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How to Keep Taxes in the Debt Limit Deal

August 3rd, 2011 . by economistmom

My own little wishful-thinking idea, just posted on CNN.com:

Here’s one way it could work out:

1. By the Thanksgiving deadline, the second-round super committee recommends legislation that would obligate Congress and the administration to strict pay-as-you-go rules on any future extension of expiring tax cuts. The pay-as-you-go rule means that any proposal includes a method to offset the cost, so the proposal does not add to the deficit.

This would include a promise to pay for any extension of any part of the Bush tax cuts at their next expiration date, which is the end of 2012. Relative to current policy, this would save $2.5 trillion over 10 years, and relative to Obama policy, this would still save $1.8 trillion.

2. At the same time, the super committee could identify and bring up for vote specific proposals to raise revenue by reducing certain tax expenditures in fair and economically efficient ways, providing a down payment on the offsets required for the future tax rate extensions. President Obama’s proposal — made in all three of his budgets thus far — to limit itemized deductions to 28% is a good example.

This would give policymakers another year to develop and debate specific tax reform proposals that would fully comply with the pay-as-you-go rule on the Bush tax cuts.

Such a strategy would recognize the disagreements between and within the political parties about tax policy’s role in deficit reduction, and would set up steps to help resolve them. And it would force policymakers into intensive tax policy therapy for the next year and a half. They clearly need it.

20 Responses to “How to Keep Taxes in the Debt Limit Deal”

  1. comment number 1 by: Monty Gaither

    It is time for cuts. Cut (close) all US Military bases outside of the United States. Cut (eliminate) all funding for faith based organizations (violation of Establishment clause anyway). Cut (eliminate) the tax exemption of all religious institutions (all businesses must pay their share of taxes). Cut (eliminate) all tax loopholes. Tax all forms of income (monitary, stocks/bonds, or physical [property, free tickets, free meals, etc.).

  2. comment number 2 by: Lauren A. Colby

    Nobody seems to understand this but there’s a limit to the amount of revenue that can be raised by taxing the “rich” (like me) because there just aren’t enough of us. Eventually, unpopular as it may be, we’re going to have to have a national sales tax. That’s the only way to reach the millions of people in the underground economy who presently pay no taxes.

  3. comment number 3 by: ST Dog

    Hey Monty,To be clear, you don’t care if they fund a rehab program, it just cannot be run by a church.
    Funny given the faith based programs have a much higher success rate.
    Not sure how funding programs from various religions/denominations violates the Establishment clause either. That a misreading of the clause. Equal treatment is not establishment.

    You going to do away with the tax exemptions for all other not-for-profit organizations too or are you just anti religion in general?

    Please show me a tax “loophole.” There are lots of deductions and exemptipons, but they aren’t loopholes. They were put there on purpose. A loophole is an unintended thing.

    Close all overseas Military bases? Nevermind our treaty obligations right. No need to worry about quick reaction capability either.

    You want to start taxing the imputed gain on property too? They do it on business now, so why not individuals? (See the arguments about LIFO vs FIFO inventory valuation).

  4. comment number 4 by: Laurie

    I am pleased to have discovered your blog. I read quite a few blogs and like economics so don’t know why it has taken me until now. Coincidentally I was born the same yr as you and have 2 boys of ages similar to your kids. Still trying to work out the personal economics of sending older son to college in a few weeks. Your post today is a bit similar to one of Ezra Klein’s, though he has sliightly more political slant compared to yours having a few more policy details. Personally, I have very low expectatuions for super congress.

  5. comment number 5 by: Centerist Cynic

    The super committee appointees will be select by the Republicans for their opposition to increases in taxes so I’m afraid your plan is a pipe dream.

    @Lauren I’m not Sur how you define wealthy but since Almost 20% of income and 35% wealth are in the hands of the top 1% of Americans, it is not a discussion about number of people it is a discussion about who has the income. By the way many of these people pay a lesser percentage of their income in federal income tax than the average secretary.

  6. comment number 6 by: Dave

    It seems to me that additional revenues are going to be needed. And I’m a republican. But no one on this side of the aisle is going to agree to straighten out the ship on the backs of the few, the wealthy, the Warren Buffetts.

    At present, given Bush tax cuts about 47% of citizens in this nation owe no income tax. (I’d love to kill the income tax and replace it with VAT, but that’s always been politically difficult.)

    More so now than any time since the Civil War, people in this country just do not agree on the role of government. Republican want it to be an international cowboy, while Democrats want it to be a domestic Robin Hood.

