Fund first blew the whistle on the downside of infrastructure spending in an important 1998 paper, “Roads to Nowhere: How Corruption in Public Investment Hurts Growth.” Last spring the Public Administration Review similarly published a study, “The Impact of Public Officials’ Corruption on the Size and Allocation of U.S. State Spending,” notably spending on highways and construction.

Barack Obama chants “spending on infrastructure” as if it were the holy of holies. It’s not, and most voters don’t need IMF economists to tell them “infrastructure” is code for the campaign contributions that flow back to the politicians only after they spend someone’s taxes on cement, bicycle paths and bullet trains.

That is the empire of taxation. It is an isolated system, based in Washington, which allocates what it exacts from the private sector. Sometimes it calls the allocations “spending choices.” Other times they are purported to be benign decisions about who gets tax credits and who doesn’t get tax credits.
Isolated systems can suffocate. The fourth-quarter growth number for 2014 came in below expectations, at 2.6%. That was of a piece with the historically weak economic growth of the Obama presidency, which is the main cause of stagnant middle-class incomes.

The most disturbing number inside the fourth quarter’s details was that business investment grew only 1.9%. Business investment is the heart and soul of the private sector that the Obama years have left behind. Republicans, the only alternative out there, need to rediscover it and reclaim it.

The reality of some marginal tax rate history

Peter Schiff: The Fantasy of a 91% Top Income Tax Rate

A liberal article of faith that confiscatory taxes fed the postwar boom turns out to be an Edsel of an economic idea.

original article

By

Peter Schiff

Dec. 6, 2012 7:02 p.m. ET

Democratic Party leaders, President Obama in particular, are forever telling the country that wealthy Americans are taxed at too low a rate and pay too little in taxes. The need to correct this seeming injustice is framed not simply in terms of fairness. Higher tax rates on the wealthy, we're told, would help balance the budget, allow for more "investment" in America's future and foster better economic growth for all. In support of this claim, like-minded liberal pundits point out that in the 1950s, when America's economic might was at its zenith, the rich faced tax rates as high as 91%.

True enough, the top marginal income-tax rate in the 1950s was much higher than today's top rate of 35%—but the share of income paid by the wealthiest Americans has essentially remained flat since then.

In 1958, the top 3% of taxpayers earned 14.7% of all adjusted gross income and paid 29.2% of all federal income taxes. In 2010, the top 3% earned 27.2% of adjusted gross income and their share of all federal taxes rose proportionally, to 51%.

So if the top marginal tax rate has fallen to 35% from 91%, how in the world has the tax burden on the wealthy remained roughly the same? Two factors are responsible. Lower- and middle-income workers now bear a significantly lighter burden than in the past. And the confiscatory top marginal rates of the 1950s were essentially symbolic—very few actually paid them. In reality the vast majority of top earners faced lower effective rates than they do today.

In 1958, an 81% marginal tax rate applied to incomes above $140,000, and the 91% rate kicked in at $400,000 for couples. These figures are in unadjusted 1958 dollars and correspond today to nominal income levels that are about eight times higher. That year, according to Internal Revenue Service records, about 10,000 of the nation's 45.6 million tax filers had income that was taxed at 81% or higher. The number is an estimate and is inexact because the IRS tables list the number of tax filers by income ranges, not precisely by the number who paid at the 81% rate.

In 1958, approximately two million filers (4.4% of all taxpayers) earned the $12,000 or more for married couples needed to face marginal rates as high as 30%. These Americans paid about 35% of all income taxes. And now? In 2010, 3.9 million taxpayers (2.75% of all taxpayers) were subjected to rates that were 33% or higher. These Americans—many of whom would hardly call themselves wealthy—reported an adjusted gross income of $209,000 or higher, and they paid 49.7% of all income taxes.

In contrast, the share of taxes paid by the bottom two-thirds of taxpayers has fallen dramatically over the same period. In 1958, these Americans accounted for 41.3% of adjusted gross income and paid 29% of all federal taxes. By 2010, their share of adjusted gross income had fallen to 22.5%. But their share of taxes paid fell far more dramatically—to 6.7%. The 77% decline represents the single biggest difference in the way the tax burden is shared in this country since the late 1950s.

