Estate Tax and Fairness

What components must a tax and budget management system have to achieve the results we want? I’ll start with a result and a candidate that illustrate a few large issues.

It seems to me now that what I said was my biggest surprise in this post, Qualities of an Excellent Tax System, should not have been a surprise at all. The American Dream is that our freedom includes equal opportunities for all of us to achieve prosperity and success. In that case, it makes sense that nine out of ten of us would say we want a relatively equal distribution of wealth. What we mean is, we want relatively equal opportunities to become wealthy.

So, the system needs to to, “lead toward the distribution of wealth we democratically choose”. By “lead toward” I mean propel the wealth distribution on average and over time, and by “democratically choose” I mean the distribution we want could change but it should at all times be in some way explicitly approved by the electorate.

Among the indicated requirements is to diminish, “unfair opportunity based on parental wealth”. Estate taxes are a potential mechanism. How much support might there be for them, and how effectively would they support the objective?

Estate taxes would not be popular at all. The compendium of public opinion research I used for this post about our tax system shows on page 21 the results of a March 2009 Harris poll about the perceived fairness of various kinds of federal and state/local taxes. Federal estate taxes are considered the least fair of all. Two in five respondents (42%) consider them “not at all fair”. Fully two thirds (67%) consider them “somewhat or not at all fair”.

Before exploring if estate taxes could nevertheless be effective, it’s instructive to set their unpopularity in context. Every form of tax has high “somewhat or not at all fair” ratings.

At the federal level, the combined “somewhat or not at all fair” ratings for each type of tax are: estate taxes 67%, gas taxes 63%, personal income taxes 48%, corporate income taxes 42%, social security payroll taxes 40%, and cigarette, beer and wine taxes 36%. At the state/local level they are: gas taxes 62%, local property taxes 50%, motor vehicle taxes 47%, state income taxes 44%, cigarette, beer and wine taxes 38%, and retail sales taxes 37%.

I’ll come back to those statistics in future posts. One thing to consider is the seeming paradox that while gas taxes are almost as unpopular as estate taxes, retail sales taxes, which are also levied at point of sale and unlike gas taxes are shown separately and so are more visible, are considered the least unfair of taxes along with those on cigarettes, beer and wine. I’ll also address why property and motor vehicle taxes, personal and corporate income taxes, and social security payroll taxes are all considered “somewhat or not at all fair” by 40% to 50% of us. The overall message from these statistics is:

Large issue 1: While everyone wants government services, many or most of us consider every way of funding them to be “somewhat or not at all fair”. It will not be enough to establish a way of collecting revenue that is reasonably fair. We must also routinely measure its fairness, publish the results and measure public opinion about that. The long term result, if the system truly is fair, will be a steep bell curve of survey results toward the middle of the range from “Very fair” to “Not at all fair”. I’ll explore this in a future post.

Meanwhile, why are estate taxes considered most unfair of all? Because they’re associated with death. That’s why opponents call them the “death tax”. We’re pretty much terrified of death and we don’t like any taxes, anyway. Also, opponents tell us it’s double taxation: “First, they took your hard-earned money in income tax, then they want estate taxes on what’s left?!” And while in theory we want equal opportunity for all to become wealthy, we probably in reality want our kids to have a better than equal chance. The message from this statistic is:

Large issue 2: We are vulnerable to powerful fears and desires that distort our judgment about government and taxes which cannot be soothed from within the tax system. We would be happier and kinder if we accepted that we will die. It would be better to prepare our kids to work for what they most want. The tax system is powerless to help us accept and act upon such truths.

Would estate taxes nonetheless be an effective way to diminish the unfair advantage of parental wealth? The answer is again, in normal circumstances, no. Estate taxes are in reality levied on only a tiny fraction of US estates and they are easy to avoid altogether with trusts and provisions in your will. If, that is, you act on the fact that you will die.

More importantly, revenue from estate taxes fluctuates because people with equal wealth do not die at the same rate every year. That means estate taxes are unsuitable for supporting ongoing levels of spending. There is also:

Large issue 3: Wealthy people can relocate their assets. Not all US states levy estate or inheritance taxes and those that do, have different rates and thresholds. You can become a resident of a different state if you expect to leave or inherit a large estate. The same issue exists for state income taxes as this link suggests. And if you want to avoid US taxes altogether, you can renounce your citizenship and move offshore. This means tax systems must be appropriate to their competitive environment, state-wise and nation-wise.

There are, however, a couple of situations where estate taxes are effective. One is when there is a widely accepted temporary need for exceptionally high government spending. By the end of WW2, for example, the top marginal estate-tax rate, referred to as “equality of sacrifice”, was 75% in the UK and 77% in the US. In WW1 when UK men were being conscripted, very high estate taxes were termed “conscription of wealth”. The other situation is when the domination of a wealthy hereditary aristocracy is overturned. The sacrifice made necessary by WW1 gave UK social reformers that opportunity.

We should work diligently and hard to avoid the need and opportunity for such a remedy in our own society.

May 8 2013

Qualities of an Excellent Tax System

Noting at the start of this project that our tax system has no defined goal and grows ever more bewildering – the Federal tax code alone grew in the past 10 years from 1.4M to 3.8M words – I asked: “What if we had a tax goal and a budget management plan?” The posts summarized below explore results of the current system to identify what should change.

What We Tax shows how much of what kinds of tax is collected at each level of government. Federal revenue is chiefly from income and social insurance taxes. State and Local governments rely mainly on property, sales and inheritance taxes. Total tax revenue grew steadily as a % of GDP to a peak in 2000 and has since dropped very sharply on two occasions although government spending has not. Federal taxes are half the total. Personal income tax is 30% of the total and social insurance 20%.

