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Jaded at Tax Reform

bob samuelson_1

From Robert Samuelson at The Washington Post, The coming middle-class tax increase

There is a broader message here. Both parties have constructed rationales for avoiding middle-class tax increases, which would be highly unpopular. It’s not that these rationales are illegitimate: The effect of tax policies on economic growth is clearly important; similarly, redistribution is a central function of the welfare state. But the resulting tax policies don’t come close to covering the real costs of government.


For all their soak-the-rich talk higher taxes on the rich will raise revenues minimally and will barely impact inequality. If they raise it too high production and investment – and its accompanying job and wage growth  - suffer and the outcome is totally counterproductive.

With tax rates where they are lower rates, even with fewer deductions, will still leave lower revenues even when scored dynamically.  There is the further risk, rarely addressed, that the  voters and investors have such little confidence that the rates and the policy will remain unchanged for very long that they are less likely to respond to tax incentives in any long term way. They have become jaded at tax reform.

There is one other option that Samuelson omits: reduce payments from the welfare state to only those that truly need it. There are many benefits that are aimed at middle class tax payers.  As the author noted there is no way that revenues can be significantly raised without the middle class paying a significant portion- one way or the other.


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Driving Corporations Overseas

from the Wall Street Journal, The Corporate Tax Political Divide

 ‘Why is the tax code making it better for foreign companies to invest in the United States than U.S. companies?” That was the pungent question posed by Pfizer Chairman and CEO Ian Read in an interview last week with this newspaper. Washington has no good answer, and President Obama shows no inclination to reform the worst system of corporate income taxation in the industrialized world. So Mr. Read’s Pfizer, currently located in New York, is considering a merger with Dublin-based Allergan. Basing the combined company in Ireland would free up more cash for shareholders, employees and research.

And yes, moving the business overseas would ironically make it easier to invest in the United States, thanks to the insane tax burden the Treasury now applies when U.S. firms want to bring profits back from overseas and invest them at home.

Mr. Read was speaking in general terms and not discussing the particulars of the potential merger his firm is now discussing with Allergan, but he neatly explained the competitiveness problem faced by U.S. companies. He noted that after paying Irish corporate income taxes, a firm based there still retains roughly 88 cents on each dollar of profits, which it can choose to invest in the U.S.

But if a U.S. company makes the same dollar in Ireland and pays the same local tax to Irish authorities, its 88-cent after-tax profit gets whittled down to 65 cents if the money is invested in the U.S. That’s because the U.S. is one of a small handful of tax collectors worldwide that demands to be paid even after a domestic company has already paid the overseas territory where it made the money.

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Separate the Tax Code and The Subsidy Code

Economist John Cochrane

Economist John Cochrane

From John Cochrane at The Grumpy Economist, Economic Growth

This is part of a 10,000 word essay that is worth every second of the time it takes to read.

The central goal of a growth-oriented tax system is to raise the revenue needed to fund necessary government spending at minimal distortion to the economy, and in particular minimizing the sorts of distortions that impede the growth process.

A first objection comes from those who want to pair reform of the code with substantial rises in overall revenue. This has been the main stumbling block to tax reform under the Obama Administration.

Second, our tax code mixes raising revenue with a host of special provisions designed to encourage specific activities and transfer income to specific groups or businesses. Objections come from those who what to preserve one or another subsidy, deduction, or exemption.

Third, our tax code mixes raising revenue with efforts to redistribute resources across income and various demographic classes.

The result is paralysis. The answer lies in separating the arguments. One could go so far as to separate the actual legislation.

First, we should discuss the structure of the tax code separately from the proper level of revenues. Let us agree that we will eliminate deductions and exemptions and have three brackets. Start with a revenue-neutral code. But agree that we can separately and much more frequently adjust the rates, which adjust the overall level of revenues.

Second, we should separate the tax code from the subsidy and redistribution code. Let us agree, the tax code serves to raise revenue at minimal distortion. All other economic policy goes into the subsidy code. And subsidies should be on-budget and explicit. So, you want a subsidy for home mortgage interest payments? Sure, let’s talk about it. But it will be an on-budget expense — we will send checks to home buyers if we do it. You want to give $7,500 to each purchaser of electric cars? Sure, let’s talk about it. But it will be an on-budget expense. We will send $7,500 checks to electric car purchasers if we do it.

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Inert Blocks of Wood

Thomas Sowell

Thomas Sowell

From Thomas Sowell at National Review, What Democrats Mean by ‘Paying Your Fair Share’

Whether in politics or in the media, words are increasingly used, not to convey facts or even allegations of facts, but simply to arouse emotions. Undefined words are a big handicap in logic, but they are a big plus in politics, where the goal is not clarity but victory — and the votes of gullible people count just as much as the votes of people who have common sense.

When the state of Maryland raised its tax rate on people with incomes of a million dollars a year or more, the number of such people living in Maryland fell from nearly 8,000 to fewer than 6,000. Although it had been projected that the tax revenue collected from such people in Maryland would rise by $106 million, instead these revenues FELL by $257 million.

Conversely, there have been some reductions in high tax rates that brought in more tax revenues at the lower rates. This happened as far back as the Coolidge administration in the 1920s. It also happened in the Kennedy administration in the 1960s, the Reagan administration in the 1980s, and most recently in the Bush 43 administration. There was a similar reaction in Iceland.

There is nothing inevitable about either a higher or a lower amount of tax revenues, whether the tax rate is raised or lowered. The government can only set tax rates. How that will affect the tax revenues actually received depends on how people react, and you can know that only after the fact. Sophisticated projections have often been laughably wrong.

Contrary to the way some people on the left conceive of the world, neither rich people nor poor people are inert blocks of wood, to be moved about like pieces on a chess board, to carry out some grand design from on high.

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Pretending to Balance the Budget

Kevin_Williamson (1)

from Kevin Williamson at National Review, We’re Not That Far from a Balanced Budget

One, Americans earning $100,000 or more pay basically all of the federal income taxes, about 80 percent. That is far in excess of their portion of national income (“national income” being another thing that does not exist but which we are obliged to talk about), and they are only about 15 percent of all taxpayers. Households earning $250,000 or more, a tiny group (2.4 percent of taxpayers) pay about half of all federal income taxes, which is, again, disproportionate to their income relative to the rest of the population.

You do have to stop pretending that you can give the American middle class a big income-tax cut when it hardly pays any income taxes, and stop pretending that you can get spending under control without touching the tiny handful of popular programs (Social Security, Medicare, Medicaid, national security) that constitute the vast majority of federal spending. You don’t have to reinvent the wheel; you just have to cut federal spending from 21.4 percent of GDP to 19.1 percent a couple of years from now, and maybe reform the tax code with an eye toward making revenue meet spending halfway. That isn’t going to make everybody happy, but it isn’t landing on Omaha Beach, either.

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