“President Joe Biden wants to raise taxes on the wealthy to pay for some of his policy proposals. Part of the way he can go about that doesn’t entail touching the tax system at all — instead, he’d just have to put the IRS to work chasing down rich people to make sure they’re paying taxes they already owe.”
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“The most recent official tax gap estimate from the IRS, from 2011 to 2013, was that it amounted to $441 billion each year. That’s a big sum already, about 16 percent of total tax liability those years. But there’s reason to believe the gap is much higher — and that wealthy people are often to blame.”
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“The IRS’s total budget is down by some 50 percent since 1993 as a share of gross tax collections, and appropriations for the IRS — adjusted for inflation — have fallen by 20 percent since 2010, and after Republicans in Congress sought to curtail its budget. It’s lost thousands of enforcement staff. And its enforcement abilities directly affect revenue, not only by collecting unpaid taxes but also by influencing behavior. If people know that the IRS is going to come after them for skirting taxes, they’re less likely to try it. Rettig told the House Ways and Means Committee at a recent hearing that the number of examining revenue agents, who are tasked with handling complex cases, fell by 35 percent since 2010, and field collection revenue officers, who manage the harder collection cases, fell by 48 percent. The audit rate for millionaires fell from 8.4 percent in 2010 to 2.4 percent in 2019.”
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“Biden’s proposal to inject funding into the IRS could go a long way in reviving the agency. Because the IRS’s budget is generally determined year by year, it makes it hard to staff up or invest in technology for the long term. Agents with the experience and know-how to deal with complex audits can take years to train and replace.
“One of the key things in this proposal is not just the money, it’s that it’s a multi-year stream of funding that would allow them to plan it and spend it out over a multi-year period,” Hanlon said.”
“In their 2017 tax bill, Republicans partially closed a tax loophole that mainly affected higher-income people in high-tax areas — i.e., relatively well-off people in blue states. They capped the state and local tax deduction (SALT) people can take when calculating their federal income tax at $10,000. People can still deduct state and local taxes from their federal tax bill, but only up to that point.
Many Democrats — namely, those from states such as New York, New Jersey, and California — want to repeal the SALT deduction cap and go back to the old regime, where people could deduct all (or at least more) of their state and local taxes. They argue the cap unfairly drives up their constituents’ tax bills, might keep their states from implementing more progressive tax regimes on high-income people, and was a vindictive move by the GOP in the first place.”
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“But some Democrats, Republicans, and economists are saying hold the phone.
“The vast majority of the benefits of repealing the SALT cap would go to the people at the very top. It would also be costly — and for that amount, we could finance much more worthy efforts to support American families and workers. We can say we are for a progressive tax code and for fighting inequality, or we can support the SALT deduction, but it is really hard to do both,” said Sen. Michael Bennet (D-CO) in a statement to Vox. When the Senate took up a vote on whether to repeal the SALT cap in December 2019, he was the only Democrat to vote against it.”
“A corporation’s book profits are actually an unhelpful metric when it comes to assessing what its tax liability should be. While the tax code is far from perfect, many deductions and credits that reduce liabilities serve an important purpose and help make the tax code fairer. Calculating a corporation’s income before factoring these in makes as much sense as complaining that a kid with a summer job gets to avoid paying regular income taxes because of the “standard deduction loophole.”
For example, consider net operating loss (NOL) carryforwards and carrybacks, one of the most common culprits behind these sensational headlines. These are normal features of a smart policy that allows corporations to pay taxes based on a realistic view of their cash flow over time.
Imagine a start-up business that spends two years developing its feature product, only to release it in the next year. If that business ran a deficit of $2 million the previous two years, then made a $1 million profit the third year, it has not actually made a profit in the long term. Disallowing NOL deductions from being carried forward would mean that the business would face corporate income tax liability despite having, thus far, lost money.”
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“NOL carryforwards were one reason Amazon had no federal tax liability when those articles appeared a couple years back. Another was the research and development (R&D) tax credit, long a bipartisan favorite. The Obama administration in 2012 identified the R&D credit as a crucial element of business tax reform, claiming that businesses undervalue R&D in the absence of the credit as the social benefit is far greater. It’s deeply disingenuous to incentivize R&D, then wag your finger when businesses respond to the incentives the R&D credit provides.
