Democrat vs Republican Tax Cuts
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Income Tax Fundamentals (with TaxCut Tax Prep Software) (Income Tax Fundamentals)
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Both Parties Have Enacted Tax Cuts in Last Half Century
However, in the 1960s tax cuts were being pushed by the Democrats in the Kennedy-Johnson Administration. Unlike today, where Republicans were urging tax cuts and Democrats opposing them, in those days it was the Democrats pushing the tax cuts and Republicans opposing them.
Was this just partisan politics in which one party proposes the policy and the other one feels obligated to automatically oppose it? The answer is “No”. There are actually two economic theories concerning how and why taxes should be cut. Further, one theory is aligned with the policy objectives traditionally pursued by Democratic administrations and the other is aligned with policy objectives traditionally pursued by Republican administrations.
Democratic Tax Cuts - Keynesian Theory
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Federal Income Tax: Code and Regulations Selected Sections (2007-2008)
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Fundamentals of Federal Income Taxation: Cases and Materials (University Casebook)
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Republican Tax Cuts - Supply Side Theory
Instead of Keynes, the Supply Siders looked to a nineteenth century French economist named Jean-Baptiste Say (1767 - 1832) who is best known for his observation that "supply creates its own demand". In other words, "you make it and they will buy it". Just as John Maynard Keynes was popular with Democrats because he distrusted the free market and saw the government as the manager of the economy, the Conservative Republicans that President Reagan led, looked to Jean-Baptiste Say because his theories supported the idea of leaving the control of the economy in the hands of the market and keeping government intervention to a minimum. Along with Say was another, contemporary, economist, Arthur Laffer of California. Laffer had advanced the theory that, by reducing high marginal tax rates, the government could both stimulate economic growth and increase revenue. He even produced a graph, which came to be known as "the Laffer Curve", which showed that, over a certain range, reductions in tax rates would lead to increases in tax revenues.
Laffer's theory solved two problems for President Reagan and his Young Turk supporters in Congress (notably Jack Kemp and David Stockman) who were looking for ways to reinvigorate the conservative wing of the party. First, it promised a way to get the economy growing and out of the stagflation that was chocking it and, second, it was a way to overcome the old line conservative (the Robert Taft wing of the party) insistence on cutting spending first and then cutting taxes. Inflation was this group's fear and they were opposed to any tax cut that threatened to be inflationary. With the Democrats in control of both houses of Congress, there was no way President Reagan and his team were going to obtain the spending cuts necessary to put through a tax cut. Laffer's theory provided a way that would reassure the old time fiscal conservatives, without having to get spending cuts through a Democratic controlled Congress.
The idea behind Supply Side tax cuts is that high marginal tax rates discourage both work and investment. As I stated in my original tax cut article, after a certain point, people have earned enough income to satisfy their basic needs for food clothing and shelter and, if most of any additional income earned, from either more work or investment, is taxed away, people have little incentive to work or invest beyond this point. By lowering marginal tax rates, people have the incentive to earn more by working and investing and, when they do this, the extra income they produce is significantly high so that, even at a lower tax rate, the total tax collected is greater than before when the rates were higher but, additional income lower. This is how tax cuts result in greater tax revenue.
Now, it must be understood that true Supply Side tax cuts only work with higher income households. These would be households with wealthy individuals or upper middle class households where both husband and wife work. Cutting lower brackets to help lower income people, simply reduces the amount of taxes collected. The reason is that people in the lower income brackets have low incomes and are probably working as much as they can to support their families. Obviously the increased take home pay helps them, but, if both husband and wife are already working one or more jobs each, they can't physically work more and, if their total income has not reached the high marginal bracket levels then the cut provides no incentive to try to work more. This is the opposite of the Keynesian tax where we want to put money into the hands of lower income people because we know they will spend it.
For analytical purposes, one of the problems with the Kennedy-Johnson, Reagan and Bush tax cuts is that all three contained elements of both Keynesian and Supply Side tax cuts. None of the three were a pure Keynesian or Supply Side tax cut. All three tax cuts had to go through the political process and politics is the art of compromise.
In the case of the Kennedy -Johnson tax cut, Democrats controlled both houses of Congress. However, many of the Democrats from Southern states at that time were fiscal conservatives and tended to vote with the Republicans on fiscal matters. As a result, the Kennedy-Johnson tax cut was an across the board tax cut that reduced rates in both the upper and lower brackets. The cut in the top bracket was major - the tax rate in the top bracket was cut from 91% to 70%, a 21% reduction. This tax cut did supply both a demand side stimulus that was credited with pulling the economy out of recession as well as a supply side stimulus that resulted in economic growth. Unfortunately, the expected Keynesian deficits ballooned as a result of President Johnson's decision to both expand the war in Vietnam as well as launch his very expensive "War on Poverty".
In the case of Presidents Reagan and Bush, in order to generate the political support they needed from both Congress and the public, they had to make cuts in all brackets. While the thrust was supply side, there were elements of Keynesian demand side cuts in lower brackets as well. In fact, in the case of President Bush's cut, he used Keynesian demand side arguments as well as supply side arguments in his selling of the idea to the American people. Deficits did appear, as anticipated, under the Reagan tax cut as a result of Congress continuing to increase spending despite the initial reduction in tax revenue (as I described in the previous article, there is a lag between the tax cut and the increase in revenues). However, the rising deficits did end up pressuring Congress to reign in some of their spending. Suddenly it was Democrats who were concerned about rising deficits but this could be due to both the public's concern about inflation, having recently experienced double digit inflation in the 1970s as well as frustration over having to cut back on new spending programs due to the inability to raise taxes to pay for them.
As to the future, we can probably expect Republicans to continue to be the party of tax cuts because these are in line with both their political and economic agendas. While Democrats will probably stay away from tax cuts as a policy tool in the near term and rely on increased spending as the tool of choice for combating downturns in the economy.
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Here we go again.
You are right about the first President Bush, he did dismiss supply side theory and then went and raised taxes after promising not to raise them. We retaliated by sitting home and letting him lose the next election – I think his son got the message.
As to the Alternative Minimum Tax, you are right, it is a big problem. But this is just another one of the liberals class warfare tactics that is now backfiring and hitting some of them. Republicans have been trying to get rid of this tax, but the tax is so ingrained in their ideological dogma that they can't bring themselves to abolish it. By the way, this tax is more of a problem for people in the more liberal eastern states with their high state and local income taxes and property taxes which cannot be deducted in calculating AMT due. In Arizona and other parts of the west this is not as much of a problem as we quickly dispatch politicians to the unemployment line when they try to raise these taxes in our state.
And, thanks for the quote from the New York Times, after a lifetime of listening to them push every tax under the sun it is refreshing to hear them cry crocodile tears about a tax hits their own wallets. I believe the term for this is “poetic justice.”
Unfortunately, deficits are nowhere close to disappearing, as they did under Clinton, which just goes to show you that today's Democrats are the real fiscal conservatives, while "Bush's son", who has never seen a piece of spending that he didn't like, is deficit-spending like no other previous administration, Democrat or Republican.
AMT was set up to extract tax revenue from tax-dodgers. I have a feeling it will eventually replace our existing tax code, which, with its countless writeoffs and loopholes, distorts business, public and personal spending.
i enjoyed your piece on differing approaches to tax cuts. in contrast, the commentary on your piece illustrates what we see on most op-ed pages---political cant. it's sad that so many people are unable to think about public issues without parroting partisan myths.
Political theory is fine, but as a practical matter, a deficit is nothing more than a tax increase in which the taxes will be paid by our grandchildren. Don't you think Bush was aware of the fact that Congress would be unlikely to put through "tax reform"?
William, Thank you for your comment. However, the Federal Deficit is simply the difference between the federal government's current tax receipts and its spending. It is short term and no different from an individual charging purchases to a credit card and then paying it off at the end of the month.
Only when the government is unable to clear up the deficit and is forced to refinance it with long term borrowing does it become the National Debt which is what people are referring to when they talk about the debt burden on our grand children.
