Tag Archives: Taxes

Why Obama’s Tax Plan Matters

Today, Obama will deliver the State of the Union address, which will focus on inequality, which he has previously called, “the defining issue of our time,” and which was recentlyhighlighted by a proposal by Chris Van Hollen. In anticipation of his speech, he has put forward a proposal to increase taxes on the wealthy and cut taxes for the middle class. The proposal is welcome.

Obama’s plan is broadly aimed at wealth inequality and closing tax loopholes that allow the rich to pay less in taxes than many middle class households. His plan includes a hike the capital gains tax rate (to the level prevailing during the Reagan administration), closing the trust fund loophole that allows the wealthy to avoid inheritance taxes and a modest fee on banks (who benefit hugely from too-big-to-fail).

While the right often complains that many Americans don’t pay taxes, symbolized by Romney’s famous 47% comment, these claims are absurd. For one, Romney was only talking about taxes at the federal level, and a recent study from the Institute on Taxation and Economic Policy shows that state and local taxes are heavily regressive. Across all states, the poorest 20% pay 10.9% of their income in state and local taxes compared to 5.4% for the richest 1%.

At the same time, across the developed world, tax rates have become less progressive, as illustrated by Thomas Piketty and Emmanuel Saez. In the US, estate taxes and corporate taxes have declined dramatically, while payroll taxes (which affect the poor) have increased dramatically.

Worse still, the porous federal tax system allows the rich to take home huge tax breaks. A recent CBO finds that the largest 10 tax breaks primarily benefit the rich. Recently, Al Jazeera reported that in 2010 the richest 400 Americans paid only 18% of their income in federal taxes, a dramatic decline from the 29.9% they paid in 1995. Therichest 400 households took home a full 16% of all capital gains in 2010—they make up .00025% of the population.

The rich receive the most in capital gains because they own nearly all the assets, and for this reason, Obama’s choice to target capital gains and large holdings of wealth is smart.

Much of the rise in inequality has come from rent-seeking and inheritance, rather than innovation. By singling out unproductive capital for taxation, he forces those who support inequality to defend an idle wealthy class.

But Obama will struggle to pass any legislation increasing taxes. As Demos showed inStacked Deck, the donor class isn’t interested in higher tax rates. Sadly, there is strong evidence that the donor class has an outsized influence on politics, through both access, agenda-setting and higher voter turnout. A 2013 study in The Journal of Economic Perspectives finds (PDF):

In 1980, the top contributor … gave $1.72 million (in 2012) dollars, nearly six times the amount given by the next largest contributor. In 2012, the two largest donors were Sheldon and Miriam Adelson, who gave $56.8 million and $46.6 million, respectively. Other members of the Forbes 400 accompany the Adelsons; 388 current members are on record as having made political contributions. They account for 40 of the 155 individuals who contributed $1 million or more to state and federal elections during the 2012 election cycle.

The rise in wealth has coincided with an increase in political power – which will make taxing the rich more difficult. However, it is increasingly necessary – 80 people in the entire world have the same wealth as the bottom 50% (some 3 billion people) combined.

The usual suspects will likely be rolled out in defense of low tax rates – conservative commentators frequently claim that low taxes increase economic growth. These arguments are facile and a large literature shows them to specious. In fact, there are reasons to believe that increasing taxes on the rich to fund public investment and middle class growth could actually boost the economy. More importantly, these arguments are being disproven before our eyes: Kansas, which was supposed to be the conservative model, massively cut taxes and the state coffers are hemorrhaging cash. The governor is now proposing new taxes to make up for falling revenues.

Obama’s proposal is bold and necessary. The problem is how to get it passed a government increasingly bought by the 1%.

This piece originally appeared on Policyshop.

How America can fix the racial wealth gap

One of the most persistent but unaddressed problems in the United States is our massive racial wealth gap. Wealth provides an important cushion from the threat of unemployment, medical emergency or other unforeseen events. Wealth can also help pay for college, the start of a new business or the purchase of a first home. However, most Americans struggle with debt. A recent Federal Reserve Report finds that of Americans who had savings before 2008, 57 percent reported using up some or all of their savings in the aftermath of the recession. However, wealth and debt are not distributed equally (see chart).