Who We Tax shows how much tax is paid by each income group. The lowest fifth whose income averages $12,400 pays 16% of that in sales and other such taxes. They do not earn enough to pay income tax. The middle 20% who average about $33,400 pay 25% in taxes overall. The topmost 1% who average $1.3 million pay 31%. Tax paid relative to income is similar for all income groups – the top fifth gets 59% of all income and pays 64% of all taxes, the bottom fifth gets 3.5% of all income and pays 2% of all taxes.

The Dept of Health and Human Services judging who has “insufficient income to provide the food, shelter and clothing needed to preserve health” determines that the entire bottom fifth has insufficient income, as does a family of four in the next fifth, and even a family of five in the middle income group. The bottom fifth, after subtracting the 16% they pay in taxes has $10,400 to support themselves.

What We Do Not Tax examines why our system is so complicated. Nobody fully understands all the provisions that exclude some income from taxation. These deductions and payments made via the tax system total almost a third of overall Federal spending, more than $800B in 2012. That is more than our spending on our three most costly programs, Social Security, defense, and Medicare.

Tax exemptions are popular with politicians because they are less visible than spending programs and generally do not need annual funding decisions. All the big exceptions have a lot of support with the possible exception of the Earned Income Tax Credit, which benefits only the bottom fifth. Although the other exemptions are imagined to benefit society in general, they primarily benefit the top 20% and some disproportionately benefit the top 1% income group.

Business Tax explores how our taxes on corporate and other businesses compare to other nations. Although our top corporate tax rate is among the world’s highest, many of our largest corporations use tax exemptions to pay much lower rates. GE paid none at all in 2010. Multinationals manage their accounts to show profits in tax haven countries to avoid US taxes. All large ones have the advantage of tax deductible debt financing. What our corporations pay is half the OECD average.

An exceptionally high percentage of our businesses that together produce half of all business net income is not incorporated, which blurs the distinction between business and personal taxes and facilitates legal tax avoidance.

Purpose and Performance of Our Tax System examines its effectiveness, overhead, fairness and clarity. The system is ineffective, failing by a wide margin to fully fund government activities and allowing illegal evasion on almost a fifth of taxable income. Its overhead at 30% on income tax is much too high. It is unfair, only two of five considering it even moderately fair. Finally, it fails utterly on clarity.

Our current tax and budget management system allows 61% of us to believe the federal deficit can be cut substantially without raising taxes while at the same time opposing cuts to programs that account for 62% of all spending. Social security cuts are opposed by 79%, Medicare by 76% and defense by 58%. While opposing cuts to any programs with significant costs, three in four believes almost half of government spending is wasted and imagines cutting programs with relatively tiny costs would be a solution.

That huge compendium of public opinion research confirms in more detail what we in fact already know: we hate taxes, we love benefits. Home owners hate property taxes but love the mortgage interest deduction. Almost everyone hates inheritance taxes although hardly anyone has to pay any. And so on. What this means is a better tax system will be impossible unless we first agree how we want the tax revenue to be spent. We will get nowhere considering changes in isolation and make progress only by assessing the impact of potential changes on the outcome we want.

Taxes, Wealth and Fairness explores the outcome we want. The previous post explored public opinion about fairness and noted, for example, that 66% of us believes “everyone should pay some minimum amount of tax to help fund government”, the implication being that some do not, e.g., the 47% Romney noted who pay no income tax, although as we saw above, the bottom fifth in fact pays 16% of their income in taxes. This post turns from exploring mechanisms to results, what we mean by saying our tax system should have a fair outcome.

Nine out of ten Americans want a society with a relatively equal distribution of wealth. The average of our opinions is that the top fifth should have 32% of the total wealth. What we think they have is close to twice that percentage (59%). In fact, they have 25% more even than we imagine, a full 84% of our society’s total wealth, and their share is growing fast at the expense of every other group. Despite great disagreements over policies that affect wealth distribution, e.g., tax and welfare, a great majority of us appears to believe that wealth should be distributed far more equally than we imagine it is, and we imagine it to be distributed much more equally than the reality.

In the next post I will begin exploring different tax approaches to get the system we appear to want, a system that:

Fully funds all authorized government activities, not necessarily every year, but on average
Makes it easy to understand the impact of proposed tax and spending changes
Leads toward the distribution of wealth we democratically choose
Has a low collection cost and allows minimal illegal evasion
Does not disadvantage US business in the global economy

My biggest surprise from the research is the relatively equal distribution of wealth nine out of ten of us appear to want. I interpret that to mean we want relatively equal opportunities to become wealthy, which would include relatively equal access to high quality education and health care, for example, as well as relatively little unfair opportunity based on parental wealth.

I began this research because year after year we keep borrowing, not to fund investments for our future, but to keep consuming, and that’s unsustainable. Better we work our way out of this downward spiral than be forced to when it is more painful. That motive is the origin of the first bullet point above. But I now see the deeper problem. The tax and budget management system we have is not at all what we want. That’s the origin of the remaining bullet points.

It will be extremely hard to get the tax system nine out of ten of us appears to want. Inequality as extreme and fast growing as we have (net worth of the wealthiest 7% grew 28% in the past three years while the lower 93% lost an additional 4%) results only when political power based on wealth is shaping government policy. When we see our tax system’s enormous and confusing volume of laws, we imagine its apparent chaos to have grown randomly. It can be no accident, however, that it results in wealth flowing always and only to the top.

I will be grateful for any comments about the research, analysis and conclusions so far. Have I failed to research anything essential, made any flawed analyses, or come to any unwarranted conclusions?

May 5 2013

Barbarous Legislation, Dysfunctional Governments and What to Do

Truck Driver’s Insurance in Nepal explains why a Nepali truck driver who injures someone goes on to kill them. Sasi Kala commented: “This is one of the most barbaric insurances I’ve ever known” and asked: “Can we do something to change this madness?” That led me to answer a bigger question; why should Americans be interested?