In an ideal world, Congress would cut spending along with taxes and thereby keep things in balance. However, even if they don't cut spending, cutting high marginal tax rates will result in economic growth (see my hub on "How Tax Cuts Work" http://hubpages.com/hub/How_Tax_Cuts_Work ) which will increase tax revenue and clear the deficit as is now happening as a result of the Bush tax cuts. Do a Google search on "Federal Deficit 2007" and you will see that the deficit is falling. It would fall even more and be eliminated if Congress, both Republicans and Democrats, was not so irresponsible and insisting on increasing spending as fast or faster than the tax revenues are increasing.
In this case Republicans have proved that they can pander to special interests as well as the Democrats and waste tax dollars as fast as Democrats. That is one reason why many of us voted against the Republicans causing them to lose control of Congress in 2006 - we wern't voting for the Democrats but were rather voting against the Republicans by either abstaining, voting Libertarian or Democrat - anything to defeat the big spending Republicans and, hopefully, teach them a lesson.
Thanks again for your comment.
Chuck, with all due respect your explanation of a deficit is a new version of Voodoo Economics. Bush inherited a surplus, not a deficit. When you cut taxes on the wealthiest of Americans you're inevitably going to spend more than you collect in taxes. On top of that, you drive up the cost of government when you spend vast sums of money "off budget" and lose billions of dollars to private contractors -- funds that aren't even accounted for, i.e., "lost." On top of that you don't save money by "privatizing" huge government operations, rather that just reduces or even eliminates needed services to taxpayers. Just compare Bush's horrendous record to that of Bill Clinton's: Clinton "achieved" a surplus; Bush "promises" to reduce the deficit after he leaves office.
William, thanks for the follow up comment. Obviously we are at opposite ends of the spectrum in terms of how we view this.
However, I have a simple suggestion for those who prefer not to have their taxes reduced and that is to point out that the taxes as levied are simply the minimum amount that we are required to pay. The IRS, and I presume state and local tax authorities as well, welcomes gifts of additional money from citizens who would like to pay more. So even thought tax rates are cut anyone is free to continue paying at the old rate. As a guide, I believe that in the 1960s and 1970s (pre-Regan cuts) the top rate in the U.S. on incomes in excess of $70,000 was 90% and in Great Britain prior to the Thatcher era the top rate on incomes over either 90,000 or 100,000 pounds sterling (the exact point escapes me) was 102%.
Thanks again for visiting my hub and for your comments.
The other side of the story here, by economist Robert H. Frank of the Cornell Business School:
http://www.nytimes.com/2007/12/09/business/09view.
Isn't it true though that there is really no such thing as tax cuts? the money just gets shuffled around depending on political beliefs. For instance, Dems are tagged as taxers and Reps are supposedly not, but in reality neither spend "bigger" or "smaller," nor tax more or less. The only difference is where dems put the money versus where reps put the money ie. programs vs defense, health vs. corporat investment.
Kane, Thanks for visiting my HubPages and for your comment.
While I agree that as far as uncontrolled spending and wasting of tax dollars goes there is no difference between Republicans and Democrats. For all practical purposes there is no such thing as SPENDING CUTS with regard to either party. With rare exceptions the closest either party in Congress ever comes to cutting spending is to reduce the amount of increase in spending for a given program. In other words, if a program or agency's budget was increased by 10% last year and only 8% this year that is what passes for a spending cut - and when we are talking about a 2+ trillion dollar budget an 8% increase over the previous year is not pocket change even if it is 2% less than last year's increase.
But tax cuts, despite the fact that they are neither as frequent nor as deep as I feel they should be, are real and have been enacted by both parties in the past half century. What I tried to explain in this hub was the different theories behind the tax cut policies of liberals and conservatives. Since the 1960s both parties have both enacted and opposed tax cuts and the logic behind their actions in both cases was consistent with the theories each was using.
Ideologically, fiscal conservatives (not to be confused with Republicans who during the present administration and their most recent 6 year control of Congress have proved themselves to be anything but fiscally conservative) tend to favor tax cuts and associated spending cuts as a part of their philosophy of limited government. Most modern day liberals, on the other hand, tend to look upon tax cuts simply as a temporary tool to stimulate consumer demand during an economic downturn. I say most because some, like the late John Kenneth Galbraith and Princeton economist Paul Krugman, are opposed to tax cutting on principle. That principle was clearly stated by Galbraith in his writings (The Affluent Society, and other works) when he described his vision of a nation where taxes were high and economic activity was directed by elites like himself. In Galbraith's mind the job of the masses was to labor and produce while bureaucratic elites would spend the fruits of the workers' labor on what they, the bureaucratic elite, felt was best. Galbraith opposed President John F. Kennedy's tax cut (which was blocked by Republicans in Congress but passed under President Lyndon B. Johnson during Johnson's honeymoon following Kennedy's assignation) with the argument that, even though Keynesian economic theory prescribed such a cut to pull the nation out of the recession that we were in at the time, it was bad policy because, once people experienced a tax cut (and there hadn't been one since the Administration of Calvin Coolidge) there was a possibility that they would get used to the cut and not only oppose future tax increases (which was the flip side of the Keynesian theory which called for tax increases when inflation was the problem) but demand more tax cuts as well.
Galbraith, whose years of prominence occurred during the years between the Roosevelt Administration (where he held a high level economic enforcement position) through the Carter years when big government types had a near monopoly on academia, the media and government (Democrats controlled both houses of Congress and most state and local legislatures during the better part of that era), could propose such undemocratic policies without fear of serious criticism from the predominantly left wing media and academia. Today, Professor Krugman and others like him have to be more subtle as a vibrant opposition has now developed in the media and academia as well as in politics (look at Ron Paul's surprising popularity in the Presidential race http://hubpages.com/hub/Ron_Paul_The_Overlooked_Re ) and such positions would be quickly challenged. Even as early as the 1960s opposition was developing against big government and high taxes which is one reason why President Kennedy is said to have appointed Galbraith as Ambassador to India – a sufficiently prestigious position for a person of Galbraith's stature in the Democratic Party but far enough away from Washington to keep him from meddling in economic policy.
Thanks again for your comments.
I thought Republicans believed in fiscal discipline....that is, don't spend what you haven't raised in taxes. The Republicans, starting with Reagan have been on spending binges and relied on Democrats to save our national bacon. Republicans accuse democrats of being "Tax and Spenders" the absurd irony is now it is Republicans who are "Borrow and Spenders". Any idiot knows what the ultimate result is of Borrow and Spend. This kind of policy is the height of irresponsibility. Republicans give lipservice to limiting government spending and then far outspend what democrats ever dreamed of spending.
David Brooks on supply-side tax policy in the NYTimes 1-11-08:
"Supply-side economics had a good run, but continual tax cuts can no longer be the centerpiece of Republican economic policy. The demographics have changed. The U.S. is an aging society. We have made expensive promises to our seniors. We can't keep those promises at the current tax levels, let alone at reduced ones. As David Frum (of "axis of evil" fame) writes in 'Comeback,' his indispensable new wook: 'In the face of such a huge fiscal gap, the days of broad across-the-board middle class tax cutting are over.'"
Chuck, have you never met a tax cut you didn't like? What programs are you prepared to cut or eliminate? Medicare? Social Security? FDA? SEC? EPA? Homeland Security? DEA? OSHA? NASA? Unemployment compensation? Or what?
its very infomational!
Very interesting read! :)
Definitely an edifying hub..
PK.
X
Kane above makes a good point. Both tax pretty much the same its only difference is where they put it. Although going from a huge surplus to a 5-6x negative deficit is horrendous, and exacly what Bush has done, not only ruined the country but his party as well. I for one dont think he should be bashing another party but working with them. Uniter my ass. 2009 cant come soon enough.
I agree, in the end they both have to generate deficit spending in order to stimulate the economy. It just a question of what we call the deficit.
