Getty Images
By now, the general framework of the 2012 fight over tax policy is probably pretty familiar: President Obama wants to extend Bush-era rates for those making less than $250,000, while asking the top 2% to pay the higher rates on income above $250,000. Republicans say that's unacceptable, adding they won't allow the breaks for the middle class to continue unless Democrats agree to also protect benefits for the wealthy "job creators."
At a certain level, the fight might seem superficial. After all, both sides are offering an expensive tax break, and the price tag between them isn't enormous, at least in terms of percentages.
But this only part of a larger fight over tax policy. There are other tax breaks to consider.
Senate Republicans will press this week to extend tax cuts for affluent families scheduled to expire Jan. 1, but the same Republican tax plan would allow a series of tax cuts for the working poor and the middle class to end next year.
Republicans say the tax breaks for lower-income families -- passed with little notice in the extensive 2009 economic stimulus law -- were always supposed to be temporary. But President Obama had made them a priority in 2009 and demanded their extension in 2010 as a price for extending the Bush-era tax cuts for two years, and both the White House and Senate Democrats are determined to extend them again.
That sets up a potentially tricky issue for Republicans. They have said they do not want taxes to go up on anyone while the economy struggles to gain altitude, but under their plan, written by Senator Orrin G. Hatch of Utah, the senior Republican on the Finance Committee, about 13 million families would see their tax refunds reduced, and some would see their taxes increase.
This isn't opinion; it's arithmetic. GOP officials don't even deny any of this -- they simply say those breaks for working people in 2009 should expire on schedule, while breaks for the rich shouldn't.
In the bigger picture, look at it this way: there are a series of tax policies set to expire at the end of this year. President Obama's plan and the Senate Republican plan, as shaped by Orrin Hatch, have something in common: they both extend some tax cuts, while letting others expire.
The difference is who'll pay more in 2013 under the competing approaches.
Under Obama's proposal, the top 2% would see their tax burdens go up (they'd pay Clinton-era tax rates on income above $250,000). Under Hatch's proposal, millions of middle-class and lower-class families would see their tax burdens go up -- or at a minimum, would see tax rebates go down.
The New York Times report fleshed this out further.
At issue are four measures from the stimulus law. One reduced the eligibility threshold to $3,000 in earned income for the child tax credit. Without it, the threshold will jump to $13,300 next year, costing nearly nine million families about $7.6 billion, an average of $854 a family, according to the liberal group Citizens for Tax Justice. But the hit could be considerably larger. Currently, a family with one full-time minimum wage earner and two children receives a total child tax credit of $1,812, almost equal to the full $2,000 credit middle-income families with two children receive, said David Harris, president of the Children's Research and Education Institute. If the stimulus provision lapses, that family's credit would drop to $267, a $1,545 loss.
The stimulus also enlarged the earned income credit for families with three or more children, reduced the "marriage penalty" on working poor couples by starting the earned income credit phaseout at a higher level for married earners, and expanded the middle-class tax deduction for higher-education tuition. The 2009 American Opportunity Tax Credit expanded the tax break for tuition, fees and educational expenses to $2,500 from about $1,800, and doubled the length of eligibility to four years of school from two. It also made the first $1,000 of the tuition credit refundable, meaning that a family without enough federal income tax liability could get a check from the I.R.S. to offset higher education costs.
In all, the Republican plan would extend tax cuts for 2.7 million affluent families while allowing tax breaks to expire for 13 million on the bottom of the income spectrum, tax analysts say.
Got that? Under Orrin Hatch's plan, 2.7 million wealthy people get a break, while 13 million struggling people lose out. It's simply a matter of priorities -- the parties disagree on who should feel the pinch in 2013.
If you're wondering -- I know I was -- this apparently doesn't count as "raising taxes" under Grover Norquist's pledge Republicans feel compelled to sign. They're letting tax breaks for working people expire, but that apparently isn't a literal tax "increase" under GOP rules.
There will be a pretty important vote on the Senate floor tomorrow. Something to keep an eye on.
Leave a Comment:
And this is surprising how?
Further proof if proof was needed about what constitutes a "good" Republican.
I'm so glad the corporate media is making sure the populace knows how stark the choice is between the two parties.