In 2006 when the civil war ended, the monarchy fell and several long visits had given me a sense of Nepal’s economic situation, I thought: “I have decades of experience in enterprise strategy as a consultant and executive, I studied it at Harvard Business School, I should be able to see a strategy for Nepal”. I wasn’t expecting it to be helpful but if I came up with something compelling I’d presumably have tried to get it heard. What happened is, I realized I was trying to answer the wrong question. It’s not just that there’s so little to build on in Nepal, it now has neither government nor leader.

Distressingly little has changed in the months since I last posted about Nepal’s political situation, or even in the seven years since 2006. The “movers and shakers who never move and rarely shake” continue only to fulminate. The Constituent Assembly elected to draft a new Constitution within two years that failed to finish in four still has not been replaced so there is still no progress on the Constitution, and no government or leader.

An alliance of 33 parties is protesting against a proposed election to be held in November. They say they will not participate. Party leaders who say they will participate are resisting setting an election date until they have their alliances nailed down. The caretaker government headed by the Chief Justice is not empowered to do anything, which suits the politicians all too well. Meanwhile, daily life gets steadily worse for most everyone else.

The truck driver’s insurance is just one manifestation of a much greater madness. There’s little we can do until that’s healed. We can’t expedite the election to complete the Constitution, or its drafting, or the eventual election of a government. All we can do in the meantime is, if we have contacts there, help them understand what should be in the new Constitution and what legislation the new government should establish. That’s worth doing.

The existing truck driver insurance seems normal to Nepalis because it’s always been that way. Justice always has been subordinate to the Executive in Nepal so its government officials always have been above the law and that, too, seems normal. We’ve lived over two centuries with the Constitution of a secular republic and a democratically elected government, so we can more easily see some things Nepalis should change.

But what if we have no contacts in Nepal? Why should we be interested in Nepalis’ situation, anyway? Because it illustrates where we’re heading.

Nepal has dramatically inadequate infrastructure of every kind because it has no government. That’s a fundamental problem. If there’s no electricity 14 hours a day, there can be no wealth-producing enterprises with jobs for educated people. Fully a quarter of Nepal’s GDP is money sent home by Nepalis doing manual work overseas. “What’s the point of educating our children if there are no jobs for them?” one of my Nepali friends asks: “They’ll either leave us behind or make another war.”

Because the US government used to be effective, we have electricity, road and rail networks, school systems and the other services necessary for a strong society. It’s easy to start a business here and grow it quickly to any size. But our infrastructure that makes such things possible is now, day by day and year by year growing weaker. Why? Because our government no longer invests effectively for the future of our economy and society.

Why do we behave as if that’s OK? Because the results are accumulating at a pace we don’t notice. It’s like not changing the oil in a truck. The wise trucker does that and other maintenance and at the appropriate time gets a new and better truck. He doesn’t just drive the one he inherited into the ground. Like Nepalis, we’re accustomed to what our government is failing to do.

We say government should get out of the way of business. Nepal shows business is impossible without government. It’s not just that you can’t operate a business without electricity and you can’t access markets if there’s no railroad or highways. It’s not even worth trying if there’s no legal protection. Over the last few years I’ve explored with Nepali friends half a dozen business ideas that could have produced worthwhile products, profits and employment. They’d all be easy to do here. Not one is viable there. There’s so much missing and what is present is undependable.

I like business. I had fun and satisfaction doing it for forty years. But I have no experience in government and little understanding of how it works. That’s a problem. We all have biases about how much of what kinds of things government should do. Bias is unavoidable but ignorance is not. We all should form not just opinions but educated and actionable ideas about government, test them against ones that don’t match our biases, think them through, then work to get them established.

The goal of my original blog and this one was at first just to help me identify and define what would be better and worse. That is necessary but it no longer feels sufficient. We must stop our government and future from getting worse, and have our government do what it must for a better future.

May 2 2013

Armed Revolution and Gun Control

Fairleigh Dickinson University just published the stupefying results of their recent national survey about armed revolution and gun control. Asked for their opinion about this question: “In the next few years, an armed revolution might be necessary in order to protect our liberties”, 29% said an armed revolution may be necessary. That’s three in ten of my fellow citizens. Three in ten!

The survey also shows how belief in the potential need for armed revolution against our government correlates with beliefs about gun control. Only four in ten (38%) who believe a revolution might be necessary support additional gun control legislation. Additional legislation is supported by over six in ten (62%) who do not think armed revolt will be needed.

The results also differ by party, with two in ten (18%) Democrats thinking an armed revolution may be necessary versus more than four in ten (44%) Republicans. That’s a lot of Republicans! It’s also a lot of Democrats.

The survey also asked if respondents believe that: “Some people are hiding the truth about the school shooting at Sandy Hook Elementary in order to advance a political agenda.” I feel naive to be shocked that a quarter of us does believe facts about the shooting are being hidden.

One of the poll analysts said: “The differences in views of gun legislation are really a function of differences in what people believe guns are for. If you truly believe an armed revolution is possible in the near future, you need weapons and you’re going to be wary about government efforts to take them away.” That sounds accurate.

As I wrote here, I once owned a .22 rifle, but not in case I needed to overthrow my government, and I didn’t get rid of it because it would be outmatched by my government’s weaponry. I always thought democracy was the least bad of all possible arrangements for a large society. That’s why I vote.

It’s very disturbing that three in ten Americans believe our democratic form of government may have to be overthrown. It’s downright peculiar that they also believe their firearms could do the job.

Apr 29 2013

Taxes, Wealth and Fairness

‘Democratic’ in my previous post’s question: “What is the purpose of our democratic society’s tax system?” – means it leads to a fair outcome. That post explores public opinion about tax fairness. But what do we mean by a fair outcome? Taxes are only the means; what about the end, a fair economic structure? We now explore the previous post’s final question: “How should society’s wealth be distributed? What do we actually want?”

