July 18, 2019

Today’s Economist: Bruce Bartlett: When Tax Cuts Were a Tough Sell

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Bruce Bartlett held senior policy roles in the Reagan and George H. W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Fifty years ago this week, on Jan. 24, 1963, John F. Kennedy sent a special message to Congress on tax reduction and tax reform. Enacted the following year by Lyndon B. Johnson, the legislation cut the top federal income tax rate to 70 percent from 91 percent and the bottom rate to 14 percent from 20 percent. Ironically, it later became the template for Republican tax policy.

Today’s Economist

Perspectives from expert contributors.

Those who don’t know the history probably assume that the tax cut was a slam-dunk for Kennedy, something that was overwhelmingly popular. In fact, a big tax cut was highly controversial because at that time Republicans actually cared about the deficit and recognized that tax cuts would increase it. This view was shared by the large bloc of conservative Southern Democrats then in Congress and the general public as well.

For example, on Dec. 14, 1960, before Kennedy was inaugurated, Senator Harry F. Byrd Sr., Democrat of Virginia and chairman of the powerful Senate Finance Committee, warned Kennedy against even thinking about a big tax cut, given the deficit situation. According to an Associated Press report published in The New York Times, Senator Byrd told Kennedy that a tax cut “would be the worst thing we could do.”

A July 1962 Gallup poll asked the American people, “Would you favor or oppose a cut in federal income taxes at this time, if a cut meant that the government would go further in debt?” Only 19 percent of people supported a tax cut, even though the high World War II-era tax rates were still in place; 72 percent were opposed.

Even among those who said that their taxes were too high, only 31 percent supported a tax cut if it would add to the deficit; 61 percent were opposed.

However, in mid-1962, Kennedy was concerned that the economy was not growing enough and that this would endanger his re-election in 1964 unless some action were taken. His economic advisers, under the influence of the British economist John Maynard Keynes, advocated an intentional increase in the deficit to stimulate aggregate demand.

But they were divided about the best way to do it. John Kenneth Galbraith, who had tutored Kennedy in economics at Harvard and was serving as ambassador to India, argued in favor of an increase in public spending to deal with unmet social needs. Kennedy rejected this advice because it would never pass Congress and because he was worried about inflation and growing pressure on the dollar from abroad.

Kennedy’s other economists favored a temporary tax cut to put money into peoples’ pockets. This course had been recommended in a 1961 report from Paul A. Samuelson of the Massachusetts Institute of Technology. Kennedy endorsed the idea at a June 7, 1962, news conference, but he remained concerned about both the politics and economics of this approach.

On Aug. 6, 1962, Kennedy met with Representative Wilbur Mills, chairman of the House Ways and Means Committee, and Mr. Mills suggested that the president consider a permanent tax rate reduction rather than a temporary one, which would be viewed as an election ploy. This would satisfy the desire of Keynesian economists to stimulate demand, and in a way that would be hard for conservatives to oppose.

On Aug. 10, 1962, Kennedy met with his economic advisers and they endorsed this approach. We know what transpired at these meetings because Kennedy secretly taped them. They were published in 2001.

Kennedy’s Jan. 24 message got the ball rolling. Using rhetoric that could easily have been spoken by Ronald Reagan two decades later, Kennedy said:

As I have repeatedly emphasized, our choice today is not between a tax cut and a balanced budget. Our choice is between chronic deficits resulting from chronic slack, on the one hand, and transitional deficits temporarily enlarged by tax revision designed to promote full employment and thus make possible an ultimately balanced budget.

Kennedy even made a “Laffer curve” case that the economic stimulus would be so great that it would offset much of the estimated revenue loss:

Once this tax brake is released, the base of taxable income, wages, and profits will grow – and a temporary increase in the deficit will turn into a permanent increase in federal revenues. The purpose of cutting taxes, I repeat, is not to create a deficit but to increase investment, employment and the prospects for a balanced budget.