Right? Right?
Is it true that if the after tax income of the 1% were as flat as that of the middle class that our economy would be strong? ("Tax" here means all forms of tax on income).
Anyone have a different view?
I don't think it is necessary to tax the wealthy to the point where their income growth is flat. But we need to reverse trickle down Reaganomics. Taxes on the wealthy should return to the Clinton rates. This still fails to address the flat growth of the middle class. That is a result of bad trade policies, outsourcing, illegal immigration, lack of investment in the infrastructure, etc. All of these factors need to be addressed to move the middle class and poor incomes upward. These issues will require major changes in our trade policies, corporate taxes to end deductions for outsourcing and more investment in infrastructure because it requires a lot of workers to rebuild. We cannot change the growth in income for the middle class and poor with tax rates alone.
@ John and Mike
Yes Mike, all those things need to be put right. Find a way to revive manufacturing for export in USA. Find a way to protect ours like I'm told every other advanced nation protects its manufacturing sector. Etc.
Yes John, raise taxes on the very rich. Maybe even back to Eisenhower's rates [91%].
But, also tax net worth to take back what they unfairly "took" by bribing Congress for 30 yrs. Maybe temporary until we get what they took.
BTW-- Note that a tax on land and cows in 1895 here in Colo. was a net worth tax.
They seem to think that when you are rich enough, you have a right to undermine democracy with your money. Time for the rest of us to say "Hell No!"
A 3% increase isn't going to cash strap the 2%'ers one whit.
For an annual salary of $300,000, that 3% increase only applies to the $50,000 made over the $250,000 limit. $50,000 x .03 = $1,500 more per year. .That's what letting the tax cuts for those folks expire will do. (adjust them to the levels seen during President Clinton's tenure.)
The Ryan Budget increases taxes on the middle class:
http://www.jec.senate.gov/public/?a=Files.Serve&File_id=bc6c837c-cfbd-4212-a85f-9b88695dcb85">
Far better long term to tax wealth than income. Not least, it's intrinsically progressive. Also, a tax on income penalizes economic activity relative to inactivity (not good) where a tax on wealth penalizes economic inactivity relative to activity (good).
Taxes on wealth alone are wrong. We have a progressive income tax that would work if we didn't have so many holes in the tax code. The biggest hole is the treatment of fund managers income as long term gains instead of ordinary income.
Please explain.
If you tax wealth alone, then it will be repeatedly taxed every year and no one in Congress would vote for such a tax. Taxing wealth plays into the Republican argument that Dems want to penalize success. The only tax on total wealth should be the estate tax which affects very few people. Income taxes are fair because your taxed only once. There are changes in the tax code that can get at the ways people are accumulating wealth.
I agree taxes on wealth don't address the core problem. If we grow the tax base of the middle class, the problem evaporates. So it gets down to economic policy. We pretty much understand the GOP perspective- we have heard it for the last 40 years. The trouble is that whatever the philosophical merits, it has failed to deliver the bacon.
Americans at heart are practical people. If something isn't working, we can be persuaded to drop it and try something else. So what is the real alternative the Left is promoting.
WhoTF knows. It is confused and ill informed.
We are a consumer economy, yet progressively since the 1970s, market forces have reduced the purchasing power of consumers by a significant amount (approximately $135 billion per year)*.
Drying up such significant amounts of spending power has consequences for the consumer economy, and it doesn't take a rocket scientist to figure out that such extraction initiates a downward spiral for an economy.
The market forces are natural. When it costs $50 a ton to move stuff from Shanghai to LA, the smart business move is to drive down costs by using the cheapest labor possible available wherever it is in the world. When a machine that allows a single laborer to perform a task that once required 10 workers, you buy the machine and after it is paid off in the first 3 years, your profit margins are much higher. It's the smart business move.
Smart from the micro perspective, but not smart from the macro perspective, because what these two cost reduction forces (automation and offshoring) are doing results in the defunding of US consumers.
My view is that this represents a structural problem that represents a market failure. While global labor will eventually balance over the next century or so, the automation force will work at an even more accelerated rate in reducing the need for a large labor pool.