    If taxes are ratchetted up on the soakable rich while half the country pays nothing, that will be perceived as profoundly, profoundly wrong. Wroing enough perhaps for civil unrest.

    So, how then to tax the lower half of the income distribution. Well, you probably can’t income tax those at the poverty line. Or even minimum wage.

    Then, how about a 7% or so minimum tax on incomes from $15,000 to about $42,000 (at which point AGI liability over tax credits and deductions generally results in fairly mainstream tax liability)?

    7% does not sound like an undue burden when those earning $250,000+ are being asked to hand over a third.

    How much would it generate? Around $40 billion per year, I believe. Would 7% distort incentives? I’d hope not. That would mean we have some pretty volatile players on the lower end of the economy.

    And then you could raise about the same on the high end of the income spectrum through decreased tax expenditures.

    Sounds like a plan. One that’s not so one-sided as what I’ve heard from Nancy Pelosi’s quarter.

  7. comment number 7 by: Arne

    “half the country pays nothing”

    I think Dave needs a consistant story on payroll taxes. The half the country “paying nothing” does pay payroll taxes. The “soakable rich” only pays SS taxes on the first $100K (about).

    I don’t actually recommend increasing the payroll cap for SS, but I do suggest avoiding Dave’s oversimplification.

  8. comment number 8 by: Vivian Darkbloom

    Arne,

    Please define “tax”. I’m old enough to know that the ampunts withheld from salary and paid by employers for social security and medicare used to be called “premiums”. When and why did this change in nomenclature occur?

  9. comment number 9 by: Jim Glass

    I think Dave needs a consistant story on payroll taxes. The half the country “paying nothing” does pay payroll taxes. The “soakable rich” only pays SS taxes on the first $100K (about)

    Because the “soakable rich” get no SS benefits after their first $106,800 — and “all SS taxes must earn benefits”, has been a bedrock principle of the program since day one.

    Many on the left have a cognitive dissonance problem on this subject as they argue — as happens to be opportune at the moment — both:

    (1) SS is a progressive, stand-alone insurance program, as FDR put it “out of the Treasury”, which provides valuable net benefits to workers, which must be preserved as per FDR’s vision;

    and also…

    (2) SS contributions are actually just a *tax* like any other, in fact a *regressive* tax that the rich manage to avoid! Which should be upped on the rich out of fairness.

    Well, you can’t have it both ways with any honesty.

    If the truth is (1), then SS insurance contributions are insurance contributions, and not a tax, as evidenced by the fact that SS contributions pay *nothing* — zip squat nada — towards the general operations of the federal govt: defense, agriculture subsidies, justice dept, debt service, education, everything and anything else.

    Ergo, SS contributions are *not* a tax.

    OTOH if the truth is (2) and SS payroll tax is just another form of revenue collected by the federal govt that goes into the total pot out of which comes payments for all its expenses, then it *is* a tax. Yes.

    That’s a perfectly reasonable view. I can go along with that fine.

    BUT THEN the entire current payroll tax structure is a regressive disaster. It is a sham.

    I mean, can you imagine either party today as a deficit slashing measure introducing a new *general revenue, feed the total pot* revenue increaser as an additional **payroll tax**?

    If the payroll tax is indeed a “tax” then the left — of all people the left! — should be lobbying to kill the whole thing outright and roll into the income tax, which *does* pay for the general operations of the govt.

    The income tax base is much larger so the required tax rate is lower, an efficiency gain … and as those paying the tax shift way up the income ladder, it is highly progressive. Win Win!

    What’s for the left not to love about this? But who on the left makes this argument? *Nobody.* So I conclude that the left is not sincere about same.

    Who *did* make this argument? Milton Friedman.

    Well, one can embrace (1) or one can embrace (2), but one cannot honestly embrace both –
    which is exactly what the left does, jumping back and forth between them according to which happens to be more useful in the political argument of the moment.

    Personally, I favor (2), FWIW — but I’m willing to deal with all the logical implications that the left puts on blinders to.

  10. comment number 10 by: Jim Glass

    Here’s how we could have kept taxes in the debt limit deal:

    Multiple reports say Boehner had *accepted* $800 billion of revenue increases in the deal — then Obama blew it.

    E.g., Podhoretz:

    …. Republican negotiators had agreed in principle to new revenues up to $800 billion in the so-called “grand bargain” Obama had sought.

