tax

Five Progressive Tax Increases that Washington Won't Talk About

Daniel Marans — Mon, 06 Jun 2011 18:15:19 -0400

Ten years ago today, the first Bush tax cuts were signed into law. The fiscal damage they have inflicted is still unparalleled. But while the tax cuts for the top 2 percent of American earners will stay off the table until December 2012, there is any number of other progressive tax increases that Washington could adopt, but won't even consider. The public deserves to know what they are. Here are my picks:

1. Scrap the cap on earnings subject to the Social Security payroll tax. Did you know that millionaires and billionaires only make payroll tax contributions on earnings of $106,800? If you didn't, it could be because you are among the 94% of American earners who make less than that amount--and are taxed on all of their earnings as a result. Social Security payroll taxes are only paid on wages up to $106,800 with employees and employers contributing equally. Scrapping the cap on earnings subject to the payroll tax, while not counting earnings above the cap toward benefits, would eliminate Social Security's entire long-term shortfall. Since Social Security doesn't contribute to the deficit, scrapping the cap won't reduce the deficit. It will make Social Security solvent for the next 75 years, and tie its financial health to growth in earnings in the upper strata, which continue to grow more rapidly than middle- and lower-income earnings. (Click here for a complete fact sheet outlining different options for scrapping the cap.)

2. Enact a modest financial speculation tax. If we levied a 0.25 percent tax on every purchase and sale of stock, and a 0.02 percent tax on every purchase and sale of a future, option, or credit default swap, we would raise $1 trillion in revenue in the next decade. (Credit to Dean Baker for all the data.) It would have the added advantage of discouraging financial speculation, since its effect would be minimal on people holding investments for long periods of time.

3. Increase the corporate income tax rates by 1 percentage point. CEOs love to complain about how high the top corporate tax rate is in America. They say it discourages competition. They say we should have a rate that is closer to Ireland's 12.5 percent. (How's that doin' for Ireland?) But the truth is that all their whining is just empty bravado. While the top corporate tax rate is officially 35 percent, thanks to countless tax loopholes and accounting tricks, 115 out of the 500 companies on the Standard & Poor's index paid a total rate of less than 20 percent over the last five years. Maybe if we jack up their rate a little bit it will offset the effect of some of the loopholes. The Congressional Budget Office (CBO) estimates that, despite the loopholes, raising all corporate tax rates by 1 percentage point will generate $101 billion in revenue over the next ten years.

4. Impose a fee on large financial institutions. Remember the bailouts of 2008 and 2009? Good times. We gave the big banks over $1trillion in interest-free loans. The banks paid back the money they owed, but never paid interest on the principal. Nor do they pay for the implied guarantee that if they go under, the taxpayers will pick up the tab. A 0.15 percent tax on all financial institutions with assets of $50 billion or more is one small way to fix that. It will also provide the treasury with $71 billion over the next ten years, according to CBO.

5. Tax carried interest as income. The carried interest loophole is how hedge fund managers claim a portion of the earnings on funds they manage--typically 20 percent--and it is taxed at capital gains rates, which are much lower than income taxes. That's why, among other reasons, Warren Buffet pays a lower tax rate than his secretary. Taxing those earnings as income would net $21 billion over the next ten years. Again, my source here is CBO.

Runner up: Increase tariffs on imports from developing countries with lower labor and environmental standards. It's a great idea. It would strengthen American exports, protect our patented technology, and bring the government much-needed revenue. I just could not find a scored proposal of how much it would save.

I left out a carbon tax and a value-added tax, because absent significant correctives, neither is progressive. (Though both may be necessary.)

There you have it. Five progressive tax increases buy you an end to Social Security's funding gap, and more than $1.2 trillion in revenue. Bring income tax rates back to Reagan levels, and throw in a millionaire's surtax, and we could be enjoying single-payer health care aboard our high-speed trains.

Oh, well. It's nice to dream.

April 15: The Issue Is Fairness, Not Taxes

Eric Lotke — Mon, 13 Apr 2009 10:00:00 -0400

Tax day is coming, and people are sad.

But the problem isn’t taxes. The problem is fairness. Who pays taxes, and who gets the benefits.

Today the Institute for America's Future publishes a new report that documents what we already know. The tax code is unfair, tilted in favor of the rich, powerful and represented. Billionaire hedge fund managers pay taxes at lower rates than their receptionists. Corporations get tax breaks for moving jobs overseas. Oil companies with the largest profits in corporate history receive annual tax breaks worth $14 billion, twice the budget of the EPA.

While rich people reap tax breaks, working people struggle just to keep even. Adjusted for inflation, weekly wages were lower in 2007 than they were in 1979.

Our report features a nice X chart. Top-end taxes have declined over the past 30 years. Inequality has risen.

To be precise: Income inequality rose 144 percent — measured by the ratio of after-tax income of the top one percent to after-tax income of the middle sixty percent. Top end taxes dropped 15 percent — measured as the average effective tax rate at the top one percent.

The tax code is one obvious tool that can level the playing field. Progressive taxation has a long and honored history, dating back to Adam Smith, even.

Adam Smith,
The Wealth of Nations (1776)

“The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess …. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

The Institute for Policy Studies has taken the lead in showing how the federal tax code can be made more progressive. Close the hedge fund manager loophole, for example. The Progressive States Network helpfully highlights state efforts to raise top brackets.

But the problem may be more than unfairness. Low taxes may be bad for the economy, as well.

When tax rates were steep, executives had more incentive to leave money in the company — investing for future growth, sharing with staff or hiring more people. Money they paid to themselves was wasted. They had to send it to the government.

Nowadays, with taxes so low, CEOs have more incentive simply to pay themselves. They get to keep the money. It’s virtually an act of charity to keep the money in the business or share it with the staff. That’s a recipe for greed, not growth.

