Category Archives: Economics

Are Tax Deductions Inherently Unfair?

Economics, Politics

 

 

This was supposed to be the week both major party candidates concentrated on their visions and proposals for growing the American economy.    On Monday, Donald Trump focused on reduced tax rates, deregulation and repeal/renegotiation of trade agreements. We have yet to hear from Hillary Clinton (scheduled for Thursday) but we know she will likely include proposals to hold or lessen the tax burden on low and middle income families while raising rates or eliminating loopholes which primarily benefit the wealthy.  Although other events have dominated the election news, economic growth and equity still deserve our attention.

My question is, “Are tax rates the best or only way to address inequities in the tax code?”  This question was inspired by Donald Trump’s proposal to convert the current child care credit to a deduction and increasing the dollar limit on eligible day care costs above the current $3,000 for one child and $6,000 for two or more children.  Who would benefit most from these changes?

  • Today, a family of four living on the cusp of the poverty line ($23,550) which spends the maximum ($6,000) on child care gets a tax credit of 30 percent or  $1,800.  However, it is highly unlikely a family at the poverty level could spend over 25 percent of their total earned income on child care.
  • In contrast a family with the median family income of $53,637  who spends the maximum $6,000 on child care  (11.2 percent of their annual income) would get a 20 percent credit worth $1,200.
  • However, if a family on the poverty threshold spends the same percentage of income (11.2 percent) on day care, their credit is only worth $790 (30 percent of $2,635 in day care expenses).

So even though the tax credit is progressive based on earned income, the absolute benefit is higher for a wealthier family.

We do not have the details of the Trump proposal,  but he talked about a tax deduction versus a credit and raising the maximum dollar amount.  Just for argument sake, let’s say he raises the dollar limit to $10,000.  Here’s what happens to those two families.

  • The family on the poverty line will have a taxable income of $0 (income of $23,550 less $12,600 standard deduction and four exemptions at $4,000/person).  Therefore, they will receive no day-care subsidy.
  • The family at the median family income will have a taxable income of $25,037 ($53,637 minus $28,600 with exemptions and the standard deduction).  They are in the 15 percent tax bracket.  If they spend the maximum $10,000 for day care, they will receive a $1,500 subsidy.
  • And a family in the proposed highest rate of 25 percent will receive a $2,500 day care subsidy.

This is just the tip of the iceberg.  Think about the major tax deductions such as mortgage interest, state/local taxes and charitable giving.  In 2013 (last year for which there are IRS statistics), total mortgage interest claimed was $317 billion.  Total charitable giving claimed was $194 billion.  And state/local tax deductions claimed equaled $506 billion.  The overwhelming majority of these claims are made by upper income taxpayers who are currently subsidized at rates of 25 to 35 percent for these personal expenditures.

Want to make the individual income tax more equitable?  Here is my proposal.

  1. Raise the exemption to $5,000/person.  Therefore, a hypothetical family of four would have its first $20,000 exempt from federal income taxes.
  2. Abolish the standard deduction.
  3. Convert all current tax deductions to flat rate credits.  For example, instead of subsidizing home ownership based on income (zero to 35 percent), paid mortgage interest would entitle all taxpayers to a flat rate refundable credit.  I am not sure how much the exact percentage would be, but it would easy to calculate.  What is the total tax expenditure for the mortgage interest deduction?  The Tax Policy Center estimates the total mortgage interest subsidy in 2016 will be $75.3 billion dollars.  My preliminary estimate suggests a refundable tax credit somewhere in the range of 15-18 percent would be revenue neutral.
  4. Develop revenue neutral deduction to credit conversions for all major Schedule A line items.
  5. All future tax incentives would be in the form of flat rate refundable credits available to all taxpayers regardless of filing status or income.

This proposal is presented only as a first step to make the individual income tax code more equitable.  During my research for this post, I found there are other organizations such as the Center for Budget and Policy Priorities which have previously raised similar issues.  After watching the current presidential campaign, my next question is, “Is the American body politic capable of organizing a movement behind solutions instead of anger and dissatisfaction?”

For what its worth.
Dr. ESP

 

 

Ayn Rand Versus Jean Jacques Rousseau

Economics, Politics, Uncategorized

Rand Rousseau

The May 12 issue of Time Magazine included an article titled, “American Capitalism’s Greatest Crisis.”  It included the following:

A couple of weeks ago, a poll conducted by the Harvard Institute of Politics found something startling: only 19% of Americans ages 18 to 29 identified themselves as “capitalists.” In the richest and most market-oriented country in the world, only 42% of that group said they “supported capitalism.” The numbers were higher among older people; still, only 26% considered themselves capitalists. A little over half supported the system as a whole.