Interesting conversation here. I'd like to chime in. No one here is asking the question of what kind of model of taxing and spending is sustainable. For example, the US (I'm an American) likes to be the world's policeman. I don't think this is a sustainable policy. Take Iraq for example. By going in unilaterally, we only reassured the world that we would gladdy step in and foot the bill whenever a world crisis occurs. This is baloney! It's no wonder that NATO countries, or any others for that matter, don't agree to go to war with us. They know we will do it. I'm not a pacifist, but one country fighting all the wars for this world is not sustainable policy. I can't believe that there is talk of unilateral military force with Iran.
Who's the slow learner here?
I work for an urban school district here in the states that is considering getting those $200 laptops, originally made for children in developing countries, for all it's $1300 teachers because the district has no money to buy 'real' laptops. Can't find $1,300,000 for laptops for teachers. The taxpayers would scream if we spent that on laptops. But no one seems to care about the billions and billions we are spending in Iraq and Afganistan.
Anyway, my point is, it is not only spending policy, it's what we choose to spend the money on. Education spending is sustainable and eventually raises our tax base by graduating more kids with higher educations.
Always had my doubts about Keynesian school of thought. The fact that WWII happened when it did threw a wrench into the so called "proof". When I was in MBA school I heard arguments both ways, I tend to see the "suppy side" arguments as slightly more convincing, but the true needed blend may lay somewere in the middle as is usually the case.
-e-
Bush started a foolish three trillion dollar war, added drug benefits to Medicare and enacted a big tax cut for the top 2%. Bad combination. If those are Republican tax cuts you can have them. Taxes are the lowest in the U.S. of any industrialized country and our crumbling infrastructure and decaying inner cities show it. We are looking more and more like a bananna republic every day.
Ralph
Please read the following:
Suppose that every day, ten men go out for Ice Cream and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do. The ten men ate in the Ice Cream Parlor every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers, he said, 'I'm going to reduce the cost of your daily Ice Cream by $20. Ice Cream for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still eat for free, but what about the other six men - the paying customers?
How could they divide the $20 windfall so that everyone would get his fair share? They realized that $20 divided by six is $3.33.
But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to eat his Ice Cream. So, the parlor owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay!
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.
'I only got a dollar out of the $20,'declared the sixth man. He pointed to the tenth man,' but he got $10!'
'Yeah, that's right,' exclaimed the fifth man. 'I only saved a $1 - it's unfair that he got ten times more than I!'
'That's true!!' shouted the seventh man. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!'
'Wait a minute,' yelled the first four men in unison. 'We didn't get anything at all. The system exploits the poor!'
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for Ice Cream, so the nine sat down and had Ice Cream without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax deduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start eating Ice Cream overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
I guess no explanation is possible.
How wealthy is too wealthy and how poor is too poor? And how big a deficit can our country stand before the Chinese own all our debt? And how many potholes can we stand in our roads and how many bridges must collapse before we decide to repair them?
Rich people pay more taxes because they make more money. Unemployed people whose jobs have been sacrificed on the altar of free trade pay no taxes. What's your point? Are you saying everybody should pay the same amount of taxes, or the same percentage regardless of income? No developed country in the world levies taxes that way. U.S. taxes, last time I checked, are the lowest of all industrialized countries, and we have more holes in our roads, trash in our streets, more people who go without adequate health care and more infant malnutrition.
BTW. Kamerschen has denied writing the silly parable. Snopes classifies it as an urban legend re-cycled gleefully among right-wingers, supply siders and libertarians. http://www.snopes.com/business/taxes/howtaxes.asp
Here's some advice on tax cuts from Ben Stein, an honest and informed Republican:
Everybody’s Business
What McCain Could Do About Taxes
By BEN STEINPublished: March 9, 2008DEAR John McCain:
Skip to next paragraph Philip AndersonCongratulations. The nomination of the Grand Old Party is yours. Now comes the hard part, winning, and the almost impossible part, governing sensibly. Since you were, in your usual modest way, genial enough to acknowledge recently that you know little about economics, may I offer you some thoughts on a big part of economics, namely tax policy, bearing in mind that no one knows much about it?
Let’s start with the obvious. Almost everyone dislikes taxes. No sane person enjoys writing out a big check to Uncle Sam when he could spend that money or bank it for retirement. By the same token, almost everyone likes the phrase “tax cuts” for the same reason.
The problem, and it’s a killer, is that over the years we have obligated ourselves as a nation to spend truly staggering sums. These sums are growing rapidly. They consist mostly of entitlements, like Social Security and Medicare; fixed obligations like interest on the national debt, pensions for federal and military employees and various subsidies that have already been enacted; and morally mandatory expenses like those for national security.
All politicians campaign on the promise to cut federal spending by identifying hitherto unfound waste, fraud and corruption. None of them ever do so in a meaningful way. Total federal spending has not once fallen noticeably since 1954, no matter the party or the promises of the incoming chief executive.
That is the first thing you need to know. The next thing is that the Republican Party (my party and yours) has for the last 30 years or so been operating under a demonstrably false and misleading premise: that tax cuts pay for themselves by generating so much economic growth that they replace the sums lost by tax cutting.
This would be a lovely thing if true, and the best of all ideas, the “something for nothing” idea. In fact, tax cuts lower federal revenue and generate federal deficits. It is also true that they do stimulate the economy and after a long period of years, federal tax receipts go back to where they were before the tax cuts.
For example, when President Bush enacted his tax cuts in the early 2000s, income tax receipts fell dramatically. It took almost six years for them to reach the level they had been in the last year of the Clinton administration, while G.D.P. in that period rose by roughly 30 percent. In the eight years Ronald Reagan was president (and I love and worship him), tax receipts did not fall anywhere near as much, but they rose more slowly, on a percentage basis, than they did in any other comparable eight-year period after World War II.
In other words, tax cuts do not pay for themselves, at least not on any basis I can see. Certainly, they are not worthless. They make taxpayers feel good and they generate growth. But basically, they shift the tax burden from us to our progeny and add immense amounts of interest expense to the federal budget. At this point, taxpayers shell out about $1 billion a day just for that item.
Moreover, immense federal deficits in modern life are financed largely by foreign buyers of our debt. This means that the American taxpayer must work a good chunk of the year to send money to China, Japan, the petro-states and other buyers of United States debt. In effect, we become their peons.
By flooding the world with debt, we in effect beg foreigners to take our dollars, and this leads to a lower value of the dollar and a higher cost of imports, including oil. If you feel pain filling up the tank, you can partly thank those tax cuts. If you feel the sting of inflation, you can partly thank the supply siders. Deficits matter.
What to do? You appear to have changed your mind over time and have recently shown more support for the Bush tax cuts than in the past. If you become president, you can just keep up the (latter-day) Republican game of make-believe. You can propose still more tax cuts, create still more deficits and add to the debt, and say to yourself, like Louis XV, “Après moi, le déluge.”
Or, you can raise taxes. But whom to tax? The poor are, well, poor. The middle class is struggling to pay for its middle-class life. That leaves the rich. It would be lovely if we did not have to tax them. Many have worked hard for their money. Many have created useful businesses. Many of them are fine people.
But as Willie Sutton said when asked why he robbed banks, “Because that’s where the money is.” By definition, the truly rich have a lot more money than they need. If they don’t, then they are not rich by my standards. The first step toward putting our house in order, once we are past the seemingly looming recession, is much higher taxes on the truly rich and serious enforcement to prevent offshore tax evasion.
TO put it even more starkly, the government — which is us — needs the money to keep old people alive, to pay for their dialysis, to build fighter jets and to pay our troops and pay interest on the debt. We can get it by indenturing our children, selling ourselves into peonage to foreigners, making ourselves a colony again, generating inflation — or we can have some integrity and levy taxes equal to what we spend.
You are probably the bravest man to have a chance at being elected president in my lifetime. Do you have the guts to stand up to the myth makers and tax cutters and the rich? Or will you just kick the can down the road?
Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.
