January 19, 2020

After Fiscal Deal, Tax Code May Be Most Progressive Since 1979

The last-minute deal struck by the departing 112th Congress raised taxes on a handful of the highest-earning Americans, with about 99.3 percent of households experiencing no change in their income taxes. But the Tax Policy Center estimates that the average family in the top 1 percent will pay a federal tax rate of more than 36 percent this year, up from 28 percent in 2008. That is the highest rate since 1979, at least.

By some measures, the tax code might now be the most progressive in a generation, tax economists said, while noting that every American is paying a lower burden currently than they did then. In fact, the total federal tax rate is still vastly lower for the very rich than it was at any point in the 1940s through 1970s. It has risen from historical lows, but is still closer to those lows than where it was in the postwar decades.

“We made the system more progressive by raising rates at the top and leaving them for everyone else,” said Roberton Williams of the Tax Policy Center, a research group based in Washington. “The offsetting issue is that the rich have gotten a lot richer.”

Indeed, over the last three decades the bulk of pretax income gains have gone to the wealthy — and the higher up on the income scale, the bigger the gains, with billionaires outpacing millionaires who outpaced the merely rich. Economists doubted that the tax increases would do much to reverse that trend.

With the recovery failing to improve incomes for millions of average Americans and the country running trillion-dollar deficits, President Obama made “tax fairness” a centerpiece of his re-election campaign. In the heated negotiations with House Speaker John A. Boehner, that translated into the White House’s insistence on tax increases for the top 2 percent of households and a continuation of tax breaks and cuts for a vast number of taxpayers.

Republicans resisted increasing tax rates and aimed for lower revenue targets, arguing that spending was the budget’s primary problem and that no American should see his or her taxes go up too much in such a sluggish economy. But ultimately they relented, and Congress cut a last-minute deal.

“A central promise of my campaign for president was to change the tax code that was too skewed towards the wealthy at the expense of working middle-class Americans,” Mr. Obama said after Congress reached an agreement.

That deal includes a host of tax increases on the rich. It raises the tax rate to 39.6 percent from 35 percent on income above $400,000 for individuals, and $450,000 for couples. The rate on dividends and capital gains for those same taxpayers was bumped up 5 percentage points, to 20 percent. Congress also reinstated limits on the amount households with more than $300,000 in income can deduct. On top of that, two new surcharges — a 3.8 percent tax on investment income and a 0.9 percent tax on regular income — hit those same wealthy households.

As a result of the taxes added in both the deal and the 2010 health care law, which came into effect this year, taxpayers with $1 million in income and up will pay on average $168,000 more in taxes. Millionaires’ share of the overall federal tax burden will climb to 23 percent from 20 percent.

The result is a tax code that squeezes hundreds of billions of dollars more from the very well off — about $600 billion more over 10 years — while leaving the tax burden on everyone else mostly as it was. And the changes come after 30 years of both Republican and Democratic administrations doing the converse: zeroing out federal income taxes for many poor working families while also reducing the tax burden for households on the higher end of the income scale.

“Back at the end of the Carter and beginning of the Reagan administrations, we had a pretty severe income-tax burden for people at a low level of income. It was actually kind of appalling,” said Alan D. Viard, a tax expert at the American Enterprise Institute, a right-of-center research group in Washington. “Policy makers in both parties realized that was bad policy and started whittling away at it” by expanding credits and tinkering with tax rates.

After those changes and the new law, comparing average tax rates for poor households and wealthy households, 2013 might be the most progressive tax code since 1979. But economists cautioned that measuring progressivity is tricky. “It’s not like there is some scientific measure of progressivity all economists agreed upon,” said Leonard E. Burman, a professor of public affairs at Syracuse University. “People look at different numerical measures and they’ve changed in different ways at different income levels.”

Mr. Viard said that over time the code had become markedly more progressive for the poor compared with the middle class. But it arguably did not become much more progressive for the rich compared with the middle class, or the very rich compared with the rich, in part because of the George W. Bush-era tax cuts on investment income.

An anesthesiologist who earns a $500,000 salary subject to payroll and income taxes might pay a higher tax rate than a hedge fund manager making $1 billion subject mostly to capital-gains taxes, for instance.

Economists are also divided on the ultimate effect of those tax increases on the wealthy to income growth and income inequality in the United States. The recession hit the incomes of the rich hard, but they have snapped back much more strongly than those for middle or low-income workers.

