plutocracy

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Real Tax Reform?

OK, let’s all calm down. The Republican tax plan is now in its last stages of design. The two versions that exist need to be stitched together and then the compromise version passed in both houses of Congress.

The law as we currently know it is a classic piece of plutocratic largesse. It will fail in its supposed intentions: it will not do much at all for the economy. It gives rich people and large corporations big dollops of cash and a slew of new loopholes to feather their respective nests. It does nothing for the middle class, except for its upper reaches in the rise enclaves around our biggest cities where it will raise rather than lower taxes. And it raises the possibility, but not the certainty, of cost to social programs down the road when the deficit grows and the far right can start shouting about the lack of affordability of those programs.

Beyond that? Poof!

Nothing.

The law will not destroy the economy. It will not destroy anything at all.

I know I am one who has complained about it loudly, but that’s because of its class basis. The reality is that the law is ineffective as tool of permanent class war simply because it leaves untouched a great deal of what we need to protect the poor, workers, the elderly, and the sick. Even in this more extreme hour the Republicans haven’t summoned up the courage to tilt full force at things like Social Security and Medicare.

And, as we all need to remember, taxes that are reduced can always be increased. I am known for my incessant criticism of Bill Clinton and his failed Third Way politics, but he did very modestly undo some of Reagan’s most damaging tax cuts. Likewise even the timid Obama managed to offset some of the damage done by the Bush tax cuts of 2001/2003.

So: relax. We live to fight another day.

Which moves us beyond criticism to the question of true tax reform. What would it look like? What would a progressive tax reform consist of?

Off the top of my head, and at the risk of upsetting everyone, here goes …

First: what are the objectives of reform?

I would argue for massive simplification. The current tax code is Byzantine and open to way too much exploitation by the rich who can afford expert advisors. So my first goal would be to reduce it to a more easily understood and enforced rump of what it currently is. Other countries have done this. We can.

Next, I would argue that any tax code needs to raise sufficient revenue to support a full set of social programs. The goal is not a balanced budget but full funding to support social goals. We need to counter the incessant attacks made by austerity hawks on those goals.

Then I would suggest we get rid of the privilege given to capital income. We ought tax work and capital equally.

Lastly, the tax code ought weigh most heavily on those who have the income and wealth to pay for it. So it has to be progressive in total.

Second: what taxes does such reform imply?

We would get rid of capital gains tax and, instead, tax gains as income and at income tax rates. Dodges like carried interest would disappear.

The level at which income tax kicks in would be raised considerably, after which rates would graduate steeply as incomes rise. There is a strong argument for raising the top rate to pre-Reagan levels, but in the exact level would emerge from the calculus of sufficiency.

I am in favor of the elimination of most if not all deductions. They distort economic decision making. So let’s be bold and get rid of them.

I also like the idea of a Federal VAT to bolster funding for social programs. Yes, I know it is regressive, but the flip side is that it is a rich vein of revenue. We could do with it. And: don’t forget we have eliminated income tax on lower incomes to defray part of this regression.

In order to get us back to a fully progressive system I would then add a guaranteed income. This would make up for the cost of the regressive nature of VAT and the loss of deductions at the lower levels. It would also streamline the welfare system which ought appeal to anyone seeking efficiency.

Third: what about corporate tax?

In general the same principles ought apply. Simplification throughout; the elimination of deductions; and enforcement of the new simple rules. Policy goals such as the pursuit of equality might cause us to tilt the corporate tax in favor of corporations with decent bonus programs for executives [enforcing a ratio of worker to CEO’s pay?]; domestic investment rather than overseas investment; and other objectives, but the problem with such additions is that they open the door for the inevitable subsequent tinkering with the tax code that produced our current mangled system.

In any case it’s fun to throw a few ideas about like this. What we all need to remember that, at some point, there will be an opportunity for progressive reform. And unlike our conservative opponents we must not waste the opportunity when it arises. We need to debate now what a progressive tax code would contain.