Determining how to answer such questions was the life work of US political philosopher John Rawls. His aim was to see how to establish the legitimate use of political power in a democracy; how a society with diverse worldviews can unify for action. He developed a method (the “original position”) to proceed from our deepest ideas about justice to reach real agreement. It works when people imagine themselves entering society in a fair position and answer using only factors their intuition considers fundamental. Phrasing the questions is critically important. Politicians typically phrase them not to promote agreement but amplify differences.

Professors Norton and Ariely used Rawls’ method to survey (see their Report and an Interview with Ariely) a random sample of 5,500 Americans to explore how we want society’s wealth to be distributed. They used pairs of pie charts depicting the distribution of wealth from richest to poorest groups among pairs of nations. They asked respondents which nation of each pair they would rather join: ‘In considering this question, imagine that if you joined this nation, you would be randomly assigned to a place in the distribution, so you could end up anywhere in this distribution, from the very richest to the very poorest.’’

The pie charts shown to respondents were not labeled. One showed the existing distribution of wealth in the USA. One showed all groups having exactly the same. The third showed another real world case, the distribution of income in Sweden. They chose that because it is quite different from the others (income in Sweden is distributed relatively equally but wealth is not).

Presented with the pair of charts representing Sweden and the USA, nine out of ten respondents (92%) preferred the Swedish distribution. The results were consistent across gender, political and economic divides: females 93% vs males 91%, Republicans 90% vs Democrats 93%, income less than $50,000 92% vs $50,001–$100,000 92% vs more than $100,000 89%. There was a slight preference (51% to 49%) for the Sweden distribution over the equal distribution when they were compared directly and a somewhat larger preference when the choices were Sweden or US (92% vs 8%) than when they were equal or US ( 77% to 23%).

Those answers are provocative; a huge majority of Americans appears to want a society with a relatively equal distribution of wealth. But the question is abstract so Norton and Ariely tested the result. Respondents were next asked what percent of wealth they believe is owned by each of the five economic groups in the United States, and what each ideally should own. They were given the following definition: ‘‘Wealth, also known as net worth, is defined as the total value of everything someone owns minus any debt that he or she owes. A person’s net worth includes his or her bank account savings plus the value of other things such as property, stocks, bonds, art, collections, etc., minus the value of things like loans and mortgages.’’

The second set of answers is equally provocative, is consistent with the first, and is also consistent with my previous post’s findings about clarity. Respondents vastly underestimated the actual level of wealth inequality in the US. They said the wealthiest fifth of Americans holds about 59% of the wealth. They actually have almost 84%. They own fully a quarter more of the total than respondents imagine.

Consistent with the pie chart answers, respondents constructed ideal wealth distributions far more equitable than their estimates of the actual. They want the top fifth to own not 59% of society’s wealth but roughly half that amount, i.e., 32% of the total. They redistributed what they feel is too much from the top fifth to the bottom three, leaving the second group unchanged, making the third about the same as the second, and more than tripling the share of the poorest group. As with the first question, the answers were highly consistent across gender, political and income groups.

So, despite great disagreements over policies that affect wealth distribution, e.g., tax and welfare, a great majority of us appears to believe wealth should be distributed far more equally than we imagine it is, and we imagine it is distributed much more equally than the reality.

We have extraordinarily mistaken beliefs about the actual level of wealth inequality, and we probably have equally mistaken beliefs about our opportunity to move up in wealth. Incomes of the lower 80% of the population have been dropping for the past three decades. Only the top 1% has seen real growth in income.

Furthermore, in the most recent three years the wealthiest 7% has enjoyed a 28% increase in their net worth, driven largely by the Fed’s successful efforts to boost the stock market, while the lower 93%, whose primary asset, if they have any at all, is typically the equity in their house, has suffered a further 4% loss in wealth. The Organization for Economic Cooperation and Development (OECD) reports that among all 34 OECD nations, only Turkey, Mexico and Chile distribute their society’s wealth more unequally than we do.

Extreme inequality results when political power based on wealth shapes government policy. That is the norm in autocracies. It can also happen in a democracy. Income inequality in Tsarist Russia was not so severe as ours is now.

Is the relatively equal distribution preferred by Norton and Ariely’s respondents optimal? My guess is we would generate more overall wealth with somewhat greater incentives. That would be good to know but we already do know our existing distribution is far from most Americans want. And history tells us that when income from work goes disproportionately and increasingly to the already wealthy as ours does now, it can only, as my mom always said, end in tears.

I hope we will not wait for a revolution but take democratic action to better distribute the wealth our society generates. I will explore changes to make that more likely in future posts about governance. But first, I will explore changes that would make our tax system better fit its purpose.

Apr 24 2013

The Purpose and Performance of Our Tax System

What is the purpose of our democratic society’s tax system? It’s very different from, say, Louis the Sun King’s France. His Minister of Finance defined taxation as: “plucking the goose to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. We only want to collect enough, not as much as possible. How well does our system perform? We have better measures than hissing:

Effectiveness – % of government activities it funds – is it enough?
Overhead – % of what is collected the process costs
Fairness – % of the population considering it fair
Clarity – extent to which the population understands what the taxes pay for

Effectiveness has two aspects. First, a perfect tax system would, not every quarter or year, but over the long haul, fully fund our government’s activities. By this measure, our current system is an abject failure. The problem is not so much that the gap widens during economic downturns, e.g., lower collections and higher spending post-2007, but that what’s collected is almost always significantly lower than what’s spent. I’ll comment below (see clarity) on why that is so. At this point we only need acknowledge that our current tax system is seriously ineffective.

The other aspect of effectiveness is what % is collected of the amount the system intends to collect, i.e., how much is illegally evaded. This 2011 study by the Federal Reserve Bank says: “18-19% of total reportable income is not properly reported to the IRS, giving rise to a “tax gap” approaching $500 billion dollars”. It is estimated that around $3T of income tax was evaded from 2001-2010.

