Income tax in the United States

The IRS Controversy and the Tax-Exempt Charade

Flickr/onkelshark

As we're learning more about the IRS giving heightened scrutiny to conservative groups filing for tax-exempt status, we should make one thing clear: If what we've heard so far holds up, the people involved should probably get fired, and new safeguards should be put in place to make sure nothing like it happens again. And let it be noted that liberal publications, at least the ones I've seen, have all taken that position and have been discussing this story at length.

Now, let's see if we can understand the context in which this happened. There's an irony at work here, which is that it may well be that the IRS employees involved were trying to obey the spirit of the law but ended up violating the letter of the law, while for the organizations in question it was the opposite: they were trying to violate the spirit of the law, but probably didn't violate the letter of the law.

I Want Your Tax

Flickr/soukup

Today is tax day, the yearly opportunity for millions of Americans to shake their fists at the government and declare their contempt for the ideas of mutual concern and collective responsibility. So on this most practical of days, it's good to remind ourselves of some realities. First, the taxes we pay are, by international standards, fairly modest. Second, despite what some would have you believe, the wealthy are not crushed by the burden of taxation. And third, though nobody particularly enjoys giving part of their income to the government, taxes are the price we pay for having an advanced, democratic society.

The IRS Threat to Turbo Tax

Flickr/401K 2012

As a general matter, I think the best reason for government not to go around competing with private industry isn't that doing so inherently diminishes our freedom, but because it's just not worth the effort, and much of the time it isn't going to provide any benefit to consumers. It wouldn't be tyrannical for the federal government to produce its own brand of cola, but it would be pointless, since they're unlikely to make something people will like better than Coke or Pepsi, and consumers seem to be perfectly happy with their current cola options. On the other hand, there are some areas where the market has clearly failed—health insurance for senior citizens, for instance (and, I'd argue, everyone else too, but that's a separate topic)—where it makes sense for the government to step in.

But what about areas where the market in question involves private companies helping consumers interact with the government itself? And where there isn't a particularly egregious market failure, but the government could clearly offer people the same service for which they're now paying, but at a lower price? Like, say, zero? In that case, it would be hard to argue that the government would be outside its rights if it made it easier for people to interact with it, solely on the basis that those private companies might suffer from the competition. Well, according to a story from Pro Publica, that's what's happening in the area of tax preparation:

Happy Birthday, Dear Income Tax

Five lessons for progressives from our first century of income taxes. 

flickr/jpconstantineau

flickr/jpconstantineau

In February 1913, exactly a century ago, the Sixteenth Amendment gave Congress a constitutional green light to levy a federal tax on income. Later that same year, lawmakers made good on that opportunity. An income tax has been part of the federal tax code ever since.

History Lesson: Tax Cuts Are No Magic Bullet

No idea is more central to conservative economic thinking than the belief that cutting taxes leads to higher economic growth. One can certainly understand the appeal of this belief: It would be great if government could collect the same amount of revenue, but with much lower tax rates, because those rates fostered strong growth. 

Both Romney and Obama Are Wrong about Who Is "Middle Class"

If Mitt Romney began this week with a misstep over foreign policy—accusing President Barack Obama of “sympathizing” with the people who attacked the American embassy in Cairo—then he has ended it with a misstep over class. In an interview with Good Morning America’s George Stephanopoulos, he said that “middle income is $200,000 to $250,000 and less.” Here’s the full context:

Poverty Stays Static, But Income Inequality Widens

As economists keep telling us, the Great Recession is officially over. The U.S. gross domestic product grew by a sad 1.8 percent last year. Here's why you probably don't know it: Just about every ounce of economic gain went to the top.

The Devil Is in the Details

Mitt Romney is pro-baby, and he doesn't care who knows it! (Flickr/tvnewsbadge)

Every candidate confronts the question of how detailed they should be in their policy plans, and the basic calculation goes as follows: I want to seem substantive and serious, so it's good to have detailed plans, but I don't want the plans to be so detailed that they give my opponent something to use against me and allow voters to find things they don't like. So usually they find some middling level of specificity, and tolerate whatever criticism they get from one end for not being detailed enough, and from the other end for specific ideas people don't like. But rarely does the question of how specific you're being become a story in and of itself.

Mitt Romney has arrived at that moment, when his unwillingness to reveal exactly what he wants to do in a variety of policy areas is becoming a story in its own right. Here's Steve Kornacki writing about it in Salon. Here's the Wall Street Journal editorial page criticizing him for not being specific. Here's a TPM report on other conservatives scolding Romney for his vagueness. Here's an L.A. Times editorial asking for specifics on Romney's tax plan (which we'll get to in a moment. Here's an NPR story about the specificity question. And President Obama is picking up the issue and using it as an attack, which helps propel the story forward.