There are non protectionist means for intervening to correct this market failure, but so far the debate is on the effects of this phenomenon (income inequality) rather than the fundamental market cause.
But we don't even hear a whisper of recognition of this level of discussion about the US's economic challenges. Maybe we will have to rely on the Daily show to cover it. Jon Stewart is having Stiglitz on sometime this week. Maybe he will say something about it.
------------
Notes:
*This is an extrapolation from this federal reserve chart of compensation paid for workers as a percent of GDP. It has gone down almost 10% since 1970, and this percent times the current GDP is about $135 billion.
There are a lot of things that Congress would never vote for -- I don't consider that to be a moral objection.
As for "multiple taxation," that's exactly what happens when the Government taxes me a chunk of my paycheck, and then taxes the plumber a chunk of what I pay her, and then taxes the mechanic a chunk of what the plumber pays him, and then ...
Far, far better to tax the money that isn't moving once a year than to tax the same dollar a higher percentage several times a year as it moves around the economy. We want money to move around, after all, but what we do is give people an incentive to avoid letting it do so.
@D.C.
Each paycheck is new income so you are taxed only once on it. If you invest that money, your tax is on the interest and dividends, but not on the money which you have already paid taxes.
The money you want to tax is the wealth being accumulated by Wall Street and the wealthy. That can be done by changing tax code and rates. But you taxes the wealth/income when it is received, not every year. The way to get money moving around is to create the tax incentives to build jobs in this country and disincentives to outsource. We have some of the incentives but not the latter. Another way to get money moving is to build infrastructure which creates jobs for the middle class and wealth for smaller businesses like construction companies, factories to make items used for building, etc. I don't understand why small businesses are not pressuring Republicans for this infrastructure instead of letting the Chamber of Commerce speak for the business community. There will be a lot of money circulating if we undertake building things.
Mike's proposal is
My assumption is that you accept the notion that protectionism will do far more harm to the economy than good. If so, we are on common ground there. So the question then comes up: What is the distinction between what you are proposing and anti free trade activities which are prohibitted by our trade agreements? Essentially you are protecting domestic labor from competition with global pools of labor.
The economic distinction I make is that the purchasing power of the US consumer is something that the entire globe has an interest in preserving. It is a common public resource whose wealth cannnot be extracted without some restrictions, otherwise, like other resources like fisheries, overexploitation will result in collapse of the industries that depend on that resource.
China offers subsidies to get companies to move there. That is in addition to the fact that China does not allow companies to sell products in their country unless the products are made there. China also demands the tech for free when these companies move there. Then there is the issue of currency manipulation. I would say that is not free trade. We can do some of those same things to get business to move back here in addition to using our tax code to reverse outsourcing.
Business does not seem to be too interested in preserving the American consumers buying power. Their primary interest is increasing their profits at any cost regardless of what it does to our workers and consumers. Walmart got big selling junk from China at a cheaper price and they don't care what their company is doing because it is so profitable. Protectionism would require us to tax foreign goods to prevent competition or decrease consumption of foreign goods. But I doubt using our tax code to create disincentives would qualify as protectionism since it does not protect any specific industries. The loss of deductions for moving to foreign countries would be a factor the companies would have to consider before moving and that can be very expensive. China would find it more difficult to lure US companies because the disincentives work against the unfair trade policies. Their country is facing rising expectations so US companies need to factor in those future costs for labor along with our disincentives.
John,
In reference to your first post: Taxing the 1% at high rates to "flatten" their income is probably IS NOT going to increase the money the government brings in from them in the form of tax revenue - I don't think these people are stupid, what they would do is reduce their taxable income.
However, what it WILL do is get them to move that money out of financial markets and into other areas. Financial markets don't really do much for the middle class - at best they provide a few MBA type jobs and a lot of low paying "service" jobs. And that is where government needs to do more - by "increasing" the 1%'s "paper" tax burden and then giving them "incentives" to invest in research, green technologies, other forms of "manufacturing", that will provide middle class jobs.
That is where the rise in tax revenue will come from - the more middle class there are - the more the government collects in tax revenue because frankly, the middle class tends to pay what the tax tables tell them to pay after a few simple deductions - they don't make elaborate attempts to "hide" their money.