Based on these data, the reporter concluded, “This is a majority of citizens being uncomfortable with the country’s economic foundation.”  What the reporter failed to realize is current economic principles and practices are NOT what the the founders viewed as the overarching philosophy on which American society should be based.  Remember, Ayn Rand’s Atlas Shrugged, which is touted by many conservatives as holding the keys to American economic exceptionalism was published 168 years AFTER adoption of our Constitution.   When was the last time the “foundation” of any structure was added a century and a half after the enterprise opened for business?

Adams, Jefferson and Franklin relied more heavily on Jean Jacques Rousseau’s The Social Contract, in which the French philosopher espoused the importance of community responsibility to the survival of civilized societies.  Rousseau did not believe capitalism and socialism were incompatible.  Instead, he saw them as complementary.

If this philosophy is applied to the topics of wealth and taxation, the world is not made up of “makers” and “takers.”  Everyone is a “maker.”  Businesses use private capital (i.e. investment) to produce goods and services.  Likewise, government uses public capital (i.e. tax revenues) to provide basic services such as national security, police, fire production and education as well as infrastructure (e.g. highways, airports, water and sewer systems) without which commerce would not exist.

In the 2012 election, President Obama muddied the waters when he suggested that business owners “did not build that.”  While he argued the sound bite had been taken out of context, it opened the door for opponents to argue he did not value the importance of private initiative. Here’s what he should have said. “Together we build a strong economy.  Privately held businesses marshall resources to fulfill the needs and desires of the marketplace.  Yet, at the same time, governments and non-profit organizations deliver public goods and services so the private sector can focus on what it does best.”

 The private sector is the primary job creator. But just as President Obama misspoke when he tried to explain the the synergy between the public and private sectors, Republicans have done an equally bad job of articulating the role of the private sector in job creation.  First, it is not only the wealthy who are the “job creators”.  Entrepreneurs emerge from every income tier.  Second, business owners create two categories of jobs.  They employ personnel DIRECTLY in their companies.  When they pay taxes, they also INDIRECTLY create public sector jobs and should be given credit for that.

If there is anyone who should be labeled “takers,” it is those individuals and companies who can well afford to pay their fair share of taxes, yet avoid them and shift the financial burden of public goods they use in the course of business to other citizens.  I can hear Rousseau now.  “You are violating the contract on  which civilized societies depend.  Return to it and all those young people just might begin to realize that capitalism is critical to the world in which they live.  Next year, Time will have articles about how capitalism survived this crisis.”

For what it’s worth.
Dr. ESP

 

Hoarders versus Spenders

Economics

 

gold-barsDuring the 2012 presidential election, there was much talk by Republicans about “makers” and “takers.” The essence of the their argument was that the wealthy were job creators while those on any kind of public assistance were not contributing to the economy.

If the success of the US economy is dependent on consumption, perhaps we should stop talking about “makers” and “takers” and focus on “hoarders” and “spenders.” Forbes Magazine reported the net worth of the 400 richest Americans rose from $1.7 TRILLION in 2012 to $2.0 TRILLION in 2013. Just imagine what might happen if most of that $300 BILLION in new wealth had gone to lower and middle income wage earners. Chances are pretty good they would have spent it on food, clothing, household needs, maybe a new car or home improvements. Would this contribute to growth in the economy as the demand for these goods and services have to be filled? That is why many, myself included, believe an increase in the minimum wage will put money in the hands of those most likely to spend it, adding to the demand for goods and services.

For what it’s worth.
Dr. ESP

 

Who Said This?

Economics

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During the height of the Occupy Wall Street movement, many opponents argued that the participants were un-American. They did not  believe in capitalism. And reveled in the drop in stock values associated with the 2008 recession.

On the morning of November 30, 2011, I saw a headline on CNBC.COM titled “Hedge Funds Drop Stocks.” In the article, there was the following quote.

The rally in October was the worst case scenario. It brought the S&P back to the black for 2011.

One might suspect the speaker was an Occupy advocate who saw the market rebound as counterproductive to their message that Wall Street speculation was hurting the national economy. But you would be wrong. The speaker was the man pictured above, Michael Murphy, CEO of hedge fund Rosecliff Capital. And what was his message. His company hoped to make money by betting AGAINST America. At the same time Mr. Murphy and other Wall Street scions vilified Occupy participants as anti-American. Perhaps Mr. Murphy needs a new mirror.

For what it’s worth.
Dr. ESP