Ch-ch-ch-changes: What’s so great about dumping deductions!

WEDNESDAY, DECEMBER 5, 2012

Incomparably, we take a guess: Yesterday, David Brooks made a concession about tax deductions—a concession against tribal interest.

But first, a bit of background:

In the current tax debate, Republicans are breaking their backs to avoid raising upper-end tax rates. Instead, John Boehner says he wants to eliminate deductions and loopholes for high earners. Like-minded Republicans are willing to enact some extremely complex schemes in order to do this.

What would this distinction matter? Either way, the highest earners would end up paying more in taxes. Why would they care if they’re paying more because of changed tax rates or because of changed deductions?

They would be shelling out more either way. Why would the method matter? Why does the method seem to matter so much?

Yesterday, Brooks said it shouldn’t matter. In this passage, he made an admission against tribal interest:
BROOKS (12/4/12): Republicans should go to the White House and say they are willing to see top tax rates go up to 36 percent or 37 percent and they are willing to forgo a debt-ceiling fight for this year.

This is a big political concession, but it’s not much of an economic one. President Obama needs rate increases to show the liberals he has won a “victory,” but the fact is that raising revenue by raising rates is not that much worse for the economy than raising revenue by closing loopholes, which Republicans have already conceded.
Oops! If raising revenue by raising tax rates “is not that much worse for the economy,” why is the GOP trying so hard to stick to that preferred method?

In this blog post from last week, Paul Krugman considered that very question. To our mind, the following possibility seems strong:

Once the marginal tax rate goes up, it’s very hard to bring it back down. It’s much easier to restore a deduction you have eliminated.

It’s hard to lower tax rates. The marginal rate has been changed just five times in the past 32 years. The marginal tax rate went up two times—under Bush 41, then under Clinton. It came down on three occasions, most recently under Bush 43.

Each change in the marginal rate was an extremely high-profile affair. Changes in tax rates are easy to explain, even for major journalists; in part for that reason, such changes get lots of attention. For that reason, it’s hard to change the marginal rate, whether up or down.

If the marginal rate returns to 39.6 percent, as Obama proposes, it won’t easily come back down.

(In 2001, Bush was able to lower tax rates because budget authorities were projecting large budget surpluses. Even in that circumstance, it took a pretty good fight.)

Loopholes, deductions and “tax expenditures” are a whole different kettle of blowfish. Loopholes come and go all the time, depending on who sent in the latest campaign contribution. If a bunch of deductions get dumped as part of a grand bargain, wouldn’t it be easier to restore them at some later date?

Does this distinction explain the GOP approach? We have no idea. But the GOP is breaking its back to offer changes in tax deductions as opposed to changes in tax rates.

Loopholes are easy, tax rates are hard. Does that explain these labors?

Boehner is said to be "easy-going." Is this why he’s working so hard?

23 comments:

  1. What would this distinction [between raising upper-end tax rates vs. eliminating deductions and loopholes for high earners] matter? Either way, the highest earners would end up paying more in taxes. Why would they care if they’re paying more because of changed tax rates or because of changed deductions?

    Surely Bob knows the economic argument, namely that the two approaches encourage different types of behavior. A self-employed, top-bracket Californian keeps around 40% of each additional dollar she earns, due to a combination of federal and state income tax and self-employment tax. If the Federal rate rises by four points, her after-tax income goes down to around 36%. The less a person earns, the less she's encouraged to work.

    OTOH the current law encourages a high-earning woman to find loopholes and deductions, so as to minimize her tax bill. It's better for the economy for someone to be doing productive work than to focus her time and effort on tax-avoidance schemes.

    BTW note that David Brooks didn't say that the two methods have equal economic impact. He said "raising revenue by raising rates is not that much worse for the economy than raising revenue by closing loopholes."

    Since raising rates is worse for the economy than closing loopholes (albeit not "that much" worse), the Republicans are right to pursue loopholes. Why are the Dems so committed to an approach that's worse for the economy?

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    1. Quaker in a BasementDecember 5, 2012 at 11:48 AM

      It's better for the economy for someone to be doing productive work than to focus her time and effort on tax-avoidance schemes.

      I see. The REAL problem with the economy is how much productivity is lost to the search for tax breaks.

      Seriously? That's what you're going with?

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    2. Also, though David treats it as such, it isn't a given truth that Brooks is correct when he says that higher rates are bad for the economy.

      In fact, Brooks is just plain-old wrong.

      Lower top marginal rates are simply not correlated with better economic performance.

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    3. D in C, this is bogus. Payroll taxes are only on the first $100,000 or so of earnings, so there are no payroll taxes taken out of top earners' additional income. You sound like Sean Hannity here (one of biggest BSers on earth). It's pretty fair to say that no high earners, in California or anywhere else in the US is paying 60% on earnings, esp earnings over $250,000.