Largely forgotten to history is that Kennedy also favored tax reforms to offset some of the estimated revenue loss. The most important of these would have been to tax all unrealized capital gains at death. Then, as now, unrealized capital gains held until death are never taxed; heirs treat the property as if it were purchased for a price equal to its value at the time of death, no matter how large the amount or how wealthy the decedent. This is an unjustified loophole that tax reformers still object to.

Kennedy’s tax plan was exactly what Republicans today recommend, but they opposed it strenuously at the time. The Republican members of the Ways and Means Committee unanimously opposed it, saying, “It is morally and fiscally wrong, and will do irreparable damage to the Republic.”

When the tax cut came up for a final vote in the House of Representatives on Sept. 25, 1963, only 48 Republicans supported it; 126 voted against it. Nevertheless, it passed by a vote of 271 to 155.

The prospects for the tax cut in the Senate were always far more dicey. A conservative coalition of Republicans and Southern Democrats had essentially controlled that body since the late 1930s, and they put budget balance ahead of tax reduction.

It is probably only because of Kennedy’s assassination in November 1963 and the strenuous efforts of Johnson, who had led the conservative coalition in the 1950s as Senate majority leader, that the tax cut passed the Senate. Even so, 11 Democrats and 10 Republicans voted against its final passage on Feb. 7, 1964.

Article source: http://economix.blogs.nytimes.com/2013/01/22/when-tax-cuts-were-a-tough-sell/?partner=rss&emc=rss

Your Money: Amid Fiscal Stalemate, How to Handle Tax Rate Uncertainty

So we’re left with no idea how much we’ll be paying in federal income taxes in 2013, and a wide range of possibilities for taxes on investments and estates and tax deductions for mortgage interest and charitable contributions. Plenty of people will spend the next several days feeling helpless, with one eye on the stock market and the other on Washington.

For all the uncertainty, though, we do know a bit about how things will change next year. For example, new taxes, some of which will help pay for Medicare, will affect a few million affluent households.

We also know that in all likelihood, whatever happens in Washington in the coming days or weeks won’t come close to solving the problem that tends to clear the room when you say it aloud: We are not collecting enough money to pay for the promises we’ve made to one another. It isn’t just Medicare, either. Many states have steadfastly refused to set aside the trillions of dollars they will need to cover benefits for public workers once they retire.

As for what you should do about all of this, the answer, for now, is probably nothing. In the short term, stock prices may decline and the economy may get the hiccups, but it’s foolish for amateurs to try to alter their investment portfolios to take advantage of the situation. Leave that to the hedge funds, and watch how many of them get it wrong.

In the long term, however, prepare to make the kind of attitude adjustment that can take awhile to embrace. A decade or two from now, most of us will probably be paying more in taxes or getting fewer services from the government than we do now. Once that happens, you’ll need to earn more, save more, live on less or take better advantage of legal tax avoidance strategies.

In fact, you may want to try to do all of these things in the next couple of years, just to see which ones you can accomplish with the least amount of pain.

Here is what we do know will happen in 2013. First, there is a new tax of 0.9 percent on wages, other compensation and self-employment income above $200,000, if you’re single, or $250,000, if you’re married and filing your taxes jointly. This is on top of the existing Medicare tax.

Second, there is a new tax of 3.8 percent on investment earnings, including interest, dividends and capital gains, in addition to whatever the capital gains tax ends up being. It applies to single people with modified adjusted gross income of $200,000, or $250,000 for married couples filing jointly.

There is still some time to maneuver around the second tax. If you have winning investments you were planning to sell soon anyway, say for a down payment on a house, you might as well do it by Monday. That way, you can avoid the new tax if you’re certain you’ll be in the qualifying income category next year.

A few other changes: For now, you can generally take a tax deduction only for unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. That floor will rise to 10 percent next year, except for people 65 and over, who won’t be subject to it until 2017.