Our turn will come.

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Tax Cuts and Jobs Act

So the Senate passed its tax cut. It is amazing to see the way in which the media has embraced the idea that this is a reform of taxation. It isn’t. It does have a number of small reform-like pieces, but those are mostly only in the legislation in order to mitigate its cost. They would not be there were the Republicans going through what the Senate calls “regular process”. When we realize this many things become clear.

  • Such is the determination of the Republican party to get some sort of legislation passed that it resorted to a purely partisan vote. The law passed 51-49 with one GOP Senator [Senator Corker] voting against. This meant that the law had to fit within prescribed budgetary limits and could not add more than $1.5 trillion to the deficit over the next ten years. Hence the rag-bag mix of “reforms” added to cut the bill’s cost. The only reason many of the bill’s features exist is because of last minute efforts to fit it within the budgetary cap.
  • The bill will blow an enormous hole in the budget — it will cost us between $1.4 and $1.5 trillion in extra debt. [Let’s not get into a discussion about modern monetary theory at this point!].
  • Never again can the Republicans argue they care about the federal deficit. Patently they don’t. This is the third time in my memory that they have passed budget-busting tax cuts [Reagan, Bush, and now Trump]. Each has been given the fig-leaf cover of being growth generating and therefore self-funding. The previous two provide us with ample evidence that this idea of self-funding is absurd, but the GOP clings onto the fig-leaf gamely in order to hide its antisocial intent.
  • That antisocial intent is to create the conditions under which they can claim the government is impoverished and thus will have to cut back on social spending. If you don’t believe me then you aren’t paying attention: Senator Hatch was asked why he hasn’t supported the re-instatement of spending for the program known as CHIP [the Children’s Health Insurance Program that provides health fare to none million poor kids]. His answer they we don’t have the money. He then voted in favor of the tax cut. Hypocrisy is the order of the day in the current Republican party.
  • And if it isn’t hypocrisy it is simply old fashioned meanness. Senator Grassley made it clear that he supported changes to the estate tax because it rewarded hard work and that it was because workers wasted money on booze and women that they didn’t have estates. Quite what hard work is involved in inheriting a fortune I don’t know. And quite how a family earning the US average of $59,000 is supposed to save up the $22 million needed to reach the estate tax exemption threshold I also don’t know. I doubt that cutting out all that booze and so on will get them there.
  • Also: those reforms that did get added into the bill are designed to undermine the budgets of typically “blue” states like New York and California. Those states have higher local taxes to pay for an array of more generous social and education programs. By eliminating the deduction for those taxes at the Federal level the Republicans are introducing a massive redistribution of tax revenues from the “blue” states to their own “red” states. This is over and above the historic subsidy that has moved in that direction already.

Overall the tax cut is an economic absurdity. It pours cash into corporate coffers already brimming over with cash. That extra cash will be spent, not on investment, but on share buy-backs and executive bonus programs. No credible study argues that the bill will increase growth by more than a minimal amount over the long haul, although next year might see a boost sufficient to make the GOP feel good. The negative impact of the rising debt will eventually overwhelm that modest boost and, as I indicated above as the real intention of the law, will provide the Republican’s with the cover they need to slash social spending.

With the Democrats poorly led and marginalized by a decade of organizational disrepair the only way for us to fend off this attack on workers, the poor, the sick, and the elderly is to heighten our local resistance. Just as repeal of Obamacare became the totem for recent Republicans seeking election, undoing the impact of the Tax Cuts and Jobs Act ought become our progressive totem. Any credible Democrat has to express a commitment to re-establishing the estate tax in order to mute the impact of inherited wealth; raising enough revenue to fund social programs adequately; and to a genuine reform of the tax code both to simplify it and re-introduce equity into it.

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Doomed to Repeat?