The changes came about not so much by movements in rates but by the addition of tax credits for the poor and the elimination of exemptions for the wealthy. In 1958, even the lowest-tier filers, which included everyone making up to $5,000 annually, were subjected to an effective 20% rate. Today, almost half of all tax filers have no income-tax liability whatsoever, and many "taxpayers" actually get a net refund from the government. Those nostalgic for 1950s-era "tax fairness" should bear this in mind.

The tax code of the 1950s allowed upper-income Americans to take exemptions and deductions that are unheard of today. Tax shelters were widespread, and not just for the superrich. The working wealthy—including doctors, lawyers, business owners and executives—were versed in the art of creating losses to lower their tax exposure.

For instance, a doctor who earned $50,000 through his medical practice could reduce his taxable income to zero with $50,000 in paper losses or depreciation from property he owned through a real-estate investment partnership. Huge numbers of professionals signed up for all kinds of money-losing schemes. Today, a corresponding doctor earning $500,000 can deduct a maximum of $3,000 from his taxable income, no matter how large the loss.

Those 1950s gambits lowered tax liabilities but dissuaded individuals from engaging in the more beneficial activities of increasing their incomes and expanding their businesses. As a result, they were a net drag on the economy. When Ronald Reagan finally lowered rates in the 1980s, he did so in exchange for scrapping uneconomical deductions. When business owners stopped trying to figure out how to lose money, the economy boomed.

It's hard to determine how much otherwise taxable income disappeared through tax shelters in the 1950s. As a result, direct comparisons between the 1950s and now are difficult. However, it is worth noting that from 1958 to 2010, the taxes paid by the top 3% of earners, as a percentage of total personal income (which can't be reduced by shelters), increased to 3.96% from 2.72%, while the percentage paid by the bottom two-thirds of filers fell to 0.51% in 2010 from 2.7%. This starker division of relative tax burdens can be explained by the inability of upper-income groups to shelter income.

It is a testament to the shallow nature of the national economic conversation that higher tax rates can be justified by reference to a fantasy—a 91% marginal rate that hardly any top earners paid.

In reality, tax policies that diminish the incentives and capacities of innovators, business owners and investors will not spur economic improvement. Such policies will, however, satisfy the instincts of those who want to "stick it to the rich." Never mind that the rich have already been stuck fairly well.

Mr. Schiff is the author of "The Real Crash: America's Coming Bankruptcy" (St. Martin's Press, 2012) and host of the daily radio program "The Peter Schiff Show."

Editor's note: This article has been amended as per the following correction:

Peter Schiff's Dec. 7 op-ed, "The Fantasy of a 91% Top Income Tax Rate," included some faulty data due to a misreading of IRS tax tables.

In 1958, an 81% marginal tax rate applied to income of $140,000 and the 91% rate at $400,000 for married couples, which would correspond to income levels about eight times higher today. The article misstated the income thresholds and the comparison to income today.

In the same year, roughly 10,000 of the nation's 45.6 million tax filers had income subject to a rate of 81% or higher. The number is an estimate and is inexact because the IRS tables list the number of tax filers by income ranges, not precisely by the number who paid at the 81% rate. The original article said the number of such filers was 236.

Also in 1958, about two million filers (4.4% of all taxpayers) earned the $12,000 for married filers needed to face marginal rates as high as 30%. These Americans paid about 35% of all income taxes but could not all be defined as genuinely wealthy. The article misstated these numbers.

Better late than never

George McGovern in the Journal

A Politician's Dream Is a Businessman's Nightmare: A 1992 column on the realities of running a business 

original article

 

George McGovern

Oct. 21, 2012 10:57 a.m. ET

Wisdom too often never comes, and so one ought not to reject it merely because it comes late.
-- Justice Felix Frankfurter

It's been 11 years since I left the U.S. Senate, after serving 24 years in high public office. After leaving a career in politics, I devoted much of my time to public lectures that took me into every state in the union and much of Europe, Asia, the Middle East and Latin America.

In 1988, I invested most of the earnings from this lecture circuit acquiring the leasehold on Connecticut's Stratford Inn. Hotels, inns and restaurants have always held a special fascination for me. The Stratford Inn promised the realization of a longtime dream to own a combination hotel, restaurant and public conference facility -- complete with an experienced manager and staff.
In retrospect, I wish I had known more about the hazards and difficulties of such a business, especially during a recession of the kind that hit New England just as I was acquiring the inn's 43-year leasehold. I also wish that during the years I was in public office, I had had this firsthand experience about the difficulties business people face every day. That knowledge would have made me a better U.S. senator and a more understanding presidential contender.