Overhead means the cost of collecting. By this measure, too, our system gets a failing grade. This report, using IRS data, estimates it at 30% for the income tax system. Local property taxes, for example, have lower overhead. Embedded point of purchase taxes, e.g., on gasoline, have about 5% overhead. I haven’t tried to estimate overhead for our overall system. It would be good to get it a lot closer to 5% and have it cause less hissing.

Measuring fairness is a challenge. How to define it? The dictionary definition is simple, “a proper balance of conflicting interests” or “showing no more favor to one side than another” but it is not so obvious how to measure that in a tax system. Since we are a democracy, the best way is what % of the people considers it fair. From a recently published 131 page compendium of survey results I selected some of the most illuminating ones about fairness and clarity.

How many of us consider the current system fair? See below. A little under half (3% + 40%) and mostly only moderately fair. A quarter (24%) considers it not at all fair. Three of five, however, (59%) regard what they personally must pay as fair. Perhaps they are the same 56% who consider that middle-income people pay their fair share? Many more, however, (68%) feel the system benefits the rich and three of five (60%) want those who earn more than $1M a year to pay a minimum of 30% in taxes. Two of five (40%) consider that lower income people pay too much. Maybe they are lower income? Fully two thirds (66%) believe everyone should pay some tax although that question is somewhat loaded. Almost two thirds (64%) think corporations pay too little tax.

Would you say that our [federal] tax system is very fair, moderately fair, not too fair or not fair at all? (p. 20, Dec. 2011 Pew) Very fair – 3%, Moderately fair – 40%, Not too fair – 31%, Not fair at all – 24%)
Do you regard the income tax which you will have to pay this year as fair? (p. 23, Apr. 2012 Gallup) Yes – 59%, No – 37%
Do you feel the present tax system benefits the rich? (p. 25, Apr. 2012 CNN/ORC) Yes – 68%, No – 29%
Are middle-income people paying their fair share in federal taxes, too much or too little? (p. 26, Apr. 2012 Gallup) Too much – 36%, Fair share – 56%, Too little – 6%
Are lower-income people paying their fair share in federal taxes, too much or too little? (p. 27, Apr. 2012 Gallup) Too much – 40%, Fair share – 33%, Too little – 24%
Are corporations paying their fair share in federal taxes, too much or too little? (p. 27, Apr. 2012 Gallup) Too much – 11%, Fair share – 21%, Too little – 64%
Would you favor requiring households earning $1 million a year or more to pay a minimum of 30% of their income in taxes? (p. 31, Apr. 2012 Gallup) Support – 60%, Oppose – 37%
[Should] everyone pay some minimum amount of tax to help fund government? (p. 20, Feb. 2009 Harris/Tax Foundation) Should – 66%, Current system is fair – 19%, Not sure – 15%

So, our current tax system is perceived to be less fair than we want. Another way to look at it is in terms of results. The tax system takes money from people at different rates and redistributes some of it to others depending on relative circumstances. How fairly do we think it does that? Almost three of five (57%) feel money and wealth should be more evenly distributed. Opinions are, however, equally divided (47% to 49%) on whether the government should redistribute it by heavy taxes on the rich.

Do you feel that the distribution of money and wealth in this country today is fair? (p. 33, Apr. 2011 Gallup) Fair – 35%, Should be more evenly distributed – 57%
Do you think that our government should or should not redistribute wealth by heavy taxes on the rich? (p. 33, Apr. 2011 Gallup) Should – 47%, Should not – 49%

Another perspective is, are we paying the right amount of tax relative to government spending? Half of us (47%) think we pay too much tax and half (47%) think what we pay is about right. But twice as many (61% to 26%) want to pay less, two thirds (67%) are against raising taxes and almost as many (61%) are unwilling to pay more. How to reconcile the desire to pay less with closing the government’s deficit? Three of five (61%) believe the deficit can be cut substantially without raising taxes and more than half (53%) favors balancing the budget by cutting spending.

Do you consider the amount of federal income tax you have to pay as too high, about right, or too low? (p. 4, Apr. 2012 Gallup) Too high – 46%, About right – 47%
Would you like to see the amount Americans pay in federal income taxes increased, decreased, or remain about the same? (p. 6, Jan. 2012 Gallup) Increase – 13%, Decrease – 61%, Same – 26%
Would you favor or oppose raising taxes as a way to reduce the budget deficit? (p. 55, Mar. 2011 PSRA/Pew) Favor – 30%, Oppose – 67%
Would you be willing to pay more in taxes to reduce the federal deficit? (p. 50, Jun. 2011 Bloomberg) Willing to pay more – 36%, Not willing – 61%
Do you think it is possible to bring down the deficit substantially without raising taxes? (p. 54, Mar. 2011 Bloomberg) Is possible – 61%, Not possible – 37%
Which would you prefer to balance the federal budget deficit? (p. 56, Jul. 2011 Economist/YouGov) Increase taxes -10%, Decrease gov’t spending – 53%, Both – 29%

Now we arrive at our tax system’s clarity. How accurately do we understand the cost of our government’s activities and how that relates to the taxes we pay? This is where our system fails most spectacularly. We want to pay less taxes and we imagine we could cut government spending to make that possible. What spending do we want be cut? Waste!

We believe almost half of all government spending (47%) is wasted. Where? Social Security, the largest program? Four of five (79%) oppose cutting Social Security spending. There is less opposition to raising the Social Security eligibility age (44% in favor, 54% opposed). Opinions are quite evenly divided on what we could save by raising the age of eligibility. I don’t know what % of the population knows Social Security does not in fact contribute to the deficit – we collect more Social Security taxes than we pay in benefits.

How about cutting Medicare etc, our second largest program? Opinions are equally distributed from a lot to not much on what that would save but three quarters of us (76%) are in any case against cutting Medicare.