One of the great pleasures of living here in southern Vermont is that we have a terrific local bookshop. I go there simply to absorb that book shop vibe unattainable in the bits and bytes of Amazon. And like all good bookshops this one throws up surprises. About three weeks ago I was browsing the small business and economics section and found a book by Heinz Kurz. It’s his “Economic Thought, A Brief History” I recommend it for all of you who want to understand the predicament of modern economics.

Now I admit I am a sucker for reading about the history of economics. It’s a great parallel story to the broader social history of the past few centuries. Economics as it weaves back and forth from one emphasis to another is a much more humble adventure than the arrogance of the overly formal neo-mathematics that is has become nowadays. There was a time when it attempted to explore reality, when it included lumpy and vague concepts, when it allowed for collective action, and when it related to experience: how different from today’s pseudoscientific axiomatically self-determining oddity.

Many of you, of course, will be completely familiar with such a history. Most of you will have your own heroes and villains as the story unfolds. Reading the Kurz book reminds me of mine.

I love the early stories.

The physiocrats for instance. They reflect their time perfectly. Agriculture reigns supreme. Industry is dismissed as a sterile sidebar. Landowner interests dominate. That was the reality of the age. No one can criticize their effort, no one can undermine their achievement. French society was teetering on the brink and was about to fall behind its industrial rivals — except, of course, those rivals were only just beginning the industrial adventure and didn’t understand it themselves. In any case, Quesnay’s “Tableau Economique” is one for the ages. None of our contemporary economists could or would attempt such an effort.

Then there’s Smith. We’ve been chasing his tail, and his tale, ever since. He is a cornucopia of observations that echo on through to today. Everyone knows about the invisible hand. If ever there was a metaphor that needs explanation this is it. What did he mean by this? We really don’t know. He only mentioned it once in “The Wealth of Nations” and probably didn’t mean it the way we commonly think of it nowadays. Subsequent economists adopted the phrase as their own. That twist in meaning is a later part of our story. Quesnay was all about flows, Smith observed a different kind of order. But is it order? Or is it the illusion of order? Your answer will depend on your point of view.

Smith’s other ideas are more interesting. The division of labor sits at the heart of modern economic society. His understanding of this makes him the first to see underneath the surface of industrialization, although I am not convinced he realized just how the revolution he was within would shake our world. Then again he understood the prominence of knowledge in spurring growth. He called it the quantity of science. Even now economics doesn’t accommodate knowledge well. The weirdness of Total Factor Productivity is a testimony to just how difficult it is to squeeze a public phenomenon like science into modern models that are simply homages to individual effort and reasoning.

Let me fast forward.

Where do the wheels start to come off? The early writers, those we call the “classical theorists” talked about economics very differently from the way we do today. We lost a lot when the change occurred. Frankly I blame the “marginalists” but that’s just me.

Between Smith and the so-called marginal revolution sits Marx and his critique of capitalism. The problem with Marx is that he is spot on: circa 1848 his observations made a ton of sense, and post-1848 the staid and the wealthy were terrified he might be right. They needed a new narrative to counter him. They needed to change the conversation.

And the marginal revolution was the response from economics.

The classical theorists thought in social terms. They observed and thought about social, political, and economic interconnections. Their vision of economics was rooted in a larger social context. It was obvious for all to see that the early years of industrialization were not altogether happy ones for a large portion, if not the majority, of society. Sure incomes were rising, but health and living standards were deteriorating. Urban squalor replaced the older rural idyll that the romantics imagined as reality prior to the rise of factory life. Marx was the ultimate critic of this squalor and his stories of the horrors characterizing the industrial interlude between that past idyll and his imagined future utopia unnerved high society.

History is a devil sometimes. Right when those in power needed to fend off their own queasiness about the effects of industrialization, and needed to arm themselves against a rising tide of worker unrest, economists could reach into the physical sciences and pull out miraculous concepts to defeat all that Marxist nonsense.