Also, if you save money in a flexible spending account for health care expenses, 2013 will bring a $2,500 cap on what you can set aside each year while avoiding income taxes. Many people routinely saved $5,000 in the past.

In the next few weeks, we’ll presumably learn more about the new tax rates on income, capital gains, dividends and estates. A solution may come in stages, with a temporary patch now and the promise of a longer-term deal later.

But this is only the beginning, and if you want to read the Stephen King version of our collective fiscal story, there are a few sources to consult. You could start with the radical centrists at Third Way, a research group, who are the best splashers of cold water that I’ve read on the topic of the federal budget. They present some truly scary data while trying to persuade Democrats to accept cuts to Medicare and other programs.

In 2010, for instance, 11,712 people turned 25 each day, while just 6,670 turned 65. By 2030, 12,499 people will be turning 25 each day, but the number turning 65 will jump to 10,948. The 65-year-olds in 2030 will probably live longer than the people who turned 65 in 2010, and keeping them alive could cost a lot more.

The Pew Center on the States, using the states’ own actuarial data, estimates that there is a $1.38 trillion dollar gap between what governments have set aside to pay for public employees’ pensions and retiree health care costs and their actual obligations. Robert Novy-Marx, an assistant professor at the University of Rochester’s Simon Graduate School of Business, and Joshua D. Rauh, a professor at the Stanford Graduate School of Business, believe the shortfall in pension financing alone is actually $3 trillion to $4 trillion.

If states were to try to fill the gap solely by raising taxes, Mr. Novy-Marx and Mr. Rauh estimate that the cost per household in 2011 would have been $2,250 in New York, $2,000 in New Jersey and $1,994 in California — and we’d need to pay that amount every year for 30 years, with adjustments for inflation. Happy New Year!

These numbers boggle the mind, which is why you’re not seeing them in the newsletters that state legislators send to your home. Instead, lawmakers are trying to change the benefits promised to public employees. But even minor changes have led to lawsuits that could take a decade to resolve. By then, the obligations will probably have grown much larger.

Read enough of these reality checks, and a hazy sort of reckoning starts to take shape. It’s not clear how high taxes will go or how many services — from retiree health care to garbage removal — we may someday need to pay more for, or cover ourselves. But it’s going to cost you more money one way or the other, unless you’re in a truly low tax bracket.

That brings us to those legal tax avoidance maneuvers, which often benefit people who can save. Flexible spending accounts for medical costs will still save you hundreds of dollars in taxes each year, even with a $2,500 cap. A health savings account, the kind that pairs up with a high-deductible health insurance policy, can grow into a sizable pile if you save the money and use it in retirement instead of to pay out-of-pocket medical expenses now. And the fact that the affluent can still avoid capital gains taxes, and get an income tax break in many states, on hundreds of thousands of dollars of college savings via 529 plans is a minor miracle.

There is also the Roth individual retirement account, where even the low-six-figure set can put away money on which they’ve already paid income taxes, leave it there for decades in stocks and bonds, and pull it out without paying a dime of capital gains or other taxes.

That’s the story — for now, at least. In 30 or 40 years, if things are really grim, might the federal government try to tax withdrawals from Roth accounts with enormous balances? As we’re learning now, most great tax deals, like the mortgage interest deduction for beach houses and the tax-free health insurance benefits that many of us get from our employers, may not last forever.

We don’t have much control over what will happen in Washington or our state capitals next year, or 10 years from now. But most of us can probably find ways to earn a little more, save a little extra or spend a little less. Pick just one of those options, make it your New Year’s resolution and see if it helps you feel more in control of your financial destiny by this time next year.

Article source: http://www.nytimes.com/2012/12/29/your-money/how-to-handle-tax-rate-uncertainty.html?partner=rss&emc=rss

Amid Fiscal Stalemate, How to Handle Tax Rate Uncertainty

So we’re left with no idea how much we’ll be paying in federal income taxes in 2013, and a wide range of possibilities for taxes on investments and estates and tax deductions for mortgage interest and charitable contributions. Plenty of people will spend the next several days feeling helpless, with one eye on the stock market and the other on Washington.