Should we cut defense spending, the third largest area of spending? Three of five (58%) oppose that but almost half (47%) think we could make very large savings by pulling out of Iraq and Afghanistan and two thirds (66%) favor doing that. Will they oppose spending the money to invade Iran?

Since the top three areas of spending account for 62% of the total, how to eliminate that 47% of waste? Two of every three of us (42%) believe we could make very large savings by cutting aid to foreign countries and 72% favor doing that. Sadly, our total non-military foreign aid in 2011, $32M, is one thousandth of one percent of total federal spending.

Do you think people in government waste a lot of money we pay in taxes, waste some of it, or don’t waste very much of it? (p. 15, Apr. 2011 CNN) A lot – 73%, Some – 23%, Not Much – 4%
For every dollar you pay in federal taxes, about how many cents do you think are wasted by the government? (p. 16, Jan. 2013 Reason-Rupe) Wasted – 47%
In order to reduce the budget deficit, would you favor or oppose reducing spending on Social Security? (p. 60, Mar. 2013 CBS) Favor – 18%, Oppose – 79%
Would you favor or oppose gradually raising the age of eligibility for Social Security to 69? (p. 53, Mar. 2011 Bloomberg) Favor – 44%, Oppose – 54%
Savings by gradually raising the age of eligibility for Social Security to 69 would be? (p. 53, Mar. 2011 Bloomberg) Very large – 19%, Fairly large – 28%, Fairly small – 24%, Little difference – 24%
Would you favor or oppose significantly reducing benefits for Medicare? (p. 53, Mar. 2011 Bloomberg) Favor – 22%, Oppose – 76%
Savings by reducing benefits for Medicare would be? (p. 53, Mar. 2011 Bloomberg) Very large – 19%, Fairly large – 25%, Fairly small – 27%, Little difference – 24%
In order to reduce the budget deficit, would you favor or oppose reducing defense spending? (p. 60, Mar. 2013 CBS) Favor – 38%, Oppose – 58%
Savings by pulling all troops out of Iraq and Afghanistan would be? (p. 53, Mar. 2011 Bloomberg) Very large – 47%, Fairly large – 28%, Fairly small – 12%, Little difference – 11%
Would you favor or oppose pulling all troops out of Iraq and Afghanistan? (p. 53, Mar. 2011 Bloomberg) Favor – 66%, Oppose – 30%
Savings by cutting aid to foreign countries would be? (p. 53, Mar. 2011 Bloomberg) Very large – 42%, Fairly large – 30%, Fairly small – 14%, Little difference – 10%
Would you favor or oppose significantly cutting aid to foreign countries? (p. 53, Mar. 2011 Bloomberg) Favor – 72%, Oppose – 26%

This is already a long post so I will make only two comments about state and local taxes. Property taxes are considered the most unfair of all, perhaps because they may force folks whose incomes drop sharply at retirement to sell their home. Estate taxes, primarily federal but which have also been levied by some states, are also very unpopular, which is inconsistent with our idealization of the “self-made man”.

The next post in this series will say more about fairness. How should society’s wealth be distributed? The cynic would expect all of us to think we personally should have more. What do we actually want? My analysis of our current tax system and how its results compare to what we want will at that point be sufficiently complete. I will then force myself to establish some proposals for a better system.

Apr 6 2013

Opposing Senate Resolution 65 re Iran & Israel

Please, everyone, join me in urging your Senators to defeat Senate Resolution 65 which would commit us to a disastrous war with Iran that would not even be entered into by our own decision. Use my letter below as a base if it helps. I’m sending a slightly different version to my other Senator, Angus King, because he has not sponsored the Resolution.

With these links you can get your Senators’ email address and if they sponsor S.Res.65 as well as its text.

Dear Senator Collins,

With utmost seriousness I urge you to withdraw your support for, and in fact work to defeat Senate Resolution 65.

S.Res. 65’s conclusion, “if the Government of Israel is compelled to take military action in self-defense, the United States Government should stand with Israel and provide diplomatic, military, and economic support to the Government of Israel” would commit us to war with Iran whenever Israel decides. It would not be our Government but Israel’s that decides whether or not to invade Iran.

Although S.Res.65 ends: “Nothing in this resolution shall be construed as an authorization for the use of force or a declaration of war”, that is exactly what it is. If the Government of Israel decides to strike Iran, S.Res.65 would commit us, too.

War on Iran is very much against our interests. As former Secretary of Defense (2006-2011) Robert Gates, said in a speech on October 3 last year: “The results of an American or Israeli military strike on Iran could, in my view, prove catastrophic, haunting us for generations … An attack would make a nuclear-armed Iran inevitable. They would just bury the program deeper and make it more covert.”

Just like the claim that Iraq had weapons of mass destruction, the claim that Iran is making nuclear weapons is false. US Director of National Intelligence James Clapper told the Senate on March 12 this year: “We do not know if Iran will eventually decide to build nuclear weapons”. He said Iran is not enriching to weapons grade and we could quickly detect it if they do. Inspectors at the International Atomic Energy Agency who monitor Iran’s nuclear sites say the same thing.

I care deeply about this both as an American and a parent. I proudly support our son’s service in the military. I believe you care about him, too. Do not blindly commit him to a war that is against our interests and would not even be entered into by our own decision.

Respectfully,

Mar 17 2013

Afghanistan, Pakistan, Iran, and More

Our foreign policy is bankrupting us, poisoning the minds of our children, and turning the world against us.

Iraq: We have so far spent $1.7T on war in Iraq and will pay $490B more in benefits to veterans, according to the Costs of War Project at Brown University. The rationale that Iraq possessed weapons of mass destruction was false. The results are a traumatized Iraqi society, reinvigorated Islamist militants throughout the region, and we destroyed Iran’s only military rival.