Back to the fore came the invisible hand, but now it was altered and updated with lots of mathematics and the notion of marginal productivity. There was, the economists of the time taught, no point in pushing back against the tide. Workers earned exactly — precisely and unequivocally — what they, well, earned. Productivity entered the lexicon. Efficiency was borrowed from physics. Inputs and outputs were tied inexorably together. And the economy was conceived, in distant echoes of Quesnay and Smith, as a great big equilibrating machine. There was no room in this scientific interpretation of the economy for romanticism or recourse to narratives. Society was only ever better off if we leave the machine to run by itself. Don’t meddle or interfere became the mantra of the age. Which, for some, it still is.

That cautionary note against interference was bulked up because of arguments going on outside economics.

The journey from ancient tyranny to modern democracy had, inevitably, to pass through its own middle ages. That was when the modern notions of liberty emerged. A problem that still haunts us today is that no single definition of liberty was passed forward to us.

There is liberty as individual freedom that motivates capitalism — the freedom to own and dispose of private property is the result of the development of this notion. And there is liberty as citizenship and equality that motivated democracy — the idea of one-person-one-vote flows from here. What happens when the two liberties conflict? Well, the answers are manifold.  And our current political battlefield is littered with the debris of the consequence of our inability to balance the two very well all the time.

What we can say, is that when Hayek distorted history to tell his story about the “Road to Serfdom” he deliberately set economics along an anti-democratic path. He valued personal liberty above all else. Democracy is, he thought and his heirs still think, a perversion of the purity of the great economic machine. It allows politics to act as a distributional mechanism alongside economics. And surrendering to the democratic wishes of the majority will inevitably doom liberty.

The taint of Hayek’s anti-democratic convictions still sullies economics. Keynes tried to find a middle path, but the trajectory of modern economics and its obsession with the unobservable phenomenon of equilibrium, and its equally opaque partner of efficiency, has led it, inevitably, to become an ideological rather than a scientific enterprise.

There is, for instance, a straight line from Hayek to the notion of shareholder value, which is nothing more than weaponized neoclassical economics. And from shareholder value there is a straight line to the modern workplace replete with tales of woe, depressed wages, household insecurity, and tenuous employment all living in the shadow of record profits. To libertarians like Hayek undermining the futures of millions of workers is a mere nothing alongside the desire to preserve individual liberty. It makes me wonder whether such liberty is worth preserving.

Economics always has, its history teaches us, been a child of its context. What is, and is not, considered appropriate subject matter is a function of the moment. There are signs that the choice of subject matter is changing. Maybe the whole marginal era will be looked back upon as a curious misadventure. Perhaps equilibrium will be seen, at last, as an illusion. And maybe efficiency will be viewed as the chimera it is.

Hayek was right about one thing: information is paramount. Economics is the study of information: who has it? What do they do with it? How does it shape exchange? And so on. He was wrong to jump to the conclusion that he did. He argued that if the totality of information is inscrutable to any one person or group of persons, then we can conclude that it is pointless to interfere in the economy. The government, he said, ought stay well away. The price mechanism of the private market will, he went on, coordinate all that information and produce the “right” answer for us.

But how do we know?

If information is that inscrutable? How does anyone know? Prices might be wrong. How would we know otherwise?

We wouldn’t. We couldn’t.

There’s more to this history yet.

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Taxes: 1970’s Redux?

Taxes. What a problem.

I was going to start by saying something about our current national debate about taxes, but that would have been an untruth. We are not having a debate. Instead we are all sitting on the sidelines whilst the Republican Party desperately tries to cobble together a tax plan in order to fulfill one of the promises it made during last year’s election. That this would be the only major promise thus fulfilled we can ignore for now.

Instead, I think I will start with an observation I have made many times before: the American tax code is ridiculously complex and inefficient. It is also rigged, although the real extent of the rigging only comes into focus when we take a look at the budget that the tax code nestles within.