“I’d still rather be really rich, even if I’m getting taxed much more than a low-income person” would be, Mr. Williams of the Tax Policy Center added.

Article source: http://www.nytimes.com/2013/01/05/business/after-fiscal-deal-tax-code-may-be-most-progressive-since-1979.html?partner=rss&emc=rss

Durable Goods Orders Fall, and Jobless Claims Rise

While much of the weakness in durable goods orders came from a big drop in demand for commercial aircraft, a critical category that tracks business investment spending fell by the largest amount since January.

In other economic reports Wednesday, the government said that initial claims for unemployment benefits rose to 393,000 last week, slightly more than economists had expected.

In addition, consumer spending increased 0.1 percent last month, below expectations and the weakest gain in four months. Incomes, however, were up 0.4 percent, which was slightly better than expected.

The overall decline in orders for durable goods was 0.7 percent, following a September decline of 1.5 percent. Orders for core capital goods, considered a good proxy for business investment spending, dropped 1.8 percent, the biggest decline since a 4.8 percent fall in January.

Manufacturing has been one of the strongest sectors in the economy in this subpar recovery, but the sector slowed this year as consumer demand faltered and auto factories had trouble getting parts after the natural disasters in Japan last March.

The October drop in core capital goods — nonmilitary products excluding aircraft — was expected to be a temporary setback. This category has been surging this year, spurred by tax breaks that are allowing companies to write off their investments all in one year as long as the purchases are made before the end of 2011. That has provoked a rush by companies to take advantage of this tax break, which Congress passed in an effort to spur the economy.

For October, orders for transportation products fell 4.8 percent, reflecting a 16.4 percent drop in demand for commercial planes. Orders for autos showed a solid 6.2 percent increase, reflecting solid sales gains in recent months.

Excluding transportation, durable goods orders posted a 0.7 percent increase. This gain reflected increases in areas like primary metals such as steel and heavy machinery.

The small increase in initial claims for unemployment insurance — up 2,000 from the previous week — came after two months of steady declines. The four-week average of applications, which smooths week-to-week fluctuations, fell to its lowest level since April, the Labor Department said.

The downward trend suggested companies are laying off fewer workers.

In the report on consumer spending, the Commerce Department said purchases of durable goods like autos showed a solid increase. But spending on nondurable goods, like food and clothing, fell.

The 0.4 percent increase in incomes in October was the best showing since March. Private wages and salaries drove the gain. The solid increase followed five consecutive months of weak income gains. And subtracting taxes and adjusting for inflation, income rose 0.3 percent in October.

Many Americans chose to save the extra money. The savings rate ticked up to 3.5 percent of after-tax incomes, up from 3.3 percent in September — the lowest level since December 2007, the month the recession started.

The Institute for Supply Management’s manufacturing index grew more slowly in October than September but still remained at a level indicating manufacturing was continuing to expand. Manufacturing, one of the first sectors to start growing after the recession officially ended in June 2009, has posted growth for 27 consecutive months, according to the ISM index.

Also, the Thomson Reuters/University of Michigan consumer sentiment index fell to 64.1 from 64.2 in the preliminary November report, according to a report released on Wednesday. Economists in a Reuters survey expected a final November sentiment index reading of 64.5.

Article source: http://feeds.nytimes.com/click.phdo?i=c3d717198e52764e119bd34b3640e883

DealBook: The Fallacy Behind Tax Holidays

In a letter to President Obama, Tom Donohue, president of the U.S. Chamber of Commerce, said tax breaks would create new jobs. The president spoke to Mr. Donohue's organization in February.Charles Dharapak/Associated PressIn a letter to President Obama, Tom Donohue, president of the U.S. Chamber of Commerce, said tax breaks would create new jobs. The president spoke to Mr. Donohue’s organization in February.

As President Obama confronts the nation’s dismal unemployment problem — stubbornly stuck at 9.1 percent with, shockingly, zero net jobs created in August — Wall Street and corporate America are working behind the scenes in Washington to push for a series of temporary tax breaks, which they insist will help create jobs.

Of course, businesses want an overhaul of the corporate tax code that would reduce rates for the long term. But for now they are seeking a series of tax holidays, including a payroll tax break for employers, not just employees, and a tax break to let companies repatriate about $1 trillion that is sitting overseas. In turn, they say, they will spend it on new recruits, perhaps as many as 2.9 million of them, according to a letter the United States Chamber of Commerce sent to the president on Monday.