Afghanistan: The combined cost of our wars in Iraq, Afghanistan and Pakistan is almost $4T. The estimated death toll from the three wars is 330,000. The rationale was to make Afghanistan a well ordered democracy that could no longer be used as a refuge by Al Queda. But unless we remain there permanently, the Taliban will regain control.

Pakistan: The UN terrorism and human rights envoy just issued a statement that our drone strikes in Pakistan violate international law. “The position of the government of Pakistan is quite clear,” he said. “It does not consent to the use of drones by the United States on its territory and it considers this to be a violation of Pakistan’s sovereignty and territorial integrity”. See here for a table and map of our drone strikes inside Pakistan.

Libya: After we supported the French-led overthrow of Gaddafi, his Tuareg supporters allied with Islamist militants to fight for the independence of northern Mali. A French-led force is now pushing them back but they can return temporarily to Libya, or just as easily go to Algeria, Niger or Mauritania. Throughout North Africa the driving force is not nation states set up in the relatively recent past by France and other European conquerors but milennia of tribal rivalry.

Yemen: Bordering Saudi Arabia and major oil shipping lanes, Yemen was almost brought to civil war last year by southern separatists and northern rebels. They sabotaged its major oil pipeline for long enough to shut down Yemen’s main refinery. They blew it up again a couple of weeks ago. Meanwhile, we’ve made 65 drone attacks in southern Yemen, mostly in the last 15 months, according to this report.

Syria: Secretary of State Kerry recently promised aid to fighters against the Syrian government. Because there is little real separation between them, the al-Nusra Front and others we say are terrorists, some of our aid will inevitably get to the terrorists.

Iran: We say Iran is developing nuclear weapons and threaten whatever it takes to stop them. Late last year former Secretary of Defense (2006-2011) Robert Gates said: “The results of an American or Israeli military strike on Iran could, in my view, prove catastrophic, haunting us for generations … An attack would make a nuclear-armed Iran inevitable. They would just bury the program deeper and make it more covert.” The US Director of National Intelligence told the Senate this week that Iran is not enriching to weapons grade and we could quickly detect it if they do. Inspectors at the International Atomic Energy Agency who monitor Iran’s nuclear sites say the same thing.

Insanity: But, stupefyingly, Senator Lindsey Graham (R-SC) recently introduced “for himself, Mr. Menendez, Ms. Ayotte, Mr. Schumer, Mr. Cornyn, Mrs. Boxer, Mr. Rubio, Mr. Casey, Mr. Hoeven, Mrs. Gillibrand, Mr. Kirk, Mr. Blumenthal, Mr. Crapo, Mr. Cardin, Ms. Collins, Mr. Begich, Mr. Blunt, Mr. Brown, Mr. Wyden, Mr. Portman, Mr. Manchin, and Mr. Lautenberg” Senate resolution 65 which “urges that, if the Government of Israel is compelled to take military action in self-defense, the United States Government should stand with Israel and provide diplomatic, military, and economic support to the Government of Israel in its defense of its territory, people, and existence.”

S.Res.65 means: It would not be our President but Israel’s who decides whether or not to invade Iran. S.Res.65 ends: “Nothing in this resolution shall be construed as an authorization for the use of force or a declaration of war”. That is, however, exactly what it does do.

I will not say more in this post about the cost or counter-productiveness of our invasions of Iraq or Afghanistan. I will just highlight again Secretary Gates’ warning: “a military strike on Iran could … haunt us for generations” and say why drones are not the answer.

Drones: See this excellent piece on the legality, morality and practicality of drones: “[they] provide a highly efficient way to destroy key enemy targets with very little risk. But they also allow the enemy to draw the United States into additional theaters of operation … in the jihadists’ estimate, the broader the engagement, the greater the perception of U.S. hostility to Islam, the easier the recruitment until the jihadist forces reach a size that can’t be dealt with by isolated airstrikes.”

Islam: It’s not just that drone attacks make other people believe we are hostile to Islam. A teacher friend tells me our relentlessly sensational media reporting has made our own children believe Muslims hate us.

What we must do: Stop trying to control the world. In particular, stop threatening Iran. They do not have nuclear weapons. Fearing they would attack with them is foolish because Iran would be destroyed if they did. Therefore, they will not. Never again go to war to destroy weapons that do not exist or make wars that cannot be won. Scuttle Senate Resolution 65.

Mar 4 2013

What We Tax

Our tax system is a lot like Topsy in “Uncle Tom’s Cabin”, who says: “I s’pect I growed. Don’t think nobody never made me.” It growed item by item, legislative session by session, with no defined goal. What if we had a tax goal and a budget management plan?

This is the first in a series of posts about our current system and its results. What can be taxed falls into these major categories:

Income, what people and corporations earn (e.g., income tax, social insurance programs)
Wealth, what people own (e.g., annual real estate tax, inheritance tax)
Consumption, what people buy (e.g., sales tax added to restaurant bill or embedded in gas price, value added tax paid at each step from raw materials through manufacturing and retail to end user)
Usage of public goods (e.g., road and bridge tolls)
Financial transactions (e.g., stock sales)

Our current system is complex for both structural and political reasons. We have three levels of government, each of which must fund its spending. That’s the structural cause. Politics is far greater. Politicians legislate what revenue will be collected, e.g., income tax rates, and what will not, which they call tax preferences. They are popular while increases are not, and they can at the last minute be attached without debate to other legislation. No wonder we have so many – the Federal tax code alone grew in the past 10 years from 1.4M to 3.8M words.

Mistakes and cheating are inevitable with such a system. And complexity leads to high costs. The IRS estimates taxpayers and businesses spent over 6B hours in 2008 complying with filing requirements, the equivalent of 3M workers who would have been paid $163B. That would have been 11% of total 2008 Federal tax revenue.