Then there’s accelerated depreciation. One of the most positive changes in the 2017 tax reform law was the introduction of full expensing of capital investments, which allowed businesses to bypass the complicated system of asset depreciation that requires them to recoup the value of capital investments over timelines as long as decades. Huffing and puffing that businesses use full expensing to zero out their tax liabilities is absurd, because it merely accelerates tax deductions businesses would receive anyway. In other words, the long-term “cost” of accelerated depreciation in terms of revenue reduction is zero. The difference is that businesses, which prefer cash on hand to cash down the line, are then able to reinvest the value of the deduction immediately rather than waiting years to receive the tax benefit.”
“A corporation’s book profits are actually an unhelpful metric when it comes to assessing what its tax liability should be. While the tax code is far from perfect, many deductions and credits that reduce liabilities serve an important purpose and help make the tax code fairer. Calculating a corporation’s income before factoring these in makes as much sense as complaining that a kid with a summer job gets to avoid paying regular income taxes because of the “standard deduction loophole.”
For example, consider net operating loss (NOL) carryforwards and carrybacks, one of the most common culprits behind these sensational headlines. These are normal features of a smart policy that allows corporations to pay taxes based on a realistic view of their cash flow over time.
Imagine a start-up business that spends two years developing its feature product, only to release it in the next year. If that business ran a deficit of $2 million the previous two years, then made a $1 million profit the third year, it has not actually made a profit in the long term. Disallowing NOL deductions from being carried forward would mean that the business would face corporate income tax liability despite having, thus far, lost money.”
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“NOL carryforwards were one reason Amazon had no federal tax liability when those articles appeared a couple years back. Another was the research and development (R&D) tax credit, long a bipartisan favorite. The Obama administration in 2012 identified the R&D credit as a crucial element of business tax reform, claiming that businesses undervalue R&D in the absence of the credit as the social benefit is far greater. It’s deeply disingenuous to incentivize R&D, then wag your finger when businesses respond to the incentives the R&D credit provides.
Then there’s accelerated depreciation. One of the most positive changes in the 2017 tax reform law was the introduction of full expensing of capital investments, which allowed businesses to bypass the complicated system of asset depreciation that requires them to recoup the value of capital investments over timelines as long as decades. Huffing and puffing that businesses use full expensing to zero out their tax liabilities is absurd, because it merely accelerates tax deductions businesses would receive anyway. In other words, the long-term “cost” of accelerated depreciation in terms of revenue reduction is zero. The difference is that businesses, which prefer cash on hand to cash down the line, are then able to reinvest the value of the deduction immediately rather than waiting years to receive the tax benefit.”
“They’ve tucked a trio of little-noticed tax hikes on the wealthy and big corporations into their coronavirus relief package that together are worth $60 billion.
One takes away deductions for publicly traded companies that pay top employees more than $1 million. Another provision cracks down on how multinational corporations do their taxes. A third targets how owners of unincorporated businesses account for their losses.”
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“[Democrats] ran into problems complying with the stringent budget rules surrounding so-called reconciliation measures like the coronavirus legislation — especially after some wanted to add provisions like one waiving taxes on unemployment benefits.
If Democrats exceeded their $1.9 trillion budget cap for the plan, they would lose the procedural protections that were used to shield the entire measure from a Republican filibuster in the Senate.
The tax increases Democrats picked to help keep their plan’s cost in check had the political benefit of being arcane. Unlike things like raising the corporate tax rate or upping the top marginal tax rate on the rich, the ones they chose won’t produce many headlines.
They also fit Democrats’ themes of fighting inequality by forcing the well-to-do to pay more.
Since the provisions were added late in the legislative process, lobbyists didn’t have much time to rouse opposition to the plans.”
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“Democrats turned to a rule Republicans created as part of their 2017 tax cuts. It limits to $500,000 the amount of losses certain people who own unincorporated “pass-through” businesses can use to offset other income and thereby reduce their tax bills.
That issue became a lightning rod last year when lawmakers temporarily suspended that limit as part of a previous stimulus package. At the time, lawmakers were trying to get money into the hands of businesses owners in order to prevent layoffs by making it easier for them to qualify for tax refunds, and the $500,000 limit would have impeded that.
Many progressives criticized the move, calling it a giveaway to the rich.