Consider it a form of horse trading — tax cuts for jobs. There is only one small problem with this strategy: temporary tax cuts rarely result in new jobs and always result in less tax revenue.

“Tax policy is not a great lever for adjusting short-term growth,” explained Howard Gleckman, a resident fellow at the Tax Policy Center , who has reviewed dozens of studies on the subject. Most temporary tax holidays “reward people for what they are going to do anyway,” he said, adding that “the bang for the buck is very low — you’re subsidizing companies that were already going to hire.”

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A seminal study by John H. Bishop and Mark Montgomery that looked at the Targeted Jobs Tax Credit bill from 1977, which was aimed at temporarily giving employers an incentive to hire disadvantaged workers, showed that “at least 70 percent of the tax credits were claimed for hiring workers who would have been hired even in the absence of the tax credit.” Companies claimed more than $4.5 billion in credits as a result.

That is not to suggest that tax policy cannot help with long-term growth — virtually every academic study says it absolutely can — but that tax policy is a lousy way to stimulate the economy on a temporary basis.

Let’s be honest, even if it is an uncomfortable truth: The jobs crisis is not really a function of tax policy; it is a function of economics. Right now, there is too little demand for products.

R. David McLean, a visiting assistant professor of finance at the MIT Sloan School of Management, published a new study last week that showed companies were sitting on trillion-dollar piles of cash, not because they are hoarders or greedy, but because they are worried about the economy and that their businesses might not be as strong as they hope in the future.

Mr. McLean said the volatility of cash flow had gone up over the last 30 years. For every dollar that companies have raised in recent years by issuing new shares, they have saved 60 cents, he said. “My study suggests that firms are saving more of their share issuance proceeds as cash because they have greater needs for precautionary cash savings than before,” he added.

To Mr. McLean, the lesson is that public policy toward business must be about creating as much certainty on regulations as possible, given that economic cycles will most likely create their own uncertainty. “If they know the rules of the game, it’s easier to play ball — even if you don’t like the rules,” he said.

Devising short-term tax incentives is the antithesis of creating long-term certainty — sticking to the rules of the game. Indeed, such holidays can create perverse incentives. The debate over a tax break for companies to repatriate cash from overseas, for example, has already created a new moral hazard of sorts. When Congress provided a one-time tax break in 2004 for this purpose, it said such a holiday should never be repeated.

“If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future,” Chuck Marr and Brian Highsmith of the Center on Budget and Policy Priorities recently wrote. “That will make corporations more inclined to shift income into tax havens and less likely to make investments in the United States.”

John T. Chambers, chief executive of Cisco Systems, has been a longtime proponent of such a tax holiday. “We believe that at least temporarily reducing the incremental tax rate on foreign-earned profits would encourage companies to invest in the U.S.,” he wrote on his blog last year. The company does not seem so interested in investing here at the moment; it is in the process of eliminating some 10,000 workers in the United States.

“They already have a lot of money now — they’re not going to start spending it because of a tax holiday,” Reuven S. Avi-Yonah, an international tax lawyer who teaches at the University of Michigan and has regularly testified in front of Congress, said of American companies pushing for the tax break.

One of the other ideas floating around is a temporary break on payroll taxes for employers — in addition to extending the current payroll tax holiday for employees past Jan. 1. The tax holiday for employees may make some sense: it provides extra cash directly to workers, who may put it back into the economy by spending it. A payroll tax holiday for employers is a different story. It would lower the 6.2 percent tax they pay on the wages of every worker they employ, in the hope that this would give them an incentive to hire workers.

But again, there is that little problem with demand. “Every C.E.O. and C.F.O. will tell you they will only hire when they are confident they can get sales,” Mr. Gleckman said. “They say to themselves, ‘How much can we sell with the workers we have?’ But there’s nothing a C.E.O. hates more than not being able to fill an order. Only then will they hire.”

Article source: http://feeds.nytimes.com/click.phdo?i=8397264a47ad8df5b0d73bba92ef9d57

Push Intensifies for Larger Deal on Debt Impasse

The White House suggested for the first time that Mr. Obama might be willing to agree to a short-term increase in the debt ceiling by Congress — perhaps for a few days — if such a deal was in sight, stepping up the pressure on the two parties to come to terms.