How much do we currently tax at each level of government? The following data (unfortunately structured a little differently from my categories above) comes from this excellent site:

Total tax revenue for 2013 is expected to be around $5.6T, 52% of which or $2.9T will be Federal, 29% or $1.6T State, and 19% or $1.1T Local taxes. Less than a third (30%) of the total will be $1.7T of individual income tax, 80% of which will be Federal. Corporate income tax at $399B will be only 7% of the total. Social insurance taxes totaling $1.1T will be 20% of the overall total. Another 20%, $1.14T, will be “ad valorem”, i.e., real estate and personal property tax, sales tax, inheritance tax, etc. levied chiefly by State and Local governments.

These charts make it easier to see what taxes are collected by each level of government.

How has tax changed over time? Total government revenue grew from 7% of GDP at the start of the 20th century to 36% now, about where it was in 2000. At the start of the 20th century Federal tax was 3%, State 1% and Local 4% of GDP. Driven by WW1, Federal spiked to 8% and total revenue to 15% of GDP, then Federal dropped back to around 5% through the ’20s. The Great Depression drove total tax back up to 19% in 1933, of which 6% was Federal, 4% State and 9% Local. WW2 drove a huge spike to 30% of GDP in 1945, dominated by Federal at 24%. Federal dropped to 16% of GDP by 1950, jumped to 20% in the Korean War and stayed mostly in the high teens since then. State revenue hit 8% in the 1982 recession and now fluctuates between 8% and 10%. Local revenue hit 6% in 1982 and now fluctuates between 6% and 8%.

What was taxed also changed. At the start of the 20th century the Federal government got its revenue chiefly from import tariffs while State and Local governments levied property taxes. Income tax was established in 1913. It went to 5% of GDP following WW1, settled around 2% through most of the ’20s and ’30s, spiked to 16% in 1944 and settled between 11% and 12% thereafter. Sales and other point-of-transaction taxes doubled from 5% or 6% at the start of the 20th century, peaked in the Great Depression at 14% then dropped to 10% by 1960 and 7% now. Fees and charges grew slowly to 1% until WW2 then faster to 3% now. Social insurance taxes established in 1937 to fund Social Security were less than 1% in the first year, grew to around 10% in the 1980s and are now 6% to 7% of GDP.

Federal revenue is now chiefly from income and social insurance taxes. State revenue was mainly ad valorem until the ’70s although they began collecting income tax in the ’20s and social insurance in the ’30s. It is now about equal thirds income tax, ad valorem, and fees plus business and other revenue (56% of which is earnings on pension investments). State income taxes rose sharply in the ’70s and ’80s, then flattened. Local revenue is about half ad valorem taxes, half fees plus business and other revenue (40% of which is from water and electric utilities).

Now we know what we tax and how it changed in the past century we can in the next couple of posts see who pays what % of the total and what taxes we intentionally do not collect.

Highlights so far include:

Total tax grew steadily as a % of GDP for half a century following WW2
Total tax peaked in 2000 and is now at the same level but it has twice fallen very sharply
Almost half of all tax revenue is collected by State and Local governments
Less than a third of the total is personal income tax
Income tax has been quite steady around 13% of GDP since WW2
Sales and property taxes are around the same level as corporate income taxes
Social insurance tax is pretty steady at 6% to 7% of GDP (but health care spending is fast increasing)

Feb 28 2013

Innovation, Capital, Jobs and Taxes

We have high unemployment in part because our financial system misallocates capital. This post starts to explore why and what to change.

I’ll use terminology from Clay Christensen’s forthcoming book, “The Capitalist’s Dilemma” because his “The Innovator’s Dilemma” is among the most illuminating I’ve ever encountered. Why, he wondered, was the industry leader in 14 inch computer disk drives not the leader in 8 inch, and why did leadership change again in the next generation? Why did the same thing happen in all fast-developing industries? It’s because, he realized, industry leaders innovate only at the high end of their market. Innovation below their market that results first in products for new markets continues to develop until it replaces products for existing markets.

Christensen terms these revolutionary innovations that transform complex, costly products into simple, cheap ones “empowering”. Examples include the Ford Model T, the Sony transistor radio, and the IBM PC. These innovations require long-term capital and, when successful, they create many new manufacturing, sales and service jobs.

“Sustaining” innovations that replace existing products with new versions create few if any new jobs because those who worked on the replaced products now work on the new ones. Sustaining innovation is attractive because it offers a faster, and in the short-term less risky, return on capital than empowering innovations. It is insufficient in the longer term because its products will be replaced by later products of empowering innovation.

“Efficiency” innovations cut the cost of making and distributing existing products and services. They cut jobs because they streamline processes. They also free up capital. Toyota’s just-in-time production system, for example, enables them to operate with much less capital invested in inventory.

What we want our financial system to do is encourage capital freed up by efficiency innovation to be redeployed as investment in new empowering innovations. We want empowering innovations because they create new consumption. We want enough of them so they create more jobs than efficiency innovations cut. That way, we’ll have enough jobs for our increasing population.

What is happening in the US today is too much capital liberated by efficiency innovations is being invested in more efficiency innovations.

Part of the remedy is to change how we tax capital gains. Gains from investments held less than a year are now taxed like personal income while gains on investments held more than one year are taxed at a much lower rate, 15%. We should change that because gains from empowering innovations come, if at all, only after considerably more than one year while efficiency innovations pay off sooner.

We should tax capital gains at a set of decreasing rates depending on how long the capital remains invested. Rates should start at the personal income rate, drop slowly in years two and three, then faster, maybe even to zero after five or eight years. This would have little impact on the Federal budget in the short term because capital gains generate only a small part of Federal tax revenue. In the longer term, by encouraging more investment in empowering innovation that creates new jobs, income tax revenue should grow and Federal spending on unemployment should drop.

Unfortunately, I’ve realized I should resume exploring tax policy. Ben Franklin famously wrote: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” I’ll start with corporate tax because Ben did not foresee the rise of corporations, which are by nature exempt from the inevitability of death and by trickery can also escape taxation.

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