March 12, 2012, Bob Brinker's Moneytalk Guest-Speaker

March 12, 2012...........................................(comments welcome)

Bob Brinker's Moneytalk guest-host, Lynn Jimenez, interviewed Roberton Williams yesterday.  This is our gift from guest-writer, Frank J, who, like our friend, DanG, is an experienced tax man.FrankJ wrote:

The third hour guest on March 11^th was Roberton Williams, a Senior Fellow at the Urban Institute’s Tax Policy Center.   He has worked there for six years and prior to that, he served for 22 years with the Congressional Budget Office. 

(Frank J's) Editorial comments in italics.

Lynn asked if paying taxes is the price of living in a civilized society, or is it pocket-picking?  Dr. Williams said we need revenue to pay for necessities (defense, a judicial system and the post office, along with other things.)  Beyond that, we choose to pay for things a wealthy society should have, and he mentioned Medicare and Medicaid. 

The “is it fair” question (referring to the tax code) came next and the answer was “It depends,” whether it is “fair” is in the eye of the beholder. 

Warren Buffet doesn’t think it is fair.  But the nearly 50% of taxpayers who actually pay no federal income tax probably think it is very fair!

Williams pointed out that for the past 40 years, about 18% of total income has gone to all forms of federal taxes.  Currently, it is about 15% because of the recession.    

“Does the tax system do what it should?”    The tax system does two things, it pays for government functions, but it is also used to shape social policy by rewarding and penalizing certain behaviors.  Williams mentioned the mortgage interest deduction, incentives for retirement savings, “ a slew of things are built into the tax system.”  Williams asserted that because of the dual nature of the tax system, it does neither task well.

Here is a partial list of the social policy aspects of the tax system: deductions for mortgage interest, real estate taxes, sales or income taxes,  some personal property taxes. 

Credits: the earned income credit, the Child Tax Credit ($1000 per bambino), dependent care credits, education credits, retirement savings credits, residential energy credits, alternate motor vehicle credits (think Chevy Volt), credit for being over 65 and/or disabled, credit for having paid foreign taxes, credit for “Tax Credit Bonds,” credits for adoption expenses, the home buyer credit (now expired), credit for health coverage for displaced workers, credit for excess social security or railroad retirement tax, credits for undistributed capital gains.    

“Who pays and who doesn’t?”   The 46% who don’t pay federal income taxes can be divided into two groups.  The first group simply does not earn enough to pay.  Their standard deduction and personal exemption(s) reduce their taxable income to zero.   The other half of the 46% pay no taxes because various credits wipe out any tax liability.  He cited an example of a married couple who would might owe $3000 in taxes, but if they have 3 children (under the age of 17), the child tax credit at $1000 per head would zero out the tax liability. 

The guest pointed out that HOW you earn your income governs what percentage of your income you pay in taxes.  Mitt Romney – 13.7%, LeBron James – 35%.  The difference being income from investments vs. salary.

 After the break, Lynn and Roberton talked about dividends and capital gains before swerving into the topic of the alternative minimum tax, (AMT).  Roberton pointed out that dividends are taxed twice, once at the corporate level and again at the shareholder level.  Capital gains are taxed at the rate of 15% out of recognition that part of the gain is due simply to inflation. 

Then Lynn butted in and brought up the AMT.  Roberton said the AMT was a reaction by Congress in the 1960’s when they learned that 155 individuals with incomes greater than $200,000 paid no income taxes.  Williams said the AMT snags 4 million individuals today, but there were 1000 millionaires last year who paid no federal income tax – because of lots of breaks we built into the tax system.   Congress will lose out on between $800 billion and $1 trillion dollars over the next 10 years if they dump the AMT.

This led into a discussion of reforms and the guest mentioned the major overhaul that took place in 1986 under President Reagan.  Lynn tried to bait him by saying, “Oh, that was trickle down, did that work?”   He said it did work for a short while, but over the next 25 years, Congress added various provisions that led us to where we are today.

Williams said that much of what we as taxpayers have done (regarding our financial decisions) is predicated on the existing tax laws.  Sudden reform therefore could have unexpected consequences.  As to whether reforms could be phased in, Williams was not optimistic – too difficult to get Congress to agree. Then he mentioned the “tsunami of tax law changes scheduled to happen on January 1, 2013.”  

After the next break, Lynn went back and beat on the issue of investment income being taxed differently from wages.  Williams explained the capital gains/inflation issue again and with regard to other investment income, he mentioned that this is taxed at “ordinary rates”  but, payroll taxes (Social Security and Medicare taxes) are not assessed on this income. 