Democrats’ coronavirus plan stops short of undoing last year’s provisions, though it does extend the $500,000 limit — which, like much of the Tax Cuts and Jobs Act, is currently scheduled to expire at the end of 2025 — by an additional year. The Senate Finance Committee says that will raise $31 billion.
Another provision generates $6 billion by going after executive compensation.
Businesses are normally allowed to deduct employees’ pay on their tax bills, though there are rules limiting those deductions when a CEO and a handful of a company’s other top employees earn more than $1 million. Democrats are doubling the number of officials, to 10, that would be subject to that restriction, which would hit businesses such as investment banks.
A third provision, which budget forecasters say will produce $22 billion, repeals an arcane provision giving multinational companies more flexibility in deciding how to account for their interest expenses when they do their taxes.
To be sure, the tax increases are dwarfed by the amount of tax revenue cut by the legislation — about $590 billion, according to the official Joint Committee on Taxation. Lawmakers are sending another round of stimulus checks to millions of Americans as well as temporarily expanding popular breaks like the Child Tax Credit and the Earned Income Tax Credit.”
“Biden’s expansive vision is about more than vastly increasing spending, but let’s start there because the numbers are simply staggering. He’s proposing $11 trillion in brand new spending over the next decade, according to the Manhattan Institute’s Brian Riedl. Big-ticket new items include $1.4 trillion to expand Obamacare; $2 trillion on his version of a Green New Deal; jacking Social Security and Supplemental Security Income by $1 trillion; and goosing spending on preschool, K-12, and higher education by $1.5 trillion. Biden has also signed on to a $3.3 trillion stimulus spending plan pushed by House and Senate Democrats.
All of this new spending would be layered on top of an existing annual federal budget that has swelled to nearly $7 trillion in fiscal year 2020, from a record-high yet relatively cheap $4.4 trillion in 2019. To pay for this new largess, Biden has laid out $3.6 trillion in tax hikes over the coming decade, resulting in what Riedl says is “the largest permanent tax increase since World War II.” Much of the new revenue would come from boosting corporate income taxes back to what they were before Republicans lowered them during Trump’s first year in office. Yet despite all the hikes, Biden would still manage to increase the national debt”
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“Pick any page of his campaign website’s extensive “vision” section and you’ll find endless proposals to tinker with everyday life and employment. He pledges to “aggressively pursue employers who violate labor laws, participate in wage theft, or cheat on their taxes by intentionally misclassifying employees as independent contractors” and also to “establish an Environmental and Climate Justice Division within the U.S. Department of Justice.” What sort of bureaucracy do those sorts of things require? The same sorts of questions are raised by his on-again, off-again endorsement of a federal mask mandate.”
“In a world in which economic reality mattered to politicians, grandiose spending plans coupled with soaring government debt would pretty much preordain grim tax policy. But we don’t live in that world. In ours, tax and spending proposals are crafted based on their appeal to target audiences of voters, with no regard for balancing books or averting financial catastrophe.”
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“It’s necessary, though probably pointless, to emphasize that neither Trump’s nor Biden’s tax plans come close to paying for the federal government’s anticipated spending spree in the years to come.”
“In 2016, Trump had campaigned on eliminating the national debt in under a decade. Yet by June 2020, the federal budget deficit had reached $864 billion…for just the month. That was more than the entire budget gaps in either 2017 or 2018. By September, the nonpartisan Congressional Budget Office (CBO) was projecting a $3.3 trillion annual deficit in 2020. Federal debt levels, which equaled just 35 percent of the economy in 2007 and 79 percent of the economy in 2019, would reach 98 percent. The CBO had previously warned that persistently high debt and deficits would have consequences: slower economic growth, an ever-increasing share of the budget consumed by interest payments on the debt, and reduced capacity to act should a major crisis arise.
And yet as the virus consumed the nation, even many deficit hawks were recommending more spending, at least in the short term.”
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“In the early ’80s, some lawmakers had come under the influence of a macroeconomic theory that would come to be known as “supply-side economics.” This theory held that tax cuts could, in budget parlance, “pay for themselves” by boosting economic growth so much that the federal government would actually raise more revenue if it reduced rates.
There was some trivial truth to this. Imagine a world in which loaves of bread are taxed at 99 percent. This is a world in which not many loaves of bread are produced or sold and thus not much revenue is raised from the bread tax. Reduce the rate to, say, 50 percent, and you would probably see a marked increase in the production and sale of bread—and higher bread tax revenues as a result. Reduce the tax further, and the bread market would probably expand even more. Supply-side effects are real, but they typically offset only a small percentage of lost revenue.