The racial wealth gap is caused by the fact that wealth is passed from generation. As Gregory Clark notes in his recent book, “The Son Also Rises, the residual effects of wealth remain for 10-to-15 generations. Given that most Americans are only four generations removed from slavery and one generation away from segregated neighborhoods, restrictive covenants and all white colleges, the only truly surprising fact is that the racial wealth gap is not larger. America is also uniquely susceptible to persistent wealth gaps because of our low inheritance, estate and capital gains taxes and the fact that what minimal taxes exist our fraught with loopholes. In 2010, the richest 400 households took home 16 percent of all capital gains (a sweet $300 million each), but paid the same tax rate as a worker making $80,000. At the same time, a loophole in the tax code has allowed the wealthiest to avoid $100 billion  in estate and gift taxes since 2000. On the other side, our public school system is profoundly discriminatoryour neighborhoods deeply segregated and access to credit is racially discriminatory. As Thomas Piketty recently demonstrated, “In terms of total amounts involved, inheritance has thus nearly regained the importance it had for nineteenth century cohorts” (see chart).

The biggest myth of the racial wealth gap that must be demolished is that education or rising incomes can eradicate it. As Matt Bruenig has persuasively shown, this argument is laughably absurd.  College educated Blacks have less wealth than white college drop-outs (see chart).

Bruenig also shows that high income Blacks and Hispanics also have less wealth than whites (see chart).

Between 2007 and 2010, all racial groups lost large amounts of wealth. However, the wealth reduction fell disproportionately on Hispanics and blacks, who saw a 44 percent and 31 percent reduction in wealth (compared to an 11 percent drop for whites). This was due to blacks and Latinos disproportionately receiving subprime loans, both because of outright lending discrimination and housing segregation.A recent research brief by the Institution on Assets and Social Policy finds that the wealth gap between white families and African Americans has tripled between 1984 and 2009. They find five main factors responsible for driving the gap, which together explain 66 percent of the growth in inequality. The factors, in order of importance, are number of years of homeownership, household income, unemployment, college education and financial support or inheritance.

The most frustrating problem with the racial wealth gap is that it is not abating. While half of whites say that “a lot” of progress has been made towards Martin Luther King Jr.’s dream,  the data show that the racial wealth gap has only increasing since 1983 (see chart).

What is to be done?

There are several important public policy changes that can alleviate the racial wealth gap. The first is to prevent the further accumulation of debt. While debt is often seen as a problem attributable to individuals, the academic literature is clear that broader economic forces are at largely responsible for the run-up of debt. Credit card debt is particularly harmful for people of color who often face discriminatory lending practices. A recent study of credit card debt finds that people of color pay a far higher IPR on average than white borrowers. The CARD act has already been a boon to consumers, but underlying drivers of debt, such as rising inequalityretirement insecurity and lack of health insurance must also be addressed.

Higher education debt must also be addressed. Research from Demos finds that if “current borrowing patterns continue, student debt levels will reach $2 trillion sometime around 2022.” However, student debt is not distributed equally, but rather falling primarily on students of color and low-income students. That’s because in our age of austerity, governments are spending less money on higher education, shifting the burden of paying for college onto students. Federal and state governments need to step up and fund an investment in the next generation.

On the other side, however, we must also foster wealth-building initiatives. Historically, homeownership has been a pathway to the middle class, but deep residential segregation means that Blacks and Hispanics often own homes that are far less valuable than white homes (see Table 3). Further, in the wake of the crisis many banks are buying up foreclosed houses and renting them out. That means income for people of color is no longer becoming wealth for people of color, but rather wealth for rich bankers.  One solution would be a first-time homeowners tax credit that is weighted to benefit low and moderate income households, rather than the mortgage interest deduction, which favors the wealthy. FICO credit scores should replaced with more reliable credit measurements.  But the ideal way to reduce wealth inequality, not only between people of color and whites, but also between the richest .1 percent and the rest of us, is a baby bond.

