Saturday, December 1, 2012

You Say Tax Reform Like it's a Good Thing

     The GOP is always pushing this idea. They never tire of speaking the need to reform our tax code that is allegedly so burdensome and complex, enriching only the tax lawyers while "stifling growth."

     It seems to me though that you have to qualify any call for tax reform. Not all tax reform is a good thing. The tax reforms that Reagan entered in with Tip O'Neil tend to be lionized in minds of the GOP and large parts of the press as if these episodes in tax reforms were unqualified positive episodes.

     Yet most of what happened in 1983 and 1986 was a shifting of the tax burden from the rich to the middle class. A new report was out from the NYTimes yesterday which says that taxes have gone down on all income rates. If you just stop here you could be mislead into thinking this was a good thing. But what we've seen as much as anything is not so much a cut in taxes as a shift in the tax burden.

      In the tax wars of the last few years some liberals have taken to appealing to Reagan in the face of GOP obstructionism and recalcitrance. After all, they point out, Reagan raised taxes more than anyone in his tax reforms of 1983 and 1986.

     It's actually important to get a handle around these episodes as with all this talk about tax reform, they are largely seen as a model for what tax reform is and should be. Reagan certainly raised taxes a lot in 1983 and 1986 but mostly on the middle class and the poor. in 1983 payroll taxes were sharply increased-with Social Security payments reduced. In other words, the average American saw their taxes raised twice-once through raised rates, then again, through decreased benefits. A lose-lose.

     And so the report shows that while income taxes decreased at each level. payroll taxes increased-and less for the affluent as payroll taxes are capped at a low level-even today only $106,800. Indeed, you can't but notice that the taxes that have decreased are those that the wealthy have to pay a lot of whereas those that have risen are those those with modest income pay.

     For example,  when you look at the increase in payroll taxes along with the decrease in income taxes you have to bear in mind that 75% of Americans pay most of their taxes via the payroll tax not through income taxes. We've also seen a rise in state and local income and property taxes which again hit the less well off harder.

     We've seen a drop in the corporate and capital gains taxes. Reagan did raise the capital gains and dividends taxes in the 1986 reform. This, of course was the one part of the reform that wouldn't last. Clinton went along with the GOP's cutting capital gains in 1997, then Bush lowered it down to 15% in the 2001 tax cuts.

      Much of the way this report phrases things superficially seems to vouchsafe Republican ideology.

      "The number of high-income households, and their average income, has increased rapidly. Even in the wake of the recession, more than a million taxpayers made at least $350,000 in 2010, and that group accounted for 15 percent of the nation’s income. As a result, while those households paid a smaller share of their income in taxes than they did in 1980, they paid a larger share of the total tax bill."

       This is often used to claim that taxes are not less progressive. The rich pay less taxes but their overall contribution is higher-however, could this not be because there are more rich people? Still taxes are less progressive:

      "In a progressive system, upper-income households pay a larger share of taxes than their share of income, while the opposite is true for lower-income households. Over the last three decades, taxation in the United States became less progressive."

      "Households earning more than $350,000 paid 20 percent of the nation’s taxes in 2010, 1.37 times their share of total income, while in 1980, those households paid taxes equaling 1.56 times their share of income. The change was larger before the recession, which reduced investment income, as in past recessions."

       So by all means let's have tax reform just of the right type. From what the President and Democrats are saying they seem to get this. The proposed rise in the top rates along with capital gains and dividends is certainly very welcome. Overall, a new shift in a more progressive direction would be welcome and there's now reason to hope that we may be going down that road now.

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