Some Republicans took this to mean that tax cuts of just about any kind would often, and perhaps even always, result in higher federal revenues. At some point, however, lowering rates does in fact end up lowering revenues. A 0.001 percent tax on bread might unleash a powerful market in artisanal breadmaking. It would probably not produce higher total levels of tax revenue than a somewhat higher rate would.
In reality, this simplistic version of supply-side orthodoxy was not a macroeconomic theory so much as a convenient excuse for Republican lawmakers to give their voters what voters tend to want: tax cuts without spending reductions, i.e., a government they didn’t have to pay full price for.”
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“As with many diets, it worked—for a time. Bill Clinton began his presidency by raising the top income tax rate from 28 percent to 36 percent—an increase, but still far lower than the top rate at the beginning of Reagan’s presidency. And then, following the Republican takeover of Congress, Clinton negotiated with GOP lawmakers to lower projected federal spending—when politicians talk about spending “cuts” they are often referring to reductions of planned future spending—particularly on welfare assistance. Accordingly, the deficit dropped from $203 billion in 1994 to $22 billion in 1997.
Forced to work across the aisle, Clinton and the Republican Congress had done what their predecessors had failed to do: reduce the deficit. Federal spending dropped as a percentage of gross domestic product, which boomed under the first wave of internet-induced investments—the 1990s tech boom. The rapidly growing economy kept voters from revolting, and Clinton framed the budgetary contraction not as a reduction in government services but as an end to federal overreach.
“We know big government does not have all the answers,” he said in his 1996 State of the Union address. “We know there’s not a program for every problem. We have worked to give the American people a smaller, less bureaucratic government in Washington. And we have to give the American people one that lives within its means. The era of big government is over.”
In Clinton’s second term, the already shrunken deficit ceased to exist. By the year 2000, the federal government was running a $236 billion annual surplus. Finally, the deficit problem seemed to have been solved.
The trouble with diets is that even when they work, they’re hard to stick to. That is especially true when the diet must be renegotiated among a rotating cast of 535 lawmakers and a new president every four to eight years.
And so, under President George W. Bush, deficits returned”
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“Simpson-Bowles consisted of 18 people—a bipartisan mix of a dozen members of Congress and six private citizens—tasked with producing a set of recommendations for deficit reduction. There were difficult choices ahead. The committee’s job was to suggest which ones should be made.
The commission was a classic Washington gambit in that, outwardly, it was an attempt to solve a policy problem, but in reality, it was a politically motivated attempt to avoid solving that very problem.
Nominally, the problem the committee was tasked with solving was how to reduce the deficit. But that wasn’t the actual problem it was trying to solve, because since the 1980s the solution had remained fairly obvious: To reduce the gap between outlays (spending) and revenues (taxes), Congress would need to either increase tax revenue, reduce spending, or do some combination of the two. To be genuinely effective, the tax hikes probably would have to hit the middle class and the spending cuts probably would have to hit entitlements.
The actual problem the committee was intended to solve, then, was that, despite occasional protestations to the contrary, neither congressional lawmakers nor the president wanted to do any of this.
In the end, Simpson-Bowles recommended cutting spending and increasing taxes. In particular, it recommended cutting spending on entitlements and raising some taxes on the middle class in order to broaden the tax base.”
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“of course, neither the president nor congressional lawmakers agreed to any of it.”
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“a problem with Congress—is that it can’t tell itself what to do. Not for very long, anyway. The 112th Congress in 2012 has no power to bind the 113th Congress, which means that if Congress in 2013 does not like the instructions passed down from its forebearers, it can tell the 112th Congress to go get stuffed.”
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“Trump, like most Republicans, had run against the federal debt. His promise to eliminate it completely in eight years was deeply unrealistic, backed by no specific plan, and predicated in part on Trump’s confusion of the trade deficit (which measures inflows and outflows of goods between the United States and other countries) and the budget deficit (which measures how much more the federal government spends than it takes in). But it was, at least, a rhetorical concession to the Republican fiscal politics of the Obama years.
