The Tax Rate Fallacy

  The Fed: Time For Transparency and Accountability – When the global financial crisis began in 2007, the Fed reacted by providing liquidity through its discount window and open market operations, later supplemented by a number of extraordinary facilities created to provide reserves as well as guarantees. Some estimates place the total amount of government loans, purchases, spending, and guarantees provided during the crisis at more than $20 trillion—much greater than the value of the total annual production of the nation. Only a very small portion of this was explicitly approved by Congress, and much of the detail surrounding commitments made—especially those made by the Fed—was clouded in secrecy. A few days ago the Fed finally released on its website some data on its behind-closed-doors deal-making. In coming weeks I will provide more comments on what has been revealed. In this column I will only raise questions concerning the appropriateness of secret bail-outs that were provided to financial institutions, nonfinancial firms, and even individuals. Fed critics from both the right and the left have been arguing it is time to reign-in the Fed and it is certain that the next Congress will return to this issue.


How the E-bond plan would work – The proposal to issue E-bonds, made in the FT by Jean-Claude Juncker and Giulio Tremonti, has sparked widespread controversy. Some observers (for example, Wolfgang Münchau) have said that it contains the kernel of a solution to the European debt crisis – which, under some circumstances, it might. But the initial response from Angela Merkel has been negative, exactly as it has been in many earlier rounds of this particular debate. The E-bond idea will obviously go nowhere without the support of Germany. But they have never before faced the real possibility that there could be a break-up of the euro if the sovereign debt crisis is not overcome. Maybe it is time for them to think again. All previous versions of the E-bond plan have fallen at the first fence because of the budgetary guarantee which Germany would implicitly offer to other member states if E-bonds are backed with a “joint and several” guarantee from all of the member states. In effect, this would mean that, in extremis, the strong economies would become liable for all of the government debt issued within the EMU bloc. Germany has always regarded this as a non-starter, for very understandable reasons. An alternative is to offer only a “proportionate” guarantee for the E-bonds, under which each member state would simply stand behind a fraction of the bond issue, with this fraction being broadly proportionate to GDP. Under this form of guarantee, Germany would not have to bail out other countries if they defaulted.

 Why a Payroll Tax Holiday Could Destroy Social Security Bruce Bartlett is an economics expert, a former Domestic Policy Adviser in Reagan Administration, and a former Treasury Official during the George H.W. Bush Administration but he was also an outspoken critic of George W. Bush. He worked for Jack Kemp and was an early proponent of supply-side economics but after becoming disillusioned with Republican leaders he wrote ‘Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy’ and ‘The New American Economy: The Failure of Reaganomics and a New Way Forward.’ He is, in short, a rare example of a Republican economics expert and a straight-shooter that is not blinded by ideology. So when Bruce Bartlett says that a payroll tax holiday will undermine or destroy Social Security we should listen.

Company Store Redux – Nick Krafft at Open Economics sends us to this IMF working paper by Michael Kumhof and Romain Ranciere, “Inequality, Leverage, and Crises.” In it, the authors develop a model in which income inequality gives rise to different preferences and behaviors within two income groups: workers and investors.  The impacts of the two groups’ preferences and behaviors play out differently depending which group is favored in terms of bargaining power within an economy. In the United States, where rising income inequality has been accompanied by erosion of labor union membership and political power and a rise in the political influence of financial and commercial interests, it’s no surprise that bargaining power has favored so-called "investors." Kumhof and Ranciere note that as income inequality has grown in the US, it has fueled a recirculating flow of borrowing by working and middle class families and lending by the "investor" class, borrowing that has been necessary to maintain working and middle class consumption as real working and middle class incomes have stagnated or fallen: Kumhof and Ranciere’s paper is chock full of interesting and thought provoking insights into the dynamics of income inequality and the economic fragility it induces, but I want to highlight one particular aspect of it that really crystallized as I read their paper. Our current situation in which 5% of the population captures and owns a disproportionate share of national output, which it then lends to the teeming masses whose share of output has been stagnant or dwindling, is really just a new variant of the company store.

RealClearPolitics – Video – Sen. Sanders To Rich "Crybabies": "When Is Enough, Enough?" – Sen. Bernie Sanders (I-Vermont), a socialist, said "greed is like an addiction" and compares it to heroin and nicotine. "This reckless uncontrollable greed is like a disease," Sanders said. Sanders asks how can anyone be proud to call themselves a "multimillionaire?"