A baby bond is an endowment given to Americans at birth and maintained by the federal government until they are 18. The bond functions in a similar way to Social Security and can be sued to pay for college, buy a house or start a business. Hillary Clinton, in fact,briefly floated the possibility of a baby bond during her 2008 campaign, although the modest $5,000 sum she proposed is certainly smaller than ideal. Britain brieflyexperimented with a baby bond proposal, although it later became the victim of Tory Austerity.  Dr. Darrick Hamilton and William Darity Jr., leading proponents of  a baby bond, propose a progressive bond that caps at $50,000 for the lowest wealth quartile bond could close the racial wealth gap in three generations.  Their proposal would be given to three-quarters of Americans (based on wealth eligibility). They estimate that such a program would cost $60 billion a year, about one-tenth of the 2014 defense budget.

The baby bond need not increase the deficit. A recent CBO report finds that right now, tax credits primarily benefit the wealthiest, at a cost of nearly $1 trillion a year. This money could easily fund an extensive baby bond program that would, over time, eliminate the racial wealth gap. Another option would be to restore progressivity to our tax system. Because the baby bond program would not be explicitly targeted at people of color but rather would benefit most Americans, it could easily win broad support (much as Social Security is currently untouchable). Any presidential candidate should make the baby bond a central plank of their 2016 if they want to seriously address the problem of wealth inequality. Without such a proposal, wealth, and therefore political power will become increasingly concentrated in the hands of a small elite. It may already be too late.

This piece originally appeared on Salon

Five reasons why democracy hasn’t fixed inequality

One of the most longstanding hopes (on the left) and fears (on the right) about democratic politics is that voters of modest means will use their electoral weight to level the economic playing field. In a market economy, the median voter’s income will invariably be below the national average creating an apparently compelling opportunity for a politics of redistribution. This makes the sustained increase in income inequality in the United States and other developed countries a bit of a puzzle. One common suggestion, offered recently by Eduardo Porter in The New York Times, is ignorance. Voters “don’t grasp how deep inequality is.”

But while Americans understanding of economic trends is certainly imperfect, the data suggest that the broad trends are known to the population. Nathan Kelly and Peter Enns, for instance, find that when asked to compare the ratio of the highest paid occupation and the lowest, Americans at the bottom of the income distribution do believe inequality is high and rising. In 1987, Americans as reported that the highest-paid occupation took home 20 times what the lowest paid occupation did – by 2000, they thought the gap had grown to 74 times.

A recent Pew survey finds that 65% of adults agree that the gap between the rich and everyone else has increased in the past 10 years, only 8% say it has decreased. A Gallup poll from earlier this year suggests that 67% of Americans report that they are either “somewhat” or “very” dissatisfied with the income and wealth distribution in the U.S.

If ignorance doesn’t explain inaction, what does? These five factors are the most important culprits:

1) Upward mobility

(Sean McElwee, data from Engelhardt & Wagner)

(Sean McElwee, data from Engelhardt & Wagner)

According to research from Carina Engelhardt and Andreas Wagner, around the world people overestimate the level of upward mobility in their society.

They find that redistribution is lower then when actual social mobility is but also lower where perceived mobility is higher. Even if voters perceive the level of inequality correctly, their tendency to overstate the level of mobility can undermine support for redistribution. In another study Alberto Alesina and Eliana La Ferrara find that, Americans who believe that American society offers equal opportunity (a mythology) are more likely to oppose redistribution. Using data from 33 democracies, Elvire Guillaud finds that those who believe they have experienced downward mobility in the past decade are  32% more likely to support redistribution. A relatively strong literature now supports this thesis.