Today we are much closer to a general acknowledgment that government must encourage business to expand and grow. Bill Clinton, Paul Tsongas, Bob Kerrey and others have, I believe, changed the debate of our party. We intuitively know that to create job opportunities we need entrepreneurs who will risk their capital against an expected payoff. Too often, however, public policy does not consider whether we are choking off those opportunities.

My own business perspective has been limited to that small hotel and restaurant in Stratford, Conn., with an especially difficult lease and a severe recession. But my business associates and I also lived with federal, state and local rules that were all passed with the objective of helping employees, protecting the environment, raising tax dollars for schools, protecting our customers from fire hazards, etc. While I never have doubted the worthiness of any of these goals, the concept that most often eludes legislators is: "Can we make consumers pay the higher prices for the increased operating costs that accompany public regulation and government reporting requirements with reams of red tape." It is a simple concern that is nonetheless often ignored by legislators.

For example, the papers today are filled with stories about businesses dropping health coverage for employees. We provided a substantial package for our staff at the Stratford Inn. However, were we operating today, those costs would exceed $150,000 a year for health care on top of salaries and other benefits. There would have been no reasonable way for us to absorb or pass on these costs.
Some of the escalation in the cost of health care is attributed to patients suing doctors. While one cannot assess the merit of all these claims, I've also witnessed firsthand the explosion in blame-shifting and scapegoating for every negative experience in life.

Today, despite bankruptcy, we are still dealing with litigation from individuals who fell in or near our restaurant. Despite these injuries, not every misstep is the fault of someone else. Not every such incident should be viewed as a lawsuit instead of an unfortunate accident. And while the business owner may prevail in the end, the endless exposure to frivolous claims and high legal fees is frightening.

Our Connecticut hotel, along with many others, went bankrupt for a variety of reasons, the general economy in the Northeast being a significant cause. But that reason masks the variety of other challenges we faced that drive operating costs and financing charges beyond what a small business can handle.

It is clear that some businesses have products that can be priced at almost any level. The price of raw materials (e.g., steel and glass) and life-saving drugs and medical care are not easily substituted by consumers. It is only competition or antitrust that tempers price increases. Consumers may delay purchases, but they have little choice when faced with higher prices.

In services, however, consumers do have a choice when faced with higher prices. You may have to stay in a hotel while on vacation, but you can stay fewer days. You can eat in restaurants fewer times per month, or forgo a number of services from car washes to shoeshines. Every such decision eventually results in job losses for someone. And often these are the people without the skills to help themselves -- the people I've spent a lifetime trying to help.

In short, "one-size-fits-all" rules for business ignore the reality of the marketplace. And setting thresholds for regulatory guidelines at artificial levels -- e.g., 50 employees or more, $500,000 in sales -- takes no account of other realities, such as profit margins, labor intensive vs. capital intensive businesses, and local market economics.

The problem we face as legislators is: Where do we set the bar so that it is not too high to clear? I don't have the answer. I do know that we need to start raising these questions more often.

Mr. McGovern, the 1972 Democratic presidential candidate, died Sunday at age 90.

Dynamic revenue

What Democrats and the CBO Don’t Get

The numbers reveal that a robust economy, not higher taxes, is the most reliable way to increase federal revenue.

original article

By

Michael Solon

Feb. 2, 2015 7:37 p.m. ET

452 COMMENTS

The recent rule change by House Republicans to incorporate the macroeconomic impact of major legislation into official budget estimates—“dynamic scoring”—has triggered heated criticisms. But three decades of hard accounting data, in addition to supporting the rule change, should prompt Washington to reconsider the way it thinks about what drives federal revenues.

Since 1984 the Congressional Budget Office has tracked all revisions to its triennial projections of federal revenues, outlays and deficits to account for economic, technical and legislative changes. Its data—from the “Changes in CBO’s Baseline Projections” tables that are published annually in the CBO Budget Outlook, the Budget Update and the Analysis of the President’s Budget—indicate which federal policies grew or shrank the economy significantly enough to generate measurable revenue gains or losses. The data also reveal the failures of core Democratic economic policies and flaws within the CBO’s current economic model.

One fact above all others emerges from the data: Economic growth is the single most powerful determinant of federal revenues.