    That would have been a huge accomplishment for Obama, because he would have split the Republican coalition and brought about a political civil war in the rival political party.

    But the president increased his revenue demand by $400 billion. In other words, and surely inadvertently, he tanked his own “grand bargain.”

    This was a negotiating strategy he apparently picked up from Daffy Duck, who once ended a rapid-fire exchange at gunpoint with Bugs Bunny by turning the rifle on himself and pulling the trigger.

    The Republicans walked. He raged. And nine days later, he was standing there endorsing a deal that didn’t feature $800 billion in revenues. It didn’t feature 800 cents in revenues. It featured nothing…

    What do you call a leader who can’t lead — who has lost the ability to turn the public discussion and turn the conversation in the direction he wants and needs it to go?

    You call him a loser.

    Which is I suspect is the *real* reason why so many Democrats are steaming mad about this deal that really is not so bad for them at all, and actually not so much of anything at all — 9 parts posturing to 1 part substance. They’ve gotten the message about what kind of leadership comes from their leader.

    The WSJ story on the negotiations added that after his demand for $400 billion more of taxes killed the deal…

    the president called Mr. Boehner and offered to return to the $800 billion

    If so, I haven’t seen such negotiation skill since my dating days in high school.

  11. comment number 11 by: Dave

    The following chart may be instructive:

    http://www.mint.com/blog/wp-content/uploads/2009/11/MINT-TAXES-R4.png

  12. comment number 12 by: Dave

    Social Security’s is about the only Trust Fund I know of where the trustee can lawfully latch onto the money and stick it in his pocket.

    http://www.janegalt.net/blog/bin/iou/transfer.jpg

    I mean, didn’t we all cheer when Madoff went to prison?

    So, around one third of the federal debt consists of claims against the Treasury because it walked off with the entrusted money to finance current federal expenditures.

    If you take the position that payroll ‘taxes’ are a contribution of revenues to the Treasury’s general fund, then we can just write off those IOU’s, correct?

    Cool. I just solved the debt crisis!

    If on the other hand we take the view that benefits under SS are promised and virtually guaranteed to the millions of people who faithfully paid in over the last 75 years,

    http://s3.amazonaws.com/readers/2010/01/25/socialsecurityposter2_1.gif

    then those defined contributions go into the so-called Trust Fund and the Treasury gets nothing out of it.

    So, yeah, half the country pays no darn taxes.

  13. comment number 13 by: Arne

    I have to agree with Jim and Vivian that how to define taxes is important. There can’t be a meaningful dialog without agreement on terms. I even agree that people tend to switch back and forth when it suits them. It is a problem for liberals and conservatives.

    If we are going to conclude that paying SS premiums is not paying taxes, then we should not include those premiums (and the benefits that balance them over the long haul) as part of the size of government. Absent SS and Medicare Part A, government has shrunk significantly as a part of GDP since WW2.

    Note that I did not say Dave was wrong to consider that a large part of the country pays no taxes, I just asked for consistency.

  14. comment number 14 by: Monty Gaither

    Lauren A. Colby (comment number 2),

    Yes there is a limit and when we reach that limit we will have to turn to other things. But not before we reach that point.

    While working for my master’s one of my economics instructors showed us that if we double the tax rate on the truly rich, annual income of over $500,000.00, they would still be paying less percentage in taxes than that of any other industrialized nation.

    While I am not suggesting that we double the tax rate of the truly rich, I am saying that all tax loopholes need to be eliminated.

  15. comment number 15 by: Monty Gaither

    ST Dog (comment number 3),

    The use of any government money or property to promote any religion or religion in general is a violation of the Establishment Clause. Most, if not all, faith based programs require that you believe in their mythical god(s) and “submit” yourself to that belief. Most, if not all, of these organizations discriminate based on religion, either in employment or in who they will help. No government funding should ever go to organizations that discriminate in favor of religion or a specific religion.

    http://www.orange-papers.org/orange-effectiveness.html - interesting information on actual effectiveness of A.A. Many would have us assume that faith based programs have a high rate of success. But, when truly scrutinized and examined using valid scientific methods of investigation it usually proves the opposite is true.

    The Establishment clause does not prohibit the government from sponsoring real educational organizations, real scientific organizations, or non-religious based organizations that are a boon to society. It does prohibit the sponsoring (establishing) religion. I am pro-humanity, pro-freedom, pro advancement of society as a whole. The history of religion shows that it is the opposite of these and is far more a bane than a boon.