  Tax Cuts Are Theft – Conservatives like to say that taxes are theft. In fact it is tax cuts that are theft because they break a long-standing contract.  The American Social Contract: We, the People built our democracy and the empowerment and protections it bestows. We built the infrastructure, schools and all of the public structures, laws, courts, monetary system, etc. that enable enterprise to prosper. That prosperity is the bounty of our democracy and by contract it is supposed to be shared and reinvested. That is the contract. Our system enables some people to become wealthy but all of us are supposed to benefit from this system. Why else would We, the People have set up this system, if not for the benefit of We, the People? The American Social Contract is supposed to work like this diagram:

Ezra Klein – Column: Six lessons from the tax deal – In Washington, the temperature dipped into the 20s this week, which is evidently the point when hell freezes over: President Obama reached an agreement on the Bush tax cuts with the Republican Senate leader who said "the single most important thing we want to achieve is for President Obama to be a one-term president." Sen. Bernie Sanders, a socialist from Vermont, and Sen. Jim DeMint, an arch-conservative from South Carolina, threatened to filibuster the agreement. Liberal Democrats said they’d prefer a permanent extension of most of the tax cuts, and the architect of those cuts said the country couldn’t afford anything more than a temporary extension. It’s been a little confusing. But it’s also been clarifying. The tax-cut deal, in which the Republicans will give the White House about $300 billion in stimulus in return for the White House giving Republicans about $130 billion in tax cuts for the wealthiest Americans, laid bare some old and new realities of how Washington works – and doesn’t work – right now. It’s worth going through them one by one.

The Effort to Claim That Economists Support Obama’s Capitulation on Tax Cuts for the Wealthy – You know the administration is desperate when it creates a web page citing economists who support its capitulation on taxes. The web page cites the support of five economists. Peter Cardillo, the Bank of America, Greg Mankiw, and Wells Fargo (are the second through fifth economists on Obama’s list). Who are these supporters and why is the administration proud of their support? Cardillo is an economist for an investment firm, Avalon Partners. Avalon’s web site states that it specializes in "wealth management" for "affluent investors…to meet the unique needs of high net worth individuals…." Yes, the wealthiest one-hundredth of one percent of Americans — the truly, uniquely needy.  The administration’s web site gives pride of placement to Avalon Partners’ support of Obama’s decision to support the extension of Bush’s dramatic reduction in the taxes its ultra-wealthy clients will pay. Obama’s capitulation on tax breaks for the richest one percent of Americans is worth tens of thousands of dollars personally to Cardillo and hundreds of millions of dollars to Avalon’s clients. Mr. Cardillo does not support Obama’s capitulation — he rejoices in it.

 The Tax Rate Fallacy – When anyone starts lecturing you that the US has the highest tax rate in the industrialized world, just turn around, walk away, and pretend you never heard of them. This person is either ignorant about this country’s taxation system, or is deliberately trying to deceive or mislead you. According to a report released by the Internal Revenue Service, America’s tax collection agency, the top 400 individual tax returns filed in 2009 reported an average gross income of $358 million each. The average amount of tax paid by these individuals came to under 17%, less than half the maximum Federal rate of 35%, which kicks in on annual income over $372,950 (click here for the 2009 tax tables at ). This explains why Warren Buffet pays a much lower tax rate than his secretary. It really is true that in America, only the poor people pay taxes. Look at any international comparison of taxes to GDP, and one can always find the United States at the bottom of the table. What the US has that other countries lack is the 100,000 pages of the Internal Revenue Code. It is a 97 year accumulation of deductions, accelerated depreciation rates, tax credits, and other tax breaks that are the end product of intensive lobbying efforts and bribes by special interest groups, corporations, unions, and even religious groups.  I have a very simple solution to the country’s budget deficit problem. Hit the reset button. Eliminate the Internal Revenue Code. Just set it on fire. Keep the existing progressive, hockey stick tax rates on income, but eliminate all deductions. And I mean everything; deductions for dependents, home mortgage interest, medical expenses, the works. There are no sacred cows. My revised Form 1040 would have only three lines on it:

-Tax Rate
-Tax Due

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