      AC /MA

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  2. This comment has been removed by the author.

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  3. "Why are the Dems so committed to an approach that's worse for the economy?"

    Because they bought into the stupid trope that the deficit, not unemployment/ under-employment is the nation's biggest problem. The Dems need to stop listening to the mouth-breathers on the cable networks and do what's right for the economy.
    BTW, David in Cal, can you imagine being such an idiot you'd fall for the whole "the deficit is the problem schtick"? Yeah, I can't imagine being so gullible either.

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  4. The very rich are consuming all they want, and not coming close to spending all their money.

    Some extra taxes added to the the top income brackets will not affect the economy at all, since that marginal income is being hoarded in offshore bank accounts.

    Taxing the middle class WILL reduce consumption, and slow the economy.

    If capital gains taxes are raised, it will reduce the benefits of gambling on existing securities, and thus encourage new investment.

    As Warren Buffet said, even if a millionaire gets to keep only 10% of his profit, he'll still opt for more profit.

    The people that say they will make sure their income does not exceed $250,000 per year of Obama gets his tax hike are simply posturing, much like Barbara Streisand and Alec Baldwin were about leaving the US if Bush won.

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    1. The people who say they will make sure their income does not exceed $250,000 per year are morons who don't even understand that they would only have to pay the higher marginal rate on their income above 250k.

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    2. You're partly right and partly wrong, mm. It's true that the higher marginal rate doesn't mean that more before-tax income can result in less after-tax income. However, there are other proposed or enacted changes that can have this effect.

      E.g., ObamaCare includes a surcharged tax rate on dividends for wealthy people. It has an absulute cutoff, based on income.

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    3. gravymeister wrote: As Warren Buffet said, even if a millionaire gets to keep only 10% of his profit, he'll still opt for more profit.

      I don't know the context of this comment, but it doesn't seem to apply to the example I gave. My hypothetical rich person had to work for her additional income. It's not a question of whether she'll keep what she can. It's a question of whether the additional after-tax income is sufficient to convince her to take on the extra effort of working more.

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    4. DinC: Really neat trick how you switched from apples to oranges there. The comment I was responding to had fk all to do with the 3.8% surtax on capital gains and dividend income which was part of the 2010 healthcare law. That surtax is already in the tax rules.

      Even here, you're full of shit as usual. The surtax you refer to only applies to the MAGI above the cutoff. The example given is as follows:
      ***
      To illustrate when the tax applies, the IRS offered an example of a taxpayer filing as a single individual who makes $180,000 in wage income plus $90,000 from investment income. The individual’s modified adjusted gross income is $270,000. The 3.8 percent tax applies to the $70,000, and the individual would pay $2,660 in surtaxes, the IRS said.
      ****
      So tell me how the individual in this example could end up with more after tax income by holding his total MAGI below the 200K?

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    5. Good catch mm. It appears that my interpretation may have been conceivable under the ObamaCare wording, but under the brand new IRS proposed rules, the thing I worried about couldn't occur.

      http://www.reuters.com/article/2012/12/03/us-usa-tax-irs-idUSBRE8B21HA20121203

      The link to mm's point also says that "the new regulations include a 0.9 percent healthcare tax on wages for high-income individuals."

      So, while the Dems and Reps are fighting about whether to raise the top rate, it turns out that ObamaCare already did so.

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  5. The reason Republicans prefer to close the loopholes is two-fold. One, it makes for tax increases further down the scale. Second, consider the fast growing income of the top 1%. A closed loophole has zero impact on the EXTRA $1 million I steal next year as a member of the top .1%. I already used up all the loopholes on the first $20 million that I stole.

    So, closed loopholes have diminishing impact as time goes on.

    Consider the FAB 400. They neither toil, nor they spin, but not even the lillies of the valley are clothed so fine. http://journals.democraticunderground.com/hfojvt/123

    But I digress. Their average income was $51 million in 1995. By 2007, it had grown to $345 million. A higher marginal rate would impact that extra $294 million in loot, but closing loopholes would not.

    Of course, as David in Cal believes, the whole economy would just shrivel away if those super-rich were not motivated to grab as much of the income pie as they could get. Just where would the people of Bedford Falls be without Potter there to steal all the wealth? Imagine what the world would look like if THAT SOB had never been born.

    Hmm, I just got an idea for a remake/twist of "It's a Wonderful life." Or would that just be another "Christmas Carol"?