One of the sneaky ways that politicians of both parties communicate about government spending is to talk only in terms of programs funded out of revenues. That’s obviously a sensible thing to do. So we hear all about such-and-such a program costing $xx billion or trillion dollars which is invariably then presented as YY% of the total budget.

This is sneaky because it immediately creates a framework for conversation about programs and policies. In particular it opens up programs to easy public scrutiny and criticism of their expense. The most oft attacked programs — things like welfare and poverty amelioration activities — are easy targets when their cost is presented in clear dollar amounts or as shares of total revenues.

Indeed anything that is a line item in the budget becomes an easily understood and vulnerable target.

But here’s the really sneaky part:

There’s a distinct bias in the type of policies or programs that become separate line items in the budget. They tend to be things associates with low income voters, the young, the sick, and so on. Other policies get their funding in more roundabout ways so their cost is hidden from view and the public has a hard time focusing on them.

Here’s what I mean:

Tax expenditures are the big game in town.

The green bars on the left of the chart are revenues actually collected by the government. That’s the cash used to fund programs like defense spending which is shown as one of the blue bars on the right. It’s the central bar where the real action takes place.

Tax expenditures are the cost of loopholes in the tax code. They are a measure of the cash the government didn’t collect because of some program or policy that ended up being paid for by rigging taxes.

And they add up to an enormous amount of money each year. Just a quick look at the chart above shows that the loopholes in the tax code leak away enough cash to pay for both defense and Social Security with change left over.

Here’s a list of the biggest tax expenditures:

The biggest loopholes benefit the middle class and business. They are huge costs to the budget. And they are very difficult to locate in the budget because they don’t exist as cash expenditure.

Middle class critics can thus attack welfare spending because it’s explicit whilst remaining blissfully ignorant about how much they, themselves, also benefit from government largesse.

Which gets me to one more thing:

There’s a strangeness to the current tax conversation. It all seems so dated.

We are being told that we need a massive reduction in corporate tax burdens in order to boost profitability and encourage investment. But American businesses are already highly profitable: profits as a percentage of the total economy are high and have been rising. There is no evidence of a profitability problem. Plus, corporations are sitting on piles of cash. They are not so cash strapped that they are forgoing oodles of great investment opportunities. On the contrary, they seem to have no idea what to do with their cash. So they are reduced to shoveling it back to shareholders rather than investing in expansion.

The economy doesn’t look very supply side constrained when you take current profitability and cash hoarding into account. The problem seems much more acute on the demand side. Were there more demand all that cash could be invested in expansion.

And yet: employment is also doing well. Unemployment is fairly low, even given the very slow recovery from 2007/2008, and the tepid policy response since.

Inflation is also low. So too are interest rates.

So why the sudden urgent need to “reform” taxes to free up the economy and get it going again?

Ideology, naturally, plays a part. Republicans always want to reduce taxes for the rich. It’s what they do. And, yes, there is merit in true tax reform to simplify the tax code and get rid of those loopholes. A lower tax burden is always an attractive policy for anyone concerned with winning the popular vote. The problem is that the current Republican tax plan seems designed to solve problems that existed in the 1970’s, not those of today.

Ideology also plays its part in framing the discussion around corporate goals. The drumbeat for short term increases in profits is so loud that it drowns out any sensible discussion about wider issues of corporate governance and financing. The shareholder value mantra long ago destroyed any alternative conception of corporate purpose and has contributed mightily to a sense of malaise in the workplace that then engenders urgency to do something. Yet that something ought not to be to pour more cash down the maw of managerial capitalism. It is not money well spent, and it encourages corruption within business and, by extension, in politics as lobbyists crawl all over Washington and subvert our democracy.

So here’s the thing:

If we have decent levels of employment; high profits; low inflation; low interest rates; and tons of investable cash, why are we discussing a tax plan that will do nothing for employment; might increase inflation; might raise interest rates; and will add to the tons of investable cash?

Why are we partying like it’s the 1970’s.