There were as many people getting "rich" in Eisenhower's time as there are now, but instead of flaunting that wealth, they invested it in all sorts of ventures - which means during the Eisenhower years and beyond for a while, the US led the world in innovation. That isn't happening now! Our middle class was doing great during those years also! Something to think about!
Right. That is precisely why it is a market failure. Something that is in their macro interests to do is not perceptible as a cost that figures into their micro level decisions. Because it has no immediate downside, it is in their interest to aggressively offshore any tradeable labor costs.
So I am with you on market interventions powerful enough to alter the assessment of the cost and benefit of offshoring. However, we may differ on how powerful those incentives need to be, as well as the rationale. Because the rationale you provided is protectionist even though a specific market sector is not being protected. I think what is necessary is to provide the convincing rationale to the trade partner that it is their interest to allow the protection, and not initiate a trade war or isolationist economic policy in response to ours.
Regarding the strength of the disincentives needed, what Bain partner Edward Conard stated in his book "Unintended Consequences" cuts to the center of the rationale for offshoring, and it has little to do with Chinese incentives:
It seems to me that the incentive the Offshoring folks are seeing is substantial. But look at his argument. He is claiming social benefits to offshoring and is activating many GOP memes about how what is wrong about US economic policy:
In the social arithmetic of offshoring companies, such managers can congratulate themselves their outsourcing serves to make the US stronger by cutting away all this dead wood. In terms of comparative worth, US labor is a very bad deal compared to foreign labor, and so are the US worker is relatively worthless to US corporations. Conard's canard is the omission that these worthless people are one and the same US consumers who are most definitely not worthless to US corporations. Interestingly, he is not just talking about people but US production being worthless. US based production is a very bad deal compared to foreign production because you don't have pensions, pollution restrictions, or DC lobbying by those production subcontractors.
There are powerful market and social reasons to offshore. The incentives for insourcing must be significant, or the intervention will do little to reverse the dramatic slide in consumer purchasing power accumulating during the last 40 years.
@OnceRep: I agree there is some incentive to move capital to more productive activities. However my view is that it is peeing into the wind. The strong headwind is simply this: 1.9 billion workers in India and China eager to work in production whose operational costs are a tiny fraction of US based operations. Anyone working in a tradeable skill has been in an extremely vulnerable position for the last 40 years. Anyone performing work which can be substantially automated are under increasing vulnerability that only engineers in artificial intelligence can fully appreciate.
Note what was happening in the 50s and 60s. You can make a convincing case that the "Greatest Generation" were inclined to make more socially productive business decisions, but let's be frank. They had the luxury of not being under significant competitive pressure that today lead businesses to be ruthless assessors of short term benefits. In Eisenhower's day, global trade was enabled with low cost shipping in cheap liberty ships and shipping lanes guaranteed by the US navy. But recall also that industries of Europe and the Far East were devastated and those populations were demanding goods that only the US was in a position to provide. Cheap foreign labor could not compete with US labor because all the factories to use them had been bombed to rubble. By 1970, it was no longer true that the US was in the driver's seat. This became clear with the gas lines of the 1970s and the energy crisis during the Iran hostage crisis, the bankruptcy and shuttering of US heavy industries, and the untenable bargaining position of US unions against global labor.
John,
I think you are missing what actually was happening in Japan in the 50's. This was the time when they were MASSIVELY developing their "manufacturing" and although I know you are too young to remember (or perhaps weren't even alive then), what Japan was sending us at the time was cheap "crap" much like what we import from China today. The Marshall Plan gave Japan a great step up so in some ways, what we are seeing from China today was much like what we saw from Japan during Eisenhower's time. It was only when Japan discovered quality control that they became a real threat to some of our exports. In much the same way, China would not now be a threat to our industries if we had any and if the "Street" weren't forcing business decisions onto our industries.
As for India, they import more than they export and they have such severe infrastructure problems, I really don't see them becoming a major trading partner with the US for the time being. Right now only about 2% of our imports come from India.