It's one thing to be vague because you think getting bogged down in a discussion of details will distract from your broader message, but it's another thing to be vague because a discussion of details will reveal that you're promising things you can't possibly deliver.

Don't Hold Your Breath for a Romney Budget that Makes Sense

If you missed it, Mitt Romney gave a long interview to CNN Money in which he explained his plans for dealing with taxes, cutting the budget, and juicing the economy. The interview is boilerplate Romney—vague declarations about policies he won’t detail—but he does comment on the recent analysis from the nonpartisan Tax Policy Center (TPC). In short, the Center found that Romney’s goal—across-the-board tax cuts that don’t affect revenue—is impossible without raising taxes on most Americans. Romney calls this a “garbage conclusion”:

Americans Paying Historically Low Taxes

The top marginal income tax rate, a testament to our oppression. (Flickr)

When the Tea Party movement started in 2009, some of its adherents made signs that read, "Taxed Enough Already!", since the movement defined itself in large part as a reaction against the oppressive tax policies of the federal government, sucking ordinary people dry in its endless search for cash to fund its freedom-destroying schemes. This was always an insane inversion of actual reality—the truth is that as part of the stimulus bill, President Obama actually cut taxes for almost everyone, and the only tax increase he imposed in his first term was a hike in cigarette taxes. It's true that the Affordable Care Act contains a number of different tax increases (on things like "Cadillac" health plans), but those have not taken effect yet. But to many conservatives, it just feels like they're paying more taxes, because...well, because there's a Democrat in the White House.

Today, the Congressional Budget Office released a report on the taxes we have actually been paying, and guess what: the average federal taxes paid by Americans are at their lowest point in the last 30 years:

Investment without Job Creation

A well-known job creator. (Flickr/Vaguely Artistic)

Some time within the last few years, conservatives decided that people who have lots of money shouldn't be called "the rich" or "the wealthy," but "job creators." Give them credit—they know how to use language to turn a problem into an opportunity. After all, defending low tax rates for the rich is hard, but defending low tax rates for job creators is easy. Every now and then you might get an apostate like this venture capitalist coming out and saying that the real job creators are middle class people who buy things and not rich people, but on the whole the "job creator" framing allows conservatives to make their tax arguments without any discomfort.

That gentleman's argument is completely valid: if you have enough middle class people buying Acme Widgets to require 100 people working in the widget factory to meet the demand, it doesn't really matter whether C. Montgomery Acme gets his income taxed at 35 percent (the current, Bush-established, free enterprise-supporting level) or 39.6 percent (the Obama-supported, freedom-crushing, socialist level).

But what about when Mr. Acme takes some of his money and invests in the stock market?

Even the Rich Get a Tax Cut under Obama's Plan

By way of this chart, Citizens for Tax Justice makes an important point about President Obama’s plan for extending the middle-income Bush tax cuts:

We talk about the Bush tax cuts as if there is one set that applies to people with income under $250,000 and another set that applies to people with income over $250,000. But that’s not quite the case. The “middle-class” Bush tax cuts apply to all taxable income under $250,000; if your taxable income is $1 million, then you’ll receive a tax cut on the first $250,000. Under the Obama plan, everyone receives a tax cut.

Tax Reform Silliness

Flickr/401K 2012

Barack Obama did a bunch of big things in his first term—passed health care reform and ended the war in Iraq, most notably. If he wants to do something big domestically in his second term (especially since he seems to have lost any inclination to do anything about climate change), one natural area to try would be tax reform. It might actually be possible to arrive at something both Democrats and Republicans could live with, if we put aside Republicans' desire to make sure he never accomplishes anything, ever (which will continue into his second term). Republicans already have their own tax plan, which lays out some goodies they'll give people (especially wealthy people, you'll be shocked to learn) while conveniently avoiding any specificity on how the goodies will be paid for.

Some analyses have been done on the Republicans' plan, and they don't look too good:

We Won't Destroy Society If We Raise Taxes on the Rich

(401K/Flickr)

Over at the Center on Budget and Policy Priorities, Chye-Ching Huang has written a massive review of the evidence and literature on the relationship between taxes on high-income earners and their effects on economic growth. Her key findings are surprisingly straightforward, and important for how we approach current debates over tax reform and economic policy:

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