For all the uncertainty, though, we do know a bit about how things will change next year. For example, new taxes, some of which will help pay for Medicare, will affect a few million affluent households.

We also know that in all likelihood, whatever happens in Washington in the coming days or weeks won’t come close to solving the problem that tends to clear the room when you say it aloud: We are not collecting enough money to pay for the promises we’ve made to one another. It isn’t just Medicare, either. Many states have steadfastly refused to set aside the trillions of dollars they will need to cover benefits for public workers once they retire.

As for what you should do about all of this, the answer, for now, is probably nothing. In the short term, stock prices may decline and the economy may get the hiccups, but it’s foolish for amateurs to try to alter their investment portfolios to take advantage of the situation. Leave that to the hedge funds, and watch how many of them get it wrong.

In the long term, however, prepare to make the kind of attitude adjustment that can take a while to embrace. A decade or two from now, most of us will probably be paying more in taxes or getting fewer services from the government than we do now. Once that happens, you’ll need to earn more, save more, live on less or take better advantage of legal tax avoidance strategies.

In fact, you may want to try to do all of these things in the next couple of years, just to see which ones you can accomplish with the least amount of pain.

Here is what we do know will happen in 2013. First, there is a new tax of 0.9 percent on wages, other compensation and self-employment income above $200,000, if you’re single, or $250,000, if you’re married and filing your taxes jointly. This is on top of the existing Medicare tax.

Second, there is a new tax of 3.8 percent on investment earnings, including interest, dividends and capital gains, in addition to whatever the capital gains tax ends up being. It applies to single people with modified adjusted gross income of $200,000, or $250,000 for married couples filing jointly.

There is still some time to maneuver around the second tax. If you have winning investments you were planning to sell soon anyway, say for a down payment on a house, you might as well do it by Monday. That way, you can avoid the new tax if you’re certain you’ll be in the qualifying income category next year.

A few other changes: For now, you can generally take a tax deduction only for unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. That floor will rise to 10 percent next year, except for people 65 and over, who won’t be subject to it until 2017.

Also, if you save money in a flexible spending account for health care expenses, 2013 will bring a $2,500 cap on what you can set aside each year while avoiding income taxes. Many people routinely saved $5,000 in the past.

In the next few weeks, we’ll presumably learn more about the new tax rates on income, capital gains, dividends and estates. A solution may come in stages, with a temporary patch now and the promise of a longer-term deal later.

But this is only the beginning, and if you want to read the Stephen King version of our collective fiscal story, there are a few sources to consult. You could start with the radical centrists at Third Way, a research group, who are the best splashers of cold water that I’ve read on the topic of the federal budget. They present some truly scary data while trying to persuade Democrats to accept cuts to Medicare and other programs.

In 2010, for instance, 11,712 people turned 25 each day, while just 6,670 turned 65. By 2030, 12,499 people will be turning 25 each day, but the number turning 65 will jump to 10,948. The 65-year-olds in 2030 will probably live longer than the people who turned 65 in 2010, and keeping them alive could cost a lot more.

The Pew Center on the States, using the states’ own actuarial data, estimates that there is a $1.38 trillion dollar gap between what governments have set aside to pay for public employees’ pensions and retiree health care costs and their actual obligations. Robert Novy-Marx, an assistant professor at the University of Rochester’s Simon Graduate School of Business, and Joshua D. Rauh, a professor at the Stanford Graduate School of Business, believe the shortfall in pension financing alone is actually $3 trillion to $4 trillion.