2) Inequality undermines solidarity

Enns and Kelly find, rather counterintuitively, that when “inequality in America rises, the public responds with increased conservative sentiment.” That is, higher inequality leads to less demand for redistribution. This is perhaps because as society becomes less equal, its members have less in common and find it less congenial to act in solidarity. Bo Rothstein and Eric Uslaner argue that, “the best policy response to growing inequality is to enact universalistic social welfare programs. However, the social strains stemming from increased inequality make it almost impossible to enact such policies.”

As inequality increases, the winner-take-all economy leads voters try to look out for their own children. The period during which overall inequality has risen has seen a massive increase in more affluent families’ spending on enrichment for their own children.

(Sean McElwee, data from Lars Osberg)

(Sean McElwee, data from Lars Osberg)

Chris Dillow points to research by Klaus Abbink, David Masclet and Daniel Mirza who find in social science experiments that disadvantaged groups are more likely to sacrifice their wealth to reduce the wealth of the advantaged group when inequality was lower than when it was higher. Kris-Stella Trump finds that rising inequality perpetuates itself, noting that, “Public ideas of what constitutes fair income inequality are influenced by actual inequality: when inequality changes, opinions regarding what is acceptable change in the same direction.”

3) Political misrepresentation

Ideological factors can’t tell the whole story. Many Americans support redistributive programs like the minimum wage and support for the idea that hard work leads to success has plummeted in the last decade. A further important reason for the lack of political response to inequality relates to the structure of American political institutions, which fail to translate the desires of less-advantaged Americans for more redistribution into actual policy change. Support for this thesis comes from many corners of the political science field, including Martin GilensDorian WarrenJacob HackerPaul Pierson, andKay Lehman Schlozman. Research by five political scientists finds that status quo bias of America’s often-gridlocked congress serves to entrench inequality.

More simply, lower-income Americans tend to vote at a lower rate. William Franko, Nathan Kelly and Christopher Witko find that states with lower turnout inequality also have lower income inequality. Elsewhere, Franko finds that states with wider turnout gaps between the rich and poor are less likely to pass minimum-wage increases, have weaker anti-predatory-lending policies and have less generous health insurance programs for children in low-income families. Kim Hill, Jan Leighley and Angela Hilton-Andersson find, “an enduring relationship between the degree of mobilization of lower-class voters and the generosity of welfare benefits.” Worryingly, Frederick Solt finds that, “citizens of states with greater income inequality are less likely to vote and that income inequality increases income bias in the electorate.” That is, as inequality increases, the poor are less likely to turn out, further exacerbating inequality.

4) Interest-group politics

The decline of labor unions has decreased the political importance of poor voters, because unions were an important “get-out-the-vote” machine. A recent study by Jan Leighley and Jonathan Nagler finds that the decline in union strength has reduced low-income and middle-income turnout. But labor’s influence (or lack thereof) is also important when the voting is done. Research finds that policy outcomes in the United States are heavily mediated by lobbying between interest groups, so organization matters.

Martin Gilens writes, “Given the fact that most Americans have little independent influence on policy outcomes, interest groups like unions may be the only way to forward their economic interests and preference.” His research indicates that unions regularly lobby in favor of policies broadly supported by Americans across the income spectrum, in contrast to business groups, which lobby in favor of policies only supported by the wealthy.

(Sean McElwee, data from Martin Gilens)

(Sean McElwee, data from Martin Gilens)

It’s no surprise then that numerous studies have linked the decline in union membership and influence with rising inequality.

5) Racial conflict

A recent study by Maureen A. Craig and Jennifer A. Richeson finds that when white Americans are reminded that the nation is becoming more diverse, they become more conservative. Dog-whistle phrases like “welfare queens” have long driven whites to oppose social safety net programs they disproportionately benefit from. Research from Donald Kinder and Cindy Kam indicates that racial bias among white voters is strongly correlated with hostility toward means-tested social assistance programs. Another study by Steven Beckman and Buhong Zhen finds that blacks are more likely to support redistribution even if their incomes are far above average and that poor whites are more likely to oppose redistribution.