Why aren’t we simplifying the tax code, getting rid of the loopholes, and moving the tax burden upwards so that the folks who have the income to be taxed pay the taxes?

Ideology.

It is the 1970’s after all. Isn’t it?

 

 

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More Fog

We still don’t have much clue what the Republicans want to do with their tax plan. It isn’t that we can’t understand the details, it is that there are no details to understand.

Take the corporate tax rate.

The big argument being put forward for a change in the corporate tax rate is that, at 35%, the US has one of the highest rates in the industrial world. But if you look at multinational corporations the facts tell a slightly different story. US multinationals pay about 28% of their worldwide profits in tax, whereas their competitors in the G-7 nations pay about 29%. In other words American businesses are not being hurt at all by the notionally higher rate.

Why not?

Because the US tax code is riddled with loopholes that any self-respecting tax lawyer or accountant can exploit. Many of those loopholes are highly specific to a particular industry. One or two are so specific that a single company benefits.

How did it get this way?

Money. Lots of it. Big corporations are the biggest source of corruption in the American political system. Only it’s not called corruption, its called lobbying. Lobbyists are very often the only people who really know what the tax code contains, especially for their clients. Politicians rarely, if ever, read the details of what they legislate, so there is plenty of opportunity for a well-connected lobbyist to sneak a paragraph or two in during the legislative process to pad the coffers of a client corporation.

As long as the American political system remains as corrupt as it is, the tax code will be a bear to reform. We are already witnessing how difficult: even though Congress has not released any detail about its big upcoming tax reform, the lobbyists along K Street in Washington are gearing up for a battle royal.

This implies, naturally, that getting anything meaningful done will be tough. Probably tougher than healthcare reform because in healthcare there are few lobbyists working on behalf of the public. So the business lobby gets to dominate it and the ideologues are more immune to money fueled attacks next election time.

This is not true of tax reform. The stakes are huge. And since the beneficiaries of the loopholes tend to be the wealthy and big corporations, these are same people who fund the corruption of our money sickened elections, the battle has big players on all sides. Someone is going to lose. That makes for a frenzied legislative process.

It is precisely because all this is known to Congress that we have no details. The minute, no, the second that any details emerge, the lobbyists will go to work. The more detail is available, the more intense the fighting becomes. Members of Congress who might want to produce a genuinely simpler tax code will be swamped by threats and/or inducements. It will take a level of political courage that hasn’t recently existed in Washington to get anything significant done.

So, much of our contorted tax code will likely survive.

Which gets us back to the easy stuff: tax cuts.

Despite all the smoke being blown by the lying cadre in charge of the White House, if the little we know is correct, then the rich will be getting a major tax cut whilst the rest of us will be getting what crumbs fall from the table.

And that, as we all know, is how America is run nowadays. That is the way a plutocracy is run: two Americas, one for the rich and one for the rest.

But plutocracies don’t last forever. They decay. Infighting enfeebles them. Contradictions emerge. And collapse ensues.

America is becoming weakened by its own system of government and the ease with which is can be controlled by a determined minority. This will worsen as the old system, designed to preserve the power of the rural heartland [and slavery along with it back in the day] is undermined by the great demographic shift into our cities. We already saw the future in the last election. Clinton won more votes than Trump by dint of her victory in the highly populous coastal states and biggest cities. She lost according to the ancient rules. How many more losses like that will it take to upend the bias in the system?

Meanwhile at the tax reform coal front a different schism also points to the future. The battle within the plutocracy to protect the rents, cheats, dodges, and sleights of hand that enable the spigot of cash to flow ever upwards will rend the wealthy into factions. How long can such greed driven and egregious plunder last? How many more Trumps do we have to endure before the system crashes to the ground?

Time will tell. But watch then tax reform fight, it will give us insight into how long the plutocracy has left.

Then again they couch it all in the name of markets and freedom. So the economists must be happy. That’s their gig.

Though quite what freedom they are talking about, I have no idea.

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