    Whatever good you may wish to believe religion has supposed produced is no where need the bad it has produced.

    “Religion is an insult to human dignity. With or without it, you’d have good people doing good things and evil people doing bad things, but for good people to do bad things, it takes religion.” — Steven Weinberg, Nobel Laureate in physics

    Tax loopholes are not limited to the ones herein described.

    1) The practice used by at least 83 of the top 100 publicly traded U.S. companies to hide their U.S. profits off-shore in low-tax or no-tax countries. The abuse costs U.S. taxpayers an estimated $70 to $100 billion per year.
    2) “An Addition to the List of Tax Loopholes” - http://dealbook.nytimes.com/2011/07/11/an-addition-to-the-list-of-tax-loopholes/
    3) “Tax loopholes seen costing billions annually” - http://www.reuters.com/article/2008/08/25/us-usa-tax-loopholes-idUSN2235030820080825

    We also need to eliminate specific tax subsidies to the very rich and those directed to large corporations. The oil companies are making tens of billions of dollars in profits while still enjoying tax subsidies.

    “Corporations that invest overseas rather than within the United States enjoy a huge advantage in the form of deferred taxes on profits. Republican policy makers are now proposing a “tax holiday” or even total elimination of American taxes on offshore profits.” - http://economix.blogs.nytimes.com/2011/07/25/of-loopholes-and-potholes/

    “The United States, like most other industrialized countries, continues to provide billions of dollars of special tax subsidies for fossil fuel industries that contribute to global warming.” - http://economix.blogs.nytimes.com/2011/07/25/of-loopholes-and-potholes/

    Other than the possible exception of Korea, what treaty obligations do we have that require us to have bases in Europe, Asian, or anywhere else outside the United States? If there are any, then of course those required by a treaty should remain until the treaty in question is revised or nullified. As for quick reaction, we now have the capability to move entire divisions of tanks and men to anyplace on the planet within a day, from the Military bases within the United States. Our Navy travels all the oceans of the planet. Within a week we can have all the Aircraft Carriers and Battleships positioned to strike anyplace that can be hit from our Navy vessels.

    I was not referring to inventory valuations. Sometimes people are not paid totally in cash. Sometimes they are partially paid in cash and then given “incentives” like stock, bonds, “golden” parachutes, season tickets to sporting events, vehicles, etc. There are times these items are not included in the tax base of the individual. They should be included and taxed at the same rate as the cash that the person is being paid.

  16. comment number 16 by: Dave

    Easier said than done.

    Some loopholes may be pure giveaways, but many correspond to very real economic costs borne by firms.

    For instance, oil & gas depletion allowances are real, physical costs of extraction. Many have calkled for their repeal. It is quite possible that the accelerated sequencing of them is overly advnbtageous, but if we just repealed them, we’d clearly have to import all of our energy needs other than solar/wind.

    A better solution than excluding deductible costs is to really sharpen your pencil: What quantity do you want to tax the existence of? Income? Value-added? Wealth? Consumption?

    Each has its own definitional issues.

  17. comment number 17 by: Jim Glass

    It is time for cuts. Cut (close) all US Military bases outside of the United States.

    This is the only part of the budget with room for cuts that would matter at all — and anyone who thinks cutting defense by a good 50% would help more than a minor amount, come anyhwere close to solving the budget problem, just hasn’t looked at the numbers.

    In 2010 payments to individuals were $2.29 trillion, *all* federal revenue was $2.16 trillion.

    Yes, if you’d cut ALL 100% of the rest of the federal government — the *entire* military, and all other government spending on everything from Agriculture to Zoology, there’d *still* have been a defict.

    And that *doesn’t* count an extra unfunded $2 trillion+ liability incurred for *future* entitlement spending.

    Cut (eliminate) all funding for faith based organizations (violation of Establishment clause anyway). Cut (eliminate) the tax exemption of all religious institutions (all businesses must pay their share of taxes).

    The budget impact would be on the scale of a rounding error too small notice.

    I’d support cutting the tax exemption for *all* tax exempt institutions — there’s no such thing as a “non profit” organization, and does Harvard really need a tax-free $27 billion investment fund while charging students $60,000? — but the budget result would be on the scale of a rounding error just barely big enough to notice.

    No spending cuts but in payments to individuals can be big enough to matter.