Only 1/3 of Corporations Pay Federal Income Tax

Armand Biroonak — Wed, 03 Sep 2008 00:00:00 -0400

Two-thirds of American corporations and foreign corporations doing business in the United States pay absolutely no federal income taxes—despite taking in $2.5 trillion in sales.

With a Weak Economy, We Need Smarter Policies

SharedGrowth — Sun, 03 Aug 2008 14:45:59 -0400

The old tricks aren’t working any more. The government’s tools for a weak economy have been to lower interest rates, borrow and spend, or have a war. Now, interest rates are so low that you can’t earn enough on your savings to keep up with inflation, the government owes $31,666 for every man, woman and child in America, and we have two of the longest running wars in U.S. history. We need something new, something smarter.

Here’s a radical suggestion. Let’s stop collecting taxes in foolish ways. All we need are two simple changes to our existing system.

Start with capital gains and dividends. Right now, people who earn more money in a year than you could dream of making in your lifetime pay only a 15% tax on most of that income, which is less than the Social Security and Medicare taxes that any middle class wage earner pays on their income. With patience and good planning, they pay no tax at all on their gains. Why do we have such a strange system? Economists will cite two reasons.

First, if we tax these earnings from wealth as heavily as we tax earnings from work, then the wealthy will tend to spend more of their money instead of investing it. But the government just went deeper into debt sending out billions of dollars in checks to try (not very successfully) to get people to spend money. So why are we bribing the wealthy to NOT spend money?

Second, because people can avoid having taxable gains by simply not selling their stock, having a normal tax rate on gains will tend to keep investment dollars from flowing to the best investments, which is bad for the economy. But what if instead we got corporations to pay out all of their earnings as dividends and then have to ask people to reinvest the cash? That would be a much more effective way to make money flow where it should.

Now consider corporate tax. Under our system, if a U.S. corporation earns $1.00 in Switzerland and keeps the cash out of the U.S., it keeps $1.00. If it earns the same $1.00 in the U.S., it must give $0.35 to the tax man. So where do you suppose companies will put their most valuable activities? Worse, this is an addiction. Again, if the company brings the cash home it pays tax, so it reinvests anyplace but here. Reinvesting that cash at a 4% return abroad is as good as getting a 9.5% return after bringing it home. That kind of incentive is what has been killing U.S. jobs and keeping down U.S. wages. There is less demand for U.S. workers because this is a bad place to invest, so employees can’t demand as much pay.

What is the simple solution? Give corporations a deduction for paying dividends, and make up the lost tax revenue by getting rid of the capital gain benefits on the individual side and raising taxes a bit on people earning over $500,000 a year. On average, the over $500,000 group would still pay total federal and state income tax of only 37.6%. Cash would flow and jobs would grow. Wouldn’t that be smarter?

Matt Lykken is an international tax attorney and the Director of SharedEconomicGrowth.org.
Biographical information at http://www.sharedeconomicgrowth.org/home/aboutus.html

The Capital Gains Tax Question Charlie Gibson Should Have Asked

David Sirota — Tue, 29 Apr 2008 13:19:15 -0400

My column last week criticizes ABC's Charlie Gibson for using his position as debate moderator to focus the presidential discourse on the supposed unfairness of asking very wealthy people to pay the same tax rate on their stock profits as their servants pay on hard earned wages. Gibson led us to believe raising the capital gains tax rate would severely harm most Americans, when the hard data shows that the richest 1 percent pays most of this tax (not surprising, considering the richest 1 percent own most of the stock).

So what should Gibson have asked when it comes to capital gains taxes? How about asking the candidates whether they are serious about ending the situation whereby their wealthy donors in the private equity industry are being allowed to bilk American taxpayers?

Specifically, these private equity billionaires are permitted to declare their seven and eight-figure incomes as capital gains, thereby avoiding the standard income tax rates the rest of us have to pay. As you can see at Brave New Films' terrific War on Greed website, private equity sharks like Henry Kravis (who I've written a column about before) are being allowed to avoid the tax rates the rest of the country has to pay - at a huge cost to the federal treasury (ie. schools, roads, bridges, health care, etc.).

This kind of question would truly make the Democratic candidates uncomfortable. Certainly, both Hillary Clinton and Barack Obama have said they support ending the Henry Kravis Loophole - and that is, indeed, a good thing. But both candidates are also surrounded by an army of private equity mavens, and have taken a huge amount of money from the very fat cats that benefit from this tax code sleight-of-hand.

This, of course, says nothing of John McCain, who - as far as I can tell through a Lexis-Nexis search - hasn't even been asked about his position on the Henry Kravis Loophole, despite his own pandering to the hedge fund and private equity industry.

There's no doubt that if and when this debate heats up, we'll be hearing from the wealthy that making sure millionaires and billionaires pay the same taxes as working stiffs is somehow "unfair." From Limousine Libertarians in Boulder to Cadillac Conservatives in Connecticut, the well-heeled will be screaming from the ramparts, "Elitists of World, Unite!" - a battle cry to make sure Congress continues persecuting the middle-class on behalf of the yacht club crowd. But as the facts trickle out about the private equity scam, you can bet public pressure for change is going to start building.

And yes, the facts are trickling out. For too long, these kind of financial shenanigans have been disguised by esoteric terms and mathematical complexity. But now folks like Brave New Films are making it much easier to understand. To see what I'm talking about and find out how these privte equity rip-off artists scam taxpayers through the Henry Kravis Loophole, see Brave New Films short video below, then sign the online petition demanding the presidential candidates pledge to close this loophole for good.

Join the book club for David Sirota's upcoming book, The Uprising, due out on 5/27.