If states were to try to fill the gap solely by raising taxes, Mr. Novy-Marx and Mr. Rauh estimate that the cost per household in 2011 would have been $2,250 in New York, $2,000 in New Jersey and $1,994 in California — and we’d need to pay that amount every year for 30 years, with adjustments for inflation. Happy New Year!

These numbers boggle the mind, which is why you’re not seeing them in the newsletters that state legislators send to your home. Instead, lawmakers are trying to change the benefits promised to public employees. But even minor changes have led to lawsuits that could take a decade to resolve. By then, the obligations will probably have grown much larger.

Read enough of these reality checks, and a hazy sort of reckoning starts to take shape. It’s not clear how high taxes will go or how many services — from retiree health care to garbage removal — we may someday need to pay more for, or cover ourselves. But it’s going to cost you more money one way or the other, unless you’re in a truly low tax bracket.

That brings us to those legal tax avoidance maneuvers, which often benefit people who can save. Flexible spending accounts for medical costs will still save you hundreds of dollars in taxes each year, even with a $2,500 cap. A health savings account, the kind that pairs up with a high-deductible health insurance policy, can grow into a sizable pile if you save the money and use it in retirement instead of to pay out-of-pocket medical expenses now. And the fact that the affluent can still avoid capital gains taxes, and get an income tax break in many states, on hundreds of thousands of dollars of college savings via 529 plans is a minor miracle.

There is also the Roth individual retirement account, where even the low-six-figure set can put away money on which they’ve already paid income taxes, leave it there for decades in stocks and bonds, and pull it out without paying a dime of capital gains or other taxes.

That’s the story — for now, at least. In 30 or 40 years, if things are really grim, might the federal government try to tax withdrawals from Roth accounts with enormous balances? As we’re learning now, most great tax deals, like the mortgage interest deduction for beach houses and the tax-free health insurance benefits that many of us get from our employers, may not last forever.

We don’t have much control over what will happen in Washington or our state capitals next year, or 10 years from now. But most of us can probably find ways to earn a little more, save a little extra or spend a little less. Pick just one of those options, make it your New Year’s resolution and see if it helps you feel more in control of your financial destiny by this time next year.

Article source: http://www.nytimes.com/2012/12/29/your-money/how-to-handle-tax-rate-uncertainty.html?partner=rss&emc=rss

Economix Blog: Bruce Bartlett: Republicans Champion ‘Voluntary Taxes’

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take.”

The Republican-controlled House of Representatives took a break last week from doing nothing to pass a bill to facilitate voluntary taxation. Almost simultaneously, Mitt Romney released his final tax return for 2011, showing that he voluntarily overpaid his taxes by taking less of a deduction for his charitable contributions than he was permitted.

Today’s Economist

Perspectives from expert contributors.

The legislation was H.R. 6410, “The Buffett Rule Act of 2012.” Those not acquainted with the misleading titles often given to Congressional bills might at first glance think this one has something to do with raising taxes on the ultrawealthy.

Of course, Republicans would never actually raise taxes on the ultrawealthy; they think, or at least assert publicly, that the deficit results from too many poor people not paying taxes. But it would be very helpful to them to have a fig leaf that looks as if they had found a way of getting the rich to pay more. That is by encouraging them to voluntarily pay more, as Mr. Romney did.

Named for the billionaire Warren Buffett, what came to be known as the “Buffett rule” is a proposal by Democrats that all those with incomes of $1 million or more pay at least 30 percent of their income in federal income taxes.

Mr. Romney and his wife had an effective federal income tax rate of just 14 percent, including the voluntary overpayment, on incomes over $13 million in each of the years 2010 and 2011, the only ones for which they have released tax returns.

In April, Senate Republicans filibustered an effort by Democrats to enact a real Buffett rule. Thus there was no chance that Congress would actually legislate higher taxes on the wealthy this year. But apparently, House Republicans feel pressured by voters to respond to the low effective tax rates that many rich people pay, which contribute significantly to historically low federal revenues as a share of the gross domestic product and, hence, to the deficit and the debt.