  18. comment number 18 by: Monty Gaither

    comment number 17 by: Jim Glass

    Your statement, in regards to my suggestion of eliminating the tax exemption of all religious organizations and funding for all faith based organizations was “The budget impact would be on the scale of a rounding error too small notice. ”

    In 1991 I did a project for an Undergraduate Economics program. The National Council of Churches had a book of statistics on their members. They claimed that in 1990 their membership organizations brought in over $450 billion, untaxed revenue. I requested information from the US Government, on estimated income of religious organization (NCC members or not) and all I found out was that there were over 250,000 officially recognized religious organizations in the US. The NCC stated that their membership was about 100,000. In 1991 alone, the US revenue from just the NCC members would have been over $100 billion. In 2000, I attempt to do the same report for a Graduate level Economics course, the teacher decided it might be too controversial. But, from an unofficial source the total revenue from just the NCC Membership was almost a $1 trillion. If you assume that the total revenue of the 150,000 non NCC religious organizations were no more than the revenue of the 100,000 organizations, the US government would have been taking in almost 2/3 of a trillion dollars a year. Then the tax deductions that are being given to those who donate to religions would also be a rather large increase of revenue, if religious organizations were not tax-exempt. The increase of revenue due to just eliminating the tax-exemption of all religious institutions would be sufficient to not require any layoffs or cuts in services or SSN / Medicare / Medicaid.

  19. comment number 19 by: AMTbuff

    The increase of revenue due to just eliminating the tax-exemption of all religious institutions would be sufficient to not require any layoffs or cuts in services or SSN / Medicare / Medicaid.
    Before or after the churches go bankrupt? A tax increase on churches would most certainly fall on their members, shifting the market-clearing demand sharply downward. In other words, you would have much lower revenue that projected, less church membership, and less charitable activity by churches. It’s not clear that this would be a benefit to our society.

  20. comment number 20 by: Jim Glass

    Jim Glass, … In 1991 I did a project for an Undergraduate Economics program. The National Council of Churches had a book of statistics on their members. They claimed that in 1990 their membership organizations brought in over $450 billion, untaxed revenue…

    There is a difference between “gross” and “net”. That’s gross. Only net is taxable.

    What dollar amounts did you allow for deductions for compensation expense for all personnel (salaries, pensions, etc), cost of all school and church operations, depreciation of all structures from cathedrals to churhes to school buildings, convents, etc., depreciation and operating cost of all equipment and vehicles, cost of all charitable and religious functions (which is their businness, after all) etc. etc.?

    That is, all the expenses that would be deductible if churches were treated as fully taxable businesses, with fully taxable revenue, just like any others. I’d like to see the data you used to compute all those expenses.

    But for now we might estimate them: Take that $450 billion of revenue they claimed as having in 1990 dollars as true, and it’s $756 billion 2011 dollars. Add 50% for 20 years of growth and we get $1.1 trillion — wow, a good 7% of GDP!

    Continuing… Taxable business profits average about 7% of revenue historically … applying that to “religion business” revenue of $1.1 trillion = $77 billion of taxable revenue … then assuming that all taxable church revenue is in the top 35% tax bracket, that makes the maximum possible tax revenue from it less than $27 billion … but as that is both impossible and unreasonable, let’s optimisitically estimate revenue of $20 billion.

    This year’s deficit is an estimated $1.5 trillion.

    And, of course, if the religion business ever had a bad year — as the airlines, auto companies and other industries are known to — you could end up with the IRS giving them a net refund.

    So I just don’t see this as a serious buget-gap-closer.

    OTOH, if I misunderstand you, and you are saying all them churches are keeping $1.1 trillion of net income *after* paying all their costs … then heck, L Ron Hubbard is going way up in my esteem, and I’ll have my own new religion started by the end of this week!

    BTW, there’s no doubt that there is *massive* financial “cheating” in tax-exempt organizations of all kinds — treating profit-motivated activities as tax-free (say “NCAA football and basketball”), taking abusive salaries and money withdrawals, nepotism hires in no-show jobs. etc., etc. — in no small part because they are all largely “audit free” as the IRS would only waste its resources in auditing them.

    I’d be entirely in favor of making ‘em *all* taxable, letting ‘em deduct documented expenses with a charitable purpose, so they could still fullfill it, and whipping ‘em all back closer to an honest line via fear of the IRS audit master. We could start with the low-hanging fruit — NCAA Sports and the Harvard Endowment — and get good results right away.

    But it ain’t gonna happen, and I have no illusion that it would be a significant revenue raiser — relative to a $1.5 trillion budget gap — if it did.