You are right that India, China, and other countries HAVE people who are willing to work cheaply, but in reality, "cheap workers" really only matters when industries become mature and when you need lots of people to do the same things the same way every time. Nascent industries need people who can innovate and adapt and that has always been one of the strong skills of the US worker, and that is what we need to foster. It is no surprise that Google, Microsoft and MANY other industries started in the United States instead of Japan, when Japan was supposedly as "technologically advanced" as the US was.
I reallly don't fear China (especially given what is happening in their country right now) or any other country taking "jobs" away from Americans, if we foster innovation in this country and slim down our "financial industry". In reality, it was only when the "financial industry" began serving itself rather than businesses, that the "great offshoring" began. Labor was always cheap in Mexico and India but our industries didn't feel the need to go there until they began having to "Beat the Street" every three months.
If we make the 1% (and I am including corporations in this) invest or lose it to taxes, they won't feel the need to "offshore". Will some of these corporations leave the US? Yep, but that only makes room for more NEW companies! Call it "creative destruction"! The Greatest Generation was more creative and did make better business decisions because they were allowed to make those decisions. The fact is, those same people couldn't have performed as well as they did in this current business climate and I don't think it really has that much to do with China or Japan or India.
Actually I am that old. What I am confused by is how this is responsive to the point about the Eisenhower years. Stuff like what Deming contributed to Japan emerged in the late 60s and 70s. If your point is that Japanese goods in the 70s were not only due to comparatively lower labor costs, then yes, there can be no denial. The media at the time was transfixed by how good a Toyota Corona was, and what a POS the Pinto, Vega or Gremlin was. Are you claiming that the Japanese did not also have a labor cost advantage?
I also don't see how any of what you say is responsive to the phenomenon that middle class jobs are disappearing. David Autor at MIT has some excellent papers documenting this. Sure tech will continue to drive our economy. But please please please. Do not make the mistake of thinking they will drive any significant demand for labor. Sure, Twitter is the kind of company that will continue to appear in the US, not elsewhere.
But so what. They have 250 million customers and employ how many? That's right. 300.
High tech is not labor intensive.
The statistics back this up. All tradable labor is going offshore, including highly trained. It is much cheaper to pay for an analysis of a a cat scan performed in India than in the US, plus you get the answers back 24/7 with fast turnaround. It would be stupid for a hospital to pay for in house services costing 20 times more and which much lower responsiveness.
What is of exceptional concern is that senior administration officials go on shows as did Geitner on Charlie Rose today and continue to assert that we can educate our way back to a strong middle class.
Well, wrong wrong wrong. That is not the labor trend of the 21st century. The only skilled labor is that which is untradeable, and relatively impervious to automated solutions. That will continue to be an ever shrinking number of jobs if there are no incentives for insourcing as you and Mike and I agree must be put in place.
I not at all clear on the substance of your proposal for incentivising insourcing- is it like some specific proposal that anyone in particular advocates?
John,
I am going to have to catch you on the weekend or next week. I've got a massive work schedule for the next few days so all I have time for are "hit and run" posts, if any. This topic deserves better than that, so I will catch you on the weekend or next week when I have more time. I don't think that the economics of the 50's are any less valid today except for the effect the financial markets have had, but I need to better explain myself and I also need to dig you out some of my old references as to why I think the way I do. To be continued.....
I understand. The other problem is that any thread older than 15 hours is stale in this forum. I doubt more than 2 or 3 people will look at what you are I are discussing, much less participate in the discussion. This forum is not at all oriented to anything but short form quips about profound challenges the US is facing. Possibly MSN will have the freedom to modify the structure to promote long form thematic discussions but will that happen? If I were internal to MSN, I don't see what business case I could make to justify the development costs.
Anyway, the nutshell of what I am saying is in that FED chart I cited. Since 1970, 9% of GDP has shifted away from compensation for workers. Look at what that does to the purchasing power of the US consumer economy. Another way of saying this is that if the middle class had been allowed their same share of GDP wealth, there would be an additional 1.35 TRILLION dollars of disposable income in the consumer economy. PER YEAR.
Note that this purchasing power has a multiplier effect on the economy. Would it change consumer behavior if every worker had $10,000 more per year in their paychecks?
What do you think?
IMHO, This balance of GDP to compensation is the number we have to orient our tax and trade policy towards. Healthy US purchasing power is good for the US economy, and its good for the global economy.