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Ralph - I too, found this letter from Ben Stein hard to believe and even went to the March 9, 2008 NY Times on line Opinion Page to check it myself. Ben Stein, in addition to his Hollywood and financial advising work, is also a conservative economist like his father, Benjamin Stein Sr. who was the Chairman of President Nixon's Council of Economic Advisers. Of course, Benjamin Stein Sr. was more middle of the road (especially in terms of today's economic policy positions) and tended toward Keynesianism and was probably behind President Nixon's famous "I am a now a Keynesian" statement) and certainly accepted the big government philosophy of that era.
I have two problems with Ben Stein’s position in this letter. First, he seems to have fallen into the trap of simply accepting government spending at both the current level of spending and current level of annual increases as a given. Using that assumption his analysis is partially correct in that current tax revenue is not sufficient to cover current spending. As I see it, what is needed to reign in the Federal Government's addiction to spending are two things - Accountability for Congress and the Federal Government and more direct input from the citizens who have to pay for all of this spending. Here are three simple reforms that could go a long way toward again making our government, in the words of Abraham Lincoln, a "government OF the PEOPLE, BY the PEOPLE and FOR the PEOPLE".
1 Require that all spending bills be submitted and voted on by Congress as single items and not lumped together in thousand page omnibus spending packages rushed through Congress in the wee hours of the morning orburied in totally unrelated pieces of legislation. A new Amtrak station for West Virginia, a bridge to nowhere in Alaska, etc. would have to be voted on and enacted as separate pieces of legislation and not quietly inserted into the middle of some other totally unrelated piece of legislation at the last minute (as Senator Harry Byrd of West Virginia did when he deceitfully attached the funding authorization for his pork barrel Amtrak Station into the Patriot Act). This way, the American people could see exactly what is being spending is being proposed and be able to inform their Congressmen and Senators as to their wishes on whether or not the proposed spending should be approved or not.
2 Require roll call votes for all legislation regarding the spending of the taxpayer's money. In this way the voters will know exactly how their representatives voted on every specific piece of spending legislation.
3 Abolish payroll withholding of income taxes and require that people pay their taxes in full each year with a check or credit card. Having to actually PAY taxes rather than having the funds siphoned off of workers paychecks by the government before the pay is even received and then receiving a refund for the deliberate overage that the Feds have helped themselves to and used interest free for up to a year is not the same as handing over cash that has already been in one's hands.
My second problem with his op ed piece is his call for a tax on the rich which is not really a workable solution as I have pointed out in my recent Hub on problems with taxing the rich which you can see by clicking here: http://hubpages.com/hub/Problems-with-Taxing-the-R
Chuck
My problem with the present tax system is:
!. All taxes are too high!2. Too many people don't pay taxes;causing too much burden on too few; this stiifles jobs, growth and incentive.3. It leads to politicians buying votes through IRS manipulation; causing social engineering and political demagoguery.4. If they raise taxes a dollar, both parties want to spend a buck fifty!5. It gives rise to multiple streams of government tax stream along with multiple layers, compound and hidden fees driving costs.6. It leads to deficit manipulation and burdens passed to future generations.7. It leads to massive invasion of privacy and civil liberties.
We need something like a "fair tax" which wouldn't solve all our problems but would make a step in a better way.
Just my thoughts
Research & Ideas
The Debate over Taxing Foreign Profits Q&A with:Mihir A. DesaiPublished:April 7, 2008Author:Sean Silverthorne Executive Summary:Corporate tax policy has suddenly become a hot topic in the U.S. presidential debate, including the issue of whether tax laws encourage American firms to outsource jobs to other countries. Harvard Business School professor Mihir Desai makes a case for exempting foreign profit from taxes if proper safeguards are put in place. Key concepts include:
The United States is increasingly an outlier in its taxation of corporate income earned on foreign soil.Critics argue the ability to defer U.S. taxation until profits are repatriated provides an incentive to ship jobs overseas. On the other hand, the current worldwide system is often derided as making American firms uncompetitive relative to their foreign competition.An alternative may be to exempt foreign income from taxes paired with safeguards against an overly aggressive use of tax havens. <p>Corporate tax policy has suddenly become a hot topic in the U.S. presidential debate, including the issue of whether tax laws encourage American firms to outsource jobs to other countries. Harvard Business School professor <b>Mihir Desai</b> makes a case for exempting foreign profit from taxes if proper safeguards are put in place.</p> About Faculty in this Article:
Mihir A. Desai is a Professor of Business Administration at Harvard Business School.
More Working Knowledge from Mihir A. DesaiMihir A. Desai - Faculty Research Page E-mail Mihir A. Desai: mdesai@hbs.eduCongress and the next president of the United States will be under pressure to make major changes to U.S. corporate tax policy, the consequences of which could have significant impact on profit and competitiveness of American companies on the global stage.
One heated issue is the charge that the U.S. tax code provides incentives for companies to ship jobs overseas. It's nothing new. In the 2004 presidential race, then-candidate John Kerry blasted "Benedict Arnold CEOs" for using tax advantages to do exactly that.
We asked Harvard Business School professor Mihir Desai, an expert on international and corporate finance, to guide us through the complicated U.S. tax law on foreign profits, and to explain why this system is so different from those found in other countries.
Sean Silverthorne: Why has this issue on taxing foreign profit become so central?
Mihir Desai: I think there are several reasons for these developments. First, the integrated, global nature of firm operations has increased to such a degree that it's hard to think about taxing corporations without figuring out what to do with their foreign profits. As one example, more than half of GE's assets are not in the United States now, and close to half of GE's profits are abroad as well. Foreign operations are growing very quickly and can be more profitable than domestic operations. There's also a growing awareness that not all countries tax their corporations in the same way, and that American firms have to compete with firms that face very different tax regimes, many of which also feature a much lower tax rate.
Second, Americans are coming to question whether globalization broadly and the foreign activities of American firms specifically are really fostering their welfare. As such, we've seen a dramatic increase in the importance of foreign activities, and this has given rise to increased scrutiny of how we should tax these operations.
Finally, there is a growing sense that firms are increasingly savvy with respect to tax planning and that profits are easily reallocated through the movement of intangible property or otherwise. As a result, the fairness of the overall system has come into question. When a number of firms tried to "expatriate" from the United States and reincorporate in tax havens in the Caribbean several years ago to avoid the U.S. tax system, their chief executives were labeled "Benedict Arnold CEOs." As such, this topic has evolved into quite a heated area.
Q: Rhetoric aside, how do the U.S. tax rules for corporations work? And how do U.S. rules compare to how other countries tax their corporations on foreign profits?
A: While the overall picture is somewhat complex, there are several underlying principles that help explain it.
First, every country must decide whether it wants to tax its citizens, including its corporations, on their domestic or worldwide income. The United States taxes its citizens and corporations on worldwide income. As a result, when engine maker Cummins, for example, makes profits in Germany, its subsidiary pays German taxes, and the U.S. government retains the right to tax those profits as well.
Second, when the United States imposes its taxes on Cummins's German activity, the government provides some relief for the foreign taxes paid by Cummins to avoid double taxation of overseas profits. In particular, Cummins would receive credits for foreign income taxes paid, up to the U.S. statutory rate. In effect, this means that Cummins will ultimately pay a total of the U.S. statutory rate on its overseas activities in lower tax countries and pay the local rate in higher tax countries. One way to understand this is to say that the United States tries to top up the tax bill on lower tax country profits to the U.S. statutory rate and doesn't do this for profits earned in higher tax countries. This system is known as the foreign tax credit system.
Third, the United States only imposes this additional tax on foreign profits when those profits are returned to the United States, not when those profits are earned. This resembles the treatment of capital gains for individuals where capital gains taxes are only due when gains are realized rather than when they're accrued. As with individual capital gains, there is value in this ability to defer taxes, and this effectively reduces the tax burden on foreign profits. But, to receive the benefits of deferral, Cummins must reinvest the profits in active businesses as opposed to passive portfolio assets.