Maybe Lynn wanted to get busy with the calls, but I think it would have been interesting for her to ask the guest if he thought that the Social Security and Medicare taxes should be assessed on investment income.  He seemed to be giving her an opening to do so.

Caller Jerry from Corvallis, OR,  (home of Oregon State University) asked for data supporting the Republican contention that raising tax rates on the highest earners kills jobs?  

Williams replied that the data doesn’t show anything.  Lynn seemed surprised, maybe disappointed.  Williams said taxes on high earners will not affect whether they invest, it will affect where they invest.  Lynn then likened the market to “a gambling den.”  

Nice going, Lynn.  Remember, this is supposed to be a show devoted, in some measure to investing, and that does include the stock market.  Williams does not think the changes in the offing will affect the investment behavior of the high earners.

Jeff, calling from South Bend (Indiana?)  asked about the flat tax.  The guest deconstructed the question to explain that a flat tax is not the same as a “single-rate” tax but it interacts with different provisions in the tax system so that it does not result in the same percentage rate applied to all income levels.    

Lynn:  Poor people would be left without enough money to eat. 

Williams:  Agreed and reiterated the merits of the progressive tax system we have, which means the most heavily taxed individuals have the greater ability to pay. 

Lynn asked about the current candidate’s tax proposals.   Williams said that the candidates would cut taxes “a lot” for the wealthy.  More than $1 trillion for 2016 alone.   They have not been specific about spending cuts to offset the tax cuts.  (There is a paper on this at the Tax Policy Center website. http://www.taxpolicycenter.org.

Lynn:  if we keep spending where it is, the deficit will not go away, so how much higher will taxes have to go to defray the deficit?   Revenues are 15% of GDP, federal spending is 23-24% of GDP.   The guest suggested letting the tax cuts of the past ten years expire, but in the next breath he said, this could push us back into a recession. 

Would this be because lower taxes help create jobs?  Oh, wait, there are no data to support this one way or the other.

Next up was the estate tax.  The guest thinks we need the estate tax as a means to tax income that would otherwise “escape taxation forever.”   He explained:  property (and investments) appreciate in value over time.  The owner dies and the property is passed to an heir.  The heir’s basis in the property becomes its stepped up value, i.e., fair market value at time of death.  Therefore the gain that incurred during the life of the deceased is never taxed. 

The second reason he offered for continuance of the estate tax was simply that there are people with a “lots and lots of wealth” and “we need money to help pay for government.” 

This gave Lynn an opportunity to make a short speech on the issue of concentration of wealth.  She said, “I mean we already have people who are worth $60 billion and own every industry in chemicals and mining and you name it,… isn’t there something to be said for breaking up the feudal concentrations of wealth?”

Williams began waxing on about how kids might be lazy if they anticipate large inheritances.   Lynn butted in and posited her “darker view” that looking back at history, kings were like conglomerates (of today) that got a piece of everything and eventually became “corrupt and awful.”  Williams deflected this, saying he would leave that comparison for the historians, he was an economist.    Maybe Lynn realized how utterly stupid she sounded.  

Caller Tino suggested a $60 - $80,000 standard deduction and above that you pay.  Williams said it depends on how high the deduction is, and how much the tax rate is.  Lynn thought it was a novel idea – Williams said it has been proposed before.  

Finally, in the last few minutes of the show, Lynn asked Williams in effect, what changes should be made to the tax system.  Williams said special preferences pull about $ 1 trillion dollars out of the amount of money the federal government gets each year.  Getting rid of all the special preferences (tax expenditures) would lower the tax rates substantially while bringing in more revenue.   

This means that people would pay more in taxes.  Fewer credits means the amount of income that is taxable, would go up.  So yes, you could multiply that number by a smaller percentage tax rate and raise more revenue.   

 You can read a paper Roberton Williams co-wrote on this topic at the Tax Policy Center’s  website, http://www.taxpolicycenter.org “Curbing Tax Expenditures.”

Honey here:  FrankJ, thank you so much for that OUTSTANDING summary!  This subject IS near and dear to all of our hearts. We are either on the receiving end of taxes or the paying end. 

Right now, the nation is  precariously balancing at the tipping point.  Almost half of us are  not paying any income tax at all. That 47% is not likely to vote for anyone who will derail their Socialist gravy train.   

Jeffchristie said...

Hi Lynn. Thanks for taking my call. I found your discussion about the rich being more likely to cheat and act unethically interesting. I am just an average guy who doesn't know many rich people. One that I do listen to is Bob Brinker. Are you implying he might be dishonest? ............................................................................................. Another question if I may. You stated that the reason we don't tax the poor is that they might not have enough left to eat. Many poor people don't pay for their food. The taxpayers do. It is called food stamps. Obama is the food stamp president.

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