In other words, a massive public education campaign about the extent of income inequality is neither necessary nor sufficient to achieve the kind of redistributive policies liberals favor. The real obstacles to policy action on inequality are more deeply ingrained in the structure of American politics, demographics, and interest group coalitions. Insofar as there is a role for better information to play, it likely relates not to inequality but tosocial mobility which remains widely misperceived and is a potent driver of feelings about the justice of economic policy. As John Steinbeck noted, “Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.” Stronger unions, more lower income voter turnout and policies to reduce the corrupting influence of money on the political process would all work to reduce inequality. It will take political mobilization, not simply voter education to achieve change. The wonks have interpreted the world; the point, however, is to change it.

This piece originally appeared on Vox.

Debunking right-wing talking points with charts

Republicans didn’t just respond to the State of the Union, they responded four times. The problem is that a lot of their talking points don’t stack up with reality.

1) Taxes Are Too High on The Rich

In fact, taxes have become less progressive since 1960:

Since 2004 there has been a modest increase in income taxes for the wealthiest one percent, but we are nowhere near the 1960s.

2) The Government is Too Big

In fact, government revenues as a percentage of GDP has remained flat in the U.S. while it has increased in other developed countries.

3) We Need to Worry About Opportunity, not Inequality

Research by Miles Corak shows that countries with high levels of inequality have lower levels of upward mobility. Raj Chetty and his colleagues found a similar trend in census zones within the U.S.

4) We Don’t Need a Higher Minimum Wage

According to John Schmitt f the minimum wage had kept rising with productivity, it would be more than double what it is now.

minimum wage and productivity

5) The Deficit! The Deficit!

The deficit is falling:

It’s awful to have to keep pointing these things out, but the right still relies on the same stale talking points.

Don’t Believe The Talking Points, Republicans Don’t Want to Bargain

For those Americans living in a Fear and Loathing-style drug binge for the past week, the government is currently shut down and the Treasury will no longer be paying off America’s debts around October 17. Republicans and Democrats have both been pumping out talking points. The Democrats and Obama are pointing out that bargaining over the debt ceiling is crazy, while Republicans are complaining that the Democrats are refusing to negotiate. They even published a picture of them all sitting at a table “waiting to negotiate.” So, is it true? Has Obama refused to compromise? Well, there have actually been a few “deals” over the past few years.

The chart below (created with CBO data) shows all the deficit reduction that happened during the budget cage-match. Remember that broadly speaking, Republicans prefer spending cuts while Democrats prefer revenue increases (obviously, there are caveats, but let’s keep this simple). So who has won? Unequivocally it’s been the Republicans. They’ve gained about $1.7 trillion in spending cuts (to both discretionary and mandatory spending), while Democrats have gotten only $650 billion in revenue increases.

The president came to the table offering entitlement reform in return for tax increases. So, what did the Republicans say? Bob Woodward’s The Price of Politics is the definitive account of the deficit brawls in Obama’s first term (which are eerily similar to the debate right now, with a small faction in the Republican Party prepared to default on the debt). It’s a long book, but one quote will suffice to explain the Republican style of negotiation. It comes during the Biden Senate committee, one of the many attempts to put Republicans and Democrats in a room that eventually failed. Senator Jon Kyl (R-Ariz.) asked, “You’re saying to me even though there are Medicare savings that you think are reasonable — that we could do— you won’t do them unless we’re going to raise taxes on somebody?” Yes Jon, that’s how “negotiating” works. In Kyl’s world, Republicans get Medicare cuts and Democrats get, well…this.

But what’s worse is that Kyl wasn’t standing up for the average Joe here. This round of debates featured in Woodward’s book was largely over whether to extend the Bush tax cuts for those earning more than 10 times the poverty line. The Republicans wanted to keep those cuts intact, so in essence, Kyl wanted lower spending on health care for millions of seniors and lower taxes for the richest 10% of so of Americans. All of this while U.S. tax revenue as a percentage of GDP is far below the OECD average. Obama is happy to negotiate. If Republicans want to prove that they are, it will take more than a photo-op— it will take concessions.