Republicans recognize that the Buffett rule is politically popular. An April Gallup poll found that Americans favor the Buffett rule by 60 percent to 37 percent, an Ipsos/Reuters poll in March found people supporting it by 64 percent to 30 percent, and a February Associated Press/GfK poll found 65 percent in favor of the Buffett rule and only 26 percent opposed.

H.R. 6410, which was introduced on Sept. 14 and passed the House by voice vote on Sept. 19 with no hearings and just a few minutes of debate, would allow taxpayers to designate on their tax returns a contribution to the federal government, over and above their tax liability, for deficit reduction. Of course, the Treasury has had a fund since 1843 to accept gifts, so the new legislation doesn’t really do anything. So far this year, $7.6 million has been donated.

Representative Chris Van Hollen, Democrat of Maryland, characterized the Republican legislation as a “pretty please” bill. As he put it, “Pretty please, Warren Buffett, pretty please, Mitt Romney, won’t you help contribute a little bit more toward reducing our deficit?”

One could perhaps take the Republican proposal more seriously if it also required a statement on application forms for Social Security and Medicare that those qualified should consider voluntarily forgoing benefits to reduce the deficit. The forms that farmers use to apply for agricultural subsidies could suggest that they put deficit reduction ahead of their personal interest, and so on.

The political reality is that Republicans don’t really support taxation at any level. Of course, none will go on the record saying that they favor abolition of all taxation; they just support every single tax cut and oppose every single tax increase. I have not heard any Republican in recent years acknowledge that the deficit results in any way from lower revenues; rather, they say, the deficit is caused only by excessive spending on everything except the military. Implicitly, therefore, the only kind of taxation a Republican can support is voluntary taxation.

Extreme libertarians, such as the novelist Ayn Rand, have long held that this is the only legitimate form of taxation. As she wrote in a 1964 essay reprinted in her book “The Virtue of Selfishness”:

In a fully free society, taxation – or, to be exact, payment for government services – would be voluntary. Since the proper services of a government – the police, the armed forces, the law courts – are demonstrably needed by individual citizens and affect their interests directly, the citizens would (and should) be willing to pay for such services, as they pay for insurance.

As we know, the Republican vice-presidential nominee Paul D. Ryan has expressed admiration for Rand’s views, and many Republicans in Congress, influenced by the Tea Party movement, support abolition of important government programs along with more tax cuts for the rich.

Interestingly, there actually are instances of voluntary taxation. The New York Times reports that the mayor of Bogotá, Colombia, once asked his citizens to voluntarily pay more taxes and 63,000 of them did. The Times has also reported that cities now often ask tax-exempt organizations to make voluntary payments in lieu of taxes and are turning to parents groups to fill holes in school funding and to community groups to take over park maintenance and other tasks.

Other examples of voluntary methods of financing governmental services include the bond drives of World War II, lotteries, tontines and political campaign contributions. Public universities often solicit private funds to pay for new buildings or programs and remittances by migrants living abroad are a kind of private foreign aid. And of course private charities often engage in social welfare, as well as providing facilities like hospitals and museums (some of which are also provided by government).

While there is no doubt that there are creative methods by which local governments might be able to raise additional revenue and encourage the private sector to take over some of their responsibilities, there is little, if any, scope for this by the federal government. Too much of what it does falls into the category of pure public goods that government must provide, like national defense, or entitlement programs like Social Security and Medicare.

Realistically, voluntary taxation is not a viable alternative to broad-based taxes. Those who oppose raising taxes on the wealthy and are concerned about the number of people exempt from federal income taxes ought to consider a national sales tax, as every other major country has. As Alexander Hamilton explained in Federalist 21, one virtue of consumption taxes is that they are to some extent voluntary.

Article source: http://economix.blogs.nytimes.com/2012/09/25/republicans-champion-voluntary-taxes/?partner=rss&emc=rss