Finally, a number of significant corporate expenses that Cummins undertakes in the United States and that might otherwise offset its U.S. tax liability—such as interest expenses and some HQ expense—are allocated abroad so that they cannot be used to lower the firm's U.S. taxes. Because foreign governments, unsurprisingly, don't recognize these expenses, these deductions are effectively lost to Cummins. One way to analogize this is to imagine if a fraction of your mortgage interest deduction was disallowed, and that fraction reflected the number of days you spent abroad. Such a disallowance would increase your taxes and effectively puts a tax on you going abroad.
So, in effect, the United States operates a mishmash of a system that taxes worldwide income, provides partial relief for foreign taxes paid, imposes those taxes only upon repatriation, and forces firms to allocate expenses on a worldwide basis.
The major other alternative out there is to simply exempt foreign income from taxation or, said another way, simply tax corporations on their domestic income. Interestingly, the United States is increasingly an outlier in the way it tries to tax overseas income of corporations. The United Kingdom was the only really other significant country that tried so hard to impose taxes on foreign income; it is undertaking a serious reexamination of that now.
In terms of the political debate, the ability to defer U.S. taxation until profits are repatriated is often framed as providing an incentive to ship jobs overseas. On the other hand, the curren
Continued:
current worldwide system is often derided as making American firms uncompetitive relative to their foreign competition. So, there are easy ways to take political potshots at the current system from both sides.
Q: Do any of these taxes really influence how corporations work?
A: It's now quite clear that these rules significantly influence how investors diversify their portfolios; the organizational and ownership decisions firms make; firm investment[PDF] decisions; and myriad financing decisions, including capital structure and repatriation. Perhaps, the biggest single sign of how these rules matter is the little experiment that the United States ran in 2004. As part of the American Jobs Creation Act, firms were allowed a "one-time" reduced tax on any profits repatriated back to the United States. Predictions varied at the time, but I don't think anyone expected the approximately $350 billion that was repatriated to the United States to take advantage of that incentive. This really woke people up about the importance of these rules.
Q: So, what is the right way to tax global corporations on their overseas profits?
A: Fortunately, economic theory can help us think through what the right way to do this is.
Historically, the idea was that multinational firms were looking at after-tax rates of return around the world and choosing to invest their capital eitherat home or abroad up to the point that those returns were equalized. If you believe that, economic theory tells you that a tax system should effectively neutralize tax differences around the world so that firms would make the decisions based on pretax rates of return. More specifically, the United States should, under this view, operate a worldwide system without deferral and with unlimited foreign tax credits so that, effectively, Cummins would pay the U.S. statutory rate no matter where it invested and would make the decision on purely pretax rates of return. The goal of that regime is to leave the distribution of capital undistorted. Indeed, this path of thinking has been highly influential in shaping how U.S. taxation has evolved.
Recently, the underpinnings of this historic view have been questioned. In particular, the historic view assumes that what multinational firms do is choose between investing at home and abroad and effectively arbitrage any differences in returns in the process. Scholars of multinational firms, however, don't really think about these firms in that way; that characterization would seem more apt for a hedge fund than Cummins. In reality, increased foreign activity by Cummins need not be associated with reduced domestic activity; and much of what these firms do is not to ship capital around the world but to take ownership of assets and run them more productively. If productivity differences are central to what these firms do and outbound investment does not reduce firms' domestic investment, then a completely different prescription emerges. In this case, it makes sense for countries to exempt foreign income from taxation.
The intuition for this is that tax rules should leave "who owns what" undistorted. If countries impose worldwide taxation, then the highest-productivity buyers may be handicapped by their tax systems, and the gains from having the right owner of those assets are lost. Concretely, imagine that Cummins is bidding on that operation in Germany and so is Mitsubishi. If Cummins is the higher productivity owner, it should win that auction in order to maximize social welfare. But tax systems can distort that, so Cummins might not win that auction.
In order to make sure that the highest-productivity owner wins, countries should typically adopt exemption of foreign income so that overall productivity is as high as it could be. Said another way, it may well be more important to leave who owns what undistorted rather than leaving the capital flows undistorted.
So, we're in the middle of a changing understanding of what these firms do and how they should be taxed. As I mentioned, most of the world has moved to exemption systems, which is consistent with this emphasis on ownership as being central to multinational firm activity.We've also come to understand that the current system is highly distortionary and, yet, raises very little revenue. As such, the rationale for the current rules is increasingly outdated, and the current rules don't appear to function very well.
Q: You mentioned that one critical assumption underlying the historic rationale for taxing corporations on foreign profits was that firms choose to invest either at home or abroad. Do we know if the activities abroad of U.S. firms really reduce their activities at home in the way that many people have suggested?
A: This intuition that firms substitute between domestic and foreign activity is the basis of much of tax policy and also of the rising concern over the global activities of American multinational firms. While a popular belief, it doesn't seem to hold up to closer scrutiny. Indeed, if anything, the opposite appears to be the case. Recent research indicates that firms that grow abroad are also more likely to grow domestically; this relationship is robust to a variety of alternative explanations. As such, the rationale for current tax policy might have the relationship between foreign and domestic activity exactly wrong.
Q: Will there be a significant change in these rules in the coming years? And if there is a change, what direction will it take?
A: I think there will be a change soon, but it's unclear which direction we will go in.
One possibility is that we move toward a greater tax burden on foreign operations. This could take the form of a repeal of deferral or the selective repeal of deferral with respect to a "blacklist" of countries that are deemed to be tax havens. Or we could try to define what a "patriotic" firm is and base the tax system on that. Some have even called for a system similar to what U.S. states do, which is a "formulary apportionment" system whereby profits would be allocated around the world on the basis of a formula. Any of these possibilities would likely result in a greater tax burden on foreign income.
Alternatively, we could move to where much of the rest of world is, which is effectively exempting foreign income from U.S. taxation. This could be accompanied by some bells and whistles to ensure that American firms didn't react to exemption by trying to shift profits offshore more so than they do now. Depending on these bells and whistles, this could result in an increase or decrease in the tax burden on foreign profits.
It's also possible that the entire corporate tax system should be rethought, given a variety of very serious problems associated with it—including the gap between profits reported to capital markets and tax authorities and the treatment of corporate capital gains.
Change is afoot, but the direction in which we move will be a function of the election and the prevailing sense of Americans toward globalization and the foreign activities of their firms. It should be interesting.
Q: What do you think should happen?
A: I think we should consider a broader restructuring of the corporate tax, and with respect to foreign income, we should consider exemption with some safeguards against an overly aggressive use of tax havens. I fear that alternative paths will lead to much more harm than good and won't raise much revenue, either. I'm in the middle of detailing some of these ideas for a proposal and will share them as soon as I have it fully cooked!
About the authorSean Silverthorne is the editor of HBS Working Knowledge.
For more of Mihir Desai's research on this topic, visit his Web page: www.people.hbs.edu/mdesai. For a variety of research on these topics, he also recommends the International Tax Policy Forum
This is another great work of yours! I have seen your hub on how to become a commercial pilot and I have noticed you have a very long list of commetns from the readers. That means you are doing a great job! Congratulations! I want to share another lens to you that may help you too http://www.privatejetscenter.com/BusinessJetCharte with so much informations on business jet charters from its cost to its features. I find it as great as yours. You can check it out!
http://www.salon.com/tech/htww/2008/03/28/supply_s A conundrum for Chuck: If tax cuts increase government revenues and tax incerases reduce government revenues, in order to "starve the beast" why not raise taxes and thus reduce government revenues, thus "starving the beast?"
Nowadays everyone is more worried discussing the gender and race of presidential candidates, the sexual scandals of governors and delegates... This is a great hub! People should be engage in dscussion this issues.
There is sooo much reference to the wonderful Bill Clinton economy and the perceived surplus accumulated as the house of cards continued to build. Little discussion, if any, includes the enormous amount of venture capital in the markets during Clinton's presidency, most of which supported .com growth. All things considered it looked like a time of prosperity and market growth. However, as one would expect, when the cork was put back on the genie bottle the markets retraced to predictable levels blame was placed on everyone but Clinton. In reality, Bill Clinton and his staff should have been warning consumers about inflated markets, the pitfalls of leveraged investing, and the risk of following venture capital into the market. Clinton stayed remarkably silent and watched as many people lost their personal fortune. I am not faulting all his policies but c'mon the 90's were a time of artificial prosperity.