Mr. Obama met separately at the White House with Republican and Democratic leaders. But neither side reported any substantive progress as they searched for a formula that would include deep spending cuts, cost-saving changes to entitlement programs and an overhaul of the tax code that would increase revenues by closing certain tax breaks and eliminating deductions but also lower some tax rates.

Politically, the main question remained whether House Republicans would be willing to negotiate over any package that could be construed as raising taxes, and throughout the day there were signs of internal debate among party leaders.

Speaker John A. Boehner has shown continued interest in a deal if it can be done in a way that emphasizes lower tax rates.

But Representative Eric Cantor, the No. 2 Republican, and others like Representative Paul D. Ryan of Wisconsin, the Budget Committee chairman, warned that the most specific proposal to be made public so far — and the one that has done the most to reopen the possibility of a bipartisan accord — relied far too much for them on higher revenues to cut projected deficits.

That plan is the one put forward Tuesday by the so-called Gang of Six, a bipartisan group of senators who worked for months to reach an agreement and whose work was lauded by Mr. Obama as a sign that a deal was possible. The plan included a net increase in government revenue of about $1 trillion over a decade.

“I am concerned with the Gang of Six’s revenue target,” Mr. Cantor said.

Deepening the impasse was growing opposition among House Republicans to a fallback position developed by Senator Mitch McConnell, the Republican minority leader, that would allow the debt ceiling to be raised without any support from Republicans but also would not impose the dollar-for-dollar cuts in spending that have been central to the party’s negotiating position.

But given the looming prospect of Congress’s missing the Aug. 2 deadline and risking a default on United States government debt — a development that could shake financial markets and harm the already weak economy — some Republicans appeared more willing to consider a deal locking in spending cuts that Mr. Obama has said he would take if balanced by new revenues. Conservatives have split over sticking to their no-taxes principles if it means walking away from progress toward restraining the growth of government.

At the White House, officials alternated between a sense of encouragement and growing concern that time is running out to avert a full-scale crisis.

“There is still time to do something significant if all parties are willing to compromise, because the parameters of what that might look like are well known,” said Jay Carney, the White House spokesman.

With an eye on the calendar, the president summoned leaders of both parties to build on Tuesday’s release of the $3.7 trillion deficit-cutting plan by the Senate’s Gang of Six.

At the Capitol, however, the emphasis was on a plan that Mr. McConnell has been putting together with the Senate majority leader, Harry Reid, Democrat of Nevada, to empower Mr. Obama to raise the borrowing ceiling.

The four House leaders — Mr. Boehner, Mr. Cantor; Representative Nancy Pelosi of California, the Democratic leader; and Representative Steny H. Hoyer of Maryland, the No. 2 Democrat — met Wednesday and, according to officials, reviewed problems with the McConnell plan.

Such talks between the two parties’ leaders in the House, which are rare given the polarized relations in that chamber, reflect the recognition that the Republican majority cannot pass the increase in the debt limit without a significant number of votes from Democrats.

Article source: http://feeds.nytimes.com/click.phdo?i=645921e79e6a5bff22f2fa5e0c21d921

2 Republicans Open Door to Increases in Revenue

One of the senators, John Cornyn of Texas, said he would consider eliminating some tax breaks and corporate subsidies in the context of changes in the tax code, provided there was not an overall increase in taxes.

“I think it’s clear that the Republicans are opposed to any tax hikes, particularly during a fragile economic recovery,” Mr. Cornyn said on “Fox News Sunday.” “Now, do we believe tax reform is necessary? I would say absolutely.”

But he insisted that any changes in taxes be “revenue neutral,” meaning that the government would not take in any more money from individuals or businesses than it does now.

The other senator, John McCain of Arizona, said he would be willing to consider some “revenue raisers” as part of a broad deal, but he refused to name specific measures.

Mr. Cornyn, a member of the Senate leadership, also said that Republicans would be open to a short-term deal on the debt ceiling to provide more time for a comprehensive agreement.

“The problem with a minideal is we have a maxi-problem,” he said. “And the big problems aren’t going to go away if you cut a minideal. All it does is delay the moment of truth. And so I’d say better now than then. But if we can’t, then we’ll take the savings we can get now, and we will relitigate this as we get closer to the election.”

The White House had no comment on the senators’ remarks.