The CBO today projects that if annual gross domestic product were to average one percentage point higher (in real terms), there would be an additional $2.9 trillion in revenues and $370 billion less in federal spending over a decade. Conversely, its 10-year revenue projections have fallen $5.6 trillion since 2007. Most of the lost revenue was not due to the financial crisis and recession, but to the historically weak recovery.

Here’s another vital fact: Economy-driven revenue changes can dwarf legislative changes. Consider the budget summit deal enacted in November 1990. The CBO projected that the law’s variety of tax hikes would raise $159 billion in revenues over five years. Two months later the CBO reported that the 1990 recession would cut revenue projections by $206 billion—wiping out 130% of the revenue supposed to be gained by higher taxes.

US Policy Metrics Partner Michael Solon on data that shows economic growth, not higher taxes, is the most reliable way to raise federal revenue.

Or consider a more recent example: In December 2013 the tax cuts for upper incomes and small businesses enacted in the George W. Bush years were allowed to expire, effectively a $615 billion, 10-year tax hike. Yet the CBO’s revenue estimates were lowered in both February and August of 2014, because of economic weakness. The projected revenue loss over a decade: $1.9 trillion.

A week ago Monday the CBO reported additional 10-year revenue losses of $234 billion from slower growth, offsetting three-fourths of the $320 billion in new taxes proposed in the president’s State of the Union address the previous Tuesday.

Economic growth also can add far more to revenues than legislatively driven tax hikes. The CBO projected that President Clinton’s 1993 tax increase would raise $268 billion over five years. But after the 1997 bipartisan agreements on budget restraint, welfare reform and capital-gains tax cuts, revenues surged, which the CBO said in 2000 arose “from the strength of the economy and changes in characteristics of income.” The CBO’s projected revenues for that year “are now $303 billion more than estimated in 1997.”

In other words, the government gained in one strong year more than the first five years of Clinton’s 1993 tax hike. Overall, an extra $1.34 trillion in revenues flowed from September 1997 to January 2001 solely for economic reasons—five times higher than the projected revenues from the 1993 tax hike.

The CBO data also help identify the periods and policies where both public revenues and private incomes grew the most or the least. These data reveal flaws both in Democratic economic remedies and within the CBO’s economic model.

Once President Obama’s agenda of stimulus and expansion of government power was implemented—along with the Federal Reserve’s record low interest rates—the CBO projected strong economic growth after 2010. In the three annual budget reports after the stimulus bill’s passage, the CBO projected average GDP growth for 2011, 2012 and 2013 of 4.3%, 3.8% and 3.4%, respectively. Instead, growth averaged 2%.

The Clinton administration is another example. Republicans took control of Congress in 1994, and over the next few years pushed through restraints on spending and regulation. As a result of declining federal borrowing, interest rates also were lower. After 1997 the CBO repeatedly projected real gross domestic product growth outside the initial year to drop to a 2.1% average during 1997 to 2000. Yet actual GDP growth averaged 4.7%.

Among many other changes, the 1986 Tax Reform Act lowered the top marginal income-tax rate to 28% from 50%. Instead of projecting an economic boost, the CBO immediately lowered projected average gross national product growth rates for 1987 through 1989 to 2.9% from 3.3% (CBO projections were changed to GDP in 1992). The final GNP figures averaged 3.8% growth, including a strong 4.2% surge in 1988 when the full rate reductions kicked in.

Neither Democrats nor the CBO appear to alter their assumptions or correct their model for economic reality. Both discount the impact of marginal tax-rate changes. The CBO has repeatedly projected since 2001 that the U.S. would enjoy numerous years of 3% or higher growth. But the only two years that occurred were in 2004 and 2005, immediately after the accelerated reductions in virtually all marginal tax rates.

The overwhelming weight of CBO accounting supports dynamic scoring. CBO revisions confirm that slow growth since 2007 has triggered a massive revenue gap, that all revenues lost in past recessions have been recaptured in recoveries until the current one, and that pro-growth policies have delivered revenue surges.

No evidence in the CBO data appears for the macroeconomic feedback that Democrats claim and the CBO assumes from stimulus spending. The data highlight the economic and fiscal benefits to the private and public sectors from tax reductions and “austerity” programs that Republicans tend to pursue but the CBO and Democrats tend to dismiss. Such findings may not change the CBO’s future projections or Democratic policy assumptions, but these are the undeniable facts of the CBO’s past accounting.

Mr. Solon was budget adviser to Senate Republican Leader Mitch McConnell and is currently a partner at US Policy Metrics.