A Republican's view of the state of our economy and the nation: In his recently published book, "Bad Money" Kevin Phillips diagnoses our ailing economy as follows:
1. The Current Debt Debacle--"The 1980s were the start of three profligate decades when the expansion of mortgage credit and the invention of financial instruments like collateralized debt obligaions led to an orgy of leveraging and speculation. The Federal Reserve kept the bubble afloat with easy money, while regulators and rating agencies looked the other way.
"By 2007 total indebtedness was three times the size of the GDP, a ratio that surpassed the record set in the Great Depression. From 2001 to 2007 alone, domestic financial debt grew to $14.5 trillion from $8.5 trillion and home mortgage debt ballooned to almost $10 trillion from $4.9 trillion, an increase of `102 percent.
2. Oil industry Upheaval--The second componenet of the perfect storm is the upheaval in the oil industry. Domestic production peaked in 1971, and there are signs that production worldwide is also peaking. And with the emergence of new economic powers like China and India, demand has risen dramatically.
3. America's "calcified" Political System--We may need new regulations to deal with the debt mess, along with an energy policy to address the changing world of oil, but Washington, Phillips says, has become dedicated to the "politics of evasion."....Instead of a "vital center" in Washington, we now have a "venal center."
The above comment was taken from a review of Kevin Phillips book by Barry Gewen in the NYTimes 4-21-07.
http://www.nytimes.com/2008/04/21/books/21gewen.ht
Good comment, Ralph. I actually agree with you on part of it. The Fed's continual expansion of the money supply has kept the economy flush with money and interest rates low but we are starting to feel the pain of the inflation that accompanies such a policy. I don't see anything wrong with collateralized debt obligations in general but, from what I have been reading, the mixing of loans of varying quality from good to very bad was not good, and this is the source of much of the current debt crisis as banks don't know what many of these debt obligations they are currently hold actually contain in terms of the quality of the loans in the package. Much of the current writing down of portfolio assets is the result of banks taking a conservative approach and assuming that large numbers of loans in these packages are poor quality and then recalculating the value of these packages based upon what they would be worth on the market if offered for sale today and did indeed contain mostly bad loans. Many of these obligations are probably in fact good and the holders of them will not sustain real losses (as opposed the the paper losses they are now recording on their books). The real problem here, in addition to the stupid practice of mixing loans of varying qualities, is the fact, as the Wall Street Journal has frequently pointed out over the past few years, that Fannie Mae and Freddie Mac, both former government entities that have since been fully privitized but still retain strong links to the U.S. government, have allowed, possibly even encouraged, investors to believe that they had a line to the U.S. Treasury and would back these obligations and not allow the purchasers of them to lose money. Apparently believing that guarantee to be real, many institutions appear to have purchased them without doing any due diligence since they were supposedly "guaranteed" not to fall in value. Without this belief, institutions would have checked the mortgage backed security insturments in advance and refused to purchase those loaded with junk loans and this would have quickly put an end to that practice.
As to oil, it is true that as the rest of the world develops, including large nations like China and India, the demand for oil will increase. However, as history has demonstrated time and again, as prices for a scarce commodity rise, people have an incentive to seek out alternatives (real alternatives, not political boondogles like ethanol as I described in my hub http://hubpages.com/hub/The-Politics-of-Ethanol). Just as the world did not come to an end or civilization collapse during the great whale oil "crisis" of the 19th century so, too, will we survive the current so called "energy crisis". Further, while investors are seeking new technologies, the high oil prices are also encouraging the seeking of new sources of oil which, while not of the same quality or have the same ease of extraction as Middle Eastern oil, they are locating in abundance. In addition to the Alaskan reserves (off limits due to government decree), we have reserves on the offshore Continental shelf along the 3 coasts of America's lower 48 states (again mostly off limits due to government regulations), the are the Albertan tar sands in Canada the known reserves of which, while expensive to extract, are equal to the known reserves in the Middle East, ditto for the Colorado shale deposits in the U.S. which also contain reserves equal to or greater than the Middle East. There is also the possibility of vast deposits under the melting Arctic ice cap which I referred to in my Hub entitled "A Very Civil War in the Arctic ( http://hubpages.com/hub/A_Very_civil_War_in_the_Ar ). Like other current problems the real problem here is government regulations designed to garner votes by appeasing special interests rather than the welfare of the nation.
Thanks again for the comment.
Good comment, Ralph. I actually agree with you on part of it. The Fed's continnual expansion of the money supply has kept the economy flush with money and interest rates low but we are starting to feel the pain of the inflation that accompanies such a policy. I don't see anything wrong with collateralized debt obligations in general but, from what I have been reading, the mixing of loans of varying quality from good to very bad was not good, and this is the source of much of the current debt crisis as banks don't know what many of these debt obligations they are currently hold actually contain in terms of the quality of the loans in the package. Much of the current writting down of portfolio assets is the result of banks taking a conservative approach and assuming that large numbers of loans in these packages are poor quality and then recalculating the value of these packages based upon what they would be worth on the market if offered for sale today and did indeed contain mostly bad loans. Many of these obligations are probably in fact good and the holders of them will not sustain real losses (as opposed the the paper losses they are now recording on their books). The real problem here, in addition to the stupid practice of mixing loans of varying qualities, is the fact, as the Wall Street Journal has frequently pointed out over the past few years, is that Fannie Mae and Freddie Mac, both former government entities that have since been fully privitized but still retain strong links to the U.S. government, have allowed, possibly even encouraged, investors to believe that they had a line to the U.S. Treasury and would back these obligations and not allow the purchasers of them to lose money. Apparently believing that guarantee to be real, many institutions appear to have purchased them without doing any due dilligance since they were supposedly "guaranteed" not to fall in value. Without this belief, institutions would have checked the packages in advance and refused to purchase those loaded with junk loans which would have quickly put an end to that practice.
As to oil, it is true that as the rest of the world develops, including large nations like China and India, the demand for oil will increase. However, as history has demonstrated time and again, as prices for a scarce commody rise, people have an incentive to seek out alternatives (real alternatives, not political boondagles like ethanol as I described in my hub http://hubpages.com/hub/The-Politics-of-Ethanol). Just as the world did not come to an end or civilization collapse during the great whale oil "crisis" of the 19th century so, too, will we survive the current so called "energy crisis". Further, while investors are seeking new technologies, the high oil prices are also seeking new sources of oil which, while not of the same quality or have the same ease of pumping out of the ground they are locating in abundance. In addition to the Alaskan reserves (off limits due to government decree), offshore on the 3 coasts of America's lower 48 states (again mostly off limits due to government regulations), there are the Albertan tar sands in Canada the known reserves of which, while expensive to extract, are equal to the known reserves in the Middle East, ditto for the Colorado shale deposits which also contain reserves equal to or greater than the Middle East. There is also the possibility of vast deposits under the melting Arctic ice cap which I referred to in my Hub entitled "A Very Civil War in the Arctic ( http://hubpages.com/hub/A_Very_civil_War_in_the_Ar ). Like other current problems the real problem here is government regulations designed to garner votes by appeasing special interests rather than the welfare of the nation.
Thanks again for the comment.
Yes, there is a big difference between Republican and Democrat tax cuts AND economics!
INEQUALITIES by Larry Bartels, NYTimes Magazine4-27-08
E-MailPrint Save Share DiggFacebookMixxYahoo! BuzzPermalinkBy LARRY M. BARTELSPublished: April 27, 2008
The past three decades have seen a momentous shift: The rich became vastly richer while working-class wages stagnated. Economists say 80 percent of net income gains since 1980 went to people in the top 1 percent of the income distribution, boosting their share of total income to levels unseen since before the Great Depression.