Last week, President Obama harshly criticized Republicans lawmakers for refusing to eliminate tax breaks like those for private jet owners, hedge fund managers, multinational oil companies and ethanol producers. He argued that eliminating such loopholes could save billions of dollars and help fix the short-term federal deficit and long-term national debt.

The administration and Congressional negotiators are racing to find a deal to raise the federal debt ceiling of $14.3 trillion by Aug. 2, when the Treasury Department says the United States will exhaust its ability to borrow money and could default on some obligations. A bargain must be struck at least a week before then to provide time for a Congressional Budget Office analysis and for both chambers to vote on it.

Mr. McCain said Sunday that closing the tax breaks that Mr. Obama mentioned would have a negligible impact on the nation’s fiscal condition and would defy the will of the voters.

“The principle of not raising taxes is something that we campaigned on last November, and the result of the election was that the American people didn’t want their taxes raised and they wanted us to cut spending,” he said on the CNN program “State of the Union.”

He added that his fellow Republican senator from Arizona, Jon Kyl, a member of the budget negotiating team, had said there were certain measures that Republicans would consider, and that he was open to them. He refused to name any.

Mr. Kyl said he would be willing to consider some increases to help bring down the deficit. “We’re perfectly willing to consider those kinds of issues in the context of tax reform, which we would very much like to do,” Mr. Kyl said last week on “Fox News Sunday.” “But we’re not going to have the time to do it or be able to do it in order just to raise revenue as part of the exercise, which should be about reducing spending.”

Article source: http://feeds.nytimes.com/click.phdo?i=51f4e9bf8f544fbdc1daa7775ef0506a

Italy Approves an Austerity Package

The three-year plan is designed to eliminate the government’s budget deficit by 2014. The package is balanced between lowering spending and increasing revenues, Finance Minister Giulio Tremonti said, adding that the measures should also spur the growth of Italy’s dawdling economy.

“Reducing the budget deficit is not just about numbers, it is a political and ethical objective of a country,” Mr. Tremonti said at a news conference. “It is reflected in choices of responsibilities between citizens and generations.”

The plan now goes to Parliament, which is expected to vote on it before the summer recess. But tensions over the measures have flared repeatedly within the cabinet in recent weeks, and the package is likely to face hurdles in Parliament.

Prime Minister Silvio Berlusconi has said that he would ask for a confidence vote.

Mr. Tremonti did not provide details on the final version of the budget, but draft versions indicated that the bulk of the cuts would come from reductions in spending on local governments and ministry budgets, an extension of existing wage and hiring freezes for public workers and reductions in tax breaks for companies and families.

In addition, the drafts called for increases in costs to the public for some medical services and a gradual increase in the age at which women will be eligible for pensions.

A commission will consider reductions in politicians’ salaries and benefits, to bring public officials’ compensation in line with European Union standards.

Greece’s debt crisis has brought much attention to the finances of other European countries in recent months. Italy’s public debt is about 120 percent of its gross domestic product, which is one of the highest ratios in the world and has put the nation under particular scrutiny.

Growth remains sluggish — just 0.1 percent in the first quarter of this year. Confindustria, Italy’s principal business association, said last month that it had cut its economic growth forecasts to 0.9 percent for 2011 and 1.1 percent for 2012, and it warned that the forecasts could drop even lower if the government’s finances were not overhauled.

Moody’s warned in June that it could downgrade Italy’s credit rating, a month after Standard Poor’s changed its credit rating for the country from stable to negative.

The most significant measures in the new austerity package would go into effect only in 2013 and 2014, after the current government’s mandate expires in 2013. These are designed to yield about $58 billion of the plan’s $68 billion in savings. Opposition leaders and some economists criticized the backloading of the plan, saying that drastic cuts to government spending were the only credible way to sort out Italy’s financial problems.

“They put off until later difficult decisions to make,” said Francesco Daveri, an economist at the University of Parma. “But correcting pensions in 2020, in politics that’s like saying who knows when that’ll happen.”

Some analysts said that the government, reeling from recent losses in local elections and referendums, had little political freedom to propose bold but unpopular measures.

But others said that by putting off the bulk of the austerity measures, the government’s actions were less credible. “This is not the right signal,” said Tito Michele Boeri, a professor of economics at Bocconi University in Milan.

Article source: http://www.nytimes.com/2011/07/01/world/europe/01italy.html?partner=rss&emc=rss