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    1. Of course, as David in Cal believes, the whole economy would just shrivel away if those super-rich were not motivated to grab as much of the income pie

      You got it, Anonymous. You may think Barbra Streissand is grabbing slices of the income pie. I think she earned her money and enriched us all in the process with her marvelous singing. I think whoever designed and build the computer you're using earned his money by providing a useful product. You think he's just grabbing slices of the income pie.

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    2. Right, because you're wrong. Earning means you traded value for value. People who rake in billions did not produce billions of dollars of value; they just exploited our system to take it.

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    3. David, it is funny that you should mention Babs. Because as I look it up, she had the album of the year in 1963 and won an award for best actress in 1969. But in the 1960s the top marginal tax rate was a whopping 70%. I mean, why did she even bother to make those movies and records when so much of her hard earned money was just gonna be taxed away? What the heck was her incentive?

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  6. It sounds like you all are arguing about the trade-off between marginal income vs leisure time.

    When does a person decide they have enough income and would rather take time off to enjoy it?

    This is a decision that hourly and commission people have to make.



    David hints that the very wealthy may not go for extra income if they have to work for it, and taxes will take a bigger percentage of it.

    We say capital gains is not earned income. If a man takes a day off from calling his broker is he really exchanging income for leisure?

    CEOs don't exchange hours for dollars. They exchange the clout they have with the board of directors for dollars.

    And don't even mention corporate performance as the justification for obscene levels of compensation.
    Our free enterprise system is rife with stories of CEOs that brought their companies to the brink of bankruptcy (and beyond) and walked away with a king's ransom as reward.

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    1. There's a civil liberties argument, gravmeister. Suppose I once bought a house from A for $40,000 and later sold it to B for $52,000. (real example.) You say my $12,000 is not "earned income". I say, why is this your business? In a free country, I should have the right to buy and sell real property.

      Or, consider CEO pay. IMHO CEO pay more often than not does reflect performance. However, I agree that there are many exceptions. I say, so what? If the Board of Directors of Corporation X chooses to overpay their CEO, why is it your business or mine? The stockholders have a right to be peeved, but that's their problem.

      Or, consider someone who pays (what I think is) too much money to buy some product or service. My opinion shouldn't count. The customer made a purchase with his own money. He has the right to spend it as he pleases.

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    2. You just keep fishing David. There's just gotta be somewhere some how a valid argument for why the rich shouldn't have to pay more taxes. There's gotta be.

      Insert quote from Galbraith here. "The modern conservative ..."

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  7. Civil liberties? Civil responsibility!

    "You got it, Anonymous. You may think Barbra Streissand is grabbing slices of the income pie. I think she earned her money and enriched us all in the process with her marvelous singing. I think whoever designed and build the computer you're using earned his money by providing a useful product. You think he's just grabbing slices of the income pie."

    So, if someone contributes to the quality of human life (as you define it), they earned their income.

    I say, if some one benefits financially from the system that we have established, they should support that system FINANCIALLY in a manner commensurate with the benefit they receive.

    Integration is the sharing of power, resources, and responsibility.
    MLK Jr.





    .

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    1. I say, if some one benefits financially from the system that we have established, they should support that system FINANCIALLY in a manner commensurate with the benefit they receive

      gravymeister, I think you mean they should pay taxes commensurate with their income. After all, some high income people and organizations didn't receive much benefit from the system.

      But, set that quibble aside. The real question is how much tax would be "commensurate." In answering this question, one might look at the taxes already being paid by the wealthy. Consider a wealthy Californian W who owns stock in a California corporation, C. Look at all the taxes already levied on them

      -- C pays numerous fees and assessments
      -- C pays around 10% of employee wages for SS and Medicare assessments
      -- C pays 35% federal income tax
      -- C pays around 10% state income tax
      -- W will pay a federal income tax on dividends received from C at a rate that will go to 39.5% if the Bush tax cuts expire.
      -- W will also pay state income on these dividends of around 12%
      -- When W spends the dividend money, he'll pay a sales tax of around 10%.
      -- If W doesn't spend the money, his estate will eventually pay a federal estate tax of 55%.

      In short, W is already paying a heck of lot of tax.

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    2. "say, why is this your business? In a free country, I should have the right to buy and sell real property."

      you're right, David.

      It's none of our business how the very rich earn their money.

      After all, they are the Masters of the Universe by divine right and a fortunate roll of the genetic dice.

      We are the serfs, and must accept the natural order of things.

      The natural order being "The greatest good for the smallest number."

      We are done here.

      Gravymeister out.

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    3. gravymeister -- My comment applied to everyone, not just to the rich. IMHO, more often than not, poverty or wealth is a lifestyle choice in this country.

      BTW "the greatest good for the greatest number" in practice turns out to mean, "give power to the government." The real world consequence is that governmnent winds up as the privileged class.

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