Skip to next paragraph Enlarge This Image Photograph by Erick Hartman/www.magnumphotos.com
Despite the historic magnitude of this shift, inequality has thus far had little traction as a political issue. Many Americans seem to accept the conservative view that escalating inequality reflects “free market” forces immune to amelioration through public policy. As Treasury Secretary Henry Paulson put it, perhaps a bit defensively, the growing income gap “is simply an economic reality, and it is neither fair nor useful to blame any political party.” Paulson’s assertion, however, is strongly contradicted by the historical record. While technology, demographic trends and globalization are clearly important, purely economic accounts ignore what may be the most important influence on changing U.S. income distribution — the contrasting policy choices of Republican and Democratic presidents.
The Census Bureau has tracked the economic fortunes of affluent, middle-class and poor American families for six decades. According to my analysis, these tabulations reveal a wide partisan disparity in income growth. The real incomes of middle-class families grew more than twice as fast under Democratic presidents as they did under Republican presidents. Even more remarkable, the real incomes of working-poor families (at the 20th percentile of the income distribution) grew six times as fast when Democrats held the White House. Only the incomes of affluent families were relatively impervious to partisan politics, growing robustly under Democrats and Republicans alike.
The cumulative effect of these partisan differences is enormous. If the pattern of income growth under postwar Republican presidents had matched the pattern under Democrats, incomes would be more equal now than they were in 1950 — a far cry from the contemporary reality of what some observers are calling a New Gilded Age.
It might be tempting to suppose that these partisan differences in income growth are a coincidence of timing, merely reflecting the fact that Republicans held the White House through most of the past three decades of slow, unequal growth. The partisan pattern, however, is remarkably consistent throughout the postwar period. Every Republican president since Dwight Eisenhower presided over increasing economic inequality, while only one Democrat — Jimmy Carter — did so. (I allow one year for each president’s economic policies to take effect, so the recession of 2001 is counted against Clinton, not Bush.)
If middle-class and poor people do so much better under Democratic presidents than under Republican presidents, why do so many of them vote for Republicans? One popular answer, advanced by Thomas Frank and others, is that they are alienated by Democratic liberalism on cultural issues like abortion, gay marriage and gender roles. This does not appear to be the case. In recent presidential elections, affluent voters, who tend to be liberal on cultural matters, are about twice as likely as middle-class and poor voters to make their decisions on the basis of their cultural concerns.
A better explanation for Republican electoral successes may be that while most voters, rich and poor alike, do vote with their economic interests in mind, they construe those interests in a curiously myopic way. Their choices at the polls are strongly influenced by election-year income growth but only weakly related to economic performance earlier in the president’s term. And while Republicans have presided over dismal income growth for middle-class and poor families in most years, they have, remarkably enough, produced robust growth in election years.
Why have Republican administrations typically presided over strong election-year growth? The pattern probably reflects the fact that presidents have more clout early in their terms than at election time. Republicans have often used that clout to rein in inflation and social spending, producing or prolonging economic contractions that then wear off by the time of the next election. New or newly re-elected Democrats, for their part, have frequently stimulated the economy and expanded employment, producing economic booms that raise all boats in their second and third years but trail off as the next election approaches. As a result, even working-poor families have experienced stronger income growth under Republicans (1.8 percent) than under Democrats (1 percent) in election years.
This year looks unusual in this respect, with slow growth likely despite the infusion of substantial tax rebates from an election-year stimulus plan. If that slow growth produces a Republican defeat in November, it will be a rare instance of economic accountability for a party with a long history of delivering meager income gains for most American families.
Larry M. Bartels, a professor of politics at Princeton, is the author of “Unequal Democracy: The Political Economy of the New Gilded Age.”
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Let's look at this very simply. We as the people have to make hard decisions regarding our budget. When our family demands more goods than we have income to provide, we must cut back or make more money. When the government wants more money to provide more "goods" it taxes those whom they decide will pay for it. This is the simple difference. Wake Up, this is not a complicated concept. Our politicians don't have the guts to make tough decisions about cutting expenses that they require us to make. Very simple!
Very interesting information. Great hub!
Interesting subject. Great hub.
Great discussion. It is hard to look a gift horse in the mouth as they say, but long term it can create more problems. You just hope that it does more good today than harm tomorrow.
Here's the real truth about tax cuts:
Fiscal Poison Pill
By PAUL KRUGMAN Published: June 16, 2008 A poison pill, in corporate jargon, is a financial arrangement designed to protect current management by crippling the company if someone else takes over.
As I read the nonpartisan Tax Policy Center’s analysis of the presidential candidates’ tax proposals, I realized that the tax cuts enacted by the Bush administration are, in effect, a fiscal poison pill aimed at future administrations.
True, the tax cuts won’t prevent a change in management — the Constitution sees to that. But they will make it hard for the next president to change the country’s direction.
Exhibit A of the poison pill in action is the sad case of John McCain, part of whose lingering image as a maverick rests on his early opposition to the Bush tax cuts, which he declared excessive and too tilted toward the rich.
Since then the budget surpluses of the Clinton years have given way to persistent deficits, and income inequality has risen to new heights, vindicating his opposition.
But instead of pointing this out, Mr. McCain now promises to make those tax cuts permanent — and proposes further cuts that are, if anything, tilted even more toward the wealthy. And how is the loss of revenue to be made up? Mr. McCain hasn’t offered a realistic answer.
You can explain though not excuse Mr. McCain’s behavior by his need to shore up relations with the Republican base, which suspects him of being a closet moderate. But he’s not the only one seemingly trapped by the Bush fiscal legacy.
Barack Obama’s tax plan is more responsible than Mr. McCain’s: relative to current policy, the Tax Policy Center estimates, the Obama plan would raise revenue by $700 billion over the next decade, compared with a $600 billion loss for Mr. McCain.
The Obama plan is also far more progressive, sharply reducing after-tax incomes for the richest 1 percent of Americans while raising incomes for the bottom 80 percent.
But while $700 billion may sound like a lot of money, it’s probably not enough to pay for universal health care, which was supposed to be the overriding progressive priority in this election.
Why doesn’t Mr. Obama propose raising more money? Blame the Bush poison pill.
First of all, Mr. Obama — like, to be fair, his main rivals for the Democratic nomination — isn’t willing to challenge the Bush tax cuts as a whole. He only proposes rolling back tax cuts for those making more than $250,000 a year.
Second, Mr. Obama proposes giving back a substantial part of the revenue raised by this partial tax-cut rollback in the form of new tax cuts.
These tax cuts would mainly benefit lower- and-middle-income families, although this can’t be said of Mr. Obama’s plan to eliminate income taxes on seniors with incomes under $50,000: since most seniors already pay no income taxes, this would do nothing for those most in need. And one wonders why we should create the precedent of exempting particular demographic groups from taxes.
But the big question is, are these tax cuts, however appealing, a top priority? The most expensive proposal, under the title Making Work Pay, would give most workers $500 in tax credits, at a 10-year cost of more than $700 billion. Isn’t it more important that workers be assured of health care?
The problem, I believe, is that even Democrats have bought into the underlying premise of the Bush years — that the best thing you can do for American families, or at least the only thing that can win their votes, is to give them a tax break.
One more thing: on Friday Mr. Obama declared that he would “extend the promise” of Social Security by imposing a payroll-tax surcharge on people making more than $250,000 a year. The Tax Policy Center estimates that this would raise an additional $629 billion over the next decade.
But if the revenue from this tax hike really would be reserved for the Social Security trust fund, it wouldn’t be available for current initiatives. Again, one wonders about priorities. Whatever would-be privatizers may say, Social Security isn’t in crisis: the Congressional Budget Office says that the trust fund is good until 2046, and a number of analysts think that even this estimate is overly pessimistic. So is adding to the trust fund the best use a progressive can find for scarce additional revenue?
Anyway, back to my main theme: looking at the tax proposals of the two presidential candidates, it’s remarkable and disheartening to see how effective President Bush’s fiscal poison pill has been in restricting the terms of debate.
Progressives, in particular, have to hope that Mr. Obama will be more willing to challenge the Bush legacy in office than he has been in the campaign.