All part of the "broadening of the tax base" Rs seems to want. Guess how that will play out and who will pay more.
Just overheard some wealthy people proudly explaining to friends how they are gaming the system by claiming to reside in another state with lower tax rate while truly living here. So they are complaining how it's going down hill, not investing in the state, yet soaking up the perks of living here, so they are effectively mooching off the rest of us. They can easily afford the taxes, they just think it's somehow "desirable" not to pay what they owe! Can't say how legal their scheme is, but what jerks they are. Not team players. I would not want to be their neighbors or work colleagues. Furthermore, I'm disgusted with the Repub party, the Koch bros, Rush, et al for fostering the attitude that the ultra-rich are like nobility, and "deserve" their govt welfare (all sorts of tax breaks and "business write offs" the rest of us don't know about and can never use) while the 99% can work 3 jobs, go without, get sick and die early. I'm beginning to wish they would all secede somewhere. We'd be better off without them, $ and all. Let them all fight over who will be king of their new country, Greed.
As an FYI, those gaming the system by claiming to reside in other states is going to be probematic in a short while. States all over the country are in the process of upgrading their tax system, especially looking for the non-filers and mis-filers.
There are several companies in the process of finding those non and mis-filers in at least 15 states. In MA, they paid special attention to people who "live" in NH and their proof was a PO Box in a NH town near the MA border. Since NH residents don't pay income tax, this reduces their MA tax burden. But states have access to incredible amounts of data now including where your cars are registered, your property tax information, whether or not you hold a professional licence etc. They can also petition the Feds for copies of the IRS tax filings. Even something as simple as where your cell phone and satelite service thinks you live can be used to identify residency. Think of all those snow birds who live 8 months of the year in their state and fly to FL for the winter. If FL has lower taxes than their state, they claim residency in FL. But the fact that they have mail forwarded to them in FL for only 3 or 4 months instead of the 8 or so in the other state can be used against them.
In addition, states are starting to band together to share data. This helps them to find people who file taxes in one state but have property and W2s in others. All states can then go after the non or mis-filer.
And some states are in the process of no longer allowing paper statements for companies reporting quarterly wage information. Some require electronic filing for as little as 10 employees. This gives states immediate information when checking last years W2 information against what has been filed in April.
This is the problem with the TeaPugnicants claim to want "smaller government." When you shrink the Federal government, the state governments get bigger. Those people you talk about who say they are scamming the system - that's State government and State revenue. The states are being starved because the Federal government has less to share, so the states are going after the cheats and deadbeats and at the same time raising rates on those who do pay. No to forget about the new "fees" which those who are paying attention know are actually "taxes." Cities are doing the same thing.
So the result of less revenue to the Federal government is more demand from local governments while simultaneously getting less services - like laying off police and fire and/or teachers and other government workers - which in turn means less revenue to the local governments and less $$$ ciculating in the local economy.
This is the true trickle down only it's more like an avalanche!
The numbers are meaningless, when the real problem is not paying for things we create.
I am not speaking of the so-called 'entitlements' for the populace at large, but the 'entitlements' for the 1%ers.
Bush's prescription drug give away to Big Pharma. Two Middle Eastern give aways to Big War. And that's two of 'em.
It's a problem that "income inequality" is not a simple concept to understand. It's an empty sound bite when people think we're just clobbering the rich... it's jealousy, etc.
When I read comments in my local paper's website, people are way out in space on the concepts. Then we apparently have people in the red states who hate "government", and apparently are willing to starve themselves and their families before they'll accept help.
Americans deserve full scale tax reform, not a patchwork quilt of special-interest tax breaks for a tax code. http://bit.ly/noTDPF
Steve, Steve... you're not helping when you use their formulation.
No. Pres. Obama wants to extend Bush-era rates for EVERYBODY on the first $250,000. He wants to end the tax breaks on net income over $250,000. You did explain this later, but putting it the way you did just reinforces the Publican message that Obama wants to end lower rates for the "rich."
EVERYBODY gets to keep some of the tax cut. The rich don't get to keep the EXTRA tax cut that applied only to them (as the ones who make more than $250,000).