In early 2018, House Democrats negotiated a budget deal with Senate Republicans that suspended sequestration caps and authorized $300 billion in spending above previously allowed levels. The particulars were complex, as budget deals often are, but in broad strokes, the agreement was straightforward: Democrats got more funding for domestic spending, while Republicans got more funding for the military. Trump signed the bill, proclaiming, “We love and need our Military and gave them everything—and more.” The bill, he tweeted, would also mean “JOBS, JOBS, JOBS.”
For years, Democrats and Republicans had bickered over budget priorities. With the 2018 spending bill, they resolved their differences—by agreeing to spend more on everything.”
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“What Democrats saw not only in the 2017 tax bill but in the decadeslong deficit wars was that Republicans had found a political advantage in arguing that tax cuts paid for themselves. There was a clear pattern to federal budgeting: Under Republicans, tax rates would go down, spending would increase, and the deficit would rise. Under Democrats, tax rates would rise slightly, spending would hold more or less steady, and the annual deficit levels would decline. The GOP, which had long branded itself the party of limited government and fiscal responsibility, was the party of neither.
To the party’s base, this didn’t just mean that conservatives were hypocrites. It meant they could pursue their priorities without pressure to make concessions or tradeoffs. They had an argument, a rhetorical strategy—or, at the very least, a convenient and self-serving pretext—that insulated them from the understanding of shared pain and shared responsibility.
To rectify that political imbalance, the left—particularly the young, online left, which increasingly favored aggressive spending programs far more expansive than even many lifelong Democratic politicians would dare contemplate—would need a pretext of their own. And they would get it, in the form of Modern Monetary Theory (MMT).”
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“As with supply-side economics, the central insight of MMT is both true and trivial: The U.S. budget is not, strictly speaking, like a household budget or a business budget, because unlike a household or business, the federal government can print its own money. From this single observation, MMT theorists have constructed an entire macroeconomic worldview, which says explicitly that deficits don’t matter and, consequently, the government can and should print money to fund federal spending projects on a massive scale.
In this understanding of the economy, debt is not a constraint; nor are interest rates charged by bondholders. Debt can be paid down with a few congressionally authorized keystrokes on central bank computers generating new dollars. Bondholders will have little recourse but to accept these newly created dollars, because America’s currency is the global reserve.
The only real constraint MMT proponents recognize is inflation, which serves as a signal that there are too many dollars in the economy and that some should be recalled by the government. But inflation has been running low for years.
The upshot of all of this is a belief not only that current deficit levels are sustainable but that they are actually too low. Congress, MMT proponents argue, should be spending far, far more. Fears about accumulating a large national debt should disappear entirely.”
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“The supply-siders had triumphed on the right, and the MMTers were winning crucial battles on the left. The deficit had always been a bipartisan problem. At last, America’s politicians had found a bipartisan solution. Lower taxes. Higher spending. And the biggest deficit ever. Finally, Washington had found its balance.”
“Trump has back-slapped the authoritarian leaders of the three main countries cited by the Times’s report: the Philippines, India, and Turkey. It’s less clear now if the bonhomie stems from their diplomatic relationships or because they lead nations that are lucrative for the president.
Turkey is perhaps the best example of this conundrum.
Trump said last year that he was a “big fan of” President Recep Tayyip Erdoğan, but their relationship hit some snags over Ankara’s attacks on US allies in Syria and its unlawful imprisonment of an American pastor.
When US-Turkey ties were low, the Times recalled a few curiosities:
“[In 2018,] a Turkish business group canceled a conference at Mr. Trump’s Washington hotel; six months later, when the two countries were on better terms, the rescheduled event was attended by Turkish government officials. Turkish Airlines also chose the Trump National Golf Club in suburban Virginia to host an event [in 2017].”
In other words, countries like Turkey can potentially find ways to Trump’s heart by ensuring money goes into his family’s pocket in hopes of altering US foreign policy. The Trump Organization, then, gives nations an unprecedented extra leverage point to influence an American president.”
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“If the president makes decisions based on his private interests, and not the public’s, then he’s subjugating the demands of US foreign policy for the bottom line of his family’s business.”
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“That issue becomes more acute when you factor in Trump’s $421 million in debt, much of it owed in the next four years. It’s unclear exactly who he owes that money to, but it’s not unreasonable given the scope of the Trump Organization’s foreign business to assume some of the debt is held by foreign lenders”