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Here's a typical GOP tax cut:
A One-Time Tax Break Saved 843 U.S. Corporations $265 Billion .nytimes.com/2008/06/24/business/24tax.html By LYNNLEY BROWNING Published: June 24, 2008 More than 840 of the largest American corporations reaped a $265 billion windfall thanks to a one-time tax break aimed at bringing home profits stashed overseas, according to recent government data.
The windfall resulted from a temporary tax deduction for big corporations, which were keeping billions of dollars in profits in overseas subsidiaries and out of the hands of the Internal Revenue Service.
The total amount brought back to the United States was far above some estimates, according to the data, which provides new details on the tax break.
American companies can typically defer paying taxes on foreign profits as long as they keep that money outside the United States. When companies bring the money back, they usually pay the top corporate tax rate of 35 percent.
In recent years, the biggest and wealthiest companies in the United States have increasingly set up foreign subsidiaries and used them either as foreign operations or offshore repositories.
The subsidiaries, many in offshore tax havens like the Netherlands, Ireland and the Cayman Islands, collectively held about $804 billion in foreign profits on which their American corporate parents had yet to pay any United States taxes, according to the I.R.S.
A one-time tax holiday enacted by Congress in 2004 offered companies the chance to bring that money back at a reduced tax rate of 5.25 percent.
Some of the biggest names in corporate America decided to take advantage, in particular those in the pharmaceutical and technology industries. Pfizer brought back $37 billion, while Hewlett-Packard repatriated $14.5 billion.
In all, 843 corporations took advantage of the offer, according to recent I.R.S. statistics of income data, bringing back $362 billion in foreign profits, paid to the parent corporations as dividends. Of that amount, $312 billion qualified for the tax break, giving those companies total tax deductions of $265 billion claimed from 2004 through 2006.
Put another way, the tax break gave each company claiming it an average $370 million in tax deductions.
Supporters of the tax break say it was a success because it brought about $18 billion into Treasury coffers that otherwise would have stayed overseas. The nonpartisan Joint Committee on Taxation, a Congressional agency, had estimated that the tax break would bring in only $2.8 billion, a sixth the actual amount.
“The provision was generally successful in prompting the repatriation of vast sums of foreign profits,” wrote Joseph Calianno, a tax partner at Grant Thornton, in a recent analysis of the data.
But the tax break would not produce income for the I.R.S. in later years in part because of associated foreign tax credit provisions set to kick in later, and in part because of the need to replenish capital in foreign subsidiaries.
Edward D. Kleinbard, chief of staff of the committee and a tax authority, said that the government had privately estimated that companies would bring back only $200 billion, or a third less than the $312 billion that qualified.
Private-sector estimates from Wall Street investment banks, including Bank of America and JPMorgan Chase, were closer to the mark.
The tax break was included in a larger piece of legislation called the American Jobs Creation Act of 2004, with the intention that the repatriated money would prompt investment in the United States economy and spur job growth. Companies had to promise to use the money to invest in their domestic operations. They could not use it to pay dividends, or compensate executives.
But the provision had wide definitions of the term investment and allowed corporations to use repatriated profits to shore up their domestic finances, pay legal bills and even bankroll advertising.
Critics of the legislation say there is little convincing evidence that companies put the money into creating jobs or investing in United States operations and deride the tax break as corporate welfare.
“It basically worked out to be one big giveaway,” said Robert Willens, a tax and accounting authority in New York. “The law never took into account the fact that money is fungible.”
Mr. Willens said while companies did make investments in their domestic operations, the repatriated money also freed up a corresponding amount of cash to pay out to shareholders or buy back stock — moves that do not generate job growth or investments. “We know that a lot of stock was retired during this time,” he said.
A 2007 academic study by Roy Clemons, then a graduate student at Texas A&M University, that was based on earlier data, found that the tax break did not stimulate investment in the United States economy and that repatriated money was often used for disallowed purposes, like stock repurchases.
According to I.R.S. data and Grant Thornton, pharmaceutical manufacturers alone accounted for more than 30 percent of the repatriated total, with 29 corporations each claiming an average tax deduction of almost $3 billion on foreign profits brought home.
Some 9,700 United States corporations had foreign subsidiaries in 2004, the latest year for which data is available. While only 843 corporations took advantage of the tax break, those companies are the biggest and wealthiest in America, Mr. Willens said.
Martin A. Sullivan, an economist and former member of the Joint Committee on Taxation, said, “just use common sense.”
“If I’m going to give you $100 to buy lunch,” he said “but you spend $500 a year anyway on lunch, you then bring receipts showing you bought $100 in lunch — it’s a ridiculous fig leaf.”
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Ralph, Thanks for the comment and article.
However, by not offering the tax break the amount of this money collected by the IRS would have been zero (which proves the point that tax cuts generate tax revenues). Further, a chunk of the money was invested in business expansion which created new jobs by these companies directly.
The portion of this money that went to legal fees, advertising and marketing was either for these services which would have been purchased anyway but by using this money from abroad the company was able to use the funds it would have paid for these services for other things (like new investment). To the extent that the legal, advertising and marketing services were only purchased because of the availability of this money from abroad, this was in effect new demand for these services which led to the creation of jobs (from janitors to executives) in these industries.
The same is true of the portion of the funds which were used to buy back stock or increase dividends to share holders. Both of these meant more money in the hands of the individual stockholders which they could spend (thereby driving up demand for consumer goods & services and creating jobs which is the standard Keynesian prescription for stimulating the economy and increasing jobs - except that the funds used are from the private sector rather than the government) or used to invest in new businesses which are currently the greatest creators of new jobs in the econmy today.
The problem with this type of liberal thinking is that the preference seems to be for others to be brought down economically rather than everyone moving up, alibet not equally. A perfect example of this occurred in pre Thatcher England when, according to one of my economic professors at the time, a poll showed that a majority of people in Britain preferred no increase in their real income rather than an increase that was less than that of their neighbor (i.e., they would rather both their neighbor and themselves each have no car, or each starve, than for them to get one car, or three square meals a day, while their neighbor got two cars, or three gourmet meals per day). My professor also pointed out that the big debate going on in economic circles at the same time was whether or not it was possible for a nation to move backwards from being an industrialized first world nation to a pre-industrial third world nation. Britain was close to third world living standards at that time. Fortunately, Margaret Thatcher won the next election and restored prosparity to the nation. As I mentioned in my Hub entitled "Anarchy Rec
Ralph Deeds says:
2 years ago
"Supply side" economics doesn't have much credibility among academic economists. Comparing "suppply side" economics and orthodox economic theory is setting up creationism up as an alternatie scientific theory along side evolution. George Bush's father called supply side "voodoo economics." It's designed to get politicians elected and to shrink the government, returning the country to social Darwinism.
Here's what the NY Times lead editorial today said about George Bush's tax cuts and the future tax outlook::
FUTURE TAX SHOCK
One of President Bush's be-very-afraid lines this campaign season is the Democrats, if elected, will raise taxes. What he doesn't say is that if you are one of the tens of millions of Americans who make between $75,000 and $500,000 a year, your taxes are already scheduled to rise starting next year--because of laws that Mr. Bush championed and other actions he failed to take.
The higher taxes stem from the alternative minimum tax, a levy that is supposed to snare multimillionaires who would otherwise get away with using excessive tax shelters to wipe out their tax bills. But these days, the alternative tax is snaring many upper-millde income filers.
Mr. Bush set the trap in 2001--and in 2003, 2004 and in 2006. In each of those years, he flogged for new tax cuts without requiring corresponding long-term changes in the existing rules for the alternative tax. It was well known that failure to update the alternative tax would create perverse interactions with the new tax cuts, causing filers' tax bills to drop because of the cuts, only to shoot back up again from the alternative levy.
Mr. Bush said he would vanquish the problem throught tax reform. Didn't happen. Congress never wrestled with lasting solutions. The truth is, the president and lawmakers are paralyzed. To fix the alternative tax while keeping the Bush tax cuts on the books would result in the loss of some $800 billion in revenue over 10 years, blowing a hole in the fe